Petition for a Writ of Certiorari — C. D. Construction Corp. v. Commissioner

Supreme Court brief1972

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Text

En en ee ee ee ee ge eee

IN THE

‘October Term, 1971

TRIE Sect

C. D. CONSTRUCTION CORPORATION, 7 1- 85 2 z

: ; _ Petitioner,

. - ° S. oe ; - .

COMMISSIONER R OF Inte RNAL REVENUE,

_ Respondent.

Petition for a Writ of Certiorari to the United States

Court of Appeals for the Fourth Circuit. = = —__-

GEORGE T. ALTMAN, ne .

424 South Beverly Drive,

Beverly ‘Hills, Calif. 90212,

‘ Attorney far Petitioner.

* Of Counsel: )

STANLEY H. WILEN,

326 St. Paul Place,

Baltimore, Md. 21202.

Parker & Son, Inc., Law Printers, Los Angeles. Phone 724-6622

a Ce

ov.

SUBJECT. INDEX

‘Reaching a Conclusion in. Another Case Now |

Pending in This Court pat Asad $edilprceadiandutoces ne

The Decision Below Is in Conflict With the | :

Decision of This Court in Commésioner v.

3 oe Page

_ Opinions Below sseedeeceeneeenensettonagtesnegsonsectee ee ae

| Jurisdiction, esac saneesees = nee inate See eee 2

Question Presented pac iaicaebean wapeanceonudvennst terete aes 2 |

Statutes Involved Sain heath he eee ake 3

’ Statement SSL rate Nets ee ies ead oP AON snodesici

Reasons for Granting’ the Writ ..... ee ae .

eS A Réviéw of This Case will Be Helpful in ;

Stern, 357 U.S. 39 (1958), and.Other Cases —

Holding, as Observed by the Tax Court

. Herein (App. 25), That in Determining Who

Is Liable as a Transferee, Applicable. State os

Law Is OOM ooo |

The Decision Below Is in ‘Clear . Conflict’:

_ With the Decision of the Court of Appeals

"for the Ninth Circuit in’ Maple et al. v. Com-

missioner, WD BB TS vcs nsntbncees es |

_’- The. Decision Below, im Treating the. United’ :

States, in Respect of a Tax: Liability Deter-

mined Under 482 of LR. C. 1954, as-a Cred-

~ itor Here, Before: the Liability Is Asserted

by the Commissioner, Is in Conflict .With

Decisions of the United States Courts of Ap-

peals for Several Circuits, Including Deci-

sions Relied on by the Petitioner in. ‘Docket

~~ No. 70-305 Now Pending in This Court ......

ii.’

i i . A a

.- Cases Involving Taxes Which Are Likewise

‘Not Self-Assessing, but Under. Other Sections

of the Internal Revenue Code Than Section

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Conchision . iV sinonventat ne Siotnies Gradina tetatetipsoronieapminanaidca

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4 . Appendix. . Qpiision of the Court . Appeals for the

Pa ‘Fourth Circuit i in This Proceeding ......-..... App. p.

Findings and Opinions of the Tax Court in This"

Proceeding - ......-... PERE Rt an A sacl App. p.

‘ Cciainn of the Court of Appeals’ for the Fourth.

Cae... gosibietineetaecesannionines App. p.° 35

a _— — aie . —_—

_ . S&S * De POLI NL IE RSET A ba IAAT IG NE AEN OTD Ta whe 4 oe

2 ‘Page

5. The Desision Below Is Also in Conflict With .

Wal gente iO! NG ‘

‘ TABLE ( OF AUTHORITIES CITED Ps :

| é ae “* Cases: * feats Nd

a Incorporated of America v. Campbell ( N.D. ;

Tex. 1966), 66-2 nape 9538, is | AFTR 2d: a

sac cyt Re IRE IN Sy ORs ARE RMON MEO a BUC 14 p

Braun Co., Inc. v. Commissioner (CA. 2), 396 F. -

. 2d et ab EE OEE TREAT: 12 4

Charles Tow, Inc. v. Commissioner, 372 F.2d 415, > é

“- cert. denied, 389 US. 841 ¢! td te TON 7 4

"—- “Coal Sales Co. v. ‘Coal Co. 105-“V. Va. 610 .......... t : q

Conimissioner v. Stern, 357 U.S. 39 (1958) .......... 8 | j

Commissioner of Internal Revenue v.: First. Security Sheer q

Bank of Utah, docket 70-305 00... eeteeepeeeeeeoes - 8 :

Erna B. a et al. v. U.S., 357 F.2d 897 eins ’ q

ibis deinlag Miortahusickaadabarouasteedesoeeakeardseauty onda H1, 13, 14 - fF:

G.UR. Co. v. Pdeaueas 117 F.2d 187 ete ae Se Pe |

Healy v. Commissioner, 345 US. TD cinco 10 . |

Hope v. Salt Co., 25 W. Va. 789 et. 9 - yi:

Interstate Fire Insurance ey v. US., 215 F. a A 4 |

OO a 12, 14 -

Interstate Fire Insurance Company’ v. US., sede ee 4 ;

F.2d G03 ...._.:.:... RE ce RE ME ee APS RM Tl. :

Maple et al. v. Commissioner, 440 F.2d 1055 . nese? Ss deere :

Motor Fuel Carriers, Inc. -v. U.S. (C. Cls.), 420,

Shc onsite oe. Ce is

* National Securities ese v. Commissioner, | —ae

137 F.2d “ith ORDA SM PRI LY all, > aos .

Neill v. Phinney, (C.A. 5) 245 F.2d 645 eae 13 b.

Ray E. Loper Lumber Co. Inc. v. US. (CA. 6), | i

“— June 24, 1971, 444 F.2d’ ON et SS

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“Unternal Revene: Code of F984, See, 482 ge

scenes Raa es oaxtaionar ne: EE Rae oe ee

United States Code, Title 26, See. 6901(a) (1)

BOO at er en ae Pe Dh Ata Be ecole ber herd 3

. United States Code. Title, ‘28, See. 1254(1) ea 2

W est Vi irginia Code Ann., Sec. ho ae ee eee 3

ae Textbooks .

ods Corpus Juris Secundum. Corporations, C497. » ae

- 11 Fletcher. Cyclopedia of Am C1971),

Chap. ~ SS, See - S082 REDE Scr gh PENS OLE Mil HS f-

bl Fletcher, Cyclopedia + of C orporation (1971), :

ae | Mites men ee PR i 9.

7 Mertens. Law of Pedieal Income 7 axation, Sec. |

+, -SBG61 af fh. 9S. .:..... pliagdscon ab riaaetact onset Decl Sal 12

| Pe

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cl e : s

deaaiiay Revenue Code of. 1954, See, 61

, ‘

Iv.

_ feies Page

Rubin v. Commissioner, 429 Fld 6500000 1b, 12°

Ta oe Memorandum Decisions, ae CM_77_ 22

Wisconsin Big, Boy: “Corp. v. Commissioner (CLA.

7). Nov, 23, 1971, 71-2 USPC | 99755. .........:42

ar Re gulations

Treasury Regulations, See. JAS 21 Cb) ( 1) i

“Treasury Regulations, ‘Sec. L482-1¢b)(3) eren

- Statutes

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SP SPANO NRE ie PEG ERED

‘

ie INTHE | -

- Supreme Court of the United Sates

: ‘Ocha: Terni, 1971" me

’ a So. No.. tevecuanes

Cc. D. CONSTRUCTION aes } “.

ee ieee EA ss Petitioner,’

ComMISsIONE i OF INT TERNAL Rivne,

a ae Ueto a "Respondent.

» e

2 \ a .

Petition for a Writ of Certiorari to the United States,

— of Appeals: for the Fourth. Circuit.

The pétitioner, Cc. D. aed Combenicn- a re-”

& spectfully prays ‘that a writ of’ certiorari issue .to ré-

‘ view the judgment and opinion .of the United States

Court of Appeals for the Fourth —o entered .in. this

. proceeding on’ November 30, 1971. eee :

iF : . 5

ani bon ss Opinions Below. ee

The opinion of the court below is not yet officially _

reported. but it appears in the Commerce Clearing

House “USTC” reports at 71-2 USTC €9772: It is

~ given in full-in the pili infra, , beginning at a

‘1 thereof. ‘ | —*

~The. memorandum findings of fact and: opinion of | |

the Tax Court were 0 ficially reported as T: C.' Mero |

1970-297. The ss thereof pertinent. to the issue

appealed are given in the Appendix, infra, is

at‘ p. 6 thereof. ie

Eee

This is a transferee case. There were prior proceed-

ings in which the taxpayer's liability for the tax in-

_ volved was litigated. The decision therein of the

court below, Charles Town, Inc. v. C ommissioner,

372 F.2d 415, cert. denied, 389 U.S. 841 (1967), is

referred to by that court herein at footnote 2 of its

opinion, p.2 of the Appendix. infra. The decision of

‘the Tax Court therein was officially reported as T. C. ©

Memo. 1966-15 and appears in the Commerce Clear-

ing House.*TCM” reports at 25 TCM 77. Pertinent

excerpts from that decision, and of its affirmance by

the court below. are included in the Appendix, infra,

beginning at p. 35 thereof.

Jurisdiction.

’ The judgment of the Court of Appeals was entered

~ on November 30. 1971: The jurisdiction of this Court is

based on 28 U.S.C. $1254(1).

Question Presented.

The question presented is whether under the facts

as found by the Tax-Court_ the petitioner is liable, as 4

transferee of a transferee of Charles Town,’ Inc., a

West Virginia corporatidh, hereinafter referred to as

Charles Town, for the ta liability,of Charles Town

previously determined by the Tax Court, and officially

reported by it. as shown above, as T. C. Memo. 1966-

15. The intermediate transferee is Fairmount Steel

Corporation, a Pennsylvania corporation with its main

office in Maryland. hereinafter referred to as Fair-

mount. As shown in the opinion of the .court below,

_ we agree ‘that: ‘petitioner .would be liable. in an amount

also agreed. if Fairmount was liable as transferee of

Charles Town for the said tax any determined

against Charles Town.

—3—

Statutes Involved.

_ The transferee provision, as cited by the court be- |

low, is 26 U.S.C. $6901() (1) (AVG), which pro-

- vides as follows:

“(a) METHOD OF COLLECT ION.—The

amounts of the following fiabilities shall, except as

hereinafter in this section provided, be assessed,

paid, and collected in the same manner and sub-

ject to the same provisions and limitatiqns as in

the case of the taxes with réspect to which the

liabilities were incurred: .

~ * (1) INCOME, ESTATR > AND’ ‘GIFT TAX-

- ES—

(A) ‘TRANSFEREES. —The liability, at daw

or in equity, of a transferee of property—

(i) of a taxpayer in the case of a tax -

imposed by subtitle A ( relating to income

taxes ).”

As: to the liability “at law” of Fairmount as a trans-

feree of Charles Town, both the Tax Court and the

court below correctly point to the law of West Virginia,

* §40-1-3, which provides as follows (App. 3-4, 27-28):"

3-4). In-doing so it relied on an issue never raised by

“Every transfer or charge which is not upon

consideration deemed valuable in law shall be void

as to creditors whos¢ debts shall have been con-

tracted at the time it. was made; but shall not,

upon that account merely, be void as to creditors

whdse debts shall have been contracted. or as to

‘purchasers who shall have purchased, after it was

'The “App.” references are to the Pages of the eppendia here-

to, without regard to the page numbers in the source.

ci ——

~made; and though it be decreed to be void as to a

prior creditor because voluntary, it shall not for

that cause be decreed to be void as to .subsec.:ent

creditors nec caterer |

The court below relied also on. the liability of Fair-

“mount as a liability of a-transferce “in- equity” (App. -

3-4). In doing so it relied on an issue never raised by

respondent in the trial court, that is, “the Tax Court, or

considered by that court. 2

The liability of Charles Town was determined by

the Tax Court solely winder section 482 of. the Inter-

nal Revenue Code of 1954 (App. 37). That deter-

mination “was affirmed by the court below also solely

on the basis of that section (App. 35-36). In this trans

feree proceeding the Tax Court considered the effect

of that section (App. 30). It is impossible to under-

stand why 4 this transferee proceeding the court be-

low takes thg wholly unusual step of not even men-

tioning it. That section’ reads as follows:

“In ,any case of two or more organizations,

a trades, or businesses (whetfier or not incorporated,

whether or not ad ‘the United States,

and whether or not affiliated) owned or con-

trolled directly or indirectly by the same. interests,

the Secretary or his delegate “may distribute, ap-

portion. or allocate gross income, deductions,

credits, or allowances between or among such

organizations, trades, or busiriésses, if he deter-

mines that such distribution, apportionment, or -

allocation is necessary in order to) prevent eva-

sion of taxes or clearly to reflect.the income of

any of such‘organizations, trades. or businesses.”

¢ 5

— i

Statement.

The court below correctly states, to the extent to

which it states. them, the facts of the Charles Town

and Fairmeunt operations involved here. We quote

(App. 2):

“Charles Town is an- empty corporate shell and.

owes back income taxes for the years 1958 and

1959 in the total amount of $375,984.50. Charles

Town was incorporated under the haws of ‘West |

Virginia and issued 100 shares of common stock

for a total consideration of $1,000. Charles Town

Operated two’ horse racing mects in West Virginia,

one in the summer of 1958 and one in the winter

of 1958- 1959, with funds supplied by Fairmount

Steel Corporation. Fairmount had agreed by con--

tracts to advance to Charles Town all of the funds

necessary for the operation of the. meets and to

bear any resulting losses in return for receiving 90°

percent of the profits from the meets. Fairmount’s

advances to.Charles Town were not evidenced by

any notes or other debt instruments, were made

without security, were made without agreement as

toa: repayment date, and were .not repayable at

all to the extent that losses were incurred in the .

meets. In 1958 and 1959 Fairmount was reim-

_ bursed for its advances of $986,525 and received

90 percent of -the racing profits, $732,299.86. Cn

June 30, 1962, Fairmount liquidated, transferring

without consideration: its assets of $253, 394.40 to

C. D. Construction.”

There are also cettain other significant facts shown by

the Tax Court's findings. Each of the two horse racing ©

meets. the first lasting 11 weeks and. the second. 7

—6—

Weeks, was under a separate contract: between the two

corporations, a separate lease of the race course, and a

separate license fromsthe Racing Commission. (App.

11, 13. 16 Welch contract was not just for horse racing’

but for the particular: horse racing meet. Under cach

contract, furthermore, the - monies provided and gen-

erated were characterized in relation toy Fairmount as “Hs-——-

montes.” «App. 14-1677 And the Tax Court ¥ppears to

concede that they “belonged” to Fairmount, | ea

“temporary.” (App. 31). As to Charles Town's stock,

while, as noted © above, us issucd stock ‘totaled only

$1.000, its authorized stock totaled only $10,000 (App. :

36). In its application for litense to conduct each micet

it stated that the funds to be used for <hat purpose would

_ be furnished by another, named corporation, Fairmount

(App. 30-37). ,

. The Commissioner made his determination against

Charles Town of the taxes involved here by deficiency

notice issued Juné 11, 1962. That notice asserted those

janes under. “sections 61 and 482" of the Internal

Revenue Code of 1954 (App. 7. 22). There is no evi-

Gence of any prior know ledge of Charles Town that.

these additional taxes would. or would probably, be as-

Serted. : |

As the sole basis for -its cenclusion that Fairmount

‘was liaMe “in equity” for Charles Town's taxes. the

court below stated:

“The Tax Court, correctly found that Fairmount

Was in substance a stockholder of Charles Town

and.: bv implication. that the transfer of - racing

proceeds from.Charles Town to Fairmount was a

corporate distribution.” (App. 3)...

_The Tax Court, however, made no such finding.

It did find, correctly, that Fairmount’s advances con- |

stituted “in substance an equity investment.” (App. 37).

Clearly: they were an equity investment in, a contribu- |

tion of capital to, a single, specific, horse racing meet—

__the mect-itsel{-not Charles Town, the corporate entity.

The Tax ‘Court did not find otherwise; it definitely did

not find that Fairmount. was “in substance a stockholder

of Charles Town.” And nowhere did either the court

below, or the Tax Court, challenge the validity,’ the --

fairness, or the reasonableness, of either of the con-.

tracts between the two corporations. On the contrary,

they relied upon them. We shall deal with this question

of the relation between the two ‘corporations again under |

Reasons for Granting the Writ.

ing a conclusion there.

RE ASONS FOR GRAN TING. THE WRIT.

a A Review. of This Case Will Be Helpful \n Reach-

‘ing a Conclusion in Another Case Now Pending

in This.C ourt.

; ,

As it Will appear more fully’ below, especkilly under

Reason 4. the decision herein of the court below is in

contlict with decisions of other United States courts of

appeals Which are “cited and relied on by the govern-

ment in a proceeding now: pending in this Court, Com-

_ missioner of Internal Revenuv v. First Security. Bank

of Utaho docket 70-305, As it accordingly follows, Wwe

support the gofernment in that case, Although we do

not depend on the issue involved there alone, we sug:

gest that a review of our case will be helptul | in reach-

2. The Decision Below Is in Conflict With the Deci-

sion of This Court in Commissioner v. Stern, 357

U.S. 39 (1958), and Other Cases Holding, as Ob-

served by. the Tax Court Herein (App. 25),

That in Determining Who Is Liable as. a ‘Trans-_

feree. Applicable State Law Is Controlling.

As noted above the court below held ‘that. Fair-

mount’s advances constituted it “in substance” a share-

holder in Charles Town: the ceurt below therefore con-

cluded that. the’ monies derived by Fairmount from each

racing meet were corporate distributions: and without

consideration. ‘There is. however. no ‘authority under

West Virginia law, or indeed the law of any other state,

holding that where one corporation carries out a speci-

fied operation with funds furnished by a ‘second cor-

poration. under a specific. valid, fitir- and reasonable

contract. that the furnishing of the funds by the second |

‘“

ak a een eee ae Re

corporation. is “in sulggance” a’ 1’ pufchase of stock. by

the second corporation in the first.

Especially this could not be so where the funds fur-

nished by the first corporation; as here, total $986,-

525, and the total authorized stock of the second cor-

-poration amounts to only $10,000. It is ‘stated in 11]

Fletcher, Cyclopedia of Corporations, 1971, <napter

58, $5082: tee

“It. is essential, of course, to the existence and

validity of stock, that it shall be duly’ authorized.

-. Its actual capital stock is the amount of its-

suthotined Capital that has been bona fide * sub-

scribed for and paid in.’

See also I Fletcher, §5085, and 18 C.JS., Corpora-

tions, 4477. j | _

We do not say that substance may not override form.

But here js a contract, with detailed terms, for carrying

out avery specific operation of very short duration.

And under the law of the state here, a contract be-

tween a corporation and a person controlling it is bind-

ing.as a contract if it is fair. The fairness is its chief

essential ingredient. Where it is fair, payments by the

corporation under it are not voluntary but for consider-

ation. Hope v. Salt Co., 25 W. Va. 789, 799;: Coal

Sales Co..v. Coal Co., 105 W. Va. 610, 617.

There is also no similarity here to the terms of a

stock certificate, or the Provisions of state law govern-

_ ing the rights ‘and obligations. of shareholders, as such.

‘As noted above, this issue‘of stockholding “in substance”

was not raised here in the trial court. Whether evidence

on it might have been. offered if the ‘issue Had been

raised there is not clear. In any case, the law of the

state is clear, and under that law, Fairmount was not,

AO Be ae ~<

“in substance” a sharcholder of Charles Town, Tt is’

that law, the law of the state, which “povertis, As 1

cheated abeve, sy) this Court has he ld.

We subinit on this Issuc that the decision below is

_plainty | tig conflict with the rule as so. stated by this

Coutt and should be -reviewed.,

3. TF r Decision Below ts in Clear Conflict With the

_ ion of the Court of Appeals for the Ninth —

(', it in Maple et al. v. ¢ ‘oumnissjoner, 440 I.2d

1055, o., :

“The court below, in reaching the conclusion that the -

“payments receyved by Fairmount out of the racing pro-

vecds were “net upen consideration deemed valuable

in) law.” makes the assumption that r ‘harles Town Tha

form and in, substance operated cach of the two racing

meets. Bot Fairmount. as observed by the court be,

low, agreed by contracts te ‘adv ance’ “wl of the. funds

necessary for thé operation of. the ‘meets and to bear

any resulting losses in return for receiving 90 percent

of the profits from the meets.” (App. 2). Where stich

a risk is taken by one person. the oper ration by a sec-

ond person under contract is in substance operation by

the first. - Maple et al. vy. Commissioner, supra, at p.

1057.\. To sav then that the monies Fairmount received

under ‘each contract, in accordance with the contract,

were Teceived by it. as the court below held. without con- :

side ration. is simply. and directly to contradict the Tax

Court's findings. as set forth by the court below itself. -

And the. burden of proof here was upon respondent:

Healy v. Commissioner, 345 U.S. 478. .

We submit. therefore, that the iiteien herein be-

lows in - confi ct with the decision of the Ninth Cir-

“satin apie. era z!. v. Commissioner, supra.

i>) e.s

»- <i ~1]

4. “The Decision Below, in Treating the United States,

‘in. Respect of a Tax. Liability Determined. Under

482 of LR.C. 1954, as a Creditor Here, Before |

the Liability Is Asserted by the Commissioner, Is

in Conflict With Decisions of the United States

_ Courts of ‘Appeals for Several Circuits, Including

Decisions Relied on -by the Petitioner in Docket

No. 70- 305 Now Pending in This Court. .—

T he decisions above referred to are as foflows:

C.A.2--Rubin v. Commissioner, 429 F.2d 650;

C.A.3—National Securities C orporation y, Cc om-

missioner, 137 I .2d 600); i

C.A.7—G.U.R. Co. y. C ommissioner, 117. F.2d

~ “187:

C, A. 6—Inte rstate Fire Insurance ec ompan yy. i“

339 F.2d 603:

CA. 7—-Erna B. Zeddies. etal. v. US., 357 F.2d

897. |

Here ‘the Cnialaiack. as noted in the Statement

‘above, in determining the deficiency against Charles

Town, cited as his basis “sections 61 ‘and 482” -of the

Internal Revenue Code of 1954. Section 61 is the gen-

eral provision on ‘gross income. The standard under it,

as the section itself reads, is.the income “derived” by

the particular taxpayer from the “source” of the income.

Section 482 is a special provision clearly beyond Section

61 and relating only to commonly controlled taxpayers.

The standard. under it for determining the income of

each of such taxpayers is, Tegardiess of the’ income “de-.

rived” by it from the ‘ ‘source” .of the incomes, alloca-

’ tion to it of a share of the common incorhe such‘ as it

would be if it were “that of an uncontrolled taxpaver

dealing. at arm’s length with another uncontrolled"

-taxpayer.” Treasury Regulations, §1.482-1(b)(1). as

~, = mers — a

| ‘quoted by ‘the petitioners in docket 70. 305 now pe vading”

in this Court; at p. 14 of its ope ning brief. Thus, in the.

“Rubin case, supra, it was held: by the Second Circuit, .

at p. 653) reversing the Tax Court, that where section

482 is applicable, “section 61 has no place. Simflarly,

in the National. Securities case, supra, at p. 602, it

was held by the Third Circuit that the section. under

prior revenue acts ‘corresponding ' to section 482 was

‘wholly superfluous except. as: applicable. ta the broad»

area of allocation of income which could not be reached »

by the sections under those, acts _ corresponding to

section 61,

Thus here’ in the proceeding involving the taxpayer,

Charles Town, while sections 61 and 482 could be as-

serted by the. Commissioner in his deficiency notice as

alternative positions, the ‘affirmance by the Tax Court

a — “and the court below. solely on the basis of section 482.

. . Tules out section 61 altogether, But section 482 is

ug wholly. discretionary with the Commissiener: only

he cam apply jt. the taxpayer cannot. . Treasury Reg-

_ ulations, $1,482-1(b)(3): 7 Mertens $38, 61 at fn. 95; .

: ee G.U R. Co. . Commissioner, supra. And because of

| the breadth. of the Commissioner's power under that.

section, which he ‘alone -can- apply, ° the allocations un-

der it must be ‘upheld unless unreasonable, arbitrary %

or capricious. Wiscensin Big Boy Corp. v. Commis-

sioner -(C.A. 7), Nov. 23, 1971, 71-2 USTC €9755:

Braun Co., Inc. v. Commissioner (CA. 2), 396 F. 2d

’ * 264, 266.

"Pies it. follows from the decisions above cited that

a tax determined. as ‘here. under section 482 is not

\ self-assessing. For that reason it was held as follows.

a in Interstate Fire Insurance Company vy: U.S., 215 F..-

Supp. 586, 598. affirmed “in all things” and for “the

reasons set forth therein,” C.A, 6, 339 F.2d 603: “The

use and application of section 482 does not result in.an

enforcible tax vonsequence until there has been a real-

location resulting in a reassessment of taxes.” :

As a result the tax involved here did not become a

liability until it was determined by the Commissioner. .

In Erna B. Zeddies et al. v. United States, supra, at p.

899, it was held by thé Seventh Circuit that to sustain

| ‘the transferee liability involved there it had to be estab-

lished that the conveyance. “directly tended to or did

impair the rights of the United Stats as a creditor at

‘the time of the conveyance.” ( Italics supplied.) The ©

“rights of the United States as a creditor did not. arise

here, as. shown in the Statement above, until June 11,

1962, in the form. of the. issuance ‘of the deficiency

notice against Charles Town, more than three years

after the payments out of the racing proceeds were re- _

ceived by Fairmount. ha

This is a wholly different. situation, even assuming

the ‘impossible, that Fairmount’s advances were pay- .

‘ ments for stock, from that in Neill v.-Phinney, ( A. 5) -

245 F.2d 645, quoted by. the court below at length.

The situation there involved distributions to actual share-

‘holders. Moreover, those distributions occurred very ©

shortly before the retroactive tax involved was enacted,

and when that tax was already -well along in process

in Congress and had ‘been widely publicized. As a re-

sult, it was ‘clearly to’ be anticipated because of exist-

ing facts. But above all, the payments there were not

made as here under an express and binding contract,

the fairness of which has not been questioned.” |

. . ‘ ms, ‘ * °

“Though the fairness of the contract here has not been ques-.

tioned, we cite, by way pf additional support, a similar race

| (This footnote is continued on next page)

\ —

Thus the decision below. by disregarding though ve*

lying on the contract involved: disregarding the absence

of any chatenge to the fairness: and reasonableness of

the contract, and disregarding the nonexistené& of the

ax ability, at the time the payments under the con--

tract Were made, because requiring assertion of that

liability by the Commissioner, is in clear conflict with

the. Sixth Circuit in Interstate Fire Insurance Company

v. U.S., supra, and the Seventh Circuit in Erna B. Zed-

dies, et al. v. United States, supra, -as well as with the

several cases cited above telied on by the petitioner in

the First Security case now pending in this Court, No.

70-305.

..S ‘The Decision Below Is Also in Conilict With Cases

Involving Taxes Which Are Likewise Not .Self-

Assessing, But Under Other Sections of the Internal

Revenue Code Than Section 482. ;

An example of such. a Case is Ray E. Saati Lum- |

ber Co, Inc. v. US. (C.A. 6) June 24, 1971, 444

’ F.2d 301. where the Court stated: “For the reasons

hereinabove stated. and particularly because the: tax

is not self-assessing, we interpret $§531-35 as giving

rise to accumulated earnings tax. liability only after

_the Commissioner has given notice and demand for

payment.” The same conclusion was reached in Motor

Fuel Carriers, Inc. vy. U.S. (C.Cls.) 420 F.2d 702.

_ For the same_reason a tax determined under section

482. as concluded by the —S ircaut in Interstate

Kire Insurance Company \ U OR supra, is not a li-

—S —— — —

track situation where the ParticS were clearly at arm's length and

there was the same percentage as here to the operating entity;

Bovs Incorporated of America v. Campbell (N.D. Tex. 1966)..

66-2 USTC ©9833, 18 AFTR ‘2d $200, Findings 11, 27. ;

” ead

ability until it is in fact determined by the Commis-

sioner. Thus the decision below herein, in . holding

United States a prior creditor under the West ‘Virginia’

code, is in conflict with the Sixth Circuit in Ray E.

Loper Lumber Co., Inc. v. U.S., supra, and the Court °

of Claims in Motor Fuel Carriers, Inc. v. US. supra.

. Conclusion, _

Because of the conflicts shown above with decisions

of this court and of the courts of appeals of other cir-

cuits, and of the pendency now in this court of an-

other case, No. 70-305, involving the same section of

the Internal. Revenue Code in a manner basic to the.

question here, we urge that this —s be accepted

_ .for review.

: Georce T. ALTMAN,

Attorney for Petitioner. -

Of Counsel:

STANLEY H. WILEN,

APPENDIX. ;

- Opinion of the Court of Appeals for the

_ Fourth Circuit in This Proceeding.

United States Court of Appeals, for the Fourth Cir- |

cuit. Ss es ;

C. D. Construction Corporation, Appellant, versus

Commissioner of Injernal Revenue, Appellee. No, 7]-

1321. |

Appeal from tht. Decision of the United States Tax

Court.. , | Pe OS

| John W. Kern; Judge. . _

: (Argued October 7, 1971. Decided November 30,

i7i.) iS Ra he oes

Before BOREMAN, Senior Circuit Judge, and CRAV-

EN and RUSSELL, Circuit Judges.

. George T. Altman (Stanley H. Wilen on brief) for

Appellant, and Richard Farber, Attorney, Department .

‘of Justice, (Johnnie M. Waiters, Assistant Attorney

General, Meyer Rothwacks, Richard W. Perkins, At-

torneys, Department of Justice, on brief ) for Appellee. -

CRAVEN, Circuit Judge: - °

This is an appeal from ‘a decision of the, Tax Court

that C. D. Construction Corporation is liable as a

transferee for unpaid federal income taxes of Charles -

Town Corporation under 26. U.S.C_A. § 6901 (a )(1)

(A)(i).’ We affirm. orn ‘

126 U.S.C.A. § 6901(a)(1)(A)(i): :

(a) Method ‘of coliection.—The ' amounts of the following —

liabilities. shall, -except as hereinafter. in this section . provided,

be assessed, paid, aad collected in the Same manner and subject

to the same provisions and limitations as in the case of the taxes

with respect to which the liabilities were incurred:

(1) Income, estate, and gift taxes. —

(This footnote is continued on Next page)

eles OC BETA tk.

. °

dk Pan sik eee es

<ereqerewener eullinnemns Gutta wre ewecmes

AM NE meee

Briefly, the facts are these? Charles Town is an

empty corporate shell and owes back income -taxes for

the years 1958 and 1959 in the total amount of $375,

984.50. Charles Town was incorporated tinder the laws

of West Virginia and jssued 100 shares of common

stock for 2 total consideration of $1,000. Charles Town

oper rated two horse racing meets in West Virginia, one,

im the summer of 1958 and one in the winter of 1958-

. 1959, with. funds supplicd by Faitmount Steel Corpora-

tion, Fairmount had agreed by contracts to advance >

Charles Town all of the funds necessary for. the opera-

tion of the. meets and to bear any resuiting losses in

—feturn for receiving 90 percent of the profits from the

Meets. Fairmount’s advances to Charles Town were not

evidenced by any: notes or other debt instruments, were

made without security, were made without agreement as

to a repayment date, and were not repayable at all to

the- extent that losses were incurred in the meets.

‘In 1958 and 1959 Fairmount Was reimbursed for

“its advances. of $986,525 and received 90 percent

of the racing profits, $732.299 86. On June 30, 1962,

“Fairmount liquidated, transferring without considera-

“tion its assets of $253,394.40, to. C.D. Construction.

The parties agree that C. D. Construction is liable as

a transferee under 26 U.S.C. A. S 6901 (a) (1(A) (i)

(A) Transferees. —The liability. at law or in equity, of a

* transferee of property—

i) of @ taxpayer in the case of a tax imposed by

subtitle x (relating to income -taxes), . . .

“For a full factual background of this. dispute ‘see Charles

Town. Inc. v. Commissioner, 372 F.2d 415 (4th Cir.), cert.

denied. 389 U.S. 841 (1967).

for the unpaid income taxes of Charles Town (to the

extent of the assets it received from Fairmount) if

Fairmount was liable as a transferee ;under 26 |

U.S.C.A. §- 6901(a)(1)(A)(i) because of having

received the racing proceeds generated by Charies

“Town.” The Tax Court held that Fairmount was li-

able, arid, therefore, that"€. D. Construction is liable

for Charles Town’s unpaid taxes to the extent of $253,- Saft eee

394.40. = |

The Tax Court cotrectly found that Fairmount: was | <a

in substance a stockholder of Charles Town and,- by | facie

implication, that the transfer of racing proceeds from

Charles Town to Fairmount was a corporate distribu-

tion.-Fairmount, therefore, was liable for Charles Town’s -

taxes “in equity”..under 26 U.S.C.A. § 6901(a)(1)

(A) (i): ar uh, 7

[T]he partics . . . lost sight of the universal rule.

Under it stockholders in dissolution are not or-

dinary transferees of corporate property as. might,

- for example, be the case of a purchaser of a’ spe-

cific piece of its property as to whom a convey-

°C. D. Construction received ihe assets of Fairmount without -

‘consideration and would, therefore, be liable “in law” under 26

U.S.C.A. § 6901(a)(1)(A)(i), supra n. 1, by operation of W. Va.

Code Ann. § 40-1-3: - ° C63

.§ 40-1-3. Voluntary transfers or charges.

Every transfer or charge which is not upon consideration

deemed valuable in law shal] be Void as to creditors whose

debts shall have been contracted at the time it was made:

but shall not, upon that account merely, be void as to

creditors whose debts shall have been ‘contracted. or as to

purchasers who shall have purchased. after it was* made:

and though it be decreed. to be void as to a prior ‘creditor’

because voluntary, it shall not for that cause be decreed to

be void as to subsequent creditors or purchasers.

Lane WE ids leah Le tauhoo te et

ar anaes

ance carries a quasi in rem liability: only when:

in fraud of creditors. Stockholders in. distribution

have not purchased property. They receive only

an-aliquot share of property. ‘The right to receive

it flows trom the accumplation of it in) excess

of the obligations owed and -by- which assets, in

this or other forms, have been accumulated. Such

Ao ‘Kholde cs receiving property in distribution hold

it subject fo pro rata habilities of the corpora-

tion. {Citations -omitted. | The stockholders hold

» What they get subject. to an equitable lien. “The

capil: i and assets of a) corporation constitute a

trust fund, for the bene Hand | security of its cred-

itors, and it is fundamental that stockholders: strip-

ping a corporation of its assets, succeed as trans--

ferees fo its tax liability. | Citations omitted. |" Tt

‘is, then, by an ageless principle a liability imposed

“in equity.” a

Neill v. Whinney, .245 F.2d 645, 651-52 (Sth Cir.

1987): °°

- Fairmount Ww as also liable toi c harles Town's taxes.

“at law” under 26 U.S.C. x § 6901(ad(1)(A)fi). Ac-

cording: to the applicable, West Virginia — statute,‘

Fairmount was liable for Charles Town's faxes if the

transfet of the racing proceeds was. “not upon con-

sideration deemed valuable in law.” There was no con-

sideration for the transfer. Foreuneets assumption of

the risk of loss was not consideration within the mean-

ing of the statute: it was siniply a risk that is borne

bv every ‘stockholder to {he extent of his investment.

’ *Set out in note 3 supra. .

- Fairmount’s right to receive 90 percent of the racing ©

- profits was not consideration. for the use of the

money advanced as it would have been “had the ‘ad-

vances to Charles ‘Town been loans, The right was rea-—

sonably viewed by the. Tax Court as a right to receive

dividends based on capital contribation. Because Fair-

mount was a stockholder; its right to any corporate

income was subject. to the corporation’s liabilities, in-

Juding the government’s claim for taxes due on the

income. é .

For the reasons stated above and for the further

reasons stated in the — of the Tax+Court, T.C.

Mem. 1970-297; _.-__.. F.C. A... (1970), the judg. |

ment below is = os oe

Affirmed

United States Tax Court.

Findings Fe re of the Tax Court

. in This Proceeding. |

Charlotte C. Weinberg Trust, Herman Cohen, Zelda

G. Cohen and Jacob Kartinan, Trustees, et_al..' Peti-

toners v. Commissioner of Internal Revenue,

ent. T. C. Memo 1970-297.

. Docket Nos. 2577-68. 2578-68, 2579-68.

2581-68, 2582-68, 2583-68,

Filed October 22, 1976.

Stanley H. Wilen and George

petitioners.

2584-68, and

Respond-’

2580-68,

2585-68.

T. Altman, for the ~

Charles. F. T. Carroll and Wiliam _ Morris, for the

respondent.

. ° ‘

Respondent has asserted transfere

e liability against

each of, the petitioners in these consolidated cases in

Petitioner-Transferee :

Charlotte C: Weinberg Trust. ;

Herman Cohen, Zelda G. |

Cohen, and Jacob Kartman.

Trustees is

Rosa L. Cohen - ~ ;

C. D. Construction Corporation

Charlotte C. Weinberg

Ben Cohen

Herman Cghen.,

Zelda G. Cohen

Rosalee C: Davidson °

Nathan L. Cohen

Docket >.

Number _

2577-68. -

2578-68

2579-68

2580-68 .

2581-68

2582-68

2583-68

2584-68

2585-68

the amounts set out below, plus interest as provided: by

law: - ;

Amount

$112,500.00

375,984.50

253,394.40

25,339.44

375.984.50

- 375,984.50

375,984.50

137,839.44

" 275,678.88

'Cases ef the following petitioners are consolidated hefewith: _

Rosa L. Cohen. docket No. 2578-68

: C. B. Construction Cor-

poration, ‘docket No.. 2579-68: .Gharlotte ‘C. ‘Weinberg, docket

No. 2580-68:

- . doeket No. 2582-68: Zelda G.

Ben Cohen. docket No. 2581-68:

Herman Cohen, . ’

Cohen, docket No. 2583-68; °

Rosalee C. Davison, decket No. 2584-68: and Nathan L. Cohen,

docket No. 2585-68. ro eae.

These determinations of transferee liability repre-

sem deficiencies in income taxes. @f° a corporation,

. Charles Town, Incorporated °( “Ghefeinafter sometimes re-

ferred to as. “Char les Town” ) for: the taxable period

“May 22, 1958 to November 30, 1958, and for the

fiscal year ended November 30, 1959 in the amounts of

$258, 616.93 and $1 '7, 367.57, respectively. These de-

ficiencies in income (axes correspond “to “deficiencies

determined ‘bythe respondent in a Statutory notice of

deficiency mailed to Charles Town on June ‘11, 1962;

wherein respondent increased Charles Town’s reported

net income by determining that certain. income and de-

~ ductions. related to the conduct of two horse racing

meets and : reported i in income ax returns: of Fajrmount

_ Steel Cotporation (hereinafter sometimes referred to

as “Fairmount” ) were instead income and deductions

of Charles Town under the provisions of sections 61

and: 482, I.R.C? 1954.2 These deficiencies: were sus-

\ tained in ‘subsequent litigation, Charles Town Inc., T.C.

“Memo. 196615, affirmed 372 F. 2d 415 bist 4,

1967), cert. denied 389 U. S. 841 (1967).

Since the deficiencies due ines Charles Town have

been established in the litigation’ mentioned above, at

issue is whether- petitioners. . or any of-them, are liable,

and if. so ad what extent, as transferees of Charles

Town: =>. \

°Hereafter all statutory’ ‘teferences are to. the Internal Rees:

Code of 1954, unless otherwise indicated.

Brera KX eee Ok oe See ty Baa VRS NIN TADS RYN RIAD

NO I at ag tg or ett

Ratguenp Were ce

. --R—

FINDINGS OF PACT

Some of the: facts and exhibits have bésn supuli ited

and are. ‘incorpor ated herein by this. reference.

Petitioner C.D. Construction Corporation. is a cor-

poration which had its principal office at 1229 Mount

Royal) Avenue, B! altimore, M: ry land, at the time of

the filing of the petition herein, |

Charles Town, Incorporated Was a corporation ine

corporated gn May 22.°1958,. under the laws of the

State of West Virginia, Ch: itles Town: filed Federal

corporation income tax returns for. the taxable period:

May 22; 1958 to November 30, 1958, and for the fis;

cal year ended November 30, 1959, With the district _

director of internal revenue, Baltimore, Maryland.

Fairmount Steel Corporation was incorporated on

daly PS. 1951, under the laws of the State of Pennsyl-

--vania. Fairmotnt filed 1 Federal corporation income

tax return‘for the ae year ended June 30, 1959°

with the district director’ of internal revenue, Baltimore,

Marvland.: s

The issued and outstanding stock of Fairmount. at

all times material he reto, consisted of Class .A common

stock and C lass B common stock, The ‘Class’ A common

_ Stock was issued for $1:00 per share as follows:

Ben Cohen 50. shares

Herman Cohen — oa 50. shares

At all tim res material hereto. Ben Cohen/and Herman

meee have held all the issued and outstanding Class

" S oe

A. common stock of Fairmount. The ey 33 common ;* ee

stock "Was issued for $50. OO per share as follows: Da

175 shares

Ben € ‘ohen (younger brother of Herman)

Herman Cohen (older brother of Ben) . 175 shares

Herman Cohen, Ben Cohen, and Stanley . :

Wilen, Trustees fot C harlotte Cohen oe ee

(daughter of Ben) now Charlotte: Weinberg . . 100 shares

Rosalee Cohen (daughter of Ben) now ©” ae

Rosalee Davison (wife. of Richard Davison) * 100 shares

Jacob Kartman, Ben Cohen, and Resi L.

Cohen (wife of Herman), Trustees for

' Nathan L. Cohen (son of Herman) 200 shares —

Raymond. Voyes ; 250. shares

In March 1953, the shares of stock oxeaaly issued to

Raymond Voyes were: transferred to Cohen Brothers,

a partnership, consisting of Herman Cohen and Ben

Cohen. In- 1957, the shares’ of stock Originally issued |

to. the’ aforementioned trustees for Charlotte Cohen, °

were distributed by said trustees to Charlotte Cohen, Pic

individually. There: were no other changes in the own-

ership of the Class B common stock ‘at any time. ma-

terial hereto, and the for going represented all the is:

sued and outstanding Class B common stock.

The officers of Fairmount, from its inception .and at

all times ‘material hereto, all of a a constituted the

board of directors of. Fairmoant, were as follows:

President ce ra ~ Herman Cohen

Vice President and. —_, Ben Cohen

Seeretary-Treasurer x

Assistant Secretary- — . Rosa L: Cohen ,

Treasurer .. | are hia eebrae

“Assistant Secretary- = Zelda G. Cohen

Treasurer, :

In addition, in, 1954, and at all timés material there: z

_ after, Richard Davison, the husband of Ben’s daughter.

« - Qe eee ‘ *

oS ies

Rosalee, pe en an Assistant. Secretary of Fairmount,

although he did not 'serve as a director.

For a number of years, Ben ahd Herman Cohen and

corporations and partnerships controlled by them or -

their families have engaged i in numerous business enter-

, prises. On nunicrous’ necasions funds were loaned ar

transferred by ope of 4c ‘Cohen enterprises to another.

.. In oF about December 1954, Herman, and Ben

Cohen‘ acquired’ controlling interest. in the Maryland

Jockey Club of Baltimore City, Inc” At or about the

Same time Louis Pondficld, a nephew of Herman and

Ben, acquired an interest in the Maryland Jockey Club

' which eventually amounted to 7-1/2°,. Since that time,

the Maryland Jockey Club has owned and operated the ~ ”

* \ Pimlico Race Course, Baltimore, Maryland. Pondftekd

\ _ was general adel the Pimlico Rage Course opera-

\ tions.’

\ At various “times dating tack to the 1930's, Ben

‘Cohea had been interested im acquiring the Charles

Race Course-n Charles Town, West Virginia

(hereinafter sometimes referred: to as the “Race

Course”). Albert’ Boyle. owner of the Race Course.

= eed tm November of 1957. Subsequently Ben and “Her.

man Coheti, together with Pontifitid, engaged in nego-

tiation’ with a representative of -Boyle’s widow, Harry

Byrer, with regard to. purchasing-the Race Course.

- Pondfield- had ‘brought “Mrs. Boyle's wish t sell the

* track to the Cohen's attention. After _Negouations for a°

purchase of the Race Course ‘failed. Ben Cohen suc.

cessfully concluded negotiations with Byrer for the pur- ©

: ."

- - ».- t —g_ - a ath agen a =< .

. “ °

. . 4 he

- . -

wail Rew

pose: of leasing it. A lease agrecment covering the term ,

of a single summer racing meet and bearing the date -

-May 20; 1958, was drafted between“Helene W. Boyle ..

and “Ben Cohen, acting for Charles Town, Incorpo

tated, a corporation to be formed inder the laws of the

State of West Virginia.” This lease was executed by”

Helene W. Boyle and Ben Cohen. On November 3,

1958, suman lease was executed covering the term

_ of a 1958-1959 winter meet:

Charles Town was duly incorporated under the laws

of the State of West Virginia on May 22, 1958. Its

certificate of incorporation provided, in part, .that the

Principal office of the corporation would be idcated at

.1229 Mount Royal Avenue, Baltimore. Maryland, at

_ which address was also located the-offices of Ben abd

......Herman Cohen. The corporate purpose and powers of

Charles Town as stated in the certificate of incorpora-

tion had Jo do with “the: business of operating a race

track Gr Face course in all of its branches.” The issued .

-and outstanding stock of Charles Town consisted of

"100 shares of common stock issued as follows: °

- Issued To : No. of Shares

Herman Cohen a I 7

Ben Cohen. !

Louis Pondficid 98 :

* The stock was issued for the- total sum of $1,000.00"

which was paid as follows:

Date Paid ' Payor Amount

July 22. 1958 Herman Cohen ~ $ 10.00

July 22. 1958 Ben Cohen 10:00

July 22, 1958 . Louis Pondficld- 980.00 -

—12— a

During’ the. taxable periods of Charles Town here con-

cerned, 20 additional stock was issued. | ——

* During the same taxable years of Charles Town, the

officers, all of whom constituted its board of diree-

tors, were as follows: , (

President | Ben Cohen

Vice President |. Louis Pondficld

Secretary-Treasurer Herman Cohen .

Bea and Herman Cohen contiiued to hold these offices

in Charles Town during the time the contract: between

Fairmount and ‘ ‘harles ‘Town, set out below, was in

effect. The by-laws of Charles Town provided that the

hoard of directors should have the control and man-

agement of the affairs, business, ant properties of. the

corporation. Pondficld was to manage the operation of

the racing meets, but important policy questions were

“to be resolved by a majority vote among Ben Cohen,

_ Cohen, and Pondfield. :

nN agreement dated’ May: 20, 1958, was centered

into between Fairmount and Charles Town which pro-

vided as follo~'s:

THIS AGREEMENT. Made und entered into

this - 20th day of May; 1958 by and between

FAIRMOUNT STEEL CORPORATION, a Penn-

_ Sylvania corporation (hereinafter referred ‘to as

“Fairmount”) and CHARLES TOWN INCORPO-

RATED. 4 corporation created under the laws of

West Virginia (hereinafter referred to as “Chastes

Town”). .

. STATEMENT OF FACTS

Fairmount, through its officers, has for some-

time been negotiating with the attorneys repre-

senting Helene W. Boyle, in her own right and as-

Executrix of the -Estate of Albert J. Boyle, de-

ceased, for the jpurchases of the Charles - Town

Turf Club in Charles Town, Jefferson County,

West Virginia, and - |

WHEREAS, Charles Town has leased the said

Charles Town race’ track for the purpose of oper-

ating a racing meet for such ‘number of days

_ asthe West Virginia Racing Commission will grant

a license to conifuct a horse racing mect on: the

premises, ahd oa aie

-. WHEREAS, Charles Town does not have the

funds, nor the credit, with which to operate the

said racing meet, and was

WHEREAS, Charles Town has negotiated with

Fairmount for the purpose of obtaining :the neces-

Sary funds for the financing of the said racing

meet, and - ans J

WHEREAS, Fairmount has agreed to advance to

. Charles Town a minimum of Four Hundred Fifty

Thousand Dollars ($450,000.00) for the financ-

ing" of the racing mect, including the sum of Two -

Hvadred. Twenty-Five’ Thousand Dollars ( $225,-

000.00) -which Fairmount. has already advanced

for the payment of the rent due pursuant to the

Said lease, provided that Charles Town agree to

operate the said race meet for the benefit of

Fairmount and shall- receive for, its setvices ten

‘pescent (10% ) of ‘the net profits for its services

‘thereunder. and if the result of the operation shall

eye

result in a loss, such loss shall be borne tg Fair-

mount, and.

WHEREAS, it was “ ndertood’ that the opera-

tions of said race meeting shall be conducted pur-

suant to the terms of this Agreement.

- NOW THEREFORE. THIS AGREEMENT

WITNESSETH, that in consideration of the mu-

tual covenants and conditions hérein contained .

and other good and valuable considerations, the

parties agree as follows:

1. Charles Town shall apply for a license to

conduct a racing meet at the Charles Town Race

Track in Chatles Town, Jefferson County, West

Virginia for as many days ‘zs said club shall .be

‘ permitted 40 operate, said meeting to be conducted

between days of May 23, 1958 and September

10, 1958.

2. The said race meeting shall be opersted by

Charles Town, but the profits therefrom shall be

for the benefit of Fairmount except that Charles

Town- receive ten percent (10%) of the profits .

for its services.in the operation of the said racing -

“meet and any loss shall be bofhe entirely by Fair-

mount. .

3. In consideration “of Fairmount receiving

ninety percent 190% ) of the profits of the said meet,

Fairmount agrges to advance all monies necessary

for the operation ‘of the said meet, it being under-

stood that Fairmount’ will advance*a minimum’ of —

Four Hundred Fifty Thousand Dollars ($450,-

000.00) to finance said costs of operations of

said meet. :

4. No interest ‘will be charged by Fairmoun

for the use of its: monies, it being understood fat

its share of the profits shall be in licu of all ia-

terest charges of any kind. hy

_ 5. Charles Town shall pay all officers for

‘their. services on behalf of both corporation’, out

of its share of the profits of the mect and no

part thereof shall be charged to Fairmount.

6, Full and complete records of all receipts

and disbursements in , connection ‘with the said 25

‘+ meet shall be maintained by Charles Town and

‘Ro -expenditures,. out of the Ordinary course of

business shall be made without the approval of

Fairmount. ‘Charles Town shall, at the request of

Fairmount,’ make ‘a, complete accountisg of all.

such receipts and disbursements. -

7. So long as Charles Town shall be indebted

to Fairmount, the officers and .directoré of Charles

Town shall be’ as follows:

President and Director Ben Cohen ~

Vice President and Director Louis Rondficld

_ Secretary, Treasurer and © Herman C ohen

Director

8. The majority of the above officers. shall

_ make ‘all major decisions as to thé allocation of

income and expenses ‘and in the management of -

the. racé meet.

. 9. Federal and State taxes on income of the

respective parties shall be a separate obligation

to be borne-by each party as to its own income. -

10. Charlés . Town shall -carry all fiecessary:

insurance to protect itself as ‘well a< Fairenount

* *

- p

, | {

‘ - ,

% °

bc qo

* .

So pA aa

’

- from all hazards. The cost of said insurance shall.

be regarded as _an_ expense of operation of the .

said racing, meet |

IN WITNESS WHEREOF, the parties caused

this Agreement to be ¢xecuted the day and year

first above written, \ |

ton behalf of Fairmount

by. Herman Cohen as its/pregident, and on behalf of

Charles Town by Louis andi

This agreement was exec

field as its’ vice president.

At the time. this agreemen Was” executed, Fairmount

had allowable net operating “oss carryovers of $852,

105.37 “from ‘its taxable years ended* June 30, 1955, -

June 30, 1956, and June 30, £957..-An_ identical

agreement was made between Charles Town and Fair-

mount providing .for -the financing of the 1958-1959

winter meet during the term of the second lease.

Horse: racing meets. were” conducted -at the - Race

Course by.Charles Town during the period June 6,

1958, through September 1, 1958 (hereinafter referred

‘to as the summer meet), and during the périod Decem-

ber 18, 1958 through February 7, 1959. (hereinafter _

referred to as the winter meet). - an

In connection with the two meets, Fairmount sup-

-plied the money necessary to begin the operation\of the

track, e.g° the payment of rents due under the two

lea ases/and the furnishing of cash sufficient to start the

parifmutuel system of betting. Charles Town operated.

the/ track. In this connection it applied for and re-

egived | a license from the West Virginia Racing. Com;

mission to condutt the two meets, maintained bank

PSE ARATE MAIS DOE GUYER SA8 IRS i a

a |

accounts, secured insiirance, became. a member of the

Thoroughbred Racing Association of the ‘United Stites,

Inc,, entered into contracts for promotional. and: other

necessary services, dealt with a- catering firm with re-

spect to sales of refreshments: at the race track, ‘made -

‘all disb Sements and: paid all expenses relating to the’

operation of the horse racing meets on checks bearing |

its. name," paid the leg zal expenses for its organization, .

filed forms and made payments with various agencies

or governmental divisions of the State of West Virginia

incident to the conduct of the racing meets, filed Fed-

eral excise tax «returns and Federal withholding and

-FICA tax returns and made payments. with respect

thereto, had stationery and maintairied a telephone in

its own name, and, after the conclusion of the two rac-

ing meets instituted an action and recovered from

Helene W. “Boyle an alleged ovegpayment of the rental ,

due ‘ih accordance with the provisions of the second

lease. The account of Fairmount’s advances to and re-

ceipis from Charles Town during the racing meets, as’

shown on the books of both, is as follows:*

‘Faitmount made wo payments by dissek to Helene ‘W. Boyle

under the’ first Jlease—the first prior to ‘the incorporation of

Charles Town, and the second on the day that CharleseTown was

incorporated, and one ‘payment to Helene under the second lease.

It also made a payment of rent under the second. lease to Citizens

National Bank of Martinsburg, West Virginia.

‘An additional amount of $30,000 was ‘received by Fairmount

.on December 1, 1959, in respect to the second mect. which was ;

credited on Charles Town's books to “Advance from: Fairmount

Steel Corp.” Another amount of $20,466.84 .Wwas shown on the

- cash receipt book of Fairmount as ‘received on June 12, 1959.

and credited to an account entitled “Charles Town, Inc.”.

although it is not shown as a cash disbursement on the fatter’s

books.

- Date’. : - Advanced by _ Received by

First Meet Fairmount . Fairmount

May 20, 1958 $225,000.00 (1)

May.22, 1958 ~ 15,000.00 (1) - |

‘May 26, 1958 5,000.00

_ May 26, 1958 5,000.00 |

May 28, 1958 ~ 2,025.00

May 28, 1958 1,000.00

.May 28,:1958 . 1,000.00 .-

May 28, 1958 we, 225,000.00° - .. |

June 10, 1958 * ee oe , $ 2,025.00 +

July 5,, 1958 . 100,000-90 (3)

July - 12, 1958- ts 449,000.00 (3)

July 24, 1958 ss 130,000.00 —-

August 9, 1958 ~, . 100,000.00

i August 9, 1958. 150,000.00

a ‘August 20, 1958. : 150,000.00

zB September 1, 1958 225,000.00

vemper 47, 1958 fies 54,642.47 .

Second Meet ‘ey m

November %, 1958 $224.250.00 (2) - #

November 5,- 1958 63,250.00 (3) z

December 5, 1958 ~ 200,000.00

: January 6, 1959 ; he, $200,000.00

January 12, 1959 63,250.00 (4)

February 3, 1959 7 . 178,250.08 (4)

‘February 10, 1959 . : * 250,000.00 6)

( 1) Paid directly to Helene Boyle. See- footnote 3..

mt : (2) Paid to Citizens National Bank of Martinsburg, West

Virginia as rent under second Lease.”

(3) Payable to Helene Boyte.

(4) Debited to Rent on Charles Town’s books, the other

receipts after July 12, 1958, except the last being debited

on Charles Town's books ‘to ~Aecounts Fayalte, Fair-

mount Steel Corp.”. .

{5) Debited to rent originally, but on “April 30, 1959:

$204,000.00, was transferred to an account entitied ad-

vance frogi Fairmount Steel Corporation. |

The sums received by Fairmount shown’ - above were’.

“he -- generated by the opéfation of the racing meets.

° ~All income’ and expenses with respect to both’ race

"meets were reflected on the hooks of Charles Town. |

By means of a: journal entry all the income and ex-

menses, with the exception of officers’ Salaries. were

Poa 5

DAG AAS DTN Rah i OR oP inh editeelosieds tetnunt 4 SNE Med SAR eBR esa

“ .

7 x

° XY

—19— ;

transferred to the books of Fairmount. By means of an-

other journal entry, 10 percent of the net profits was.

allocated to Gharles ‘Town. Three sets of these entries \.

were made: the first 0 ne 30, 1958, covering the

period of the summer meel\ through said date which

“was the end’ of Fairmount’s

, r inder of the summer

- . Meet; and the third in the spring of 1959, covering the

_ winter meet. This was done purportedJy pursuant to the

contracts between the parties, the first of which is. set

out above in these findings, .. .../- ./

The receipts from the operation of both racing meets. .

here-cOmeerned ‘were deposited in the regular account |

of Charles “Kown in. the Peoples Bank of Charles

Town, Charles own, West Virginia, from. which ac-

count all expenses and charges incident to the opera- .

tion of both racing meets were paid. |

. During’ the period May 28, 1958, through February ©

+ 17, 1959, deposits in the total amount of $6,523,-

- 215.27 were made in. the regular account at the Peo-

ples Bank. During the period February 21, 1959,°

through November 6, 1959, additional deposits totaling

$78,234.80 were made in this account. ae ~

During the period May 29, 1958, through February. -

. 20, 1959, 847 checks were drawn on the regular ac-

ceunt totaling $6,270,972.25. During the period Febru-

‘ary 24, 1959, through June 17. 1960, 65 additional.

checks were drawn Q@ the-regular account totaling

$305,415.47. _ | |

Fairmount reported ‘on. its Federal income tax returns

the gross. receipts and all the expenses in connection

with the operation of the two racing meets. It claimed -

a deduction for commission expenses representing the 10

wo”

teen ne *

OTE TNE le PEIN

. 0“

r is ,

Te retmae

-- at

° ‘f ~ 0 ; < : a

“ ‘ ioe : ‘ : ;

percent of the net profits allocated) to Charles ‘Town.

' agg

Pateiount’s return for the taxable year ended June a,

1999, reflected a net protit of $732299. 86 from. the.

tracing mMects,

On-iuts Pederal incoine tax returns for the ‘taxable -

pettods ended November 40, 1958) and November 40,

19N98, Chatles Town reported: gross reevipts ino the re

speefive amounts of $04,886.93. and 82.0,05-6.87, which

amounts represented. the 10 percent allocited to

. . 5 ‘i ‘ ty. = 5 ’ ?

Ghailes Town and witch covesponded with the deduc

fons claimed by Eairmount for commission expense. On

e . . , :

Us Bederal tacome tan’ return for the taxable period

ended November 30, 1998, “Chaettles Town: claimed a

deduetion in. the amounLor $40; 000.00 for compensa

‘tion of officers as fo OWS:

“Lduis Pondfichd 0 $25,000.00

Heyman Cohen ~ 7,800.00

Ben Cohen | ee ere ee

“In addition. it chimed a deduction ef $1,000.00. for

sy contributioen to the Hernan and: Ben ‘Cohen Chari:

-table Foundation, Inc. On its Federal income, tax re-

turn for the fiscal vear ended November ‘30, 1959,

a at foe

[ har! es Town. claimed a deduction in the Amount of

$20,000. OO for cof sation “paid: ‘to ‘Pondfield: In.

dition ae claimed relatively small amounts for ‘other

dueti ons, including S 200. ee) for contributions to .the

eyman and Ben Cohen Charitable Foundation. Inc.

. Town, Inc: showed net assets of $20,690.92... .

“

In the balance sheet. ‘portion of its income tax return.

for the fiscal vear ended November: 30, 1959. Charles

‘ a

The income and expenses of the two. horse racing

meets here’ concerned were re ported only on the Fed

cr atl mcome tax returns of Charles ‘Town and Mair

‘mount. No partner: hip information - rehirns, we re filed

with the Internal Reverie Service: reflecting any of the

income ore ve HSCS of the t qo horse racing micets.

‘On April 2 1, 1959, a Corporation named Charles

‘Town, Preigoiios, Incorporated (hereinafter, referred to

is Properties ) citercd into a contract with Mrs. Helene

W. Boyle for the: purchase. of the Chailes ‘Town Race

Track (@harles Town, West Virginia) ‘and subse -quent-

ty purchased the track. -

“Although Properties’ wats formed by persons. other

than the Cohens and Pondficld, hy, May - 19, 1959,

all-of the stock of- Propcitics: was held by or on behalf

of members of. the Cohen famjly, or ‘by Pondfield.

Since that time, and. until it was sold to outside inter-

ests in 1965, Prope rties owned and operated the Charles

Town Race Track. . Ser

After the forapiotipe of the two racin meets, Charl 5

Town conducted no, further business. At some- time”

_between May 16, 1960, and May 15, 1961. Pond-

field acquired the two shares (oF Charles. Town -previous-

| ly held by Ben and Herman Cphen. |

On June 11, 1962, | respondent sent. -to Charles

| Town, Inc., by certified mail \ i src notic é of de-

ficiency determining. a sci =f in ‘imcome tax ‘for.

the taxable periods May 2 958 to ‘November be

1958,:and December l, 1988 to November 30. 1959. 1

bad

2 —o— .

: e ™

—22—

refpective. amounts of $258,616.93 and-"$117-

367.57: "In’h statement attached te the deficiency no-

+ Tice issued fo Charles Town, the respondent explained

his adjustments fer the period May 22, 1958 to No-

* vember 30, 1958, as follows: - : -

fa Adiditional income $497,833.02

te is heehd that income in the. amouit of $2,808,220.18,

~ Mcleded im the tat ecturn of Farmount Stee! C@wporation

forthe taxable year ended June MM) 1949. constituted

“widynonal income to you under the prowsons «

7 61 afd Section 482 of the Imtermal Revenue Code of 19

' -in additional taxable income im the amount of

$497,533.02: compited as follows

. Mutual Dept. Commisfon = -- —$2.389.657.03

- Mutu Dept. Reakage : " 220,678.86

¢ Programs +. - 21,837,600

2 Usandivand . - St.9R4.45

Clubhouse . ; 49,208 81

° Box Scats ASR 6F

~* House Complimem@ary one ts

Oncgssions ~ : *AX,773.12

Valet Parking 8424.25

~ Miscellancous Income * 3,254.80

Federal Admission ' 164.49

Total Income $2.808,220.18

Less: Total Expenses? -2. 308, BES.46

« $ _499,334°72

Less ‘Unknown Difference rat .

bacome fron .

. Charles Town Race Track s 497,833.02

\ sienilad explanation and computation (involving dif-

ferent amounts) was’ included: in the notice with re-

spect to the-fiscal year ended November Be 1959.

On September 5. 1962, Charles Town filed with this

- Court a- petition, docket" No. 3517-68, requesting a re

| determination of said- deficiency, After the trial of the

case on June 14 and 15, 1965, this Court’ determined

thar-theve was a ‘deficiency in income tax due from

Town fér the taxable periods May 22, 1958

to ber 30. 1958, and December 1, 1958 to No-

yember 30,"198F in the respective amounts. of $258,-

% ee. 4 @”

oe ee

616.93 and $117,367.57; and said -decision became

final op Octobtr 9, 1967." ‘These deficiencies wore

_assessed on April 29, 1966. In Jyne of 1966, the In

ternal Revenue Service mgde_ attempts to collect the Ge-

ficiencies against Charles Town. At that time Charles

* Town had ne moncy to pay the tax. Charles Town's

only business had bece operating the two racing mets

and after the completion of these meets it engaged, in

no further business. Any further attcnipts by the Inter.

-nal Revenue Seréice to collect the defitiencics against 3

Charles Town would have been futile... . \

C. D. Construction Corporation (herei some.

times referred to as “C. D. Corporation”) is a cor-

poration formed under the laws of the State of Mary- /

Jand. It was ingprposated on or about. May 1. 1962.

: OF D. Corporation issyed* two shares of stock in ex-

change for cach share of Fairmount Steel stock*to the _.

Shareholders of Fairmount Steel. However, no stock -

in C. D: Corporation was issued for the Class A voting —

stock in Fairmount Stcel. After this transaction, the

stock .in C. D. Corporation was held as follows:

whey 350 shares

Cohen 350 shares

Charlotte Weinberg - 200 hares

Rosatce Davison 200 shares

Nathan L. Cohen Trust 400 shares

“reported in 2 Memorandum Opinion of

Was

* this Court, TC. Memo. 1966-15. and ays affirmed bE the Cours

Circuit, 372 F. 2d 415 (1967).-The |

Supreme Court denied a ¥rit of certiorari from the decision of

as the Court of Appeals, 389 U.S. 84! (1967).

There have been no changes in the stock ownership

tothe presept time except that the Nathan L. Cohen

Trust has been terminated and Nathan 1. Cohen be-

*, came the owner of the stock held by the trust. ;

On June 30. 1962, Fairmount Stee! Corporation

was tiquidated and its net asseis of a value of $253;-

394. 40) were: transferfed to, ¢ 4% Construction Cor-

poration. Phereafttr, Fairmount engaged. in-no. further

business activity. . =

Without taking into account any ‘Rabiliny for Fed-

eral income tax deficiencies duc with respect to Charles

’ Town, Inc:, the balance. sheets attached -to Fairmoum

" Sedls Federal income’ tax returns from. its” fiscal year

ending June 3), 1958 through its. fiscal year ending

Jume 30, 1962, show cither deficits’ or small surpluses

wiuch were eat no time ereater than $7. 187. 63.

OPINION i

., KERN, ‘Juage: Acting under’ the procedures set forth

’ in section 6901 respondent asserted transferee liabifi--

ty against cach of the petitioners as transferees or trans-

_ferees of transferees of C ‘harles Town, Inc. The pe- .

* titionets concede that Charles ‘Town is liable. pursugmt

“SEC. 6901. TRANSFERRED: ASSETS.

ta) Method of * Collection: —Tlie amounts of the following

liabilities shall, excopy, as hereinafter in this.section provided, be

assessed, paid, and coliected in the saime manrter and subject to ”

the same provisions and limitations as in the case of the taxes

with-respect to which the liabilities were incurped:

41) Income. Estate. atid Gift Taxes.—

(AY Transferees.—The liability, at Jaw or in equity, of

a transferee of Pe

*-. s * * at

a respect of the tax imposed by-subtitle A or B.

(b) Liability —Any Eability referred to in subseetion (a) po

‘be either as to the amount of tax shown on a return or as te any

deficiency or underpayment Of any tax.

—25— - ; ete

.- 7 ——

lo prior court determination, for the total sum of $375,-

984.50 in income. taxes for its taxable periods ending

November 30, 1958 and: November 30, 1959. It js

clear from the record, and petitioners appear to con-

cede this also, that Charles Town has not made and -

cannot make any payment on ite tax. liability and -

that all retsonable_ means to. collect the tax from

Charies Town have been exhausted.

‘Both parties. recognize that in determining who is

liable as a transferee applicuble Mate law. is control-

ling. See, ¢.g.. Commissioner vy. Stern, 357 US. 39.

» (1958). The partics appear to agree that & “transferee”

under gection’ 6901 includes one who «receives proper-

ly in a transaction which is fratdulent as to the cred:

itors of the transferor under the laws of the States, here

West Virginia and Maryland, in which the transfers in ,

guestian took place.” In general terms, under the laws

of both states,-a fraudulent: transfer occurs’ as to éx-

ising creditors of the transferor without regard to any

actual intent to defraud when property is transferred

to a transferee without. consideration “deemed valuable

in law” (in West Virginia), or “fair considération”

(in Maryland ). being given in return, from a transfer-

of who is insolvent -or who is rendered insolvent ‘by

that transfer. “ey _ o.

In- his answer to the petitions filed by the petitioners

herein, respgndent asserted: transferee liability under

five separate theorig¢s—each theory applying to some.

‘but not alk of the pétitioners named herein as trans-

ferees. These cases were consolidated for purposes of

trial, briefs and opinion. In his original brief. -Tespond- —

7, Va. Code Ann. secs. 4-1-2 and 40-1-3 (1966)! Terrick y

Mcintyre, #10 W. Va. 529. 158 SF. 788: Md. Ann. Code art.

39B, secs. 1, 3 and 4 (1965). Ae

aor, >

ox, ae

ent- expressly sheidoncd: one of bis’ five thcorics.. but

‘continues to maintain the validity of the four remain.

‘ing ‘theaties utder which he asserts transferee liability

as fo cight of the ning, petitioners in these consolidated

cases.”

“Respondent’s four remaining theories can be sum

inazized as follows: . . . . 4 rs.

3. . ... Fairmount becume a transferee of Charies.

Town hen. it received payments under the agreement

between these two corporations ‘because i reecived,

without eC. payments of funds belonging to.

Charles Town, ;

‘ << Oo Construction Corporation is liable as a

> transferee of Charles own to the extent of $253.-

394.40 ~ ingerest of percent” accruing from’ June

30-1 2. Faiymount Was 4 transferee of Charles Town

for the reasons set forth in respandent’s third theory,

supra. Thereafter Fairmount liguidated, -transferring

without consideration all of ,it. assets to C.’ D. Con-

struction C orporation on June 30, 1962. -

As we understand petitioners? arguments, they,

can ie sunfnarized as follows: : .

A Charles, Town's finbibity ‘for the deficiericies in.

income tax involved hereiv did not arise until, at_ the

earliest. the time When res ndent-sent to Charles Town -

a.statutory notice of deficiency as to thoSe taxes (June ~

11. 1962). because. although the deficiencies were de-

termined. under ‘section 61 and section 482.. these .de-

_ficiencies were sustained by the Tax Court and on

appeal by the Court of Appeals solely under section

482 without reference to section 61. und section 482

"We stated previously as a-result of ‘abundoning one ; -of his

theories. reépondent concedes that there ‘is tip transferee Viability e

in the case of Charlotte Weinberg, docket No. ‘encurae

can be applicd ina determination of -taxes only by re-

spondent. Thus petitioners contend that there was no.

" fiability for additional taxes on the part of Charles

Town, the alleged transferor, until after the date of the

alleged transfers, and consequently the transfer could

not be considered as fraudulent under the pertinent

Statutes of West Virginia since the United States did

not beceme an cxwsting creditor of C hharles Town prior

‘to June 1, 1962. — ~- :

2.. Under-the terms of the eee Charles

Town and Fairmoynt (the first of which is set out in,

our “Findings of Fact), the 90 perceft of the profits ;

fram the racing meets which Fairmount was to re-—

* ceive in return for advancing aM of the Tunds neces.

sary for the operation of the racing meets constituted

the property of Fairmount when received, afid conse-

quently there was no transfer from Charles Town to

Fairmount on which transferee liability may be found-.

on SAS

. * Even if this Court were to find that the 90

as a of the profits from the racing meets -réceived

~ by Fairmount \was at one time. the property. of Charles

Town, sti! under- the terms of the contracts "between

Charles Town and Fairmount tlie transfers of the funds

from Charlies Town to ‘Fairmount were not voluntary

but were made for full consideration. eA

- We first decide the issues raised by petitioners in. *

their arguments set forth above. .

Petitioners’ first argument, based upon cerfain -ian-

guage in WwW. Va. Code Ann, sec. 40-1-3 (1966).”

econ 40-1-3 provides:

Every tragsfer of charge which iS not upon consideration.

deemed val in law shall be void as to--crediters « hose

\_ «, (This e is. eae on next page)

can

' .

+ j , ‘

a, a

set forth ino the maygin below, is that Charles ‘Towa.

had not become subject to the tax liability determined

‘mm docket No. 3517-62) (the | prior case Nn which

Charles-Town’s substantive tax liability was devérn med )

wand thus no debt) had been “contracted at) the? time”

the monies were received by Faermouni from the tac

ing meets, in LYSS and 19589. Citing certain authorities -

for the proposition that a tagpayer Cantiot require the

appheatian of section 482. and relying on a statement

In Lnterstate Fire Insurande Co. v. United States, 215

KE. Supp. S80 (ELD. Tenn.), affirmed: per curiam 339

Sectidn 482 does not result in an -entorcible tax conse-

-quence. until there has been a reallocation resulting. in

a feassessment of taxes,” (215 F. Supp. at 5983—

pettoners argue that under te law of West Virginia

sor any other state no-obligation for Charles Town's

tan’ lability involved herein could have arisen at least

until the determination under. section 482. by the re-

spondent in his notice of deficiency dated June 11,

1962 ‘ < .

“We think ‘petitioners’ ‘argument is without’ merit.

The general rule is stated in 9 Mertens, Law of Fed-

erai Income Tax Momsec. 53.37 as follows:

it is well settled that.a transferee is retroac- ’

tively. liable for the transferor’s taxes in the year

of the transfer and prior years, to the extent of the

assets received from the transferor. This is so even

though ‘the transferor’s tax liability was unknewn

eat the ‘time of the transfer. | Footnote omitted} j

de “bts shall have been eitaeed at the time it was made:

but shall not, upon that account merely; be void as to

creditors Whose debts shal! have been contracted. or as to

purchasers Who shall have purchased. after it was made:

and though it be.decreed to be void as to a prior creditor.

because voluntdry, jt shall not for that, cause be decreed -to-

be’ void as to subsequent creditors or ‘purchasers.

‘

Deen, ee, ,

: opinion in that case {25 T.C.M.. 77) we said; at: p.

ae: | - 2

- Ly—

See also, ta, Seow y. Conmissioner, 117 FB. 2d- 36

CLA. 8): Archie Swinks, 51°T6C.<13* and Lstate. vf

Marry Se hinetder, 29 TLC. 940) (1958). Cases have

indicated that the shudow of the inchoate. Tight of, the

Federal POVEFEIBERE Lo tax income i Gast continuously

upon a business prodticiny income throughout the year |

“(see Updike v. United States, $b. 2d. 913 (CA

"8. 1925)L and that this shadow Way be Cast. upon,

the current incagne of a business even by a‘retroactive

fax imposed : a, Stafute cnacted after the close of the

lixable year (Neill v. Phinney, 245 FP. 2d 645 (0A.

5, 1997)). sf :

: ; ia ‘on es ‘

Contrary to one of the premiscs im petitioners’ ar,

rumen, the respondent: in fis determination of ’ def?

Ni iency agaist Charles Town relied upon: section, Gt

well as section 482 -and this fact wa’ pointed out by

both “this Court and the Court of. Appeals in - the

Charles Town case. furthermore, both courts made ‘it

plain -that they considered the income in question to_

have been carnéd by Charles Town and: to have |

the income of Cliarles Town. when carned. In o

It follows from all of the foregoing ‘that Charles

Town earned the income in question.. The at-

tempted. shifting of this 7 income to- Fairmount ma}

» properly be corrected by the application of the

oo of iechon 482 of the 1954 Code..

In affirming us. the ‘Court of: Appeals in, 372 F. 2d

415 said, at-p. 422: ‘

‘In view of ‘our Seudldsden that : the Tax Court .*

" was not clelirly erroneous in finding that Charles

Town itself earned Sess income from the two rac- _-

. . . “ as = : a

- as . fe : . = an ae

‘al — 2 | ee :

ing meets; sthe Commissioner's allocation of the

total net income to Charles ‘Town -plhiinly -ts

not unreasonable or arbitrary. Anticipatory agree-

‘ments designed fo prevent the vesting of income

3 in‘the owners, which was determined to be the es-

sential nature of the intereorporate agreements in .

the instant case, will be disregarded and the’ tax |

assessed against the entity carning the income.

-Hets clear that: both’ est € ‘ourt“and the Court ef Ap-

- peals considered: that the income in question belonged

to Charles Town as 4 was earned and was taxable to

- ‘it as earned under section -61,-and that any «<ttempt

to shift this income to. Fairmount: by arf anticipatory

agreement designed.to prevent the vesting of this in-’

ceme in. the owner, of- the income (Charles ’ Town)-

could be corrected by the ‘application of section 482:

Thus Charles” Town became liable in an unknown

ansount for taxes on income earned by it at the time*

‘it was earned dnd thus had. a debt which had been be

contracted at the time the: " transfers were made. This °

liability did not originate from and was not created? by:

ailocation under section 482. This section was availed.

of to preyent the shifting of this income :. (and the

tax liability thereon ) by an anticipatory agreement.

As we have indicated. petitroners’ principal reliance

in connection with this’ line of argument is on‘ the sfate-.

ment quoted from /mterstate Fire Insurance Co. v.

“United States, supra. That casé did not involve any

question having to do with transferee liability and db-

viously was not intended by the Court to state the law:

in this area. In any event it is not controlling in the

instant case where the income in“ question was earned

by the transferor and th¢ inchoate Jiability for | taxes:

thereon arose prior to the transfers.

We. ate also unable to: agree with, petitioners’ Sec-

ond argument, that the 90 perecent-Of the profits from’

the racing meets “belonged” to Fairmount and never

.were the property of Chi itles Town. Without entering

into a lengthy discussion 6n the collateral estoppel is-

sues ralscd by the parties, and without ag SOLD) Lite Sep

the numerous “aCliVities undyrtaken by. Charles Town in.

——— and operating the racing meets: ous ‘ake

stated an our Findings of Fact,*we think is suffi-.

cient: to state the ultimate conclusions are we draw.

from those -facts? that Charles “Town itself. carned all

of the profits. generated from its apcralion: of the two °

racing meets and that these profits, at least tempo- |

rarily,. “belonged” to Charles. Town. Charl?¢s Town, Inc.

supra, National Carbide C orp. G onmissioner, 336

ee > Sa . Bar gd

Contrary to. petitioners’ “third argument, in Our view |

the transfer. of funds generated by the racing ‘meets

from Charles Town to Fairmount under the contract

between. them’ was ‘not ‘made as petitioners urge, in.

return for a “consideration deemed valuable. in, law”

- under the law of West Virginia. In support of their. ar-

gument, petitioners. do not directly urge that the ad-.

vances from Fairmount to Charles Town created .

debt obligation (presumably in the nature of an income

~ bond). Instead petitioners, rely on the terms of the con- ,

_ tract betwean Charles Town and Fairmount which state

that Ben and. Herman Cohen: were named. officers of

Charles Town, and the signature of at-least one: of

-them was required for checks on Charles Town’ s Teg-

ulat* account. From these facts: petitioners. argue .'that

Fairmount’s - ‘money. was ‘provided for. specific uses and

. purposes under specified protettions’ and for specified

consideration’ (90 percent of the profits of the racing

j ‘ F ps = Ay ' ; ne “a

See Daca

Sea A Oe SNe”

sae be einen center ctor tno

cm ae “.

32 _

‘

meets), As ¢ consequence, petitioners conclude, We

payments from Charles Town to’ Fairmount were not

“voluntary” -under applicable West Virginia law, foot;

~ note 8. eta and were rot nierely a* return on Capi-.

tal. aes cae.

We disagree. As -this Court has previously pointed

out in the Charles Town, Inc. casé, the advances from |

Fairmount were not evidenced by: an “notes or other *

debt instruments, were made without security, werd?

maye without agreement as to a repayment date, and -

were not repayable at all to the extent that losses

were incurred in the” racing meets: The portions of the

‘contracts. ‘between Charles Town and “airmount relied |

upon by petitioners, do no more than Sugges. that Fair-

mount intended to retain some control as _to how ts

advances were spent; they’ are -not helpful in ascerfain-

ing the character of these advances. These advances,

. made with the intention that Hairmount was to take

the risk of. loss attendant upon | Charles Town's opera-

‘ tion of the racing meets here in question, were. con-. .

tributions to capital. See Motel. Corporation, 54 T.C.

1433 (filed June 29, 1970) and | cases cited -therein:

Charles Town, Inc. , supra.

Hence we decide that during 1958 and 1959 Charles

Town made transfers of its funds to Fairmount and did.

not receive. in return consideration “deemed valuable in.

for federal taxes arising from its. operation of the i facing .

meets from which ‘Charles Town’ S funds Wete generat-:

ed: In determining whether a transferor was insolvent |

at the ‘time transfers were made, the transferor’s i-

ability for federal income taxes, even # unknown at

- the time of the. transfers, must be taken into account.

3 See 9 Mertens; Law of. Federal Income’ Taxation, sec.

. 33 af and cases cited at footnote 86 therein. Apply-

ing this rule to the facts herein, it is clear ‘that’ the —

- transfers made by Charles Town ‘to Fairmount during |

1958 and 1959 rendered Charles. Town insolvent. oe

cordingly we conclude that, Fairmount wads a trans-

feree of Charles Town within the contemplation of sec-

tion 6901 of the Internal Revenue Code: of 1954..

‘Finally we turn to respondent's fourth theory, that

Cop. Corporation was a transferee of: a transferee of:

Charles ‘Town, in that Fairmount. was a transferee. of

Charles Town and C. D. Corporation: was a transferee

pee Fairmount to the extent of the assets. transferred by.

. Fairmount to C. ‘DS! Corporation when Fairmount was

liquidated on June 30, 1962; This theory is sound.

Petitioners appear: to concede that Fairmount thas’ not

i. made and cannot make any’ payment on its previously |

established transferee liability from’ Charles ToWn, and

all ‘reasonable means to colleet the Tiabuity. from Fair- .

mount have been exhausted. We. are convinced that |

the transaction in which Fairmount transferred all- its’

, assets to 5, Pa ‘Corporation was a fraudilent convey-

ance under Maryland law, see Acme Card ‘System Co.

@”: Remington Rand. Business Ser vice Inc.; Big. Supp.

°742. 747 (D. Md.),-and that cf. Corporation is li-

| _ able for the income tax liabilities’ ‘of Charles Town to

the extent wt the assets: received by it as a transferee

« /

Penh ef OAS ERE A —_ .

34 tt 8 e

" of a transferee of Charles Town. The parties have stip- :

ulated that the net value of the assets transferred by

_ Fairmount to C. D.- - Corporation wi was $253, 394.40.

- The income tax liabilities of Charles Town were in ex-

Coss of that sum. More specifically we hold’ that C. D.

Se Corporation became liable for Charles Town’s Federal -

income tax deficiencies td the extcnt of $253,394.40

on June 30, 1962,. plus: interest thereon as provided

_ by law. Archie A. Swinks, supra.

In accordance with the conclusions we have reached |

herein, wae

Decisions will be ~~) i the petitioners

in docket Nos. 2577-68, 2578-68 and 2580-68

through 2585-68. .

Decision will be entered for respondent in °

_-docket No. 2579-68. —

eo ne

’ Excerpts From Opinion of the Court of Appeals for.the

Fourth Circuit ‘in the Cpaites Town, en Case,

372 F.2d 415.

By the very terms of Section 482 bontrot can be either _

direct or indirect. The regulations. promulgated under.

Section. 482 define.control to include “ any kind of con-

‘trol... whéther legally enforceable, and however exer-

cisable or. exercised. It is the reality of control nese

is decisive, not its form or the mode of its exercise.’

Treas. Reg. § 1 482-1 (a) (3). ;

We cannot say that the Tax Court was Clearly in

error when it determined there. was sufficient contro!

of Charles Town and .Fairmount by the same interests

(the Cohens) to permit the Commissioner’s application —

_ Of Section 482. We agree with the Tax Court that the

—

control exercised by the Cohens by reason of the inter-

corporate agreements. between Charles Town and Fair-

mount “was only one of several facts . . by which their-

_ actual. and effective control of the carporation was

acquired and exercised.”

Finally, Charles oie da to the allocation to it

_ of the entire net income from. the racing meets on the

basis that the “allocation of. ali: the fruits to. Charles _

Town alone is directly contrary:to the requirement” in

Section 482. that “the Secretary or his delegate Sons

distribute, apportion, or allocate . . . between or among

”

the controlled hein: This contention is

without merit. The Commissioner has broad discretion

in making such allocations and they will not be counter-

‘- manded unless the taxpayer shows them to be unreason-

able, arbitrary, or capricious. F.¢., Spicer Theatre Inc.

v. Commissioner, 346 F.2d 704. 706 ¢6th Cir. 1965):

Balentine Motor Co. v. Commissioner, 321 F.2d 796,

800 (4th Cir. 1963); Aiken Drive-In Theatre Corp. v,

wre ew vine y emetenetlbndetianineten we

United States, 281 F.2d 7, 10 (4th Cir. 1960); Dil-

lard-Waltermire, Inc. v.° Campbell, 255 F.2d° 433, ~~

435-36 (Sth Cir. 1958). Moreover, this circuit-recently -

has held specifically that the Commissioner may trans-

fer the total income and expenses of one controlled cor-

poration to ‘another under. Section 482. J: R. Land Co.

_v. United States, 361 F.2d 607 (4th Cir. 1966)...

Excerpts From Findings and Opinion of Tax Court in

the Charles Town, Inc. Case, T. C. Memo. 1966-15.

Charles Town was duly incorporated under the laws

of .the State of West Virginia~on-May 22, 1958. its

certificate of incorporation provided, in part, that the

principal office of the corporation would be located

at 1229 Mt. Royal Avenue, Baltimore, Md., which ad-

dress was the office of the Cohen brothers. The objects

for which the ‘corporation was formed were to engage

in and catry on the business of operating a race track.

_The corporation’s authorized capital stock was 1,000 .

‘shares of common stock of a par value of $10 each.

However, only 100 shares were issued by certificates

dated May 22, 1958, as follows:

Certificate No. Issued to hes No. of Shares

1 ‘Herman Cohen 1 .

2 , BenCohen — ei

3 Louis Pondfield 98...

When Charles Town filéd with the Racing es

' sion its application for license to conduct the meets, it

was required to file a supporting statement to the ap-

plication. In the supporting statements, Charles Town —

represented to the Commission that Charles Town was

tion was “Charles Town Incorporated:”. that the race

track and racing were to be conducted by a corpora-

tion; that Charles Town was that corporation; that its

stockholders,: officers, and directors were Ben Cohen,

—

Pondfield, and Herman Cohen; that the Fairmount Steel :

Corporation. had “advanced by loan, or otherwise, the ~

Capital invested in the business” in the. amount of $500, -

000; and that Herman Cohen, -Pondfield,. and Ben

Cohen had all been interested in the operation of a race. .

track in Baltimore, Md., called the Maryland Jockey

Club, in the capacity of president, vice president, and

_Secretary-treasurer, respectively.

The respondent, ‘in allocating the income reported by

~~ Fairmount from these | racing meets to Charles Town,

- did not act unreasonably, arbitrarily, or capriciously. _

Said determination of the respondent -was necessary

in order to prevent the evasion of taxes and, to clearly

reflect the taxable income of Charles Town, -within.

the meaning of section 482 of the 1954 Code.

The advances to Charles Town by Fairmount-con- —

Stituted in substance an equity investment.

It follows from. all of the foregoing that” Charles

Town earned the income in question. The attempted

shifting of this income to Fairmount may properly be

corrected by the application of the provisions of sec-

tion 482 of the 1954 Code.’ [Footnote is a quotation

_ of the section cited].

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.