Petition for Writ of Certiorari — Helvering v. American Dental Co.

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AMERICAN Deva Co.

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FOR A WRIT or CERTIORARI TO THE UNITED

nad wn COURT OF AFPRALL INS XBR

8

: INDEX

. ; = 7

Opinions eloꝶ”tt .. 1

Jurisdict ion e SEER . 2

— — LX.

ee regulations invaived TTT N 2

ee ee te 3

iden dan ip wed......... tte wine nena Fas,

3 Reasons for granting the writ_ . — — 5

Conclusion * PTT 10

Appen din ie Sess (peeve nenbhes 11

f CITATIONS:

Sede & Marine Co. v, Commissioner, 66 F. (2a) 776 8 a

Bass v. Hawley, aR Ce te

Bogardus v. Commissioner, 302 U 3 See ee

Boston Consol. Gas Co. v. ‘Commissioner, 128 F. (2d) 473

“Buffalo Union Furnace C Helvering, 72 F. (2d) 399

eS SS er rere

Charleston & W. C. Ry. Co. v. Burnet. 50 F. ae a.

Chicago N. I. & P. Ry. Co. v. Commissioner, 47 E. 9

certiorari denied, 284 U. S. 618...

‘ Commissioner v. Liberty Bank & Trust Co., 59 F. (24) 320

missioner v. Vandeveer, 114 F. (2d) Gebers

Ge @2028200S92

Fiber v. Commissioner, 59 F. (2d) 192...-:_.--..:---.--

Fuck v. Helvering, 70. F. (2d) 583333.

Haden Co. v. Commissioner, 118 F. (2d) 285. certiorari

een... RARE 1

— ¥. American Chicle Co., 291 U. S. 426. *

Helvering v. Jan@@Holding Corp., 109 F. (2d) 933, certiorari

denied. 310 U. S. 653, rehearing denied, 311 U. 8. 728

Helvering v. National Grocery Co., II

9 Maryldmd Casualty Co. v. United States, 251 U. 8.

Noel v. Purrott, 15 F. (2d) 689_.......-----------------

Old Colony Trust Co. v. Commissioner, 279 U. 8. 16... 2>.

: 3 . N

— fae. Kitty Lumber Co., 284 U. 8B. 1 .

United States v. Litile Wer Creek Coal Co., 104 F. (2d) 483 a

477224—42 (i)

S D 0

+

Walker v. 2 ria (2a) 170 certorar dened,

r. * 22

Weagant v. Bowers, 87 F. (2d) 670..............-------- 7

Welch v. Hering, 200 U. K 11IiIi .. 9

Wilmington Trust Co. v. Haring, died Apt 1942,

No. 775, o Term, 1041 8 0

Statute: N

r

n —— it

Miscellaneous 8

Treasury Regulations 77, promulgated under the Revenue ~~

Act of 1982, Art. 64 — 8

94, promulgated under the Revenue

Act of 1936, Art. 22 (a)-14.........-- HSER Sf 8, 11

i

PETITION: FOR A WRIT OF CERTIORARI TO THE UNITED

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The Solicitor General, om behalf ot Guy 7. ‘Hel: a

vering, Commissioner of Internal Revenue, prays .

that a writ of certiorari isn to review the judg- |

ment of the United States Circuit Court. of Ap-

peals for the Séventh Cireuit entered in the above

entitled case on May 15, 1942, reversing the deci-

sion of the United States Board of Tax Appeals: ;

OPINIONS BELOW

The . ‘of the United. States Board of Tax

Appeals (R. 38-42) is reported in 44 B. T. A. 425.

The opinion of the Cireuit Court of Appeals (R.

. is reported in 128 F. (2d) be i .

3

„ «2

The judgment. of the Circuit Court of t Appeals

‘was entered on May 15, 1942 (R. 51). The juris-

‘diction’ of this Court is invoked under Section :

240 (a) of the Judicial Code, as amended by the

* February 13, 1925. .

QUESTION PRESENTED

| Whether creditors’ eancellations in 1937 for

business reasons of debts for past due rents and

interest owed by the taxpayer and ‘accrued and de-

duéted as business expenses in its returns for years

prior to 1937 resulted in taxable income to the

taxpayer. or, as held by the Cireuit Court of Ap-

peals, constituted gifts which were exempt from

income tax.

STATUTE AND REGULATIONS INVOLVED

The pertinent provisions of the Revenue Act of -

1936, e. 690, 49 Stat. 1648, and of Treasury Regula-

tions 94, promulgated under the Act, are setiforth

in the Appendix, tnfra, pp. 11-12. )

STATEMENT,

„ ihe Board of Tax Appeals found: the following

facts (R. 38-40) : The respondent taxpayer is a

corporation ‘engaged in operating a laboratory

where it does prosthetic work for the dental pro-

fession. For a number of years it has: occupied 55

space in the Mallers Building i in Chicago. In De-

cember 1933 it negotiated a new ledse which re-

— —

3 * *

3 y

Auel ‘the annual rental from’ $15,200 to 68 400.

There was then due from the $15,298.99

in back rent. Its president n the rental

agent that it was unable to pa ail of that amount é

and requested an adjustment. e agent said.

that he would make an adjgitment. taxpayer © .

regularly. Faid the rent nder the new lease and

in April 1884 the agent advised the taxpayer that

| he would” accept $7,500 in payment of the back

and for the

rent and would ganeel. the remainder. In 1937

t time made an entry on its books f

showing that back rent in the amount of 7,798.99

had been forgiven. In the same year the landlord

a likewise for the first time made an entry on its

books cancelling the back rent in that amount

(R. 38-390). ce :

The taxpayer kept its books and made its re-

turns upon an accrual basis of accounting. Dur-

ing the years prior to 1934 in which it bad failed to

pay its rent, it had | xpgularly accrued the rent

on its books and taken deduetions therefor in its

income-tax returns. Those deductions served to

offset ineome in like amounts for those years (R.

39). ä

In November 1986 taxpayer was indebted to

= several creditors for merchandise which they had

furnished it over a period of years and for which

it had given its interest-bearing ‘notes. It had

been a good custoffler of these ereditors for many

years. During the month’ mentioned it requested

4

three of these creditors to cancel interest on the

notes on the ground that they had made similar

arrangements with their other customers. The

three creditors agreed to cancel all interest aceru-

ing after January 1, 1932. The first entry that

the taxpayer made on its books showing that the

interest had been ‘forgiven was made in December

1937 when the accounts payable to the three cred-

itors were credited with a total of $16,947.74 rep-

resenting interest on the notes aceruing after

January 1, 1982. All of this amount had been

_____dedneted by the taxpayer in its returns for the

years, igyluding 1936, during which the: interest

had accrued. The deductions had offset income

‘on those returns to the extent of $11,435.22 R.

39-40). N

Neither in its return for 1937 nor in any other

return did taxpayer report any of the cancelled

rent or interest as income. The Commissioner in

determining deficiencies in income and excess

profits tax for 1937 held that the cancelled items

constituted taxable income for that year to the

extent that they had served to offset income in

prior years. Accordingly, he included in tax-

paper's income for 1937 the forgiven rent in the

amaunt of $7,798.99 and the cancelled interest in

the amount of $11,435.22 (R. 40). .

The Board stated in its opinion that no evi-

dene was introduced to show a donative intent

on the part of any creditor and that the evidence

indicated that the creditors acted for purely

business reasons s and did not * the debts for

—. . —— emma

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altruistic reasons or out of pure e (N.

tze action of the Commissioner in treating the

items as taxable income for 1937 and in determin-

ing deficiencies (R. 42).

The Cireuit Court of Appeals for the Seventh

Oireuit veversed the decision of the Board on the

ground that the cancellations constituted gifts

exempt from income tax since, as the court con-

cluded, they were made without. consideration and

for the taxpayer’s benefit (R. 50).

42). Holding that there was no gift, it affirmodd

r ~~ SPECIFICATION OF “ERRORS TO BE 9

The Circuit Court of Appeals erred:

1. In holding that the cancellations of meat due

indebtednesses for interest and rent constituted

. gifts exempt from income tax.

2. In failing to hold that the cancellations re-

sulted in taxable income.

3. In relying upon Article 64 of 8 Reg

ulations 77, prommlgated under the Revenne Act

of 1932, instead-of Article 2 (a)-14 of Treasury

Os

Act of 1986.

4. In reversing the decision of the Beara of

Tax Appeals, 8 |

| AAo FOR GRANTING THE WRIT

e Decisions of this Court and of the lower fea.

circumstances similar to those: presented by the in-

stant case a debtor realizes taxable incéme when

the debt is forgiven or settled or ae sat-

Regulations 94, promulgated under the Revenue —

eral courts have established that in à variety f :

Ser 6. Rot ee

isfied for less than its face value. These decisions

usually have been based either on the theory that.

there is an accession to income in that assets of the —

. debtor are made available for other purposes

(United States v. Kirby Lumber Co., 284 U. S.

g I; Helvering v. American Chicle Co., 291 U. 8.

426) or on the theory. that a restoration to income .

‘should be required where, as in the present case,

‘deductions on account of the debt were taken in

the debtor’s returns for prior years and had the

effect of offsetting incomé for those years. .Mary-

land Casualty Co. v. United States, 251 U. S. 342,

~~ 352.7 Whichever of these theories be deemed ap-

‘ Intérest forgiven (Helvering v. Jene Holding Corp., 109

F. (2d) 983. (C. C. A. 8), certiorari denied, 310 U. S. 6838, re-

hearing denied, 311 U. S. 725; Walker v. Commissioner, 88 F.

(2d) 170 (C. C. A. 5), certiorari denied, 302 U. S. 692);

principle of indebtedness forgiven or settled by compromise b

(Haden Co. v. Commissioner, 118 F. (2d) 285 (C. C. A. 5),

certiorari denied, 314 U. S. 622; United States v. Little War

Creek Coal Co., 104 F. (2d) 483 (C. C. A. )). :

*Ttems deducted.as expenses for which chere vas subse-

quent reimbursement (Buffalo Union Furnace Co. v. Hel-

vering, 72 F. (2d) 399, 403 (C. C. A. 2)) ;; settlement with

enployees for less than amounts previously deducted. as ex-

pense (Commissioner v. Vandeveer; 114 F. (2d) 719, 722-723

(C. C. A. 6); debts deducted as bad in prior years and sub-

“sequently paid (Commissioner v. Liberty Bank & Trust Co,,

50 F. (2d) 320 (C. C. A: 6)) ; Askin d Marine Co. v. Commis-

sioner, 66 F. (2d) 776 (C. C. A. 2)); wages deducted as ex-

pense but uncollected are income · chen subsequently charged

back to profit snd loss (Chicago, R. J & P. Ry. Co, v. Com-

_ missioner, 47 F. (2d) 990 (C. C. A. 7), certiorari denied, 284

2 S. 618; Charleston & W. C. Ry. Co. v. Burnet, 50 F. (2d)

342 (App. D. C.)); unclaimed deposits credited to surplus -

(Soon Consol. Gas Co. v. 8 138 * (2d) 48

(C. C. A. )).

* 7 g

8 plicable here, or whether both be, the decision of

the court below represents a, departure from the

uniform result ‘reached in the cases cited.

r Ae

and interest constituted gifts exempt from in-

come tax, the decision is in conflict with Haden

8 ry v. Commissioner of Internal Revenue, 118

g yon 285 (C. C. A. 5). certiorari. denied,

a U. S. 622, and is, erroneous. The creditor

e in the Haden Co. case cancelled an

indebtedness for the purchase price of materials

and for rent owed by the taxpayer egmpany. The

latter had the same stockholders and officers. and

dhrectors as the ereditor and was engaged in sell-

ing the creditor’s products to the retail trade. 2

The Board of Tax Appeals found that the ean-

eellation, although voluntary, was made in recog-

* ° nition of business benefits which would result and

Vas not a gift.“ The Circuit Court of Appeals for

the Fifth Circuit sustained this finding as proper

and affirmed the Board’s holding that the can-

celled. debt, which the taxpayer had deducted in

its returns for prior years, was taxable income in

the year of cancellation to the extent that it made

the taxpayer solvent. ss «

The conflicting decision of the court below in the

. instant case is based a’ on the court’s assump-

tion that a gift within meaning of the ‘statu-

— cee

n 4e the Board in the Haden Co.

Se carer, ay in the record (pp. 14-18)

in the case on file in this C „ 1941.

—

tory provision excepting property acquired by

gift, bequest, devise, or inheritanee from the

definition of income is exempt from tax as income

even though the taxpayer took ded ions . which

offset income in prior years; and (b) on the

court’s holding that such a gift must nevessarily

be intended if the cancellation is without con-

sideration and if, as would always be the case, it

benefits the debtor. . : 7

2 Assuming, but not conceding, tkat eourt’ 8

assumption is -valid, its holding plainly goes be-

yond established law,“ as was recently said

by the Circuit Court of Appeals for the Third

Circuit in commenting upon the decision.“ The

voluntary character of a payment or of a dis-

charge of indeptedness is not alone sufficient to

establish it as a gift. There must be a donative

intent and this is not present where payments or

discharges. are motivated by business considera~

. cc (R. 40):

“The Gov@rnment freely concé@pd. that unless the forgive-

ness of indebtednews in each of, these instances was based

upon a.consideration, it would amount to a gift, and gifts are

not taxable as income to thé done.” No such concession was

made on brief or otherwise. However, court denied a

motion to delete the statement from the inién (R. 51-52).

I. its opinion the court also relied upon Article 64 of

Treasury Regulations 77, promulgated under the Revenue

Act of 1932. The applicable regulation is found, however,

in Article 22 (a) 14 of Treasury tions 94, promul-

gated under the Revenue Act of 1

Sportwear Hosiery Mills v. Commissioner 0. C. A. 3

‘decided June 25, 1942, not officially reported but found i

104 C. C. H. Voll, Par. 9965, fn. 25 g

9 .

tions; it is present only where they are made

without incentive of anticipated benefit of any

kind beyond the satisfaction which flows from .

the performance of a generous act.“ Cf. Bo-

gardus v. Commissioner, 202 U. 8. 125 41, and

eases cited in footnote. °

Although in the instant case 0 burden of

proof was on the taxpayer, the Board stated that

the evidenge failed to show a donative intent but

indicated, on the contrary, that the cancellations:

were made for business reasons (R. 42). Since

this is an inference of fact and is supported by

the evidence with respect to thé business rela-

tionships existing between the taxpayer and its

creditors and with respect to the manner in which

the cancellations were sought and. obtained, it

was eonelusive on the court below. To. the ex-

tent that the court failed to adopt the Board's

"finding, its decision conflicts with the familiar

0 rule recently applied in Wine Trust Com-

: *Old Colony Trust Co. v. — 279 U. 8. 716,

730; Sportwear Hosiery Mills v. Commissioner, supra;

“Fitch v. Helvering, 70 F. (2d) 583, 585 (C. C. A. 8) ; Noel v.

Parrott, 15 F. (2d) 669, 671 (C. C. A. 4); Weagant v. Bowers,

57 F. (2d) 679 (C. C. ‘A. 2); Fisher v. Commissioner, 59 F.

(2d) 192 (C. C. A. 2) Bass v. 2 F. (2d) 721

(C. C. A. 5).

“The instances are many in which purpose or state of mend

determines the incidence of an income tax.“ Helvering v.

National Grocery 00. 50 U. S. 282, 289 é

" Reinecke v. Spald „280 U. S. 297, 282-233; Burnet v.

Houston, 288 U. 8. . Welch v. Helvering, 200

V. 8. 111,115; and Fiteh v. Hetwering, 10 ¥. (2d) 583, 585-

586 (C. C. A. 8). : | .

. ©

3

10

ran v. Helvering, decided April u, 1942, No.

775, October Term, 1941.

| CONCLUSION 7

é

It is ect submitted that this e for

a writ of certiorari be granted.

CHARLES — N

oy Solicitor Ge 3

Avausr 1942. ae

- APPENDIX

‘Revenue Act of 1936, e. 690, 49 Stat. 16483

xc. 22. Gross INCOME. ; -

(a) General Deſinition.— Gross income“

ineludes gains, profits, and income derived

from salaries, wages, or compensation for

personal service, of whatever kind and in

whatever ferm paid, or from professions, -

vocations, trades, businesses, ¢ erce, or

sales, or dealings in property, whether real

or personal, growing out of the ership -

or use of or interest in such property; also

from interest, rent, dividends, securities,

ox the ‘transaction of any business carried

on for gain or profit, or gains or profits

and income derived from any source what-

e

(b) Eoihisions from Gross Income.—The

following items shall hot be included in

gross income and shall be — from

taxation under this title:

* * a : * *

(3) Gifts, Bequests, and Deuises.— The

value of property acquired by gift, bequest,

devise, or inheritance (but the ineome from

such property. shall be included in gross

income); *

* ‘ * * * *

Treasury Regulations 94, promulgated under

the —— Act of 1936:

Arr. 22 (a)—14. Cancellation of indebted-

ness.—The cancellation of indebtedness, in

whole or in part, may result, in the reali-

zation of ineome. If, for example, an in-

(11) ‘i

3 eer

dividual performs services for a creditor,

who in consideration thereof cancels the

debt, income in the amount of the debt is

realized by the debtor as compensation for

his services. ot OF e of d A.

dy the payment or of his obli-

gations at less than face value.. (See

article 22 (a)—18.) it a shareholder in

a corporation which is indebted to him

, gratuitously forgives the debt, the. trans-

naàetion amounts to a contribution to the

‘capital of the corporation. *

*

S

1—— pareTine orrice: 1948