# Petitioners Brief — Texas & Pacific R. Co. v. United States > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386008_0191%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Petitioners Brief - **Published:** January 1, 1932 - **Citation:** 286 U.S. 285 ## Text oF Py ‘ . 8 £4 oa bP FILECOPY | ,.,. IN THE _— Court of the United Piates OcTOBER TERM, 1931. ‘ No. 634. THE TEXAS & PACIFIC RAILWAY COMPANY, Petitiotier, a | we UNITED STATES. BRIEF FOR PETITIONER ON WRIT OF CERTIORARI TO THE COURT OF CLAIMS. y ‘ JOHN W. DAVIS, ADRIAN C. HUMPHREYS, Newton K. Fox, _ Attorneys for Petitioner. INDEX. . : PAGR ’ - OPINION OF THE CouRT BELOW .....,.......005- errr a | JURISDICTION .....+-. fee cees ee eeeeees seecseseesspee Et STATEMENT OF THE CASE .........% sittees humibews . 2 STATUTES INVOLVED ete Sa ac ote - QUESTION INVOLVED ........ ene e eee e eee ee eens 3 "SPECIFICATION OF | rrr Sivdaveteaws Sulake ae SUMMARY OF ARGUMENT ...... Pop aie ine red yo | FS, Se. Pe vere ten ee or a ET a ne >. I, ‘THE “GUARANTY” PAYMENT UNDER THE TRANSPORTA- « TION ACT, 1920, WAS A GOVERNMENT SUBSIDY DESIGNED TO INSURE AN ADEQUATE TRANSPORTATION SYSTEM FOR THE COUNTRY 2. .cscerscccccrevcns ee rs | 1. The situation of the railroads at the end of Federal control and the purpose of the Transporta- SF rrr ree eiaeaas feakites wine en «x 2, There’ was no legal obligation on the Govern- ment to.make the “guaranty” ..... ..ssceeseues 8° ee tm. - U 3. The “guaranty” payment was not income from operation of the railroads but was a subsidy ..:.... 9 . ‘ x. 4 * ° Il. BEING A suBSIDY, the “GUARANTY” PAYMENT IS NOT “INCOME” WITHIN THE MEANING OF THE ‘SIXTEENTH AMENDMENT eeeevweveoeveeeoeveeeeeeeveeeeeeee eee eeeeee eee eee & 11° i , PAGE 1. A subsidy is not taxable as “income”’..... aes 2E 2. Mutuality and consideration for the agreement. to pay the “guaranty” “does not make the payment taxable as “income” CREME EREEKMERTAGS CREOLE CES 12 ‘3. The way in which the “gtaranty” payment might be spent does not cotermine its status as ge ee ee ee eee 14 4. Income Defined ite ecnie Len iescetents ae QUI vcs oc dvnsdnvedes jiiate eee a (APPENDIX: | Excerpts from Revenue Act of 1918, Sections 218, 233.. 17 | Excerpts from Transportation Act, 1920, Section 209.. 18. df iii Table of Cases. PAGE Birmingham Trust & Savings Co. v. Atlanta, éte., Ry. Clg BOW POR BFS is cdc crass cn csas Pets eonees rrr 4,9 Blodgett v. Holden, 275 U. 8.142 ..... cee geeceee eens 13, 16 Bowers v. Kerbaugh- -Empire Co., 271 U.S. 170 eer ere re 4,13 Eastern Extension, ete. Tel. Co. Ltd. v. United States, ae 2 er eer Tre rr: eee ee eee ee 8 Edw ‘ards v. Cuba ‘Railroad Co., 268 U. 8S. 628.....4, 11:12, as ‘Kisner v. Macomber, 252 U. SS. reer ee ec 5, 18, 15, 16 Flint v. Stone Tracy Co., 220 U. 8S. 107...... Pere ye 9 Merchants’ Loan & Trust ic ‘Trustee v. Smietanka, MR A a cei nae way ak ts kanss ieee pomee Miles v, Safe Deposit Cos, 259 U.S. MR iN os 13 Smietanka v. First Trust & Savings Bank, 257 U. S. 602. 16 Stratton’s Independence Ltd. v. Howbert, 231 U. S.399. 9 United States v. Guaranty Trust Co., 280 U.S. 478. ..4, 6, 14 ‘ United States v. Merri iam, 263 U. . errr . Be 13, 14 United States v. Supplee-Biddle Hardware Co., 265 U. 8. are tee eeees hee ceu nee errr ween eee tenons 4,13 Statutes Cited. 7 . Act of — of February 13, 1925.:.........08. Pa | Corporation Excise Tax Act of August 5, 1909... inne ke 9 Federal Control Act ..,.. A Ase Rees Re EEN wf, 8, 5, 8 Revenue Act es eee rr re eee OY | ~ Rev entie Act of 1918, Sections 213.and 233 (Appendix). 17 Transportation Act, 1920 ........ 2, 3; 4, 5, 6, 8, 10, 13, 16, 18 Transportation Act, 1920, Section 209 (Appendix)... .18- 29 ‘ . 3 Miscellaneous Citations. Congrensianel Record, Vol. 58, Part Pere re 7,8 “Congressional Record, Vol. 58, |, ee ere 10, 11 Congressional Record, Vol. 59, Part 4..........+00095 7,10 Finance Docket No. 1176, 70 I. C. ©. 115........0 eee 8 —_— iti Bites. Aap eon > IN THB - Supreme Court of the Huited States OcToBER Term, 1931. a | / - | No. 634. | es , - ‘ . ’ mm e . t. » 9 ; ° Tue Texas & Paciric Ramway Company, Petitioner, vs. UNITED STATES, r 3 “ > * ~ ° . “a BRIEF FOR RETITION] ‘R ON WRIT OF CERTIORARI yo THE COURT OF CLAIMS. On writ of certiorari to the United States to review a judgment in an action for the ref income and excess profits taxes. + ourt of Claims . Opinion of. the Court Below. The opinion of the Coyrt of Claims is reported in 52 Fed. - (2d) 1040 (Re13). j Jurisdiction. " The jurisdiction of the Court is invoked under Section ‘3(b) of the Act of Cong. February 13, 1925, e. 399, 43 Stat. - 986, 939, amending Section 240 of the J udicial Code. A petition for a writ of certiorari was filed on January 14, 1932 (R. 18) and was granted February 15, 1932 (R. 19). og 2 Statement of the Case. This is a suit to recover $208,138.01, part of the income and excess profits taxes paid by Petitioner for the year 1920 under the provisions of the Revenue Act of 1918 (Act of Cong. Feb. 24, 1919, c. 18), 40 Stat. 1057 (R. 8/. Petitioner is a railroad eorpora and during the months of January and February, 1920, sapsicconieos ‘were operated + by the Director General of Railroads under the Federal { Control Act (Act of Cong. Mar. 21, 1918, c. 25), 40 Biat. 451 (R. 9). - - Federal Control] terminated on February 29, 1920, under the provisions of the Transportation Act, 1920 (Act of Cong. Feb. 28, 1920, ‘c. 91), 41 Stat. 456, and, during the remainder of the calendar year 1920, the Petitioner. was operated by a receiver under a decree of court (R. 9). Petitioner accepted the provisions of Section 209 of the Transportation Act, 1920, and under the “guaranty” received — for the period-of, six months after Federal-Control ceased, called the “guaranty period”, the.sum of $2,043,041.77, and one of its two subsidiaries receiVef $18,040.86, a total of $2,061,082.63 (R. 9). For the year 1920 Petitioner filed its tax return ang re- ported thereon and paid a tax’ of $332,976.71 (R. 9). Peti- tioner’s two subsidiaries filed separate tax returns’ and re- ported losses (R. 10). The Commissioner of Internal ‘Revenue upon audit and _ reaudits of the 1920 returns in 1925, 1926 and, (1927, consoli- dated the Petitioner and its subsidiaries (R. 10-11), made paul s adjustments ‘to lincome and finally, in April 1927, deter ined a consgHdated net income of $3,639,968.48 (R. 11), and a tax liability of Petitioner and its subsidiaries of $363,796.85, which was allocated $361,797.42 to the Petitioner . and $1,999.43 to one of its subsidiaries (R. 12). The result- ing deficiency in tax of the Petitioner of $28,820.71 was duly © paid .(R. 12): The total net tax paid by Petitioner after reimbursement made by the Director General of Railroads was $349,737.51 (R. 12). : ed ee . . \ 3 a ») The Commissioner of Internal Revenue jf determining the __ consolidated net income of Petitioner and Ys subsidiaries for / the year 1920 included as income the “guaranty” payment of $2,061,082.63 made under Section 209(c) (1) of the Trans- portation Act, 1920 (R. 12). ' Thereafter the Petitioner duly filed a claim for refund of $206,108.26 based upon the erroneous inclusion in income of ' the “guaranty” payment and a claim for'$2,029. 75 based upon? ‘ certain minor items (R. 12). The Commissioner of Inter nal antec rejected the veronammett wee” from the date of rejection (R. 3). ; The Court of Claims gave judgment for the he Rie for $1,962.09 (R. 13), sustaining thé Petitioner’s conténtions as to the nffmor items. The Court held, however, that the “guar. anty” payment of $2,061,082.63 was “income” ee to fax (R. 15). ; Statutes Involved. my ‘ . The Statutes involved are the Revenue pan of 1918 (Act xs of Cong. February 24, 1919, ec. 18), 40 Stat. 1057, and Section 209(c) (1) of the Transportation Act, 1920 (Act of Cong. ¢ Feb, 28, 19: 20, c. 91), 41 Stat. 456, 464-467. Pertinent ex- cerpts from these Acts are, i at in the Appendix hereto. a Involved. Was the “ramen payment under Section 209(c) (1) of the Transportation-Act, 1920, a “subsidy” or taxable as “in- come” under the Revenue Act of 1918 and the Sixteenth ‘Amendment to the Constitution? Specification of Errors. 1. The Court of Claims erred in holding that the “guar- anty” payment to Petitioner under Section 209 of the-Trans-~ portation Act, 1920, was “income” taxable under the Revenue “a 1918 and the Sixteenth Amendment to'the Constitution. ie 3 ge se . ‘4 ' r x Fi ¢ ie ~ the Court of Claims erred in not ent Petitioner in the sum rf SV) 200.07, the overpaid for 1920 on excluding the “guaranty pavinent f “income” Summary of Argument. I. The condition of the railroads at the termination of Mederal contvol was such that rehabilitation was necessary to insur@ ah adequate transportation system, The purpose of the Transportation Act, 1920, was to remedy this situation United States Vv. Guaranty Trust Co., 280 U.S. 478. Congress recognized the immediate need of the railroads for additiongk“eapital”’. Without any legal obligation on the part of the Government, the Transportation Act Was massed providing fe The “gué of the railrgad. Birminghom Trust & Savings Co. v. Atlanta etc. Ry. Co. a0@Age. 173. The payment was in fact and was intended by Congress as a subsidy. ’ ‘a “guaranty” payment, ‘anty” pagment was not income from operation Il. Being a Mifsidy the “guaranty” payment is not income Within the meaning of the Sixteenth Amendment. Edwards Vv. Cuba Railroad Co,, 268 U.S. 628. Every economic ad- vantage or rec@pt of money does not result in “income”, Mutuality and @6nsideration did not remove the “guaranty” payment from the category of a subsidy or convert it into “income”, Ldwards \. Cuba Railroad Co., supra; ¢ nited States v. Supplee-Biddle Hardware Co., 265 U. 8. 189; Bowers V. Kerbaugh-Empire Co., 271 U. S. 170. The provi- sion for payment by the railroads to the Government of any excess over the “guaranty” was a limitation or condition to eliminate carriers not in need of the subsidy. It was not inserted as a money producing provision for the Government. ‘It was designed primarily as an administrative measure to eliminate applications by carriers not in need of financial assistance and to save auditing expenses and delay. et ire e “gua anty” parment, and not the fhanner vhich it might be spent, determines qhether it is “income” Merriam, 203 6 8. 159. The “guaranty” yt was fot derived from capital er labor, or from both nbined It was not “income” within the definition which this Court has ndopted and consistently followed, HLisner vy. acomle o2 tS IS, a8 a limitation upon the power of lnder tha Sixteenth Amendment. ARGUMENT. Preliminary Statement. The question of the taxability as “income” of the payment under Section 2O9(e)(1) of the Transportation Act, 1920, is not to be confused with payments made to carriers under the Federal Control Act as compensation for the use by the Government of railroad properties during Federal Control. The Transportation Act terminated Federal Control on Feb- ruary 29, 1929. Payments under the Federal Control Act are admittedly “income” and subject to tax. Taxes based on those payments and on earnings of Petitioner from operation of its road in 1920 are not sought to be recovered in this action, This case involves a “guaranty” payment under the Trans- portation Act, 1920, for the period of six months, March 1, 1920, to August 31, 1920, called “the guaranty period”, after possession and use by the Government had ended and the properties had been returned to private ownership, Section 209 provides for a “guaranty” payment by the Gov- ernment under various conditions prescribed therein. This case, falls under Section 209(¢)(1) as the Petitioner had a contract fixing just compensation for the Federal Control period. TR. this case the amount of the ‘ ‘guaranty’ payment is the excess of one-half of the annual amount fixed as “just compensation” in the Federal Control contract over “railway operating income.” ' “Railway operating income” (a term defined by the Inter state Commerce Commission in its Regulations, “Issue of 1914", governing the “Classifcation of Income, Préfit and _Loss for Steam Roads”) is an amonnt determined by deduct ing from “railway operating revgfiues”, the items of “railway operating expenses”, “railway tax accruals”, and “uncotlecti ble railway revenues.”.-*— ” a “” Pa I. The “Guaranty” Payment Under the Trans- portation Act, 1920, Was a Government Subsidy Designed to Insure An Adequate Transportation System for the Country. 1. The situation of the railroads at the end of Federal con- trol and the purpose of the Transportation Act, 1920. Government operation of railroads during the war years had resulted in a critical situation and the maintenance of a transportation system for the United States was at. stake, Tracks, structures and rolling stock Jad deteriorated. . Addi- tions and betterments were imperative. Funds were needed for improvements, expansion and additional equipment. The railroads had to be rehabilitated from the standpoint of “cap- ital.” The condition of the railroads when the Transportation Act, 1920,. was passed and the purpose to preserve for the nation the whole existing transportation system was stated by this Court in / nited Ntates v. Guaranty Trust Co., 280 U.S. 478, as follows: “These appropriations were made in order to meet a pressing need, At the time of the passage of Transporta tion Act, 1920, most of the railroads of the United States lacked funds for necessary improvements, equipment, and expansion of facilities. Some of the carriers needed funds, also, to meet maturing obligations. The credit of 7 many carriers was seridusly impaired. There was a gen- eral reluctance among investors to purchase new rail- road securities even of the strongest railroads, Con- gress deemed it important to preserve for the nation sub- stantially the whole existing transportation system. Compare New England Divisions Case, 261 U. 8. 184, 190". (p. 484). ’ The same purpose Was expressed by Congress. Senator Cummins, Chairman of the Interstate Cominerce Committee of the Senate, said (Ceng.-Ree., Vol. 59, Part 4, p. 3327) : . “Without entering into the details of the situation it is well known to every observer that .we need from 100,000 to 200,000 additional cars, we need more main tracks, more side tracks, more warehouses, and more terminal faeilities of all kinds. If the railways are to succeed in giving to the people what they must have, if we arato prosper, these companies must borrow or secure in some way not less than $600,000,000 this vear and $1,000,000,000 next year.” Representative Cooper, a member of the Interstate Commerce Committee of the House, said (Cong. Ree., Vol. 59, Part 4, p. 83808) : “ ' “es * * “It is estimated that about 200,000 new cars must be built in 1920 to make good the deficiency. It is also stated that the nofmal railroad require- ments are about 3,000 new locomotives per year, yet dur- ing Federal control only 2,000 locomotives, or one-third | of the normal requirement has been provided. Only 923 hew passenger cars have heen pfirchased in over two years and only 721 miles of raalroad extension have been built.” . Representative Barkley, a member of the Interstate Com- merece Committee of the House, said (Cong. Ree., Vol. 58, Part &, p. S445): . “Therefore as a matter of fact if we do not help them to finance at this time these capital investments they 8 will have to go into the markets at the present high mur of money and finance them themselves, And the inal itv te do so is yoing’to put many of the railroads int the hands of receivers.” $ Regpesentative Karkley (Coyg. Ree, Vol. 5s, Pyrt x b S331) : . 5 . - : . \ - ° wa, - . . ” . . . 15 4. Income Defined. This Court in the de of Lisner v. Macomber, 252°U. &. 189, defined “income”,-within the meaning of the Sixteenth Amendment to the Constitution, as follows: “«~ * * “‘Tncome may be defined as the gain derived from capital, from Jabor, or from both combined,’ pro- vided it be understood to include profit gained through a sale or conversion of capital assets, to ‘which it was applied in the Doyle Case (pp. 183, 185).” 7" Oe & * 6“The Government, although basing “its argu- ment upon the definition as quoted, pla wed chief emphasis upon the word ‘ gain,’ which was extended to ‘nclude a variety of meanings; while tN significance of the next three words: was either overlooked or misconeeived. # ‘Derived-from-capital’ ;—the gain-derived-frome-capital. ; } , 9g f / ete.” (p. 207). ‘ In the case of Merchants’ Loan & Trust Co., Trustee v. a Smietanka, 255 U. S. 509, the above definition was followed (pp. 517-518) without modification or change, “this Court being “entifely satisfied” with the completeness of the deti- nition. ’ The definitiorg of income in the Macomber Casetwas not caguM or used by way of illustration. It-represents av all. ipelusive rule est» blished for future use in determining what ‘is “income”. The Court after defining income then consid- ered whethei a stock dividend fell within its terms. This established defimition has been consistently used in deciding all- subsequent cases invelving the question of what is “income”. - As to the constitutional limitation upon Congress and the ” distinction between what is and what is not “income” this Court said in the Macontber Case, at page 206: “In order, therefore, that the clauses cited from - Article I of the Constitution may have proper force and effect, save only as modified by the Amendment, and that the latter also may have proper effect, , it becomes. essen- 4 ° een eererr: 5 at ht ee ed a a ee * Tar As ticable apply the rule set forth in the Proviso | (a) of section oO of the “standard contract bet w ee United States and the carriers (whether or not such eont has heey entered into with the carrier whose 1 i Vail uting mcome is being computed | : (4) There shall not be included any taxes paid under lor Il of the Revenue Act of LOLT. or sneh portion of taxes paid under Title Il or ITT of the Revenue Aet of | us Hy the terms of sueh Act are to be treated as ley md Act in amendment of Title Lor Il of the Revenne Act 1917; and (oO) The Commission shall require the elimination and statement of the operating expenses and revenues (other th for maintenance of way and structures, or maintenance equipment) for the guaranty period, to the extent necessay to correct and exclude any disproportionate or unreasonall charge to such expenses or revenues for such period, or any charge to sugh expenses or revenues for such period whieh under proper svstem of accounting is attributable te an other. period. “ The Commission shall. as soon as practicable after Certifi the exptration of the guaranty period, ascertain and certify rab. to the Secretary of the Treasury the several amounts neces: make sary to make good the foregoing guaranty to each carrier, 2" The Secretary of the Treasury is hereby authorized and di rected thereupon to draw warrants in, favor of each such carrier upon the Treasury of the United States, for the amount shown in such certificate as necessary to make good such guaranty, An amount sufficient to pav such warrants is hereby appropriated out of any money in the Treasury not otherwise appropriated, Appr --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386008_0191%3A2. Public record. Not legal advice.