Petition for Writ of Certiorari — Anders v. Commissioner

; | Office:supremte Co US

{ary “pa

GuPREME COURT. U. & | FILED |

: : | sep 1 1909 |

| a ; JOHN F. DAVIS, cuERK

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1969

No. >) 8 3

D. B. ANDERS.

Petitioner,

COMMISSIONER OF INTERNAL REVENUE,

Respondent. ,

|

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

mean aes? 8 THE TENTH CIRCUIT e

R. Euvcene McGANNON

1100 Commerce Trust Bldg.

Kansas City, Missouri 64106

Counsel for Petitioner

Of Counsel: ae |

HARLOW B. KING ° ;

J. GLENN HAHN :

WALTER J. KENNEDY .

1100 Commerce Trust Building

Kansas City, Missouri 64106

To eA

FSGS -

2]

ed

E. L. Menpennary, Inc.. 926 Cherry Street, Kansas City, Mo. 64106. HArrison 1-8030 .

INDEX

Citation to Opinion Below o..ceeececeeeeeene om

Jurisdiction

Question Presented .................---.----- ‘

Statute Involved ... ’

“+

OCTOUINEND CE CORI annie nicest

Reasons for Granting the Writ ..........

Conclusion ase EN ae ean etd ee 20.

Appendix A-1—Section 837 (a) (b) and (ec), Internal

Revenue I ETI vsti inisicccensesncenecnneeniens Al

Appendix A-2—Regulation Section 1.337-3 ia’. 26 CFR

NS Sicesscdatconsmominennanieneaan A3

Appendix B-1—Opinion, Tax Court of the United States,

0 eee P.O tdci A4

Appendix B-2—Opinion, Usiited States Court of Ap-

peals, Tenth Ciretait. —.....-..---.--n.------neo-cocensceceeneteceneceentes Al18

Appendix B-3—Order ening Petition for Rehear-

| eae mene hci calanrsaconnea ammonia , ictal _A28—

Iw wnnw bd

Table of Ax ithorities :

CASES

Alice Phelan Sullivan Corporation. v. United States,

381 F.2d 399 (Ct. Cl. 1967) -....-.--------------------ee eee 15

Citizens Federal Savings and Loan Association of Cleve-

land v. United States, 290 F.2d 932 (Ct. Cl. 1961) ........ 15

Commissioner of Internal Revenue v. Brown, 380-U.S.

563 (1965) .. ic cin poaindibeeioecbuasiealeatbcei is orectsciliniabalasg 12

Commissioner v. Court Holding Co., 324 U.S. 331

(1945) ssi tedaonclaeala shcciconeeeped ta sesatintadelaamahsibiees rr 2

Commissioner v. First State Bank of Sercipiad. 168 F.2d

1004 (5th Cir. 1948), cert. denied 335 U.S. 867 (1948) 14

[

II | > INDEX ;

Dobson v. Commissioner, 320 US. 489 (1943) Sere Cee 3°

_ Donzel D. Bowman, et al. (Pending before District Di-—

_rector. Omaha, Nebraska) se inca ean epee eeoecneaepionns 8

Estate of Henry Sagemuller (Pending before District

Director,,Omaha, Nebraska) ........---.--------------- diene i

:Frank W. Verito, 43 T.C. 429 (1965) tesco. 9

Fribourg Naviqation Company. Inc. v. ‘Commissioner of

Internal Revenue, 383 U.S: 272 (1966) ......-...------------- 13

Gritsch Corporation (Claim Disallowed, IRS San Fran-

cisco, California, September BD iasncacctnannis Eek eematinctivanve 8.

Lloyd H. Faidley, 8 T.C. 1170 (1947) ...... eneesouncs 15

Malat v. Riddell, 383 U.S. 569 ORE: ACI ee 10

Merchants National Bank. of Mobile v. Commissioner,

199 F.2d 657 (5th Cir. 1952) -......------------/-- 15

Monday v. Commissioner, decided January 2, 1957 (P-H

Memo T.C., par. 57,001), affirmed per curiam, 252

F.2d 789, cert. denied 358.U.S. 883 -........-.-------.------------ 15.

Reynolds v. Boos, 188 F.2d 322 (8th Cir. SED snc ~ a

S. E. Evans, Inc. v. United States, No. FS-69-C-27 (W.D.

DEM) ooccsnenncccecncievnceecnsoevessexcideensnncenenenatonnnsnncsnnentnesunvsesoneccensons 7,15

Spitalny v. United. States, 288 F. Supp. 650 (D. Ariz.

OS occa cectreesteenete ose cnvcnnerepsasinvengnsommansrseelbadiine. sipctab naan: 7,15

Steel Parts Corporation v. CI. R., Tax Court Docket No.

ZOBB-69 _-nnnaaenennevseetnnssernnnsecnnsecencseesnnsteecnnnarenneseccnnseconsses eons 7

United States v. Cumberland Public Service Co., 338

Sie ee eG. |) Heeeeemeemmueec seemeneenennonmeonererrnn ost ree 9

United Stafes v. Korpan, 354 U.S. 271 ( 1957), reh. ‘den.

BEA U.S. DAG os nc--.-nncnecenceasnoncesneccnccenonvoinereosnnescennssnesenenescenss 16

West Seattle National Bank of Seattle v. Commissioner,

288 F.2d 47 (9th TD csiiseincosvcpievwinccheveneismnatanmebinenc:- ting 14

FEDERAL REGULATIONS AND STATUTES

Reg. Sec. 1.337-3 (a), 26 CFR, Sec. 1.337-3 (a) . 3.10, 14, 16, 19 .

Section 337 (a) (b) and (c), Internal Revenue Code of

1954, 26.USC, Section 337 (a) (b) and (c) .....:.-.-----------

ss Reitman sonra one 8,9, 10, 11, 12, 13, 14, 16, 17, 18

-—*

INDEX ier oes mm

- OTHER AUTHORITIES |

“Rev. Rul. 59-308, Cum, Bull°1959-2, p. 110........... 1718, 19

* Rev. Rul. 61-214, 1961-2 Cum. Bull., p. “ SECS “74, 90

S. Rep. No. 1622, 83rd Cong., 2d Sess., 1954, 3 U.S. ?

Code Cong. and Adm. News 4621, at 4680 -................- >

3 U.S. Code Cong. & Adm. News 4244, 4896 (83rd

Cong., 2d _—. NOGA) anna ngininntnssscensneceennesazeencenentnnee Wis 10

IN THE

SUPREME COUNT OF THE UNITED sr ATES

OCTOBER TERM, 1969

¢ | ; ; ’ 5

No. __. ners a

re ar i on ee

D. B. ANDERS,

Petitioner, 7

o . . . AN

COMMISSIONER OF INTERNAL REVENUE, ~~’

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

‘UNITED STATES COURT OF APPEALS FOR

THE TENTH CIRCUIT.

Petitioner prays that a writ of certiorari issue to re-.

view the judgment of the United States Court of Appeals

- for the Tenth Circuit entered in the above-entitled case

on June 20, 1969, rehearing denied on August 6, 1969.

2

CITATION TO OPINION BELOW

’ The opinion of the Tax Court of the United States,

printed in Appendix B-1 hereto; infra, Page A3, is re- |

ported at 48 TC 315. The opinion of the Court of Appeals

for the Tenth Circuit, printed in Appendix B-2 hereto.

infra, Page A18, is reported in ........ aE. senses (69-2

USTC, Para. 9478) (24 AFTR 2d, Para. 69-5043), rehear-

ing denied at ........ a (69-2 USTC, Para. 9573),

—_— in iacacsssaaes B-3, Page Ad, infra.

JURISDICTION

The judgment of the Court of Appeals was dated and >”

entered June 20, 1969, Appendix B-2,' Page A18, infra.

Petitioner’s timely petition for rehearing was denied on

August 6, 1969, Appendix B-3, Page A28, infra. The juris-

diction of this court is invoked under.28 USC Sec. 1254(1) .

and 26 USC Sec. 7482(a). The jurisdiction of the Tax

Court of the United States was based on 26 USC Sec. 7442

and 26 USC Sec. 6212 as an action for the redetermination

of a deficiency in income taxes previously determined by

‘the Commissioner of Internal Reverlue. :

QUESTION PRESENTED

Whether the Court of Appeals for the Tenth Circuit

erred in holding that certain of a corporation’s gain from

the sale of rental property did not qualify for the non-

recognition provisions under Sec. $37 o the Internal Rev-

enue Code of 1954 where:

(1) The corporation had arene idea to its

expense accounts when ‘pulchased the cost of the property

used in conducting its industrial laundry . rental business;

e

( 2) At the.end of each taxable year the corporation

credited the expense aceount with the cost ‘of the ending

*

3

inventory of property which had not been placed in use

at the end of such taxable year; and

(3) The aforesaid accounting method used by the

corporation was not challenged by the Internal Revenue

Service for the taxable year in question, nor for prior tax-

able years.

ST@TUTE INVOLVED

The statutory provision involved is Sec. 337(a) (b) and

(c) of the Internal’ Revenue Code of 1954, 26 USC, Sec.

337(a)(b) and (c), 68A Stat. at Page 106. Said statute is

printed in Appendix A-1, infra, Pages Al to A3, inclusive.

The regulation involved is Reg. Sec. 1.337-3(a), 26

CFR, Sec. 1.337-3(a), Page 69.'. Such regulation is printed

in Appendix A-2, infra Page A3.

STATEMENT OF CASE )

Petitioner commenced this action in the Tax Court of

the United States under 26 USC Sec. 7442 and 26 USC Sec.

6212 for the redetermination of a deficiency in income

taxes for the year ended July 31, 1961, as determined by

the Commissioner of Internal Revenue.

In the notice of deficiency, the respondent determined

a deficiency in income taxes of D. B. Anders, Inc., for the

taxable year ended July 31, 1961, in the amount of -$121,-

160.00 and he notified Petitioner that the deficiency and in--

terest, constituting the Petitioner’s liability as the trans-

feree of assets of the corporation, would be assessed against

the Petitioner. (The Petitioner admits that he stands in the

shoes of D, B. Anders, Inc., insofar as any determination of

the income tax issue involved in this case is concerned.) The

petitioner owned all of the stock of Service Industrial Clean-

o

4

ers, Inc., a Kansas corporation which in 1961 changed its

name to D. B. Anders, Inc. (hereinafter referred to as

“Service” or the “Corporation”).

Prior to 1951, Service’s business consisted primarily of

the laundering of industrial uniforms and other items

belonging to its customers, which type of business is re-

ferred to in the trade as “NOG,” meaning “Not-Our-Goods.”

(R 95, 96). Service began the rental business of garments

and other property in 1951 (R 96). The corporation was

engaged in the business of conducting and providing a

rental service of cleaned and laundered towels,’seat covers,

fender covers, wiping materials and dust cloths, coats,

coveralls, shirts, pants and other textiles and apparels, in-

cluding dusting and wiping equipment, sweeping tools, mops

and accessories, as well as conducting a cleaning and

laundering service of substantially the same types of prop-

erty owned by others. In the taxable year ended July 31,

1961 (prior to May 1961 when the corporation sold its as-

sets), some eighty to eighty-seven percent of the corpora-

tion’s business was attributable to laundry-rental business

(R 35-36, 46-47).

Service’s garment rental business consisted of fur-

nishing laundered shirts, trousers, coveralls and related

items to its customers on a periodic basis (Exhibits 10, 11,

12). Its principal garment customers were General Motors,

Ford Motor, Company, Trans-World Airlines, Bendix. and

industries of hat type. In addition, garment service was.

provided for such customers as garages, florists, cemeteries,

filling stations, motor car dealers and small’ manufac-

turers (R 96, 98, 147). In 1961, Service had approximately

40,000 garments in circulation in its rental business (R 103,

104). 7

Service’s shop towel rental business. consisted of fur-

nishing laundered shop’ towels to its customers on a pe-

oe as /

H)

riodic basis. Shop towels are ‘made of absorbent cotton

‘material and are used in industry ‘for wiping oil and

greases (Exhibits 13, 14, 15; R 97). Its principal shop

towel customers were railroads, pipe lines and industries

of that type (R 97). Service’s principal railroad customer

was the Union Pacific Railroad which was serviced on a .

system-wide basis from #ervice’s plant in Kansas City

(R 98).

For. Federal income tax purposes, Service charged to

its éxpense accounts when purchased the cost of the

garments and other property used in conducting its in-

dustrial laundry rental business. At the end of/@ach tax-

able year, the expense accounts were credited with: the

‘costs of the ending inventories of property which’ had not

been placed in use at the end of such taxable year (R 36,

37, 137, 138). Service’s annual replacement costs of

garments and other property used in. the rental business

averaged approximately $200,000.00 per year (R 100, 48, 41).-

The previously mentioned accounting method used by

Service in accounting for replacement costs for Federal in-

come tax purposes was not challenged by the Internal Rev- .

‘enue Service for the taxable year ended July 31, 1961, nor -

for prior taxable years (R 61, 141). Service had.a zero

basis in these assets (R 142). Other assets involved in the

sale to be hereinafter mentioned also hed a zero basis .(R

On May 16, 1961, Service entered int6\an “agreement

of sale” with four individuals for the sale of the assets of -

the business, including patronage and goodwill, for the total

sum of $509,500.00. The parties agreed that this did not

include new, unused and unwashed garments and rental

property and that there would be added to the price an

amount equal to the seller’s cost of such property (R 40-

50).

é

The sale by Service of its assets. was completed on or

about May 22, and 23, 1961 and pursuant to a plan of

liquidation adopted by Service, the corporation distributed _.

all of its assets in complete liquidation to the Petitioner,

its sole stockholder, within the 12-month period begin- .

ning May. 12, 1961. In April, 1962; the corporation filed a

resolution of dissolution with the Secretary of State of

Kansas and its corporate existence ceased (R 38, 50).

On its, income tax return for the- fiscal year ended |

_ July 31, 1961, the corporation reported a gain of $446,601.89

arising out of the sale of the assets tothe buyers and it

claimed exclusion of such gain from taxable income under :

Sec. 337 of the Internal Revenue Code of 1954. The

amount of gain reported, and for which exclusion from

taxation was claimed, included $233,000.00 as the amount

of the consideration received under the terms of the sales

agreement by Service allocated to the rental property in

use at the time of sale (R51).

The Tax Court found in favor of the Petitioner, stat-

ing that the sole issue was whether in a liquidation under

Sec. 337 of the Internal Revenue Code of 1954, the corpora-

tion is entitled to the nohrecognition of gain on property,

the cost of which had previously been,deducted as an ex-

pense. The respondent duly perfected an appeal to the

Court of Appeals for the Tenth Circuit, which court re-

versed, finding as a matter of law that the so-called tax

benefit rule precluded nonrecognition under Sec. 337 of

the Internal Revenue Code of 1954, such. judgment being

entered on June 20, 1969. The Petitioner thereupon filed

a timely petition for rehearing which was denied by the

Court of Appeals.on August 6, 1969 (Appendix B-3, infra,

Page A28).

«

7

_ REASONS FOR GRANTING THE WRIT

The question presented, i., whether the entire

amount of the gain realized by Service on. the sale of its

assets to the buyers is properly excluded from taxable in-

come, as the clearly expressed intention of -Congress, un-

der Sec. 337 of the Internal Revenue Code, as Petitioner

contends; or. whether a portion of the gain realized, namely

the $233,000.00 realized from the sale of the tangible per-

sonal property then in use in the corporation’s rental busi-

ness, is includible in income by reason of the creation of a

judicial exception té Sec. 337, notwithstanding the clear

“language of that statute (namely the “tax benefit rule”),

is an issue which is of significant national importance.

This case is a case of first impression and settlement of

the question by this court is plainly in the public interest, »

_ since it is currently involved in numerous proceedings both

before the Internal Revenue Service and in the various

courts which have jurisdiction of income tax matters as is .

shown by the following table of pending matters:

Status Before Court :

Or Before Internal Amount

Case Name - Revenue Service In Issue

1. Spitalny v. U.S., Appeal pending before $110,409.71

,288 F. Supp. 650 United States Court of

(D. Ariz: 1968) © Appeals for Ninth Cir- ‘

cuit.

2: S. E. vans, Pending on motions for $102,377.34

Inc. v. U. S., No. summary judgment

FS-69-C-27 (W. D. filed on behalf of both

Arkansas) plaintiff and defendant.

3. Steel Parts Cor- At issue and ready for $599,538.99

_ poration v. C..R., trial before Tax Court

Tax Court Docket of the United States.

No. 2085-69 worse

x

8.

4, Estate of Henry Pending on district con- $16,552.61 -

Sagemuller ference before District

| Director, Omaha, Ne-

‘braska. te

5. Donzel D. Bow- fending on district con- $9,508.07

man, et al. ference before -District

Director, Omaha, Ne-

~ braska. ‘

. 6. Gritsch Corpo- Claim for refund dizail- $17,004.00

ration lowed by IRS _ San, :

Francisco,’ California

office September 1968.

In addition, the opinion of the Court of Appeals has

departed so far from the accepted and usual course of ju-

dicial proceedings as to call for an exercise of this court’s

power of supervision, i.e. , namely the Court of Appeals has

created a judicial exception to a clear and unambiguous

statute and regulation. Section 337 of the Internal Reve-

nue Code of 1954, 36 USC Sec. 337, first enacted in 1954,

provides that if a corporation adopts a plan of complete |

liquidation on or after June 22, 1954, and within.a 12-

month period beginning on the date of the ‘adoption of the

plan, all of the assets of the corporation, less those retained

‘ to meet claims, are distributed in complete liquidation, then ,

. no gain or loss shall be recognized to such corporation from

the sale or exchange by it of property within*such 12-

month period.

The purpose of the inclusion of Section 337 in the

1954 Code was to deal with the so-called “Court Holding

. Company” problem. Prior to the enactment of Section 337

if a sale of assets was made in connection with the liquida-

tion of a corporation, it was necessary to determine

whether the sale was made by the corporation, in which

case liabilities for two income taxes, one on the corporate

level and one on the shareholder level, incurred, or

~

9

whether the assets were first distributed to the sharehold-

ers and the sale made by the shareholders themselves, in

which case’ only the shareholder’s tax applied. The pur-

’ pose of Section 337 was aimed at eliminating the uncer-

tainties attendant upon the Supreme Court decision in

Commissioner v. Court Holding Co., 324 US. 331 (1945),

and United States v. Cumberland Public Service’ Co., 338

‘U.S. 451 (1950). The enactment of Section 337 was to

-make moot the question as to whether a sale of assets

was accomplished by the corporation or its stockholders.

See Frank W: Verito, 43 T.C. 429, 437-39 (1965).

There is no dispute in this case with respect to the

facts attendant to the complete liquidation of Service. On

- May 12, 1961, Service adopted a plan of liquidation pur-

‘suant to Section 337 of the Internal Revenue Code. (R 37,

176). Subsequent to the adoption of the plan, on May 16,

1961, Service entered’into an agreement of sale with Albert

Gitlow, Abraham Gitlow, Ben E. Singer, and Joseph L:

Fradkin, acting in behalf of Service Industrial Cleaners, :

Inc., a Kansas corporation formed on May 17, 1961 (the —

Buyer); for the sale to Buyer of substantially all the as-

_ sets of Service (R 37, 188). Pursuant to said panes

Service sold to Buyer on May 22 and 23, 1961, substa lally

all its assets including its plant and office equipment, real

estate, ‘goodwill, its entire inventory of garments, shop

towels, fender and seat covers, and dust control items in

use in its laundry rental business, its accounts receivable,

and its inventory of new articles‘ which had not yet been

placed in service to the customer (R 38, 188).

The decision of the Court of Appeals for the Tenth

_ Circuit necessarily is founded solely. on its so-called “tax

_ benefit theory.” It is apparent from examining Exhibits

10 through 18 that the corporation sold tangible personal

—: If as this court has’ usc de stated, the words

re)

10

of statutes, including revenue » acts, should be interpreted

“where possible in ordinary everyday sense, the term

_ “property” as used in Section 337 certainly embraces tan-

gible personal property. Malat v. Riddell, 383 U.S. 569 at

571 (1966). Furthermore, the technical definition of prop-

erty set out in Sec. 337 and the regulation ‘promulgated

thereunder is equally persuasive. . Section 337 defines

“property” by a.process of exclusion. Section 337(b) (1)

states that, for the purpose of the nonrecognition of gain

provision of Section 337(a), the term. “property” does not

include: |

“(A) stock in trade of the corporation, or other prop-

erty of a kind which would properly ‘be included in

the inventory of the corporation if.on hand at the close

of the taxable .vear, and property. held by the cor-

poration primarily for sale to customers. in the ordi- .

nary course of its trade Or business,

. (B) installment obligations acquired in respect of the

sale or exchange (without regard to whether such sale

-_ or exchange occurred before, on, or after.the date of the

adoption 6f f. the plan referred to in subsection (a)) of

stock {In trade or other property described in -subpara-

graphA) of this paragraph; and

(C) installment obligations acquired, in respect of

- property (other than. property described in subpara-

graph (A)) sold or exchanged before the date of the

adoption of such plan of liquidation.”

The legislative history of Section 337 dom not con-

tain any discussion of the term “property” beyond. the .

basic statutory definition. 3 U.S. Code Cong. & Adm.

News 4244, 4896: (83rd Cong.,. 2d Sess. 1954). Petitioner,

in his Regulations, US. Treas. aS Sec. 1.337- 3( a), de-

fines “property.” as follows:

“(a) Except as provided in section 337 (b) (2)

and this section, the term ‘property’ as used in section

? | aa ; Y

33V7(a) and. section 1.337-1 does not: include, (1) shi

- in trade of the corporation, or other property of a kind

which would properly be included ,in the inventory

of the corporation if on hand at the close of the taxable

"year and property held by the corporation primarily

for sale to customers in the ordinary course of its

trade or business (hereinafter for purposes. of section

337 referred to as ‘inventory’), (2) installment ob-

ligations ‘acquired at any time from the.sale or ex-

change of inventory, or (3) installment obligations

acquired from the sale or exchange of property (other

than inventory) prior to the adoption of the plan of

liquidation. With the exceptions listed in this para-

graph, the term ‘property includes all assets owned by

a corporation.” (Emphasis —: (Adopted 12

2/55 by T.D, 6152). |

The installment obligations exception of Section 337(b)

(1)(B) and Section 337(b)(1)(C) clearly have no ap-

plicability to the case at bar. .It is clear that the Court

of Appeals does not find that any of the exceptions to

the statutory definition of the word -“property’? are ap-

plicable to the Petitioner. Furthermore, eVen if such ex- ~

ceptions were applicable, under the specific provisions of

Sec. 337 a disposition of such assets in a sale in one trans-

action precludes recognition of gain and such property, even

though inventory, et cetera, is included as property. Sec.

337(b) (1) (A). This exception for so-called bulk sales. of

inventory was added by the Senate so that Sec. 337 “more

nearly corresponds to the results that would follow a-sale

of all the corporate assets (including the inventory) and

~ the sale of all the stock.” S.Rep.No. 1622, 83rd Congress,

2nd Sess., 1954, 3 U. S. Code Cong. —_ = News. 4621, at

4680. ; |

In addition, no contention was made by the Court of

Appeals that there had not been a “sale” of such assets

and under a decision of this court there could be little

\

> a

7 \ i

_doubt that there was a sale since a sale in the ordinary

‘sense of the word, is a transfer of property for a fixed price

in money. Commissioner of ‘Internal Revenue v. Brown,

380 U.S. 563 (1965). Thus, the Court. of Appeals really

ruled in the instant case that property was sold in a duly

executed Sec. 337 liquidation and sale but that by reason

of the “tax benefit rule,” Sec. 337 need not be followed.

The gist of the Court’s opinion is contained in the Pevision

‘to its opinion which resulted from the Petitioner’s petition

for rehearing where the Court states at modified Page 3 of

its a:

. We conclude that the fact that a transaction in-

volves the disposition of property within the meaning

of Sec. 337 does not compel treatment of ooh niger

from it-as gain from a transfer of the property. . .

Where the cost of the property was fully expensed

and deducted for tax pufposes, ‘tax benefit principles

reasonably call for treatment of the proceeds as re-

coupment of the prior charges and ordinary income.

By Sec. 337 Congress showed no intention to discard

such principles.” are

. The decision which is usually relied upon as ‘a basis

for the tax benefit rule is Dobson v. Commissioner, 320

U.S. 489 (1943). If Dobson be the parent of child known

as the’ “tax benefit rule, ” then ‘apparently the parent does.

not acknowledge the child. .In the coursé of the Dobson

opinion this Court stated at Page 506:

“

. We are not adopting any rule of tax benefits.”

Despite this express disclaimer, the Court of Appeals

in the instant case applied the tax benefit rule as an un-

wavering principle of law which must be followed-even in

_ the face of express unambiguous language from Congress.

- As clearly indicated . in the previous quotation fromm

‘Dobson, there is no such rule. Other Courts of Appeal

eo ge

have also clearly indicated that there is no such rule. In

Reynolds v. Boos, 188 F.2d 322 (8th Cir. 1951) the court .

stated at Pages 325 and 326 as follows: .

“What it apparently is here sought to get estab-

lished is an absolute rule of liability in any case of

tax benefits. Individual situations may perhaps exist

where a liability soundly can be found to be present

because of some previous tax benefit, but there is no

‘such general or blanket principle of tax liability. The

Supreme Court specifically said in Dobson . ... ‘We

are not adopting any rule of tax benefits.’” .

Furthermore, if the respondent’s position and the posi-

tion of the Court of Appeals is to be consisient, the tax

benefit theory ‘must mean that one would , always -lose

depreciation. in the year of sale in a Sec. 337 liquidation.

If this were not ‘the case, the taxpayer would receive a

“tax benefit” for which he received reimbursement inthe

year of sale. However, this court has refused to follow

that theory in a Sec. 337 liquidation. Fribourg Navigation

Company, Inc. v. Commissioner of Internal Revenue, 383°

-U‘S. 272 (1966). Petitioner submits that the rationale of

Fribourg is that since prior to the adoptign of Sec. 1245

of the Internal Revenue Code in 1962, Congress had not

provided for the recapture of depreciation in the year of

sale, and since Sec. 337 proyided. for nonrecognition on the .

gain of the sale of assets, it necessarily followed that if

useful life and salvage value were correct, then deprecia-

‘tion must be allowed in the year of sale. The gist of

the ii: case as stated in 383 U.S. at Page 285 is:

. For post-1962 transactions Sec. 1245 applies

to the ‘situation which occurred in the instant case

and would produce greater revenue. The taxpayer

“must report as ordinary income all depreciation

recouped on sale, and this. notwithstanding that the

sale was part of a nonrecognition liquidation within

Sec. 337. . . .* .(Emphasis that of Court).

In short, Congress has specifically provided by statute

,14 rs —

_ that all gain on the sale of property owned by a corporation

{?

ae

involved in a Sec. 337 liquidation (including even inven-

tory, d property held for sale if sold in one transaction)

vend from Sec. 337 in the sense that no gain is recognized

by the corporate taxpayer. The only exclusions are those

\expressly stated in the statute such as, inventory. sold in -

jmore than one transaction. Furthermore, the ‘regulation

prothulgated pursuant “tg that statute ‘quite clearly fol-

lows the statute and concludes with the statement “with

the exceptions listed in ie paragraph, the term ‘prop-

erty’. includes all assets owned by a corporation.” Reg.

°1,337-3(2). ‘The Petitioner submits that to engraft onto

an unambiguous statute of Congress and onto an unam-

‘biguous regulation properly _adopted pursuant to that

statute an exception under the “tax benefit rule” is an

improper judicial function. If: the purpose be to close a

so-called tax “loophole” (which seems to be a podpular

topic of conversation during this era), then Congress

certainly has it within its power to amend Sec. 337 to

close that loophole. Courts should not ‘legislate to do other

than what Congress intended by an unambiguous Sec.

337.

The erroneous interpretation of the Court of Appeals in

the instant case is best illustrated by the authorities relied

upon in its opinion. The opinion of the Tax Court below

(48 T.C. at 822, 823) clearly distinguished Commissioner

v. First State Bank of Stratford, 168 F.2d 1004. (5th Cir.

1948), cert. denied 335 U.S. 867 (1948) and West Seattle —

National Bank of Seattle v. Commissioner, 288 F.2d 47 ( 9th

Cir. 1961), and the Court of Appeals did nothing to point.

out any respect in which the Tax Court erred in so doing.

The comments made by the Tax Court with respect to

First State. Bank of Stratford are equally applicable to

15

Merchants National Bank of Mobile v. Commissioner, 199

F.2d 657 (5th Cir..1952). Citizens Federal Savings and

Loan Association of Cleveland v. United States, 290 F.2d

932, 936 (Ct. Cl. 1961), states that the income there in-

volved did not arise from the sale of assets. Nor was there

any sale or exchange in Alice Phelan Sullivan Corporation

v. United States, 381 F.2d 399, 402 (Ct. Cl. 1967) or Lloyd

H. Faidley, 8 T.C. 1170 (1947). Monday v. Commissioner,

decided January 2, 1957 (P-H Memo T.C., par. 57,001),

affirmed per curiam, 252 F.2d 789, cert. denied, 358 U.S.

883, does not even remotely involve the tax benefit rule,

let alone the application of the tax benefit rule to gain real-

ized from a sale.

As stated previously in this petition the issue involved

in this action is national in scope. Some indication of the

scope of that issue is illustrated by a recent District Court’

opinion which followed the Tax Court decision in the in-

stant case. Spitalny v. United States, 288 F.Supp. 650 (D.

Ariz. 1968), on appeal to the Court of Appeals for Ninth

Circuit. That decision involved a supposed deficiency in

Federal taxes of $110,409.71. In an opinion written by a °

respected member of the judiciary who was a past president

_of the American Bar Association, the theory of the Tax

Court’s opinion in the instant case was followed completely.

It is therefore apparent from the Spitalny case and the

cases previously referred to as now pending involving this

issue, that the issue is national in scope involving a con-

siderable sum of money in the aggregate. Furthermore,

the Petitioner submits that most of the cases pending on

this issue can be disposed of as a matter of law, since

there is usually no question that the particular item in-

volved, such as the property rented in the instant case, was

charged to expense. (Petitioner is advised for instance

that the case.of S. E. Evans, Inc. v. U. S., referred to in

16

the table at pages 7-8 above is now pending on the motions

for summary judgment on behalf of both the taxpayer and

United States with the only issue of law being whether or

not the tax benefit rule is an exception to Sec. 337.) Ob-

viously, this issue apparently is one upon which members

of the judiciary at the lower level will have disagreement.

Also, it is an issue which will continue to recur so long as

Sec. 337 remains a part of the Internal Revenue Code, said.

section having been at first adopted in 1954. Such being

the'case, the Petitioner submits that settlement of the is-

sue involved in the instant case is plainly in the general

public interest, and Petitioner further submits that a de-

termination of whether or not a judicially engrafted ex-

ception (the tax’.benefit rule) can be used to modify a

clear and unambiguous taxing statute passed by Congress

is also in the national interest. In other words, the in-

stant case raises an important question in the administra-

tion of the revenue laws. This court has indicated that such

a question is reason enough to grant a petition for certiorari.

United States v. Korpan, 354 U.S. 271 (1957), reh.-den. 354

U.S. 945. There, this court stated at Page 273:

. we granted certiorari because the case raised

‘eel questions in the administration of the rev-

_ enue laws... .”

The Petitioner further subinits that the position taken

by the Commissioner of Internal Revenue in the instant

case represents a sudden and unwarranted change of posi-

tion from a consistent administrative, practice followed pri-

or to 1961. As has been mentioned previously the regula-

‘tion which the Commissioner of Internal Revenue adopted

under Sec. 337 quite expressly defines property as including

all assets owned by a corporation. Reg. 1.337-3(a)

(Adopted 12/2/55 by TD. 6152). Graphic evidence of the

fact that the Commissioner specifically intended. exactly

i

17.

- what he said in his regulation is contained in Rev. Rul.. 59-

308, Cum. Bull. 1959-2, Page 110, where the Commissioner

had a request made to him as to the proper tax treatment

of the sale of amortized emergency facilities where the sale

was made by a corporation under ‘a Sec. 337 liquidation.

Deductions had been taken upon the facilities under Sec.

168 of the Internal Revenue Code over a period of 60

months, amortizing the entire adjusted basis in such assets.

(In other words the assets had a zero basis.) Yet the. rul-

ing states that such property was_protected by the non-

recognition provisions of Sec. 337/ Sperifically, the ruling

states at Page 111:

“There is no provision in-Sec. 1238 of the Code

which requires gain to be recognized. That section

only classifies part or all of the gain, when recognized,

as ordinary gain rather than capital gain. Section 337

of the Code provides for the nonrecognition of the gain

from the sale of property of the corporation in con-

nection with a liquidation meeting the requirements of

. that section. Emergency facilities, not having been

specifically excluded from the definition of ‘property’

as used in Section _ (a) of the Code, are included in

* that term.”

The first departure by the Commissioner of ikarealt

Revenue from such position was taken in Rev. Rul. 61-214,

1961-2 Cum. Bull., Page 60. That ruling involved an office

building corporation which adopted a plan of complete liq-

uidation under Sec. 337. Included in the ‘assets sold we

a pile of coal, plumbing supplies and small tools. The |

of such items had. been deducted in prior years. The Com-.

missioner held that the consideration received for such

items was taxable as ordinary income. Petitioner assumes

- that the theory of the latter ruling is that the so-called “tax

benefit rule” is an exception to Sec. 337. If this be the

case, it is.an exception which the Commissioner did not

recognize either in his regulation or in Rev. Rul: 59-308,

8: AD

which ruling has never been revoked: or modified by the

Commissioner of Internal Revenue. Petitioner submits that

to the extent that Rev. Rul. 61-214 attempts to engraft onto

Sec. 337 an exception not provided by Congress, that the

revenue ruling is invalid, and for the same reason that the

Court of Appeals’ decision is incorrect. :

Petitioner’s position in this regard is contained in the

opinion of the Tax Court where the Court stated at 48 T.C.

at Page 821 as follows:

/

~

“In support of his contention that the tax-benefit

rule is applicable here, respondent has cited Rev. Rul.

61-214, 1961-2 C:B. 60, wherein if was held that a por-

tion of the proceeds received by an office building

corporation, in a sale in ‘complete | liquidation, for a

stockpile of coal, plumbing supplies, and small todls,

the cost of which had been deducted in prior years,

was. to be treated as ordinary income under section 61

and not’ as nonrecognized gain under section 337(a).*

This ruling is no more than an expression of the

_ opinion or position of the Internal Revenue Service with

_ respect to the law applicable to the facts recited there-

in and does not have the force of law. See the pref-

ace to the Cumulative Bulletin; Rogovin (then Chief

Counsel, I.R.S.), ‘The Four.R’s: Régulations, Rulings,

Reliancé and Retroactivity—A View From Within,’ 43

Taxes 756 (Dec. 1965); Pictorial Review Co. v. Helver-

ing, 68 F.2d 766, 768; Radiant Glass Co. v. Burnett, 54

F.2d 718, affirming 16 B.T.A. 610; Bush #1, - yf 8e

218, 232. .

4. In Rev. Rul. 59-308, 1959-2 cB. 110, respondent held that

no taxable gain was to be recognized by a corporation, under sec.

337, from the sale during the period of liquidation of emergency

facilities amortized under sec. 168 of the Code. In the stated case

the property had been completely amortized. In that ruling re-

spondent. conceded that the facilities, not having been specifically

excluded from the definition of “property” as used in sec. 337,

were included in that term (Court’s footnote).

19

Though noted ‘without comment’ in Hollywood

Baseball Association, 42 T.C. 234, 262 fn. 6, affd. 352

F.2d 350 (C.A. 9, 1965), vacated and remanded 383 U.S.

824, Rev. Rul. 61-214 has not to our knowledge been

approved by: any court. The conclusions reached are

not supported by the authorities cited therein, are

clearly contrary to the provisions of section 337(a)

and, in our opinion, are not a valid interpretation of

the statute. See Gutkin & Beck, ‘Section 337: IRS

Wrong in Taxing, at Time of Liquidation, Items Pre-

viously Deducted.’ 17 J. Taxation 146.”

{ can

Neither the respondent nor the Court of Appea

seriously contend that there was no “sale” in the instant —

case. Neither the respondent nor the Court of Appeals

can seriously argue that the sale was not of “property.”

The only basis upon which 'the position of the respondent

can be sustained and upon which the decision of the Court

of Appeals can be sustained is by reading into Sec. 337

a judicial exception, namely the tax benefit rule. However,

-such a position is in direct conflict with the Commissioner’s

own Reg. 1.337-3(a) and Rev. Rul. 59-308, supra, which reg-

ulation and ruling Petitioner submits are a correct interpre-

tation of a clear and unambiguous statute created-by Con-

‘gress.

Pe BS ERE ITE

§ 20

CONCLUSION

For the foregoing reasons, this petition for a writ of

certiorari should be granted, m

Respectfully submitted,

R. EuGENE McGannon

~ 1100 Commerce Trust Bldg.

Kansas City, Missouri 64106

. Counsel for Petitioner

Of Counsel: -. us

Hartow B. .KIncG

J. GLENN HAHN “g

WALTER J. KENNEDY

1100 Commerce Trust Building ’

Kansas City, Missouri 64106