Petition for Rehearing — B. Forman Co. v. Commissioner

No. 71-1280 | m 45 i

ene oo | |

SoU PMIMPcr PCD s on AUER :

In The nd

Supreme Court of the United States

October Term, 1971 —

B. Forman Company, Inc., et. al.,

Petitioners,

v.

Commissioner of Internal Revenue,

Respondent.

.

——>2 —

PETITION FOR REHEARING OF AN ORDER DENYING A

WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

ELLSWORTH A. VANGRAAFEILAND,

PETER L. FABER, -

Attorneys for Petitioners,

700 Midtown Tower

Rochester, New York 14604

Wiser, Shaw, Freeman,

VanGraafeiland, Harter

& Secrest,

Richard B. Secrest, |

William M. Colby, of counsel.

ON Rochester, New York

- (10483)

TABLE OF CONTENTS

Page

I: GY GE NUEINEED cen ccsticcctessvstvesecss I

REASONS FOR GRANTING THE REHEARING ....... i.

I. .In two decisions filed the day following the denial

of certiorari in this case, the Tax Court, a court of

national jurisdiction, expressly rejected the reasoning

of the Court of Appeals for the Second Circuit below as

an aberration from settled law. The Tax Court’s re-

affirmation of the view of the Court of Appeals for the

Sixth Circuitvill result in the unequal application of

Section 482 of the Internal Revenue Code in different

IE ocean wavhlevcdsseaenceunwens 1

Il. The commissioner is relying on the decision of the

Court of Appeals for the Second Circuit below to at-

tempt to expand his authority under Section 482 even

further. This will cause unnecessary and wasteful litiga-

‘tion unless this Court resolves these issues now. ...... 4

ED Ds hg banc kas on easdéen 64 beae es See 5

TABLE OF CITATIONS

CASES:

Friedlander Corp.,’ The, 25 T.C. 70 (1955), Acq. 1956-1

“~ Cum. Bull. 3, Nonacq. 1972-18 LR.B.7............. 4

Huber Homes, Inc., SS T.C. 598 (1971) ...........-... 2,3,4

Kahler Corporation, The, 58 T.C. ——, No. 50 (6/20/72) .. 2

Kerry Investment Company, 58 T.C. ——, No. 49 (6/20/72) 2

i a i

ii

Page

E. C. Laster, 43 B.T.A. 159 (i940), Acq. 1941-1 Cum. Bull.

7, modified on other grounds, 128 F. 2d 4 (Sth Cir.

BONEN Ss cdc sckc ee eeaueaeeenati eck ateaeeer akin 3

Lynch v. Tilden Co., 265 U.S. 315 (1924) ............244. 3

Polak's Frutal Works, Inc., 21 T.C. 953 (1954), Acq. 1955-1

Cum. Bull. 6, Nonacq. 1972-18 L.R.B.7 ............. 4

PPG Industries, Inc., 5S T.C. 928 (1970) ...... 6.62225 00. 3

Seminole Flavor Co., 4 T.C. 1215 (1945), Acq. 1945 Cum.

Bull. 6, Nonacq. 1972-18 LR.B. 7 ............-2445: 4

Smith-Bridgman & Co., 16 T.C., 287 (1951), Acq. 1951-1

CUR BE FF 6c Se abddecdecenctentedpetassoeneees 3

Tennessee-Arkansas Gravel Co. v. Commissioner of Inter-

nal Revenue, 112 F.2d 508 (6th Cir. 1940) ........... 2,3

Texsun Supply Corporation, 17 T.C. 433 (1951),Acq. 1952-1

Ss Es nbn Rade nck cwanaucusneudebasdtawnees 3

Turnbow v. Commissioner of Internal Revenue, 368 U.S.

TE UD hh incu cubeaknews er ree ree 3

STATUTES:

Internal Revenue Code of 1954 (26 U.S.C.), Sec. 482. 1,2,4,5 ©

~ MISCELLANEOUS:

Internal Revenue Bulletin 1972-18, May 1,1972.......... a

Research Institute of America Tax Coordinator, Check-

list 1972-11, Section 1, page 1 (S/25/72)............ ~ §

No. 71-1280.

In The

Supreme Court of the United States

October Term, 1971

B. Forman Company, Inc., et al.,

Petitioners,

Vv.

Commissioner of Internal Revenue,

Respondent.

PETITION FOR REHEARING OF AN ORDER DENYING A |

WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

Petitioners request a rehearing of the order denying a writ of

certiorari to review the judgment of the United States Court of

Appeals for the Second Circuit.

DENIAL OF CERTIORARI

Certiorari was denied June 19, 1972,

REASONS FOR GRANTING THE REHEARING

I. In Two Decisions Filed the Day Following the Denial of

Certiorari in this Case, the Tax Court, a Court of National

Jurisdiction, Expressly Rejected the Reasoning of the Court of

' Appeals for the Second Circuit Below as an Aberration From

Settled Law. The Tax Court’s Reaffirmation of the View of the

Court of Appeals for the Sixth Circuit will Result in the Unequal

Application of Section 482 of the Internal Revenue Code to

Taxpayers in Different Parts of the Country.

2

In Kerry Investment Company, 58 T. C. , No. 49,

6/20/72, a case similar to the case at bar, the court held that the

Commissioner of Internal Revenue lacked authority under

section 482 of the Internal Revenue Code to increase the gross

income of the maker of an interest-free loan by a hypothetical

interest charge where the proceeds of the loan generated no

income for the borrower. In reaffirming the’ position articulated

in Huber Homes, Inc., SS T: C. 928 (1971), the court expressly

repudiated the holding of the Court of Appeals for the Second

Circuit below that section 482 could be applied irrespective of

whether the proceeds of the loans produced income for the

borrower. “ s

In The Kahler Corporation, 58 T. C.- » No. SO, 6/20/72,

the Tax Court held once again that interest may not be imputed

toan interest-free loan under section 482 without a showing that

the proceeds of the loan produced income. The Court considered

the reasoning of the Court of Appeals for the Second Circuit in

the case at bar and rejected it in the following words:

“With due respect, we are of the opinion that the

Second Circuit has incorrectly .delineated both the

’ purpose of section 482 and the circumstances required

before the statute can operate. Hence, we opt to follow the

interpretation. of the intent and usage of section 482

expressed in previous Tax Court opinions on this issue.”

Thus, the Commissioner is wrong in stating that the position of

the Tax Court is “not in square conflict with the holding below.”

(Resp. 14, note 8).

In both Kerry and Kahler the court traced the origins of

established law from the decision of the Court of Appeals for the

Sixth Circuit in Tennessee-Arkansas Gravel Co. v. Com-

missioner, 112 F. 2d 508 (6th Cir. 1940) through the decision in

Huber Homes, Inc., supra. Both Kerry and Kahler were reviewed

by the entire Tax Court with but one dissent. The two decisions

indicate clearly the fallacy of ‘the Commissioner’s argument

3

before this Court in his brief in opposition that the law is as yet -

unsettled. In fact, as the Tax Court pointed out, the law has been

settled for over thirty years. The Tennessee-Arkansas Gravel Co.

holding has been consistently followed by the Tax Court, both

before and after the Commissioner’s adoption of his most recent

regulations under section 482. E. C. Laster, 43 B. T. A. 159

(1940), Acq. 1941-1 Cum. Bull. 7, modified on other grounds,

128 F. 2d 4 (Sth Cir. 1942); Smith-Bridgman & Co., 16 T. C. 287

(1951), Acq. 1951-1 Cum. Bull. 3; Texsun Supply Corporation,

17 T. C. 433 (1951), Acq. 1952-1 Cum. Bull. 4; PPG Industries,

Inc., 55 T. C. 928 (1970); Huber Homes, Inc:, 55 T. C. 598 (1971).

The proscription by the Sixth Circuit against the creation of

income where none has been realized by the parties as a result of

the transaction in question was clear in 1940 and remains clear

to. this day, the Commissioner’s suggestion to the contrary

notwithstanding.

The Tax Court is a court of national jurisdiction and is not

bound to follow the Second Circuit’s decision in this case except

within that Circuit. Its decision to follow the view of the Court of

Appeals for the Sixth Circuit instead will result in the in-

consistent treatment of taxpayers in different parts of the

country. This is well recognized as a ground sufficient to warrant

the granting of certiorari by this Court. Turnbow v. Com-

missioner, 368 U. S. 337 (1961).

There is no reason for this Court to await further judicial

developments under the Commissioner’s present regulations, for

the regulations added nothing to the law with respect to the

issues in this case. They represented merely another attempt by

the Commissioner to do the same thing which the courts in

Tennessee-Arkansas and the other cases cited above had said he

could not do under the statute. An improper interpretation of a

statute cannot be legitimized by being put in the form of a

regulation. Cf. Lynch v. Tilden Co., 265 U. S. 315 (1924). The

eonflict between the Sixth and Second Circuits is no less real

because one decision pre-dated the regulations.* The Second -

Circuit apparently regards a conflict to exist since if made no

attempt to distinguish Tennessee-Arkansas in its opinion

below.

The Sixth Circuit and the Tax Court have taken issue with the

Second Circuit. The courts have clearly articulated both sides of

the issues at bar repeatedly throughout the last thirty years. The

Commissioner concedes that they are important ones. The

arguments and policies governing this dispute are clear and it is

unlikely that additional litigation will contribute to the debate.

The issues are ripe for review by this Court.

Il. The Commissioner is Relying on the Decision of the Court

of Appeals for the Second Circuit Below to Attempt to Expand

his Authority Under Section 482 Even Further. This Will Cause

Unnecessary and Wasteful Litigation Unless This Court

Resolves these Issues Now. ‘

In Internal Revenue Bulletin 1972-18, May 1, 1972, the

Commissioner announced the withdrawal of his long-standing

acquiescences in The Friedlander Corp., 25 T. C. 70 (1955);

Polak's Frutal Works, Inc., 21 T. C. 953 (1954); and Seminole

Flavor Co., 4 T. C. 1215 (1945). Each of these cases denied his

authority to shift hypothetical income among related groups in

-slightly different circumstances from those in the present case.

Commentators have noted that the withdrawals of acquiescences

by the Commissioner were in apparent reliance on the Second

Circuit’s decision in this case. See, e. g., Research Institute of

America Tax Coordinator, Checklist 1972-11, Section 1, page 1

(May 25, 1972).

*That the Commissioner himself may regard the conflict to

exist ean be seen in his failure to appeal the Tax Court’s decision

in Huber Homes, Inc., supra. The appeal would have had to have

been taken to the Sixth Circuit.

r

This change in the Commissioner’s position indicates that,

contrary to his brief in opposition; he is unwilling to “await

further developments in the Courts of Appeals” before con-

tinuing his attempted expansion of the scope of his authority

under section 482. (Resp..page 15). The Commissioner’s present

course of action, absent timely intervention by this Court,: will

unnecessarily increase litigation and its consequent expense to

both taxpayers and the Government. The Commissioner should

not be allowed to build on the decision of the Second Circuit .

before the conflict with the Sixth Circuit is settled by this Court.

CONCLUSION

For these reasons, the petition for rehearing should be granted

and a writ of certiorari should be issued to review the decision of

the court below.

Respectfully submitted,

ELLSWORTH A. VANGRAAFEILAND,

PETER L. FABER

Attorneys for Petitioners

700 Midtown Tower

Rochester, New York 14604

WISER, SHAW, FREEMAN,

VANGRAAFEILAND, HARTER

& SECREST

RICHARD B. SECREST

WILLIAM M. COLBY

Of Counsel

July , 1972

. I, Peter L. Faber, counsel for petitioners hereby certify

‘that this petition is presented in good faith and not for

delay, and that it is confined to intervening grounds. of

substantial or controlling effect.

July 11, 1972

/s/ Peter L. Faber

Peter L. Faber