# Petition for Writ of Certiorari — Helvering v. American Dental Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386403_0128%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1943 - **Citation:** 318 U.S. 322 ## Text ‘FILE CORY], 7°. oto. wie /- AUG 14.1942 z 2 2 S 7 | OEABLES tt tien kl r 205 secretin sur a * a bees Tent, Ba — — N dx T. Aber ene. Cont MIsstoNER« > e 5 e ae AMERICAN Deva Co. — — 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 WWW 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 0 — we 8 ; ; .< j 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386403_0128%3A2. Public record. Not legal advice.