# Opposition Brief — United States v. Waterman, Largen & Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385605_0198%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Opposition Brief - **Published:** January 1, 1970 - **Citation:** 400 U.S. 869 ## Text 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: 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 ‘ 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 ‘ --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385605_0198%3A2. Public record. Not legal advice.