# Petition for Writ of Certiorari — Anders v. United States > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_1515%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1972 - **Citation:** 409 U.S. 1064 ## Text 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 II 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. ae sig Shek Oana Hm «eater 0% Sven thal or~- 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 ER pe .u ee 13 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. 14 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 15 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 16 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. 17 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 18 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. 19 “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 Al 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- a Ve aa EE ELE IEEE ta ME OIE me PE SS — ay ™ A2 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 A3 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). ET sR 5 pais ace teeth tie 8! et SAREE Sy AEE SS Rew eee ae ran ‘ A4 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. om Rey ote A5 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 A6 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 (C) installment obligations acquired in re- 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. (c) Limitations.— (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 A8 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 Ag 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 ai He tii He da i (i 2 ; i il 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 ~ i | e 5 Fas | 1 3 4 i it il $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 (c) | Goodwill and customers patron- 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: a . 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. SS 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 ee ee ' 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. (c) A memorandum of contentions of fact and law, 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, ee 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. (c) A list of the proposed defense exhibits, meeting 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. dL 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. (c) A statement admitting or denying the admissi- 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. (c) Memorandum of Contentions of Fact and Law (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. pa 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 (C) installment obligations acquired in re- 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- — - _» ae Clb 7 il sagt aa Hut a ee ee ee ee ee ee ll ee ae a 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 vr ab 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: r 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. (c) Memorandum of Contentions of Fact and Law (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 i % i 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 a 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? ¢ oF 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. HH a ite Fue ae re : fits: ; [ aL | rs 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 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 ta 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 7 (C) installment obligations acquired in respect | 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 (c) Permissible methods—(1) In general. Subject 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- y 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 3 4 3 i . 5 <1] . a 4 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 Se rn 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. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_1515%3A1. Public record. Not legal advice.