Opposition Brief — Bankers Mortgage Co. v. United States

Gu the Supreme Court of the United States

OctoBeR TERM, 1969

No. 1552

BANKERS MortTGAGE COMPANY, PETITIONER

’.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINIONS BELOW

The memorandum and order and the findings of

facts and conclusions of law of the district court (R.

48-55, 128-131)’ are unreported. The opinion of the

court of appeals (Pet. App. la-—12a) is reported at 423

F. 2d 73.

JURISDICTION

The judgment of the court of appeals was entered

on February 20, 1970 (Pet. App. 18a). The petition

*“R.” references are to the separately bound Appendix to peti-

tioner’s brief in the court of appeals. “Pet.” and “Pet. App.”

references are to the petition for certiorari and the Appendix

thereto, respectively.

(1)

387-512—70

i

tioner was not required to repay the loan and could

cancel the loan at any time, the transaction was in sub-

stance a sale of its mineral interest for $300,000, and

was to be treated as such for income tax purposes,

The Tax Court upheld the Commissioner's determina-

tion in 1943 (1 T.C. 698), and, in 1944, the Fifth Cir-

cuit affirmed (141 F. 2d 307, affirmed on rehearing,

142 F. 2d 130), and this Court denied the subsequent

petition for certiorari (323 U.S. 727). (Pet. App. 4a.)

Despite the judicial determination, petitioner and

Humble continued to treat the 1937 transaction as a

loan on their respective books and for other purposes.

By 1962, petitioner’s obligations under the notes, with

the exception of its obligation to pay interest at matu-

rity on the $200,000 note, had been fully discharged

through application of the royalties due petitioner

under the lease. Petitioner thereupon exercised its

option to pay the interest on the $200,000 note ($137,-

389.29), and Humble released the deed of trust that

had secured the notes. (Pet. App. 4a-5a.)

Petitioner deducted its 1962 payment on the

$200,000 note as interest, Consistently with the prior

judicial determination that the 1937 transaction was

a sale and not a loan, the Commissioner treated peti-

tioner as having exercised its option to repurchase the

property. Accordingly, he viewed the 1962 payment

as the purchase price and disallowed the interest

deduction. Petitioner paid the tax in dispute for 1962

and brought this suit for refund in the district court.

Petitioner also claimed a refund for 1937, seeking

to reopen the 1943-1944 litigation. (Pet. App. 2a, 5a.)

4

The district court held (R. 128-131) that petitioner

was collaterally estopped to assert the 1962 claim by the

prior judicial determination. It also held (R. 48-55)

that petitioner could not reopen the prior proceeding

under Rule 60(b) of the Federal Rules of Civil Pro-

cedure and that this claim was barred by res judicata.

On appeal, the Fifth Circuit affirmed (Pet. App.

la-12a).

ARGUMENT

The decision below is correct. There is no conflict

or any other ground for further review.

1. The courts below properly held that petitioncr’s

claim for 1962 was barred by collatera] estoppel. As

the court of appeals explained (Pet. App. 10a), the

prior litigation and petitioner’s 1962 claim involve the

identical question—whether the 1987 transaction con-

stituted a loan. Thus, under this Court’s decision in

Commissioner v. Sunnen, 333 U.S. 591, 599-600, the

prior determination that the 1937 transaction was not

a loan bars the new claim unless, in the interim, the

controlling facts or applicable legal principles have

changed.

There has been no change in the controlling facts.

The alleged ‘‘new’’ facets upon which petitioner relies

(Pet. 11) are that it has continued to treat the transac-

tion as a loan for non-tax purposes and made a pay-

ment in 1962 which it characterizes as interest. Peti-

tioner’s treatment of the transaction other than for

tax purposes and the label which it chooses to attach

to its 1962 payment cannot control the tax conse-

quences here. The essence of the earlier determina-

RE ee I RE ENG BGA SNE I OF WON BENS TOR

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tion was that, notwithstanding the form of the 1937

transaction, the transaction was in substance a sale.

Petitioner’s ‘new’ facts would be controlling only

if the form, rather than the substance, of the transac-

tion was determinative of the tax consequences,

Nor has there been a change in the applicable law

Subsequent to the 1943-1944 litigation, which would

prevent application of collateral estoppel. Petitioner

relies (Pet. 14) on Section 1.163-1(b) of the Treasury

Regulations (Appendix, infra, pp. 9-10). That Regula-

tion, which was promulgated after 1943, provides that

a taxpayer-owner of real property may deduct as in-

terest on indebtedness interest on a mortgage note

upon which he is not “directly liable.” The Regula-

tion is of no help to petitioner since it assumes that

the taxpayer is indebted on a mortgage. The ques-

tion here, however, is whether petitioner was so in-

debted, and, on this question, the Regulation is

irrelevant. (See Pet. App. 10a-11a.)

Contrary to petitioner’s contention (Pet. 10), there-

fore, the decision below in no way conflicts with Com-

missioner v, S “nen, supra, The court of appeals fully

adhered to the principles of Sunnen in concluding

that petitioner was collaterally estopped to make its

1962 claim.

2. Also in keeping with prior authority is the court

of appeals’ holding that petitioner’s claim for refund

of 1937 income taxes is barred by the doctrine of res

* Petitioner also relies (Pet. 15) on New McDermott, Inc.

Vv. Commissioner, 44 B.T.A. 1035. New McDermott was decided

in 1941, however, and thus could not reflect a change in the

law subsequent to the 1943-1944 litigation.

=

7

judicata. Petitioner contends that the court below

erred in refusing to grant relief from the earlier

judgment by considering its claim as an “independent

action to relieve a party from a judgment” under Rule

60(b) of the Federal Rules of Civil Procedure ( Ap-

pendix, infra, pp. 10-11). This contention is without

merit.

The court of appeals correctly held (Pet. App. 8a)

that petitioner was not entitled to maintain an inde-

pendent action because it failed to show that mistake,

fraud, or accident prevented it from presenting a

meritorious defense in the prior proceeding (cf. Na-

tional Surety Co. v. State Bank, 120 Fed. 593 (C.A.

8)), and because there were no other equitable

grounds warranting relief.’

Petitioner’s claim to a new hearing rests on one of

the same grounds upon which it relies to avoid col-

lateral estoppel with respect to its 1962 claim—that

there was a change in the controlling facts subse-

quent to the 1943-1944 litigation. Since, as we have

shown, there was no such change, petitioner, in effect,

seeks to relitigate precisely the same issues that were

dealt with in the prior action. This it may not do. See

American Surety Co. v. Baldwin, 287 U.S. 156; To-

ledo Co. v. Computing Co., 261 U.S. 399; 7 Moore’s

Federal Practice, par. 60.37; 3 Barron and Holtzoff,

Federal Practice and Procedure (Rules ed.), See.

1331.

* Petitioner incorrectly states (Pet. 17) that the court of

appeals limited possible relief under Rule 60(b) to situations

involving mistake, fraud, or accident. The court quite clearly

took into account other “equitable considerations” (Pet. App.

8a).

8

CONCLUSION

The petition for a writ of certiorari should be

denied.

Respectfully submitted.

ERwWIN N. GRIswOLp,

Solicitor General.

JOHNNIE M. WAtTERs,

Assistant Attorney General.

Witiiam A. FRIEDLANDER,

IsstE L. JENKINS.

Attorneys.

JUNE 1970.

APPENDIX

Internal Revenue Code of 1954 (26 U.S.C.):

Sec. 163. INTEREST.

(a) General Rule——There shall be allowed

as a deduction all interest paid or accrued

within the taxable year on indebtedness.

* * * * %

Treasury Regulations on Income Tax (1954 Code)

(26 C.F.R.):

Sec. 1.163-1 Interest deduction tn general.

* * * * *

(b) Interest paid by the taxpayer on a mort-

gage upon real estate of which he is the legal or

equitable owner, even though the taxpayer is

not directly liable upon the bond or note secured

by such mortgage, may be deducted as interest

on his indebtedness. Pursuant to the provisions

of section 163(¢), any annual or periodic rental

payment made by a taxpayer on or after Jan-

uary 1, 1962, under a redeemable ground rent,

as defined in section 1055(¢) and paragraph

(b) of § 1.1055-1, is required to be treated as

interest on an indebtedness secured by a

mortgage and, accordingly, may be deducted

by the taxpayer as interest on his indebted-

ness. Section 163(e) has no application

in respect of any annual or periodic rental

payment made prior to January 1, 1962, or pur-

suant to an arrangement which does not con-

stitute a “redeemable ground rent” as defined

in section 1055(c) and paragraph (b) of

§ 1.1055-1. Accordingly, annual or periodic pay-

ments of Pennsylvania ground rents made

before, on, or after January 1, 1962, are deduct-

ible as interest if the ground rent is redeem-

(9)

10

able. An annual or periodic rental payment

under a Maryland redeemable ground rent

made prior to January 1, 1962, is deductible

in accordance with the rules and regulations

applicable at the time such payment was made.

Any annual or periodic rental payment under

a Maryland redeemable ground rent made by

the taxpayer on or after January 1, 1962, is,

pursuant to the provisions of Section 163(¢),

treated as interest on an indebtedness secured

by a mortgage and, aceordingly, is deductible

by the taxpayer as interest on his indebtedness.

In any case where the ground rent is irredeem-

able, any annual or periodie ground rent pay-

ment shall be treated as rent and shall he

deductible only to the extent that the payment

constitutes a proper business expense. Amounts

paid in redemption of a ground rent shall not

be treated as interest. For treatment of re-

deemable ground rents and real property held

subject to liabilities under redeemable ground

rents, see section 1055 and the regulations

thereunder.

* * * * *

Federal Rules of Civil Procedure:

Rute 60. Revier From JupGMENT oR ORDER

* * * * *

(b) Mistakes; Inadvertence; E.xreusable Ne-

3 glect; Newly Discovered Evidence; Fraud, «te.

. On motion and upon such terms as are just, the

court may relieve a party or his legal represent-

g ative from a final judgment, order, or procced-

ip ing for the following reasons: (1) mistake,

inadvertence, surprise, or excusable neglect:

(2) newly discovered evidence which by due

diligence could not have been discovered in

time to move for a new trial under Rule 59(b) ;

(3) fraud (whether heretofore denominated in-

trinsic or extrinsic), misrepresentation, or

other misconduct of an adverse party; (4) the

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judgment is void; (5) the judgment has been

satisfied, released, or discharged, or a prior

judgment upon which it is based has been

reversed or otherwise vacated, or it is no longer

equitable that the judgment should have pro-

spective application; or (6) any other reason

justifying relief from the operation of the

judgment. The motion shall be made within a

reasonable time, and for reasons (1), (2), and

(3) not more than one year after the judgment,

order, or proceeding was entered or taken. A

motion under this subdivision (b) does not

affect the finality of a judgment or suspend its

operation. This rule does not limit the power of

a eourt to entertain an independent action to

relieve a party from a judgment, order, or pro-

ceeding, or to grant relief to a defendant not ac-

tually personally notified as provided in Title

28, U.S.C. § 1655, or to set aside a judgment

for fraud upon the court. Writs of coram nobis,

coram vobis, audita querela, and bills of review

and bills in the nature of a bill of review, are

abolished, and the procedure for obtaining any

relief from a judgment shall be by motion as

prescribed in these rules or by an independent

action.

U.S. GOVERNMENT PRINTING OFFICE: 1970