Petition for ReHearing — Higgins v. Commissioner

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Supreme Court af the Muted States

a Cone Term, 1940.

: No. 253.

°. Kueene Hicerns, Sc |

or ee rer,

, eR ‘ vs. !

‘ Guy T. HELveRING, Commissioner of Internal Reveesl,

eo : , Respondent.

abe | rr.

» Ox Wrié or CERTIORARI TO THE Unirep Srates Cuicurt ©

Pe: : . Court or-APPEALS FOR THE Sxconp Circvir.

, i a Ne

PET ITION FOR REHEARING.

_ Seupen Bacon, -

a - -Orwi V.’W. Hawkins,

Counsel for Petitioner. |

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Supreme Court of the. Buited States

_Ocroper Term, 1940.

No. 253. Fo Aes

a RR ;

Evcene Hiccrns;

eo : to

? Petitioner,

Vs.

Guy T. Hetverinc, Commissioner of Internal Revenue,

4 e «

Oy Writ or Certioraki To THE Unitep States Cmcurr”

Court or APPEALS FOR THE Ssconp. Circuit.

3 - shes Po se ea es

Petition for Rehearing.

fi The above-named petitioner respectfully prays a re-

hearing of the above-entitled cause, for that in its opinion

in this cause, filed herein on February 3, 1941, the Court

has inadvertently been misled into stating that:

‘‘No regulation kes ever been promulgated which

interprets te meaning of ‘ earrying ona business. sal ieg

: : ; Respondent. -’

a ; 0

and into, concluding ‘therefrom that the repeated rulings

* of the Board of Tax Appeals and the acquiescences therein

of the Commissioner“of Internal Revenue, and repeated

' decisions of, the United States District Courts and Cireuit

Courts of Appeal are not determinative and do not amount

to settled administrative practice, and that ‘‘it should not

‘‘be assuined, from rulings of this.class that Congressional

‘‘re-enactment of the-language which they construed was

‘‘an adoption of their interpretation.”’

The’ attention of. the Court is respectfully called to the

- foliowing regulations approved by the penetany of the

Treasury in February, 1918:

‘Art. 8. Trade in the case “of individuals.

‘‘In’ the case of an individual thesterms ‘trade,’

‘*business,’ and ‘trade ‘ ‘or business’ comprehend all his

activities for gain, profit, or livelihood, entered into

- with sufficient frequency, or occupying such ‘portion of

his time or attention as to constitute a vocation, in-

cluding occupations and professions. When such ae-

tivities constitute a vocation they shall be construed

to be a trade or business whether continuously carried

on during’ the taxable year or not, and all the incote

arising therefrom’ shall be included in his return for

excess- -profits tax.

“In the following cases the. gain or income is we

subject to excess profits tax, and the capital from which

such gain or income is derived shall not be included i in

‘invested capital’; (a) Gains or profits from trans-

actions entered into for profit, but which are ‘isolated,

incidental, or so infrequent as not to constitute an_ ot

-eupation, and (b) the income from property arising

‘merely from its ownership, including interest, rent and

similar income from investments except in those casts

/

in which the management of such investments’ really.

constitutes a trade or business.’’

Regulations No. 41, Art. 8, (signed by the Cont-

- missioner - and, dipproved by the Secretary of the

Treasury and released, eal publication on February 4,

, 1918).

It is true that ‘Regulations No. 41 was expressly made

relative to the War Excess Profits Tax’’; but the War

Excess Profits Tax was imposed on the net income, (with

some specified exemptions), determined under the provi-

’ sions of the J neome Tax Act.

The War: Excess Profits Tax Act of Octobier 3, 1917 was

Title 2 of the Revenue Act: of that year. . Title 1 of -that

Revenue Act was the Income Tax. Law. {ae

By Section 200 of: that Title 2, it was specifically pro- |

vided that:

, “The terms ‘trade’ a d hgatness include pro-

- fessions — occupations. ”’ |

By Section 201 of that Title Y. it was provided: .

‘That in addition to the taxes under existing law .

and under this Act there shall be levied, assessed,

collected, ard paid for each taxable year upon the in-

come of every corporation, partnership, or individual, |

a tax (hereinafter in this title referred to as the tax)

equi to the following we of the net income:

By Section 206 of that Act, it was provided that:

“The net income of a “partnership or? : individual

shall be ascertained and: returned. for the calendar

years nineteen hundred and eleven, nineteen hundred

a — ~~ pt A ee

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-_. and twelve, and nineteen hundred and thirteen and for

- the taxable year apon the same basis and in the same

manner as provided in Title I of such Act ‘of Septem.

ber eighth, nineteen hundred and sixteen as amended

* «by this Act, except that the credit allowed by subdivi.

: sion ie b) of section five, of such Act shall be deducted. “s

+ Title 1 of the Act of September 8, 1916. was the Incoine

Tax Law. . .

“Section? 43 of that Title 2 ‘provided ae the making. of

Regulations by the Commissioner of Internal ‘Revenue with

thre appr oval of the Secret y of the “Treasuty..

It was thus specifically provided ‘that ‘the taxable net in.

confé under the Excess Profits Tax law. should. be based

on the 24; income as ascertained under the Income Tax

Law, and/the Regulations as to what should constitute g

trade or business of which the’ expenses. were deductible

~ were thus made directly applicable fo the section of the In,

*.. come Tax Act permitting ‘such. deductions as‘ are here in

question. nae , ".

The re-enactment of the Income Tax Law, in the 1918

form, in which Section 214 (a) took its present form, oc-

eurred about a year after the penser of this “Art. : of

Regulations 41.

The ‘tats thus parma Y in. this Regulation rons

“ ethrough all the decisions of the Boayd of Tax Appeals

and of the United ‘States District and Circuit Courts ‘of

* Appeals on the ecnstruction of the-term ‘‘carrying on any

tradé or business’’, up to the decision of the Board of Tax

Appeals by ahaa case at bar. S

* Bel oak examined ithe briefs filed i in behalf of the ‘Com:

missfoner in the Circuit Court of Appeals in the three

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ann referred. to by- this Court, namely, the Kales case,

101 F. (2d) 35; Foss.v. Commissioner, 75 F. (2d) 326 and

~ Washburn v: Commissioner, 51 F. (2d} 949. ;

Aside from the fact that these briefs are but argu-

‘ments of counsel, and not even rulings of the Commissioner,

in 10 one. of them do we find the bald proposition us-

serted that * no amount of activities on the part of a tax-

payer, however continuors, in managing his own securities

could be deemed ‘‘carrying on business’’.

The nearest to’ assertion of this proposition appears in

the brief ‘on. behalf of .the Commissioner im the Circuit

2 | ~Court of Appeals, in the case of Washburn v. Commissioner, *

‘(in 1931), but. the contention was there advanced con-

- cerning the construction of Section 204 (a), a separate

enactment, and it was; in that brief, claimed that the con-

struction to be given to the wording of that section, was

différent from that to be ideal to the expression in Sec-

tion 18.

In the brief : in F ogs v. Commissioner, 75 F. (2d) 326, (in

1934) we have found no such contention.

In the brief in Kales v. Commissioner, 101 -F. (2d) 35,

‘(in 1938) counsel for the Commissioner (abandoning the

contention that- had been made in Washburn v..Commis- *

stoner, 51 F. (2d) 949), asserted that Section 204 (a) and

18 should. be governed vad like construction of the term ;

“carrying on business”’

In each of the three ca$es, the contentions actually ad- -

. vanced by counsel for, the Commissioner. were overrule. by

the Court.

s'

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‘

Al the decisions and rulings throughout the 2 Fears, up

to 1934, are cléarlv based on the principle embodied i in this |

Regulation, Article 8 of Regulations 41; which has been

so overlooked, but which principle we had deduced from

- the rulings and decisions themselves.

We may also‘be permitted to point out that the Court

seenrs to have overlooked one fact shown in the Record,

namely,—that the Commissioner’s ruling on the. 1932 re.

turn of the petitioner, before the case came. before the

Board of Tax Appeals, was that the petitioner was carry-

ing on a single business in managing both his real estate

and his securities (R. p. 21). The Commissioner then |

sought ‘to divide the entire expenses of The _petitioner’s

business in proportion to the amount of income derived

‘ respectiyely from taxable property and from non-taxable

seeurities (R. p. 21): It was when*the Board of Tax Ap-

peals ruled that such division of the expenses was im-

possible (R.. p.-84) that the Commissioner asserted the

claim that the taxpayer’s management of his own secu-

rities could not be held to be carffying on business, no

matter how continuous and varied the petitioner’s ac-

tivities. :

- As the decision of this Court was largely. based.on the

. proposition that no Regulation has ever been promulgated

which interprets the ineaning of ‘‘carrying’ on.a business’,

and the conclusion therefrom that the repeated decisioris

were, therefore, not determinative and did not amount to

settled administrative practice; - and. that consequently’ q

Congressional re-enactment of the language of Section

214, a (in later acts Section 18) was not to be regarded as

an adoption‘of that interpretation; it is respectfully sub- = |

mitted that. this petition for a reargument should be

sranted in view of the overlooked Article 8 of Regulatiors

No. 41 of February, 1918.

;

‘In view of that Article 8 of Regulations 41, it is also

dear, as pointed out under Point I, A and B of our main

brief, that the finding that the petitioner was not engaged

in carrying” on business in the management of his secu- .

rities was a finding of mixed’ law and fact, and both pi

the, Board of Tax Appeals and by the Circuit Court cof

Appeals based on an erronepus view of the-law, as estab

lished and recognized by the Congress i in its re- -enactments,

and so reviewable.

. Respectfully submitted,

SrLpEen BacoX,

Orwiy V. W. Hawkins, :

Counsel for Petitioner.

oie ops

We hereby certify that the foregoing pefition for re-—

lvaring is presented in good, faith and.not for delay.

Seven Bacéy,

’ Orwitt -V. W. Hawking,

Counsel for Petitioner.

No. 253,—OcTOBER TERM, 1940.

Eugene Higgins, Petitioner,

-. U8. a

Commissioner of Internal Revenue.

the United States Circuit

Court of Appeals for the

Second Circuit.

[February 3, 1941.] -

‘Mr. Justice Reep delivered the opinion of the Court.

: Petitioner, the taxpayer, with extensive investments in real. es-

| tate,-bonds and stocks, devoted a considerable portion. of his time

F to the oversight of his mterests and hired others to assist him ~

> in offices rented for that purpose. For the tax: years in question, °

f 1932 and 1933, he claimed the salaries and expenses incident-to

looking after his properties were deductible under Section 23(a)

of the Reventie Act of 1932.1 The Commissioner refused the deduc-

) tions. The applicavle phrases are: ‘‘In computing net income there

e shall be allowed as deductions: (a) Expenses.—Al the ordinary and

R necessary expenses paid or incurred during the taxable year in

} carrying on any trade or business .”? There is no dispute

; over whether the claimed deductions are ordinary and necessary’

expenses. As the Commissioner also conceded before the Board of:

Tax Appeals that the real estate activities of the petitioner in rent-

_ ing buildings? constituted a business, the Board allowed such por-

* tions of the claimed deductions as were fairly alloéable to the hand-

ling of the real estate. The same offices and staffs handled both

real estate and security matters. After_this adjustment there re-

mained for the year 1932 over twenty afd for the’ year 1933 over six-

‘teen thousand dollars expended for managing the stocks and bonds.

Petitioner’s financial affairs wera conducted through his “ew

York office pursuant to his pe etailed instructions. His resi-

, dence was ‘in Paris, France, whtre he had a second office. By cable,

telephone and-mail, petitioner kept a. watchful eye over his securi-

ties.. While he sought permanent investments, changes, redemptions, :

maturities and accumulations caused limited-shiftings in. his port-

147 Stat. 169, ¢. 209.

2 Cf, ‘Pinchot «. Commissioner, 113 F. (2a) 718.

On Writ of Certiorari to

SUPREME COURT OF THE UNITED STATES.

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6 aati

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7 ‘ Higgins: vs. Commissioner of Internal Revenue.

‘folio. These were made under his-own orders. The offices ke

records, recei securities, interest and dividend checks, made ¢

posits, forwarded. weekly and annual reports and undertook ge

7 erally the care of the investments as instructed by the owner. -Pt

‘schases were made by a financial institution. Petitioner did not pa

ticipate directly or indirectly in the management of the corporatio

in which he held stock or bonds. The method of handling }

affairs under examination had been employed by pecitioner for-mo

than thirty years. No objection to the ee had A peovinns

been made by the Government.

. The Board of Tax Appeals® held that these activities did not co

stitute carrying on a business and that the expenses were capa

of apportionment between the real estate and the investments. T!

Cireuit Court of Appeals affirmed,* and ve oe certiorari i

cause of conflict.5 —

Petitioner urges that the ‘‘elements of continuity, constant rep

tition, regularity end extent’’ differentiate his activities frem ¢

oceasional like actions of the small investor. His activity is ar

the occasional action is not ‘‘carrying on business.’’ On the oth

hand, the respondert urges that ‘‘mere personal investment acti

ties never constitute carrying on.a trade or business, no matter ™

i

much of one’s time or of one’s employees’ time they may occupy.”

Since the first income tax act, the provisions atithorizing busine

deductiors have Wwaried only slightly. The Revenue Act of 191

alloaved as a deduction ‘the necessary expenses actualiy paid |

carrying on any business.’? By 1918 the present form was fixed ar

has so continued.? No regulation has ever-been promulgated whi

interprets the |meaning of ‘‘carrying on a business,’’ nor any rv

ings approved \py the Secretary of the Treasury, i.e., Treasury D

cisians.® Certain rulings of legs dignity, favorable to petitioner

appeared, in individual cases but they pte not determinative.

a‘

239 B.T. A. 1005. We |

4111 F. (2d) 795, ; ‘ *

. 5 Kales v. Com.aissioner, 101 F. (2d) 35; ‘auPouit v Deputy, 103 F. (2d) 25

€ 88 Stat. 167, Section II B. yo

7 40 Stat..1066, See. 214(a)(1). / Pe

8 Cf, Helvering v. New York Trust Co., 292 U. S. 455, 467-468.

90, D. 537, 2 C. B. 175 (1920); O. D.:877, 4 C. B. 123 (1921y; I. T. 275

XIII-1 ©. B. 43 (1934). See gilso 1934 C. ©. H, Federal Tax Service, Vol.

1 6035, p. 8027.

10 Biddle v. nr 4 302 tT S. 575, 582. Cf. Estate of Sanford

Commissioner, 308 U. 8,89, 52. But see Helvering v. Bliss, 293 U. S. 144, 15

and McFeely v. Commissioner, 296 U. 8. 102, 108. .

a

_ courts, it should not be assumed, from r

gressional reenactment of the language

Higgine vs. Commissioner of Internal Revenue. Rit

7 : after defeat does not *

amount to settled ‘edasinistrative practige.? Unleas the fa iminis-

“Bureau and without challénge by the Gov ent iy the Board and

ich they construed «was an

adoption of their interpretation. : —

While the Commissioner his ¢

in'the courts, sometimes successfully’* and Sometimes unsuccess-

fully,!* the petitioner-urges ‘that phe Biireau accepted for years the

doctrine that the mariagement of one’s own securities might be a bus-

iness where there was sufficient extent, continuity, variety and regu-

‘larity. We fail to find such. a fixed administrative construction in the

examples cited. It is true that the decisions are frequently puf on

the ground that the taxpayer’s activities were sporadic )ut it does

not follow that had thise activities been. continuous the Commis-

‘sioner would not have used the argument advanced here, i.e., that

no amount of personal investment management would turn ‘those

activities into a business. Evidently such was the Government’s

contention in the Kales case,’®° where the things the taxpayer did

met petitioner’s tests, and in Foss v. Commissioner’® and Washburn

v. Commissioner'*- where the opinions turned on ‘the extent of the.

taxpayer’s participation in the manageme":-t of the corporations in

which investments were held.1®

Petitioner relies strongly on the definition of business in Flint v.

Stone Tracy Company :'® ** ‘Business’ is a very comprehensive term

~ and embraces everything about which a-person can, be employed.’’

This definition was given in, considering whether certain corpora-

11 Kissel v. Commissioner, 15 oe 1270, acquiesced in VITI- 2. B. 28

pee) ; Loe v.. Commissioner, 27 B. T. A. 588, acquiesced in XII-1 C. B.

4. (1933

12 Higgins v. Smith, 308 U. S, 473, 478-479.

13 Bedell v. Commissioner, 30 .F. (2d)7622, 624; Monell v. Helvering, 70 F.

(2d) 631; Kane v. Commissioner, 100 F., (2d) 389. °

14 Kaleo v. Commissioner, 101 F. (2d) 35; duPont.v. Depv’7, 103 F. (2d)

- 257, 259, reversed on other grounds, 308 U. ‘8. 488.

15 Kales v. Commissioner, oe mT, 1046, 101 F. (2d) 35...

18 oe F, (2d). 326.

51 F, (2a) 949° 953.

18 se Roebling v. Commissioner, 37,B. T. A. 825 Heilbroner v. Commis-

sioner, 34 B. T. A. 1200.

19 226, U..S. 107, 171.

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of this class, that Con-'

ated views s}imilar to petitioner "5

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4 Higgins -vs. Commiss'oner of Internal Revenue.

4

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2

tions came under the Corporation Tax law whieh levies a tax on

eérporations engaged in business. The immediate issue was whethe

corporations engaved principally in the ‘‘holding and management

of real estate’. were subject te the act. A definition given for

such’an issue is not controlling in this dissimilar inquiry.24

To determine whether ‘the-activities of a taxpayer are ‘‘carrying

on a business’’ requires an examination of the facts in each case, Ag

the Circuit Court of Appeals observed; all expenses of every businesg!

transaction are not deductible. Only those are deductible which re

late to carrying: on a business. The Bureau of Internal Reveny

has this duty of determining what is carrying on a business,’ sub-

ject to reexamination of the facts by the Board of Tax Appeals

and ultimately to review on the law by the courts on which juris.

diction is conferred.** The Commissioner and the Board appraised

the evidence here as insufficient to establish petitioner’ 8 activities

as those of carrying on a business. The petitioner merely kept ree.

ords and collected interest and dividends from his securities, through

managerial attention for his investments. No matter how large the §

estate or how continuous or extended the work required may be

such facts are not sufficient as a matter of law to 7 ermit the courts

to reverse the decision of the Board. Its conclusion is adequately

supported by this record, and rests-upon a conception of carrying

on business similar to that expressed by this Court for an antecedent

section.”4 ° a

The petitioner makes ‘the point that his activities in managing his

estate, both realty and personalty, were a unified business, Sinee it ;

was admittedly a business in so far-as the realty is concerned, he

urges, there is no statutory authority to sever expenses allocable.

the securities. But we-see no reason why expenses not attributable,

as we have just held these are not; to carrying on business cannot be

apportioned. It is not unusual to allocate expenses dais for services, :

partly aan and -partly business.?5 i

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20 Id. 169.

21 Cohens v. — 6 Wheat. 264, 399: Puerto Rico v. Shell Co., *302 U. 6

253, 269..

22 Revenue Act a 1932, 47 Stat. 169, $272; Internal Revenue Code, his 4

23 Internal Revenue Code, § 1141. ° ; ;

24 Van Wart v. Commissioner, 295 U. S. 112, 115.

53 Paul & Mertens, Law of Federal Income Taxation § 23.65; cf. National .

-Outdoor caeteeee Bureau v. Havering, $3 FY (24) 878, 881. . x