Petition for Writ of Certiorari — Braswell Motor Freight Lines, Inc. v. United States

IN THE

SUPREME Count OF THE UNITED STATES

OCTOBER TERM 1975

73 ~ 68 3

Number...

ee

BRASWELL MOTOR FREIGHT LINES, INC.

Petitioner

Vv.

UNITED STATES OF AMERICA,

Respondent.

Petition for Writ of Certiorari to the

United States Court of Appeals

for the Fifth Circuit

CHRISTOPHER, BAILEY & TAYLOR

M. WARD BAILEY

2412 Continental Life Building

Fort Worth, Texas 76102

Counsel for Petitioner

4

Fort Worth Brief Printing Co., 610 S. Jennings Street Phone 332-4070

INDEX

Page

TABLE OF AUTHORITIES a iii

I. PETITION re |

II. OPINIONS BELOW, CITATIONS TO 1

III. JURISDICTION 2

IV. QUESTIONS PRESENTED. ....00.0........c..c-ccescecceseseeeeesees 2

V. FEDERAL STATUTES AND

REGULATIONS INVOLVED 00000002o......ccceccecceeceeseeeeseenee 3

VI. STATEMENT OF THE CASE ...00000........cccccccccsseseeess 4

VII. REASONS FOR GRANTING THE WRIT .................. 9

1. The “all or nothing loss” issue is a case of first

impression and there has been no judicial ex-

planation or interpretation to guide other tax-

payers, lawyers, judges or legal scholars. .............. 9 ;

2. There is Supreme Court and appellate court

precedent for several of the points raised by

a na aS ECTS EIS Soe 12

3. The startling application of form over sub-

stance and the failure to allow the tax loss to

follow the economic loss requires this Court’s

SERED TE SS AIO 15

4. This Court needs to clarify the question of

when the taxable year of the corporation be-

gins and the relationship between the require-

ment of filing a return and the concept of the

taxable year. 16

5. The lower courts entirely overlooked the fact

that the 1957 return filed by Subsidiary clearly

stated that the corporation had no activity and

that it was dormant—a mere candidate—prior

to 7-1-57, and that the return was for the short

period 7/1/57-12/31/57 which was the period

of affiliation with Parent and which entitles

Parent to the loss carry-over. 18

INDEX (Continued)

Page

- REQUEST FOR HEARING 19

CONCLUSION 19

CERTIFICATE OF SERVICE 20

ENTRY OF APPEARANCE .20

INDEX TO APPENDIX AND APPENDIX ................ 21

4

i

i

TABLE OF AUTHORITIES

Page

Bongiovanni v. Commissioner (CA 2d 1972),

73-1 U.S.T.C. 99133 14

Central Hanover Bank & Trust Co. v. Commissioner,

159 F.2d 167, 169 (2d Cir. 1947) 13

F. C. Donovan Ine. v. U. S.

(CA 1 1958), 261 F.2d 470 ...... 14

Libson Shops, Inc. v. Koehler, 353 U.S. 328 (1957) ................ 15

Moline Properties v. Commissioner, 319 U.S. 436 (1943) ...... 15

National Carbide Corporation v. Commissioner,

336 U. S. 422 (1949) 15

Northern Railroad v. U. S., 334 F.2d 936 (CA 1, 1964)............ 16

World Service Life Insurance Company v. U. S.

(CA 8th 1973), 73-1 U.S.T.C. 99162 14

United States v. American Trucking Associations,

Bn, TD Tn Ws es UD CID ecaccceresenssessinsevnsctceniccevisnannioce 13

Title 28 U.S.C. §1254(1) .. 2

Title 28 U.S.C. §1346........ 6

Treasury Regulation 1.443-1 4

Treasury Regulation §1.1502-31A(b) (3) (b),

26 C.F.R. 1502-31A/b) (8) (bd) .......2....ceeceeeeeeeeeeee 3,6

Treasury Regulation §1.6012-2 4,17

Internal Revenue Code, Section 172(b),

Title 26, U.S.C. §172(b) (1) (ce) 5

Internal Revenue Code, Section 441 $,17

Internal Revenue Code, Section 441 (b) (3) 8

Internal Revenue Code, Section 441(c) ..... 8

Internal Revenue Code, Section 443 3

Internal Revenue Code, Section 1501 ............... 8,7, 11

Internal Revenue Code, Section 1502 3, 7, 9,11

Internal Revenue Code, Section 6012 (a) (2) ...............20..e 3,17

Internal Revenue Code, Section 7701 (a) (23) .................. 3, 8,17

IN THE

SUPREME COURT OF THE UNITED STATES

BRASWELL MOTOR FREIGHT LINES, INC.

~ Petitioner

UNITED STATES OF AMERICA,

Respondent.

Petition for Writ | of Certiorari to the

United States Court of Appeals

for the Fifth Circuit

I. PETITION

Braswell Motor Freight Lines, Inc., Petitioner here-

in, prays that a writ of certiorari issue to review the

judgment of the United States Court of Appeals for

the Fifth Circuit and the denial of the Petition for Re-

hearing.

Il. CITATIONS TO OPINIONS BELOW

The opinion of the trial court, the United States

District Court for the Northern District of Texas, re-

ported at 72-2 U.S.T.C. $9675, is appended hereto at

page 22 of the Appendix.

The opinion of the appellate court, the United States

Court of Appeals for the Fifth Circuit, is a per curiam

affirmance without published opinion reported at 477

Srey PS a ee

i eee et lg a AOE Basra eile

Fed.2d 594 and at 73-2 U.S.T.C. 99520 and is append-

ed hereto at page 29 of the Appendix.

The Petition for Rehearing was denied by the Unit-

ed States Court of Appeals for the Fifth Circuit with-

out opinion and is not appended hereto.

Ill. JURISDICTION

The per curiam affirmance without published opin-

ion by the United States Court of Appeals for the

Fifth Circuit was entered June 1, 1973. The order

denying the Petition for Rehearing was entered by the

United States Court of Appeals for the Fifth Circuit

on July 23, 1973.

The jurisdiction is invoked under Title 28 U.S.C.

§1254(1).

IV. THE QUESTIONS PRESENTED

Two federal questions, with appertainances, are pre-

sented :

First, whether the regulation of the Commissioner

of Internal Revenue interpreting the consolidated re-

turn statutes is invalid, arbitrary, discriminatory and

illegal where the parent and subsidiary are required

to be affiliated for each day of the loss year in order

for any portion of the operating loss of the subsidiary

to be carried over to the consolidation and where the

parent had supplied all of the funds lost by the subsid-

iary during the six months of affiliation of the loss

year and the subsidiary had no other operations during

such year and no prior or subsequent affiliation other

than with the parent, in view of the consolidated re-

ee a

3

turn statutes specifically recognizing affiliation for a

fractional part of a year and requiring that the Com-

missioner’s regulations clearly reflect income tax lia-

bility.

This first question we shorthand as the “all or noth-

ing loss issue.”

Second, whether the taxable year of a corporation

began with its period of operations pursuant to the

grant of federal transportation authority where it was

required to be formed two years earlier solely to make

application for such authority, which may or may not

have been granted, and where during such two-year

interim period it had no operations, assets, employees,

activities, or income.

This second question we shorthand as the “taxable

year issue.”

V. FEDERAL STATUTES

AND REGULATIONS INVOLVED

The consolidated return statutes and one of the in-

terpretive regulations are in issue. The statutes are

Sections 1501 and 1502 of the Internal Revenue Code

of 1954, and are set forth at page 30 of the Appendix.

The regulation is Section 1.1502-31A(b) (3) (b) of the

Treasury Regulations on Income Tax, 26C.F.R. 1.1502-

31A(b)(3)(b) applicable to years prior to 1965, and

it is set forth at page 31 of the Appendix.

The “taxable year” statutes and regulations are in

issue. The statutes are Sections 441, 443, 6012(a) (2),

and 7701(a)(23) of the Internal Revenue Code of

Doe beter A NR AES RR

4

1954, Title 26 U.S.C., §441, 448, 6012(a) (2), and 7701

(a) (23), and are set forth at pages 31-34 of the

Appendix. The regulations are Sections 1.443-1 and

1.6012-2 of the Treasury Regulations on Income Tax,

26 C.F.R. 1.443-1 and 1.6012-2, and are set forth at

pages 35-36 of the Appendix.

VI. STATEMENT OF THE CASE

In May 1955, Hall Company, sometimes hereinaf-

ter referred to as Subsidiary, was formed by Mr. Hall

solely to acquire certain Federal transportation author-

ity owned by Mr. Hall and companies he controlled. In

June 1955, Mr. Hall and the companies he controlled,

including Hall Company, filed an application with the

Interstate Commerce Commission for the Hall Com-

pany to acquire such authority. Hall Company could

acquire no operating rights nor conduct any transpor-

tation operations until the application was approved

by the Interstate Commerce Commission and the trans-

action consummated. While the application was pend-

ing, Petitioner negotiated with Mr. Hall to acquire

such authority through the Hall Company and to ac-

quire certain other rights and properties owned by

Hall and companies he controlled for a total considera-

tion of $1,250,000.00. Petitioner then filed an appli-

cation with the Interstate Commerce Commission for

approval of such acquisitions. This application had to

be approved before Hall Company could acquire any

operating rights or conduct any transportation activi-

ties as a subsidiary of Petitioner. After the Interstate

Commerce Commission formally approved of the ap-

plications the transaction was consummated on July

5

1, 1957, at which time the operating rights and prop-

erties which Petitioner had acquired for $1,250,000.00

were transferred to Subsidiary as an investment in

Subsidiary and Subsidiary began operations.

Prior to July 1, 1957, Subsidiary had no assets, em-

ployees, income, expense, operations, or activities, and

had no authority to undertake the function which was

the sole basis for its formation. Consequently, Subsid-

iary filed no Federal income tax returns during such

period nor sought any waiver of any return require-

ment. Subsidiary did not know whether it would ever

become a viable entity for the purpose for which it

was formed until the applications were formally ap-

proved by the Interstate Commerce Commission and

the transactions consummated.

During the period July 1, 1957-December 31, 1957.

Subsidiary operated as a wholly-owned subsidiary of

Parent and incurred a $233,000.00 operating loss. Sub-

sidiary filed a separate Federal income tax return for

this short period of operations. Parent and Subsidiary

subsequently filed consolidated returns and on Janu-

ary 1, 1964, Subsidiary was merged into Parent. Of

the $233,000.00 operating loss sustained by Subsid-

iary from July 1-December 31, 1957, the remaining

$154,000.00 was claimed as an allowable loss carry-

over against the income of the Parent in 1964 under a

special seven-year carry-forward statute applicable to

regulated transportation companies (Section 172(b)

of the Internal Revenue Code of 1954, Title 26, U.S.C.

§172(b) (1) (c)).

The Commissioner of Internal Revenue disallowed

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6

the $154,000.00 loss carry-forward from Subsidiary to

Parent because of the requirement in the consolidated

return regulations applicable to years prior to 1965,

Section 1.1502-31A(b)(3)(b), that such loss be al-

lowed only if Parent and Subsidiary were numbers of

an affiliated group for each day of the 1957 loss year

(emphasis supplied). The Commissioner took the posi-

tion that Subsidiary was in existence prior to 1957 and

that its taxable year 1957 was January 1-December

31, 1957 and that Parent and Subsidiary were not af-

filiated for each day of the taxable year.

Parent filed a claim for refund and then a suit for

refund in U. S. District Court pursuant to Title 28

U.S.C. §1346. The District Court sustained the Com-

missioner and the Fifth Circuit affirmed per curiam

without a written opinion pursuant to its Local Rule

21. Parent’s Petition for Rehearing and suggestion

that the rehearing be en banc was denied.

Parent’s position on the “all or nothing loss” issue

is that Parent has suffered a $154,000.00 economic loss

and that it should also be entitled to the tax loss for

the reason that the rezulation denying such loss is in

opposition to the consclidated return statutes and con-

tains no valid ascertainable standard allowing the

amount of the allowable loss carry-over to be measured

by the amount of the Parent’s investment, the period

of affiliation during the loss year, and the period of

affiliation during which the loss was incurred. The

adamant refusal by the regulation to recognize any of

the loss unless all of the loss is recognized is so arbi-

trary as to be completely inconsistent with the concep-

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7

tual recognition of the results of operations arising

from affiliation for a fractional part of a year. Con-

gress recognized fractional year affiliation in Section

1501 and further required the Commissioner in Sec-

tion 1502 to prescribe consolidated return regulations

in such manner as “clearly to reflect the income-tax

liability.” The Commissioner may not legally take the

easy way out and deny fractional affiliation because

Section 1502 requires that he prescribe the various

factors necessary to determine the correct income tax

liability. Surely no one could argue that income tax

liability has been correctly reflected where the Bras-

well enterprise invested $1,250,000.00 at business risk

and lost $233,000.00 of which amount $154,000.00 has

been disallowed and where the $154,000.00 loss can

never be claimed by anyone else and inures to no one’s

benefit save the Government’s. It would be a simple

matter for the Commissioner to prescribe responsive

regulations which would properly measure the allow-

able loss carry-forward by taking into account during

the loss year the investment by the parent, the period

of affiliation, the period of affiliation during which the

loss arose, and whether the loss was otherwise avail-

able to the subsidiary or another parent by carry-over

to a separate return year or to another affiliation. The

regulation as written clearly reflects income tax liabil-

ity only in one instance but fails to clearly reflect in-

come tax liability in those other numerous factual situ-

ations which might arise. The regulation as written is

not a reasonable interpretation of the statute and dis-

torts the intent of Congress. This is a case of first im-

pression and it is imperative that this glaring inequity

Sree. POETS td %

8

be cured for the benefit of this taxpayer and other sim-

ilarly situated. Parent’s briefs contain references to

several instances where the appellate court has strick-

en regulations where literal compliance with such reg-

ulations was inconsistent with Congressional intent.

The position of the Parent with respect to the “tax-

able year issue” is that where a corporation is re-

quired to be formed for a single purpose and is unable

to assume any responsibilities or obligations with re-

spect to that purpose until approval is received from

a third party Governmental agency (which approval

may never be received), then the taxable year of such

corporation should not begin until it receives the ap-

proval and can begin operations as a viable entity.

Prior to that time it is a mere candidate, a corporate

shell without any assets, employees, operations, activi-

ties or income. It is true that the Subsidiary bylaws

provided for a calendar year but this is a proforma

adoption of bylaws and docs not prevent a short period

return from being filed for the period from the begin-

ning of operations until the end of the calendar year.

Section 441(b)(3) of the Internal Revenue Code of

1954 defines taxable year as the period for which a re-

turn is made if a return is made for a period of less

than 12 months. Nor did Subsidiary have an annual

accounting period in 1957 which is defined in Section

441(c) as the annual period on the basis of which the

taxpayer regularly computes his income in keeping his

books, because prior to July 1, 1957, Subsidiary had

no books or income and did not regularly compute any

income. Further, Section 7701(a) (23) of the Internal

Revenue Code of 1954 defines taxable year as the cal-

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9

endar year or fiscal year upon the basis of which the

taxable income is computed and in the case of a return

made for a fractional part of the year it is the period

for which the return is made. With no income prior to

July 1, 1957, it is axiomatic that the taxable year of

Subsidiary had to be the short period beginning July 1.

All of the cases cited by the Government and the

District Court on the taxable year issue involve situa-

tions where the corporation was the agent of its share-

holders, the alter ego of the shareholders, or in a ter-

mination procedure, and where the income was attrib-

utable to either the corporation or its shareholders.

Here, the economic loss incurred by the Parent enter-

prise must devolve upon Parent or be completely lost.

There is no inequity in allowing the loss; the Govern-

ment has no mission to upset any undeserved tax ben-

efits; the loss was real enterprise loss incurred for bus-

iness reasons and the disallowance is based on an un-

realistic and highly technical regulation and a failure

to recognize when the Subsidiary became a sufficiently

viable entity to assume the responsibility of having a

taxable year.

VII. REASONS FOR GRANTING THE WRIT

1. The “all or nothing loss” issue is a case of first im-

pression and there has been no judicial explanation

or interpretation to guide other taxpayers, lawyers,

judges or legal scholars.

The regulation in question, Section 1.1502-31A(b)

(3) (b) of the consolidated return regulations, was en-

acted by the Commissioner in 1965 and allowed consol-

PO PAB Sm Ey td I OE -

10

idations operating loss carry-overs from separate re-

turn years of affiliated companies. However, the Com-

missioner applied a limitation sanction that the com-

panies must have been affiliated for each day of the

loss year. This sanction raises many questions where

for valid business reasons the subsidiary may have

been affiliated with the parent for only a portion of the

loss year. The aim of the Commissioner is laudatory to

prescribe limiting rules for guidance of taxpayers and

to avoid misunderstandings and misinterpretations.

However, these rules must be fair and equitable and,

so far as possible, correctly reflect income.

It is not difficult to conceive of many varied fact sit-

uations where the subsidiary may have been activated

or acquired during the loss year, where the subsidiary

may have been an active separate entity prior to affili-

ation during the less year, where the subsidiary may

have been an active separate entity after deaffiliation

during the loss vear, where the subsidiary may have

been a member of two or more affiliations during the

loss year, ad infinitum. Also, in each case described

above, the funds which were lost could have been sup-

plied in whole or in part by the various entities in-

volved. This is not to say that the Commissioner is re-

quired to anticipate and precisely prescribe for each

fact pattern which is likely to emerge but he is re-

quired to prescribe sufficient ascertainable standards

that will serve as a guide to taxpayers and their ad-

visors,

Here, it is unarguable that the Commissioner has

fai'ed to prescribe any ascertainable standard other

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than the “all or nothing” affiliation for each day of the

taxable year. The situation is similar to the old com-

mon law forms of action prior to the intervention of

the Chancellor — if the party aggrieved could not fit

squarely within the form of action then he had no

remedy. However, it is difficult to believe that the Com-

missioner may validly prescribe such limiting relief

provisions in view of the statutory directive of Section

1502 that the regulations should correctly reflect in-

come tax liability, and the conceptual recognition of

fractional affiliations in Section 1501.

All of the above considerations, plus the prevalence

of form over substance and plus the failure of the tax

loss to follow the economic loss, provide more than ade-

quate fodder to activate the judicial grist mill at the

appellate level. Present are the following:

1. A newly-enacted legislative regulation.

2. Failure to accord with Congressional intent.

3. Form over substance.

4. Failure to allow tax loss to recognize economic

loss.

5. No ascertainable standard for guidance.

6. An arbitrary fixed standard that applies to only

certain taxpayers.

7. Discrimination in application.

8. Substantial and perceptive legal arguments in

opposition.

9, Legal precedents at the appellate and Supreme

Court level to disregard specific language of the

regulations which leads to absurd results.

10. Enterprise loss disallowed to the enterprise.

12

Yet, with all of these factors present, any one of which

alone should require more explanation by the appel-

late court, the Fifth Circuit rendered a per curiam

affirmance without any written opinion. So, as the

matter now stands, without intervention of this Court

by way of granting the writ, the answers and inter-

pretations required by taxpayers, lawyers, judges and

scholars must await another courageous taxpayer and

the Braswell enterprise must be left to wonder what

the correct answers and interpretations truly are.

There are perceptive and interesting questions that

are directly in issue involving the need for the regula-

tory amendment, the language used, by the Commis-

sioner to meet that need, the obvious interpretation

utilizing the Commissioner’s language, and the result-

ing fair or unfair result obtained. The case is here and

the time is now to analyze the regulation and its ap-

plication. The taxpayer may be in error but, if so, it

deserves more explanation than a per curiam affirm-

ance without opinion — and this Court is the last re-

sort.

4

4

———

2. There is Supreme Court and appellate court prece-

dent for several of the points raised by Petitioner.

The entire thrust of the “all or nothing loss” feature

of the case is enforcement of a technical amendment to

a regulation which resulted in a very unfair failure to

allow the enterprise tax loss to recognize the enter-

prise economic loss. The Government has never con-

tended that the result was fair nor has the Govern-

ment ever argued that a decision for the Petitioner

would be unfair. The Government has not denied that

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this case constitutes an absurd result of an economic

loss not recognized in the tax loss. The only contention

the Government has made is for strict compliance with

the regulation. This Court spoke on too literal compli-

ance with the specific language in United States v.

American Trucking Associations, Inc., 310 U.S. 534,

543 (1940) as follows:

“When ... [plain] meaning has led to absurd or

futile results . . . this Court has looked beyond the

words to the purpose of the act. Frequently .. .

even when the plain meaning did not produce

absurd results but merely an unreasonable one

‘plainly at variance with the policy of the legisla-

tion as a whole’ this Court has followed that pur-

pose, rather than the literal words.”

That respected appellate court jurist, Judge Learned

Hand, also feared a too literal interpretation of the

wording used and his cautions were set forth in Cen-

tral Hanover Bank & Trust Co. v. Commissioner, 159

F.2d 167, 169 (2d Cir. 1947) as follows:

“There is no more likely way to misapprehend

the meaning of language—be it in a constitution,

a statute, a will or a contract—than to read the

words literally, forgetting the object which the

document as a whole is meant to secure. Nor is a

court ever less likely to do its duty than when,

with an obsequious show of submission, it disre-

gards the overriding purpose because the particu-

lar occasion which has arisen, was not foreseen.

That there are hazards in this is quite true; there

are hazards in all interpretations, at best a peril-

ous course between dangers on either hand; but it

scarcely helps to give so wide a berth to Charyb-

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14

dis’s maw that one is in danger of being impaled

upon Scylla’s rocks.” (Emphasis added).

Two recent appellate court cases holding the literal

language of the Commissioner’s regulations or literal

statutory language to be invalid are World Service

Life Insurance Co. v. U. S. (CA 8th 1973), 73-1 U.S.

T.C. 99162 (net operating loss carry-over in a “C”’

reorganization), and Bongiovanni v. Commissioner

(CA 2d 1972), 73-1 U.S.T.C. 99133 (gain recognized

on tax-free incorporation). The comments of the court

in the concluding paragraph of World Service Life In-

surance Company, supra, were

“.. places form over substance, ignores the eco-

nomic realities . . . and distorts the statutory

scheme and manifest intent of Congress. ... Such

distortion does not consistently interpret the stat-

ute and the regulation is, therefore, invalid.”

The appellate court in Bongiovanni, supra, had this to

say about the literal wording of the statute:

“However, we believe that at least on the facts in

this case, a too literal reading of the words of the

statute produces an inequitable result which can-

not be allowed to stand.”

As stated above, the Government does not deny that

the substantial economic loss was incurred by the

Braswell “entity” and on this unarguable point the

First Circuit commented as follows in F. C. Donovan,

Inc. v. U. S., (CA 1 1958) 261 F.2d 470:

“ . . it would seem a sterile technicality, and

wholly unrealistic, to impute to the Congress an

15

intention .. . to make the loss carry-back depend-

ent upon the mere form...”

The “enterprise” view espoused by this Court in Lib-

son Shops, Inc. v. Koehler, 353 U.S, 328 (1957), would

justify disregarding Subsidiary as a corporate entity

prior to July 1, 1957, for the practical purpose of

the loss carry-forward despite Moline Properties v.

Commissioner, 319 U. S. 436 (1943), and National

Carbide Corporation v. Commissioner, 336 U. S, 422

(1949), earlier cases from this Court requiring the

corporate entity to be recognized where it acted as

agent for its shareholders.

3. The startling application of form over substance

and the failure to allow the tax loss to follow the

economic loss require this Court’s supervision.

No one has contested the fact that Braswell put up

the $1,250,000.00 which resulted in the disallowed op-

erating loss in issue. No one has questioned that the

substance of the loss belongs to Braswell. No one has

questioned the amount of the economic loss incurred

by Braswell as a result of putting up the investment

in the subsidiary. No one has argued that the loss in

question should be claimed by any other taxpayer. No

one has denied that disallowance of the tax loss would

result in no one benefiting from the economic loss in

any manner except the Government.

This Court has stated numerous times in an axio-

matic manner that taxation is practical and realistic,

that form should not be allowed to prevail over sub-

stance and that the tax loss should reflect the economic

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loss. On each count the treatment of this Petitioner by

the Commissioner and the lower courts has resulted in

an inequitable result and this writ should be granted

to correct such inequitable results.

The Government attempted a similar inequitable re-

sult in Northern Railroad v. U. S., 334 F.2d 936 (CA

1, 1964), where the loss carry-forwards of the subsid-

iaries were disallowed to the parent and the subsid-

iaries had ceased operations and could never utilize

the losses. The court allowed the losses to the parent on

the proposition that (at page 939) :

“. .. Here, the two subsidiaries were without as-

sets and liabilities. 1f the parent was not allowed

the loss it would have inured to no one’s benefit

save the Government's.” (Emphasis added.)

4. This Court needs to clarify the question of when

the taxable year of the corporation begins and the

relationship between the requirement of filing a re-

turn and the concept of the taxable year.

There is a lack of clarification between the require-

ments of filing a return and the requirements of a be-

ginning taxable year for a corporation.

Both the district court in this case and the Govern-

ment briefs cite appellate court and Supreme Court

cases on the question of recognition of the corporate

entity. However, all of those cases involve either a cor-

porate agency question, a corporate alter ego question,

or a corporate termination question. Only the cases

cited by Petitioner involve corporate beginnings. There

17

is no applicable Supreme Court decision on the issue

of when a corporation taxable year begins.

There is a basic visceral reaction that a corporation

should not be deemed to have a taxable year unless and

until it incurs some transaction that has a tax conse-

quence. There should be a clearly defined difference be-

tween the requirement of filing a return (mere exis-

tence) and the requirements of a taxable year (some

transaction with a tax consequence).

Section 6012(a) (2) requires every corporation sub-

ject to taxation under Subtitle A to file a return. Fur-

ther, the regulation interpreting Section 6012(a) (2),

Section 1.6012-2, clearly points out the distinction be-

tween the duty to file a return and the concept of tax-

able income as follows:

“... every corporation ... shall make a return...

regardless of whether it has taxable income...”

Thus, a return is required even in the absence of tax-

able income. But neither this statute nor regulation

equates the return requirement with the taxable year

definition.

Section 441 states that taxable income shall be com-

puted on the basis of taxpayer’s taxable year—but this

statute is premised on the existence of income. Section

7701(23) likewise defines taxabie year in terms of tax-

able income computed under Subtitle A—this statute

is also premised on the existence of income. The need

for the taxable year definition ceases without the pres-

ence of taxable income. It is unnecessary to define tax-

able year when there is no taxable income. This is tan-

eer

18

tamount to saying that there is no taxable year with-

out taxable income—despite the fact that a corporate

return may be required each year of the corporate ex-

istence.

The clarification of the concept that taxable year de-

pends upon taxable income and explanation of the

proper distinction between the requirement for filing a

corporate return and the definition of taxable year are

long overdue by this Court. This case presents an ex-

cellent vehicle for the Court to set the matter straight.

5. The lower courts entirely overlooked the fact that

the 1957 return filed by Subsidiary clearly stated

that the corporation had no activity and that it was

dormant—a mere candidate—prior to 7-1-57, and

that te return was for the short period 7/1/57-

12/31/57 which was the period of affiliation wit’

Parent and which entitles Parent to the loss carry-

over.

Petitioner pointed out in its brief to the lower court

that the 1957 return was a short-period return. Page

143 of the Appendix in the record before the Fifth Cir-

cuit contains the first page of the 1957 return. Ques-

tion I asks the amount of income or deficit from the

1955 and 1956 returns. In answer to this question the

affirmative statement is made as follows: “Company

dormant 5-13-55 to 7-1-57.” This affirmative state-

ment is far more indicative than leaving the calendar

year 1957 heading unchanged. Further, page 151 of

the Appendix in the record before the Fifth Circuit

contains the 1957 depreciation schedule. The heading

is “Depreciation, Calendar year 1957” but the asterisk

19

footnote states “Majority of fixed assets purchased 7-

1-57 with subsequent purchases. No fixed assets prior

to 7-1-57.” In addition, the depreciation claimed on

the schedule is arithmetically computed for only six

months rather than a year.

The failure of the lower court to recognize this

short-period return and the failure of the Fifth Cir-

cuit to review with any explanation requires the su-

pervision of this Court.

a

SH

Fy

t

“

a

I

S

if

;

os

VIII. REQUEST FOR HEARING

Petitioner requests an oral hearing and the oppor-

tunity to present complete briefs on the merits.

UTE TEER IS egg

IX. CONCLUSION

WHEREFORE, Petitioner prays that this Petition

for Writ of Certiorari be granted.

CHRISTOPHER, BAILEY &

M. WARD BAILEY

2412 Continental Life Building

Fort Worth, Texas 76102

Attorney for Petitioner

20

X. CERTIFICATE OF SERVICE

The undersigned, M. Ward Bailey, hereby certifies

that this 22nd day of October, 1973, service was had

upon the Respondent by depositing three copies of the

foregoing Petition in the United States mail, Air Mail,

postage prepaid, addressed to the Solicitor General,

Department of Justice, Washington, D.C. 20530 and

by depositing three copies of the foregoing Petition in

the United States mail, Air Mail, postage prepaid, ad-

dressed to Hon. Scott P. Crampton, Assistant Attor-

ney General, Tax ya of »Justice,

Washington, D.C. 250 /;

M. flan iil ila,

XI. ENTRY OF APPEARANCE

The undersigned, M. Ward Bailey, 2412 Continental

Life Building, Fort Worth, Texas 76102, a member of

the Bar of the Supreme Court of the United States,

hereby enters his appearance in the captioned cause

on behalf of Braswell Motor Freight Lines, Inc., Peti-

tioner. The firm of Christopher, Bailey and Taylor,

2412 Continental Life Building, Fort Worth, Texas

areca: [woed/ ye £,

M. WARD BAILEY

Attorney for Petitioner

21

XII. APPENDIX

Index to Appendix

Opinion of U. S. District Court, Northern

District of Texas, Braswell Motor —

os ccsohacbssdnseemnmaeeroen 22

Opinion of United States Court of Appeals

for the Fifth Circuit, Braswell Motor :

Freight Lines, Inc. v. U. S. o.u....cecececcececceecccececcececceseececeeee 29 i

Section 1501 of the Internal Revenue Code of

1954, Title 26 U.S.C. §1501 .. sieaubroincewinnie 30 i

Section 1502 of the Internal Revenue Code of [

1954, Title 26 U.S.C. §1502 _ 30 k

Section 1.1502-31A (b) (3) (b) of the isan f

Regulations on Income Tax,

26 C.F.R. 1.1502-31A(b) (3) (DD) ooccecoeecccccceccecceceee 31 b

Section 441 of the Internal Revenue Code of 1954, ;

Ce I in snmsasbacaleaepneitsneimaceeeaeosens 32 :

Section 443 of the Internal Revenue Code of 1954, ?

PM Es ND prec vecececcccecesesnsnctcscisicsasnsonniencansesesnenecacesene. 33 i

Section 6012(a) (2) of the Internal Revenue Code :

of 1954, Title 26 U.S.C. §6012(a) (2) 34 :

Section 7701 (a) (23) of the Internal Revenue Code :

of 1954, Title 26 U.S.C. §7701(a) (23) ...B4 :

Section 1.443-1 of the Treasury Regulations on ;

Income Tax, 26 C.F.R. 1.443-1 ..3D :

Section 1.6012-2 of the Treasury Regulations on i

Income Tax, 26 C.F.R. 1.6012-2 36 i

et ae ae el

22

[$9675] Braswell Motor Freight Lines, Inc. v. United

States of America.

U. S. District Court, No. Dist. Tex., Dallas Div.,

Civil Action No. CA-3-3502-D, 8/31/72.

Findings of Fact

Hill, District Judge: 1. Plaintiff is a Texas corpora-

tion with its principal place of business located in the

Dallas Division of the Northern District of Texas.

2. Plaintiff timely filed a consolidated income tax

return for 1964, and paid the tax shown thereon to be

due in monthly installments. On August 11, 1965, the

plaintiff filed a claim for refund in the amount of

$76,945.33. Defendant made a refund of $13,180.86,

but disallowed the balance of plaintiff's claim in the

amount of $63,764.47. Plaintiff seeks recovery of said

sum in this cause.

3. Plaintiff waived statutory notice of claim disa!-

lowance and timely commenced this action.

4. Plaintiff is a motor common carrier of general

commodities in interstate and foreign commerce. At all

times pertinent to this cause plaintiff was a “regulated

transportation corporation” as defined by § 172(j) of

the Internal Revenue Code of 1954. Prior to July 1,

1957, David C. Hall (hereinafter “Hall”) and D. C.

Hall Transport, Inc. (hereinafter ‘Hall Transport”),

a corporation owned by Hall, were also motor common

carriers and qualified as regu'ated transportation com-

panies within the meaning of § 172(j). Plaintiff and

the Hall interests operated pursuant to certificates of

iad

PTET FAIL RN CP A

ao

public convenience and necessity issued by the Inter-

state Commerce Commission.

5. On May 13, 1955, Hall caused to be incorporat-

ed the D. C. Hall Company (hereinafter “Hall Com-

pany”) in the State of Delaware. Hall Company was

formed for the purpose of succeeding to the properties

and operating authorities of Hall and companies he

cwned and thus becoming a motor common carrier.

The bylaws of Hall Company adopted May 18, 1955,

provided that the fiscal year of the company began on

the first day of each year. Hall Company has never

made application for a change of annual accounting or

to be relieved of the necessity of filing an income tax

return. Hall Company did not file an income tax re-

turn for the years 1955 or 1956.

6. On June 20, 1955, Hall, Hall Transport and Hall

Company filed an application with the Interstate Com-

merce Commission in which Hall Company sought at-

thority under the Interstate Commerce Act, 49 U.S.C.

§ 5(2), to purchase the properties and operating au-

thorities of Hall and Hall Transport.

7. On October 29, 1955, Hall, Hall Transport and

plaintiff entered into a contract whereby Hall and Ha'l

Transport agreed for a consideration of $1,252,410.00

to sell to plaintiff the properties and operating author-

ities of Hall and corporations that Hall owned, includ-

ing all stock of Hall Company. This contract was

amended on February 18, 1956.

After the execution of this contract plaintiff joined

in the June 20, 1955, application filed with the I.C.C.

The application was approved by the Interstate Com-

‘© a |

24

merce Commission on April 28, 1956 and again for-

mally approved on April 29, 1957.

8. On July 1, 1957, the properties and operating

authorities of the Hall interests were transferred to

Hall Company and the stock of Hall Company was

transferred to plaintiff. Hall Company had no proper-

ties or income before July 1, 1957.

9. Hall Company filed a separate income tax return

for the year 1957 and reported a net operating loss of

$233,351.74 from July 1 to December 1, 1957. Plain-

tiff filed a separate income tax return for the yea>

1957.

10. Plaintiff filed a consolidated income tax return

for the year 1958 which included the operations of

Hall Company. In 1959 Hall Company changed its

name to Braswell Freight Lines, Inc. (hereinafter

“Braswell Freight’) and on January 1, 1964, the Hall

Company was merged into plaintiff. The net operating

loss of Hall Company for the year 1957 was carried

over as an offset against income of Hall Company and

Braswell Freight in the years following 1957. A por-

tion of this loss ($153,890.00) remained available as

a deduction and offset for the year 1964.

11. Plaintiff seeks to set off such remaining portion

of the 1957 net operating loss of Hall Company against

plaintiff’s income for the year 1964, rather than the

income generated by the operation of Braswell Freight.

12. Any conclusions of law deemed as constituting

a finding of fact is hereby adopted as a finding of fact.

25

Conclusions of Law

1. This court has jurisdiction of the subject matter

pursuant to 28 U.S.C. § 1346 and of the parties. This

cause is properly brought in this court.

2. A regulated transportation company can carry

over a net operating loss sustained in any taxable year

ending after December 31, 1955, for seven years fol-

lowing the year of such loss. Int. Rev. Code of 1954,

§ 172(b)(1)(C). During the year 1957 plaintiff and

Hall Company being regulated transportation compa-

nies under § 172(j) of the Code, each company could

carry over net operating losses it sustained during

1957 for seven years (to the year 1964, the year in

question) as a deduction on its income tax return.

3. An affiliated group of corporations can make

consolidated tax returns in lieu of separate returns.

Int. Rev. Code of 1954, § 1501. The Secretary of the

Treasury is authorized to prescribe Regulations for

making of consolidated returns. Int. Rev. Code of

1954, § 1502. Such regulations have the same force

and effect as an Act of Congress. Allstate Ins. Co. v.

United States [64-1 USTC 4 9325], 329 F.2d 346 (7th

Cir. 1964).

4, Treas. Reg. § 1.1502-31A(a)(3), T. D. 6813,

1965-1 Cum. Bull. 436, allows a taxpayer filing a con-

solidated return to offset against its income net oper-

ating loss carry-forwards and carrybacks from affili-

ated corporations filing separate income tax returns in

certain circumstances. However, this treatment is sub-

ject to a limitation imposed by that Regulation:

Pc. St WO LW 0

26

(b) To taxable years beginning after Decer-

ber 31, 1963, attributable to a taxable year beyin-

ning before January 1, 1964, in which such cor-

poration was (on each day of such year) a mem-

ber of the affiliated group.

Hall Company and plaintiff were only affiliated from

July 1 to December 31 during the year 1957 and the

net operating loss of Hall Company for such period

can be used by plaintiff in 1964 only if such six month

period was the taxable year of Hall Company in 1957.

5. A corporation’s taxable year is its annual ac-

counting period, if it is a calendar year or a fiscal

year. Int. Rev. Code of 1954, § 441. Where a corpora-

tion is in existence for a period of less than 12 months

such short period is its taxable year. Int. Rev. Code of

1954, §§ 441, 443. A corporation is required to make a

tax return for any taxable year in which it is in exis-

tence regardless of whether it has income. Treas. Reg.

§ 1.6012-2(a).

6. As a general rule a corporation comes into evis-

tence when its charter is granted. The corporation may

be in existence if it engages in any business activity,

however slight. A corporation is in existence if it has

the power to contract and to acquire property. Com-

missioner v. Allegheny Broad (Broadcasting) Corp.

[50-1 USTC $5950), 179 F.2d 844, 846 (3rd_ Cir.

1950). By analogy, simply because a once active cor-

poration disposes of all its assets and ceases all activ-

ities does not mean that the corporation is no longer in

existence. Berry v. Commissioner [58-1 USTC § 9130],

ie

27

254 F.2d 471, 474 (9th Cir, 1957). The corporation

does not cease to be in existence until it is disso!ve’.

Allegheny, supra, at 846.

7. Hall Company was created for the purpose of

consolidating the properties and operating rights of

the Hall interests, and after Hall Company received

its charter it had the right to contract and to acquire

these properties and rights. To this end Hall Company

actively joined the Hall interests in the application to

the I.C.C. seeking its approval of such consolidation.

Though it had no assets or income until July 1, 1957,

Hall nevertheless came into existence when its charter

was issued on May 13, 1955.

8. Because of the existence of Hall Company from

the date its charter was issued and the adoption in its

bylaws of a calendar year, the 1957 taxable year of

Hall Company began on January 1, 1957 and conclud-

ed on December 31, 1957. Its taxable year was not the

short period from July 1, 1957 to December 31, 1957.

9, Hall Company and plaintiff were members of

the same affiliated group for 183 days of Hall Com-

pany’s 365-day taxable year ending December 31,

1957. Plaintiff and Hall Company not having been

members of the affiliated transportation group for

each day of Hall Company’s 1957 taxable year, the net

operating losses of Hall Company for the year 1967

(1957) can not be carried over to the year 1964 and

used by plaintiff as an offset on its income for 1964.

10. Plaintiff is not entitled to a refund of any of

the amounts at issue in this cause.

1

%

e

Fi

e

11. Any finding of fact deemed as properly consti-

tuting a conclusion of law is hereby adopted as a con-

clusion of law.

Judgment

This matter having come on for trial before the

Court sitting without a jury on July 21, 1972, and this

Court having rendered its findings of fact and conclu-

sions of law on August 31, 1972, in accordance there-

with, it is hereby

ORDERED, ADJUDGED AND DECREED that

plaintiff take nothing. Costs shall be taxed against the

plaintiff.

29

IN THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 72-3448

BRASWELL MOTOR FREIGHT LINES, INC.,

Plaintiff-Appellant,

versus

UNITED STATES OF AMERICA,

Defendant-Appellee.

Appeal from the United States District Court for the

Northern District of Texas

(June 1, 1973)

Before TUTTLE, GODBOLD and MORGAN,

Circuit Judges

PER CURIAM: AFFIRMED. See Local Rule 21.’

1S$ee NLRB wv. Amalgamated Clothing Workers of America, 5 Cir. 1970,

430 F.2d 966.

30

Sec. 1501. Privilege to file consolidated returns.

An affiliated group of corporations shall, subject to

the provisions of this chapter, have the privilege of

making a consolidated return with respect to the in-

come tax imposed by chapter 1 for the taxable year in

lieu of separate returns. The making of a consolidated

return shall be upon the condition that all corporations

which at any time during the taxable year have been

members of the affiliated group consent to all the con-

solidated return regulations prescribed under section

1502 prior to the last day prescribed by law for the

filing of such return, The making of a consolidated

return shall be considered as such consent. In the case

of a corporation which is a member of the affiliated

group for a fractional part of the year the consoli-

dated return shall include the income of such corpora-

tion for such part of the year as it is a member of the

affiliated group.

Sec, 1502. Regulations.

The Secretary or his delegate shall prescribe such

regulations as he may deem necessary in order that

the tax liability of any affiliated group of corpora-

tions making a consolidated return and of each cor-

poration in the group, both during and after the pe-

riod of affiliation, may be returned, determined, com-

puted, assessed, collected, and adjusted, in such man-

ner as clearly to reflect the income tax liability and

the various factors necessary for the determination of

such liability, and in order to prevent avoidance of

such tax liability.

31

§ 1.1502-31A Basis of tax computation.

In the case of an affiliated group of corporations

which makes, or is required to make a consolidated

return for any taxable year, and except as otherwise

provided in the regulations under section 1502, the

tax liability determined under § 1.1502-30A shall be

determined subject to the definitions and rules of com-

putation set forth in paragraphs (a) and (b) of this

section.

(b) Computations, * * *

(3) Limitation on net operating loss carryovers

and carrybacks from separate return years. (i) In

no case shall there be included in the consolidated net

operating loss deduction for the taxable year as con-

solidated net operating loss carryovers or carrybacks

under paragraphs (a) (3) (i) (b), (4) (i) (f), (g), (h),

(j), and (k), and (ii)(¢) and (d) of this section

(relating to net operating losses sustained by a cor-

poration in years for which separate returns were

filed, or for which such corporation joined in a con-

solidated return filed by another affiliated group),

an amount exceeding the taxable income of such cor-

poration included in the computation of the consoli-

dated taxable income for the taxable year, adjusted

as provided in subdivision (ii) of this subparagraph.

This subdivision shall not be applicable to a carryover

under paragraph (a) (3) (i) (b) of this section of a net

operating loss of a corporation —

Pa "eer

(b) To taxable years beginning after December 31,

1963, attributable to a taxable year beginning before

January 1, 1964, in which such corporation was (on

each day of such year) a member of the affiliated

group, or

Sec. 441. Period for computation of taxable income.

(a) Computation of Taxable Income.—Taxable in-

come shall be computed on the basis of the taxpayer’s

taxable year.

(b) Taxable Year. — For purposes of this subtitle,

the term “taxable year” means —

(1) the taxpayer’s annual accounting period,

if it is a calendar year or a fiscal year;

(2) the calendar year, if subsection (g) ap-

plies; or

(3) the period for which the return is made,

if a return is made for a period of less than 12

months.

(c) Annual Accounting Period. — For purposes of

this subtitle, the term “annual accounting period”

means the annual period on the basis of which the

taxpayer regularly computes his income in keeping

his books.

(d) Calendar Year.— For purposes of this sub-

title, the term “calendar year” means a period of 12

months ending on December 31.

* * *

(g) No Books Kept; No Accounting Period. — Ex-

38

cept as provided in section 443 (relating to returns

for periods of less than 12 months), the taxpayer’s

taxable years shall be the calendar year if —

(1) the taxpayer keeps no books;

(2) the taxpayer does not have an annual ac-

counting period; or

(3) the taxpayer has an annual accounting

period, but such period does not qualify as a

fiscal year.

Sec. 443. Returns for a period of less than 12 months.

(a) Returns for Short Period. —A return for a

period of less than 12 months (referred to in this sec-

tion as “short period’) shall be made under any of

the following circumstances:

(1) Change of annual accounting period. —

When the taxpayer, with the approval of the

Secretary or his delegate, changes his annual ac-

counting period. In such a case, the return shall

be made for the short period beginning on the

day after the close of the former taxable year

and ending at the close of the day before the

day designated as the first day of the new tax-

able year.

(2) Taxpayer not in existence for entire tax-

able year. — When the taxpayer is in existence

during only part of what would otherwise be his

taxable year.

(3) Termination of taxable year for jeopardy.

— When the Secretary or his delegate terminates

34

the taxpayer’s taxable year under section 6851

(relating to tax in jeopardy).

* * *

Sec. 6012. Persons required to make returns of income.

(a) General Rule. — Returns with respect to in-

come taxes under subtitle A shall be made by the

following:

* * *

(2) Every corporation subject to taxation un-

der subtitle A;

Sec. 7701. Definitions.

(a) When used in this title, where not otherwise

distinctly expressed or manifestly incompatible with

the intent thereof —

(23) Taxable year.— The term “taxable year”

means the calendar year, or the fiscal year end-

ing during such calendar year, upon the basis

of which the taxable income is computed under

subtitle A. “Taxable year” means, in the case of

a return made for a fractional part of a year

under the provisions of subtitle A or under regu-

lations prescribed by the Secretary or his dele-

gate, the period for which such return is made.

35

Treasury Regulations on Income Tax (1954 Code)

(26 C.F.R.):

§ 1-443-1 Returns for periods of less than 12 months.

(a) Returns for short period. A return for a short

period, that is, for a taxable year consisting of a

period of less than 12 months, shall be made under

any of the following circumstances ;

* * *

%

i

F 4

y

(2) Taxpayer not in existence for entire tax-

able year. — If a taxpayer is not in existence for

the entire taxable year, a return is required for

the short period during which the taxpayer was

in existence. For example, a corporation organ-

ized on August 1 and adopting the calendar year

as its annual accounting period is required to

file a return for the short period from August 1

to December 31, and returns for each calendar

year thereafter. Similarly, a dissolving corpo-

ration which files its returns for the calendar

year is required to file a return for the short pe-

riod from January 1 to the date it goes out of

existence. Income for the short period is not re-

quired to be annualized if the taxpayer is not in

existence for the entire taxable year, and, in the

case of a taxpayer other than a corporation, the

deduction under section 151 for personal exemp-

tions (or deductions in lieu thereof) need not be

reduced under section 443(c). In general, the

requirements with respect to the filing of returns

and the payment of tax for a short period where

the taxpayer has not been in existence for the

Ne ceegeepteriny?

entire taxable year are the same as for the filing

of a return and the payment of tax for a taxable

year of 12 months ending on the last day of the

short period. * * *

§ 1.6012-2 Corporations required to make returns of

income.

(a) In general — (1) Requirement of return. Ex-

cept as provided in paragraphs (e) and (g) (1) of

this section with respect to charitable and other or-

ganizations having unrelated business income and to

certain foreign corporations, respectively, every cor-

poration, as defined in section 7701(a)(3), subject

to taxation under subtitle A of the Code shall make a

return of income regardless of whether it has taxable

income or regardless of the amount of its gross in-

come.