Brief for the United States in Opposition — Virginia National Bank v. United States

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C. EE ee ‘71-1006 | | "MAR 29

In the Supreme Court of the Guited States

OcroBer TERM, 1971

Vimeisia Nirionat BANK, PETITIONER - sien |

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Unirep States.oF AMERICA. ,- - ¢° - .

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: pee ast

ON PETITION FOR A WRIT OF CERTIORARI.TO THE

UNITED STATES ‘COURT OF APPEALS FOR 4

~« THE FOURTH CIRCUIT

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: . ' e

‘BRIEF FOR THE UNITED STATES IN OPPOSITION

re ie ae _ -ERWIN N: GRISWOLD, , —

. i . -- . Solicitor General, - ehh

ee SCOTT P. CRAMPTON

eal * Assistant Attorney General,

{ _ THOMAS L. STAPLETON,

* DAVID ENGLISH ——

Attorney, .

°. Depart ment -of Juitice,

: Washitigton, D.C. 20530.

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See a

: In the Supreme Court of the United States

-OcTOBER Term, 1971

No. 71-1006

VIRGINIA NATIONAL BANK, PETITIONER

mn

‘Unitep States oF AMERICA

ON PETITION OR A WRIT OF CERTIORARI TO THE

_ UNITED STATES COURT OF APPEALS FOR

THE FOURTH CIRCUIT _--

BRIEF FOR THE UNITED STATES IN OPPOSITION

_ OPINIONS BELOW

The memorandum opinion of the district ¢ ourt (Pet. °

"App. 19-27) is reported at 321 F. Supp. 316. The opin-

ion of the court of appeals (Pet. App. 29-35) is re-

ported at 450 F.-2d 1155.

JURISDICTION |

_ The judgment of the court of appeals was entered on

November 15, 1971 (Pet. App. 36). A petition for re-

_ hearing ‘was denied on December 15, 1971 (Pet. App.

37). The petition for a writ of certiorari was filed on

GQ)

a a

February 7, 1972. The jurisdiction of this Court is in-

voked under 28 U.S.C. 1254(1).

‘QUESTION PRESENTED |

_ Whether payments that Virginia law requires peti;

tioner to make to some of its shareholders are nonde-

ductible dividends or are deductible either as ordfmary

and. necessary business expenses under Section 162

as taxes under Seetion 164(a)-or Schaal the-Tifernal

Revenue Code of 1954. :

hee STATUTES AND REGULATIONS INVOLVED

- The pertinent provisions of Sections 162, 164 and 316

of the Internal Revenue Code of 1954, Sections 1.164-7

and 1.301-1 6f the Treasury Regulations on Income Tax

“« (1954 Code), and Chapter 10 of Title 58-of the Code

of Virginia of 1950, as amende<, are set forth in the

Appendix to the petition (Pet. ‘.pp. 38-61). The perti-

nent provisions of Sections 31 and 312 of the Internal

Revenue. Code of 1954 are set forth in the Appendix,

inffa, pp. 9-10.

STATEMENT

Petitioner is a national bank doing business in Vir-

ginia. Under authority af Revised Statutes; Section

5219, as amended (12 U.S.C. 548), permitting states

to levy taxes upon the shares of national banking asso-

ciations within their limits, Virginia i imposes an annual

tax ($$ 58-465, et seq.,.¢. 10, Code of Va., 1950, Ann-)

: upon the stock of national bank shareholders at the

/ rate of one dollar on each one hundred dollars of the

stock’s value. Some -of petitioner’s shareholders—

ee

3s

charities and -insyrance companies—are exempt from

the tax. Virginia law (§ 58-480.1, ¢. 10, Code of: Vir-

ginia, 1950, Ann.) requires that the banks pay directly

to such exempt shareholders an amount equal to the

tax that would be assessed against tliem if they were not

exempt.’ (Pet. App. 20-22, 29- 30.) — .

Ini accordance with: state law, petitioner paid the

Vi irginia tax with respect to those of its shareholders

that-were subject to it, and also made the payments

required by Virginia law to shareholders that were ex-

empt fromthe tax. During the taxable: vears in suit

(1963-1966), the former “payments amounted to more

.than $1.1 million, and the latter to approximately

$36,500. Petitioner did not formally declare a dividend

to cover either type of payment. (Pet. App. 22-23.)

On its: federal income tax returns for the taxable

years, petitioner deducted all of the payments required

by state law—hoth the taxes paid to Virginia and the

distributions to tax- -exempt shareholders. ‘The Com-

,

-- missioner allowed deductions for the former under —

Section 164(e) of the Internal Revenue Code of 1954,

which permits a corporation to deduct taxes paid by:

(

it on behalf of shareholders whose stock intérest.in a

corporation is subject to tax, and further provides thiat

under sich ¢ircumstaneces the shareholders shall not

be entitled to deductions. He disallowed deductions for

e. 5 :

* Prior to 1964, such payments could be turned over to the State,

which would then distribute them to the tax-exempt shareholders.

A 1964 amendment to the state law did aw ay with the initial transfer

to the State, and provided that each national bank make direct

payments to those of its shareholders ented from the state tax.

(Pet. App. 22.)

«>

the payments to tax-exempt shareholders on the ground

that they ‘were nondeductible corporate: distributions |

tO Shareholders. Petitioner paid the taxes in dispute, |

and thereafter brought this suit for refund, claiming

that the payments to tax-exempt shareholders were

deductible either as taxes under Section 164(a) or (e)

or as ordinary and necessary husiness-expenses under

Seetion 162. (Pet. App. 22-23, 30.)

The district court concluded that because the pay-

mets to tax-exempt shareholders were made annually

and under compulsion of Vi irginia law, they qualified

- as ordinary and ‘necessary business expenses under .

Section 162 (Pet. App. 93-24). It alternatively held

them deductible as taxes (Pet. App.. 24. 27). A divided

Fourth: Circuit ‘reversed, holding that the payments

were nondeductible corporate distributions, and that

neither the state law requirements nor the annual na-_

ture of the payments made them deductible as ondinary

and necessary business expenses or as taxes.’ \ (Pet.

App. 29- 39.)

ARGUMENT

‘The decision below is correct. There is no conflict

of decisions or any other reason for further review.

4 A distribution by a corporation to its shareholders

as such is to be treated as a dividend to the extent of

the corporation’s post- -1913 earnings and profits. _Sec-

tion 301(a) and (¢), Appendix, infra, pp. 9-10, and >

- Section 316 of the Internal Rev enue, Code of 1954;

* The. dissenting judge ‘agreed that the payinents were- not.

deductible as taxes, but concluded that ordinary and neceenaty

‘business expense deductions were warranted (Pet. App. 35).

Pa es

‘Treasury bine on Income Tax (1954 Code), |

§1:301-1(¢). Such a distribution is not a cost of doing

business,’ .and is not deductible under Section 312(a)

of the Code, Appendix, infra, p. 10. The nondeducti-

ble character of a corporate distribution is not altered

by the fact that there is no formal dividend declayation

by the corporation, that the distribution is only to

certain shareholders,’ is not intended,’ or is compelled.’

Application of these fundamental rules to the: facts

of this case requires the conclusion that the payments

in question constitute nondeductible corporate distri-,

- butions within the meaning of the relevant statutory

provisions. The payments indisputably were made to.

the exempt shareholders in their capacity as share-_

holders, and came from petitioner’s earnings and prof-

its. No more is necessary to the resolution of this case.

The court below thus was.corre¢t in rejecting peti-

‘ tioner’s contention that the requirement of Virginia

law that payments be made annually to exempt share-

holders somehow converted their character from non- ° |

° é

3 Swed Distributing Co. v. Commissioner, 323 F.. 2d 480 )(C. A. 5).

* Sachs v. Commissioner, 277 F. 2d 879, 82 (C.A. 8), certiorari

denied, 364,U.S. 833; Hash_v. Commissioner, 273 F.. 2d 248, 250

(C.A. 4) ; Paramount-Richards Theatres Commissioner, 153 F. 2d

602, 604 (C.A. 5); Nickerson Lumber Co. v. United —_— 214

F. Supp. 87, 92 (Mass.).

5 Sachs v. Commissioner, supra, 277 F. 2d at 882; Hash vy.

Commissioner, supra, 273 F. 2d at 250; Nickerson Lumber Co. v.

United States, supra, 214 F. Supp. at 92. ?

® Sammons v. United States, 433*F. 2d 728, 732 (C.A. 5); Sachs

_ v. Commissioner, supra, 277. F. 2d at 883; nan v. Commissioner,

supra, 273 F. 2d at 250.

* Swed Distributing Co. v. Commissioner, supra, 323 F, 2d at 483.

—

Ay | . 6

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dedugtible- distributions of earnings and: profits inte

ordinary and necessary business expenses. The pay-

ments are no less dividends because made regularly. A

* dividend is the “‘recurrent return upon stock paid to:

. stockholders by a. going corporation in the ordinary

‘course of business.”’ Hellmich vy. Hellman, 276 U.S.

233, 237.

Nor does a corporate, dividend hecome-a deductible

business expense merely because the dist ributinig. cor-

- poration is required to make it. Many distributions to

phareboldes rs are ¢ ompelled—for example, required div-

itlends on “enmiulative « preferred. Stock, dividends

deemed to have been declared under the foreign ‘per-

sonal holding company ‘provisions of thé Code’ (See-

tions 551 et seq.), and dividends paid to avoid the

ace ‘umulated earnings tax imposed by Section 531 or

- the personal holding ¢ompany tax imposed by Sec-

tion 641. But they are not any the less dividends for.

that reason. As this Court stressed only last Term in °

Commissioner v. Lincolu-Saraugs & Loan Assn., 403

U.S. 345, 399, “the fact that a payment is imposed com-.

pulsorily upon a taxpayer does not in and of itself make -

that paynient an ordinary and necessary [business]

expense within the méaning of Section 162 (a) of the -

1954 Code.” See alse National Bank of Commerce v.

Allen, 223 Fed, 472, 477 (C.A, 8); Swed Distributing

Co. v. Commissioner, 323 F. 2d 480 (CLA. 5). By

2. The payments likewise are not deductille-as taxes |

under Section 164(a) or (e). Section 164(a) prevides ,

for the deduction of taxés, but only “by the taxpayers:

“upon whom they are imposed. See Sc ction 1.164-1(a)

(5), Tre asury Regulations on ee "ax Seay Code)

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“ded

(26 C.F.R.). Virginia law does not irnpose the tax on

national banks but ‘‘upon each stockholder. * of the

shares of. [such] “stock”? (other than exen

holders). Since no tax is imposed on petiuoner, it may

not take a deduction under Section 164(a).° |

Accordingly, the only. possible argument for a- tax

deduction rests on Section 164(e), which permits a

corporation to deduct taxes “paid by it on behalf of its

shareholders upon whomni a tax is imposed. But, as the

court: below recognized (Pet . App. 34), petitioner did”

not pay taxes for its tax-ex empt shareholders. It merely

distributed ¢orporate earnings to them, Section 164(e),

us its legislative history indicates (see 8. Rep. No. 275,

67th’ Cong., Ist Sess., p..19), is designeeto permit a

vould be

; . J °

deductible by shareholders. Since the tax-exemipt share-

corporation to deduct taxes that otherwise

holders were not taxed, and therefore were not e ntitled

to a tax deduction, there is no, deduction that could be

transferred to petitiqner under Section 164(e).

~ Petitioner devotes considerable argument (Pet.

»

‘This is true not only for the payments to exempt shareholders,

but also for the actual taxes paid ta: Virginia with .respect to

‘the shares of nonexempt shareholders: Deduction of the Jatter

payments is allowed only} under Section 164(e), which ‘artificially

permits the deduction of. the payments: as if the « corporation had

paid the taxes on its own behalf. See Porter v. United. States,

27 F. 2d 882, 885 (C.A. 9); Furst Nat. Bank of Jackson, Miss. v.

MeNeel, 238 Fed. 559 (C.A, 5), National Bank of Commerce v.

Allen, 223 Fed. 472. (C.A. 8) ; ” Eliot wat. Bank v. Gill, 218 Fed. |

600 (C.A. 1) ;-Art. 566 of Treasury Rewulat ns 45 (1920 ed.).; T.D.

1763; 15 Treasury Decisions, Internal Revenue 2 25 (1912). See also

I.T. 1300, I-1 Cum. Bull. 11 (1922) ; Bank of Mount Hope v. Com-

missioner, 29 B.T.A., 542. Compare Rev. Rul. 70- 293, 1970-1

Cum. Bull. 282, 283. geen a :

pt share=

ie 15) ‘to es question whether Virginia’ may compel

| national banks to make distributions. se ans the .

es _ | ansWer -may be to that question, it has no bedring on | ~\

_ the tay i issue presented here. The question of Virginia’s a

‘of

pow or to compel distributions could properly be raised

. only in. ‘a case W ‘her rea national bank ora shareholder :

+ challenged the % irginia. statute. That is not this case.

. *

ee _° CONCLUSION |

tt \- The. petition for a writ of ¢ ertiorari should be denied, 2 hy

Respectfully. iii iictes ee See a

oF ge ee ~ -Erwy N, Griswor, }

Re Fe hag) cree pe” “Solicitor General. #.

eh) leery eee torn : Scorr P. Crampton,

Sh. hae es ¥s ae Assistant Attorney General.

-THomaAs L. STAPLETON,

; David ENGLISH CarMACcK,

, Attoryeys.

\ ? : " fr J

i

* _ APPENDIX

Internal Revenue Code of 1954 (26. US. C.):

SEC. 301. DISTRIBUTIONS OF PROPERTY.

“Y(a) In General. —Except as otherwise prov ided

in this chapter, a distribution of property (as dé- .

fined in section 317(a) ), Amade by a corporation to *

a shareholder with respect to its stock shall be -

treated in the manner provided in subsection {¢).

* * *& #& ses

(e) A mount Taxrable—In the case of a distr ibu:

tion to which subsection (a) applies—*

| (1) Amount * constituting dividend. “That

- portion of the distribution which is a dividend

(as defined in section 316) shall be inc luded in

2 gTOss income. 5

(2): Amo unt applied against basis. —That por- |

. tion of the listribution whic his not a div idend

shall ‘be applied against aml reduce the adjusted

| basis. of the stock... ;° ete ;

(3) Amount se of basis.—

(A) In gei erale—Except as provided in

. subpar agraph (: B), that portion of the dis-

ar ibution Ww thich is not a div idend, to the extept

that it execeds the adjusted basis of the stock,

shall be treated as gain from the sale or ate

a of | property. ,

(B) Distributions: ‘Out of 3 increase in value *

* ° March 1, 1913.—That portion of the distribu-

- tion which is not a div ridend, to the exfent that

it exceeds: the adjusted basis ‘of the stock and

or ~ to the extent that, it is out of j increase in value

pa 9:

*

«< wa

f

of

—

or |

we.

10

« accrued before March 1, 1913, shall be exempt

from tax. —

as ; ; e = 7 = oe, 2

SEC. 312-. EFFECT ON EARNINGS* AND °

- PROFITS. : :

» (a) General Rule —Except as otherwise pro-

vided in this section, on the distribution of prop-

erty by a corporatjon with respect.to its stock, the .

earnings and se 7 of the corporation (te the

extent thereof) shall be decreased by the sum of —

. C1) the amount of money, - :

(2) the principal amount of the obligations

of such corporation, and \

(3): the adjusted basis of the other property,

so distributed.

-

» : eee an. .

tr US. Government Brinting Office. 1972—440-372/575