# Brief for the Respondent — Helvering v. American Dental Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386403_0128%3A5 ## Record - **Collection:** Supreme Court brief - **Document type:** Brief for the Respondent - **Published:** January 1, 1943 - **Citation:** 318 U.S. 322 ## Text FILE Copy al Supreme Court of the United States rv —— TERm, 1942. | N O. 303 _-_ GUY T. HELVERING G, Commissioner of Internal Reveniic, Petitioner, ‘ — * ~ -- AMERICAN DENTAL COMPANY. - ON WRIT OF CERTIORARI TO THE UNITED STATES CIRCUIT COURT OF APPEALS FOR THE SEVENTH CIRCUIT. _ BRIEF FOR THE RESPONDENT. . any eal i Joun E. Huénes, . ; 4 Jawes A. O’CALLAGHAN, Counsel for Respondent. — EO amneienial Printing Oo.; Phone | Eabuview 6581, “Caieago, Illinois LO PDA GI ee GOO tea IN Nt en . - IN THE Supreme Court of the United States ‘Genii TeRM, 1942. No. 303 —— ’ GUY T. HELVERING, Corfimissioner of Internal Revenue, ; Petitioner, : v. AMERICAN DENTAL COMPANY. > .ON WRIT OF CERTIORARI TO THE UNITED STATES CIRCUIT ‘ COURT OF APPEALS FOR THE SEVENTH CIRCUIT. - BRIEF FOR THE RESPONDENT. * -Joux - E. Huenes, 4 James A. O’CALLAGHAN, Counsel for Respondent. —— —_ eee -_ Questions Presented sciioal SCP atk ROMO — Summary of. Argument socladicarisicoais ‘ soni I. The forgiveness of debt v was & site within the : - meaning of Section 22 (b) (3) of the Interval Revenue Code .. an If the nies aa was at a gift then there was -no effective forgiveriess of debt and consequently _ there is no question of income in this case ............ “ITI. The foregiveness of the rent in this case Was a: - mere ‘reduction in the purchase price of prop- erty, or contract renegotiation, and did not ‘give The interest forgiveness did not: result-in * taxable income because taxpayer never re- raAS rise to taxable income ........!............. Porn N Ieee eI ; . . : NE eis coiuaacnee sake Foreword seca SR Gare aaa Sane MY oe aes 19 . caved anything of exchangeable or realizable . value for this interest RPSL edb Be oe Pade ar AM ee -. * The* forgiveness of . debt _ was not _incomé ' within Section 22 (a) even if it, was not a gift . and ithe forgiveness was effected. by some _ in the same year it bought and — sold the property and the Treasury. regulations in force for’ years expressly covered the situation. In the. case at bar taxpayer received no cash or anything of exchange- able value and such Treasury regulations as there have ever been, referring to the situation, favor taxpayer. Also the bonds in the Kirby case were a mortgage on the prop- ’ erty which was freed therefrom. Here the debts were not. a lien on property. eee ae ead ol a The American Chicle Sis ate inc ah atte —— for less than the price for which. they -weré issued. How- . -ever, this court cautiously said in its opinion ( 291 U.S. at page 428): ‘“‘The meagre stipulated facts present only a narrow. point ‘to which our decision must be: limited. ey ‘| SUMMARY OF ARGUMENT, _ When: Congress used the word gift”? in seston 93 (b) (3) of the Revenue Act pf 1936 it had a well settled judi- cial meaning uniform for over a hundred years. ‘Congress is presumed to have used it in this méaning. Uwited States # v. Merriam, 263 U. 8S. 187. The judicial definition of “gift?” is the same as that given by Blackstone and Kent and the dictionary. It is: “A voluntary transfer of property by one to an-. other, without any consideration or. compensation therefor.’ - (Law of Federal Income Taxation, Paul & Mertens, Vol. 1, sec. 6.05, page 151 and cases. cited vs pages ‘12 to 14 hereof.) It i is not ‘disputed i in petitioner’s: “brief that the forgive- ness in the case at ber was voluntary and withont con- sideration. Hence it falls squarely within the definttion of ‘wift™.. | ; . . -. . . Petitions seeks to have this court add tothe definition a hazy and nebulous requirement which he cals ‘‘dona- tive intent.’?’ lf he succeeds it will backfire on him in the gift tax cases. Donativée intent is merely. another way of saving that the transfer must be voluntary and with intent to. vest the subject of the -gift in the donee ‘and that there must be no consideration. An analysis of the casés using the term will reveal they either’ turned on the question whether there had been a. consfructive deliv- SS ery (and hence intent, to. transfer the property), or thé ———tratrfer wir on its face might have been ‘compensation for services. In other words, was there consideration? Hence it was there necessary to decide whether it-was intended as com- pensation or asa gift. Neither of these situations is now at har. None of the elements of the above quoted defini- ° tion of eift are disputed by petitioner's brief to exist here. ‘Also, for sixteen years, during which. ‘Congress repeat: | edly reenacted in identical terms the Statute here involved, the trearury regulations contained the regulation quoted by the court below (R. 49). The numerous’ reenactments of revenue acts. while it was extant made it part of = Statute (see CASeS collected on. page . 11 « hereof). ° | ~ course we would not make this point if any contrary regu- " jation had ever been promulgated but-none has.. The regu-. . lation quoted on page 21 of petitioner’s brief (it was not _ promulgated under the section of the Statute dealing with zifts) merely states cancellation: of debt ‘‘may’’ result ~ in the realization of income. ‘‘If for example” and it then ives three examples two of which are not cases of. the for- giveness of debt but (1) of cancellation of debt as com- 7 pefsation for services ; (2) Income from sale and purchase | of property, which two it says are income, and (3) a case ~——"@f @ shareholder’s capital contribution, such as C ‘arroll . McCreary Co., 124 F. (2d) 303 (C. . A. 2nd), which it says is not income. ; Omitted in petitioner’ 8 brief is: thie following statement in the regulation: - ‘*Income is not realized by a taxpayer a virtue of the discharge of his indebtedness as a result of an adjudication ‘in bankruptcy, or by virtue of a com- position agreement among his creditors, if immediately thereafter taxpayer's liabilities érceed the oot of his assets,”’ (tales ‘Oara:) * te daaleaae that the italicised portion of the regu- lation is abs ruptcy or makes a sempecition. with tredi purpose of the bankruptcy law is to create solvency and if . a tankrupt bas a job or a penny he is always solvent after his discharge. -Also, the only reason a creditor forgives a debt is to make the debtor solvent, otherwise he would be merely making a gift to his fellow creditors. ‘To say that n ‘ discharged banhrut, pn ‘eolvent by .. bankruptcy, has- realized income from his discharge: re- - quires merely statement to disclose the absurdity of the principle petitioner would have this court lay down and the reasoning on which his argument rests. : 5 However, if there was no ‘‘gift’’ in this case ‘then no debt was forgiven and there can be no question of i income. (See page 19 hereof.) All the cases cited by pe itioner find a transfer of property based on a valuable conside “tion and thus outside the definition of ‘‘gift’’. sh, if - petitioner did prevail on the first ground respondent should _ prevail on al | | \ I 8 a So far as section 22 (a) of the Revénue Act applies, here, it has been the same since income tax laws were en- acted. It has been repeatedly construed by this court and — Congress has repeatedly reenacted it between such con- . _structions. Tho construction of the word ‘‘income’’ by this court was, by. reenac ‘tment ‘after these decisioiis, im- age by. Congress into the Statute. Hecht v. Malley, 265 .S. 144, 153; Burnet v. Harmel, 287-U. S. 103, 108. In ra decisions thps adopted by Congress this court defined - income as ‘‘something-of exchangeable value’’ and ‘‘a gain derived from capital; from labor or from both combined.’’' “The regulations (Art: 22 (a)-1, Reg. 94) repeat”and for vears have repeated this definition. The forgiveness of debt in the case at bar was not derived from capital or labor nor was it anv thing of exchangeable. value. The’ Scesbneiiie of the rent was a mere reduction in — the purchase price of property which had depreciated in - Value below the amount agreed to bé paid for it, peotin to . the depression. It bas been unifgrmly held’ such sit tion does not give rise to income (see page 20 hereof hk spondent never received ete for the interest, No péint © can i ‘onl’ = petitioner of the fact that. re- . spondent deducted the rent and interest in prior years be- cause it was stipulated respondent, offered to pay the tax - saved by these deduttions but petitioner rejected the offer (R. 19). In this respeet the case at bar differs frém any in the books. Also section 3801 was designed to preve the py ramiding of tax in one year due to prior year de- ductions, by making pavable only _the“amonnt saved by som deductions, (See page 26 hereof. 2. t 1 Strattons Independence v. Howbert, 231 U. 5. 399: Doyle v. Mitchell - Brothers, 247 U. 8. 179, and many other cases. ae a Kerbdaugh Empire Co., 271 1. 8. 170, : pes e- (> ry i) o.' . ‘se . Finally, the subsidiary finding of the Board éoncerning the interest item overrides its ultimate finding: because *~ it shows the interest was forgiven prior to the*year before the court and hence it could not be income in this ‘year : (See page 23 hereof). They also show the rent was for- given ‘‘in April, 1934” (R., 38). In Burnet -v. Sanford ¢ Brooks, 282 U.’S. 359, at page 364 (cited on page 11 of petitioner’s brief), this court dis- tinguished: Bowers v. Kerbaugh & mpire Co., 271 U. S. 170, by stating: Taxpayer ‘‘had neither made a profit. on t@e transaction nor received any maqney or property which could be made subject to tax.’’ That is the situation at bar. oe a 3 The Forgiveness of Debt was a Gift Within the Meaning SZ of Séction 22 (2) (3) of the Internal Revenue Code. Section 22 (b) ‘of the I. R. C. reads: “(b) Exclusions from Gross Income.—The ‘fol- J lowing items shall not be included in gross income. and shall be exempt from taxation under this title: “*(3) Gifts, Bequests, and Devices.—The value of property acquired by gift: * oe a: | : Article 23(b)(3)-1 of Regulation 94, pronrulgated under the Revenue Act cf 1936, like all other regulations under this section .past and present, is the only regulation under this section and: merely states: 6. | ‘*Property received as:a gift * * * is@xempt from income tax.’’ ‘The word ae is a word used in the Statute. Its . meaning therefore is a question of law. “ie there were any wr = 2 “© 10 doubt about the interpretation of the word it would have — to be arent in favor of the taxpayer. Hassett v. Welch, 303 U.S. 3033 >. : ‘ In using the word “pitt” C‘ongress meant to employ it in ‘the ordinary and well settled meaning of the term. — Woolford Realty Co. v. Rose, 286 U.S. 319, 327; Old Colony Railroad Co. v. Commissioner, 284 U. S. 552, 560. And where a word has an established judicial meaning, as ‘‘gift’’ had, Congress is presumed to have used # in that meaning (see quotation from this’ court on page +o) k hereof). Be . 4 The applicability of the word ‘‘gift’’ to the transaction ‘at bar is supported by dictionary definition, by a judicially approved treasury income tax regulation which, existed - unchanged for sixteen years (quoted in the opinion of the court below), by a present treasury gift tax regula- tion, by Congressiunal intent, and by the judicial definition | of gift given in Blackstone and Kent and stated in in- numerable and uniform decisions and as firmly established "as anvthing can be in the law. Vebster’s New Interiational Dictionary (2d Ed.), de- fines a gift as ‘anything voluntarily transferred by one person te another without compensation.’? So do Black- stone and Kent, uniform Court decisions and state Codes. Treasury regulations 45, promulgated under the 1918 Act; Regulations 62, under the 1921 Act; Regulations 65, ‘under the 1924 Act; Regulations 69, under the 1926 Act; . Regulations ‘74 under the 1928 Act and Regulations 77 under the 1932 Act, all contained the following, a by the cour# below (R. 49): rate “If, however, a creditor merely desires to benefit a - debtor and without. any consideration therefor can- 11 ai. o _ eels the debt, the amount of the debt is a_gift from ” the creditor to the debtor, and need not be inetnted i in the latter’s gross income.’ Since the proniulgation: of this ‘regulation under the. oe enacted five revenue acts and left the ' applicable Statute unchanged and the regulation was is- sued in identical terms under each of these revenue acts thereby bringing in operation the rife of legislative ap- proval. Brewster v. Gage, 280 U. S. 327, 337; Poe v. Sea- - born, 282 U. S. 101, 118; Burnet v. Thompson Oil & Gas a Co., 283 -U. S. 301, 307; “McLaughlin v. Hershey Choco-- late Co., 283 U. S. 488, 492; United States v. Kirby Lum- ber.Co., 284 U. S. 113; Old Colony R. R. Co. v, Commis- sioner, 284 U. 8.552, 557; Murphy, Oil Co. v. Burnet; 287 U. » §. 299, 302, 307 ; Massachusetts Mutual Life Insurance Co. v. United States, 288 U. S. 269, 273; United States v. Dakota, Montana Oil C ov, 288 U. S. 459, 466; Reinecke v..Smith, 289 U.S. 172, 175; Helvering v. Bliss, 293 U. S. 144, 151; Zellerbach Paper Co. v: Helvering, 293 U. S. 172, 178, _ 180; Old Mission Portland Cement Co. v..Helvering, 293 U.S. 289, 293; Hartley v. Commissioner, 295 U. S. 216, 220; McFeely v. Commissioner, 296 U.S. 102, 108; Mor- — risey v. Commissioner, 296 U.S. 344, 355; United States v. - sr Safety Heating & Lighting Co., 297 U.S. 88,95; Lang v. Commissioner, 304 U. S. 264, 970: Helvering v. Winmill, 305 U.S. 79, 83; Morgan v. Commissioner, 309 U.S. 79, 81. The Statute has never been changed. While the quoted ‘words were not in the regulations issued under the 1934 ‘sAct, no contrary regulation has ever been promulgated and nothing published stating rescission therefrom. (The ' regulation quoted on page 21 of the government brief does not declare the contrary. It was not promulgated as. : construction of section 22(b)(3) excluding gifts, but as a construction of 29 (a). It gives three examples, two of iootng " 312 are not examples of the forgiveness of debt. The third is and is declared non-taxable. ‘ i Since their promulgation, the regulations under the sec- tion of the Code imposing the Git Tax have always stated and: now state: “Thus for. pratt a- taxable pate maybe ef- fected by * * * the forgiveness of a debt’’ (Art. 2; Reg. t 79). Axtucle 1 of these regulations refers ‘‘to transfers of property without consideration which, in common law, are +] termed gifts. of Coming now to -anifestations of. Congressional intent the word ‘‘gift’’ is not defined in the Revenue Code nor in the income tax regulations, but both the reports of the House Ways & Means Committee and the Senate Finance Committee on the Revenue Act of 1932 (when the present vift tax was enacted) state: ‘The forgiveness. or payment by’A of B’s indebted- ness would constitute a gift to B. *? (72nd Congress, Ist Session, Senate Report No. 665, page 39; House Report No. 708, page 28.) © (C. B. 1939-1, part 2, pages. chi 524.) ae an - The adove quoted dictionary ‘definition of ‘gift’? is found in 2 Blackstone 440 and 2 Kent 437. It obtains in New. York where par{ of the. interest was forgiven. See (rray.v. Barton, 55 N. Y. 69 and in Illinois, where the bal- ance of the debts were forgiven, Berbacker’s Estate, 277. Ill, App. 201, 205, wherein the court says: ‘*A gift, as defined by the authorities, is'a voluntary transfer of property by one to another wien ¢ anv consideration or spies noncenich —— 13 _ The income tax decisions in the federal -courts have -adopted it and defined ‘‘gift’’ as a ‘‘voluntary - transfer of property from one to another without any consideration or compensation therefor.’’ Blair v. Rosseter, 33 F. (2d) (286 (C. C. A. 9th); Noel.v. Parrott, 15 F. (2d) 669, 671 (C. C. A. 4th). Instead as pointed out-in Bothin ‘Real Es-— tate-To. v. Commissioner, 90 F. (2d) 91, 93, 94, State (‘odes enact this definition. ve the court below pointed out ‘the transaction in the - case at. bar literally falls within it. .Petitioner’s case dlepends on enlarging the definition. « The court below disposed of the basis of the Tax C ourt’s an decision as follows. (R. 50) : Rv ‘The Board states in its opinion: ‘No evidence was . ‘introduced .to show a donative intent on the part of any creditor. The evidence indicates, on the contrary, that the creditors acted for purely business reasons and did not forgive the debts for altruistic reasons or out.of pute generosity. In none of the four in- stances was the forgiven a gift.’ M4 ‘‘Suppose the creditors did act for purely business reasons. As long as there was no consideration for the cancellation, the intent to give necessarily followed. Evidently the Board confused intent with motive. There is no evidengg that the creditors.did that which they did not intend. to do. The creditérs motives are immaterial, South Dakota v. North Carolina, 192 U.S. 286, 310. si Under the view of the Tax Court ‘what 1 is a taxpayer to: do? Add technical {Arce to the trial by calling the creditor to ask him if he intended to do what he’ did? There is a firmly established presumption of law that one’ is pre- ‘sumed. to intend the natural grout of his acts. . Allen v. United States, 164 U. S. 492.° ‘Intent is ‘the pur- pose to use a particular means to effect a certain result. 9 ‘ eee Motjve is the reason for doing it.’’ Baker v. State, 120 Wis. ‘135. “* Motive. is the cause Rar action. Intent. involves. the will.’ _ Mate v. er ‘Mo. 351. — Cc aeehn case. (petitioner’ . brief, page 13) | a ~ corporation paid money to a man who had worked -for it. Obviously on this state of facts the payment might have been one of two things—a gift or compensation for serv- “ices. — The question ‘necessarily was which did the payer intend it to be? In other words was there consideration? = In the case at bar the facts are plain and unlike that in the Bogardus case give rise‘to no such question. ‘It is not contended there was consideration. Either the forgive: - ness was a gift or no forgiveness took place. (See page 19 hereof.) -s / / It is ‘submitted that the motive of a gift, if it can ever be considered, can only be considered im deciding the ques- troms (1) whether there was a transfe r; (2) whether it was voluntary and (3) whether there was no consideration for - at. Uf these three elements are présent, as in the case at Lar, then a gift has. been made and the motire or reason for making it is utterly immaterial. | The government did-not dispute in the court below and it does not dispute in its present brief that the forgive- - ness Of debt was voluntary and that it was without con- "sideration. It thus falls squarely within and ineets all the requirements of the definition of gift, which is: ‘*Anvthing voluntarily transferred by one’ person to another without compensation. i This would end the case except that the petitioner seeks to- inject, into and add to the above unifarm dictionary, judiciai, text book and statutory definition of a gift ‘(in Code states) a further, hazy’ and nebulous coneeption of 15 e donativé intent. (What does he mean by this anyway! ay Intent to benefit the debtor or does he inquire into aho- tives?) A consideration of the ‘decisions will disclose tliat where courts have employed the phrase it has been either solely ‘as another way of expressing ,the requirements that the transfer. must be voluntary, in. order to solve the ques- . tion of constructive delivery or-else it has been used ‘in __the cases where money was transferred to a corporation’s ‘employee and the question -was_solely whether the pay- ment was intended as compensation for services or a gift ~ - (i.e. whether there was consideration)-such as the Borgar- dus case, cited on page 13 of petitioner’s brief, or the Old Colony Trust Company case cited on the same page, in * which this court expressly pointed out there was considera- tion for the payment, saying (279 U. S. 716, 729,. 730) : ‘The taxes were paid upon a valuable consideration, namely, the services rendered by the employee and as — part of the compensation therefor. We think there- fore that the payment constituted income to the em- ployee.”” ase . _ Had the payment there been, as here, a voluntary one and without consideration it certainly_would have been a : gift. | The same. section of the Statute, which excludes gifts from income, also excludes legacies from income but this court has indicated a legacy is taxable income where it | is: compensation for services. United States v. Merriam, 263 U.S. 179, 186-7. : 6 ' 16 a fy, that case ‘the court also said at page 187: : ‘The word ‘bequest’ having the ‘judicially settled meaning which we have stated, we must presume: it was used in that sense by Congress. Kepner v. United States,\195 U.S. 100, 124; The Abbotsford, 98 U. _S.. 440, 444."° ; Of course, the sanie reasoning applies to the word “wift’’. If ‘*donative intent’? means anything it merely -means‘a voluntary intent to transfer property to another without consideration. Reasons for doing it are. beside . the point and immaterial, except as they cast light on whether’ there was a transfer or whether there was con- sideratidn. In South Dakota v. North ( ‘arolina, 192 U.S. 2X6, 210, this court said; ; ‘*But the motive with which a gift ix made, whether. yxood or bad does not affect its.validity.’’ lu Moores, 3 B. T. A. 301, (in whieh the reason or mo- lives of the gift was to. avoid income on), the Tax Court sald at page 304 : **In our opinion, however, the motives that impelled - hint to make the gift are immaterial."’ “- As pointed out in Moore v. Moore, 237 Ill. App. 190, 194, the intent to give has been considered in gift cases only _.because it is involved in the question whether there has. been delivery and acceptance (2. e., a transfer) or whether there was consids ration. ‘it may not be amiss to point oat that. the injection of a nebulous theory of donative intent into and its addition to ‘the essentials of a wift will afford a fertile, field for gift tax litigation by donors seeking to avoid a gift tax ‘and backfire on respondent. In 51 Harvard Law Review, p. 50, M*. Paul says: ‘What is controlling is ‘the absence of obligation to make the gift; it is ‘immaterial that me doaor may receive incidental benefits.’ > 17 The court below. properly ‘observed that the Board's statement ‘‘the creditors acted for purely business rea- sons and did not forgive the debts for altruistic reasons or out of pure genercsity’’. was immaterial so long as the. creditors did ‘forgive the debts’’: Many gifts, such as - some campaign contributions are not made for altruistic reasons. If campaign contributions; induced:by'a donor's . hope for an intment, are not gifts they are income to the donee public salary of Senators from large states will not be enough to pay the tax on them. The. famous Trojan horse is the classic example of a zift not so made. Many wedding presents, including some to Mar- shall Goering’s bride, may also be cited. If one man who . hated another gave him $100,000 so he could drink himself to death it would nevertheless be a gift and subject to gift-tax._The Board thus reached its legal conclusion by ‘mistaken reasoning and confusing intent arid motive. It is common knowledge that gifts result froin business rela- —. tionships just as they result from soéial: relationships. (Section 23(q) of the I. R. @. allows seepeetionn to de- duct the gifts therein specified.) Me The argument made by petitioner here was made and rejected in Carroll-McCreary Co. .v. Commissioner, 124 F. (2d). 303_4C. C. A. 2nd) in which the court said (page ge . ‘‘In our opinion the phrase ‘isieiihicaaie Brgives the debt’ means simply that no consideration is paid by the corporation for release of the debt.’’ That case distinguishes Helvering v. Jane Holding Cor- poration, 109 F. (2d) 933, cited by petitioner, by pointing out there ‘was consideration in that case and also’ shows “the caves, cited at pages 10 and 11 of petitioner’s brief — ~~ 38 mappheable. (See alee pages 27 to 29 beesil for comment _ on those prior deduction cases.) If pages 14 and 15 of Petitioner’s brief be construed Ms advancing the argue nt that the question whether the forgiveness. was a gitt Was a pure question of fact, such argument is unsound. °. .- ae In his response to taxpayer's pef{tion for certiorari in the Jane Holding Co. case (cited ge 8 of peti- - tioner’s brief) this present petitioner sa (page 7. there- ~ of): ‘Whether under the Sitinine of ciredunstantial ot of evidentiary facts the cancellation of the debt was gratuitous was a question on which the court might properly substitute its own judgment for that of the Board. See Helrering v. Tex Penn Co., 300 U. S. 4st, 490), ™. "" . aThe precise’ point was decided in Bogardus v. Commis- sioner, 302 U.S. 34, inewhich this court, at page 39 said of the question whether the transaction was a gift: “This, as we recently have pointed out, is a con ~ehisien of. law or at least a determination of a mixed question of law and faet.__It is to be distinguished from the findings of primary, evidential or- -eircumstantial facts. It is subject to judicial. review, and, on such——- review, the court may substitute its judgment fer that . of the Board. Helrering v. Tex, Penn Oi Co., 300 - UL 8. 481, 491. Helvering’ v. Rankin, 295 U. S. 123, 131."°. : : re ; S The following cases, among others, apply this principle : Deputy v. Dupont, 308 U.S. 488, 499; Magruder v. Wash- ington, Baltimore & Annapolis Realty Co., 316 U. S. 69; Helvering v. Price, 309 U. S. 409; United States v. Arma- ture Rewinding Co., 124 F. (2d) 589, 591 (C. C. A. 8th). 19 If the Forgiveness Was Not a Gift Then There Was No — Effective Forgiveness of Debt and Consequently There . Is No Question of Income in This. Case. If these debts were legally transferred from io -ernd: itors to respondent it’is axiomatic and- indisputable they . would bave to be transferred either by gift or by contract based on valuation consideration. .Otherwise - they were not transferred and in such event no question of income arises and the decision below must be affirmed. There are only two ways known to the law by which legal title to personal property can possibly be transferred . in a situation such as here presented.. One is by: gift. The other is by contract based on a valuable considera- tion.- The last is excluded by the facts’ found and there is no contention. it‘exists. An examination of all court income tax cases, cited by petitioner, hoiding no gift took _ place will disclose they find a transfer based on valuable consideration. Hence they are not in point here. As said in 33 Harv ard Law Review at page 691: “tA gratuitous ge forgiveness of a chose in \ac- tion is not valid. -? ‘See also Allen v. Witherow, its S. 119. In all the cases where the point has arisen the debtors had to sustain it as a gift and failing this it was held no » . _ forgiveness took place. Levy v. Greenberg, 261 Il. App. -541, is in-point on the rent item. It holds it a gift but Pusatere v. Darnell, 296 Til. App. 524, 528 holds ne gift and no transfer in analogous circumstances. See also L/nited : States v: Bostwick, 94U. S. 53. S#ercases collected in Gifts, 24 Am: ‘Jurisprudence, Sees. 11 and.12; also sec. 76, page 770, in which creditors in situations like the one at bar promised to forgive the debts and afterwards sued for them. Also Restatement of Contracts, Sec. 76(a), pages "Os ; 83, 85. Gleason v. McDonald, 103 F (2d) 837, 838, 839 (C. C. A. 6th). Farmers Life Assoc, v. Caine, 224 Ill. 599, 606! Janci v. Carney, 287 Ill. 359, 366. The Statute of Limitations on a written promicp is ten years in Illinois (eh. 83, sec. af). ._> “There is no centention that a consideration sufficient to | sustain any transfer, other than by gift, exists in this case. ‘The Board-did not meet this question. If the trans- fer was not a gift, there was no transfer and consequently no question of 1937 incouie and the decision. below -must be affirmed. = Ii. Av The Forgiveness of the Rent in This Case Was a Mere ‘Reduction in the Purchase Price of Property, or Contract Renegotiation, and Did Not Give Rise to Taxable Income. ‘Where property has depreciated in value and. the cred- itor, in recognition of’ this reduces its purchase price, no- _ taxable income results. Helrering v. A. L, Killian Co., 128 F. (2d) 433 (C. 7 Fr 8th); Hirsch v. Commissioner, 115 F. (2d) 656-(C. C. A. 7th); Borin Co, v.. Commissioner, Wi F. (2d) 917; He rtel v, Huston, 28 F. Supp. 521. Petitioner. had purchased, by a lease, property, i.¢., the right to use Hoor space, for $15,200 a year. The court will take judicial notice of the depression and its effeet on realty values. (See note in 81 L. Ed. 1103.) This shrink- age-was such that in 1933, instead of being worth $15,200 this space was only worth $8,400, as shown by the rental _ in the new lease then made (R. 38). . It had suffered this. shrinkage in value jin 1932 and 1933. . These facts bring sinubels in operation the principle of the foregoing cases, as this court will immediately per- 21 ceive as soon as it reads them. See also Bowefs v. Ker- baugh Empire Co., 271 U. 8. 170. A somewhat analogous - situation is life-div idends on a life insurance poliey which _. are treated as a reduction of cost. On this ground, also, _ the decision below should be affirmed. The interest forgiveness did not’ result in taxable ‘incomé because taxpayer never received anything of exchange- able or realizable value for this interest. The income tax rests wholly on the theory of ability to pay and the undistributed profits tax presupposes there — is‘income to distribute, As the court below points out (R. 50), ‘tof course; the taxpayer never received a nickel it could have distributed as dividends.” Moreover, taxpayer never received any property or any accession to its assets on account. of this interest. Nor were its assets freed of any lien. There was nothing to pay tax out’ of, This brings the item. within the state- ments in Commissioner v.. Rail Joint Stock Co.,.61.F. (2d) - 751, (€. C: A. 2nd) at page 751, that the money sought to be included in incomé must have at some time added some- thing to taxpayer’s assets. And, under Phellis v, United States, 257 U. S. 156, 169, this something°should: be of ‘exchangeable value.’? The court said in The Rail Jomt . Stock Co. case (pages 751, 752): ‘*In other words, the consideration receiv ved for the obligation evidenced by the bonds as well as the con- sideration paid to satisfy that obligation nrust be looked to in order to determine whether xain or loxs _ is realized when the transaction is ¢ toned.’ The forgiveness of debt was not income within Bection 22 (a) even if it was not s gift and if ‘the forgiveness _ Was effected. by some other legal method than gift. — When Congress enacted section 22(a) of the 1936 Act (noted on pate 19 of petitioner’s brief) it did so with ty 22 , fn. the definitions of income, made by this court, in mind. Indeed, section 22(a), so far as applicable here, was a re- enactment in identical-terths of the. same section contained in all revenue acts since 1918. This court repeatedly. and‘uniformly construed the defi- nition, between the dates of its varieus reenactments by . Congress: In Merchants Loan & Trust Co..v. Smietanka, 255.0. ‘SS. 509, 519, it’said the word had the ‘same mean- ing in the incoine tax acts as that given it in decisions (under: the excise tax) from 1909. . It reaffirmed the defi- nition in Eisner ¢. Macomber and prior “decisions, as’ it ~ ~ Tas repeatedly done, and added: Boe ‘In determining the definition of inconie thus ar- rived at, this court has consistently refused to enter . into the refinements of lexicographers or economists, and kas approved,'in the definitions quoted, what. it believed ‘to be the gommonly understood’ meaning of the term which must have heen in the minds of the people when they adopted the 16th Amendment to the Constitution. (Citing cases.) Notwithstanding the full argumeéent heard -in this case and if the series. of cases now under consideration we continue entirely satisfied with that, definition.” Compare’ DeGanay v. Le deter, 250 U.S, 376,, 384, The definition was re peated i in Goodrich v. Edwards, 255 . @ S87, S36. - Bos dee é % The definitions given the word ‘tincome’’ by this court are repeated in Hirsch v. Commissioner, 115. F. (2d) 656, in which forgiveness of debt was held not ‘to result in in- come atid it was ‘pointed out: : ‘A transaction whereby’ nothing. of satmmapalie value.gomes in or is received by the taxpayer, does not give rise to or create taxable income,’’ and prior decisions of courts: below are examined. | | _ _ » 9 os ‘ Y ‘ ia - e / ‘See requirement of ‘exchangeable value’’ in United States v. Phellis, 257 U. S. 156,169. , The income tax regulations under 22(a) now and for . over twenty-two years have defined income as ‘‘a gain de- ~ rived from capital or labor or from both combined.’’ ' Phe forgiveness of debt in the case at bar was not a gain derived from labor or from capital’ It was therefor not taxable under section 22(a). See Bowers v. Kerbaugh Empire Co., 27% U.S. 170. It is hardl¥ arguable that Con- gress would adopt a law defining forgiveness of debt to be. income or that Wiese re the 16th Amendment so intended. q a Edwards v. C ‘iba Rajlroad Co., 968 U. S. 628, gov- - ernment subsidies were. held not income under section 99 (a). . The sébaidiary ndings of tui make by the Board override and show the interest was forgiven in 1934. . song 1936 and the The only year and the decision below must be affirmed. The ultimate finding of the Board is that it took place: in 1937 but this cannot stand because it is clearly eontra- dicted: by the subsidiary, circumstantial and special facts _ found by the Board. said at ‘ ge 31: 4 may, of course, inquire whether the abort. nate or circumstantial. findings made by the court be- low necessarily override its ultimate findings of fact re involved i is 1937. It the forgive eness 4 _ took place priof.to that year it could not be 1937 income In a States v. Sees: Pelterie, 303 U. ‘s. 26, it is Rhy c> 24 and show that the judgment i in ans of law is not sus- tainable.’ In the same case on an earlier review (229 U.S. at page 206) it was said: ‘‘The special findings may not be aided by state- ments in the conclusions of law or the opinion of the caurt.’’ " | See also statement of this court i in the Bogardus case quoted at page 18 hereof, The findings, with regard to the j interest, are specific . and "unquestionably show the interest was forgiven i in 1936. =r They are as follows (R. 39): ‘*The petitioner; in November, 1936, owed several. creditors for merchandise which they had furnished - the petitioner over a period of prior years. ‘The peti- — tioner-tiad been a good customer ot these c: editors for many years. It had“given its interest-bearing notes for th@smount which it owed to.each creditor. It went to three_of these creditors .in November, 1936 and asked for cancellation of interest on the notes on the ground that the creditors had made a similar arrange- ment’ with their other customers. Three creditors agreed that they would cancel all interest accruing after January 1, 1932."" | If the finding may be aided by resort to the only evi- dence on which it could he“based, the evidence shows the same thing (R. 13 to 15). There is no evidence of any conversation with the creditors or any ‘act on’ their part in 1937.7 A’& to the rent the Board found (R. 38): 2 The fact that it was entered ou the taxpayer's books in 1937 shows only that and nothing more. It is not evidence that the conversations — forgiving it teok place in 1937. Tte Board expressly found they took place in Prior years, . ; - 25 2 , ~~ ' Spares “21) so he couldn’t have forgiven the rent in 1937. As ‘pointed out in United States v. Bostwich, 94 U. S. 53, this rent reduction was not a con- tract. Pusatere v. Darnell, 296 Ill. App. 525, 528. See also am of court below (R. 49). - Petitioner is not helped by the on edie deducted the rent and interest in prior years because respondent | offered to make him whole and he rejected this offer. ee of the I. R. C. is applicable. It was stipulated (R. 19) that respondent offered to pay petitioner the amount of tax it saved by the deductions in prior years and petitioner rejected the offer. He did so because he thought he could use the fact of the earlier de- ductions to eollect much more tax from respondent than: it saved by the deductions... « . Taxation i in a current year on account of items deducted — in prior years is based on a principle akin to estoppel. There is no ground for an estoppel when one party offers to make the other whole, restore the’ status quo and save him from damage. The court below commented on ‘‘the unfairness’ of the government’s position’? (R. 50). The argument of petitioner (Br. p. 17) that section. 3801 is inapplicable rests on the misapprehension ie what respondent offered to pay was the taxes for 34 and 1936, based on. the assumption that the forgiveness took place in those years. What respondent offered’ to. pay was not this but the tax it sav ed by deducting the interest and rent (R. 19). C~ s 26 The committee reports show Congress knew a tax- payer might have saved little by deducting items in prior years but under the decisions cited on pages 10 and 11 of petitioner's brief might be taxed a Jarge sum in a later vear solely ‘because of the earlier deductions, grossly dis- ‘proportionate to the amount of tax saved by such deduc- tions and wanted to. prevent this in the future.. ; The Senate Finance Cominittee report;on section 3801 states (see C. B. 1939-1, part 2, page 814): “This section of the bill provides an ontaink whe tion of certain classes of income fax problems, now very numerous, which have caused much hardship to taxpayers, and great difficulty to the Commissioner, the Board of Tax Appeals and the Courts.”’ However, even if the case is not within paragraph (2) of section 3801 (quoted page 21 petitioner’s brief) it is surely within the spirit and object of the section and since respondent, by offering to pay the tax saved by the deduc- tions in prior years, thereby offered to do the.same thing this section seeks to do, it is immaterial whether its case falls within it. The offer made it the same as if it did. For any one of the reasons above stated and to do mani- — fest justice the «lecision below should be affirmed. All of which is respectfully submitted. . Joun E. Hucuegs, James A. O’CaLLacHan, Counsel for Respondent. _ APPENDIX. Page to Page Analysis of Petitioner's Argument. The court did not err in relying on Article 64 of Regu- lations 77 as urged at page 5 because. ‘this regulation states what would be a gift at common law. The word “gift”? was used in the statute in its judicially accepted meaning and, this’ being so, no regulation could give it a gloss and none has tried to. It is not claimed the — regulation misstates the law. The Maryland Casualty Co. ¢ase, cited on page 6, is not applicable. There the cash on which it was taxed was actually received by taxpayer. In the second place, it never offered to.pay the tax. saved by charging it to ~ reserve. There is nothing in the Board’s findings of fact which’ states. the ‘cancellations ‘were made by the creditors ii anticipation of comniercial benefit with no intention to make | a gift’’. Also, good will is often, and indeed. nearly al- ways, secured by gifts and gifts are often made to secure it. As stated by Randolph Paul in 51 Harvard Law Re- view at p. 50: ‘It is irrelevant that the donor may re- ceive incidental benefits’’ and ‘‘what is edntrolling is the absence of obligation to niake the gift.’’ None of the « cases cited on page 7 are cases of forgive- ness of debt. They were cases of profit from sale and purchase of property. | ‘Besides, the 1942 Act has set them aside. It would have. sbeen better for the coun fad they all heen decided the other way. As to the cases cited’ on page 8, the Board, in its opin- ion in the Hadden case pointed out taxpayer was liable as a guarantor for the debts of the corporation whose debts it forgave. This forgiveness prevented it having to pay them and this cash saving constituted consideration suf- .fictent to support a contract. Also, it had deducted the debt in prior-years but liad not, as here, offered to pay the tax saved. The decision of the same cirenit in Dallas Transfer Co. v. Commissioner, 70.F, (2d) 95, 96, indicates this is the distinction. ‘The a rent was held not income. The other cases are — ‘on page 6 of | our brief in opposition, As: notgd in note 9 on page 11 the 0 State iia Bank - decision (which. the Tax Court had refused to follow) was set aside by the. 1942 Act. | All the cases cited in note 6 on page 10 arid on page 11 ‘are distinguishable from that at bar on four grounds. (1) There the taxpayers actually got the cash on which _ they were taxed; (2) They did not offer to pay the tax saved by deductions in prior vears; (3) also none of them are cases of: forgiveness ef debt; and (4) none involve _ any possible gift. _ On pages 12 and 11 petitioner dodges’ the question of de- fining a ‘‘gift’’..OQnce it is defined he is out of court for the facts here literally fit the definition. Absence of con- sideration is controlling where the transfer is voluntary. In the Sporfswear Hosiery Mills.case taxpayer had paid . the processing tax to its vendor and when the vendor's - liability to pay it to the government was enjoined and the _tax subsequently held unconstitutional taxpayer was prob- ably entitled to recover it from its vendor. At the time verdees were so claiming and many vendors thought 80." . o t7 ss As above pointed out there was consideration in the Had- dew case in the contractual sense. The court below did not, as alleged at the bottom of page 13 of petitioner’s brief, predicate ‘‘its decision exclu- sively on a finding of no’ consideration,’’ as-a reading of © its opinion will show. It said the forgiveness was volun- tary and the creditors intended to forgive the debt. The argument at the bottoin of page 14 and top of page 15 that the Board’s conclusion of no gift is conclusive is answered at page 18 of this brief. Furthermore, the statement confuses the opinion of the Board with its find- ings of fact. There is no fact finding that a gift was not made or of. intention either. Answering page 16 it is pointed out on page 24-hereof that the subsidiary facts found contradict the finding of ultimate fact. -The conclusion that the forgiveness oc- ‘ eurred in 1937 cannot stand where it is overridden by the findings of subsidiary and circumstantial facts. As pointed out on page 25 hereof, the petitioner on * page 17 misapprehends taxpayer’s offer. The Board repeatedly referred to the transaction as ‘Forgiveness of Indebtedness’? (R. 38) ‘‘forgiveness of " interest’? (R. 39). See also Opinion, R. 40. The word ‘‘forgiveness”’ including as it does the word < ‘‘give,’’ implies.a gift. As said in Roe v. Roe, 98.Fla. 840: ‘*A debt may be the subject of a gift by the creditor to his debtor and is generally referred to as foregive- ness of debt.’’ --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386403_0128%3A5. Public record. Not legal advice.