Respondents Brief in Opposition — Magruder v. Supplee

ee Geena;

Supreme Court of the United Sistes

, OcTOBER TERM, 1941.”

eerie ee es

M. HAMPTON MAGRUDER, Cottector oF INTERNAL

REVENUE FOR THE DisTRI T OF MARYLAND,

Petitioner,

. « VS.

FREDERICK Mt SUPPLEE anp ELIZABETH G.

“SUPPLEE, ‘His WIFE, +

Respondents.

On PEFITION FOR A WRIT OF CERTIORARI. TO THE UNITED

States Cirqvit Court of APPEALS FOR THE. _

FourtTH CIRCUIT. |

BRIEF FOR RESPONDENTS IN OPPOSITION’

a

a

“ay NATHAN J. FELSENBERG,

v JAMES M. HOFFA, :

Attorneys for Respondents.

: ve ey eee ,

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The Daily Record Co. Print, Baltigpre.

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INDEX. —

| aon 7) Pha

Opinions. BELOW... sshd oaeeteieeame gas? al

| ° JURISDICTION ©: | Pe io eatin SMR Vics oe

f - SraTuTEs INVOLVED, Pew eS Meme. aes

STATEMENT ¥ ieee ¥ ornate Se

Facts ; | ene ae

ARGUMENT eee Sek ey Se ae

. CONCLUSION ~ Pits ST Een ene

. é 5 7 * yg ~

CiTayions,

Cases:'* - | ;

Lifson v. Commissioner, 98 F. (2d) 508, certiorari

denied, 305 U.S. 662. ° «2 45,6 |

Commissioner v. Plestcheeff, 100 i". s 24) 62. Lie a

Commissioner’ Vv. Coward, 110 F. (2d 725 - 4,7,8

Commissioner v. Patrick Cudahy F. Co. 110 F. 42d)

= 925 Vises = an

Walsh-McGuire Co. v. Commissioner, 97 F. (2d) 9835

ic. <. A OR): ; Ree FS

36 B. T. A, p. 594 (Lifson V. v. Commissigner So ee ae

Statutes: °

|. Revenue Act of 1936, c. 690, 49 Stat. 1648: SUSNS es

: Section 23 eee . 2,7,8

In THE 2

Supreme Court of the United States

, Octroper Tero, 1941.

s

No. 947.

M. HAMPTON MAGRUDER, Coxtgctor oF INTERNAL

_ REVENUE FOR THE DisTRICT OF MARYLAND,

Petitioner,

: VS.

" FREDERICK M. SUPPLEE anv ELIZABETH G.

SUPPLEE, His Wire,

. Respondents.

On Petition ror A Writ or CERTIORARI TO THE UNITED

Srates Crrcurr Court or APPEALS FOR THE

FourtuH CIrculr.

al

¥

BRIEF FOR RESPONDENTS IN OPPOSITION. —

| ‘OPINIONS BELOW.

The District Court’s opinion (R. 14-25), is reported in

6 F. Supp. 722.

The opinion (R. 28), of the Circuit Court of Appeals is,

reported in 123 F. (2d) 399. =

2° | ;

7 JURISDICTION.

The judgment of the Circuit Court of Appeals was en-

tered November 12, 1941 (R. 29). The Jurisdiction of.

this Court, is invoked under Sec. 240(a) of the Judicial

Code, as amended by the Act of February 13, 1925.

QUESTION PRESENTED. —

Whether a purcha%r of real estate in Baltimore City

‘ who has paid current City and State taxes thereon, as-

_ sessed prior thereto to the seller, and adjustment of which

has been made to the date of sale, may, in-his’ income-tax

return, deduct from gross income that part of such taxes

representing the time he was the actua] ow ner of Chesteell

erty. i 7 rie

: ?

STATUTES INVOLVED.

Revenue Act of 1936:

“Sec. 23: Deductions from gross income:

“In computing net income there shall be allowed as

deductions: ‘ P

, fad enciaee #9. ;

(b) Interest * * * {

‘c) Taxes Generally—Taxres paid or accrued

within the taxable year, except * * *” (Ex-

ceptions not material here). ”

STATEMENT.

This i is a civil suit by Frederick M. Supplee and Elizabeth

G. Supplee, his wife, respondents herein, against M. Hamp-

ton Magruder, Collectur of Internal Revenue foy the Dis-

trict of Maryland, petitioner, to recover, $883.51 with in-

terest, »y reason of alleged overfgyment of income taxes

{ for the taxable years 1936 and 1937. o - ,

ke y, :

FACTS.

In November, 1938, the Collector assessed the respond-

‘ ents the following deficiency income taxes for the calendar

vears 1936_gnd 1937.

1936 pele ASF f

se .: $3,399.71 Tax " $646.24

_ Interest 327.44 Interest .. 23.46

Total $3,737.15 Total © ~~ $669.70

These amounts were paid by the respondents on Novem-

ber 21, 1938, under protest. Later, and prior to the filing

of the amended complaint, appropriate claims for refund ~

of the parts thereof hereafter mentioned’ were filed with

and denied by the Commissioner of Internal Revenue. __

__ Included in the 1936 deficiency assessment is $200.68, and

interest, $19.33, which represents the amounts the respond-

ents wére compelled to pay the Callector by reason of the

disallowance, in corhputing net income, of dedictions for

the respondents’ proportionate share of the 1936 City and

State taxes-paid by them on certain parcels of ‘real estate

‘ acquired dusing that year, adjustment of said reat estate

taxes in this and the following instance, as between bu¥er

and seller, having been made to the dates of sale. Respond-

ents had taken such deductions-in their 1936 income tax

return. . |

Similarly, included in the 1937 deficiency assessment is

$646.24 and inter&t, $23.46, representing the amounts the .

respondents were compelled to pay by reason of the dis- 2

allowance of deductions for their, proportionate share of‘ ~

1937 City and State taxes: paid by them on certain other .

*

ie ree

parcels of real estate bought by them during that year.

They had likewise taken these deductions in their 1937 in-

come tax return. :

- The pene Nar ae claimed deductions for the pro-

portionate parts of the State and.City taxes for 1936 and |

1937 which they had actually paid, and which covered the

periods of time they weré the actual owners of the prop-

- erties (R. 25), and the seilers likewise, in their. income tax

return, claimed deductions on a similar basis (R. 20-1). The

Commissioner disallowed these deductions by the respond- -

ents on the ground that those taxes had accrued on the

‘properties prior to their acquisition by the. respondents,

and the payment of any part thereof by them constituted

but a part of, the purchase price, and was not the payment

of “taxes” within the meaning of section 23(c ) of the Rev-

enue Act. of 1936, undér which such deductions were —

claimed as ‘‘taxes paid” during the taxable year.

: ARGUMENT. ¢

The sole reason advanced by petitioner“for granting the |

_writ‘is conflicting decisions among the Circuit. Courts of

Appeal. To show such conflicts petitioner cites the fol-

‘lowing cases: > ‘ ;

Lifson v v. Caciicaealens: 9g F. (2d) 508 (cc A.

Sth) certiorari denifd, 305 U. S. 662; oe

Commissioner: v. Plesttheeff, 100 F. (2d) 62

P : | Se: Cc. A: 9th);

Commissioner v. Coward, 110 F.. | 2d) 725 Cc.

A. 3d);

J; Commissioner v. Patytick Cudahy F. Co., 102 F.

> (2d) 930°(C. C. A..7th); and.

/ Walsh-McGujre Co. v. Commissioner, 97 F. (2d)

‘° 983 (C.C. A. 6th).

We accordingly analyze those decisions: |

-In Lifson v. Commissioner, Lincoly Co., in 1932, owned

i. buiiding which, in May, 1932, it mortgaged. ’ The mort-

gage was foreclosed.on October 7, 1932, and the building

purchased at the foreclosure sale by the mortgagee. The

law allowed one year thereafter within whith the mort-

gagor could redeem the property. On August 16, 1933,

the taxpayer, Lifson, purchased the sheriff’s certificate of :

foreclosure sale from the mortgagee, thereby acquiring the

property, and took possession on October 16, 1933: The

1933 real estate ‘taxes on the ‘property became ‘a lien on

May 1, 1933, although the amount of the taxes had not |

at that time been ascertained or levied and they were not

due and payable until January, 1934. There was no ad-.

justnfént of taxes to the date of sale, as in the case at bar,

and the purchaser, eae. expressly agreed to pay the |

accrued tax, as a part of the purchase price.

That ‘there may be a distinction between cases where

buyer and seller, by agreement, prordte the property tax,

as in the case at bar, and cases where there is no such.

agreement, as in the Lifson case, was recognized by the

‘Board of Tax Appeals i in the Lifson case when (36 B. T. A.,

. 594) it used the following language:

ay “Since by state law tHe charge is fixed as of May 1,

/

although not accurately calculated till later, a buyer _

_ after May 1 would take it with knowledge of the tax

and would negotiate his price accordingly, either. to

exclude or to include the tax, or perhaps to prorate it.

Cf. State v. Northwestern Telephone Exchange Co.,

80 Minn. 17; 80 N. W.‘1080. Buying the sheriff's cér-

tificate, petitioner had no such choice. She bought the .

certificate with the burden of the accrued tax attached,

and the cost of this certificate included the accrued

tax.” (Italics ours.),

o

6 =

We accordingly submit.that the decision in the Lifson |

case isnot in conflict with that in the present case, since

the facts are materially different.

In Commissioner v. Plestcheeff, the facts were +a:

Husband and wife made a joint return for 1932. On April

5, 193th the wife’s father died, by the terms of ase will,

real estate in n Washington was devised to the wife. During °

~- a deduct{on accordingly on a mah site PP Commissioner _ y

that liability for real estate Takes in Washington

was fixed as of March Ist, even though the amount of the

‘tax was not ascertainable on that date, 4nd, as the testator

_ ‘was then the livi ing owner of the property, the payment of |

.sajd taxes-by another after the property had, by devise,

beeXvacquired by him was not deductible by the new

owner, the estate presumably having been alone entitléd

to the ae and then only if paid by it. .°

The taxpayer contended that under the state statutes,

as construed py. its Qpurts, the assessed taxes «did not be-

come perfected liens*until in October, whien levies were

made. ! }

The Court found that the lien would ordinarily “have

- attached on March Ist, as contended by the Commissioner,

but that in thai case the relationship between testator and

devisee was that of grantor and granteé within a statute -

.F (Remington's Revised Statutes of Washington, Sec. 11265)

which expressly provided that -‘as between the grantor’

~ and grantee such lien shal] not attach until the first Mon-

day in February of the succeeding: year”, on which date

the taxpayer was the. owner of the property; that hence

the acta should be allowed.

Se} deciding the case as it did, all the Court had«to find

as that the taxpayer was a-“grantee” within the meaning

of the special statute: Hence all other comments by the

: Court were mere obiter dicta which does not rise to the .

dignity of a judicial decision in alleging a conftict of de-

cisions between. Circuit Courts of Appeal. We accord-

ingly submit that the Plestcheeff decision. does net comet

-with-the decision in the case at bar.

_* In Commissioner v. Coward, the facts Were these:. In’

- . 1933 two parcels of improved income producing real estate

were owned by one X, one of which was acquired (pre-

- sumabtV by purchase) by Coward on October 16, 1933, and

the other on January 8, 1934. ‘With relation to these two

properties Coward paid real estate taxes for the year 1934- |

promptly as they, im instalments, became payable, on Feb-

ruary 1"(the amount being estimated with reference to

‘the taxes for the previous year), May 1, (likewise esti-

mated), August 1, and November 1, 1934 (adjusted to the

estimates so as to total the by theh determined amount of

_ the 1934 tax.), Had such payments not been: made a lien

would have attached therefor. on December 1, 1934.

In his income tax return for the year 1934, Coward

claimed deductions from gross income for “Taxes paid

~* * © within the taxable year”, under 26 U. S. C. A. Int.

‘Rev. Code, 23 (c),which deductions were disallowed. The

Comnffssioner contended that under the law of New Jersey

all property is “assessed to the owner thereof with refer-

ence to the amount” then owned, on October Ist of each

véar, “and. that said real estate taxes accrued on that date

(1933), when Coward's predecessor in title owned the prop- .

erty; that therefore, liability for said taxes having become

fixed as of that date, their subsequent payment by Coward

converted them from taxes in the ordinary sense, into a

we *

ee

. . # .

capital expenditure, or part of the purchase price paid by |

Coward for said properties, and as such sail were not

deductible.

‘After examining the reported cases the Court dim 727-8) ©

said: 3

“Respondent's two: parcels were, in theory,” sie

‘liable’ for the 1934 taxes when she purchased them.

That is to say, nothing which occurred after the as-

sessment of October 1, 1933, could alter the fact that

the land itself must ultimately yield those taxes either

directly through the eventual foreclosure of a tax lien,

or indirectly through the medium of its’ then or sub-

sequent owner's pocketbook. If, for instance, the land

assumed a tax exempt. status on October 2, 1933, it

would ndvertheless, bear its full share of 1934 tax. The -

presence $f this liability i in rem may well afford a basis

for ‘accruing’ the tax in the accounting sense. But

does its pre-existence deprive the purchaser who later

discharges it of his income tax deduction?

We think me Fe

The Court acesrdingly held that the deductién should ;

be allowed. In doing so, that decision supports the decision

.in the preserft case, and, we submit, in ‘no way conflicts

with it. | . ao tr aes /

In-Walsh-McGuire Co. v. Commissiongr, the decision WHE

based on a construction of the words ‘ ‘accrued within the

taxable year’, and not on the words. “taxes paid * * *

cM ithin the taxable year”, as in the case at bar. Section

23 fc), .supra, authorizes deductions for “Taxes paid or

_ accrued within the taxable year, * * *”. In the Coward

case, supra, the Court drew a clear distinction between the

two types of a saying (p. "727 ) after referring | to the

Walsh-McGuir@¥and other similar cases: ©

“These have to do with the interpretation of the

word ‘accrued’. * * * Here, on the other hand, the word

under construction is ‘taxes’ not ‘accrued’.”

7

as, :

ay ° . & |

. 9. .,

‘Hence there is no conflict betw een this. case oa the case

at bar. ,

In Commissioner v. Patrick Cudahy F. €o.. the case-also - .

turned on the word “accrued” afd not on the word “taxes”,

and the decision was in favor of:the taxpayer. We accord-

‘ingly submit that ‘t is.not in conflict. with the decision in

” the case at bar.

CONCLUSION.

The decision below is correct, there is no’ conflict of. de-

_. cisions, and the petition should therefore be denied.

Respectfully submitted,

~

NATHAN J. FELSENBERG, he

‘JAMES M. HOFFA, _ ot

Attorneys for Respondents.