Petition for Writ of Certiorari — Anders v. United States

Supreme Court brief1972

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In the Supreme Court of the U

OCTOBER TERM, 1972

No. £225 9 0

D. B. ANDERS,

Petitioner,

. vs.

" UNITED STATES OF AMERICA,

4 Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

4 UNITED STATES COURT OF CLAIMS

. J. GLENN HAHN

: 1100 Commerce Bank Building

p Kansas City, Missouri 64106

P Counsel for Petitioner

? Of Counsel:

> Har.ow B. Kinc

WALTER J. KENNEDY

| 1100 Commerce Bank Building

[ Kansas City, Missouri 64106

FE. L. MEnvenwAtt. Inc., 926 Cherry Street, Kansas City, Mo. 64106, 421-3030

Coa - . - . -

SP eee

COPIES TONS SEPT

INDEX

a. ccnatosesietiintbaelllannuieiienahans

EL eee

Question Presented ................. oF

Statute, Regulation and Rules nantent Sintadhiieaseateialaesiaana

i a bielisinaningninico

Reasons for Granting the Writ

I. Interpretation and Application of Rule 101 ........

A. The Court of Claims Improperly Failed to

Determine That Material and Genuine Issues

of Triable Fact Exist

B. The Court of Claims Improperly Interpreted

Rule 101(f) by Its Assumption That the Bur-

den of Proof Was Shifted to Petitioner ........

II. The Holding of the Court of Claims on the Legal

Issue Patently Thwarts the Clearly Expressed

Congressional Intent in Enacting Section 337 of

the Internal Revenue Code of 1954

Conclusion ......

Appendices:

A-1 Opinion, United States Court of Claims, Anders

v. United States, ........ - == , 72-2 USTC

Par. 9561 (Docket No. 35-71, July 14, 1972) ....

B-1 Internal Revenue Code, 26 U.S.C. § 337(a),

RR TIRE aescirsseeninanessnniensiavecnnsanmnnsiniaaitaesiniatescremesen

B-2 US. Treas. Reg., 26 CFR § 1.337-3(a) ............

B-3 United States Court of Claims Rules 101(d),

EE iene ae Ne ew WOR ee oP

peas:

Crear Shen ors

panes heat NO Ra

C-1 Petition, United States Court of Claims, Anders

v. United States, supra All

C-2 Answer ...... A20

D-1 Standard Pretrial Order on Liability (Rule

UD sesectisssecientibiinetesanenednecnieiatioan A22

D-2 Plaintiff's Submission Pursuant to Standard

Pretrial Order ......... A26

E-1 Defendant’s Motion for Summary Judgment and

Brief in Support Thereof A35

E-2 Plaintiff's Response to Defendant’s Motion for

Summary Judgment and Supporting Brief .... A52

E-3 Defendant’s Reply Brief .......................-..-..-..0-0-0++ A85

Table of Authorities

CASES

Adicker v. Kress & Co., 398 U.S. 144 (1970) .................... 10

Anders, Commissioner v., 414 F.2d 1283 (10th Cir.),

cert. denied 396 U.S. 958 (1969), reversing 48 T.C.

Ge CED skeen , 16, 17, 18, 20

- Connery v. United States, ........ nn (72-2 USTC

Par. 9441) (May 22, 1972) ................. 20

Court Holding Company, Commissioner v., 324 U.S.

ot | eens 13, 14, 15

Cumberland Public Service Co., United States v., 338

i i ene aia aad 13, 14

Sheridan v. Garrison, 415 F.2d 699 (5th Cir. 1969) ........ 10

Spitalny v. United States, 430 F.2d 195 (9th Cir. 1970),

reversing 288 F.Supp. 650 (D.C. Ariz. 1968) ............

i Ee REE AL Ree ren 7, 9, 15, 16, 18, 20

2361 State Corp. v. Sealy, Inc., 402 F.2d 370 (7th Cir.

Ex csdiassreka-cashancaiasaacnebentiontin: 12

Ill

FEDERAL STATUTES, REGULATIONS, AND RULES

Sections 337(a), (b), and (c). Internal Revenue Code

of 1954, 26 U.S.C. Sections 337 (a), (b), and (c)

2, 3, 13, 15, 16, 17

Reg. Sec. 1.337-3(a), 26 CFR Sec. 1.337-3(a) ................ 3

United States Court of Claims Rule 101(d) .........2.......... 3,8

United States Court of Claims Rule 101(f) 2,3, 8,10, 11,12

Rule 56, Fed. R. Civ. P. .......... 8, 11

OTHER AUTHORITIES

S. Rep. No. 1622, 83rd Cong., 2d Sess. 1954, 3 U.S. Code

Cong. & Adm. News 4621, at 4680 ..............-.-.-------- 13, 14

H. Rep. No. 1337, 83rd Cong., 2d Sess. 1954, 3 U.S. Code

Cong. & Adm. News 4025 at 4244 eee 13, 14

3 Barron & Holtzoff, Federal Practice and Procedure

Oe TR, TEE CR i TD titre ee 8

O’Hare, “Statutory Nonrecognition of Income and the

Overriding Principle of the Tax Benefit Rule in the

Taxation of Corporations and Shareholders”, 27 Tax

L. Rev. 215 (1972) .......... 15, 17, 18

nities

In the Supreme Court of the United States

OCTOBER TERM, 1972

No.

D. B. ANDERS,

Petitioner,

vs.

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF CLAIMS

Petitioner prays that a writ of certiorari issue to re-

view the judgment of the United States Court of Claims

entered in the above-entitled case on July 14, 1972.

CITATION TO OPINION BELOW

The opinion of the United States Court of Claims,

printed in Appendix A-1 hereto, infra, p. Al, is reported in

rim F.2d ........ (72-2 USTC Par. 9561) (Docket No. 35-71,

July 14, 1972).

hy SG EA ia i

Ma oY

JURISDICTION

The judgment of the United States Court of Claims

was dated and entered July 14, 1972. The jurisdiction of

this court is invoked under 28 U.S.C. Sec. 1255(1). The

jurisdiction of the United States Court of Claims was based

on 28 U.S.C. Sec. 1491 and 26 U.S.C. Sec. 7422 as an action

on a claim for refund of income taxes.

QUESTION PRESENTED

Whether the United States Court of Claims erred in

granting respondent’s motion for summary judgment and

dismissing petitioner’s petition where:

(1) The Court of Claims did not find that there was

no genuine issue of material fact to be tried, but nonethe-

less proceeded to consider the case on its merits, when in

fact a genuine issue of material fact does exist;

(2) In granting respondent’s motion the Court of

Claims placed upon petitioner the burden of setting forth

specific facts showing that there was a genuine issue of

material fact to be tried, although respondent as the mov-

ing party had filed no affidavits or otherwise come within

the provisions of Rule 101(f) and should have been re-

quired to establish the absence of any material fact to be

tried; and

(3) The Court of Claims held that the “tax-benefit

rule” is an unwritten exception to Section 337 of the In-

ternal Revenue Code, 26 U.S.C. Sec. 337.

STATUTE, REGULATION AND RULES INVOLVED

The statutory provisions involved are Secs. 337(a), (b)

and (c) of the Internal Revenue Code of 1954, 26 U.S.C.

Secs. 337(a), (b) and (c), 68 A Stat. at p. 106. Said stat-

utory provisions are set forth in Appendix B-1, infra, p. A6.

The regulation involved is U.S. Treas. Reg. Sec. 1.337-

3(a), 26 CFR Sec. 1.337-3(a), p. 69. Such regulation is set

forth in Appendix B-2, infra, p. A8.

The rules involved are United States Court of Claims

Rules 101(d) and 101(f). Such rules are set forth in Ap-

pendix B-3, infra, p. A9.

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STATEMENT OF CASE

Petitioner as plaintiff below commenced this action in

the United States Court of Claims under 28 U.S.C. Sec. 1491

and 26 U.S.C. Sec. 7422, pursuant to a timely claim for re-

fund of Federal income taxes in the amount of $60,839.60

for the taxable year ended July 31, 1961, paid by petitioner

as transferee of the assets of D. B. Anders, Inc., a Missouri

corporation.

The petition, a true, complete and correct copy of

which is set forth as Appendix C-1 hereto, infra, p. All,

was duly filed on or about February 4, 1971. Respondent

as defendant below duly filed its Answer, a true, complete

and correct copy of which is set forth as Appendix C-2

hereto, infra, p. A20, on or about June 4, 1971.

On or about June 7, 1971, Mastin G. White, Commis-

sioner, United States Court of Claims, to whom the case

had been assigned, issued Standard Pretrial Order on Li-

ability (Rule 111), a true, complete, and correct copy of

which is set forth as Appendix D-1 hereto, infra, p. A22.

On or about August 5, 1971, petitioner duly filed and served

on respondent Plaintiff's Submission to Standard Pretrial

Order (Rule 111), a true and correct copy of which is set

forth as Appendix D-2 hereto, infra, p. A26. By motions

duly filed September 23, 1971 and November 8, 1971 re-

spondent obtained extensions of time to December 7, 1971,

within which to file its response as required by the aforesaid

Pretrial Order of June 7, 1971. On or about December 7,

1971, respondent filed a third motion, requesting a further

extension of time to December 22, 1971, within which “to

file its motion for summary judgment and brief in support

thereof in lieu of defendant's responsive submission under

the Pretrial Order of June 7, 1971,” which motion was

granted. On or about December 21, 1971 respondent filed its

Motion of the United States for Summary Judgment and

Brief in Support Thereof, a true, correct, and complete copy

of which is set forth as Appendix E-1 hereto, infra, p. A35.

On or about February 5, 1972, petitioner filed its Plaintiff's

Response to Defendant's Motion for Summary Judgment

and Supporting Brief; a true, correct, and complete copy of

which is set forth as Appendix E-2 hereto, infra, p. A52.

On or about March 23, 1972, respondent filed its Reply

Brief, a true, correct and complete copy of which is set

forth as Appendix E-3 hereto, infra, p. A85.

On or about September 24, 1971, respondent by letter

addressed to petitioner requested that petitioner furnish

respondent with copies of the documents numbered 4 to 11

in Plaintiff's Submission to Standard Pretrial Order, Ap-

pendix D-2, infra, p. A27 and with copies of the Federal in-

come tax returns of D. B. Anders, Inc., the transferor cor-

poration, for the taxable years ended July 31, 1957, 1958,

1959, and 1960. The aforesaid documents numbered 4 to 11

and the Federal income tax return of the transferor cor-

poration for the taxable year ended July 31, 1960, were

furnished by petitioner to respondent on or about October

6, 1971, the returns for the earlier years being unavail-

able. At no time did respondent file any response as re-

quired by paragraph 2 of the Standard Pretrial Order on

Liability, Appendix D-1, infra, pp. A23-A24. Respondent

filed no affidavits or any other documents in support of his

Motion for Summary Judgment, either before or after the

filing of said Motion for Summary Judgment. The aforesaid

documents numbered 4 to 11, supra, were not filed with

the Court.

The pleadings and plaintiff's pretrial submission es-

tablished that the transferor corporation, D. B. Anders, Inc.

= a ee a

had been engaged in the industrial laundry business in Kan-

sas City, Missouri, providing a rental service of shirts,

pants, jackets, and other garments, clean and laundered

towels, seat covers, fender covers, and various wiping ma-

terials, hereinafter referred to as “rental items.” For in-

come tax purposes the corporation deducted the cost of the

rental items used in conducting its industrial laundry busi-

ness at the time such items were placed into use.

In May, 1961 the transferor corporation adopted a plan

of complete liquidation pursuant to Section 337 of the In-

ternal Revenue Code of 1954, and sold all of its properties,

including the properties used in the conduct of its rental

business, to one purchaser in one transaction. On its in-

come tax return for the taxable year ended July 31, 1961,

the corporation reported a gain in the amount of $163,002.24

arising out of the aforesaid sale and claimed the exclusion

of such gain under Section 337. The gain included the

sum of $117,000, which was the portion of the total contract

price allocated to the properties in use in its rental busi-

ness. The respondent's assertion was that the gain on the

sale of these properties was not exempt under Section 337

because the cost thereof had been previously expensed.

The record before the Court did not establish the total

amount paid or incurred by the transferor corporation dur-

ing its taxable year ended July 31, 1961, for the purchase

of rental items, the cost of such items placed into use dur-

ing said taxable year, the inventory of the rental items on

hand at the date of the sale, or the original cost thereof.

Defendant’s Motion for Summary Judgment was ar-

gued before the Court of Claims in Washington, D. C. on

May 3, 1972. So far as petitioner is aware no transcript

exists of these proceedings. Respondent adduced no evi-

dence at the hearing. During petitioner's argument the

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Court’ stated that by filing its motion for summary judg-

ment therein, respondent had shifted to the petitioner the

burden of coming forward with the evidence to show that

there was a material and genuine issue of triable fact.

On or about July 14, 1972, the Court of Claims entered

its opinion granting respondent’s motion for summary

judgment and dismissing the petition, apparently relying

principally upon Spitalny v. United States, 430 F.2d 195

(9th Cir. 1970), all as set forth in its opinion of that date,

a true, complete, and correct copy of which is set forth

as Appendix A-1, infra, pp. Al-A5.

Petitioner timely filed the instant petition for writ of

“sss wt nt ln ie 0a i le at ta aaa nae aaa tenia

REASONS FOR GRANTING THE WRIT

I. Interpretation and Application of Rule 101

The procedural question presented, whether the Court

of Claims properly interpreted and applied Rule 101 in

granting respondent’s motion for summary judgment is of

major importance in connection with all suits for refund

of Federal income taxes, not only in the United States

Court of Claims, but also in all United States District

Courts, since Rule 56, Federal Rules of Civil Procedure is

substantially identical to Rule 101.

A. The Court of Claims Improperly Failed to Deter-

mine That Material and Genuine Issues of Triable Fact

Exist.

The Court of Claims did not properly exercise its func-

tion in its consideration of the motion before it. On a mo-

tion for summary judgment the court cannot try issues

of fact. It can only determine whether there are issues

to be tried. 3 Barron & Holtzoff, Federal Practice and Pro-

cedure $1231 at p. 101 (2d ed. 1958). The question to be

decided on such a motion is whether there is a genuine

issue of fact and not how that issue should be deter-

mined. Ibid. $1234 at p. 122. In the instant case there

was no finding by the Court of Claims thai there was

an absence of a genuine issue of material fact to be

tried. Indeed, there is not even any discussion of the bur-

den of proof. Instead, the court purported to make find-

ings of fact and proceeded to try the case on its merits

while sitting as an appellate forum.

This was reversible error. From the opinion of the

Ninth Circuit Court of Appeals in Spitalny v. United

States, 430 F.2d 195 (9th Cir. 1970), upon which the Court

of Claims ostensibly relied, it is clear that it was essential

for the trial court to make findings of fact as to each of

the following:

(1) The total costs paid or incurred by the

transferor corporation during its taxable year ended

July 31, 1961, for the purchase of the rental items;

(2) The total costs of such items placed in use

by the corporation during said taxable year;

(3) The inventory of such items at the date of

the sale to the purchaser and the original cost there-

of; and

(4) The amount of the total sales price allocated

to the rental items.

Indeed, the Spitalny case was reversed and remanded to

the lower court with these comments:

“We conclude that the District Court . . . erred

in holding the entire sales price of the feed on hand

to be nonrecognized gain under §337.

“One difficulty remains. It cannot be ascer-

tained from the present record what the cost (and

the basis) of this feed was. If the feed was sold in

liquidation at a greater figure than cost the sales price

does to that extent represent gain which would be

nonrecognizable under §337. In our view appellees

should have the opportunity to establish the facts in

this respect.” 430 F.2d 195 at 198 (italics added).

The Court of Claims in the case below made no finding

with respect to the first three items above. There was

no record from which it could make such findings. If the

original cost of the rental items sold was less than $117,000,

then any excess of the sales price over such cost would

be “nonrecognized gain under §337.” There were genuine

and material issues of triable fact; the court below erred

in failing so to determine.

B. The Court of Claims Improperly Interpreted Rule

101(f) by Its Assumption That the Burden of Proof Was

Shifted to Petitioner.

As the moving party respondent clearly had the bur-

den of showing the absence of a genuine issue as to any

material fact. Adicker v. Kress & Co., 398 U.S. 144 (1970).

This rule applies, even though plaintiff would have the

burden of proving the facts at trial. Sheridan v. Garrison,

415 F.2d 699 (5th Cir. 1969). For the purposes of deter-

mining whether the moving party has met its burden, the

material it lodges must be viewed in the light most favor-

able to the opposing party. Adicker v. Kress & Co., supra.

Rule 101(f) provides as follows:

“(f) Form of Affidavits; Further Testimony:

Supporting and opposing affidavits shall be made on

personal knowledge, shall set forth such facts as would

be admissible in evidence, and shall show affirma-

tively that the affiant is competent to testify to the

matters stated therein. Sworn or certified copies of

all papers or parts thereof referred to in an affidavit

shall be attached thereto or served therewith. The

court may permit affidavits to be supplemented

or opposed by depositions or by further affidavits.*

When a motion for summary judgment is made and

supported as provided in this rule, an adverse party

may not rest upon the mere allegations or denials of

his pleading, but his response, by affidavits or as

otherwise provided in this rule, must set forth specific

facts showing that there is a genuine issue for trial.

If he does not so respond, summary judgment, if ap-

propriate, will be entered against him.” (italics

added).

Respondent filed no affidavits at any time in the court

below. It filed no response as required by the Standard

Pretrial Order on Liability as entered by the Court on

June 7, 1971. Indeed, respondent filed nothing but its An-

swer, Appendix C-2, infra, p. A20, and its Motion for Sum-

mary Judgment and Brief in Support Thereof, Appendix

E-1, infra, pp. A35-A42. Petitioner filed no cross-mo-

tion for summary judgment. Under Rule 101(f) it is only

“when a motion for summary judgment is made and sup-

ported as provided in this rule,” (italics added) i.e., by

the filing of sworn affidavits, depositions or by further

affidavits, that “an adverse party may not rest upon the

mere allegations or denials of his pleading, but his re-

sponse, by affidavits or as otherwise provided in this rule,

must set forth specific facts showing that there is a

genuine issue for trial.” Respondent’s motion for sum-

mary judgment was not supported by affidavits or other-

wise as required by Rule 101(f). There are genuine ma-

terial issues of triable fact, as set forth above. Respond-

2. Rule 56(e) Federal Rules of Civil Procedure, is identical

to Rule 101(f) except that this sentence reads, “The court may

permit affidavits to be supplemented or opposed by depositions,

answers to interrogatories or further affidavits.” (italics added).

| ansedds Ree paneo den bainds

ent did not establish the absence of these issues; it and

the court simply ignored them. Further, the court’s com-

ments at the hearing make it clear that the case was de-

cided upon the erroneous premise that by the mere filing

of its motion, respondent had shifted to petitioner the bur-

den of showing the presence of a triable issue of material

fact, despite the fact that respondent’s motion was un-

supported in any way. This is not the law; it cannot be.

If it were, the respondent could require every taxpayer

to try his tax refund case on a motion for summary judg-

ment by the simple expedient of filing such a motion, un-

supported by affidavits or otherwise. It would render

meaningless the words in Rule 101(f), “and supported as

provided in this rule.”

In sustaining his burden on a motion for summary judg-

ment, the moving party positively and clearly must dem-

onstrate that there is no genuine issue of fact, and any

doubt as to the existence of such issue must be resolved

against the moving party. The party opposing summary

judgment does not have the burden of showing that there

is a genuine issue for trial until the movant has produced

evidentiary material showing that there is no genuine is-

sue as to any material fact and he is entitled to judgment

as a matter of law. 2361 State Corp. v. Sealy, Inc., 402

F.2d 370 (7th Cir. 1968). The trial court erred in deter-

mining the case below upon the premise that the burden

of showing that there is a genuine issue for trial had shifted

to petitioner under Rule 101(f) when respondent filed no

sworn affidavits or depositions in support of its motion for

summary judgment.

7S > ee

II. The Holding of the Court of Claims on the Legal

Issue Patently Thwarts the Clearly Expressed Congres-

sional Intent in Enacting Section 337 of the Internal Rev-

enue Code of 1954. .

Seldom has a legislative body so clearly expressed its

intent as in the enactment of Section 337 of the 1954 In-

ternal Revenue Code. And even more rarely have the

courts been permitted to thwart such clearly expressed

legislative intent by rhetorical artifice. Yet this is the

inescapable result of the holding of the court below on the

substantative issue of law.

There can be no reasonable doubt as to the Congres-

sional purpose in the enactment of Section 337. The House

Report is explicit:

“Section 333* incorporates in the bill rules for

treatment of the problem raised in the decisions of

Commissioner v. Court Holding Company (324 U.S.

331, 65 S.Ct. 707) and U. S. v. Cumberland Public Serv-

ice Co. (338 U.S. 451, 70 S.Ct. 280) and the numerous

related cases. These decisions concern the question

of whether the corporation or a shareholder effected

a sale of property in connection with a liquidation.

Under the decision in the Cumberland Public Service

Co. case, supra, it is indicated that in the case of an

actual distribution in liquidation of the corporation pri-

or to an actual sale by the shareholders a single tax

[is] imposed at the shareholder level. Accordingly,

under present law, the tax consequences arising from

sales made in the course of liquidation depend primarily

upon the formal manner in which transactions are ar-

3. Section 337 in the Senate version, infra.

ranged. The possibility that double taxation may oc-

cur in such cases results in causing the problem to be t

a trap for the unwary.

“Your committee intends in section 333 to provide

a definitive rwle which will eliminate any uncer-

tainty.” H. Rep, No. 1337, 3 U.S. Code Cong. and Adm.

News, 83d Cong., 2d Sess. 1954, 4025 at p. 4244

(italics added). )

The Senate speaks with like clarity:

“Section 337 corresponds in function to section 333 ,

of the House bil] and concerns the problems raised by

the decisions in Commissioner v. Court Holding Com-

pany, 324 U.S. 331, 65 S.Ct. 707, and U. S. v. Cumber- )

land Public Service Co., 338 U.S. 451, 70 S.Ct. 280, and )

the numerous related cases. These decisions involve -

the question of whether the corporation or the share-

holder effected a sale of property in connection with

the liquidation of the corporation. Under the decision i

in Cumberland Public Service Co., supra, it is indicated }

that in the case of a distribution of property in liquida- |

tion of a corporation followed by its sale made in

fact by its shareholders, a single tax is imposed at the )

shareholder level. Where the shareholders in fact did )

not effect the sale, tax is imposed both at the cor-

porate and at the shareholder level. Accordingly, un-

der present law the tax consequences arising from

sales made in the course of liquidations may depend

primarily upon the formal manner in which the trans-

actions are arranged. Your committee intends in sec-

tion 337 to provide a definitive rule which will elim-

inate the present uncertainties. . . .” §. Rep. No. 1622,

Ibid. at p. 4896 (italics added).

PETES FOCI = SAIN Ear en, : al

But there can be no doubt that the result of the decision

of the court below in following Spitalny v. United States,

430 F.2d 195 (9th Cir. 1970) and the related line of cases

is to reinstate the uncertainties which Section 337 was

designed to eliminate. As one writer has recently ex-

pressed it:

“The recent decisions applying the tax benefit

rule to the sales of assets under a plan of complete

liquidation normally protected from recognition of gain

or loss by section 337 will require careful tax planning

to assure that unexpected income in substantial amounts

is not recognized on such transactions.””*

In considering methods of “avoiding recapture of prior

deductions” under the tax benefit rule, the same writer

goes on to state:

“'. . it may be possible to arrange a sale of the

property having recapture potential by shareholders

following a liquidation distribution of the property in

order to avoid recognition of income at the corporate

level. ... First, the sale of the property by share-

holders must not be attributed to the corporation under

the familiar Court Holding Company doctrine. .. .”

Ibid. at p. 239 (italics added).

No clear mandate of analytical judicial persuasion led

to this resurrection of the Court Holding Company prob-

lem under Section 337. To the contrary the judicial path-

way has been one of strained construction, tortuous gram-

mar, and pre-ordained conclusion, all artfully sewn to-

4. O’Hare, “Statutory Nonrecognition of Income and the

Overriding Principle of the Tax Benefit Rule in the Taxation of

Corporations and Shareholders,” 27 Tax L. Rev. 215, 238 (1972).

— article is cited in its entirety by the court in the opinion

ow.

Peon: prides

gether in the three years which have elapsed since the

decision of the Tenth Circuit in Commissioner v. Anders,

This legal issue under Section 337 was first considered

judicially by the United States Tax Court in D. B. Anders,

48 T.C. 815 (1967), that court stating without equivocation

that the application of the tax-benefit rule “would contra-

vene the clear and unambiguous provisions of section

337(a)....” 48 T.C. at 821 (italics added). “If the result

here is undesirable,” the Tax Court went on, “the remedy

is for Congress, not the courts.” Ibid. at 823.

Approximately one year later the United States

District Court for Arizona had before it Spitalny v. United

States, 288 F.Supp. 650 (1968) which involved a similar

legal issue under Section 337. The District Court there

held that the tax-benefit rule was not an exception to

Section 337, citing with approval the Tax Court’s decision

in Anders v. Commissioner, supra.

The decision of the Tax Court in Anders was reversed

by the Tenth Circuit on appeal, 414 F.2d 1283 (10th Cir.

1969), cert. denied, 396 U.S. 958 (1969). The language

of the Tenth Circuit’s opinion mirrors its ordeal in arriv-

ing at its conclusion. This opinion was considered at

length in Plaintiff's Response to Defendant’s Motion For

Summary Judgment and Supporting Brief herein®. Suf-

fice it to say here that although that court was unable to

determine with definity whether the rental items in ques-

tion constituted “property” within the intendment of Sec-

tion 337(a), or whether a “sale” of such property within

5. Petitioner here was also there involved as transferee of

the assets of D. B. Anders, Inc., a Kansas corporation.

414 F.2d 1283 (10th Cir.), cert. denied, 396 U.S. 958 (1969).

6. Appendix E-2, infra, p. A52.

the intendment of such Section had in fact occurred, and

despite the Court’s own admission that:

“As the taxpayer says, the controversy is not

clearly decided by any of these cases.” 414 F.2d at

1288.

it was nonetheless able to conclude, “with little to guide

it’’ that:

“In these circumstances we do not believe that

treatment as a non-recognizable gain was intended

by Congress.” Ibid. at 1288-89.

In other words its conclusion was that Congress in-

tended to preserve the uncertainty in those cases where a

sale of property is effected in connection with a Section

337 liquidation. If the corporation sells certain types

of property, the tax-benefit rule will cause the gain on

the sale to be taxable to the corporation although it has

adopted a Section 337 plan of liquidation, whereas if the

corporation first liquidates and the shareholders sell the

property, no gain to the corporation will result from the

sale of such property. This is consistent with an express

Congressional intent to “eliminate any uncertainty”?*

Perhaps the language of the Tenth Circuit’s opinion

in Anders was too purposeful even for the court below.®

In any event it turned for its authority to the 1970 holding

7. O’Hare, op. cit. supra n. 4 at 225.

8. In oral argument on his Motion for Summary Judgment,

and in his Reply Brief, Appendix E-3, infra, respondent's counsel

contended that if the corporation were first liquidated and the ex-

pensed property sold, the corporation would realize income on its

final return ostensibly equal to the amount which the share-

holders received on its subsequent sale. The authorities there cited

by respondent obviously do not involve a liquidation followed

by a stockholder sale. “We submit” hardly cures this discrepancy.

9. It was shunted aside as a “see” authority. As to “see,”

see Appendix E-2, infra, p. A70, n. 23.

Nae ot denne, Ot Met lll

of the Ninth Circuit in Spitalny v. United States, supra

which followed the lead of Anders in reversing the lower

court’s decision at 288 F.Supp. 650. The Spitalny record

clearly shows that the corporation had in its last taxable

year prior to liquidation purchased feed and other sup-

plies in the total amount of $607,968.02; that it maintained

a memorandum inventory of feed and other supplies on

hand; that at the time of the sale the corporation had on

hand $177,437.37 of the feed and supplies purchased during

the fiscal year, and that $177,437.37 of the total sales price

of the assets was allocated to the feed and other supplies

on hand.” The Commissioner argued in both the trial

and the appellate court in Spitalny that what the Com-

missioner did was to disallow the expense deduction for

purchase of feed in the year of sale to the extent of the

sales price under Section 446(b) of the Internal Revenue

Code and Section 1.162-3 of the Regulations. The appel-

late court sustained the Commissioner, holding that the

distortion of income resulted from the taxpayer’s account-

ing method.

Having done so, the court then proceeded to discuss the

application of the “tax benefit rule” espoused by the Tenth

Circuit in Commissioner v. Anders, supra. While candidly

admitting that the “tax benefit rule” does not apply to a

situation where costs are recovered in the same taxable

year in which they were incurred, the court nevertheless

went on to embrace Anders in patent dicta. “Struggling

to avoid the logic of the syllogism of the Tax Court in

D. B. Anders” and perhaps unwilling to take refuge be-

hind the nebulous distinctions drawn by the Tenth Circuit

as to whether the property constituted “property” or a

10. The court below in the instant case had before it only

the amount allocated to the sales price of the rental items.

11. O'Hare, op. cit. supra n. 4 at 226.

“sale” was indeed a sale, the Ninth Circuit seized upon a

new tack, was “gain” realized? Its predictable conclusion

follows:

“We agree that the feed and supplies on hand are

‘property’ under §337(b) and, accordingly, that ‘gain’

realized on their sale shall not be recognized. The

crucial question, however, is whether ‘gain’ was real-

ized. The assignment of a zero basis to expensed

items is not in response to adjustments in valuation.

It amounts, rather, to a present fictional conversion

of that ‘property’ into a consumed item of expense.

If the feed and supplies are to revert to ‘property,’

they should be reconverted. They should not at the

same time be property and still retain attributes of a

fictional nonentity.” 430 F.2d at 198 (italics added).

This “fictional” philosophy appears to be the basis of the

decision of the Court of Claims below:

“We agree that both that the rental items are

‘property’ under Section 337(b) (1) and that the trans-

fer to the buyer was a ‘sale.’ We further concur that

if the ‘gain’ had been realized from the ‘sale,’ it should

not have been recognized. However, we feel that the

‘gain’ was not realized from the ‘sale,’ but rather from

reconverting the previously expensed items into ‘prop-

erty.” ”*

What does “fiction” have to do with the tax law? There

was no “fictional expensing” of the rental items; there

was a “factual expensing.” There was no “fictional re-

conversion”; there was no “reconversion.” Two fictions

do not a fact make! How can the clearly expressed overt

12. Le., the gain was realized from reversing the fictional

expensing of the rental items. Appendix A-l, infra, p. A4

(italics added).

OP Or ee Re rer me |

intent of Congress be overcome by this judicial legerde-

main? If the Congressional intent was all this clear, would

all this “fiction” be required?

The law as expressed by the Tenth Circuit in Anders

and the Ninth Circuit in Spitalny is clearly wrong, a patent

thwarting of the Congress. Yet it continues to spread its

tentacles. The Court of Appeals triad is completed by the

Third Circuit’s decision in Connery v. United States,

F.2d ....... (72-2 USTC Par. 9441) (May 22, 1972). The

United States Tax Court has not abandoned its stand as set

forth in the original Anders case; this opinion is now five

years old. The decision reached by the Court of Claims in

the case below in reliance on Spitalny furthers and promotes

judicial erosion and creates uncertainty in the adminis-

tration of the tax laws by its interpretation of a statutory

provision which was clearly designed to remove uncer-

tainty. It should be reversed.

CONCLUSION

For the foregoing reasons, this petition for a writ of

certiorari should be granted.

Respectfully submitted,

J. Gtenn Hann

1100 Commerce Bank Building

Kansas City, Missouri 64106

Counsel for Petitioner

Of Counsel:

Har.ow B. Kinc

Water J. KENNEDY

1100 Commerce Bank Building

Kansas City, Missouri 64106

APPENDIX A-1

Opinion of the Court of Claims

IN THE UNITED STATES COURT OF CLAIMS

No. 35-71

‘ (Decided July 14, 1972)

D. B. ANDERS v. THE UNITED STATES

J. Glenn Hahn, for plaintiff; Harlow B. King, attorney

of record. Walter J. Kennedy, of counsel.

Kenneth R. Boiarsky, with whom was Assistant At-

torney General Scott P. Crampton, for defendant. Joseph

Kovner and Philip R. Miller, of counsel.

Before Cowen, Chief Judge, Durree, Senior Judge,

Davis, SKELTON, NicHOLs, KASHLWa, and Kuwnzic, Judges.

ON DEFENDANT’S MOTION FOR

SUMMARY JUDGMENT

Kunzic, Judge, delivered the opinion of the court:

This is a suit for a refund of federal income taxes paid

by plaintiff, as transferee of the assets of D. B. Anders,

Inc., formerly Service Industrial Cleaners, Inc. [Service].

Service was a Missouri corporation engaged in the busi-

ness of renting cleaned and laundered towels, seat covers,

fender covers, wiping materials and other textiles and

apparels, as well as conducting a cleaning and laundering

service of similar items, and in general, conducting an in-

aa EE ELE IEEE ta ME OIE me PE SS — ay ™

dustrial laundry business. For federal income tax pur-

poses, Service charged the above rental items to its ex- i

pense account at the time they were purchased. At the

end of the taxable year, the expense accounts were

credited with the cost of items not yet placed into use.’

On May 12, 1961, Service’s directors and stockholders

passed resolutions approving the terms of a sale of the ,

company’s assets and adopting a plan of complete liquida- j

tion pursuant to Section 337° of the Internal Revenue Code

1. Items already placed into use, although not used up, were

not so credited. ;

2. “GAIN or Loss ON SALES OR EXCHANGES IN CONNECTION

WITH CERTAIN LIQUIDATIONS ’

“(a) General rule—lIi— j

“(1) a corporation adopts a plan of complete liquidation on j

or after June 22, 1954, and

“(2) within the 12-month period beginning on the date of

the adoption of such plan, all of the assets of the corporation are

distributed in complete liquidation, less assets retained to meet

then no gain or loss shall be recognized to such corporation from

the ws or exchange by it of property within such 12-month

peri

“(b) Property defined.—

“(1) In general.—For purposes of subsection (a), the term

‘property’ does not include—

“(A) stock in trade of the corporation, or other property of

a kind which would properly be included in the inventory of the

corporation if on hand at the close of the taxable year, and prop-

erty held by the corporation primarily for sale to customers in

the ordinary course of its trade or business * * *.

“(2) Nonrecognition with respect to inventory in certain

cases.—Notwithstanding paragraph (1) of this subsection, if sub-

stantially all of the property described in subparagraph (A) of

such paragraph (1) which is attributable to a trade or business of

the corporation is, in accordance with this section, sold or ex-

changed to one person in one transaction, then for purposes of

subsection (a) the term ‘property’ includes—

ae (A) such property so sold or exchanged see”

OC — oa

ee ee

of 1954.75 On May 22 and 23, Service sold substantially

all of its assets, including the rental items in question.

Pursuant to the plan of liquidation, Service distributed all

of its assets, in complete liquidation, to plaintiff within

the 12-month period beginning May 12, 1961. The cor-

poration was dissolved in March, 1962.

In the terms of sale, Service agreed with the pur-

chasers on specific consideration to be paid for the rental

items ($117,000).* On its income tax return for the fiscal

year ended July 31, 1961, Service reported a gain of

$163,002.24 from the sale of all its assets, and claimed

nonrecognition of the gain under Section 337. This gain

included the $117,000 received for the rental items in use.

The sole issue presented by defendant’s motion for

summary judgment is whether the amounts received from

the sale of the previously expensed rental items, as part

of the sale of all of Service’s assets preceding a complete

liquidation, were gain from the sale of property within the

provisions of Section 337 for nonrecognition of gain to the

corporation, or whether such amounts were taxable as or-

dinary income to the corporation under the tax benefit

principle.*

We hold that the amount received was taxable as ordi-

nary income.

Plaintiff alleges that the transfer of the rental items to

the buyer was a “sale” of Section 337(b)(1) “property.”

3. All section references hereinafter are to the Internal

Revenue Code of 1954.

4. These include rental items which had already been placed

into use, but still had remaining serviceable life. See note 1

supra.

5. For a thorough discussion of the “tax benefit rule”

and its applicability to Section 337 liquidations, see O’HARE, Stat-

utory Nonrecognition of Income and the Overriding Principle of

the Tax Benefit Rule in the Taxation of Corporations and Share-

holders, 27 Tax L. REv. 215, 222-233 (1972).

sR 5

pais ace teeth

tie 8! et SAREE Sy AEE SS

Rew eee ae ran

‘

He contends that it must follow that the “clear and unam-

biguous” provisions of Section 337(a) require that the gain

from the transfer of these items not be recognized to the

corporation and that the tax benefit rule is inapplicable.

We agree both that the rental items are “property”

under Section 337(b) (1) and that the transfer to the buyer

was a “sale.” We further concur that if the “gain” had

been realized from the “sale,” it should not have been

recognized. However, we feel that the “gain” was not

realized from the “sale,” but rather from reconverting the

previously expensed items into “property.””*

As noted above, Service had previously expensed these

rental items, so that they were no longer shown on Ser-

vice’s books and records as assets. “The expense deduc-

tion as permitted by regulation is intended to reflect the

cost of [items] actually consumed during the taxable

year * * *.” Spitalny v. United States, 430 F. 2d 195, 197

(9th Cir. 1970). Normally, the advantage Service gained

through the full expensing of these items in one year

would have been balanced by the lack of deduction there-

for in the following years. However, the effect of the

liquidation is to destroy this balance. Plaintiff's

assignment of a zero basis to expensed items is not in

response to adjustments in valuation. It amounts,

rather, to a present fictional conversion of that “prop-

erty” into a consumed item of expense. If the [rental

_items] are to revert to “property” they should be re-

converted. They should not at the same time be prop-

erty and still retain attributes of a fictional nonentity.

Id. at 198. Accord, Connery v. United States, Nos. 19,432 &

19,433 (3rd Cir., May 22, 1972); see Commissioner v. Anders,

6. I.e., the gain was realized from reversing the fictional

expensing of the rental items.

Rey

ote

414 F. 2d 1283 (10th Cir.) cert. denied, 396 U.S. 958 (1969);

Murray, “Developing Uncertainties in Section 337 Liquida-

tions—The Tax Benefit Rule and Other Problems,” 23 Tax

Lawyer 181, 183 (1969).

This reconversion of an expensed item into property

is accomplished by use of the “tax benefit rule.” Simply

stated, the “tax benefit rule” requires the inclusion, in tax-

payer’s income, of an amount which represents a recovery

of an item previously deducted, to the extent that the pre-

vious deduction was of benefit to him. See Dobson v. Com-

missioner, 320 U.S. 489, 505-06 (1943); Estate of William

H. Block, 39 B.T.A. 338 (1939), aff'd, Union Trust Co. v.

Commissioner, 111 F.2d 60 (7th Cir.), cert. denied, 311 U:S.

658 (1940).

Although the “tax benefit rule” usually has been ap-

plied where the deduction giving rise to the tax benefit

and the recovery occur in different taxable years, it is

equally applicable where the deduction and the recovery

occur in the same taxable year. Spitalny v. United States,

supra at 198; see Commissioner v. Anders, supra.

In this case, the “tax benefit rule” gives “to the prop-

erty sold its true basis as property and den[ies] to it the

benefit of an adjusted basis which is false and distort-

ing * * *.” Spitalny v. United States, supra at 198; see

Bishop v. United States, 324 F. Supp. 1105 (M.D. Ga. 1971);

S. E. Evans, Inc. v. United States, 317 F. Supp. 423 (W. D.

Ark. 1970). The “tax benefit rule” requires Service to

recognize as ordinary income the $117,000 received for the

rental items, not as “gain” from the “sale,” but as recon-

version of the previously expensed items into “property.”

We find that plaintiff is not entitled to recover. There-

fore defendant’s motion for summary judgment is granted

and plaintiff’s petition is dismissed.

puts dod &,

aia CAN eNOS

Pad aad de

| ae Dail atten ition AY a Lh oe

APPENDIX B-1

Statute Involved

Internal Revenue Code of 1954, 26 U.S.C.:

§ 337. Gain or loss on sales or exchanges in connection

with certain liquidations

(a) General Rule.—If—

(1) a corporation adopts a plan of complete liq-

uidation on or after June 22, 1954, and

(2) within the 12-month period beginning on the

date of the adoption of such plan, all of the assets of

the corporation are distributed in complete liquidation,

less assets retained to meet claims,

then no gain or loss shall be recognized to such corpora-

tion from the sale or exchange by it of property within

such 12-month period.

(b) Property defined.—

(1) In general.—For purposes of subsection (a),

the term “property” does not include—

(A) stock in trade of the corporation, or other

property of a kind which would properly be included

in the inventory of the corporation if on hand at the

close of the taxable year, and property held by the

corporation primarily for sale to customers in the

ordinary course of its trade or business,

(B) installment obligations acquired in re-

spect of the sale or exchange (without regard to

whether such sale or exchange occurred before, on,

or after the date of the adoption of the plan referred

AZ7

to in subsection (a)) of stock in trade or other prop-

erty described in subparagraph (A) of this para-

graph, and

spect of property (other than property described in

subparagraph (A)) sold or exchanged before the

date of the adoption of such plan of liquidation.

(2) Nonrecognition with respect to inventory

in certain cases.—Notwithstanding paragraph (1) of

this subsection, if substantially all of the property de-

scribed in subparagraph (A) of such paragraph (1)

which is attributable to a trade or business of the cor-

poration is, in accordance with this section, sold or

exchanged to one person in one transaction, then for

purposes of subsection (a) the term “property” in-

cludes—

(A) such property so sold or exchanged, and

(B) installment obligations acquired in respect

of such sale or exchange.

(1) Collapsible corporations and liquidations to

which section 333 applies——This section shall not ap-

ply to any sale or exchange—- ~

(A) made by a collapsible corporation (as de-

fined in section 341(b)), or

(B) following the adoption of a plan of com-

plete liquidation, if section 333 applies with respect

to such liquidation.

(2) Liquidations to which section 332 applies.—

In the case of a sale or exchange following the adop-

LBL LAD tt RIAN

tion of a plan of complete liquidation, if section 332

applies with respect to such liquidation, then—

(A) if the basis of the property of the liquidat-

ing corporation in the hands of the distributee is de-

termined under section 334(b) (1), this section

shall not apply; or

(B) if the basis of the property of the liquidat-

ing corporation in the hands of the distributee is de-

termined under section 334(b) (2), this section shall

apply only to that portion (if any) of the gain

which is not greater than the excess of (i) that por-

tion of the adjusted basis (adjusted for any adjust-

ment required under the second sentence of section

334(b) (2)) of the stock of the liquidating corpora-

tion which is allocable, under regulations prescribed

by the Secretary or his delegate, to the property

sold or exchanged, over (ii) the adjusted basis, in

the hands of the liquidating corporation, of the prop-

erty sold or exchanged.

* * *

APPENDIX B-2

Regulation Involved

U.S. Treas. Reg. § 1.337-3(a) (1955):

* * *

§ 1.337-3. Property defined—(a) Except as pro.

vided in section 337(b)(2) and this section, the term

“property” as used in section 337(a) and § 1.337-1 does not

include, (1) stock in trade of the corporation, or other

property of a kind which would properly be included in the

inventory of the corporation if on hand at the close of the

taxable year and property held by the corporation pri-

marily for sale to customers in the ordinary course of its

trade or business (hereinafter for purposes of section 337

referred to as “inventory”), (2) installment obligations

acquired at any time from the sale or exchange of inven-

tory, or (3) installment obligations acquired from the sale

or exchange of property (other than inventory) prior to

the adoption of the plan of liquidation. With the excep-

tions listed in this paragraph, the term “property” includes

all assets owned by a corporation.

a * *

APPENDIX B-3

Rule Involved

Rules, United States Court of Claims:

VIII. SUMMARY JUDGMENT; DISMISSALS

RULE 101. SUMMARY JUDGMENT

s *

(d) Motion and Proceedings Thereon: After a mo-

tion for summary judgment has been filed, and after the

expiration of the time allowed for a response thereto or

for a reply to the response, if any (Rule 52(b)), such

motion may (subject to the provisions of Rules 54(b), 146

(b) (2), and 166(b)) be assigned to the calendar. (See

Rule 14(b) (2).) The judgment sought shall be rendered

if the pleadings, depositions, and admissions on file, to-

gether with the affidavits, if any, show that there is no

issue as to any material fact and that the moving

is entitled to a judgment as a matter of law.

judgment may be rendered on the issue

tii

;

pleading, but his response, by affidavits or as otherwise

All

oo mee eee e-- +s

2. The defendant is the United States of America.

3. This is an action for the recovery of internal

revenue taxes and this Court has jurisdiction by reason

of Title 28, U. S. C. Section 1491.

4 Recovery is sought of federal income taxes for

the taxable year ended July 31, 1961 paid by plaintiff as

transferee of the assets of D. B. Anders, Inc. (formerly

1961, with the District Director at St. Louis, Missouri, and

paid income taxes on account of such return in the amount

of $13,334.66. The District Director assessed against the

plaintiff as transferee of the assets of Service additional

Fas

$71,800.72. Plaintiff alleges that such additional income

taxes and interest were erroneously and illegally assessed

and collected and demands recovery of $71,800.72, together

with such interest as is allowed by law.

5. On or about July 6, 1966, plaintiff filed with the

District Director at St. Louis, Missouri, a claim for refund,

a copy of which is attached hereto, marked Exhibit A and

made a part hereof. An identical claim for refund was also

filed on said date with the District Director at Wichita,

Kansas. On or about December 23, 1966, the District Di-

rector at St. Louis, Missouri, advised plaintiff that he had

ment entered into on or about May 16, 1961, Service sou

was dissolved on or about March 29, 1962. The total gain

realized by Service in the amount of $163,002.24 arising

out of the aforesaid sale of substantially all its assets was

properly excludible from taxable income for Service's

said taxable year ended July 31, 1961 under said Section

337 as gain realized from the sale or exchange of prop-

erty within the 12-month period following the adoption

Al4

of a plan of complete liquidation. The Appellate Division

of the Internal Revenue Service at Kansas City, Missouri,

erroneously and illegally treated that portion of the gain

realized from the sale of Service’s entire inventory of

items in use in its laundry rental service business as

taxable income.

WHEREFORE, plaintiff prays for judgment in the

amount of $71,800.72, plus such interest and costs as are

allowed by law, and such other relief as the Court may

deem just and equitable.

Harlow B. King

1100 Commerce Bank Building -

Kansas City, Missouri 64106

J. Glenn Hahn

1100 Commerce Bank Building

Kansas City, Missouri 64106

Walter J. Kennedy

1100 Commerce Bank Building

Kansas City, Missouri 64106

Of Counsel:

Hoskins, King, Springer, McGannon and Hahn

1100 Commerce Bank Building

Kansas City, Missouri 64106

ial Ripe PR Aa EI I atl IOS Oe, il PN iy nt ep Ae

COPY BOUND TOO CLOSE IN CENTE

Al5

Exhibit A

EXHIBIT A

rem B43 ana

ree | support ==» Claim

‘eterna! Revere

ce terns! Revenue Service will indicate on the block below the hind of claim Hled. and fll in. where required

[ Refund of Taxes Megalty, Erroneousty, or Excessively Collected.

() Retund of Amount Paid for Stamps Unused, or Used in Error or Excess.

() Abatement of Tax Assessed (not applicable to income. estate or gift taxes).

— Prease Type or Print Plainly ae, fe

cane of taxpayer OF purchaser of stamps

p. 8. Anders, Alleged Transferee of D. B. Anders, Inc. (Missouri)

Aomber end street City or town, State, and ZIP code

we Valley View Drive _. | Overland Park, Kansas 66212

____ Fill in applicable items—use attachments it necessary

S vewr social security number — Baan: sniei ions ‘sierenieennncapenstonees

Tlaenal Revenue Service offtce where re @ Nome ond e6dress shown on return, if different from above

oes | D. B. Anders, Inc. (formerly Service Industrial Cleaners,

. Kansas City, Missouri Inc.) 3612 East 27th, Kansas City, Missouri __

—temo—4 ter ton ceperted on ennusl Geel, prapere seperate torm tor each tensbte year { King of tex

| fom August 2. 060. July 32 Rome

4 Amount of essesement Detes of payment

176,172.87 ___ wae ME 15, 1961; Jan. 15, 1962; May 27, 1963; Nov. 23, 1964

ee + Amount to be refunded (it mcome tex, } Remnant to Ge abeted (at apgtectte to income, >

complete computation De -ow! tate. or gift tenes)

nanan } 60,839

[Dee clement Believes that the claim should be allowed for the followng reasons.

s 60° * we i irae

SEE ATTACHED STATEMENT

*or such greater amount as may be legally refundable, plus interest as

provided by law.

COMPUTATION OF INCOME TAX REFUND income Tax

|. Te withheld

ee ae 66 oe ad @ boa ene ee

A ar a eg ee |

eS eee eee Ss ll UR

6 Less Your computation of correct tax ea ae eee bee ee aoe eee

7 Amount of overpayment . Sele wae ee a eae

8 Amount premouanprmbanaeck Claim filed. May. 18,. -196§ . aa a

§ Net overpayment (enter in itemiabove). . . _ . P ’ . |... $60,839.60

Under penatties of perjury, | declare that | have examined this claim. including accompanying schedules and statements,

a to the best of my knowledge and belief it is true, correct, and complete.

SEE INSTRUCTIONS ON REVERSE Form B43 cme 6-68)

COPY PRINTED CLOSE TO EDGE

Al6

Form 843, Claim for Refund

STATEMENT

D. B. Anders

Alleged Transferee of D. B. Anders, Inc. (Missouri)

8448 Valley View Drive

Overland Park, Kansas 66212

1. D. B. Anders, Inc. (formerly Service Industrial

Cleaners, Inc.), hereinafter called “Service”, a Missouri

corporation, having its principal office at Kansas City, Mis-

souri, filed its Form 1120, U. S. Corporation Income Tax

Return, for its taxable year ended July 31, 1961, with the

District Director of Internal Revenue at Kansas City, Mis-

souri.

2. On or about May 12, 1961, the Board of Directors

and stockholders of Service adopted a plan of complete

liquidation pursuant to Section 337 of the 1 R C., 1954.

3. On or about May 16, 1961, Service entered into

an agreement to sell to Albert Gitlow, Abraham Gitlow,

Ben E. Singer, and Joseph L. Fradkin, acting on behalf of

Service Industrial Cleaners, Inc., a Kansas corporation

formed on or about May 17, 1961, which corporation is

hereinafter called “Buyer”, substantially all the assets of

- Service’s industrial laundry business. Under the terms of

this agreement Service sold to Buyer the following as-

sets for the consideration stated:

(a) Its entire inventory of towels,

seat covers, fender covers, wiping materi-

als, dusting cloths, coats, coveralls, shirts,

pants, and other apparel and textiles, dust-

ing and sweeping equipment, and all other

items used in the conduct of its rental

service business $117,000.00

Al?

(b) Furniture, fixtures, machinery,

tables, garbage disposal and refrigeration

units and miscellaneous equipment, in-

cluding office equipment and miscellane-

ous supplies 49,610.00

age 50,000.00

(d) Real estate 63,000.00

(e) Accounts receivable 25,396.43

4. Service ceased the active conduct of business up-

on the completion of the aforesaid sale to Buyer on May

22 and 23, 1961. Thereafter, the only business conducted

by Service was the winding up of its affairs. Pursuant

to its plan of complete liquidation under Section 337, I. R.

C., 1954, and within the 12-months’ period beginning on

May 12, 1961, Service distributed all its assets in complete

liquidation to D. B. Anders, its sole stockholder, claimant

herein. Anders is an individual, residing at 8448 Valley

View Drive, Overland Park, Kansas 66212. On or about

March 29, 1962, Service was liquidated and dissolved un-

der the laws of the State of Missouri.

5. On its Federal income tax return for its taxable

year ended July 31, 1961, Service reported a gain in the

amount of $163,002.24 arising out of the aforesaid sale of

substantially all its assets to Buyer, the total amount of

which gain Service excluded from taxable income pur-

suant to Section 337, I. R. C., 1954. Included in the amount

so excluded was gain in the amount of $117,000, the

amount of consideration received by Service for its entire

inventory of articles in use in its laundry rental service

business.

oth ald Liaw Aris aceite inci rest eah aca tN

PO eh a abe

Al8

6. The Federal income tax return of Service for its

taxable year ended July 31, 1961, was examined by the

Internal Revenue Service. A deficiency in tax in the

amount of $3,998.61 was determined upon the original ex-

amination and a further deficiency in tax in the amount

of $60,839.60 was determined upon a supplemental ex-

amination. The amounts of these deficiencies were as-

serted against D. B. Anders, as alleged transferee of the

assets of Service, and were paid by him as set out in para-

graph 11 below.

7. The deficiency in the amount of $3,998.65 was

based upon an erroneous determination by the Internal

Revenue Service that depreciation in the amount of

$7,704.11 claimed on depreciable assets in the year of sale

was not allowable. A claim for refund of this amount was

filed May 18, 1965, with the District Director of Internal

Revenue, Wichita, Kansas.

8. The deficiency in the amount of $60,839.60 was

based upon an erroneous determination by the Internal

Revenue Service that $117,000 of the $163,002.24 gain real-

ized by Service on the sale of its assets to Buyer was not

excluded from taxable income under Section 337. The

$117,000, representing that portion of the gain realized from

the transfer to Buyer of Service’s entire inventory of items

in use in its laundry rental service business, constitutes

gain realized from the sale or exchange of property within

the 12-month period following the adoption of a plan of

complete liquidation, and as such, is properly excludible

from taxable income under Section 337, I. R. C., 1954.

9. Service paid its Federal income taxes for its tax-

able year ended July 31, 1961, to the District Director of

Internal Revenue, Kansas City, Missouri, as follows:

ao -~

9 nr re tn

Alg

Date Paid Amount

October 11, 1961 $ 9,000.00

January 12, 1962 4,334.66

Total paid per return $13,334.66

10. Anders, as alleged transferee of Service, paid ad-

ditional Federal income taxes assessed against Service for

Service’s taxable year ended July 31, 1961, to the District

Director of Internal Revenue, Wichita, Kansas, as follows:

Date Paid Additional Tax

May 27, 1963 $ 3,998.61

November 23, 1964 $60,839.60

11. The amount of the overpayment claimed herein is

computed as follows:

Taxable income per return $46,006.55

Income tax due thereon $13,334.66

Tax paid 78,172.87

Amount of overpayment $64,838.21

Amount previous claim 3,998.61

Amount of this claim $60,839.60

NOTE: Because the tax return of the transferor, Serv-

ice, was filed and the tax shown as due thereon paid to

the District Director of Internal Revenue, Kansas City,

Missouri, and the taxes assessed against Anders as trans-

feree were assessed by and paid to the District Director

of Internal Revenue, Wichita, Kansas, this claim is being

filed simultaneously with the District Director of St. Louis,

Missouri, and Wichita, Kansas.

A20

APPENDIX C-2

Defendant’s Answer

IN THE UNITED STATES COURT OF CLAIMS

No. 35-71

D. B. ANDERS,

Plaintiff,

Vv. >

UNITED STATES OF AMERICA,

Defendant.

ANSWER

(June 4, 1971)

Defendant, the United States of America, by its attor-

neys, in answer to the petition filed in the above-entitled

case, respectfully denies each and every allegation con-

tained therein, except as specifically admitted herein.

Defendant further:

1. Admits the allegations contained in paragraph 1.

2. Admits the allegations contained in paragraph 2.

3. Admits the allegations contained in paragraph 3.

4. Admits the allegations contained in paragraph 4

except denies the allegations contained in the last sentence

of paragraph 4.

A2l

5. Admits the allegations contained in paragraph 5

except to deny each and every allegation set forth in the

refund claim unless otherwise expressly admitted herein.

6. Admits the allegations contained in paragraph 6,

except to deny that plaintiff overpaid the taxes mentioned.

7. Admits the allegations contained in paragraph 7,

except denies the last two sentences of paragraph 7; de-

fendant further avers that prior to the liquidation sale,

business expense deductions from the taxable income had

been taken by Service for its entire inventory of items in

use in its laundry rental service business; these deduc-

tions were recovered in the gain realized by Service from

the liquidation sale, and this portion of the gain was,

therefore, properly includible in the year of recovery.

WHEREFORE, defendant prays that plaintiff's peti-

tion be dismissed at its own costs.

Respectfully submitted,

/s/ Johnnie M. Walters

Johnnie M. Walters

Assistant Attorney General

/s/ Kenneth R. Boiarsky

Kenneth R. Boiarsky

Attorney

May 26, 1971

ee ee

acute eae eae ine Ae le ater Bla tg A

ret

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PNB NG As tier

A22

APPENDIX D-1

Standard Pretrial Order on Liability, Rule 111

IN THE UNITED STATES COURT OF CLAIMS

No. 35-71

(Filed June 7, 1971)

D. B. ANDERS,

Plaintiff,*

Vv.

THE UNITED STATES,

Defendant.

STANDARD PRETRIAL ORDER

ON LIABILITY

(RULE 111)

IT IS ORDERED as follows:

1. Plaintiff's Submission. On or before August 6,

1971, the plaintiff* shall furnish the following to the attor-

ney of record for the defendant and to the commissioner:

(a) A list accurately describing the documents that

are relied on and are to be offered in evidence. The docu-

ments shall be numbered; and the list shall be accom-

panied by a copy of each document referred to therein,

except that (1) no copy need be supplied to defendant’s

*The ‘word “plaintiff,” as used in this order, means “plain-

tiffs” in a case where two or more persons have joined together

in filing a petition.

iii

—-

A23

counsel where the plaintiff reasonably believes that the

defendant already has the original or a copy, and (2) the

commissioner need not be provided a copy of any exhibit

unless its admissibility is put in issue.

(b) A statement of the material matters of fact as

to which it is believed that there is no substantial contro-

versy between the parties, or which have been agreed to

by the parties. The paragraphs of this statement shall

be numbered.

which shall comply with the following requirements:

(1) The contentions of fact shall consist of a concise

statement of the ultimate, material facts which the plain-

tiff expects to establish, rather than a general statement

of the claim or a repetition of the pleadings.

(2) The contentions of law shall be in the form of

conclusions of law based on the ultimate facts which the

plaintiff expects to establish, and, in addition, shall con-

tain a brief statement of the points of law and a citation

of the authorities relied upon in support of each point.

(d) (1) A list setting forth the name, address, and

occupation of each of the witnesses whom the plaintiff pro-

poses to call, and a succinct statement of the issue or issues

to which the testimony of each witness will relate.

(2) The preferred date for the beginning of the trial,

and the preferred place or places therefor.

(3) An approximation of the time that will be re-

quired for the direct examination of the plaintiff's wit-

nesses at each place.

2. Defendant’s Response. Within 45 days after re-

ceiving the data referred to in paragraph 1 of this order,

A24

the defendant shall furnish the following to the attorney

of record for the plaintiff and to the commissioner:

(a) A statement admitting or denying the admissi-

bility of each document listed under paragraph 1(a) of this

order, together with the reasons for any denial of admis-

sibility, and a further statement admitting or denying the

genuineness of any documents the admissibility. of which

is disputed.

(b) A statement (arranged in numbered paragraphs)

agreeing to, denying, revising, or otherwise commenting

on the factual data submitted under paragraph 1(b) of this

order.

the requirements of paragraph 1(a) of this order.

(d) A statement setting out any further material

matters of fact as to which the defendant believes that

there is no substantial controversy between the parties.

The paragraphs of this statement shall be numbered.

(e) A memorandum of contentions of fact and law,

which shall comply with the requirements set forth in

paragraph 1(c) of this order.

(f) A list of the proposed.defense witnesses, comply-

ing with the requirements of paragraph 1(d) (1) of this

order.

(g) A statement indicating the defendant's prefer-

ence as to the date and location of the trial.

(h) An estimate of the time likely to be required for

the presentation of the direct testimony of the defendant's

witnesses, and the cross-examination of the plaintiff's wit-

nesses, at each preferred location.

3. Plaintiff's Reply. Within 30 days after receiving

the data referred to in paragraph 2 of this order, the plain-

tiff shall furnish the following to the attorney of record

for the defendant and to the commissioner:

(a) A statement agreeing to, denying, or otherwise

commenting on any revised or additional factual data sub-

mitted under paragraph 2(b) and (d) of this order.

(b) Such observations in rebuttal! as the plaintiff may

wish to offer respecting the defendant's contentions of fact

and law submitted under paragraph 2(e) of this order.

bility of each of the documents listed under paragraph 2(c)

of this order, together with the reasons for any denial of

admissibility, and a further statement admitting or deny-

ing the genuineness of any documents the admissibility of

which is disputed.

(d) An estimate of the time likely to be required for

the cross-examination of defendant's proposed witnesses

at each preferred location.

4. Form of Compliance. For convenience of refer-

ence, submissions in compliance with this order shall fol-

low the format of the order by citing the numbered pare-

graph pursuant to which each portion of a particular sub-

mission has been prepared.

5. Sanctions. Rule 114(b) provides sanctions for

failure or refusal to comply with the requirements of this

order.

Mastin G. White

Commissioner

.e ——- *—_—-—a -

Comes now the plaintiff by his attorney, Harlow B.

King, and in compliance with Standard Pretrial Order on

Liability filed herein June 7, 1971, submits the following:

1. (a) List of documents. The following docu-

ments are relied on and are to be offered in evidence:

(1) Form 1120, U. S. Corporation Income Tax

Return of D. B. Anders, Inc., a Missouri corporation,

formerly Service Industrial Cleaners, Inc. (herein-

after referred to as “Service”) for its taxable year

ended July 31, 1961;

(2) Minutes of special meeting of the Board of

Directors of Service dated May 12, 1961;

(3) Minutes of special meeting of the stockhoid-

ers of Service dated May 12, 1961;

~ (4) Agreement of Sale dated May 16, 1961, be-

tween Service and Albert Gitlow, Abraham Gitlow,

Ben E. Singer, and Joseph L. Fradkin, acting in behalf

of Service Industrial Cleaners, Inc., a Missouri corpo-

ration formed by said Albert Gitlow et al. on or about

May 17, 1961, which corporation is hereinafter re-

ferred to as “Buyer”;

(5) Restrictive Covenants Agreement dated

May 17, 1961 between Buyer and D. B. Anders, an in-

dividual, the plaintiff, hereinafter referred to as

“Anders”;

(6) A second Restrictive Covenants Agreement

dated May 22, 1961, between Buyer and Service;

(7) Bill of Sale from Service to Buyer dated

May 22, 1961;

(8) “Memorandum Relating and Applying to

Four Certain Agreements of Sale Entered into Re-

spectively Between D. B. Anders, Inc.” et al. dated

May 22, 1961;

(9) Articles of Incorporation and all amend-

ments thereto and Articles of Dissolution of Service;

(10) Statutory notice of ibility mailed to

Anders on July 7, 1964;

(11) Proof of payment by Anders as transferee

on or about November 23, 1964, of a deficiency in Fed-

eral income tax of Service for its taxable year ended

July 31, 1961, in the amount of $60,839.60;

™ pee

A28

(12) Statutory notice of disallowance of claim

for refund in the amount of $60,839.60 dated March 2,

(b) A statement of material matters of fact about |

which it is believed that there is no substantial contro-

versy:

(1) D. B. Anders is an individual residing in )

Overland Park, Kansas. ad

(2) Service was a corporation organized in

March, 1949, under the laws of Missouri with its prin-

cipal offices in Kansas City, Missouri. At all times

material its stock was owned by Anders directly or

through his nominees. By amendment filed May 17,

1961, Service’s name was changed to D. B. Anders, Inc.

(3) Service timely filed a corporation income

tax return for the fiscal year ended July 31, 1961, on

an accrual basis with the district director of Internal

Revenue at St. Louis, Missouri.

(4) Service was engaged in the business of con-

ducting and providing a rental service of cleaned and

laundered towels, seat covers, fender covers, wiping

materials and dust cloths, coats, coveralls, shirts,

pants, and other textiles and apparels, including dust-

ing and wiping equipment, sweeping tools, mops, and

accessories, herein referred to collectively as rental

items, as well as conducting a cleaning and launder-

ing service of substantially the same type of items

owned by others, and in general conducting an in-

dustrial laundry business.

(5) For Federal income tax purposes Service

: charged to its expense accounts when purchased the

, cost of the rental items used in conducting its rental

A29

service business. At the end of each taxable year the

expense accounts were credited with the costs of the

ending inventory of items which had not been placed

in service at the end of the taxable year.

(6) In May, 1961, Anders reached an agreement

for the sale of Service’s business to a group of per-

sons. The purchasers desired to carry on the business

under a different corporation with the same name.

(7) On May 12, 1961, the board of directors and

the stockholders of Service adopted resolutions ap-

proving and authorizing the sale of the corporation’s

properties and business, changing the corporate name

to D. B. Anders, Inc. and adopting a plan of complete

liquidation pursuant to the terms of Section 337 of the

Internal Revenue Code of 1954.

(8) As of May 16, 1961, Service entered into an

“Agreement of Sale” with Albert Gitlow, Abraham

Gitlow, Ben E. Singer, and Joseph L. Fradkin, herein

referred to as the purchasers, acting in behalf of

Buyer.

(9) Under the agreement Service as “Seller”

and the named individuals as “Purchasers” agreed to

the sale and transfer to the purchasers or their assigns

of all seller’s inventory of the articles used in conduct-

ing the seller’s rental service business, furniture and

equipment, accounts receivable, interest in real prop-

erty, name, routes, customers’ patronage, and good-

will.

(10) The price was stated in the contract as

follows:

one

Inventory of rental items $116,000

Furniture and equipment 49,610

Sweeping tools, mops and ac-

cessories 1,000

Goodwill and customer patron-

age 50,000

Real property 63,000

Total $279,610

———

In addition, there was to be paid a sum equal to the

trade accounts receivable at the close of business May

17, 1961, and prepaid items as of that date.

(11) As of May 17, 1961, Anders entered into a

covenant with the purchasers to refrain from competi-

tion with them or their corporation in the conduct of

rental service or laundry business.

(12) As of May 22, 1961, Service, then known as

D. B. Anders, Inc., entered into an agreement with the

purchasers to a similar effect. As of the same date

Service delivered to the buyer a bill of sale of certain

assets. On or about May 22 or 23, 1961, the sale by

Service of substantially all its assets to the buyer was

completed.

(13) Pursuant to the plan of liquidation Service

distributed all its assets in complete liquidation to peti-

tioner, its sole stockholder, within the 12-month period

beginning May 12, 1961.

(14) The corporation filed with the secretary of

state of the State of Missouri its resolution of dissolu-

tion in March, 1962 and its corporate existence ceased.

A31

(15) The corporation paid its Federal income

taxes for its taxable year ended July 31, 1961, as fol-

lows:

Date Paid Amount

October 11, 1961 $9,000.00

January 12, 1962 4,334.66

(16) Anders paid additional Federal income

taxes assessed against the corporation for its taxable

year ended July 31, 1961, as follows:

Date Paid Amount

May 27, 1963 $ 3,998.61

November 23, 1964 60,839.60

(17) On its income tax return for the fiscal year

ended July 31, 1961, the corporation reported a gain of

$163,002.24 arising out of the sale of substantially all

its assets to the buyer, and claimed exclusion of such

gain from taxable income under Section 337, I.R.C. of

1954. The gain reported included $117,000 which was

the amount of the consideration received by Service

from Buyer allocated to the items-in-use in its laundry

rental business.

(1) Contentions of Fact. Plaintiff expects to es-

tablish the following ultimate material facts:

(i) On or about May 12, 1961, Service adopted

a plan of complete liquidation pursuant to Section

337 of the Internal Revenue Code, and within the

12-month period beginning on the date of the adop-

tion of the plan, distributed all its assets in complete

liquidation to Anders, its sole stockholder.

Agra Ta Wate dtp ALITA atl ee een ide eet

A32

(ii) Following the adoption of said plan of liq-

uidation and pursuant to an agreement of sale en-

tered into on or about May 16, 1961, Service did on

May 22-23, 1961, sell, transfer and deliver to the

Buyer in one transaction substantially all its assets,

including the garments, shop towels, fender and seat

covers, and dust control items in circulating use in

Service’s industrial laundry business.

(2) Contentions of Law. Plaintiff's case is based

upon the following contentions of law:

(i) The garments, shop towels, fender and seat

covers, and dust control items in use by Service in

1961 in its industrial laundry business constituted

“property” within the intendment of Section 337 :b)

(1) of the Internal Revenue Code of 1954.

LR.C. 1954, 26 U.S.C.A. Sec. 337 (b) (1)

U. S. Treas. Reg., Sec. 1.337-3 (a)

Malat v. Riddell, 383 U.S. 569, 571 (1966)

Jeanese, Inc. v. United States, 227 F. Supp. 304

(N.D. Cal. 1964), rev’d. on other grounds, 341

F.2d 502 (9th Cir. 1965)

D. B. Anders, 48 T.C. 815 (1967), rev’d. 414 F.2d

1283 (10th Cir. 1969), cert. denied 396 U. S.

958 (1969)

Frank W. Verito, 43 T.C. 429 (1965).

(ii) The May, 1961, transfer by Service to the

Buyer of the garments, shop towels, fender, and seat

covers, and dust control items then in circulating

use in its industrial laundry business constituted a

A33

sale or exchange within the intendment of Section

337 (a) of the Internal Revenue Code of 1954.

LR.C. 1954, 26 U.S.C.A. Sec. 337 (a)

US. Treas. Reg., Sec. 1.337-2

Commissioner v. Brown, 380 U.S. 563, 570-71

(1965)

Frank W. Verito, supra

George J. Aitken, 35 T.C. 227 (1960)

(iii) In the alternative, if the garments, shop

towels, fender and seat covers and dust control items

in circulating use by Service in its industrial laundry

business did not constitute “property” within the in-

tendment of Section 337 (b) (1) of the Internal Rev-

enue Code of 1954, then they did constitute stock in

trade or other property of a kind properly includible

in inventory within the scope of Section 337 (b) (1)

(A), and substantially all of said property was sold

or exchanged to one person in one transaction with-

in the intendment of Section 337 (b) (2), Internal

Revenue Code of 1954.

LR.C. 1954, 26 U.S.C. Secs. 337 (b)(1)(A) and

337 (b) (2).

U. S. Treas. Reg. Sec. 1.337-3(b).

Jeanese, Inc. v. United States, supra.

(d) (1) Plaintiff plans to call as witnesses the fol-

lowing:

(i) D. B. Anders, 8448 Valley View Drive, Over-

land Park, Kansas, formerly president of Service.

Anders will testify as to the operation of Service’s in-

dustrial laundry business, the rental of industrial laun-

dry items, the adoption of the Section 337 Plan of

Reith epi PEDAL: MAAN AEE be

een x.. ab Bes

A34

Liquidation, the sale to the Gitlow interests, and the

liquidation of Service.

(ii) William E. Mangold, C.P.A., Power and

Light Building, Kansas City, Missouri. Mangold will

testify as to the accounting practice of Service, the

reporting of the sale to the Gitlow interests on Serv-

ice’s final corporate income tax return, and the final

distributions of assets at date of liquidation.

In the alternative, there is the possibility that the case

can be submitted entirely upon a written stipulation of facts,

if all the necessary facts can be mutually agreed upon by

the parties.

(2) The preferred date for the beginning of the

trial is on or about December 1, 1971, and the pre-

ferred place is Kansas City, Missouri.

(3) It is estimated that approximately four (4)

hours total time will be required for direct examination

of plaintiff's witnesses.

Respectfully submitted,

Harlow B. King

Attorney for Plaintiff

Of Counsel:

J. Glenn Hahn

Walter J. Kennedy

A35

APPENDIX E-1

Defendant’s Motion for Summary Judgment

and Brief in Support Thereof

IN THE UNITED STATES COURT OF CLAIMS

No. 35-71

D. B. ANDERS,

Plaintiff,

Vv.

UNITED STATES OF AMERICA,

Defendant.

MOTION OF THE UNITED STATES FOR SUMMARY

JUDGMENT

Comes now the defendant, the United States of Amer-

ica, pursuant to Rule 101 of the Rules of the United States

Court of Claims, and respectfully moves the Court to grant

summary judgment in its favor for the reason that the

pleadings and plaintiff’s pretrial submission of August 5,

1971 (Appendix to Brief, infra), show that there is no

genuine issue of fact and the defendant is entitled to judg-

ment as a matter of law.

Respectfully submitted,

/s/ Scott P. Crampton

Scott P. Crampton

Assistant Attorney General

/s/ Kenneth R. Boiarsky

Kenneth R. Boiarsky

Attorney

December 14, 1971

A36

BRIEF FOR THE UNITED STATES IN SUPPORT OF

ITS MOTION FOR SUMMARY JUDGMENT

This is a suit for the recovery of federal corporate in-

come taxes and interest in the amount of $71,800.72 for the

fiscal year ended July 31, 1961, plus statutory interest

thereon.

QUESTION PRESENTED

Whether the amount received from rental items of ap-

parel, towels, and the like, in a sale of corporate assets pre-

ceding a complete liquidation was a gain from the sale of

property within the provisions of Section 337 of the In-

ternal Revenue Code of 1954 for nonrecognition of gain to

the corporation where the cost of such items had been fully

expensed when they were purchased, or whether such gain

was taxable as ordinary income to the corporation under

tax benefit principles.

STATUTE INVOLVED

Internal Revenue Code of 1954 (26 U.S.C.):

SEC. 337. GAIN OR LOSS ON SALES OR EX-

CHANGES IN CONNECTION WITH CER-

TAIN LIQUIDATIONS.

(a) General Rule.—li—

(1) a corporation adopts a plan of complete

liquidation on or after June 22, 1954, and

(2) within the 12-month period beginning on

the date of the adoption of such plan, all of the as-

sets of the corporation are distributed in complete

liquidation, less assets retained to meet claims,

A37

then no gain or loss shall be recognized to such cor-

poration from the sale or exchange by it of property

within such 12-month period.

(b) Property Defined.—

(1) In general—For purposes of subsection

(a), the term “property” does not include—

(A) stock in trade of the corporation, or

other property of a kind which would properly

be included in the inventory of the corporation if

on hand at the close of the taxable year, and prop-

erty held by the corporation primarily for sale to

customers in the ordinary course of its trade or

business,

(B) installment obligations acquired in re-

spect of the sale or exchange (without regard to

whether such sale or exchange occurred before,

on, or after the date of the adoption of the plan

referred to in subsection (a)) of stock in trade

or other property described in subparagraph (A)

of this paragraph, and

spect of property (other than property described

in subparagraph (A)) sold or exchanged before

the date of the adoption of such plan of liquidation.

(2) Nonrecognition with respect to inventory

in certain cases—Notwithstanding paragraph (1) of

this subsection, if substantially all of the property

described in subparagraph (A) of such paragraph

(1) which is attributable to a trade or business of

the corporation is, in accordance with this section,

sold or exchanged to one person in one transaction,

then for purposes of subsection (a) the term “prop-

erty” includes—

sweeping tools, mops, and accessories, herein referred to

collectively as rental items, as well as conducting @ clean-

ing and laundering service of substantially the same type of

items owned by others. and in general conducting an in-

dustrial laundry business. (Pitf Pretrial Submission. par

1(b) (2), 1(b) (4).) For federal income tax purposes, Ser-

vice charged to its expense accounts, when purchased. the

cost of the rental items described; at the end of each tax-

trial Submission, par. 1(b) (5).)

In May, 1961, plaintiff Anders, owner of the stock of

Service directly or through nominees (Pit{, Pretrial Sub-

mission, par. 1(b) (2)), made an agreement for the sale of

the business and properties of Service. (Pitt, Pretrial Sub-

mission, par. 1(b)(6).) On May 12th, Service's directors

and stockholders passed resolutions approving the terms of

viduals purchasing the business who were acting in behalf

of a newly formed Kansas corporation also known as Ser-

vice Industrial Cleaners. Inc (Pitt Pretrial Submission.

per. 1(b) (8); Pet. Ex. A. par 3.)

By amendment filed May 17, 1961. Service's name was

changed to D B Anders. Inc (hereinafter also referred to

as “Service”) (Pitt, Pretrial Submission, par. 1(b) (2),

1(b)(7).) On May 22 and 23, Service sold substantially

all of its assets, including the rental Hems in question, to

the purchasers. (Pit!, Pretrial Submission, par. 1(b) (12);

Pet. Ex. A, par. 4) Pursuant to the plan of liquidation,

Service distributed all of its assets in complete liquidation

to plaintiff within the 12-month period beginning May 12.

1961, and the corporstion was dissolved in March, 1962.

(Pitt. Pretrial Submission, par. 1(b) (13), 1(6) (14); Pet.

Bx. A, par. 4)

In the terms of sale. Service agreed with the purchasers

on specific consideration to be paid for the rental tems

in question. and also specified considerstion to be paid for

furniture and machinery. goodwill, realty. and accounts re-

ceivable. (Pitt. Pretrial Submission, par. 1(b) (10); Pet. Ex.

A, par. 3.) On its income tax return for the fiscal year

ended July 31, 1961, Service reported a gain of $163,002.24

from the sale of all such property. and claimed nonrecagni-

tion of the gain under Section 337; this gain included

$117,000 received for the rental tems in use. (Pitt Pre-

trial Submission, par. 1(b) (17); Pet. Bx. A, par. 5.)

Pursuant to audit by the Internal Revenue Service of

Service’s federal income tax return filed on the sccrual

basis (Pitt, Pretrial Submission, par. 1(b)(3)) for its tax-

able year ended July 31, 1961, certain deficiencies and in-

terest were assessed against. and paid by. plaintiff as trars-

feree of the assets of Service, which, insofar as relevant

here. were based upon the determination by the Interna!

Revenue Service thet $117,000 of the $163,002.24 gain

realized by Service on the sale of its assets attributable to

the rental items was not entitled to nonrecognition under

Section 337. (Pet. par. 4. and Ex. A thereto. per. 8) A

claum for refund was filed thereon and disallowed on March

5, 1970. (Pet. par. 5.)

Anders +. Commissioner, 414 F. 24 1283 (CA. 10, 1969),

rev'g @ TC. 815 (1967), cort. denied, US. 968 (1969).

rehearing denied, 396 US 1631 (1970). Plaintiff im that

ection was the same as here (though im that case os trane-

ment of the expense charges.” thus giving rise to ordinary

income The heart of the opinion reads a: follows (414

F234. pp. 1287-1288):

We turn to s consideration of thes case under tax

benefit principles The rental items in question had

2 zero bass and their cost had been fully expensed on

purchase by Service in its Federal income tax returns

end deductions were taken therefor by Service In

similar circumstances a recovery of property by the

taxpayer was treated as recoupment of prior chart

table deductions and as taxable income Alare Phelan

Sullivan Corporation v. United States, 381 F 2d 298,

$02, 180 Cu. Cl. 658 (1967). In wiew of Service's charg-

— - _»

Clb

7 il

sagt

aa Hut

a ee ee ee ee ee ee ll ee ae

se @eeneesrtea& ss

A42

transfer. Comnussioner v. Gillette Motor Co., 364 US.

130, 134, 80 S. Ct. 1497, 4 L. Ed. 2d 1617 (1960);

United States v. Eidson, 310 F. 2d 111, 113-114 (5th

Cir. 1962), modified on other grounds, 312 F. 2d 744

(Sth Cir. 1963); West Seattle National Bank of Se-

attle v. Commissioner, supra; cf. Dyer v. Commissioner,

294 F. 2d 123 (10th Cir. 1961) and Commissioner v.

First State Bank of Stratford, supra. Instead, we

of the proceeds not as gain from the sale of property,

but as ordinary income which was deducted on its

purchase.

We believe that the Anders decision is soundly based

on principles upheld by this Court and should be followed.

See also Spitalny v. United States, 430 F. 2d 195 (CA. 9,

1970); S. E. Evans, Inc. v. United States, 317 F. Supp. 423

(Ark., 1970); Bishop v. United States, 324 F. Supp. 1105

(Ga., 1971).

CONCLUSION

For the foregoing reasons, the defendant's motion for

summary judgment should be granted and the petition

dismissed.

Respectfully submitted,

/s/ Scott P. Crampton

Scott P. Crampton,

Assistant Attorney General,

Philip R. Miller,

Joseph Kovner,

Kenneth R. Boiarsky,

Attorneys,

Department of Justice,

: Washington, D. C. 20530

A43

Appendix

IN THE

UNITED STATES COURT OF CLAIMS

THE UNITED STATES OF AMERICA,

Defendant.

PLAINTIFF'S SUBMISSION PURSUANT TO

STANDARD PRETRIAL ORDER

(RULE 111)

Comes now the plaintiff by his attorney, Harlow B.

King, and in compliance with Standard Pretrial Order on

Liability filed herein June 7, 1971, submits the following:

1. (a) List of documents. The following documents

are relied on and are to be offered in evidence:

(1) Form 1120, U. S. Corporation Income Tax

Return of D. B. Anders, Inc., a Missouri corporation,

formerly Service Industrial Cleaners, Inc. (herein-

after referred to as “Service”) for its taxable year

ended July 31, 1961;

(2) Minutes of special meeting of the Board of

Directors of Service dated May 12, 1961;

(3) Minutes of special meeting of the stockhold-

ers of Service dated May 12, 1961;

he ah ese OCS eee / |

A4t4

(4) Agreement of Sale dated May 16, 1961, be-

tween Service and Albert Gitlow, Abraham Gitlow,

Ben E. Singer, and Joseph L. Fradkin, acting in behalf

of Service Industrial Cleaners, Inc., a Missouri cor-

poration formed by said Albert Gitlow et al on or about

May 17, 1961, which corporation is hereinafter re-

ferred to as “Buyer”;

(5) Restrictive Covenants Agreement dated May

17, 1961 between Buyer and D. B. Anders, an indi-

vidual, the plaintiff, hereinafter referred to as

“Anders”;

(6) A second Restrictive Covenants Agreement

dated May 22, 1961, between Buyer and Service;

(7) Bill of Sale from Service to Buyer dated May

22, 1961;

(8) “Memorandum Relating and Applying to

Four Certain Agreements of Sale Entered Into Re-

spectively Between D. B. Anders, Inc.” et al dated

May 22, 1961;

(9) Articles of Incorporation and all amendments

thereto and Articles of Dissolution of Service;

(10) Statutory notice of liability mailed to

Anders on July 7, 1964;

(11) Proof of payment by Anders as transferee

on or about November 23, 1964, of a deficiency in

Federal income tax of Service for its taxable year

ended July 31, 1961, in the amount of $60,839.60;

(12) Statutory notice of disallowance of claim

for refund in the amount of $60,839.60 dated March

2, 1970.

A45

(b) A statement of material matters of fact about

which it is believed that there is no substantial contro-

versy:

(1) D. B. Anders is an individual residing in

Overland Park, Kansas.

(2) Service was a corporation organized in

March, 1949, under the laws of Missouri with its

principal offices in Kansas City, Missouri. At all

times material its stock was owned by Anders directly

or through his nominees. By amendment filed May

17, 1961, Service’s name was changed to D. B. Anders,

Inc.

(3) Service timely filed a corporation income

tax return for the fiscal year ended July 31, 1961, on

an accrual basis with the district director of Internal

Revenue at St. Louis, Missouri.

(4) Service was engaged in the business of con-

ducting and providing a rental service of cleaned and

laundered towels, seat covers, fender covers, wiping

materials and dust cloths, coats, coveralls, shirts,

pants, and other textiles and apparels, including dust-

ing and wiping equipment, sweeping tools, mops, and

accessories, herein referred to collectively as rental

items, as well as conducting a cleaning and laundering

service of substantially the same type of items owned

by others, and in general conducting an industrial

laundry business.

(5) For Federal income tax purposes Service

charged to its expense accounts when purchased the

cost of the rental items used in conducting its rental

service business. At the end of each taxable year the

A46

expense accounts were credited with the costs of the

ending inventory of items which had not been placed

in service at the end of the taxable year.

(6) In May, 1961, Anders reached an agreement

for the sale of Service’s business to a group of persons.

The purchasers desired to carry on the business under

a different corporation with the same name.

(7) On May 12, 1961, the board of directors and

the stockholders of Service adopted resolutions ap-

proving and authorizing the sale of the corporation’s

properties and business, changing the corporate name

to D. B. Anders, Inc. and adopting a plan of complete

liquidation pursuant to the terms of Section 337 of the

Internal Revenue Code of 1954.

(8) As of May 16, 1961, Service entered into an

“Agreement of Sale” with Albert Gitlow, Abraham

Gitlow, Ben E. Singer, and Joseph L. Fradkin, herein

referred to as the purchasers, acting in behalf of Buyer.

(9) Under the agreement Service as “Seller”

and the named individuals as “Purchasers” agreed to

the sale and transfer to the purchasers or their as-

signs of all seller’s inventory of the articles used in

conducting the seller’s rental service business, furni-

ture and equipment, accounts receivable, interest in

real property, name, routes, customers’ patronage, and

goodwill.

(10) The price was stated in the contract as

follows:

1,000

Goodwill and customer patron-

age 50,000

Real property 63,000

Total $279,610

In addition, there was to be paid a sum equal to the

trade accounts receivable at the close of business May

17, 1961, and prepaid items as of that date.

(11) As of May 17, 1961, Anders entered into

a covenant with the purchasers to refrain from com-

petition with them or their corporation in the conduct

of rental service or laundry business.

(12) As of May 22, 1961, Service, then known as

D. B. Anders, Inc., entered into an agreement with

the purchasers to a similar effect. As of the same

date Service delivered to the buyer a bill of sale of

certain assets. On or about May 22 or 23, 1961, the

sale by Service of substantially all its assets to the

buyer was completed.

(13) Pursuant to the plan of liquidation Service

distribution all its assets in complete liquidation to

petitioner, its sole stockholder, within the 12-month

period beginning May 12, 1961.

(14) The corporation filed with the secretary of

state of the State of Missouri its resolution of dissolu-

tion in March, 1962 and its corporate existence ceased.

A488

(15) The corporation paid its Federal income

taxes for its taxable year ended July 31, 1961, as fol-

lows:

Date Paid Amount

October 11, 1961 $9,000.00

January 12, 1962 4,334.66

(16) Anders paid additional Federal income

taxes assessed against the corporation for its taxable

year ended July 31, 1961, as follows:

Date Paid Amount

May 27, 1963 $ 3,998.61

November 23, 1964 60,839.60

(17) On its income tax return for the fiscal year

ended July 31, 1961, the corporation reported a gain

of $163,002.24 arising out of the sale of substantially

all its assets to the buyer, and claimed exclusion of

such gain from taxable income under Section 337, LR.C.

of 1954. The gain reported included $117,000 which

was the amount of the consideration received by Serv-

ice from Buyer allocated to the items-in-use in its

laundry rental business.

(1) Contentions of Fact. Plaintiff expects to

establish the following ultimate material facts:

(i) On or about May 12, 1961, Service adopted

a plan of complete liquidation pursuant to Section

337 of the Internal Revenue Code, and within the

12-month period beginning on the date of the adop-

tion of the plan, distributed all its assets in com-

plete liquidation to Anders, its sole stockholder.

A49

(ii) Following the adoption of said plan of

liquidation and pursuant to an agreement of sale en-

tered into on or about May 16, 1961, Service did on

May 22-23, 1961, sell, transfer and deliver to the

Buyer in one transaction substantially all its assets,

including the garments, shop towels, fender and

seat covers, and dust control items in circulating use

in Service’s industrial laundry business.

(2) Contentions of Law. Plaintiff's case is

based upon the following contentions of law:

(i) The garments, shop towels, fender and

seat covers, and dust control items in use by Service

in 1961 in its industrial laundry business constituted

“property” within the intendment of Section 337

.b) (1) of the Internal Revenue Code of 1954.

LRC. 1954, 26 US.C.A. Sec. 337 (b) (1)

U. S. Treas. Reg., Sec. 1.337-3(a)

Malat v. Riddell, 383 U.S. 569, 571 (1966)

Jeanese, Inc. v. United States, 227 F. Supp. 304

(N.D. Cal. 1964), rev’d. on other grounds, 341

F.2d 502 (9th Cir. 1965)

D. B. Anders, 48 T.C. 815 (1967), rev'd. 414

F.2d 1283 (10th Cir. 1969), cert. denied 396

U.S. 958 (1969)

Frank W. Verito, 43 T.C. 429 (1965).

(ii) The May, 1961, transfer by Service to the

Buyer of the garments, shop towels, fender, and seat

covers, and dust control items then in circulating use

in its industrial laundry business constituted a sale

Boor te we etic

A50

or exchange within the intendment of Section 337

(a) of the Internal Revenue Code of 1954.

LR.C. 1954, 26 U.S.C.A. Sec. 337 (a)

U. S. Treas. Reg., Sec. 1.337-2.

Commissioner v. Brown, 380 U.S. 563, 570-71

(1965)

Frank W. Verito, supra

George J. Aitken, 35 T.C. 227 (1960)

(iii) In the alternative, if the garments, shop

towels, fender and seat covers and dust control

items in circulating use by Service in its industrial

laundry business did not constitute “property” with-

in the intendment of Section 337 (b)(1) of the In-

ternal Revenue Code of 1954, then they did consti-

tute stock in trade or other property of a kind prop-

erly includible in inventory within the scope of Sec-

tion 337 (b)(1)(A), and substantially all of said

property was sold or exchanged to one person in

one transaction within the intendment of Section

337 (b) (2), Internal Revenue Code of 1954.

LR.C. 1954, 26 U.S.C. Secs. 337 (b) (1) (A) and

337 (b) (2).

U. S. Treas. Reg. Sec. 1.337-3(b).

Jeanese, Inc. v. United States, supra.

(d) (1) Plaintiff plans to call as witnesses the fol-

lowing:

(i) D. B. Anders, 8448 Valley View Drive, Over-

land Park, Kansas, formerly president of Service.

Anders will testify as to the operation of Service’s in-

dustrial laundry business, the rental of industrial

A51

laundry items, the adoption of the Section 337 Plin of

Liquidation, the sale to the Gitlow interests, and the

liquidation of Service.

(ii) William E. Mangold, C.P.A., Power and

Light Building, Kansas City, Missouri. Mangold will

testify as to the accounting practice of Service, the

reporting of the sale to the Gitlow interests on Ser-

vice’s final corporate income tax return, and the final

distributions of assets at date of liquidation.

In the alternative, there is the possibility that the case can

be submitted entirely upon a written stipulation of facts,

if all the necessary facts can be mutually agreed upon

by the parties.

(2) The preferred date for the beginning of the

trial is on or about December 1, 1971, and the pre-

ferred place is Kansas City, Missouri.

(3) It is estimated that approximately four (4)

hours total time will be required for direct examina-

tion of plaintiff’s witnesses.

Respectfully submitted,

/s/ Harlow B. King

Harlow B. King

Attorney for Plaintiff

Of Counsel:

J. Glenn Hahn

Walter J. Kennedy

2 The decision relied upon by Defendant, Commi-

sioner v. Anders,* 414 F.2d 1283 (10th Cir. 1969) &

ES hg eh

Anders v. (oe).

>*Fe &

Ss *F

clearly erroneous and should not govern the dec-

sion of this Court; and

3. Defendant is not entitled t© judgment as « met-

ter of law.

WHEREFORE, Plaintiff prays thet Defendants mo-

uon for summary judgment be overruled

Respectfully submitied.

Harlow B Kirg

Attorney for Piammntt

Of Counsel:

J Gienn Hahn

Walter J Kennedy

February, 1972.

industrial laundry business corstitute a “sale or exchange”

Revenue Code of 1854"

oe i oe ee

> +7 * & ~ & * *

Ta rrr

marily for sale to customers within the scope of Section

au7(b) (1) (A), was substantially all of said property sold

oe exchanged to ome person im ome transaction within the

intendment of Section 337(b) (2)°

4 If the geins realized by Service im 1961 from the

sale of the garments, shop towels, fender and seat covers,

ARGUMENT

I. There are Genuine Issues of Fact in This Case.

Plaintiff has set forth above under “Questions Pre-

sented”, supra, the issues of fact in this case. In its opin-

ion in the Kansas case (filed September 6, 1967), the Tax

Court of the United States answered substantially identi-

cal questions in favor of the taxpayer therein, saying to

the first two:

“On the basis of these facts, it appears that there was

literal compliance with the requirements of section

337(a), and further, not being property specifically

excluded by section 337(b) (1), that the rental items

involved were property, the gain or loss from the sale

of which is not to be recognized to the corporation

under section 337(a). See sec. 1337-3, Income Tax

Regs.; Rev. Rul. 59-120, 1959-1 C.B. 74.” 48 T.C. at

819.

To the last, which it was not required to answer because

of its holding on the first two, the Tax Court observed:

“In this connection, it is to be noted that had the

rental items-in-use been inventoried, sec. 337(b) (2)

would have required the nonrecognition of gain to the

corporation.” 48 T.C. at 823 n 5.

In order to remove any possibility of confusion in this

case on the issue’, plaintiff here wishes to reiterate its al-

R? ¢

RES rESS &

AS7

ternative position as to the issue set forth as paragraph 3

under “Questions Presented”, supra. It is plaintiff's alter-

native position that the rental items constituted stock in

trade or property includable in inventory or property held

primarily for sale to customers. If they are none of these,

then by the language of defendant's own regulations, they

perforce are “property” within the intendment of Section

337(b) (1) of the Internal Revenue Code of 1954. Treas.

Reg. § 1.337-3(a).

The last issue, the applicability of the tax-benefit

rule in contravention of section 337, was also squarely be-

fore the Tax Court in the Kansas case. The Court stated

the issue succinctly:

“On brief, respondent states that he ‘relies on the

well established rule that if an amount deducted from

gross income in one taxable year is recovered in a

later year, the recovery is income in the later year.’

The rule referred to is commonly known as the tax-

benefit rule or doctrine.” 48 T.C. at 819-820.

ite

Fue

re :

fits:

;

[

a oe oe ee

The Tax Court’s answer is equally precise:

“Where, as here, application of the tax-benefit rule

would contravene the clear and unambiguous previsions

of section 337 (a), we think it should not be applied.”

48 T.C. at 821 (italics added).

More than four years have elapsed since the Tax

Court’s issuance of its opinion in D. B. Anders v. Com-

missioner, supra. Despite the subsequent reversal of its

decision by the Tenth Circuit on June 20, 1969, no opinion

of the Tax Court issued since that date has given any in-

Qin wine in

qi eg

i ult ae

cit Heatle deeut il

EE HBG aa

nil Ty BiH lif

| bl <i al i HE

A60

so held in the Kansas case’ and defendant itself here

states that case involved “a substantially identical factual

setting”*

The opinion of the Tenth Circuit in the Kansas case

on this question, as on others at issue, could most chari-

tably be said to equivocate. Compare these statements

made in sequence in the opinion, as they appear in juxta-

position:

(1) (2) (3)

“The factthat “Instead, we con- “As the opinion

a transaction in- clude that tax stated, we con-

volves disposition benefit principles clude that the fact

of property does call for treatment that a transaction

not compel treat- of the proceeds involves the dis-

ment of the pro- not as gain from position of prop-

ceeds as gain from the sale of prop- erty within the

such a transfer.” erty, but as ordi- meaning of § 337.

414 F.2d at 1288 nary income ...” Order De

(italics added). which was de- nying Petition for

ducted on its pur- Rehearing, 414 F.

chase.” Ibid (ital- 2d at 1289 (italics

ics added). added).

Yes, the transaction involves a disposition of property;

the garments, shop towels, fender and seat covers, and

dust control items are property. No, on second thought,

the garments, shop towels, fender and seat covers, and

dust control items are not property; they are income

5. Sve 48 T.C. at 819, quoted at p. A56, supra.

6. Defendant's Brief, p. A40.

7. The phrase “ordinary income which was deducted on

its purchase” has no logical legal connotation with respect to the

Internal Revenue Code of which plaintiff is aware.

A6l

(sic)! But on the other hand, they are property within

the meaning of § 337." Grasp it now, ere like Saint Nick,

it fades out of sight! What kind of machinations are

these?

Apparently the Tenth Circuit did not feel that the

taxpayer in the Kansas case was entitled to a definitive

answer as to whether the rental items did in fact consti-

tute property. In the absence of any statement by the

Tenth Circuit that the Tax Court finding that the rental

items did constitute property was clearly erroneous, how-

ever, it appears reasonable to conclude that the findings

of fact of the Tax Court on this issue were not set aside

by the Tenth Circuit. Indeed, the Tenth Circuit could have

no reasonable grounds for so doing.” The rental items

there and here were property.

B. The Transfer by Service to Buyer on May 22-23,

1961 of the Garments, Shop Towels, Fender and Seat

Covers, and Dust Control Items in Use in Service's Indus-

trial Laundry Rental Business Constituted a “Sale” of Said

Property.

The answer to the second Question Presented, supra,

is likewise in the affirmative. The transaction in question

constituted a sale. The Tax Court opinion in the Kansas

case clearly so held.” As a matter of fact, the Reply

Brief for Respondent in the Tax Court case was equally

to the point:

“Respondent does not question the fact that a sale

took place.””’

8. Perhaps they were property, but there was no sale? See

paragraph B, infra.

9. The findings of the Tax Court are subject to the pro-

tection of Rule 52(a) of the Federal Rules of Civil Procedure by

reason of 26 U.S.C. § 7482.

10. 48 T.C. at 819.

1l. Reply Brief for Respondent, p. 6.

~ haw *

A62

It seems a simple enough question. Did a sale of property

occur? And the answer of the fact-finding body was

straight-forward enough. But the Tenth Circuit could never

quite bring itself face to face with the question.

What did the Tenth Circuit have to say? Was there

a sale or wasn’t there? No one can tell with certainty,

but perhaps that was the whole idea. Some idea of the

difficulties encountered by that Court in upholding its house

of cards can be gathered from a comparison of the follow-

ing language appearing from time to time throughout its

7 . .

“The issue involved is whether the amount received

for rental items of apparel, towels and the like in a

sale of corporate assets... .” 414 F.2d at 1284.

“Qn May 22 and 23 the rental items in question and

substantially all of Service’s assets were sold to the

purchasers.” 414 F.2d at 1285.

oe ©

“Tt is this gain from disposition of the rental items

in use... .” Ibid.

“If . . . the tax benefit rule and similar principles

would have made the proceeds from the sale of such

property... .” 414 F.2d at 1287.

Certainly sounds like a sale to this point, doesn’t it?

But now the fancy work begins as “We turn to a considera-

tion of this case under tax benefit principles”: **

12. 414 F.2d at 1287.

A63

“The rental items in question had a zero bas’; and

their cost had been fully expensed on purch:se by

Service in its Federal income tax returns and deduc-

tions were taken therefor by Service. In similar cir-

cumstances (sic) a recovery of property by the tax-

payer....” 414 F.2d at 1287 (italics added).

That the case cited by the Court in support of this premise,

Alice Phelan Sullivan Corporation v. United States, 381

F.2d 399 (Ct. Cl. 1967), involved not a sale at all of any

kind but a reconveyance to the taxpayer of two parcels

of realty which it had previously donated and claimed as

a charitable deduction deterred the Court not at all. A

sale is “simila:” to a charitable contribution? How?

The Cow: next observes that:

“Under such (tax benefit) principles the proceeds

of the rental items should properly be treated as re-

coupment of the expense charges.” 414 F.2d at 1287-

1288 (italics added).

That the cases there cited in support of its conclusion are

obviously not in point’* is ostensibly irrelevant.

Was there a sale? Why, yes, there was “[A] sale of

corporate assets... .” (414 F.2d at 1284); “(S]ubstantially

all of Service’s assets were sold... .” (414 F.2d at 1285);

“(T]he proceeds from the sale... .” (414 F.2d at 1287).

Well, now, maybe there was not. Does the omission of

the words “of sale” after the word “proceeds” appearing

in the phrase cited above’ have some legal significance?

Or is it mere sleight-of-hand? Why were the “proceeds of

13. A cold hard fact which the Court finally comes to grips

in its concluding paragraph. See p. A67, infra.

14. “Under such (tax benefit) principles the proceeds of the

rental items. .. .” 414 F.2d at 1287.

rT se

eee cca nite sion AR ocd hibeet ate as

A64

the rental items” any different from the “proceeds” of the

real property or the “proceeds” of the furniture and equip-

ment? Can it be said that the taxpayer “recouped” the

real property when he sold it for cash and notes?

Here again the Tenth Circuit could apparently not

reach a yes-or-no answer to the question was there a sale.

And again in the absence of any definitive statement by

the Tenth Circuit that the Tax Court findings of fact on

this question were clearly erroneous, the only reasonable

conclusion which can be drawn is that the findings of the

Tax Court on this issue were not set aside. There was a

sale of the rental items.

C. In the Alternative, If the Garments, Shop Towels,

Fender and Seat Covers, and Dust Control Items in Use in

Service’s Industrial Laundry Rental Business Constitute

Stock in Trade, Inventory, or Property Held Primarily for

Sale, Substantially All of Said Property Was Sold to One

Person in One Transaction.

It is plaintiff's primary contention, as set forth pre-

viously herein, that the assets in question constitute prop-

erty as defined by Section 337(b) (1). If it is determined,

however, that the assets fall within the exclusions of Sec-

tion 337(b) (1) (A), it is respondent’s alternative conten-

tion that the gain must nonetheless be excluded from tax-

able income under Section 337 because all the assets in

question were sold to one person in one transaction, and

hence, the assets constitute property as defined in Section

337(b) (2).

Section 337(b) (2) states that if substantially all the

property described in Section 337(b) (1) (A), i.e., stock in

trade, inventory, or property held primarily for sale to cus-

tomers, which is attributable to a trade or business of the

corporation, is sold or exchanged to one person in one trans-

A65

action, for purposes of Section 337(a), the term “property”

includes such property so sold or exchanged, and install-

ment obligations acquired in respect of such sales or ex-

changes. This exception for bulk sales of inventory was

added by the Senate so that Section 337 “more nearly cor-

responds to the results that would follow a sale of all the

corporate assets (including the inventory) and the sale of

all the stock.” S. Rep. No. 1622, 83rd Cong., 2nd Sess., 1954,

U.S. Code Cong. & Adm. News 4621, at 4680.

There is no dispute with respect to the facts here ap-

plicable. Service sold to one person the corporation formed

to acquire such assets, in one transaction, substantially all

the assets of its industrial laundry renta’ business, includ-

ing its “entire inventory” of garments, shop towels, covers,

and dust control items (R. 37, 38, 188). Hence, even if it is

assumed, arguendo, that the assets in question are property

of the type described in Section 337(b)(1) (A), all of such

assets were sold to one person in one transaction and hence

they are included in the definition of the term “property”

by the force of Section 337(b) (2). The Tax Court so ob-

served in the Kansas case. See Jeanese, Inc. v. United

States, 341 F.2d 502 (9th Cir. 1965), reversing 227 F.Supp.

304 (N.D. Cal. 1964).

Did the Tenth Circuit opinion in the Kansas case an-

swer the taxpayer on this issue? Not exactly. Forced

to deal with it after the taxpayer’s Petition for Rehearing

called to the Court’s attention that it had “erroneously

failed to give any consideration whatsoever to the alterna-

tive position of the Respondent in this case,”’® the Court

laconically observed:

“As the opinion stated, we conclude that the fact that

a transaction involves a disposition of property within

15. Petition for Rehearing p. 3.

A66

the meaning of § 337 does not compel treatment of the

proceeds of it as gain from a transfer of the property.

The same reasoning applies if the property is treated

as within the meaning of § 337(b)(2).” 414 F.2d at

1289.

Hence, the only reasonable conclusion to be drawn is

“perhaps” the rental items in question constitute property

within the meaning of § 337(b) (2) and “perhaps not”. If

the answer is no, then by the defendant's own regulations,

they must constitute “property” within the intendment of

section 337(a).* If the answer is yes, then the sale is also

within Section 337. No wonder the Court sought to side-

step the Commissioner’s dilemma.

D. The Gains Realized by Service from the Sale of

the Garments, Shop Towels, Fender and Seat Covers, and

Dust Control Items Constituting Gains from the Sale of

Property Within Section 337, the Tax Benefit Rule Does

Not Require That Such Gains Be Taxed As Income to the

Corporation; to Do So Would “Contravene the Clear and

Unambiguous Provisions of Section 337(a).”

Despite the intricate maneuvering and grammatical

sleight-of-hand by the Commissioner and the Tenth Cir-

cuit in the “substantially identical factual situation” of

the Kansas case, the answers to the first three questions

there and here presented rise clearly above the contrived

confusion. Yes, there was a sale of property by Service

within the intendment of Section 337. This leaves only

the last issue, do “tax-benefit principles” require that gains

from such sale be taxed to the corporation even though to

do so would as the Tax Court said, “contravene the clear

and unambiguous provisions of Section 337(a)"""?. For all

16. Treas. Reg. Sec. 1.337-3(a).

17. 48 T.C. at 821.

<A PPE A

A67

its citations of authority, even the Tenth Circuit at last ob-

served:

“As the taxpayer says, the controversy is not clearly

decided by any of these cases.” 414 F.2d at 1288 (italics

added).

And plaintiff submits that the conclusion there reached by

the Tenth Circuit was clearly erroneous.

What were “these cases” and why was the Tenth Cir-

cuit led to amend judicially Section 337 of the Internal Rev-

enue Code? Its rationale is not easily followed. The posi-

tion of the Commissioner of Internal Revenue in his brief

and oral argument before the Tenth Circuit, even though

much of it was not reflected specifically in the final opinion

of the Tenth Circuit, apparently confused that Court as to

the true issues in that case, as an analysis and comparison

of the Commissioner’s briefs in the two jurisdictions clearly

illustrates:

Each of the legal authorities relied upon by the Com-

missioner in his briefs in the Tax Court were clearly and

adequately distinguished by the Tax Court in its opinion.

Revenue Ruling 61-214, 1961-2 Cum. Bull. 60, which was

the start of the whole thing, the Commissioner’s initial

attempt to amend Section 337, received this comment from

the Tax Court:

“The conclusions reached are not supported by the

authorities cited therein, are clearly contrary to the

provisions of Section 337(a) and, in our opinion, are

not a valid interpretation of the statute.” 48 T.C. at

822.

One of the cases cited in Revenue Ruling 61-214, Commis-

sioner v. First State Bank of Stratford, 168 F.2d 1004 (5th

Cir. 1948), reversing, 8 T.C. 831, cert. denied 335 U.S. 867,

was disposed of by the Tax Court in short order:

atic Ses MURS aie

A68

“The Court of Appeals held the bank taxable under

the anticipatory assignment of income rule. Obvi-

ously, Section 337, enacted some 6 years later, was

not involved, nor was there a ‘sale or exchange’ of

property in partial or complete liquidation.” 48 T.C.

at 822.

Central Building & Loan Association, 34 T.C. 447 (1960)

was likewise distinguished by the Tax Court on the grounds

that there was no sale or exchange, but rather a collection

of interest. The absence of a sale or exchange was also

noted by the Tax Court in West Seattle National Bank of

Seattle, 33 T.C. 341 (1959), aff'd 288 F.2d 47 (9th Cir. 1961),

and J. E. Hawes Corp., 44 T.C. 705 (1965), both of which

held that Section 337 did not apply to the restoration of

bad debt reserves to income, following the sale of the

accounts receivable to which they related.’* To Commis-

sioner v. Kuckenberg, 309 F.2d 202 (9th Cir. 1962), modi-

fying 35 T.C. 473 (1960), cert. denied 373 U.S. 909 (1963)

and Pridemark, Inc. v. Commissioner, 345 F.2d 35 (4th

Cir. 1965), aff’g. and rev’g. 42 T.C. 510 (1964), the Tax

Court replied that the sales of completed contracts there

were anticipatory assisnments of earned income, assign-

ment of income cases patently were not applicable to the

facts in the Kansas case. As a matter of fact the Tax Court

appraised the Commissioner’s entire position with admir-

able candor:

“Neither of these two cases which were cited in Rev.

Rul. 61-214, support the ruling or respondent’s con-

tention with respect to the application of the tax-

benefit rule in a complete liquidation under section

337. Nor do any of the other cases cited by respond-

ent on brief.” 48 T.C. at 822 (italics added).

18. Has the holding of these cases been overruled by Nash

vy. United States, 398 U.S. 1 (1970)? See p. A72, infra.

A69

From what course came the reversal of the Tenth

Circuit? The opinion first recites the purported Con-

gressional intent in enacting Section 337, i.e., to deal with

the so-called Court Holding Co.” problem; the purpose

was to eliminate the incurring of a double tax, one at the

corporate level and one at the shareholder level. The

Court noted:

“And the means employed was to provide for non-

recognition of the gain to the corporation on the sale

of property (as defined in § 337) by it before its liqui-

dation.” 414 F.2d at 1287.

The Court conveniently fails to discuss the fact that the

result of its reversal of the Tax Court decision in the

Kansas case is to impose a tax upon the corporation as well

as upon the shareholder; that the tax upon the corporation

weuld not have been incurred if the corporation had been

first liquidated and the sale of its assets, including the ren-

tal items in question, been made by the stockholder indi-

vidually. In other words, the result of the Tenth Circuit

reversal is to impose a double tax; the clearly stated Con-

gressional intent was to eliminate one. So how did the

Court come by its reversal?

The Court next turns to speculate*® the Congressional

intent concerning the applicability of “tax-benefit princi-

ples” in cases under Section 337. It stated its conclusion

with great brevity:

“The statute used a definition of property in § 337

parallel to that of assets (sic) in § 1221 of the 1954

19. 324 U.S. 331 (1945), and its companion case, United

States v. Cumberland Public Service Co., 338 U.S. 451 (1950).

20. And speculation is all that it is since neither the Senate

nor the House report even mentions “tax-benefit”, let alone sug-

gest how it should apply to Section 337. See S. Rep. No. 1622,

83d Cong., 2d Sess. 258 (1954); H. R. Rep. No. 1337, 83d Cong.,

2d Sess. A106 (1954).

Wie Rate A A ee MOR: ADDN EEE RA de PTT Te |

A70

Code.’ Moreover, there is no provision in the statute

showing an intent to alter or bar the application in

cases under § 337 of tax-benefit principles fashioned

under other provisions of the Code. Therefore, we

conclude that tax benefit principles are applicable

here as under other statutory provisions and that § 337

intended no disregard of them in liquidation cases.”

Ibid.

This is purely the arbitrary conclusion of the Court, un-

supported by legal authority. True enough, the opinion

says, “See Citizens Federal Savings & Loan Association of

Cleveland, 290 F.2d 932, 154 Ct. Cl. 305 (1961) and West

Seattle National Bank of Seattle v. Commissioner, 288

F.2d 47 (9th Cir. 1961)”*, but the Court’s reasoning for

the prefatory “see” is obvious enough.**

The Citizens Federal Savings & Loan case clearly in-

volves the same issue as West Seattle National Bank of

Seattle, whether the credit balance in a bad debt reserve

account is required to be credited to income in the year in

which the need for the reserve ceases, and if so whether

the credit to income is exempt from tax if the corporation

has duly adopted a Section 337 plan of liquidation.

The irony of the Tenth Circuit’s reliance upon West

Seattle lies not only in the fact that the Tax Court opin-

ion in the Kansas case pointed out clearly that West Seattle

21. This foretells the gymnastics to come upon its second

conclusion.

22. 414 F.2d at 1287.

23. The signal word “see” indicates that the cited authority

constitutes basic source material supporting an opinion or con-

clusion of either law or fact drawn in a textual statement. It

indicates that the asserted opinion or conclusion will be suggested

by an examination of the cited authority rather than that the

opinion or conclusion is stated by the cited authority. A Uniform

System of Citation 87 (11th ed. 1967) (italics added).

Oe SER s ere ot

AT7l1

did not involve any gain from the sale of assets, but also

in the fact that the Ninth Circuit’s opinion in West Seattle

affirms the decision of the Tax Court below, 33 T.C. 341

(1959)! The Tax Court opinion in West Seattle is

straightforward and squarely to the point:

“The income here sought to be taxed did not arise

from the sale of assets. The only relation the sale of

petitioner’s assets had to this income is that it re-

moved the necessity for maintaining the reserve for

bad debts because petitioner no longer held receiv-

ables, the full collection of which might be doubtful.”

33 T.C. at 344.

And with respect to the nature of the item being dealt

with the Tax Court further observed:

“As we stated in Geyer, Cornell & Newell, Inc., su-

pra, a reserve for bad debts consists of entries upon

books of account. It is neither an asset nor a liabil-

ity. . . . Unlike an asset or liability it cannot be trans-

ferred to any other entity...” Ibid.

The decision of the Tax Court in West Seattle was

affirmed by the Ninth Circuit, not reversed, and the in-

sertion by the Tenth Circuit of language from the Ninth

Circuit opinion out of context* clearly fails to support the

premise for which it is cited since a bad debt reserve is

something which by its very nature cannot be sold or

transferred.

Citizens Federal Savings & Loan, supra, relies heavily

upon the Tax Court opinion in West Seattle and cites the

24. “* * * increment realized in this area over and beyond

adjusted basis does not then represent any gain in capital or

asset value.” 288 F.2d at 49, cited at 414 F.2d 1287. “This

area”, read in context, clearly refers only to “a bad debt re-

covery.” 288 F.2d at 49.

AT72

language above quoted, “The income here sought to be

taxed did not arise from the sale of assets.” 290 F.2d at

936.22 Hence, the Court’s initial premise in the Kansas

case is obviously incorrect. The bad debt reserves in

Citizens and West Seattle were taxed not because the tax

benefit rule applies to Section 337, but because by the

Court’s own words, there was no sale.

In a recent decision of the United States Supreme

Court in Nash v. United States, 398 U.S. 1 (May 18, 1970),

which was subsequent to the Tenth Circuit decision in

Anders (June 20-August 6, 1969), the Court there held

that although the “need” for a bad debt reserve had ended

with the transfer of the accounts receivable to several

corporations pursuant to Section 351 of the Internal Rev-

enue Code, the end of that need did not mean a “recovery”

within the meaning of the so-called “tax-benefit rule”. As

the court said, it was there dealing with § 351(a) of the

Code which provided specifically for the nonrecognition

of gain under the circumstances there described, just as

here we are dealing with a similar provision in Section

337. Plaintiff submits that the effect of the holding in

the Nash case is to overrule the holdings in West Seattle

National Bank v. Commissioners, supra, and Citizens Fed-

eral Savings & Loan, supra, concerning the treatment of

bad debt reserves in a Section 337 liquidation. Citizens

Acceptance Corporation v. United States, 320 F. Supp. 798,

804 (D. Del. 1971). This being the case the Tenth Cir-

cuit’s opinion in Commissioner v. Anders, supra, which

purports to be based thereon, should, plaintiff submits also

be deemed to be overruled by Nash.

Nor does the Tenth Circuit’s second premise withstand

scrutiny any better. The Court cbserves further:

. 25. Cf. Perry v. United States, 160 F. Supp. 270 (Ct. Cl.

1958).

A73

“Under such (tax benefit) principles the proceeds of

the rental items should properly be treated as recoup-

ment of the expense charges.” 414 F.2d at 1287-1288.

But its authorities** support no such conclusions. Most

have already been distinguished herein previously.” As

for the remainder, they are equally inapropos. Merchants

National Bank of Mobile v. Commissioner, 199 F.2d

657 (5th Cir. 1952) obviously has nothing to do with Sec-

tion 337, having been decided two years prior to its enact-

ment and involving the taxable year 1944. In any event

the issue is whether the amounts received from the sale of

notes receivable charged off to bad debts in an earlier year

constitute ordinary income or capital gain. Protestations

thereof by the defendant herein notwithstanding, this is

not and has never been the issue in the Section 337 case**

such as this. William Eugene Monday, Jr., 16 TCM 1

(1957), affirmed per curiam, 252 F.2d 789 (6th Cir. 1958),

cert. denied, 358 U.S. 883 (1958) involves two issues, one

on ordinary income v. capital gain on the sale of defense

housing units and another on the taxation of mortgagee’s

escrow accounts; neither the tax benefit rule nor Section

337 are remotely involved. No serious contention can be

made that Lloyd H. Faidley, 8 T.C. 1170 (1947), involves

a sale of any variety; obviously it does not involve Sec-

tion 337.

The Court’s last premise, representing an entirely new

approach by the Commissioner from the Tax Court to the

26. Again preceded by “see”. See n. 23, supra.

27. Alice Phelan Sullivan Corporation v. United States,

supra; Citizens Federal Savings & Loan Association of Cleveland

v. United States, supra; West Seattle National Bank of Seattle v.

Commissioner, supra; Commissioner v. First State Bank of Strat-

ford, supra.

28. See the plaintiff’s statement of its alternative position

herein, p. 13, supra.

4d aa behipt a hh sis

Daw ek

“a

aga he UNE RR AMS OES AIRS

> Be

tht Git

A74

Appellate Court, is not at once apparent from the opinion

of the Tenth Circuit, though developed at somewhat

greater length by the Commissioner’s brief and oral argu-

ment.” Briefly stated the Commissioner’s “new theory”

was to the effect that:

(1) the tax benefit rule is an exception to the capi-

tal gains statute, LR.C. 1954, Section 1221;

(2) the definition of capital asset in Section 1221 is

substantially the same as the definition of prop-

erty in Section 337 (b);

(3) therefore, the tax benefit rule is applicable to

Section 337.

The difficulty with this premise is two-fold: the tax

benefit rule is not an exception to the capital gains stat-

ute; and whether or not the rental items in question were

capital or non-capital assets is, they were property so long

as all assets were sold to one purchaser in one transaction.

Whether such premise was actually accepted by the Court

is difficult to tell:

“The fact that a transaction mvolves disposition of

property does not compel treatment of the proceeds

as gain from such a transfer. Commissioner v. Gil-

lette Motor Co. (sic), 364 U.S. 130, 134... United

States v. Eidson, 310 F.2d 111, 113-114...” 414 F.2d

at 1288.

The issue in Gillette Motor Transport was clearly whether

amounts received by the taxpayer from the government

as compensation for the temporary taking by the govern-

ment of the carrier’s business facilities during World War

29. Including a totally-unexplainable citation to Corn Prod-

ducts Ref. Co. v. Commissioner, 350 U.S. 46 (1956), rehearing de-

nied, 350 U.S. 943 (1956).

A75

II represented ordinary income or capital gain within the

meaning of LR.C. 1939, § 117(j) (IR.C. 1954, § 1221).

The property in question was the right to determine freely

what use to make of the taxpayer’s transportation facili-

ties. The Supreme Court did not hold that such right was

not property; to the contrary, it said to the taxpayer’s

contention that it had been deprived of property, “That

is indeed true.” 364 U.S. at 133. What it did hold was

that while the right was property, it was simply not a

capital asset. Amounts received therefor were ordinary

income. Gillette Motor Transport clearly does not sup-

port the premise for which it is cited by the Tenth Cir-

cuit, and that Court’s failure to make reference to the only

real issue in Gillette can hardly contribute to a sound solu-

tion to the problem at hand. One has only to read the

citation in the Eidson case to realize that Gillette is

authority simply for the proposition, “TWjhat has many

times been made clear by the Supreme Court - - - it is

not every transfer for a consideration of property that

gives rise to a capital gain.” 310 F.2d at 113. Certainly,

Gillette has nothing to do with tax benefit principles.

Whether or not the rental items in issue were capital

assets, they were clearly “property” within the meaning

of Section 337(b) and the regulations thereunder. And

there was clearly a sale. It is submitted that the decision

of the Tenth Circuit in Anders v. Commissioner is clearly

erroneous, is not supported by the authorities cited therein,

and should not be determinative of the decision of this

Court herein.

III. Defendant Is Not Entitled to Judgment As a

Matter of Law; Its Motion for Summary Judgment Should

Be Denied.

Defendant has here filed a Motion for Summary Judg-

ment pursuant to Rule 101 of the Rules of this Court.

se aii Lote ap tei ah

“HE ASL AS ih AAE IE BB Susie

Die lide Rai

GE ERR ES WE TAREE

A76

Since this rule is substantially the same as Rule 56 of the

Federal Rules of Civil Procedure, the practice and inter-

pretation of Rule 56 in the Federal District Court should

be here considered by this Court. Love V. United States,

104 F. Supp. 102 (Ct. Cl. 1952).

It is axiomatic that if a genuine issue of material fact

exists in a dispute, the case cannot be ripe for disposition

by summary judgment. Washington v. Cameron, 411 F.2d

705 (D. C. Cir. 1969). The burden of proving that there

is no genuine issue as to any material fact is here on the

defendant, the moving party. In sustaining his burden,

defendant must demonstrate positively and clearly that

there is no genuine issue of fact, and any doubt as to the

existence of such issue must be resolved against the mov-

ing party. 2361 State Corp. v. Sealy, Inc., 402 F.2d 370

(7th Cir. 1968). The inferences to be drawn from the

underlying facts contained in defendant’s motion herein

must be viewed in the light most favorable to plaintiff,

the opposing party. Adickes v. Kress & Co., 398 U.S. 144

(1970).

There were three specific issues of fact in the Kansas

case: Did the rental items constitute property within

the meaning of Section 337(b)? If the rental items did

not constitute property as defined by Section 337(b) (1)

and the regulations thereunder, did they constitute property

within the inventory exception of Section 337(b) (2)?

Was there a sale or exchange of property within Section

337(a)? In the Kansas case the Tax Court determined

each of these issues of fact in favor of the taxpayer; the

holding of the Tenth Circuit with respect thereto can

most charitably be said to be “ynclear”. In any event, the

Tenth Circuit is not, or should not be the finder of facts

in any case. Under such circumstances, how can defendant

seriously contend that no genuine issue of fact exists here?

AT77

As plaintiff has pointed out at length earlier, the Tenth

Circuit decision in Anders v. Commissioner is clearly er-

roneous. And the other cases cited by defendant in his

motion add nothing to the rational solution of the issue.*°

Further, plaintiff submits that the Supreme Court decision

in Nash v. United States, supra, has overruled West Seattle

National Bank, supra, and Citizens Federal Savings &

Loan, supra, relied upon so heavily by the Tenth Circuit

in the Anders case.

In any event, were the Anders issue to come again

before the Tax Court, that Court would not be bound by

the Tenth Circuit’s reversal of its prior decision, unless

the case originated in the Tenth Circuit. Jack E. Golsen,

54 T.C. 742 (1970); Arthur L. Lawrence, 27 T.C. 713 (1957).

Even if appeal were to lie to the Tenth Circuit, the Golsen

rule is only a rule of practicality to foster “efficient and

harmonious judicial administration”. It does not permit

the Tax Court to avoid its judicial responsibility as a court

30. S.E. Evans, Inc. v. United States, 317 F. Supp. 423 (W.D.

Ark. Sept. 17, 1970) and Bishop v. United States, 324 F. Supp.

1105 (M.D. Ga. Jan. 7, 1971) merely parrot the language of Com-

missioner v. Anders, supra, and Spitalny v. United States, 430

F.2d 195 (9th Cir. July 29, 1970). If the Tenth Circuit had diffi-

culty in rationalizing its conclusion in Anders, it was nothing

compared to the ordeal of the Ninth Circuit in Spitalny, which

found it necessary to “fictionalize” the question in this way:

“We agree that the feed and supplies are ‘property’ under

§ 337(b) and, accordingly, that ‘gain’ realized on their sale

shall not be recognized. The crucial question, however, is

whether gain was realized.” 430 ‘F.2d at 198.

Logical enough to this point. But now the paradoxical words

begin:

“The assignment of a zero basis to expensed items is not in

response to adjustments in valuation. It amounts, rather, to

a present fictional conversion (sic) of that ‘property’ into

a consumed item of expense. If the feed and supplies are

to revert to ‘property’ they should be réconverted. They

should not at the same time be property and still retain

attributes of a fictional nonentity.” Ibid.

Fiction, this may well be. Tax law, it is not!

set Cae dled cabin

Patti a ee ‘

A78

of national jurisdiction. Oddee Smith, 55 T.C. 260 at 269

(1970).

The substantive question here presented is one of first

impression in this Court. There are material issues of fact.

Defendant is not entitled to judgment as a matter of law.

WHEREFORE, plaintiff prays ‘that defendant's Mo-

tion for Summary Judgment herein be DENIED.

Respectfully submitted,

Harlow B. King

Attorney for Plaintiff

A7S

Appendix A

STATUTES AND REGULATIONS

Statutes:

Sec. 337 [1954 Code]. (a) GENERAL RULE—If—

(1) acorporation adopts a plan of complete liqui-

dation on or after June 22, 1954, and

(2) within the 12-month period beginning on the

date of the adoption of such plan, all of the assets of

the corporation are distributed in complete liquidation,

less assets retained to meet claims,

then no gain or loss shall be recognized to such corpora-

tion from the sale or exchange by it of property within

such 12-month period.

(b) PROPERTY DEFINED—

(1) IN GENERAL—For purposes of subsection

(a), the term “property” does not include—

(A) stock in trade of the corporation, or other

property of a kind which would properly be included

in the inventory of the corporation if on hand at the

close of the taxable year, and property held by the

corporation primarily for sale to customers in the

ordinary course of its trade or business,

(B) installment obligations acquired in respect

of the sale or exchange (without regard to whether

such sale or exchange occurred before, on, or after

the date of the adoption of the plan referred to in

subsection (a)) of stock in trade or other property

described in subparagraph (A) of this paragraph,

and

of property (other than property described in sub-

paragraph (A)) sold or exchanged before the date

of the adoption of such plan of liquidation.

(2) NONRECOGNITION WITH RESPECT TO

INVENTORY IN CERTAIN CASES.—Notwithstand-

ing paragraph (1) of this subsection, if substantially

all of the property described in subparagraph (A) of

such paragraph (1) which is attributable to a trade

or business of the corporation is, in accordance with

this section, sold or exchanged to one person in one

transaction, then for purposes of subsection (a) the

term “property” includes—

(A) such property so sold or exchanged, and

(B) installment obligations acquired in respect

of such sale or exchange.

Sec. 351 [1954 Code]. (a) GENERAL RULE.—No"

gain or loss shall be recognized if property is transferred

to a corporation (including, in the case of transfers made

on or before June 30, 1967, an investment company) by

one or more persons solely in exchange for stock or se-

curities in such corporation and immediately after the ex-

change such person or persons are in control (as defined

in section 368(c)) of the corporation. For purposes of this

section, stock or securities issued for services shall not be

considered as issued in return for property.

A80

A8l

(1) stock in trade of the taxpayer or other prop-

erty of a kind which would properly be included in

the inventory of the taxpayer if on hand at the close

of the taxable year, or property held by the taxpayer

primarily for sale to customers in the ordinary course

of his trade or business;

26 U.S.C. § 7482. Courts of review

(a) Jurisdiction—The United States Courts of Ap-

shall have exclusive jurisdiction to review the de-

cisions of the Tax Court except as provided in section

1254 of Title 28 of the United States Code in the same

manner and to the same extent as decisions of the district

courts in civil actions tried without a jury; and the judg-

ment of any such court shall be final, except that it shall

be subject to review by the Supreme Court of the United

States upon certiorari, in the manner provided in section

1254 of Title 28 of the United States Code.

Regulation:

§ 1.162-3 Cost of materials

Taxpayers carrying materials and supplies on hand

should include in expenses the charges for materials and

supplies only in the amount that they are actually con-

sumed and used in operation during the taxable year for

which the return is made, provided that the costs of such

materials and supplies have not been deducted in deter-

mining the net income or loss or taxable income for any

previous year. If a taxpayer carries incidental materials

or supplies on hand for which no record of consumption

is kept or of which physical inventories at the beginning

and end of the year are not taken, it will be permissible

a Ah

oe -

A82

for the taxpayer to include in his expenses and to deduct

from gross income the total cost of such supplies and ma-

terials as were purchased during the taxable year for which

the return is made, provided the taxable income is clearly

reflected by this method.

§ 1.337-3. Property Defined. —

(a) Except as provided in section 337(b) (2) and

this section, the term “property” as used in section 337 (a)

and § 1.337-1 does not include, (1) stock in trade of the cor-

poration, or other property of a kind which would prop-

erly be included in the inventory of the corporation if on

hand at the close of the taxable year and property held

by the corporation primarily for sale to customers in the

ordinary course of its trade or business (hereinafter for

purposes of section 337 referred to as “inventory”), (2)

installment obligations acquired at any time from the sale

or exchange of inventory, or (3) installment obligations

acquired from the sale or exchange of property (other

than inventory) prior to the adoption of the plan of liqui-

dation. With the exceptions listed in this paragraph, the

term “property” includes all assets owned by a corporation.

(b) Except as provided in paragraph (c) of this sec-

tion, if substantially all of the inventory is sold or ex-

changed to one person in one transaction, then for the

purpose of section 337(a) the term “property” shall in-

clude:

(1) The inventory so sold or exchanged, and

(2) Installment obligations acquired in such sale or

exchange. For this purpose, the term “substantially all”

means substantially all of the inventory at the time of

the sale and includes inventory subject to liabilities,

A83

specific or otherwise. Section 337(b)(2) shall be inap-

plicable if the inventory so sold is replaced by like inven-

tory, or by a new kind of inventory.

§ 1.446-1 General rule for methods of accounting

to the provisions of paragraphs (a) and (b) of this sec-

tion, a taxpayer may compute his taxable income under

any of the following methods of accounting:

Be ~ *

(iv) Combinations of the foregoing methods. (a)

In accordance with the following rules, any combination

of the foregoing methods of accounting will be permitted

in connection with a trade or business if such combination

clearly reflects income and is consistently used. Where a

combination of methods of accounting includes any special

methods, such as those referred to in subdivision (iii) of

this subparagraph, the taxpayer must comply with the

requirements relating to such special methods. A tax-

payer using an accrual method of accounting with respect

to purchases and sales may use the cash method in com-

puting all other items of income and expense. However,

a taxpayer who uses the cash method of accounting in

computing gross income from his trade or business shall

use the cash method in computing expenses of such trade

or business. Similarly, a taxpayer who uses an accrual

method of accounting in computing business expenses

shall use an accrual method in computing items affecting

gross income from his trade or business.

anaemia ae “ “-

A84

§ 1.471-1 Need for inventories

In order to reflect taxable income correctly, inven-

tories at the beginning and end of each taxable year are

necessary in every case in which the production, purchase,

or sale of merchandise is an income-producing factor.

The inventory should include all finished or partly finished

goods and, in the case of raw materials and supplies, only

those which have been acquired for sale or which will

physically become a part of merchandise intended for sale,

in which class fall containers, such as kegs, bottles, and

cases, whether returnable or not, if title thereto will pass

to the purchaser of the product to be sold therein. Mer-

chandise should be included in the inventory only if title

thereto is vested in the taxpayer. Accordingly, the seller

should include in his inventory goods under contract for

sale but not yet segregated and applied to the contract and

goods out upon consignment, but should exclude from in-

ventory goods sold (including containers), title to which

has passed to the purchaser. A purchaser should include

in inventory merchandise purchased (including contain-

ers), title to which has passed to him, although such mer-

chandise is in transit or for other reasons has not been

reduced to physical possession, but should not include goods

ordered for future delivery, transfer of title to which has

not yet been effected. (But see § 1.472-1.)

A85

APPENDIX E-3

Reply Brief for the United States

\N THE UNITED STATES COURT OF CLAIMS

No. 35-71

D. B. ANDERS,

Plaintiff,

Vv.

UNITED STATES OF AMERICA,

Defendant.

REPLY BRIEF FOR THE UNITED STATES

Plaintiff opposes the Government’s motion for sum-

mary judgment on two grounds: (1) that there are genu-

ine issues of material fact, and (2) that, as a matter of

law, the tax benefit rule is not applicable to a recovery

of a prior deduction through a Section 337 liquidation sale.

The following comments, in addition to those set forth in

our initial brief, are submitted in reply.

Plaintiff characterizes the questions as to whether the

rental items here involved were “property” within the

meaning of Section 337(b) (either under Section 337 (b) (1)

or as “inventory” under Section 337(b)(2)) and whether

there was a “sale or exchange” within the meaning of Sec-

tion 337(a), as being disputed factual issues. We disagree.

Plaintiff (Br. 4) admittedly does not dispute the facts set

forth in defendant’s initial brief; no further facts are sub-

A86

mitted by plaintiff to disclose any basis for dispute; ac-

cordingly, the resolution of these issues becomes a question

of law on the undisputed facts. See United States v. Win- |

throp, 417 F. 2d 905, 910 (C.A. 5, 1969). In any event,

whether the rental items in question fit literally within

the provisions of Section 337 of the 1954 Code is not de-

terminative in plaintiff's favor. Assuming, arguendo, that

they do, the question here is whether tax benefit principles

nevertheless apply to require the recognition as ordinary

income of the previously expensed cost of the rental items

which was recovered in the liquidation sale. We wish to

note that should this Court find that the defendant's legal

contention is in error, plaintiff would accordingly be en-

titled to judgment in its behalf, though plaintiff's response

to defendant’s motion for summary judgment did not con-

tain a cross-motion.

As our opening brief noted, the application of the tax

benefit rule set forth by this Court in Alice Phelan Sul-

livan Corp. v. United States, 180 Ct. Cl. 659, 381 F. 2d 399

(1967),’ to the recovery of a prior deduction through a

Section 337 liquidation sale has been squarely upheld by

the Ninth and Tenth Circuit Courts of Appeals. Spitalny |

v. United States, 430 F. 2d 195 (C.A. 9, 1970); Commissioner.

vy. Anders, 414 F. 2d 1283 (C.A. 10, 1969), cert. denied, 396

U.S. 958 (1969). We add that the issue is now pending

<1]

Ln RBS 4

a): This Court said (180 Ct. Cl., p. 663, 381 F. 2d, pp. 40l- ,

$ Yet the principle is well engrained in our tax law that

¥ the return or recovery of property that was once the subject

¥ of an income tax deduction must be treated as income in the

i year of its recovery. (Citations omitted.) The only limita-

3 tion upon that principle is the so-called “tax-benefit rule.”

i This rule permits exclusion of the recovered item from income

: so long as its initial use as a deduction did not provide a

tax saving. (Citations omitted.)

a There is no showing here that the deduction of the cost of the

rental items in question did not provide a tax saving.

A87

before the Third Circuit Court of Appeals in Connery v.

United States (No. 19,413), involving prepaid advertising

expenses in a Section 337 liquidation, on the taxpayer’s

appeal from the District Court’s decision. (Connery v.

United States, 26 A.F.T.R. 2d 5123 (N.J., June 29, 1970).)

The Connery case was argued before the Third Circuit on

March 14, 1972.

Contrary to plaintiff's assertion (Br. 18, 19), Spitalny

and Anders do not contravene the purpose of Section 337.

Section 337 was designed to eliminate the distinction be-

tween Court Holding Co.” situations and Cumberland Pub.

Serv. Co. situations. See Bittker and Eustice, Federal In-

come of Corporations and Shareholders (2d ed.), pp. 402,

404 (fn. 96). The application of the tax benefit rule here

is not involved with that distinction; in either situation (a

sale by the corporation as in Court Holding, or a distribu-

tion to, and sale by, the shareholders as in Cumberland Pub.

Serv.), we submit that the tax benefit rule would apply

to cause corporate recognition of the recovery of the pre-

viously deducted cost of the rental items here involved.

Commissioner v. Anders, supra, p. 1286; Bishop v. United

States, 324 F. Supp. 1105, 1110-1111 (M.D. Ga., 1971).

Plaintiff maintains (Br. 22, 23) that the United States

Supreme Court’s decision in Nash v. United States, 398

US. 1 (1970), in effect overrules the holdings in West

Seattle National Bank of Seattle v. Commissioner, 288 F. 2d

47 (C.A. 9, 1961), and Citizens Federal S. & L. Assn. of

Cleveland v. United States, 154 Ct. Cl. 305, 290 F. 2d 932

(1961). Further, plaintiff maintains that Nash should be

deemed to overrule the Tenth Circuit’s decision in Com-

missioner v. Anders, supra. Nash involved the transfer of

2. Commissioner v. Court Holding Co., 324 U.S. 331 (1945).

sss) United States v. Cumberland Pub. Serv. Co., 338 U.S. 451

A88 ¥

partnership accounts receivable at net value (the face

value of the amounts receivable less the amount of bad

debt reserve) to several corporations in exchange for

stock under Section 351 of the 1954 Code, and the Su-

preme Court held that although the partnership business

had terminated and it had no “need” for the reserve

(which had previously been the test for recognition as

income of bad debt reserves under tax benefit principles),

the tax benefit rule did not apply since the partnership

received no gain as a result of the transaction and there

was no “recovery” of the benefit of the bad debt reserve.

West Seattle National Bank involved a liquidation sale

under Section 337 of accounts receivable at face (not net)

value, and the Ninth Circuit held under tax benefit

principles that the taxpayer’s bad debt reserve should be

recognized as ordinary income and was not insulated

from recognition under Section 337. Since there was a

“recovery” in West Seattle National Bank, we submit that

the result is unchanged by Nash. See Bishop v. United

States, supra at 324 F. Supp., pp. 1111-1112, and Citizens’

Acceptance Corp. v. United States, 320 F. Supp. 798 (Del.,

1971). While the opinion in Citizens Federal S. & L.

Assn., supra, does not disclose whether the federal insur-

ance reserve there involved was “recovered” in the liqui-

dation sale, in absence of which a different result might

obtain under Nash, it is unnecessary to so determine here,

since it is clear that in the instant action the previously

expensed cost of the rental items was, in fact, recovered.

Accordingly, we believe the decision in Nash confirms,

rather than overrules, the rationale of Spitalny and

Anders.

While the advantage gained through the full expens-

ing of these items in one year is normally balanced in a

going business by the lack of deduction therefor in the

ini hoc RS WO Ss kin mae ae Tce ae AN A ET ea hr Oe

Fitter a. fa Kikwead A Ny alae

ene

‘Vea

A89

following years, the effect of liquidation here (or of a sale

without a Section 337 liquidation) is to destroy that bal-

ance, which is redressed by the application of the tax

benefit rule. See Spitalny v. United States, supra, 430

F. 2d, p. 197.

CONCLUSION

The petition should be dismissed.

Respectfully submitted,

/s/ Scott P. Crampton

Scott P. Crampton,

Assistant Attorney General,

Philip R. Miller,

Joseph Kovner,

Kenneth R. Boiarsky,

Attorneys,

Department of Justice,

Washington, D.C. 20530

MARCH, 1972.

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.