Opposition Brief — United States v. Waterman, Largen & Co.

cerary— | a ai

SUPREME COURT, U. 5. — ee ee ree

AUG 18 1970.

e, nit De aaa “CEER

‘ — es =:

Sel %

INTHE | ee

| Supreme Court of the United § States

OCTOBER TERM, 1970

Roe Sie atk Ti ite Cit a

5 , «

No. 415 oe

° o _

. sisialillatans ‘ )

= ’

Untrep States or America, Petitioner,”

| v.

ees WATERMAN, LARGEN & Co., Inc., Respondent - oe

ss Cee eek a Ws :

:

- On Petition. for a Writ of Certiorari to the ‘ ! ‘

_ United States Court of Claims : a *

J

apres, nxt

aay

a - ‘ , é : ° we

BRIEF FOR THE RESPONDENT IN OPPOSITION —

See

C

Feit ke GORE TS

JOSEPH E. McANDREWS

| _ Caron. K. NicKEL ~ ?

7 ae y._ Tvins, PHILLips & BaRKER | z

~ _ 1700 Pennsylvania Ave, N.W. ~ y ;

Washington, D. C. 20006 : Pets)

ir see . -- Attorneys for Respondent

Shy Se PRY

s

——

Press oF Byron S. ADAMS PRINTING, INC., WASHINGTON, D,’C-

*

EET

. , Ar :

INDEX

4 4a €

4 oS,

« Le -

Opinions below and jurisdiction

Statutes involved

ie De RD BOS SS ENA Ee 6 Oe OLS 4 SO Ag Se ES

et ee eee Se ee eee eee ea eee eee Ce Oe SS

Bo. | eee rae eee as

Question: presented

Argument ..00:... UNS Seng RO age eee ere

Conclusion ...... RMS aie oa Tea y Oia ed ah ok acca

-CIPATIONS

“CASES: |

Booth Newspapers, Tue. ‘v. Unitad States; 147 Ct. C1.

EN oy ae eae 8 Oo SK Da op ee ics

Chase Candy oo vy. U wited States: 130 Ct. Cl. “102, 126

Oh SS ae ant Sere a hee Ser ne 7

(OMMISSIONCL XV, PODS yd Sew al Co,, 2216 ad O44 (2d

RR tt oe See Sy ge a Ar 6

(C‘ommissione ; i Gille the Motor Peaispodt Tne 5 OOF *

lug eR Ears Aree nt A A a

Comunissioner v.P.G. Lake. Tne. Gee A, Oe ek a 7,10

Corn Products Reffhing Co. v. Commissioner: 350 ©, a ;

ag EE REED See Aa aD 5,6, 7,8, 9, 10,11 |

Donruss Co.. The &. U witeat States. 200 TS, 997 ......... 11

Duffey ve Lethert, COA USE CLE MAD tee 7

Edwards.v. Hoag, 214 ¥.2d 640 (Sth Cir) ooo... oe, pi |

Blectri@al F nity Re orp. v. Commissioner, 23.7 re 1026 ° 6

Elston Co, veo U nited States,°21 F. Supp. POT oe, >

PN a err arn oe ee ee atid a

FS. Services, Inecy. United: States, WSC. C L. Sf4, te ime

SA se oie IE a SA tay arene ae a re eee 6

Grier, John J... Conv. United States! 28 KF. 34 162 (7th

eR es ite kara ews ee EL springs PME oR AD 6

“lal flea: Nria Ca. ¥. { a , eT C. 1S. alf*d

per curiam, 261 F.2d 88 .. 0.6... ye ay 7,

Hagan v. United States, oe . lias. a er Pe 6

Lb BO Bee Re be 6

Holliseogl Rase hall. [sso ae ( "OM MASSEGIL yp £03

2d 494 (9th Cir. 1970), cert. applied for M: iy a4).

i : Peta ae ae ek GRRE bike aa a ae en 7.10

peut? v. Commisatomer, Jia Use 26... Cis ee claw eee 7,10

a ;

° a

ul - . » Index Continued

. 2 Pave

ar eae 1: ‘oe

Leonard Haathy. Commissioner, TCS Memo nil . Ss.

oad 22. Sa RY ki Ai,

fournal Coon. Vluited Slates, T%) 2 Bas a bets oS Ree ae

‘KRehew hala. Cex € se oagnee ss F. ee ee ee a

Laveslen Caaf r, 4 ML 3 Stag alent on ale

Vole wo Riddell, AS3 ee au) Seek hae

Tay Id Mournal Coov, Commisstoner, 7 \ V. Gal ON t 4:

Varwand Coal ~ Coe C om pane NM Ginnis, 80 KF. +e

OES SrA PENT co ale ea ee na a ates 9

any Peal Lik I ie pee hp ( rt ye *: Tnited States. {OD Woe d

PTE (ETC. 1969) nine ies ks ee fee eee ae

Ve fromlitan Lain ri Co. x 1°85... (OE. Sapp. son. :. 9

Wissisnue? Corp vv. Commissioner, 3¢ FACE iow. s: <F 7

Vihlock vo Commissioner, AV ot 1iSd.(7th Cir. W969) 11

ONE Dominion PRneood COEp. ve. Commisstoner, 2

BP EN A oe elect are ee ne ee er .- a

Pierce SS Cae, © nite T States: A722 VSI. TO886.- 7

Sonerstetn. ER stiite of, PA. Svan 1970 ees ae

Soodheosttrn Meriation Underwriters, Inet ve Commis

HORE Ee EE ee Bee ee Beer pare re ere ae

Steadinan vy Commissioner, rat Pld 1 (6th Cir. ) AER 6, 10

Po nlin w. Conntissioners Jatt OE ae ves 9

Western Wine and Liquor a.ve C OMISSION, 18 iP ie

1000), neg. THOR OT Be oe ee 6, S28, 10, =

Whinple v. Commissiqner, 9038 US. 195 (19038) 2.020. . A,

Internal Revenne Code of 1954 (26 USC.) :

Section 162(2) eeSra th mao ferk oe ay Rare Pee ce Bee A= a |

Rsotinay IAP) ca eee Pah aN eae tae he Pea are tee =

Revtiod WECM) eee Pea eie cont eee Poet oe

Seelion 16(d) ..5.. Ve cate egaace eels Pee NE ere ae

Mvctran: LUA cooks es ings ath ele kee ee A oe ae b-

Keetion VIVE oi0 co Sar aes ee we ag ee ce 0

MiscEnl AXE0DI'S $

Rev, Rul. a7- 02, 1857-2 era ae Ree

Rev, Rul. 59-40, 1958-7 CR, 97% oily... Peed 8, 10, 12

7} ae Randolph, Announeeme nt May | 12

ey NCTE 7

Supreme Court of the United States

Ocronen Term, 1970

+

Untrep Srares dr Amerntoa, Petitioner,

= vi

WATERMAN, LARGEN & Co. DNC. Respondent

On Petition for a Writ of Certiorari to the

ie tes: United States Court of Claims.

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW- AND JURISDICTION -

The Oplilons helow and: the basis of. this Court x

Jurisdiction. are adequately set forth im the petition. —

STATUTES INVOLVED ag

Internal Revenué Code of 1954 (26 UIS.C.) +

Sco. 162. . TRADE OR BUSINESS: EXPENSES, ©

Z c * ry’ f / a.

(a), IN Generat.—There shall be allowed> as a

deduction all the ordinary and necessary expenses

loss where the stock purchase was business necessity

e

. . ”

‘ ¢ ~~

°

> paid or tmeurred diving Hacinsnthe year i earry

ing on any trade or business, including»

See. Tho. Losses.

ca) Gaexenar Rowe Phere Gall be allowed) as

a deduetion any loss stust: vine “«l during: the taxable

ver and net: compensated or. by IMSurAnEe OF

otherwise.

_ | QUESTION PRESENTED-

Whether a loss realized onothe sale of stoek of a

yarn null purehased and. held by a yarn mill broker

solelye te retain an existing ®irnimission seeournt, IS aun.

RP lass or Drsiness ey pense rather than a eapital

in erder tor the broker te egntinue tolexistain its then

corporate form.

STATEMENT .

Respondent isin’ the business of sellifng, on a.com

mission basis, various tivpes af yarn produced by its

Till aeeounrits. ore gecouet of which was the Etmvyale

Worsted Company. heteinafter called “helnvale, a

Massachisetts corporation located im Pittstield, Massa-.

chusetts. «(Pete App. NAT a2) *

Kinvale., Ke tlie Tatter part of Io ard become

Respondent's third largest aecotint and the principal

faetot dm the, worsted division of its business. “Hlna-

vee, however. had fdund operations nnprotitable and

ti ery December, fos, it decided to terminate op-

erations. (Pet. oa) SHI) | |

The protent lial loss of his aecount Was.a serious blow

te Respondent. Respondent was then operating at

_

.

“8

—

: Fh A ths ; = Nas

ca doss and the THlmyvale aeeount wars an important seg

ment of its worsted sales operation and was the only

substantial worsted wool account Respondent had.

(P ret. App. ADD-56) | ‘ -

te hadi promptly and diligently attempted: te

obtain another wousted Wool aecourit Jat ‘did not sue

coed, stnee sueh aecounts were extreme ly diffientt to

secure, Respondent, an Ree Mlmavale’sy presi

dent wished fo insure: dis son's business ae in

quired whether he would be. interested In Continming

in business if some other satists retory mill could he

located at a different location: Wher he re plied that.

sucha possibility would be given every consideration,

Respondent went out and located. a suitable mill ine

Laurens, South Carolina, (Pet. a ADD-90

After investigating ae, Inspecting this new plan

site, HMlnivale’s preside nt dise losed his willinguess to +

become the dominant shareholder tna new eor poration 3

to he organized to take over the assets of the Laurens

‘eine (Pet. App. A57) ak

Some incatinas were he ld to dise ‘uss the possibilitic s

_ of reopening in South ‘arolina and at one of these

meetings Responde it’s role in connection with the new

organization was disensse dd. Elmvale’s president stated

that: Responde nit would not he pe mitted to act as

Mlmvale’s Comraission agent unless Respondent’ pure

chased $100,000 worth of stock that’ would be issued

in connection with the setting up of the new corpora

tion. For sueh $100,000 -participation. however, it

would become the exclusive selling agent for the Lan-

res operation.” (Pet. App. A57-58)

In view of the impossibility. of securing another

worsted wool account, Respondent's officers deternined

e

+. he: 7 a

that they would either have to attempt to secure the

Laurens account or to liquidate or otherwise: dri asti-

cally reorganize ne wr business, TE he v finally cone liked

that Respondent, should. tn ain effort to continue:

as a business entity in its then form, attempt to raise

$100,000 in. orde to obtain the Laurens account. (Pet.

App. ADd58-59) ’ ee

After arranging fo borrow the necessary finds, Re-

~spondent’s officers advised the Elmyvale president that

they wonld be willing to. put $100,000 in the proposed

corporation, provided they would:be desigmited as its”

exelusive selling ageney (Pet. App. A59-60)

I* urther det fils were worked et aa ii final agree-:

mente was reac ‘hed 4 dn May, 1999. ( Pet?-App. AGO)

Respondent did not put the $100,000 ingo Elmvate

ts an investment in the sense of looking to future

stoek appreci: ition or dividerids as a return on capital.

The sole pur pose of berrowitig the, money and putting |

“if inte the’steck of Ehmy ale was to regainan important

xt ‘Hing ageney arrangement and therefore replace thre

Commissions lost frem the (old) Massachusetts) Klm-

V ale corporgition. Tt was antic ipated that the expected

commissions would result) in the profitable operation

‘

of. Waterman, Largen’‘s aes d- wool ‘division. and-

would permit repayment of the loan within two or

three years (Pet. App. Ao8-59, 61-62) - |

Respondent revelyed 851,900 in commissions from-

Elmvale between May. 1959. and une, 1961.- | (Ret.

ae A6?2 2-4) | ed sae we \ oe

Elmvale’ = operations continue d to. he unprofitabje

even in the neve loeation, however, and by May of

1961, an Elmvale financier required Elmvale to appoint

| a - : \

: ro a

a competitor of Respondent as gales agent, thereby

discontinuing Respondent as exelusive sales agent,

On June 22) 1961, Respondent’s sales agerey with

Klmvale was completely terminated effective June 30,

OT, (Pet. App. AG5-64) | : /

stock interest in Elmvale was ‘thins terminated, Re-

spondent immediate ly took steps to sell the stipe k. On

July 21, 1961 Respondent’ sold its shares for $25,000,

resulting inva loss of $75,000. (Pet. App. AGS)

. . : Ah,

- "ARGUMENT

The taxpayer, Waterman, Largen & Cox Ine. op-

poses the Petition for Writ of Certiorari in this ease

heeawse there is no conflict among the Courts of Ayp-

peals or the Court of Ciaims on the issue presented.

and certainly no question of substantial legal impor-

tance Which has not previously heen resolved hy this

Court.:... 4 :

°

« 7%

1. "Phe issué in’ this case is whethersa loss ou the

sale of stock purelfised to equ re Or THSUre a SoTrEe

of evervday business requirenerits (itt this: ease stiles

commissions obtained through an-exe ‘Tusive sales Gone

tract) is amordinary lossor gd capiti il loss, This issue

is governed by the principle set’ forth in’ the pra

of this Court in Corn Products Pee fining. Co. ve. Com-

“missioner, 350. U S. 46.(1955). That prine ile cit he

stated to be. that, even though the literal lafignage .of.

the definition-of a capital asset? may be met. Congress

* jritended that profits and losses arising from the ever y-

day operation of a business should be considered

my .. , i oe . i: «

"Section 1225; Internal Revenue Code of 194. ees

‘ ‘

.G :

: foe

; : ‘

Since the only business reason for ret; dng the.

®

NK:

‘ : / . 6

ordinary Income or loss 1% ather than eapitzil gain or.

loss. It would appear that this principle ditec tly cone

tradiets tie contentionsmade in the Petition (pp. 8-9):

that. the lamtuage Ripe orapot connected) with

his trade or business)" iu the définition a& a. capital

“asset re quires seas i om treatment.

~

During the fifteen vears sinée the Corn Products, .

supra, decision, this specitie issue has come before the

Tax Comt’ a number of Distriet Courts! four U.S.

Courts of Appeals.! and the Court of Claims.® + No con-

Hliet has developed. The lower court devisions have ap-

plied the pryneiple ee in Corn Products, su-

pra, tea myriad of factual sit tious with no greater

difficulty “than is sacra 1 the horn judie jal

process of applying governing. ee principles ‘toa

LVariety of factual situations. Tn addition, the ‘cases

have not. beer Buitormly fivorahle to the taxpayer.

The Government has succeede din denying ordinary

2 Seer cy. Western Wine & Liquor Co. v. Commissioner® 18 ToC,

1090, aeg. 1)8-2 LBS: Eleetrical Fittings Corp. v.-€ommis-

‘sroner, BETA, 1026: Livtshay ve Commissioner, YO TOM. 133. Old

Dominion Pliroond Corp, Vv. Comiausstoner, DO TCLM: O78: Nouth-

astern’ Aviation Underwriters, Ine, v. Commissioncr, 25° TCM.

- £12, : ae: me ‘ <*

* 8 See, 7. Journal Co, y. United States 195 BF. Supp. 434; Ihogg |

v. Allen, 105 FL Supp, I; Hagan v. United States, 221 F. Supp.

248, | . sere, ;

1&

* Commissioner ¥, Bagley & Sewall Co, 221 F.2d 944 (2d Cir.)

* Edwards v. Mogg, 214 F.2d 640 (oth Cir.) ; Grier, John d., Cory.

United States, 328 F.2d 163 | “th Cir.): 3 Steadman Vv. Commissioner,

424 F.2d 1 (th Cir.). ha

* Booth Newspapers, Inc. v. United States: 157 Ct. Cl. 886, 303

/ P.2td 916; PLS. Services, Ine, v. United States, Iss Ct! Cl. 874, 418

F.2d ats, 4

, 7

oT.

loss treatment 2 ahd 7 impoxmg ordinary ineome tre: ut-

ment“ wider the Cokn Products principle. |

Given the ae principle set forth in. Corn

Products, supra, as we Abas? in Mort vy, Coin missioner,

313 US: 28 " and Commissioner of Internal Revenue

v. P. G? Lake, lies 350 US: 260, limiting the definition’

fofac apital asset to exelude items avhich are essentially

an element of myty , ifwome, the application of,

this principle to id vitmerous factual sittations ih

Which the issu “nrises must necessarily be le Hip to the

trier of faut. The issue isvessentially a factual issue.*

‘As — Cofirt sti nee: in Corn: Products, ‘supra, Nat

4 ‘ o

a ‘For tax purposes Petitioner's purchases hate

heen found to ‘constitute an integral part of its

manutheturing busines’? by both “the ‘Tax Court

and the Court of Appeals, and on essentially fae-

tual questious the findings of two courts -shorld

not ordinarily be disturbed.” * | Emphasis: added |.

x See Gulfter Drug Co. v; Commissioner, 29 TC. 118 aff'd por

e¢ridm 261. F.2d 238: peice a Corp. Vv. Commissioner. 37° ToC.

791; Chase Candy Co. United States, 130 © tL. Cis 102, 126 F.

Supp. 2] ; Duffey v. letheré 63-10 S.T.C, § 9442. 7

See, c.g Mansfield Journal Co. V. Commissioner, 27 1 Kod 2

Pierce, SWS., Co. ve United Statés, 57-2 U S, T.C. © 9886: Holl ww

Baseball Hoses iation v: Paviaiibedante, 423 °F 24 494 (9th C ir. 1970),

cert. applied for May 14, P70. . ae iiss

. Here, the fac ‘ts show that the t taxpaye r was a conimission sales

agent of_yarn. The-Court of Claims found that the soke purpose

of purchasing the stoek in question. was to regain an important

yarn sales agency arrangement it would otherwise Have lost. The

taxpayer r sue ‘eded in regaining the agenc Vv arrangement and earned

$51,900 in commissions during theatwo- year period the ar raigemeit

endured, . After the arrangement was terminated. the taxpayer

sold the stock it was required to purchase to obtainsthe. sales’ age yey

agreement.” It incurred a loss of $7: 5,000. on such sale,

“ 4

?

adi

e

ss nee

The Oprnen of the Commissioner of the Court of

Clann. adopted hy the Court betow, Found (Pet. Xpyp.

AU Mite 0 a eeu ee

“Tt seem: plum that the situation Calls within the.

Booth’ Ve sfiapineie primerple as tscamiilies

cere cused bua tarpager as an integral and Wee

Pes Motel 1 the. conduet foal Ios’ business’

| SOT adde “ab -<* caer

Vous. en the csscntig a facliatl question, we have the

same tindities Here by aa the Commissioner aud the

Court of Chats cas was troeain Corn Products, supra,

Gaver suel findtagsatd this Court's statement in simi

lar ocirdnastamees that sueh tindines should note ar

marily be disturbed, erant oot the dustant Petition

would appear te be fruitless, ; ;

Et contd betavgued that the Cor Products, supra,

mrimerple is tnapplicable te the dastant ease’ because

Girn Products? supra, involved regukir. Purchases: and

esales, rather than a single tr: AISLE thorn. llowever, the

“application it the Core Products, xiipra, principle to

atone shet™ purchase of capital stock of a corpor

soon isarécegnived and -acvepted by the Petitioner in

eats Pesition gpp. P21) as well as by the acquiescence

of tte buternal Revenue Se ryice in Western: Wine and

bivite ae yore fi, and in Rev. Rul. aS 410, W998 1 CUB.

raat, Further, the » |? Petition does not quarrel with the

socalled stem transaction doe cue th; it Th one asset as

aratired solela to obtain gather, it isdeemed that the.

latter asset has been aCqaned to determine the tax

Pscduences of thectransaction? "Thus. in applying

his docerine to the instant epse, the character of the

TON treatment of the S75.000 lass. ineurred by the tax-

payer turnsn the quéstion whether a commission sell-

“ss

°

bagreoagrent ean deduet acai vorddnuary doco the aivound

paid to obtain an aigeney eortraet when that vontaaet

ts subsequentiy eaneedled. Phe haw i elear that. an

‘ordinary deco i te he atlowed.” On the other hand,

hal the fas payverciot only earned she commando but

Saloe realized a profit on the oale of the ageney eon

froaeh iteelfy expital gain would not be allowed on the

contract

The Petition tn this eave does not ach thie Cora

flo overrule the “partie Ipole oat Porth ihn Conn Products,

TT Le ar ote py 1 hye elegy fr getion or St took

through’? doctrine relied Hpon dn Western Wane and

Liquor, supra, Rather, hi Court i apparently a. ked

fo day down further rales as toowhen the Carw Pro

ducts, supra, doctrine should be applied. Poise oub

mitted that thie one of capital gain or deo arice. iia

wide variety. of differing faetual situation’ whieh ide

not lend themeelves to. detailed rules "Phe Aneine

exigencies whielrimay Gause a taxpayer te puvebince one

asset inorder to obtain another a Mtowhieh i vital or

necessary too his evervday bueine-- operations do got

compe in sitnplae, neat, factual package. for whieh is et

Of specifie ritles is ay propriate, Pt i. -riben Hes this

thie LOVe ring prine ipoles of Coors Prroducts, . Tord, and

Wester Wine and Liquor, supra, are the rypeny yey

er! - ; : ; ae - BY

Ne Pa ae .

See, c.4., Robert Templing 1a TC M.

Kilston Co. ve UN. 21 Stupp. 267 COt Cs, Iregu

“Metropolitan Laundry Co, Ak Sent, Oe 100 oe ip amy '

- fist.) ; Meredith Broadcasting A ve 8.405 F 2d: 7214 20

1969) (TV network affiliation, eontract : Rev. Rul. 57-503, 1957.2

C.B.189 (goodwill).

19 Sop not-only Corn Products, supra, hus also Leonard Huatth.

Commissioner, T.C. Metin 1961-318. ad 995 F277) th (ir

cert. den. 379 TLS. 832: Maryland Coal & Coke Companies, Mo.

Ginnis, 350°F.2d 293 (3rd Cir, 1965 ;

Fe 10

guidelines ta be applied by the lower courts. “Phe fact

that 1 vehes after the Corn Products, supra, decision

noe coutliet among the lower courts has arisen demon:

strates this. ~The three cases presently before this

Courtion Petitions for Writ of Certiorari! all retleet

consistent application of the governing prine;ple of

Corn Products, supra, to different: factual situations,

Riles or restrictions Which might be adopted to limit

the application ef the Corn Products, supra, principle

toa given set of facets will almost certainly give rise

te additional problems and further litigation with ‘re

spect to a dttferent set af fete

A consistent body of law exists with respeet to eaeh

aspect of the Governmentés purported distinetions be

tween Corn Products, supra, and-the iastant ease,

cnamely, that Corn Products, supra, invelved inventors

rather thanscother assets > that Corn Products, supra,

invelved transactions Tor ao temporary period. and

that Comm Products, supra, involved a continuing series

of tr anisaetions.” Any alleged coutliet: ine the! de-

cisions is factual rather than legal. and! results from

"Steadman Vv. Commissioner, supra fn. Ay Hollywood Rasetall

Association-v, Commissioner, supra tn. 7: and the instant proceed

ing. ~ *

12 See Commissioncr ¥. Gillett pag Transport, Ine. 364 fee

W530: Mart vi UVomirtsstorer: 8 an, . OS: Colrinissioner vy P.

Lake, Ine. 856 V8, 260 for deni: +p of capital gain on Ceslaheted

of Noiinventory assets,

MsSee Corn Products, supra, where the taxpayer had alregular

practice of pure Masing futures to insure a supply of manufacturing

requirements and. fn, Saat p. WW for a five-year history of this

prac tice. ; ; ‘ a ss

MW See Western Winie and nang supra, fi. 2. and Rev. Rul. 5s

10 for application of the Corn Products, supra, principle .to a

stngle transaction. : a

11 ‘3

application of aonb a legal standards my varying,

Pactual situations." -

The fegaa standards oetua in these deci isions Wish

apply the. C orn Products.’ supra, principle ‘to the

sale or worthlessness of stogk are not only consistently

applied, they are also virtually identical fo the stand-

ards applied to deterthine’ whether a taxpayer has

stiffered a‘ btsiness”’ had debt, whieh is deductible.

fall in the year of worthlessness under section 166

(a) of the Internal Revenue Code éf 1954, or a

*nonbusiness’* bad debtewhieh is deductible asa’short-

term capital loss under section 166(d), .

JEP there is any issae “i ereat Importance, ite would

oe appear fo hea contliet in the lower court deeisions

but the Government's auditing problemi referred

to in the Petition (pp. 19-21). Simply put. the Gove

ermment says a gain on dAhe sale of stoek will always

he reported as capital gain and, if appropriate, a loss

will be reported as an ordinary loss. Apparent!

~ the problem arises because stock is presumed to be a

capital asset. However, the taxpayer does not see how

"Tt is-analogous to the application of this Court's decisions

~in John Welley Co. v. Comiuissioncr, 826 US. 521: The Donruss

Coy. United States, 393 ULS, 297: 0r Malat vy. Riddell, 883 ULS, 569,

to the numerous factual sitnations involving, respectively, ‘the +

question of whether a loan to a corporation shoukd be treated as

a ovalid’debt or ia contribution to capital, whether a business is

; ‘unreason: ably accumulating its income or whether a@ particular asset

is sold incthe ordin: iry course of trade cor Dusiness, -Certaindy. the

Petitioner would not ask the Court to reexamine its decisions in

those cases in Hight of their application toe varied factual situations,

vet it is asking for such a reexi tmination in the. instant case,

See W hipple . Commissioner, B73 US. 19319638) 2 Nibloek

y. Commissioner, 47 Bid 1185 (7th Cir. Wes, Estate of Saper-

‘stein, TC. Memo 1970-209,

° ¥

~~.

12

the Government has asked this Court to solve its

auditing proble m. ‘The Government concedes that un-

der some’ cire stances at loss ineurred oma one- shot.

sale of stock is entitled to be treated as an ordinary

loss. See, ag. Pets i-bh | Weslern Wine and

Liquor, supra, and the Government's aequiescence

therein, supra fas 2s) Reve Rul S840. supra. Tlow-

ever, if in these situations the steck in question had

‘appreciated In value during the period held, the Gov-

erfiment would have had: exactly the same auditing

problem deseribed in the, P etition if the taxpayer the

had reported the profit as a capital gain, ¢

séquenthy, the taxpayer fails to-see hew the ane

problem is a relevant factor before this’ Court. Tf

there ix such oan aniliting problem, it. would ap-

Be that if the Tnternal Reverie’ Service cannot pro-

vide adequaty. safeguards AS they have swith respect

fo entert: vitigent expenses and auimerous other sub-

jects @ and’as is proposed on-the 1970 returu with re-

spect to disclosure of foreign bank accounts.” Congress

would be the appropriate branch of the Government

ting

in which to seek relief."

1 See, 6.4. Questions G through Q on Corporate Re ‘turn Form

1120. ‘

-

Sep Commissioner of Internal Revenue Thrower’s announee-

ment. May 11. 1970.) In addition, the Internal Revenne Service

dees not appear to encounter any auditing difficulties in applying

esection 260 to disallow deductions incurred to purchase or carry

tax-exempt bonds, even though - the interest earned on such bonds

Jis not Reported by individuals in any way... -

Vn this connection, it might be noted that at no point in the

entire legislative history, of the recently-enacted Tax Reform Act

“(primarily enacted to elose ** toopholes””) is there any mention of

the “loophole complained of in the Petition.

l-

Pdi

; 13

| CONCLUSION |

The Petition, for a Writ of Certiorari: should: be

denied. | a

_ Respectfully submitted,

Josepu i. MCANDREWS

‘ - 6 CAROL WK. NICKEL

Attorneys for Respoudcut

we.

August, 1970

Ate ae

’ i on

Me xt

a

oh the Supreme Court of the Wied Sates

: OCTOBER Tero, 1970

Me. 415 : ae isi g oo Cae ;

‘

~s

UNITED STATES OF UAXLERICA, PETITION ER:

WATERMAN, Lancen & Co. DNc.

ON PETITION FOR A WRIT OF CERTION. ikl Q THE UNITED

STATES COURT OF “CLAIMS :

* “No. 416°

COMMISSIONER OF ENTERS AL REVENUE, PE wreken

Cuantes W. A NEPDonority TF. STEADMAN ¢

ON. PETITION FOR-.A WRIT OF CERTIORARI TO THE UNITED

STATES. satetaate atl APPEALS FOR TITEL SIXTU-GIRCUIT —

| REPLY BRIEF FOR THE UNITED STATES AND THE

Nos _ COMMISSIONER

i

1. The briefs in opposition in these cases them-

selves. demonstrate the nee ed for prompt review anid

cor ection by this Court. : ies

Respondents cqneede (Br. (No. 415) 8: Br. (No.

- 416) 10) that thoy acqtiired capital interests incor

porations; W aterman, Largen concedes (Br. iNo,

; : (1)

404-949-—70 ‘