# Petition for Writ of Certiorari — McClain v. Commissioner > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386401_0322%3A03 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1941 - **Citation:** 311 U.S. 527 ## Text = ‘ © . Pa FILE COPY © ors wx | ee ae ie ; CHARLES ELMORE a0PLBY SUPREME COURT OF. THE UNITED ) STATES pian. _ OCTOBER TERM, 1939 ee ye re rie. EERO 2 Pree ees ‘No. Mil 55 DONALD §. McCLAIN, _ | ad Petitioner, a : Ss. COMMISSIONER OF INTERNAL REVENUE. . PEMTION FOR WRIT OF CERTIORARI TO THE _ UNITED STATES CIRCUIT COURT OF APPEALS FOR THE FIFTH CIRCUIT AND BRIEF IN SUP. . PORT THEREOF. ’ i: _M. .E._ Kivparrick, ‘ KE. D. Smrru, Jr.,. ~Counsel for Petitioner. = S ; . 4 * ~ INDEX - PETITION FOR WRIT OF CERTIORARI -” | 4 boas aes _ . §tatutes Involved i eek TEN ak Sao St Reasons for Granting Writ_... | ee ie | | . P Judgment antl Opinion’ Below... : mas: ey | @aestion Presented. lg . Statement of ‘the Case . | a UIT SIE os “3, 4,5 + Certification of Error : 5 - Importance of Question | ets , 5, 6 i : : Conclusion . f win 6 : | TABLE OF CITATIONS Revenue Act of 1984 - e a j ) Section 23 . (k) | | 8, 4, 5 Section 117 (f) | 2, 8,3- : | — a S. C. Thomson v. Commissioner of Internal Revenue, 108 Fed. (2) 642 (January 8, 1940) nani 2 ; e ‘ he ; . Paws oe | Oe, INDEX © | BRIEF IN SUPPORT OF PETITION FOR CERTIORARI | Page ie 6 7 Question Involved =.» ny | ie i eae 1 Conflict Between Circuits els Bae | 7 Intention of Congress 8, °9, 10 Confusion Within Fifth Circuit oly of Appeals. | Board of Tax Appeals baie ) es TABLE OF CITATIONS ~ Austin Corbin, 2d, v. Commissioner, _ eee 39 B. T. A. 1163, at page 1169 . ieee Fairbanks v. United States, ? 806 U.S. 436, 59 Sup. Ct. Rep. 607 | 8, 10 Henry R. Hunting v. Commissioner, : 32 BT. A. 495.2 | g Stewart v. ‘United States, : | 106 Fed. (2d) 405, headnote 8 , 10 W. A. Thomas, Collector; v. Perkins, | | -’ “Jo8 Fed. (2d) 87 2 10 S. C. Thomson v. Commissioner of Internal Revenue, - 108. Fed. (2d) 642 (January 8, 1940)... y= John H. Watson v. ‘Commissioner, +e FETs | 8,9 : ~ ii. * Henry P. Werner v. Commissioner, 15 B. T. A. 482 | ae —_ } Paul and Mertens Law on ane Income Taxation, . par. 28.87___ ica 8 Judicial Code Section 240, (Title 28 U. ‘Ss. C. A. Sec. 347) , 7 House of Representatives Committee Seek No. 1860_.. 9 Revenue Act of 1982 j Revenue Act of 1934 Section 23 (k) Section 117 (f) | Revenue ‘Act 1938 Section 23 (k) 2: Regulations 86 a Article 23 (k) (4) | \ Sa, IN THE Supreine Court of the Mnited States. " OcToBER TERM, 1939 DONALD S: McCLAIN, PETITIONER Vs. . : TEER ees THE COMMISSIONER OF INTERNAL | REVENUE, - RESPONDENT PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES CIRCUIT COURT OF APPEALS FOR ees THE FIFTH CIRCUIT Petitioner respectfully petitions for a writ of cer- tiorari to review a judgment of the Circuit Court of Appeals for the Fifth Circuit, and for. reason there- ° for respectfully shows the following : : JUDGMENT AND OPINION BELOW The judgment sought to be reviewed was entered | - on March 23, 1940, by the Circuit Court of Appeals - for the Fifth Circuit in the case of “Donald S. McClain, _ Appellant, v. Commissioner of Internal Revenue, wail pellee” (R. p: 30). 7 The judgment of the Circuit Court of acouis afore- said affirmed the decision of the Board of Tax Ap- _peals. The memorandum opinion of the Board of Tax 1 a weg * : . ote 3 SABES ae Oy ite ere Sarees a8 tee Agee AGC ar ty | PER ROMS Ys ot: RE Ne . . \ OS Se aS Tg RE RO ee AE Re ETERS Teer aS Te eR vA + Appeals appears (R.. p. 19). The decision of the mone of Tax —— appears (R. p. 21). STATUTES INVOLVED ee, ~ The Revenue Act of 1934 is avulved 1 in this contro- moe versy and this controversy turns upon the construction | of Section 117 (f) thereof. | j | \. . + Revenue Act 1934, Section 117 (f ) \ “Retirement of bonds, ete.—For the ‘purposes _ \ . of this title, amounts received by the holder upon the retirement of bonds, debentures, notes, or cer- ~\ . tificates or other evidences of indebtedness issued. _ by any corporation (including those issued by a - - government or political subdivision thereof), with ‘ Interest coupons or in registered form, s all be — as amounts received | in aati there- or | , REASONS FOR GRANTING WRIT : The revenue of the United States of America is in- ae volved in this controversy. A direct conflict exists be- | tween the Fifth Circuit Court of Appeals in this opin- . ion, and the Second Circuit Court of Appeals in the | case of S. C. Thomson v..Commissioner of Internal Revenue, 108 Fed. (2) 642 (January 8, 1940). Both of these cases deal with the meaning of the word “re- tirement” as used in Section 117 (f) of the Revenue Act of 1934, and the two courts come to exactly. oppo- _ site conclusions as to the manning of. that word: as there used. 7 QUESTION PRESENTED The sole question here presented is whether ‘winds : _ of, a corporation or a political subdivision” ‘of a state ee ae a SO See Oe en, ee Be 3 are “retired” within the meaning of Section 117 (f), - Revenue Act of 1934, when the debtor becomes insolv- ent and unable to meet its obligations, and the creditor receives payment on the bonds at less than the ‘face value thereof. If a “retirement” is thus effected, the - loss is limited by the capital loss provisions-of-the Revenue Act; if a “retirement” is not thus effected, the _ Joss suffered is as a bad debt and deductible in full by the creditor, taxpayer, under Section 23 (k) of the Revenue Act of 1934. . STATEMENT OF THE CASE In 1918 Donald S. McClain received as a gift from his father bonds of the Cameron County Water District (Texas) of the face amount and of the value of $15,- | 000. The Cameron County Water Improvement Dis- trict. was a political subdivision of the State of Texas. (R. p, 14) In 1935 the said water district became financially embarrassed and was in default on both principal and © interest on its outstanding bonds. (R.-p. 16). After - an-unsuccessful attempt at bankruptcy, said attempt being unsuccessful because the Municipa! Bankruptey _ - Act was declared unconstitutional, the water district applied to the Reconstruction Finance Corporation for a loan. In thé year 1935 it was successful in securing - aloan from that corporation to the extent of $264,500, this being sufficient to pay 49.9 per cent of its outstand- § . ing bonds. {«R. p. 15). The Reconstruction Finance Corporation, prior to making this loan, had made a - ‘survey of the properties of the water district and gen- i eral-conditions and had determined that the so made . j ‘ , ; ie ¢ é ° ‘was the maximum amount that the water district could | stand, and at the Same time, meet its current liabilities ; and charges. sae p. 16) After securing this aa jun the ‘Recenstvadion . Finance Corporation, the Cameron County Water Dis- ° trict paid to Donald S. McClain the sum of $7,476. 75, which amounted to 49.9 per cent of his bonds. (R. p. 17). In view of all of. the circumstances bearing upon the financial responsibility of the water district and its inability to meet its obligations, Donald S.’ McClain accepted this payment and in turn determined -the balance of these bonds to be uncollectible in year 1935, and in that year charged off on his books the sum of $7,523.25 as uncollectible, and in his income tax for. that year claimed a deduction of that amount, pursuant to the provisions of Section 23 (k) of the Revenue Act of 1934. In other words, he treated the-loss suffered by him as a loss.upon a debt becoming partially worth- less and uncollectible. In fact, the debt became un- collectible during 1935, except to the extent of 49.9 per - cent on the dollar. (R. p. 18) : _ The understanding of Donald S.’ McClain in accept- ing the amount agreed on was that he would receive. the payment thereon at the rate of 49.9 per cent and that such payment was to be the only amount he would receive. However, there was no writing to evidence this, nor in fact any agreement between the district and the bondholders to this effect. (R. p. 18) The Commissioner in auditing the returns of Mr. McClain disallowed this deduction and -asséssed a de- ficiency. The disallowance of the Commissioner was a“ oan based upon his contenton that the bonds had been “retired” within the meaning of Section 117 (f) of the Revenue Act of 1934, and, consequently, the loss suf- fered was a capital loss limited to $2,000. _ CERTIFICATION OF ERROR The Circuit Court of Appeals erred: . 1, In its ruling that the bonds in question were ré- tired within the meaning of Section 117 ( f of the Revenue Ac of 1934. ; 2. In its ruling that the bovis were retired. and i in ruling that petitioner was not entitled to coon ithe loss suffered as for a bad debt. . ' 8, In affirmitig the decision of ihe United States Board of Tax Appeals. IMPORTANCE OF QUESTION ‘The question here involved is highly important in the administration of the Revenue laws of the United States, because it is a question which is constantly re- curring. In every bankruptcy and in every compromise with creditors governed by the Revenue Acts of 1934 . -. and through 1937, the question arises whether the. ‘obligations of the insolvent or financially embarrassed debtor are retired within the meaning of Section 117 (f) of the Revenue Act of 1934, or whether the loss _ suffered by the creditor is to be treated as a loss upon * a debt becoming worthless and treated: under Section 23 (k) of that revenue act. With the irreconcilable conflict existing between the Circuit Court of — — 6 of the Fifth Circuit and the Circuit Court of Appeals -of the Second Circuit, endless litigation must neces- ° sarily result. It is, therefore, highly important that this court grant ceritorari and settle definitely and finally this qiiestion so that taxpayers and litigants may be .able to determine their controversy without . - the necessity of iets ‘and expensive litigation. CON a We For the reasons stated, it is respectfully submitted that the writ of ceritorari be granted. DONALD S. McCLaIN : By M. E. KILPATRICK, E. D. SMITH, JR., \ ee } Attorneys for Petitioner, 1045 Hurt Building, Atlanta, Georgia . J e . om Seen +, - BRIEF IN SUPPORT OF PETITION FOR Capa ~ The decision sought to be reviewed! is at pages 30-34 of the record. ee JURISDICTION ik The » jlirisdiction of this honorable court is based . upon Section 240 of the Judicial Code as amended by the Acts of February 1 18, 1925 (Title 28. a S.C.A. Sec- . . tion we QUESTION INVOLVED . The question involved in this petition for wei : turns entirely upon the construction of the word “ tirement” as used in Section 117 (f) of the psa 7 Act of 1934. Reference must also be had to Section 23 _ (k) of the same-revenue act in dealing with nae situa- . ‘an. ’ q 4 CONFLICT BETWEEN CIRCUITS. Ying 2 ‘S.C. Thomson v. the Commissioner of fatoondi Revenue, 108 Fed. (2d). 642 (eenuery 8, 1940).. Mr. Thomson .owhed twenty-five china dollars : " ($25,000.00) of the debentures of New: York Hotel, Inc. In 1935, after that company had ‘secured an ex- tension from its debenture holders and after receivers . had been appointed in the United States District Court On a creditor’s bill, Mr: Thomson received a final divi- Ne dend on his bonds at the rate of five dollars ($5.00) per thousand, thus receiving in all, one hundred twenty- five dollars ($125.00): ‘This payment was the only and final payment on said bonds, In his income tax — return for 1935 he treated this loss,as a bad debt loss under Section 23 (k) of the Revenue Act of 1984. The ° : fi 8 Commissioner disallowed this deduction and treated ‘the loss as having been suffered upon the retirement of the bonds and hence -treated the loss as a capital loss under Section 117. ( f) of that revenue act. The Board of Tax Appeals upheld the Commissioner. The - Cireuit Court of Appeals for the second circuit re- .’ versed the Board. ef Tax Appeals and held that bonds were not retired within the meaning of the Revenue Act when upon the collapse of the debtor Based were paid off at less than face value: From this statement of the Thomson ‘case, it be- | comes appar7znt that this-case is in irreconcilable con- flict with the decision ofthe Circuit Court of Appeals -of the Fifth a adh in the casé here pies aii this | petition. . INTENTION OF CONGRESS ; ~ L. The prior law allowed a full deduction for loss suf- fered upen bonds becoming” went or. partially ) worthless. . ere . : ‘Petttviie’ v. the United ‘States 306 U. S. “436, 59 Sup. », Rep. 607; "Henry: R. Hunting uv. the Commissioner, 32. B.T.A. 495 (bonds partially worthless); : Se es John H. Watson v. the Commissioner, 27 B.T°A. _ 463 (reversing siege P. Werner, 15 B.T.A. .. 482); Paul and M erten, Law 0 ig Federal Income Taxa- tion, par. 28.87. ; ‘ ‘ : ° ‘ sass ie 3 ‘ ; “ . yeti reals ee ees DD SKE eR gs ee : ty : : = Kite le ve Xs Ze eb RS ae Pe he. Oe ate as "485 - * ‘ . ‘ S = a aeae ® . os . hie 4 ¢ ° ‘ a = \ . . : - ty ° vd . > = . . . q : ¢ ‘ . VJ ¥ ARS. * . + d => Section 117 (f) “ the ‘ie Act of 1934 was _ aimed at the situation created by the John H.. Watson ease (27 B.T.A. 463) which, for the first time, allowed . a full deduction for the loss suffered by a bond holder when his‘: bonds matured and werg paid off in full. This case was decided December 29, 1932 after the ~ ~ enactment of the Revenue Act of 1982. Congress did not have an opportunity to correct this situation until the Revenue Act of:1934. The 1934 Act did not at- . ‘tempt to deal with the situation where bonds became worthless or partially. worthless. Revenue Act 1934, Section 23 (®), Regulation 86, Art. 23 (k) 4. ; 8. The intention of Congress in the Revenue Act of fe " 1934 was made more clear by the Revenue Act of 1938, oer th Section 23 (k) -was. meengee amended to cover this very situation. Revenue ‘Act of 1938, Section 23 (k), 2; : oe .. House. of Representatives Report No. - 1860/° . 1984, it could easily have'added Section 23 (k) in that 16th Congress, 3rd Session, appearing 1939-1 Cumadative Bulletin, page 728 at page La : ee 4. te on = ’ aoe e ~ ‘Had’ Congress intended to cover this ‘situation in | year. Also; had Congress thought that the amendment “in aes covered this atoaasct then the addition ¢ . a present case. Se po oc eae canon Tosa T og IE SS i ; — : —— ‘ , 10 eeu sub-Section 2 to Section 23 (k) inthe Revenue Act of: 1938 was a useless thing and without meaning. (The | 1938 Act was enacted prior to the decision of the 8. C. Thomson ease, supra. ) Fairbanks v. the United States, 306 U. S.. 436,- : 59 Sup: Ct. Rep. 607; Stewart v. the United States, 106 Fed. (2d) q — 405, Headnote 8. : CONFUSION WITHIN FIFTH CIRCUIT COURT OF APPEALS “2 _ Confysion exists within the decisions of the Fifth ~ Circuit Court of Appeals by virtue.of the case of W. A. © Thomas, Collector v. Perkins, 108 Fed. (2d) 87 (De- q cember 7,.1939) which is contrary to its decision in the | BOARD OF TAX APPEALS ; “The Board of Tax Appeals i in dealing with this exact... | question recognizes that in a proper case loss suffered 4 on bonds becoming worthless, may be deducted in full | . under the Revenue Act of 1934. Such a proper case is 4 here presented. ‘ Austin Gorbin, od, v. the Commissioner, 39 B.T.A. 1163, at page 1169. ; Bespectfully submitted, HirscH, SMITH & KILPATRICK E ] 1045 Hurt Building M. E. KILPATRICK, | Atlanta, Georgia _ E. D. SMITH, JR. Attorneys for Petitioner ———— --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386401_0322%3A03. Public record. Not legal advice.