# Petition for a Writ of Certiorari — C. D. Construction Corp. v. Commissioner > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_0457%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for a Writ of Certiorari - **Published:** January 1, 1972 - **Citation:** 405 U.S. 988 ## Text En en ee ee ee ee ge eee IN THE ‘October Term, 1971 TRIE Sect Th 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. Bo eo @ sy 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 ; 8 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- 10 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 482 oc eeeepeeee oo pegesnemer SMenknees ES EAE Seat? nee ee Conchision . iV sinonventat ne Siotnies Gradina tetatetipsoronieapminanaidca ~ ‘ 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 . ve ~ 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 eam g Aiea E a 7 toe pintmlee, Fe A 3 . ’ 7 NU ail ORS MISE Se EOE, Pee) Lee are ares Se Nia WCAG te e SN ee ee oe 7 gio ager ; ‘ win “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 ".@ cl e : s ne va 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 erp o . ; 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. e 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.” a ¢ 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 i —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 ) e.s »- 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 | . 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. =e 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: =>. \ \ \ a °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 Te en 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 - . - * 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 . a 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. : al 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 * 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, ; ‘ 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).” oY 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 Fo 2d 003 (CLA. ©) ‘that “the: use and-arpplication of 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 ‘ ~ s. . us Se a fo 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 i j ‘ F ps = Ay ' ; ne “a 4 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 * Oe 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. law” at ‘a time when Charles Town had become liable © 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 ax 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 _ the applicant; that the name to be used in the opera- © 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]. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_0457%3A1. Public record. Not legal advice.