Opposition Brief — Helvering v. National Grocery Co.

IN THE

= Court of the Gnited States

Ocroser Term, 1937.

No. 723.

Gog T. HELVERING, Commissioner of Internal Serene,

Petitioner,

vs.

NATIONAL GROCERY COMPANY,

Respondent.

On Petition for a Writ of Certiorari to the United States

Circuit Court of Appeals for the Third Circuit.

.

BRIEF FOR THE RESPONDENT IN OPPOSITION. : 7

a

v EpwINn F. SMITH,

. James D. CARPENTER, JR.,

Attorneys for Respondent.

~

INDEX.

PAGE

nS NON in ie a tel eee 1

" Fonmpi0rton ........................ TENE RTO I 1 |

THE QUESTION PRESENTED.00001.20.0.000c0cc:ceccecseeecoeceeeses......, 2

SratuTe anv Reeuations fi Meets eee 2

ee, Se ENTS, ST EM enceeveesesenen fiosinads 2

(8) Ovigin of BuslneeGcisiiciicssc5 4

(b) Growth’ of Business on its Earnings..... cae 4

(c) No Gains Accumulated in the Taxable Year 6

(d) The Evidence as to Respondent’s Purpose 9

THE Boarp’s a te ee AEE St Ee IS 14

Tue Decision or tHe Circurr Court OF APPEALB........ 17

pn RRL ee es EA ER 1?

| al *

I. No new question of law is involved... 17

II. The evidence before the board was not dis- am!)

puted ........ ponnvernstnesesessutinns sanccenescnsosemntasiebevenssoee 19

III. The purpose to evade surtaxes is not proved

by mere.showing that a corporation is able

to pay dividends.............. RRA TES ORD 22

yOANs to Kou Dip Not Prove rue For-

ee a ae oe 25

IV. Section 104 being a penal statute, must be

construed strictly and in the light most

- favorable to the taxpayer............ iscsiaiaibiidenelatail 27

CONCLUSION oooececcccocccceececeeeeceeece... Sea ee 28 : E

APPENDIX PRU RAO Ps Sen RINT Chee RET Pe 29

ii

Cases Crrep.

| ee PAGE

Almours Securities, Inc. vs. Guy T. Helvering, Com-

missioner of Internal Revenue _— 613 October

I Cio deceanscadhensbtiicsniecishanctanbdcininnesenTiicesenvonnmemcnnsen 17

Aluminum Castings Co. vs. Routzahn, 282 U. S. 100.. 28

"Crocker vs. Malley, I sc Samiminenanoninn 28

Gould ve. Gould, 245 U. 8. 151. sanenneanenneeeennns 28

_. Hecht vs. Malley, 265 U. 8. 196....2.-----------------eeeeeeeegeee . 28

Old Colony vs. Commissioner, 284 SG 28 .

‘Pariso vs. Towse, 45 Fed. (2d) Se a maennee 16, 21

Reinecke vs. Northern T. Co., 278 U. S. 348............-..- 28

Shwab vs. Doyle, 258 U. 8. -834........-.------------0-e0-eeeeeeee 28

Smietanko vs. First Trust Bk., 257 U. S. 606...............- 28

- United Business Corporation ys. Commissioner, 62

Fed. (2d), 754; certiorari denied, 290 U. S. 635... 16

U. S. vs. Field, 255 U. S. 262.............- “sce CO ae 28

U.'S. vs. Merriam, 263 U. S. 188.........--..-2..------ecce-eeeeeneee- 28

United States vs. Tway Coal Sales Co., 75 Fed. (2d)

on i A le et ee a 27

Western & A. R. Co. vs. Heailiveon, ‘279 Uz US. 639 ese 21

| Sratutes CITED. — ‘

Judicial Code: ” ' |

- Section 240 (a) -....----------------co-sseerseec teen eeeeneesenteceeeeeee! 2

Revenue Act: | ;

LOOT ceca B, 23, 21, 29"

in 20) LAR 27

Section 14, Rev. Act 1936... 24

*

- Supreme Court of the United States

Ocroser Term, 1937.

No. 723.

Guy T. Hetvertne, Commissioner of

Internal Revenue,

fi On Petition for a Writ

Petitioner,

of Certiorari to'the

United States Circuit *

Court of Appeals fdr

the Third Circuit.

Vs.

NationaL Grocery Company,

Respondent.

BRIEF FOR THE RESPONDENT IN OPPOSITION.

’ Opinions Below.

? ;

- The opinion of the Board of Tax Appeals together with

the dissenting opinion (R. 17-32) is reported in 35 B. T. A.

163.

The opinion of the Circuit Court of Appeals (R. 172-

180) is reported in 92 Fed. (2d) 931.

- Jurisdiction.

The judgment of the Circuit Court of Appeals was en-

tered on October 21, 1937 (R.180).

Petition for certiorari was filed on J anuary 20, 1938,

4

2

The jarisdiction of the Court is-invoked under section

240(a) of the Judicial Code as amended by the Act of Feb-

ruary 13, 1925. .

The Question Presented.

- The Circuit Court of Appeals, having found that dee

was no evidence substantial or otherwise. to sustain the de-

termination of the Board of Tax Appeals that respondent -

was availed of during the taxable year for the purpose of

preventing the imposition of the surtax upon its sole stock-

holder, did it err in reversing said determination?

' Statute and Regulations Involved.

The statute and regulations involved are set forth in the

_ Appendix, mfra, pp. 29-33.

Statement.

’ This case. iwwelves the saa of an attempted assess-

ment under Section 104, Revenue Act of 1928, of a-penalty

tax of $477,360.68 for respondent’s fiscal year ended Janu-

. ary 31, 1931 (R. 11-14). For that year respondent had

paid normal income taxes of $103,616.60, on net income of

$863,471.67 (R. 12) reported on its tax return.

Respondent is in the chain grocery business, its principal

office being in Jersey City, N. J.

There was no conflict in the evidence before the Board

of Tax Appeals. The only witnesses who testified before

the Board were called by réspondent. In addition to the

testimony of witnesses the Board received in evidence a

3

number of statements taken from respondent’s books show-

ing all the details of respondent’s business from the date

of its incorporation in 1908 to the time of trial, including.

the number of stores operated each year, gross sales, salary

paid Henry Kohl, the sole owner, State and Federal taxes,

wages and rents paid, and in short all the important details

of the business. The only evidence introduced on behalf

of the Commissioner were certain income tax returns of

‘respondent and Henry Kohl, and a statement Showing the -

surplus of the business from its inception. The proofs

~ showed, without contradiction, that the business had grown

from insignificant proportions in 1908 tg $25,000,000.00 for

the year in question. The details will be referred to later.

This is the first case which. has come before the Board

or the Courts where the Commissioner attempted to apply

Section 104 to a mercantile or industrial activity organized

_ prior to the income tax law, which has consistently followed

the policy of ploughing its earnings~back into the business

(R: 31).

In the year under review, although the taxpayer’s

' income tax return showed large earnings, it in fact suffered

depreciation in all of its assets far in excess of the earnings

reported. Respondent proved that panicky business con-.

ditions prevailed in 1930, and that its purpose in not paying

dividends was not to avoid the imposition of surtaxes, but

to conserve all its resources for business, needs. It further

proved that it was at the. time negotiating the purchase of

another large chain of grocery stores, which purchase would

have required all its resources. It further proved affirma-

tively that its capital and surplus were not in excess of the

reasonable needs of the business,

fh.

od

4 °

(a) Origin of Business.

Henry Kohl, a foreigner, came to America in 1887, when

sixteen years of age, without money or property. He

worked as a clerk in grocery stores.and saved a few hun-

dred dollars (R. 63). :

In 1891, having saved $217.00, he and a friend, as part-

ners, bought a grocery store for $500.00. A short time lat

they bought a second store for $250.00, paying half cash.

The partnership dissolved, each partner taking one store.

By 1900, Kohl had purchased two stores.

In 1906, he had three stores and that year incorporated

them into Henry Kohl Company, a New Jersey corporation.

These were old-time grocery stores doing business on credit.

In 1908, his stores losing money, Kohl conceived the

idea of selling groceries on the cash and carry basis in

. individual packages and organized respondent, National

Grocery Company, which opened one store.

After about six months, this store proved very successful

and respondent opened additional stores as fast as its

limited capital would permit (R. 63, 64).

In 1911, Kohl merged Henry Kohl Company into the

National Grocery Company and increased its capital to

$200,000.00.

Henry Kohl always owned all'the stock of the corpo-

ration.

(b) Growth of Business on Its Earnings. -

From its organization in 1908 until the year under re-

view (J anuary 31, 1931), respondent pursued the policy of ,

retaining all possible- — in the business and of con-

stantly expanding-on its own’ earnings. This was the policy

4)

- é

of thrift that Kohl himself had pursued from the day he

landed at Castle Garden, a. penniless emigrant.

“. The Company has never been financed or expanded on

borrowed money and never sold any stocks or bonds to the

public (R. 77). Mr. Kohl never put anything into the busi-

ness by way of securities’ or contributions to capital (R. 83).

The capital and surplus of the Company under Kohl’s

‘method grew from $20,943.46 in 1908, to $8,138,965.54 as of

. January 31, 1931 (Ex. 6, R. 136). During this same period,

the number of stores grew from three in 1908 to eight hun-

dred and fifteen in 1930.. The number of employees grew

from a handful in 1908 to twenty-three hundred and thirty-

two in 1930. In 1930 the wages paid employees aggregated

$3,132,891.99 (Ex. 9, R. 140). The purchases in 1930 aggre- .

” gated $19,993,937.83, and rents paid aggregated $929,918.70

(Ex. 10, R. 141). In 1930, by discounting its bills, the Com-

’ pany saved $493,719.24 (Ex. 10, R. 141). The Company’ ~

gross sales grew fgom $181,028.11 in 1908, to $25,142,537.41

in 1930 (Ex. 7, R. 138). In 1930, the Company owned and

operated a large bakery (Ex. 17, R. 150), an office building,

warehouses, and garage (Exs. 16 and 18, R. 148 and 152):

These were built to ‘serve between 1,500 and 2,000 stores

(R. 78). In every year from 1908 to 1932 the number of

stores increased (Ex. 4, R. 132). Sales increased every

year up to'1930 excepting in 1921 and 1922 (R. 138).

From the first year the Company was in business it

invested surplus money in stocks, and purchased its first

- bonds in.J917. Its stockholdings increased from $750.00

in 1907 to $2, — 47 in 1930 (cost figures), and that

date its bonds cost $313,391.27 (Ex. 6, R. 136).

2 " S = deh ow

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eri aag hot y+

SRE TORO cag atlas

of RAL ge Bie

—6«~6

A list of the securities owned with their cost and market

at the beginning and‘end of the taxable ‘year ended Jan-

uary 31, 1931, appears as Exhibit 15 (R. 146). . a

Mr. Kohl testified that the surplus funds of the Com-

pany were invested in securities ‘‘so that when we would’

need it we would have it. All corporations do that more

or less. * * * It was part of our business. , We carried that

money, of course, prihcipafly to have the money on hand

and get something for it. * * * You know, you can-turn

that stuff over in the morning, in a couple of hours, and

you have your money if you want it’’ (R. 75, 76). Corrobo-

rated by “Miss Mullins (R. 77).

From the incorporation of the Company | in -1908 to

January 31, 1931, Henry Kohl’s salary had aggregated

$1,026,570.00, while in the period from 1912 to January 31,

1931, respondent had paid Federal income and excess profits

taxes aggregating $1,842,719.79 (Ex. 4, R. 132). |

(c) No Gains Accumulated in the Taxable Year.

Respondent actually had no gains or profits in the year

-under review. ;

The income tax return filed by reapendont for the fiscal

year ended J anuary 31, 1931, showed

-- Net income taxable under Section 13 of

_ the Revenue Act of 1928......... ne

Non-taxable income ........::-.-.--------:+---0--+-0---- 90,858.40

_ Net income ........ Notional Sannsanioonieoonnnecnbsdinnneien $954,330.07

(See Commission’s letter R-11 and Statement R-12, 13.)

The Company paid normal income taxes aggregating

$103,616.00 (R. 14).

ne

Exhibit 15 (R. 146) shows that respondent suffered de-

_ -preciation in securities for its fiscal year ended January 31,

1931, aggregating $943,517.42. |

Mr. Ferguson’(R. 93), Mr. Field (R. 87), and Mr. Arm-

- bruster (R. 96) testified that the local bank stocks should

be eliminated from the statement because they were unsal-

able, had no liquidity, and could not be used as collateral

for loans. In other words, the Corporation could not faise

money by selling them; and they had lost all their value for

obtaining credit or borrowing money.

Therefore the following securities must be eliminated -

from Exhibit 15 (R. 146) to see the true condition of

respondent :

~ Commercial Trust Company of New Jersey $ 768,240.00

_ First National Bank of Jersey City............ . 38,600.00

Hudson County National Bank.............. ~ 127,654.00

First National Bank of Hoboken................. 15,360.00

New Jersey Title Guarantee & Trust :

II cccrctccnambiceakee sig 60,288.00

Trust Company of New Jersey.................... 58,480.00

MII sieiistsndismabciane enantio kt 9h $1,068,622.00

Deducting from the market value of all oy

securities 1/31/31 ovsscneeneesnsenpesnsenntncannesnnesse $2,125,434.50

the estimated value of the local ‘bank

stocks, as shown above... 1,068,622.00

there remains a miarket value of all the __

securities in the portfolio of................. $1,056,812.50

~. 8

{ The evidence thus establishes that National Grocery “

Company between J anuary 31, 1930, and January 31, 1931,

suffered depreciation as follows:

Securities (R: 146) saeadiaiaeniaee $ 943,517.42

. Inventory® ...... Sis cainecseassstennannacanssenstatianansnanennss 376,457.56

Bread iatentee® nn ans.xne.n xen yeevnsccenensesicensesenessene 125,000.00

IEE. .cssshensinsdngniesannisiinieninaeennnectaiganentininn $1,444,974.98

If we add to that figure the quoted market |. .

value of the local bank stocks, to wit...... 1,068,622.00

the gross depreciation suffered in the fis-

_eal year ended 1/31/31, was.....................- $2,513,596.98

Deducting from this figure total net in- .

come (p. 6, SpE) n-ne 954,330.07

we find that in the year 1930 the Com-

pany’s net worth shrank in value............ $1,000,386.51

What more graphically could show the necessity of an

adequate surplus than such shrinkages!

Therefore the Company had in fact no accumulation of

gains and profits within the meaning of Section 104 in its

fiscal year ended January 31, 1931. ;

The Company did not sell any of the above securities

- to make a deductible loss under the Revenue Act, although

it could readily have done so, and wiped out all the net

income and saved the normal income tax of $103,616.60

which it paid. Such realized losses would also have obvi-

ated all questions under Section 104.

2

* From. Ex. 6, R. 136—Maullins estimated the inventory loss

_when testifying at a (R. 81).

** R. 98.

rs ye

9

i (d) The Evidence as to Respondent’s Purpose.

The testimony is without dispute that the intention of

the taxpayer from its organization up to the date of trial

was to expand; to build up a ‘‘chain”’ of stores ; to contin-

ually increase the number of stores in its chain.

_ An examination of the evidence discloses that this pur-

pose existed from thé formation of the National Grocery ae

Company, and that from that beginning (at a time! when “=

‘there was no income t ; or undistributed p§ofits ) the ; | \

taxpayer consistently aba to the policy of accuniulat-

ing gains and profits for the purpose of. building up the

-buginess. This was Kohl’s policy while he lived in the back

~ ofa store, cooked his own meals, and as he stated it? lived

‘‘as all poor devils do’’ (R. 63). . :

Mr. Kohl, respondenp’ President, testified the purpose x

of National Grocery Company was to open more and more

Sfores ; that they wanted more stores.

i After relating his early struggles he said, speaking of |

pe merger of the Henry Kohl Company with National

rocery Company in 1911: >

BS i.

“‘After this merger I had fifty-seven stores. It

is quite a question how I financed the additional

stores. I did it by using all of the money I could

borrow and what little I made in profits’? (R. 65).

**As time went on and by the method of keeping

all of my profits in the business, except what were.

necessary for my bare living expenses, ‘I was inde-

pendent and did not want to sell it’’’ (stock in his

company). —

. * * * * _ : ‘

s tj

4 10

‘*T expanded the business year by year * * * and

financed the expansions with the profits I made from

paths year to year, leaving them right in the business”’

’ ’ (R. 66).

* , * * * * *

‘“‘The National Graecery Company had in mind

opening more and more stores. I always had great |

big ideas’’ (R. 67).

‘‘Our system was right and the public wanted

“them, but we could not carry it out all the time.

Competit'on came, but we wanted plenty of stores.

We had to have a certain gmount of capital in order

to have credit. Your, credit depends on your state-

- ment. ‘If you don’t have a decent statement you

cannot buy your merchandise right or do anything

right.’ The National Grocery Company had to buy

large quantities of merchandise all the time. Ever

since we have been able to discount our bills we have’

- been doing it. It is a very important thing in our |

business to get the discounts and pay cash for mer-

chandise. That is the inner profit of the business.

‘‘For the year 1930 the discounts amounted to

$434,000. The purchases for that year were in ex-

cess of $19,000,000, and the discounts were almost

two per cent of that figure. In order to make those

purchases and take our discounts we had to have

large-capital’’ (R. 67, 68).

Again, Mr. Kohl testified that he had been on the look-

out at all times to buy an existing chain of stores. He said

that in 1929 and 1930 Mr. Bohack of the H. C. Bohack Com-

( pany, in Brooklyn, was alive, and ‘offered to sell his chain

| of five or six hundred stores, and he seriously considered

| purchasing part, if not the whole of the business. He made

— sé a careful survey of the business to see if it was profitable

to purchase, but while the negotiations were pending Mr.

.. ~~

a

11

Bohack became ill and died. The negotiations were resumed

as late as last year (1936). The Bohack Company is a large

concern, five or six million dollars (R. 70).

Mr. Kohl also testified that he kept all the earnings in

the business, because ‘‘I needed them in the business—

always. needed them in the business. I never had any too

much money in my business.’’ (R. 72).

In this connection Mr. Kohl said:

“<* * * Even with all the capital that the he

had we had to borrow money from the banks occa-

sionally as it was needed. We needed jt to buy but-

ter and eggs and put them in storage, and to buy

merchandise when it was the right time to buy. Fre-

quently you need more money that you have got. It

ad takes all of the money we have got to swing that.

We’ buy butter every day, but in June we buy butter

for the next Winter. :

Q. How about coffee—do you buy that in large

quantities? A. That all depends,

Q. On what? A. If war were declared suiaaioa

- we would buy a year’s supply and would be fortunate

to have the money to do it with’’ (R. 72).

Again:

‘Tt has been the habit with us to keep in the busi-

. hess every possible dollar, and let that accumulate

‘ for the benefit of the business. I think it is good

business judgment and I guess everybody else does.

The bankers tell you that. If we had adopted a dif-

ferent policy and in the good years from 1920 to 1930

had drawn out of the business a large part of ‘our

profits, I do not think we would have been able to

withstand the effect of this depression the way we

have. I think those concerns who did do that have .

gone” (R. 73), : — | le

12

He testified that:

‘‘T did not refrain from paying dividends in the

National Grocery Company in 1930 in order to avoid

the payment of any government taxes. I have never

done that’’ (R. 75).

Miss Mullins, Treasurer of the Company, who had been

associated in the business with Mr. Kohl since 1897, when

he had one store, fully corroborated Mr. Kohl’s testimony

(R. 77). She said:

- “Tt has been Mr. Kohl’s policy from the forma- ©

tion of the business that he could make more money

by reinvesting the earnings in the business than in

any other type of investment’’ (R. 77).

. * _ * * * * ee

‘When Mr. Kohl had one store he promised me

he would have ten some day. After he had ten and

he thought if I would stay a little longer maybe he

would have a hundred, and that has been his —

_ right along”’ (R. 78).

* + * * r * *

**T believe in 1919 we had two hundred stores.

At that time Mr. Kohl was figuring on having a >

thousand. When he got up to six and eight hundred

stores his plan was to have two thousand’’ (R. 78).

She testified that the present warehouse and bakery and

machinery are built to take care of between 1,500 and 2,000

stores (R. 78). This fact shows that the purpose of the

management was.to increase the number of stores as oppor-

tunity offered to double the 815 operated in 1930.

13

She also said: , .

_ “Tt is my opinion, as Treasurer of the Company,

that in the year 1930 the surplus was not in excess of

the reasonable needs of the business, and is not

today, although conditions are different. In order to

finance the purchase of $20,000,000 worth of mer- —

chandise and, pay a million dollars in rents per

annum, the Company required its surplus, in my

opinion. There were times even at that when we were

short of cash, and had to borrow temporarily from

the banks in onder to pay for i we Wiis merchandise’’

(R. 79):

Miss Mullins corroborated Mr. Kohl’s Sperere about

“negotiations with. Mr. Bohack\ in 1930 for the purchase of

his business, and also negotiations for the purchase of a

chain of stores in Paterson, New J ersey (R. 79, 80).

Mr. Field testified that a company like respondent to

get the full advantage of a chain store business must cover

with stores the total territory that can be reached with

trucks from its central warehouses (R. 87, 88).

At Mr. Kohl’s request Mr. Field tried to induce the .

owners of one chain of stores to sell.to respondent (R. 89).

The management of respondent saw values of every-

thing steadily declining in the year under review. They

were negotiating a great expansion through the acquisition

_ of the H. C. Bohack chain of stores ,in Brooklyn and ~—

Island.

‘* Any conservative management would have con-

served all its ready cash, because they did not know -

what the future would bring forth’’ (Field, R. 91;

Ferguson, R. 92, ey

14

The Board’s Decision.

The Board of Tax Appeals divided eight to seven. The

findings of fact and opinion of the majority confirming the

assessment by the Commissioner completely ignored the

| evidence proving respondent’s need of large capital'in these

particulars:—(a) of the number of employees and wages

paid; (b).rents paid; (c) amount of purchases; (d) the tes-

timony of Mr. Kohl, Miss Mullins, Mr. Field and Mr. Fer-

guson that the capital and.surplus was notin excess of the

reasonable needs of the business; (e) the testimony of Mr.

‘Kohl and Miss Mullins relative to plans for expansion and.

purchases; (f) the testimony of Mr. Kohl and Miss Mullins

that the Company did not have any intention of evading

taxes in not paying dividends; (g) that for the year in ques-

tion the Company in fact suffered a net loss when the mar-

_ ket value of its assets was considered, although an examina-

tion-of the income tax return on the Government blank

showed net profits on its face.”

— The majority opinion and findings of fact stressed the

earnings of the Company, its investment in securities, its

failure to pay dividends, loans to Mr. Kohl in 1930 of »

$140,000 and prior loans, and concluded that petitioner was

_ availed of for the prohibited purpose (R. 18-24).

The majority of the Board proceeded on the erroneous

assumption that the presumption created by Section 104(b)

of the statute cast the burden on the taxpayer of proving

that it was not availed of for the prohibited purpose, and

‘* The income tax law oe not take into consideration depre-

ciation in the portfolio of sécurities and real estate, but only gains

and losses determined by sales. In this taxpayer’s method of

accounting, the inventory was carried at cost or market, whichever

was lower, and this method was followed in the year under review.

~

15

did not have gains and profits in excess of the reasonable

needs of the business.

The opinion of the Board says:

‘‘Does thé evidence overcome. this prima. facie

presumption’’ (R. 22)?:

The Board concluded:

‘‘We are also of the opinion that the evidence of

record does not rebut the prima facie presumption

created by the statute’’ ete. (R. 23).

The Commissiéner had offered no proof before the Board

as to what the reasonable capital.needs of respondent are.

No one will contend that it needs no capital. Without ade-

quate capital it could not have discounted its bills payable,

and such discounts in the year under review amounted to

$493,719.00 (Ex. 10, R. 141), or fifty-seven per cent of the

net earnings for the year. 7

The respondent had affirmatively prov ed by its President

and Miss Mullins that it heeded all of its capital in its

business.

The Board of Tax Appeals made its finding from an ex-

amination of the balance sheet alone, wholly disregarding

_ the testimony of Mr. Kohl, Miss Mullins, Mr. Field, and Mr.

Ferguson, that respondent’s capital and surplus were not

in excess of the reasonable needs of the business:

Likewise, the Board’s conclusion that respondent’s pur-

pose in not paying a dividend in 1930 was to avoid the im-

_ Position of the surtax on Mr. Kohl, was supported” by no

evidence. There was nothing whatsoever to support it ex-

cept the statutory presumption, and respondent having gone

forward with its proofs and having affirmatively shown that

16

it had no such purpose (United Business Corporation vs.

Commissioner, 62 Fed. (2d), 754; eertiorari denied, 290

U. S., 635), the presumption automatically fell out ef the

case. | j

Pariso vs. Towsé, 45 Fed. (2d), 962 (infra, p

21).

* The minority of seven, speaking through. Member Mel-

lott, took into consideration the testimony above referred

to that had been ignored by the majority of the Board; and

- eoncluded :

«The inquiry as to whether there has been an

accumulation of surplus beyond the reasonable needs

of the business is not determinative of the ultimate

question to be decided. Even if the evidence be suf-

ficient to show that there was an unreasonable

accumulation—which, however, I do’ not believe has

been shown in this case—this merely raises a rebut-

table presumption of the existence of the crucial

purpose. ‘Such presumption is overcome by the evi-

dence in this.case which shows an absence of such

purpose. The corporation merely continued its long

established practice of ‘ploughing its earnings back .

into the business.’ Indubitably it had in the earlier

‘years, no ‘purpose of preventing the imposition of.

the-surtax upon its.shareholders’, for there was no

surtax to escape. There had been no ‘sudden change

of policy, coincident with large increases in the sur-

tax rates, (which) might * * * betray a purpose to

- accumulate against a season more propitious for dis-

tribution.’ (United Business Corporation, 62 Fed.

(2d) 754). It had pursued the same policy through-

out the years’’ (R. 30, 31).

S

a

a a* rt x

17

The Decision of the Circuit Court of Appeals.

In due time the respondent appealed to the United

States Circuit Court of Appeals for the Third Cjreuit, and

assigned seventeen assignments of error (R. 39-44).

The Cireuit Court of Appeals, in an opinion by Judge

- Buffington, earefully reviewed all the evidence that was

- before the Board, and said:

‘‘We limit ourselves to holding that the Tax

Board had before it no proof, substantial or other-

wise, to support its imposition of this penalty tax.

Its judgment is therefore reversed’’ (R. 172, 178).

ARGUMENT:

ae

No new question of law is involved.

Petitioner contends that the Circuit Court of Appeals

so far departed from the accepted and usual course of judi-

cial procedure as to call for the exercise of this Court’s

power of supervision.

Two months ago, petitioner filed a brief “in this Court

opposing the granting of a writ of certiorari in Almours

Securities, Inc. vs. Guy T. Helvering, Commissioner vf -

Internal Revenue (No. 613 October orm dr) in = peti-

tioner said (p. 13):

‘. ‘*Hxamination of ‘National Grocery Co. v. Helver-

ing, supra, discloses no conflict with the. decision

below. The Circuit Court of Appeals for the Third

Cireuit, merely held ‘that the Tax Board had before

. it no proof, substantial or otherwise, to support’ it.

18

‘‘Both that court and the court below treated the

question before them as one of fact and directed their

inquiry to the question whether or not the ultimate

finding of the Board had any substantial support in

the evidence in the case. Because of the supposed

nature of the evidence in the National Grocery case, ~

~

the court held that the ultimate finding had no sup. .

port in-the evidence. Both courts applied the same

legal principles of judicial review. The cases di-

verged because of differences in the analyses of fact

situations and the’ state of the records presented in

' the two cases.

‘‘The comparative enalvele drawn by the peti-

tioner (Br. 30) between the cases ignores the very

consideration given predominant weight in the

National Grocery case. The petitioner here was a

mere holding or investment corporation (see i/ra,

pp. 14-18), which fact alone raises a statutory pre-

sumption of the interdicted purpose, while the Na-

tional Grocery Company was an actively operating

company. The court there concerned itself with.

showing. that the Government had not submitted -

proof rebutting the taxpayer’s evidence to the effect

that the sums withheld were reasonably necessary

for a rapidly expanding grocery store business, a

consideration which in itself is obviously sufficiontego

avoid any conflict with any ruling of law in the in-

stant case.’’

Ina footnote at the bottom of page 12 of said brief, the

Government said:

‘<A dictum in the National Grocery case indicates

, that the court viewed the decision as to the purpose

* for which the corporation was formed or availed of

as a question of mixed law and fact. This statement

_ did not enter into the decision of the case.”’

>

’

19 7

Certiorari in the Almours Securities Company case Was

denied January 10, 1938. .

Il.

The evidence before the board was not disputed.

In its second reason for the issuance of a writ petitioner

contends that’ the Circuit* Court of Appeals substituted its

judgment for that of the administrative

What the Board of Tax Appeals whe yt did, was wholly

to disregard a large portion of respondent’s evidence, par-

ticularly the evidence as ‘to what motivated respondent’s

business conduct, the purpose for which it accumulated its

earnings, its need of large capital for operating and expan-

sion purposes and the sworn testimony that its surplus

was not in excess of the reasonable néeds of its. business

ond was not accumulated to avoid any taxes. .

No witness for the Commissioner testified that the ratio

between capital and surplus and business done was too large.

No witness contradicted the taxpayer’s evidence in any

respect. ay

The Board of Tax Appeals mergly picked out*of the

taxpayer’s balance sheet certain items, compared the ratio

between the capital and the surplus, noted that the corpora-—

tion had a surplus of $7,938,965. 54 (R. 23) (which figure dis-

regarded all depreciation of every kind), and that it, had

loaned a comparatively insignificant amount to its prin-

cipal stockholder, and from those faets dlone concluded that

since its income tax return for 1930 showed large net earn-

ings which it did not distribute in dividends, it therefore

had the purpose te evade the imposition of the surtax.

*.

|

in

\ Maren §

a

/

/

v

see The Board entirely ignored the most important factor,

r.€., the ratio between the capital and surplus, on the one

| hand, and business done, on the other. Respondent’s annual

“turnover was 6 to 8 times its working capital (R. 86).

The Board entirely disregarded the proven fact that

this corporation, which operated a chain of grocery stores

te

throughous Northern New Jersey, Staten Island, and a part

of New York, also owned and operated a large central dis-

tributing plant, a large administrative building, a large

bakery, garages, storage warehouses, a fleet of automobile

trucks, and at all times carried large stocks of merchandise

in its stores and warehouses to serve over 100,000 cus-

tomers daily (R. 83). Capital was the life-blood of this

_ business.

The Board ced the fact that the taxpayer had 2,332 |

employees, who had to be paid regularly wages aggregat-

ing $3,132,891.99 pér annum, and that it had annual rents

to pay aggregating $929,918.70, as well as State, City and

Federal taxes, to say nothing of bills far merchandise

aggregating $19,998,937.83 in the year under review.

The Board ignored the fact that sound business prin-

os

ciples require: the accumulation of surplus in times of

plenty against the coming of times of famine,. the likeli-

- hood of wars, recession, depression, strikes, drought, floods

and the consequent scarcity of merchandise.

Respondent, as. we have heretofore shown, proved

affirmatively and convincingly that its capital and ‘surplus

were not in excess of the reasonable needs of the business, .

and that it did not fail to pay dividends in the year under

review to avoid the imposition of surtaxes on its sole stock-

holder: The Government introduced no evidence; and as 4

matter-of Jaw the presumption contaiited i in Section 104(b)

~ + ZI

ented when the siceniaaees went forward with 4 sworn

testimony and overcame the presumption.

_ See Parisorvs. sania 45 Fed. (2d), 962, where —

Hand said:

“Tn Potts vs. Pardee, supra, page 433 of 220

N. Y., 116 N. E., 78, and Rose vs. Balfe, 223 N. Y.,

481, 486, 487, 119 N. E. 842, it was said that the .

sumption disappears upon any ‘substantial’ eévi-

‘dence. in defense; and this would appear to imply

no more than that the defendant in the prescribed

situation must proceed or lose.’’ .. . ‘*Thus it fol-

lows that the office of a presumption must disappear

when the opposite side puts in proof, and the party

charged with the burden of proof must fail, if he

goes no further, or cannot use his adversary’ S$ evi-

dence as support of the.affirmative. To hold other-

Wise would be to impose the burden of proof upon

the party having the negative.’’

Western & A. R. Co. vs. H enderson, 279 U.S. 639.

In the face of the convincing testimony that respondent

corporation did not have more capital than its business

required, and occasionally was obliged to borrow for Short

" periods to pay for incoming merchandise (R. 79), what was

there to support the Board’s finding that respondent’s

profits were:’in excess of the reasonable needs of the

business?

Every business must have capital. Even the newsboy |

must have a few pennies with which to purchase the papers

he sells on the street corner. No corporation can grow and -

have a healthy business that distributes all its earnings.

The capital \required to run one business would be wholly

inadequate for another business. The National Grocery

22

Company with 2,300 employees and 800 stores requires far

more capital than the grocer with one store and three

employees. ;

There was not a particle of evidence before the Board

to warrant it in making the conclusion it did.

We submit that the Circuit Court of Appeals could

properly have made‘no other finding in the face of the -

undisputed testimony contained in this record,

The purpose to evade surtaxes is not proved by

_ mere showing that a corporation is able to pay divi-

dends.

The petition for certiorari charges that the Court below

overlooked facts indicating that a sizeable portion of re-

-spondent’s profits for the. taxable year could have been

declared as a dividend, without curbing in the slightest the

reasonable necds of the business (p. 15), contending (1)

that the accumulations were not needed to acquire new -

stores; (2) they were not needed in the business, and (3)

they were not needed because of the depreciation taxpayer

suffered. |

This argument entirely disregards the fact found by the

Board, that:

‘For many years the petitioner has contemplated

greatly.expanding the number of stores operated:

For a time it negotiated for the purchase of stores .

in Paterson, New Jersey, and also for stores in New

York City proper, and for a large chain of stores in

Brooklyn, New York. The petitioner has not, how- —

ever, made the contemplated expansions .because in |

23

the opinion of the petitioner’ 8 president, eae

Kohl, the stores could not be purchased at what he

regarded as a fair price’’ (R. 18, 19).

The evidence shows that these negotiations were car-

ried on in 1929 and 1930 (Kohl, R. 70; Mullins, R. 79, 80).

Mr. Kohl testified that the H. C. Bohack Company,

which he was negotiating for, was a large business, running

into five or six million dollars (R. 70).

If this purchase had been made respondent would have_

- needed every dollar of its surplus. |

. This case cannot be considered or decided on the same

basis as that of a corporation formed by a rich man, who

transfers to it his cash and securities in éxchange for stock,

and uses the corporation as a means of tax avoidance. Such

_4 corporation needs very little money, and it may be that

Section 10 requires such a corporation to distribute a large —

part of its net earnings. :

To enforce the same rule on corporations like re-

spondent, which are engaged in an active mercantile and —

manufaeturing business, would result in the stifling of busi-

ness. What business can continue to grow and expand if

it is to be subjected to the normal income taxes and the

fifty per cent penalty tax of Section 104? |

It is to be noted that Section 104 does not specify how

it dan be avoided by the payment of dividends; what divi-

dends should be paid; what ‘surplus a hinsindna may prop-

erly have. ’

_ An attempt was rn to assess a penalty tax of fifty

per cent under Section 220 of the former law (now Section

104) on National Grocery Company for its fiscal years

ended J ar, 31, 1923, and January 31, 1924. The tax was

24

}

set aside on appeal to the General Counsel of the Bureau of

Internal Revenue (Ex. 1, R. 10i). f~’

Again an attempt was made to assess the penalty under

- Section 220 on respondent for the fiscal year ended January

31, 1928. Respondent protested and after hearing the pro-

test was sustained (Ex. 1, R. 125).

The record: below shows a tremendous growth in this

- business. after these attempts were made. For the year end-

ing January 1925, the Company had 1,462 employees, paid

them wages of $1,683,947.70 (Ex. 9, R. 140), and operated —

482 stores with gross sales of nearly $16, 000,000.00 (Ex. 7,

R. 138). For the fiscal year ended January 31, 1929, the

Company had 2,210 employees, paid them wages of $2,825,- _

615.53 (Ex. 9, R. 140), and operated 782 stores, with gross

sales of $24,116,343.72 (Ex. 7, R. 138). Two years later (the _

fiscal year under review) the number of employees had i in-

creased by 122, wages had increased by $307,000.00 per:

annum, stores had’ increased from 782 to 815, and gross

sales had increased by over $1,000,000.00.

Ts. it probable that any such increase would have fol-

lowed the. collection of the fifty per cent penalty in 1924,

1925 or 1928?

The test under Section 104 is not whether a eieedian

is able to pay dividends but rather, is it used as an instru-

ment of tax avoidance. The question raised by the statute

is whether gains and profits are permitted to accumulate

for the purpose of avoiding surtaxes that otherwise would :

fall on the owner. This statute does not impose a tax on

corporations because they do not pay dividends when they

might de so—as petitioner seems to contend. That is the

theory of later legislation imposing a surtax on undis- -

tributed profits of corporations generally (Rev. Act 1936,

Sec. 14; 49 Stat., 1655).

25

No intention of the management of this business to avoid

taxes can be found in this record. To the contrary, from

the beginning of this corporation in 1908 to the year under

review there has been a steady growth year by year

through the policy of. ploughing all possible earnings back

into the business. The net result is that the Government

~ has received in taxes more than the owner; employees re-

ceived more in wages for the year under review than the

owner received during the entire history of the business,

and those engaged in trade and commerce have sold the

Company many millions of dollars of merchandise.

Loans to Kohl Did Not Prove the Forbidden Purpose.

P

In the year under review Mr. Kohl temmporarily bor-

rowed from his Company $140,000.00. He had developed

a heart condition and used $40,000.00 to purchase a resi-

dence in Florida.. He borrowed $100,000.00 in order to make

a contribution to complete a home for the Young Women’s

Christian Association in Jersey City (R. 70). He gave the

- Company demand notes for the amounts (R. 71). The

amounts loaned were entered on the books under the head

of ‘‘Notes receivable’’ and appeared in every statement, the

Company made (R. 81). The reason he borrowed from the

Company instead of declaring a dividend was that he ex-

pected to repay and the surplus account would not be

lowered, whereas if he had declared a dividend the money

would be permanentiy out of the business (R. 79).

-Mr. Field, President of the Commercial ‘Trust Comair

of New J ersey, testified that: ie

‘“‘T don’t think it would have made much differ-

ence whether he borrowed the money from the bank

or his own company”’ (R. 89). He

a

26

On cross examination he said:

- “T presume that Mr. Kohl’ s borrow rings from the |

Piya was @ good asset for the corporation’’

(R. 92).

On re-direct :

‘“We have considered the item of $610,000 owed

by Mr. Kohl to National Grocery Company an asset

_ of the Company, collectible whenever ‘the aeery

elected to collect it’? (R. 92).

-. In effect. the Commissioner conceded these loans are.

good and collectible for he includes the notes receivable in

the surplus (Exs. 5 and 6, R. 134, 136).

The element of loans by a corporation to a stockholder

is not in any sense a fair test of a purpose to evade taxes.

Suppose a corporation is in the banking business, all of

its stock being owned by one man. The business of a bank

is to loan money. If the bank loaned money to its sole

stockholder agaifst his note, could it be said that because

he borrowed from the bank which he owned, that thereby

an intention was shown to use the corporation to evade

taxes?

The facts conclusively show that Koh] borrowed from

his corporation temporarily. He so handled the matter that

for the purposes of credit the surplus was mt depleted.

The fact is that within seven weeks of the end of the year,,

he repaid $60,000.00 of his temporary borrowings, during

- the following year he paid off $65,000.00, and May 4, 1933.

he paid off $86,000.00 (R. 142). The Commissioner’s notice

of the attempt teassess this penalty tax was dated April 25,’

1934 (R. 11) and was received about a year after all the

27

loans in the year under review, and a part of the earlier

—Toans had been repaid. This clearly demonstrates.that the

purpose of the stockholder was to retain all assets in the

corporation, according to its historic policy, for continued

growth and expansion. | | ~

In United States vs. Tway Coal Sales Co., 75 Fed. (2d)

336, the taxpayer sued for the recovery.of Ses paid after

an assessment under Section 220 of the former law. Judg-

ment for the taxpayer in the District Conft was affirmed by

the Circuit Court of Appeals (Sixth Circuit), despite the :

fact that the sole stockholder had borrowed relatively

larger sums from his corporation than Kohl did from Na-

tional Grocery Company.

IV. . _

Section 104 being a penal statute, must be construed

strictly and in the light most favorable to the taxpayer.

Section 104 of the Revenue Act of 1928 imposes a

penalty of 50 per cent of the income, including dividends

and jncome from tax exempt: securities, and aH other

income, while Section 293(b) of the Revenue Act of 1928

provides that for fraud the penalty is 50% of the taz.

) “If any part of any deficiency is due to fraud

_ with intent to evade tax, then 50 per centum of the

- total amount of the deficiency (in addition to such

deficiency ) shall be so assessed, collected, and paid,

in lieu of the 50 per centum addition to the tax pro- .

vided in Section 3176 of the Revised Statutes, as

amended’’ me? 293 (B), Rev. Act, 1928).

28

Since Section 104 imposes a penalty far greater than for

fraud, it should be construed most strongly against the

Government.

Gould vs. Gould, 245 U. 8. 151;

Crocker vs. Malley, 249 U. S- 233;

U. S. vs. Field, 255 U: S. 262;

. Smietanko vs: First Trust Bk., 257 U.S. 606;

Shwab vs. Doyle, 258 U. 8S. 534;

U. 8S. vs. Merriam, 263 U. S. 188;

Hecht vs. Malley, 265 U. 8. 156;

‘Reintcke vs. Northern T. Ca., 278 U.S. 348;

-” Aluminum Castings Co. vs. Routzahn, 282 U.S.

9 100; ee ae a : .

* “Old Colony vs:‘Commissioner, 284 U.S. 561.

CacsBadion.

We respectfully submit that the decision of the Circuit

Court of Appeals is correct. The Court below finding that

there was no evidence to support the action of the Board

properly reversed. . _

Respectfully submitted:

. Epwin F. Sirsa, ~

James D. CarPENTER, JR., |

Attorneys for Respondent,

id Jersey City, N. J.

i

February, 1938.

«4 6

29

e

Appendix.

Revenue Act of 1928, c. 852, 45 Stat. 791:

Sec. 104. ACCUMULATION OF SURPLUS TO EVADE ; KS

SURTAXES.

(a) If any corporation, however created or or-

ganized, is formed or availed of for the purpose of

preventing the imposition of the surtax upon its

shareholders through the medium of permitting its.

gains and profits to accumulate instead of being

divided or distributed, there shall be levied, collected,

and paid for- each taxable year upon the net income

of such corporation-a tax equal to 50 per centum

of the amount thereof, which shall be in addition to

the tax imposed by section 13 and shall be computed,

collected, and paid upon the same basis and in the

« same manner and subject to the same provisions of

law, including penalties, as that tax.

(b) The fact that any corporation i is.a mere hold-

ing or investment company, or that the gains or

profits are permitted to accumulate beyond the rea-

sonable needs of the business, shall be prima facie

evidence of a purpose to escape the surtax.

(c) As used in this section the term ‘‘net income”?

means the net income as defined in section 21, in-

creased by the sum of the amount of the dividend - 7s

deduction allowed under section 23 (p) and the

amount of the interest on obligations of the United

States issued after September 1, 1917, which would \

be subject to tax in whole or in part in the hands of |

an individual owner. SS a

JS

(d) The tax imposed by this section shall not Mg

apply if all the shareholders of the corporation in- “oe

clude (at the time of filing their returns) in their aS

pe ane

eo.

- 30

gross income their entire distributive shares, whether

distributed or not, of the net income of the corpora-

tion for such year. Any amount so included in the

gross income of a shareholder shall be treated as a

dividend received. Any subsequent distribution

made by the corporation out of the earnings or

profits for such taxable year. shall, if distributed to

any shareholder who has so included in his gross

income his distributive share, be exempt from tax in

the amount of the share so included.

Subdivisions (a) and (b) of Section 220 of gbe Revenue

Act of 1924, c. 234, 43 Stat. 253, and subdivisions (a) and

(b) of Section 220 of the Revenue Act of 1926, ¢. 27, 44

Stat. 9, are substantially identical with subdivisions (a)

and (b) of Section 104 of the Revenue Act of 1928. x

Treasury Regulations 74, promulgated under the Rev-

enue Act of 1928: tee

Art. 541. Taxation of corporation utilized for

evasion of surtax—Section 104 is designed to dis-

courage the formation or use of a.corporation for the

purpose of preventing the imposition of surtaxes

upon its shareholders, through the device of per-

mitting its gains and profits to accumulate instead. .

of being distributed. If a domestic or foreign cor-

poration is so formed o¥ availed of, it is subject

to a tax at the rate of 50 per.cent upon its net income

in addition to the tax imposed by section 13. _How-

ever, the additional tax at the rate 50 per cent does

not apply for 1928 or any subsequent taxable year

-if all the shareholders of the corporation include (at

the time of filing their returns) in their gross income

their entire distributive share, whether distributed or

not, of the net income of the corporation for such

year or years. Any amount so included in the gross

income of a shareholder shall be treated ‘as a divi-

po

\

. a /

dend received, and any subsequent distribution made

by the corporation out of the earnings or profits for

such taxable years shall, if distributed to any share-

- helder who has so included in his gross income his

distributive share, be exempt from iax in the amount

of the share so included. :

Arr. 542. Purpose to escape surtax—Prima

‘facie evidence of a purpose to escape: the surtax

exists where a corporation is a mere investment com-

pany, where a corporation has practically no busi-

ness except holding stocks, securities, or other prop- .

erty and collecting the income therefrom or investing |

therein, or where a corporation other than a mere

holding or investmenécompany permits its gains and

profits to &kecumulate beyond the reasonable needs of

the business. The statutory presumption that a mere

holding or investment company is subject to the addi-

tional tax imposed by section 104 may be overcome

if the corporation can show, either by reason of the

fact that it distributed a large portion of its earnings

for the year in question, or that its stock was held

not by the members of a family or of a:small group

but by a Jarge number of persons and in compara-

tively sniall ‘blocks, or by other evidence, that it was

not availéd of for thé purpose of preventing the

imposition of the surtax upon its shareholders.

The business of a corporation is not merely that

which it has previously carried on,. but includes. in .

general any line of business which it may ‘légiti-

mately undertake. ‘However, a radical change of

business when a considerable surplus has been accu-

mulated may afford evidence of a purpose to escape

the surtax. When one corporation owns the stock

of another corporation in the same or a related line |

of business and in effect operates the other corpo-

ration, the business of the latter may be considered

.

¥

**

.

‘

- tion is not without anything further to be regarded

32

in substance the business of the first corporation.

Gains and profits of the first corporation put into

the second. through the purchase of stock or other-

wise may>therefore, if a subsidiary relationship is

established, constitute employment of the income in

its own business. To establish that the business-of

one corporation can be regarded as including the

business of another it is ordinarily éssential that the

first corporation own substantially all of the stock |

of the’ second. Investment by a corporation of its

income in stock and securities of another corpora- .

as employment of the income in,its business.

Arr. 543. U nreasonable accumulation of profits.—

An ‘accumulation of gains and profits is unreason-

able if it is not required for the purposes of the busi-

ness, considering all the circumstances of the case.

It\is not intended, however, to prevent reasonable

accuntalations of surplus for the needs of the business.

No attempt can be made to enumerate all the ways

in which gains and profits of a corporation may be

- accumulated for the reasonable needs of the business.

Distributions made by a.corporation shortly after

the close of its taxable year shall be. taken into con-

sideration in determining the reasonableness of the

amount of earnings and profits of the corporation

retained by it for such year. Undistributed income

is properly accumulated if invested ‘in increased in-

- yentories or additions to plant reasonably needed by .

the business. It is properly accumulated if retained

for working capital required by the business, or in. ,

accordance with contract obligations ‘placed to the

credit of ‘a sinking fund for the purpose of retiring

bonds issued by the corporation. In the case of a -

banking institution thé business of which is to receive

and loan money, using capital, surplus, and deposits

\ 33

for that purpose, undistributed income actually rep-

resented. by loans or reasonably retained for future

loans is not accumulated beyond the reascnable needs

of the business. The nature of the investment of

‘ae gains and profits is immaterial if they are not in

fact needed ‘in the business. It is an unreasonable

accumulation of gains and profits by corporations

with the purpose of enabling their shareholders to

escape surtaxes on such gaims and profits which sub-

jects such corporations to the additional tax imposed

by section 104. Among other things, the financial

condition o* the corporation at the close of ‘the tax-.

able year. and the manner in which its funds are in-

vested at that date, determine the reasonableness of

the accumulations.

For the purpose of section 104 of the term ‘‘net

income’’ means the net income of the corporation as

defined in section 21 increased by the sum of (1) the

amount received as dividends and allowed as a de-

duction by section,23 (p), plus (2) the amount of

interest on obligations of the United States issued

after September 1, 1917, which would ‘be subject to

tax in whole or in part in the hands of an individual

owner. The Commissioner, or- any collector upon

direction from the Commissioner, may require any

corporation to furnish a statement of its accumulated

gains and profits, the name and address of, and num-

ber of shares held by, each of its shareholders, and

the amounts that would be payable to each, if the

income of the corporation were distributed. (See

section 149 (c).)

Articles 352 and 353 of Treasury Regulations 65 and

Articles 352 and 353 of Treasury Regulations 69 are sub-

stantially identical with Articles 542 and 543 of Treasury

Regulations 74. ;

a,

‘s