Brief for Respondents in Opposition — C. D. Construction Corp. v. Commissioner

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te No. 71-852. °. - 7 ec) so

In the Supreme Court of the Cited States

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Ocropen Term; 1971

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Cc Dp, ‘ONSTRECTION CORPORATION, PETITIONER-. | :

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COMMISSIONER OF EN TERN AT, REVENUE “

Seger, So

ON PETITION FOR A WRIT OF CERTIOR. ihr TO THE en

UNITED STATES COURT OF APPEALS FOR «>

THE POU KTM CIRCUIT ; :

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BRIEF FOR THE RESPONDENT IN OPPOSITION” =.

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“ERWIN W. GRISWOLD, :

ot SoliettorcGs neral,. * .

SCOTT -P. CRAMPTON, os

Assistant Attorney Ge neral, ee 8 ;

RICHARD W. PERKINS.

_ RICHARD FARBER,

cor Attornen®, |

~ Department of. ‘Justice.

Was hiugtons- B.C, 20530.

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In the Supreme Court of the Unites States

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— Ovrone RK Tr RM, 1971.

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» D. Consrnvcrios CORPORATION, PETITIONER

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Vv. : f Fay,

COMMISSIONER OF INTERNAL REVENUE -

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ON PETITION FOR A WRIT OF CERTIORARITOTHE |’.

UNITED STATES COURT OF APPEALS POR oe.

THE FOURTH CIRCVIT |

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BRIEF’ FOR THE RESPONDENT IN OPPOSITION .

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_ OPINIONS: BELOW

~The: memorandum opinion: \of the Tax Court ( Pet..

pen 6-34) is reported at.29 T.C.M. 1370. The. opinion

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“of the court of appeals (Pet. App. 1-5) js not; yet

reported. : | . en:

, -.))« SURISDICTION

The judgment of the court. of appeals was entered .

on November. 30, 1971. ‘The petition for a writ of ‘cer--

i ari was filed on December 30, 1971. The jur isdi¢tion :

of this Court'i is invoked under 28 U.S.C. 1254( 1)..

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QUESTION PRESENTED

Whether, under the. vireuinstances, petitioner was

i Hable as transferee, purguant to Seetion G9OT of the

Internal Revenue Code, for a portion of the tampontet

taxes due from another corporation. .

STATUTES INVOLVED.

The pertinent provisions of. the Laternal Revenue

Code of 1M4 and of the West Virginia Code Annotated —

are set-forth in the petition (pp. 3-4).

STATEMENT a

Proceeding under Section 6901 of the Internal Rev-

enue Code, the Commissioner asserted transferee lia-

bility against petitioner fer a portion of the unpaid

taxesiof Charles Town, Ine. (Charles Town) for 1958

and 1959. The basis fer the assertion of such liability- 3

Was the transfer, for an inadequate consideration, of

avsets of Charles Town to Fairmount Steel Corporation”

(Fairmeunt), coupled with a subsequent transfer of

Fairmgunt's assets ‘(also without adequate considera-

tion) togetitioner. Petitioner concedes (Pet. 2) that

*. . , . . . . .

Fairmount’s transfer to it was without adequate con-

sideration, and that if Fairmount was liable as a trans-

feree of Charles Town, then petitioner is liable for a

pertion ef Charles Town's unpaid -taxes. Thus, the

only disputed question is whether Fairmount was liable

as a transferee of Charles Town.

During 1958 and 1959, (uartes Town, Inc, operated

twe-horse-racing meets in West Virginia. Fairmount

atvaneed to Charles Town the’ funds necessary for

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ope ration of the meets pursuant to writterr agreements

which prov ided that Fairmount was to receive 90 per-

cent of ¢ ‘tharles 'Town’s profits from the meets and was

fo hear any losses. The advanees were not evidenced

by hotes or other debt Instruments, were made without

scenrity ar agreement as toa repayment date, and were

Jot repayable at all to the extent that losses were in-

erred in the meets. (Pet App. 2.

In 1958 and 1959, Charles Town reimbursed Vair-

mount aml, in aeddition, dis tribute doinere than #700000

to Fairmount as its 90 percent share of the profits.

Pairinieunt Ported the profits as ineome on ite tax

returns for those years. Ow audit of Charles Town's

returns; the Commissioner determined, pursuant to

Section 61 (taxing income from whatever source de-

rived to its carner) and Section 482 (relating to alleoves-

tions of i inmconne het ween related taxpayers) of the Code,

that the eritire amount of the profits was taxable to

Charles Town. This determination was ustained in

Charles Town, Ine. v. Commissione

77, affirmed, 372-F. 2d 415 (CLA. 4), certiorari dem

389 US. 841, but the government was unable to collect

the deficiencies from Charles Town. ( Pet. App. 2, 19-20,

22-253.) °

Petitioner argued below that Charles Town trans-

ferred funds to Fairmount ‘in satisfaction of a valid

contractual obligation and, in ednsequence, “that the

transfers were for an adequate consideration. Peti-

tioner also argued that Charles Town's tax liability

was not sufficiently fixed at the time of the trans fers to

accord the United States the status of a *‘prior credi-

wl,

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PRET RRM

tor’ entitled, under the applicable West Virginia stat.

ute (AV. Va. Code Amn., § 40-1-3), to sivoid a transfer

of assets for an inadequate consiteration, ‘This latter

argument rested on petitioner's claim that, in the

arher lifigation involving Charles Town, liability

against. it was sustained only under Seetion 482; that

such liavility: is not ‘‘self-assessing”™’; and, therefore,

that the liability did not arise until the deficiency notice

was issued on June 11, 1962, three years after the last

of the transfers.

On the first argument, the Tax Court held that Fair-

mount's advanees to Charles Town constituted an

equity investment. From this it followed that Charles

Town's transfers were merely distributions of cor-

porate profits, and, under the W est Virginia statute,

were *‘not upon consideration deemed valuable in law.”’

Since the transfers left Charles Town with insufficient

funds to pay its taxes fer 1958 and. 1959, Fairmount

was Hable as transferee under Section 6901. With /

respect to the second argument, the Tax Court held that

the ComnySsioner’s assessment against Charles Town,

which was involved in the earlier litigation, restéd on

Section 61, as Well as on Section 482. Since liability

under the former provision concededly is ‘‘self-assess-

ing,’ it arose prior to the time of the transfers to Fair-.

mount. ( Pet. 6-34.)

On appeal, the’ Fourth Circuit affirmed the Tax

Coitrt’s rejection of both of petitioner’s arguments. It

also held in the alternative on petitioner’s second argu-

ment that the United States-was entitled to prevail _

~ under-the West Virginia statute even if it did not have

the status of a prior ereditor. The court of appeals -

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reasoned that the assets received by Fairmount, as a

stockholder in dissolution of Charles Town, would, ‘iin

‘any event, be impressed with an equitable trust in favor

of all creditors of Charles Town, regardless of when

those debts were contracted. (Pet. App, 4-5.)

The decision below. is correct. There is: no conflict.

or any other reason for further review.

-1. In holding that Fairmount’s advances constituted

an equity investment'in Charles Town, the courts below

reached the only conclusion compatible with the uncon-

-troverted facts of this ease. The funds advaneed clearly

were at the risk’of Charles Town’s business, and the

distributions, in consequence, were dividends... Under

the applicable local statute, they thus-were not for an

adequate consideration. ;

Maple v. Commissioner, 440 F. 2d 1055 (CLA. 9),

cited by petitioner (Pet. 10), is not to the contrary.

There was no issue of transferee liability in that case.

The only question in Maple was whether a partnership

which had purchased seedlings from a nursery, and

then contracted to. have the nursery raise the seedlings

for its account wes entitled to deduct as farming ex- .

_penses the fees it paid the nursery for raising the

seedlings. The Ninth Circuit’s finding that the part-

nership bore the risk of. loss of the seedlings is fully

consistent with the decision below. Of course Fair-

mount bore the risk of. loss on its equity investment.

But since What it purchased was an equity investment,-

rather than goods or services, the distributions it re-

LTRS SEE om 20 TPES Sta Te els RE RT OTT ATO re ee ae =:

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ceived nonetheless were without adequate considera-

tion. ;

2a etitione r also relies on several cases arising

—/ under Section 482 for the proposition that tax liability

thereunder is hot **se ‘lf- “USSUSSINE, and therefore that.

Charles Town's 1958 and 1959 liability Was not t fixed _

“until June LI, 62 awhen tte deficiency hotice issued,

‘On this basis it asserts conflict With the Seetion 482

eases (Pet. 11-14). But. whatever the merits of peti-

‘tianer’s view regarding tax liability under Section 482,

there is no contliet worthy of this Court's review. For

both courts below found that Charles Town's tax lia-

bility rested also on Section 61, and petitioner does not

dispute that liability under that provision is ‘self

assessing."* Foy the same reason; eases involving the

accumulated earnings tax, which petitioner also alleges

to be not **self-assessing’) (Pet. 14-15), are not in point.

Finally, there is no conflict with Stern v. Commis-

sioner, 3397 U.S. 39, as petitioner claims (Pet. 8-10).

As is .pparent from the opinions belew (Pet. App. 1-5,

25). both the Tax Court and the court of appeals ap-

plied local law, as requiyed by this Court’s holding in

Stern, in determining that Fairmount was liable as

Charles Town's transferee.

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CONCLUSION °

The petition for a writ of certiorari should be denied.

« Respectfully submitted.

FEBRUARY 1972.

ERWIN N..GRISWOLD,

Solicitor General.

SCOTT P, CRAMPTON, |

Assistant Attorney General.

RICHARD W. PERKINS, |

RICHARD FARBER, — + |

Attorneys.

WUS. Government. Printing Office: 1972—457-011/486