Petition for Writ of Certiorari — John Kelley Co. v. Commissioner

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‘PETITION FOR WRIT OF CERTIORARI TO. THE

U NITED STATES CIRCUIT CCURT OF APPEALS

- FOR THE FiRST CIRCUIT

. BRIEF IN SUPPORT OF PETITION FOR WRIT

Bs _____-OF CERTIORARI rt

TOA ase ee MELVILLE F. WESTON,

: eet WES, ; Counset,for Petitioner.

ees cee aes TALBOT MILLS. ~ - :

Powers & Haun ; ee

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—_ PETIT ION FOR. WRIT. OF CERTIORARI TO. THE

UNITED STATES CIRCUIT COURT OF APPEALS |

| FOR THE FIRST! CIRCUIT: °°

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°To THE HONORABLE THE JUDGES OF THE SUPREME COURT OF

. ‘FHE UNITED STATPS > ; [+s 5 bet a

Talbot. Mills, a Massachusetts: corporation, prays that ¢ a”

Writ of vertiorari issue to rey iew the decision of the. Cireuit

Court of Appeals for the First Circuit, entered in the above

case on December 22, 1944, affir ming a decision of ‘the Tax

Court of the United States: entered Febr vary 12, 1944. _

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: STATEA ENT OF THE- -M MATTER INVOLVED

Sn - the Supreme : Court. of. the Gnited Staves

Petitioner :

Responden Sas

The Respondent deter mined .a deficiency in Petitioner's

‘Ine ome and Excess Profits Tax liability for the Petitioner's

taxable (fise al) year ended. September 30, 1940. (R.. DTH}:

Petitioner applied to the. Tax Court of the United States for,

at redetermination of the deficiency (R. 3-6-). The Tax Court’

Sustained the Respondent's deterarination of a “detfici iency

"- States Circuit Court.of Appeals for the First Circuit (R. 86--

_ firmed the decision of the Tax Court 8--93-106}.— Secs

' the aggregate fare value of $400,000 (R. 74, 95).A specimen

~ stipulated that the item”of $40,000 was properly accrued for

an unqualified promise ‘to Pay to each payee a fixed, sum of 7

' range the actua! rate in each year was to be determined “hy

_in ‘good faith, and intended to be: performed in accordance

with their fertase There was ho suggestion that the notes were

- ae

CR. 72-81, 35). Petitioner duly sought review by ‘he United

7). The Cireuit Court of Appeals, one judge dissenting, vaf- 4

“The deficiency was based upon the disallowance by the

Respondent of $40,000 which the Petitioner had deducied as.

_interest upon its return: (R. 59, 73, 93-94). This was interest

“ on the Petitioner’s issue of registered notes, outstanding in

of these notes appears ‘if the record (R. 19-2 25). It’ was

and en account of the taxable’ year in question (R. 14-15). 4

—The-issue-was- whether-such-item, “S60 accrued,’ ‘constituted »

interest deductible within the meaning of Sec tion 23 (b) of

the Internal Reyenue Code (R. 59, 3-6, 14- 15, 73, 78, 97).

The central and,dominant feat ure of Petitioner's notes was

dollars at a definité maturity, slightly ever twenty-five (25)

years after the date of issue, ¢R. iy, TA 95)- The Petitioner

further promiséd to pay to each payee, as interest upon such:

fixed antount of principal, not Jess than 2 percent (2%) yor

more than ten per cent, q10%) in each year; within. Which

@ formula having reference to. the Peétitioner’s earnings for

such year (R. 20, 75, 95). Interest for the rear ended Septem-

ber 30, 1940, was determined at the rate ef 10 per-cent, in

accordance with ‘these provisions (R- 48, 78, 96-97) being the

$40,000 the deduction whereof is in question (R: 78, 93).

Nowhere in the Commissioner’s pleadings or in the find-

ings of the Tax Court or in. the opinion of the Cirenit- C ourt.

of Appeals can be found any Suggestion that the promises :

embodied in the Petitioner’s notes were not genuine, made”

a “sham,” or that they did not embody thé real uniderstanding

of the” parties to’ the fransaciion. i :

I Bee scarey the dissenting opinion (R. 108)

ame es ae hs pe A ee

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_ sharing advantage of stock, leaving intact thei voice in the

| Management? but extending a tax advantage to the corpo.

_ration not possible in stock”: (R! 80-81). ? pie

_. The Cirenit Court of Appeals based its decision upon the « \—

cireumstances that, the ‘notes were issved in exchan

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Nevertheless, the Tax Court held that the notes did not”

_ &reate any “proper indebtedness,” that they “were wore in

the nature of a capital investtiént than.a-loan to tae éorpo-

ration,” and that the payments made as interest were not

deductible under Section 23 (b). of the Interna] Revers.

Code (R. 81), em Uta OR 2 a

The Tax Court based its conchision upon thé cireum-.

stances -(a) that the notes bore a. “variable rate of interest

| ‘computed with reference té profits” (R. 79); (b)-that they

° were “issued in exchange for stock of the issuing eorpora-

tien” (R. 79, 80); (« ¢) that the-rotes provided under certain

_cirenmstances that—“the payment of interest might be de-

ferred” (R..79) ; and (d) that. the “faetor of tax avoidance”

‘was a “substantial purpose motivating the transaction” (R.

tive features tends to cast doubt on the real: nature of

the instant “transaction” {R. 80); that therefore the intent

of the parties must be soyght, with ‘evidence aliunde the

eentract admissible (R. 80) > and that “what the parties

really infended to create was a security retaining the profit-

stock (R.-98, 101); that the rate of interest was variable,

(R. 99-100); that the notes’ were capable of being subor-

_dinated ‘te the claims of other creditors (R. 101); that the

payment. of interest conld be (deferred (R. 300) ; and that

od

Petitioner had tax avoidance as-a motive in the issuance of — .

- hotes in exchange for stock (R. 98-99). It also held that the

‘leaning of the notes was governed -by extrinsic evidence

(R. 98, 99). In addition, the Court relied upor-Dobson vy.

Commissioner, 320 U.S, 489. (1943) as requiring that ‘the

Tax Court be upheld. Eas a “Se os

‘only to the stock, not to*the notes,

*dgnoring the obvious fact that this right was attached

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80). It asserted that the “cuniulation of these various Testric. °

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Both the Tax Court and the Circuit Court of Appeals also

apparently regarded as material the facts that the Peti-

tioner had: but few stockholders, who were related by blood.

‘or, niarriage; that ‘the noteholders. also \continued to “hold.

- stock; and that bit feweof thé notes. had been transfer red

to dats (R. 74, 76, 80, 94, 98,99).

The Tax Court and the Circuit Court ‘of Appeals both

: ignored the strong categorical language of LRG. Section 23

{b) providing ‘that de&uction shall’ be allowed for “all in-

terest paid oF agerued within the taxable year on indebted-

ness” (italics added). Both. paid, as little regard’ as: possible

to the fundamental fact fhat the notes embodied : =) firm :

promise. to pay a fixed sum of money at .a fixed matuftity,

_ which, at least for every purpose other -than taxation, would

unquestionably. constitute an indebtedness. , Bot!..concerned

themselves with “tax motives.” The tenor of both decisions.

ois made sharply clear by the contrast prpetnted by tlie dis:

venting opinion ef Judge Magruder (R. 1Q1)..

- The- Petitioner. submits that the decizion ‘of the € ire! lit

oe ourt. should be reyiewed by this Court upon cqptiorari, for:

’ the reasons stated below, in meres — a brief is filed

a : . The Cirenit. Court of Abpeals has decided federal

4 1. *The decision is in- substance in. conflict with the. de. q

-cigion of the Circuit Court of Appeats for the Second Cir-’

herewith, pate: es

REASONS RELIED. on FOR THE tLowaNcE OF .

: ; THE WRIT oS: og

Under the principlés enunciated 4 in Section: D. (b) of Rule

_ 88 of this Couri, the Petitionewsubmits that the writ should

be granted for the following: reasons : ;

euit in Commissioner v. O.P.P. Holding Corporation, 76 F.

a A. 2nd, 1935).

pid Mo in a way probably in conflict with applic able: deci- :

sions of this Court ine at least thie” Potlowi ring respects:

(8) Ww ith b reapect to the pesca of “interest” as used

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in the tax statutes—Deputy y. Dupont, 308. U. 8. 488, -

- 84 L.Ed. 416 (1940). ERP SS

{b) With respect.to the propriety of stipulating .. eee

a variable rate ‘of interest coniputed with reference to

__ profits—Meehan v. Valentine; 145.U. 8. 611, 36 L. Ea.

| BOB GION) hes 5 :

(c) With respect to proper principles of construction, _

. giving. to: words in the tax, statutes their plain, and

natural meaning—Deputy V. Dupont, Supra.

- —, -(d) With respect to the construction of tax statutes -

* in favor of taxpayers ‘in- proper cases—Gould vy. Gould, — -

245 U. 8. 158, 62 L. Ed, 211: (1917), - ee |

(e) With respect to when. “evidence aliunde the con-

tract” may be used to contr¢l the meaning of _a written

instrument—Hamilton y. Liverpool, ete. Ins, Co. 136 ®&. -

U. 8. 282, 34 ;'Ed. 419. (1890), fi SET ROT

3

ff) With respect to the right of taxpayers to.arrange

-

their affairs with an eve to tax consequences—Bullen ¥. -

- + Wisconsin, 240 U8. 625,-60 L, Ed. 830 (1916)

(gg) With respect to a proper regard to the actual

language used by Congress and ‘to refraining from”

judicial legislation—Crooks y. Harrelson, 282 U.S. 55,

- 75° L. Ed: 158 (1930) ; Iselin vy. Usited States, 270 Ul 8.

* 245, 70 L. Ed: 566 (1926). - lis Seer

otek al ”

©(h) With respect to-the application of the rule mak-

"ing decisions of the Tax Court final in gespect of matters

_of fact but not in respect of matters of law—Dobson Y.

Commissioner, 320 U. 8. 489; 88 L, Ed. 179 (1943).

8. The-Cireuit Court of Appeals has decided important

questions of federal law which have not: been, bufshon!d be,

- settled by this Court because of, ... : ore

(a) Their importance in. the administration of the:

-tax laws; . eake une tre hina ager

(by Their importance to citizens of the Countey about

“fheir, commercial affairs; a

(ec) Their importance with respect to Peritilsaibie

“judicial methods. : ce Se a, a bop

Each of the grounds mentioned dhove will be. expandéd

... and supported in the Petitioner's brief. : Po

Pay Ww ‘hérefore, your Petitioner respectfully prays that a writ.

‘-. -of certiorari be issued go the United States Circuit ¢ ‘ourt.

of Appeals for the First Circuit for a review of the deci ision.

of the Circuit Court of Appeats-amd_that-the judgment of

'. the Circuit Court of Appeals be reversed and.that the Peti-

tioner he granted such other | and furtber relief‘as weed be .

a ro eos hee $F)

L MELVILLE F. WESTON,

. Counsel for Petitioner.

‘TALBOT MILLS.

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Powers & HALL

‘Of. Counsel.

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INDEX TO BRIEF *

. - (And to wetition )' :

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ee 0 fr g i

PetrrieN oh ' Pace

* Statement of the Mattes iwvoieee Pere arts! ices 41

Reasons. ‘Felied on ow the Allowance of the ‘Writ . ae

Brier > ete 2 : ees ; ‘es

Opinions Below. faba’ veseeas tL ENE eee ie i

-- Jurisdietion® ....... SANG AGRE 5 eR Sa wed crs Lae ae

‘Statement of the 2 | eS aie ses fedeep eas’ t : eee

Characteristics of Phiditonera Woes Vieeure Rass 7 8

Specification cf Errore... 3030.00.05 Essie Rt

Summary of Argument. , Fikes Tee ec Ss sleovance’ 3 EF

Argument. 7s... eehbes cebettesab seis . Resid! +6.

ee i. The decision of the Cireitt’ Court of hei me hs

-» for, the First Circuit is in conflict with Com- ye

missioner vy, O.P.P. Holding Corperation, ies.

_ 76 F, 24-11, Decided in 1935 ‘by the Cirentt. 2

$i + @ourt of Appeals for the: ‘Second Cireuit . 12-13 Saye.

* “II? athe decidion of the € ireuit Court of Appeals - eae

‘for the First Cirenit is in probable conflict *. * &

with numerous decisions of this Sourt . - 13-23,

aaa meaning of “interest.on indebt-

edness.” Herein- of the -variable _. =

rate Gf interest ........ weeegene, 1915

__B. Rules'for the construction. of, statutes ;

‘—Ordinary meaning of ‘téems— te A

: ‘C nstruction in’ “taxpayer's favor 15-17

ena _C. The: use of “evidence aliunde the |. ates

ages contract” vekoesvas gree eeteee. 17-19 >

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D. -As to the: right of the Petitioner ta

rearrange its affairs with frank.

ve regard to minimizing the Licliietatte: | eek

| a Oe tasellte ss ooo coe jaacres Dati |

-Ez The inapplicability of Dobson 2¥,

Commissioner vee irapred eee 20-2

The anebicas of law presented are of impor- 7.

~ tance and should he decided by this, Court 23--27

“A. The issues ’ are ‘ important in. the

“> _ Sdministrgtion of the revenue4aws 23-24 :

BX .

'C. The- i isgues presetited: dre of. impor:

) danee with respect. to: \the judicial ”

a "process itself aweee tanebav cede 95-21,

b] Rana:

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ag AOE? WeProctor: Siidp Ine. 82. fF. 2d 792, oh as age

79 (C.CLA, 9th; tte SET RPE ET ACES Cokes seeuf 18, 98

» Commissioner v. Raphael, 133 F.: 2d) 442, 445; Set

(CGA, 9th, 1943) . eT re O45 eee were ee oe 21 |

“Crooks v. Harrelsoy, 282 U 8.55, 75 L. Ed. 156, 175 mare

(1930) - PAseeey cara. we TG < 3e

H.R, Demitt Gy. 7 7 BTA 7 heheh vate ant Pecbancts ‘Qa

Deputy Vv. Dupont, cam ul S. 488, st L. Ed. 46

(1040) 3 Ss SVReb ee ates es sabe cs 2-5, 14, 15, 16

biamond Calk Horse Rhee Co: v, Weiss States,

‘D.C.D. Minn: 9/20/ 40, CCH Par. 9641, ruaoee

’ Dismissed on Stipulation 116 F. 2d 284 2.2. 24

; ‘Deine vy. Commissioner, 320 BG ‘Ss, 456-a0-% Ed: guise

“179. (1943) maces oe EG Se Pieri Ae nie te 3,5, 11, 20; 31, 24

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et ve : TABLE OP CASES CITED }

(Including Citations i in Petition) Neos 2

ee ae o Beg ars 3 done? : \ ,

Be Sys ee

Arthur R. — Syndicate. ¥GLAnmigsioner, oh ¥, sees

2d SF (C. C.A, 7th, Mee ao oe teee- IL 18,

Bross v. J.C: eager Grain ., 15 F.. 2d 514 . ‘ a: a

(CCA, tt, 19263 i Sbrabs wets vavecee se cc oe | t

Builen v. Wisconsin, 0 U. 8. 625 , 60 * ‘Ea, 830. |

(1916). PEt aa Chav ones eae ee Oe 19, 26

oe ommissioner v. Coastwise Tandlor tation Corp, : $s Dale,

71, F. 24-104, 105, (Cl JA; Ast, 1984)... |. eteae si. HF 2

* Conmihisgioner . _ehohn Kelley Co.; 146. ¥ 2d 466, : E Seen

468, o C.A, Fth, Lcint x Me ee Phen eee ie 24, 26 |

Commi — aig Ep. aration, <6,»

F. 2d"11,; c C. A. 2nd, 1935), eas Pefeeee ee ody 12, 13, 25°

2

Be

34 L. Ed. 419 (1890) 3.2.0... sake at aces ©)

' Helvering f Northuest Steel Rolling ° Mills, 311 = a8

U. 8. 45, 85.L. Ed. 29 (1940) oi... catateina'e wrt eae

Helvering v. Ohio Leather Co.,. 817 U8. 102, 87 Onan

ae Ed. 113 (1942)) 0. ese cere eden eee ee ees 16°

‘Helvering y. Richmond’F. & P. R. Co, 90 F. mo ,, te

- 971, (C.C.A. 4th, 1987) ¢..... wos Aca eal

Seale v. United States, 270 U. 8. 245, 251: 70 L. pat ae

. + Ed. 566, 69-70. (1926) .....:..... iethele ures 5, 20

John Kelley CR TDR OF iis oes eulticai eo ee

‘Kena, Ine. o 44 BA. yb oe. Pere ee cae acwhes ; 15°

8. 8. Kresye Co. vi ‘Sears, 87 F. 2d 135,138, 140

- (C.CMed lat; 1986) 3.6.0... Caw aikey un itee tt o> ae

S. H. Kress Co. v. Fisher, O5F. 2d 682, 683 tC. CA a

| Ath, 1983) 2... ee, i vhew it cae cows bupek eax Dea

M ar Corporation ¥; Commissioner, ni F. 2d 187;

191{C.CA. Bb; WO). es. euler a ET me ae

Meehan V. ‘Valentine, 1450. 8. 611; 36 b Ed. 835, ee

"(1892)". ee ice LEA ahioeae one A BEES Per thy 6, 14

+ Gould.y, Gould, 245 U. §. 151, 62 L. Ed. 261 (1917) .

: Guaranty Savings £ Loan Co., 14 BTA 4 WS sca: _. Zhe

Hamilton v. Liverpool, ete. ins. Co., 136 U. 8.242, ....

é i ° .

me his

+ ° iy f

: ; ‘

eee, lite Asauranee- Society v. Commissioner, :

U.8. 88 B. Ed. 603, (1944) of. ee ee. TS Sa

Forstman v. Rogers, i28 F. 2d 126, 129 (C. C. A. 3d, :

WDAZ) cc cesdesenections eb ts eh 49 ih ban Wh 09s 2.

Gregory Vv. Helvering, 298 U. 8. 465 ~ 2.68 See 11, 19

b.-16, 17

Meridian ne T hirteenth Realty Co., 44 BTA 865 ee Py

- Merinos Viesca ¥ Companiav. Pan American Pé T

ae Co., 83 F.2d, 240, 242 (OOM: 2d we beagestie ys.

(CCA, Sth, 1937) PFEOR ARS seas herded tea cee.

New. Calonigl Ice Co. v. Helv ering, 292 U. s. 435,

- 78L. Ed. “1348 GES ibe e

Noteraan y. Wele th, 108 FE. 2d. 206 +208, 215, (Ce “A, >

Ist, gat A a eB WS bie WRN Sww ah bbe uke

ld Colony ‘Rai? road Co 0.9. C 'ommissioner, 2840.8.

552, 560,76 L. Ed. 484, 489 BIW E Sievers ns - 3

fe

i

fiociial Revenue ‘¢ ‘oda, Bection 23 (b) re Be

Judicial ¢ ‘ode, Section. 240 D(a)" (Us 8. Code, Title ie

‘Vv

National Hurety Corp: V. Ellison, 88 F. 2d 399, 403 |

Pabopnge Stacy. Merrill, ‘Ine. 39. Bi PA 636, Atfind..

Jil B20. OO... 5; eelisuevebases tov ce

* Union State-Bank & Tr, €0. ¥. Nertneeetss crn life

Ins, Co, 55 F. 2d 1070; 1072 (C, eC, A! Sth, T9382) ,

Western & Southern Life Ins. Co. Vv. Huwe, 116

2d 1008; 1010, (C.C,A. 6th, 1941)...

White vy. U nited. States, 305 U. 8, 481, 82 Ls Ed: ,

172° ( 1938) AOL ENT porte LN + hbk alg, wis had ain

Wiggin Terminals v. United States, 36 FS 24 893,

W oolford Realty Co. v. Rose, 286 U. 8. 319, Puy. Li

Ed. 1128 Sra a Pe eee ee Peoeeoevcesee s-o rr

: 28, Section 347 {a)) ve ON NED page ek Pia des

Act of: February 13," _- iv 8. Code; Title 28;

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Sn the Supreme. Court of the" Gnited States

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OCTOBER TERM 1944 * ST eetE ae ie

: No. 4 ors, : Z : 2

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‘- . ‘TALBOT: MILLS, “. |

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"Gee Sites Seren - mee te

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COMMISSIONER OF INTERNAL REVENUE, |

a : Respondent

BRIEF IN. SUPPORT OF PETITION FOR WRIT ‘

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A terrapeetomnmmaet meng ictectrn ming, gene Bune Piper: Pe a

"Talbot MiHs, a Mateachunekis eerponsioa, respectfully

submits this brief in support of its petition for, a writ Of

certiorari, i, printed and filed hérew ith. os oe

; | _ OPINIONS BELOW ~ — eee ae

The opinion of the Cirenit Court of Appeals: (R. 93) is 3

reportedin | F.2d. - . The opinion of the Tax Court = a

(R. 73-81) does not appear.yet to be officia ly reported, the”. ys

_bresently available reference being-3- Ee e ee ny

An unoffic ial report. may: be found in the CCH Tax Court: Te TAC ee

Servic eV ofome 2 » Dec. 13,691. eae : f

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t ‘ eae

xh “JURISDICTION ak Stal eo ee

A. The jurisdiction of this C ourt is inv oked . under Sec-

tion 240 (a) of the ri ial Code .as, amended by. the Act of

reunary 13, 1925 ¢U. 8. Code, Title 38, Section 347 (a)). ° .

‘Phe case ert the construction ‘and application...

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ek ag ees ene mewn ones orton Soe

of anna Revenue Code, Section 23 (b),; providing that in.

. computing net income. there shall be allowed as a eduction sf

. allinterest paid or accrued within the taxable year on indebt-, :

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ten ( with Yo siccepttins not inatefial,). This deduction has

‘in the Circuit Court of ete and hy the matters ——

hereinafter in this brief.

the requirements of the-Act of February 13, 1925 (U. 8. Code,

. Title 28, Section 350) will be filed within three months after”

_ . the above-mestioned date: ah Bp .

eS | of .the Petition,: “supra, contains in ‘Summary form

‘the facts material to the comsideration: of the questions pre:

sented, with references to the, pages of ‘the ‘record. For’ the.”

sake of brevity, we do -not.1epeat this material here but

pas ciate nis as Be coy

al

been denied to the Petitioner in violation of applicable prin--

ciples of law, as hereinafter set forth. That the issues are |

substantial tppears we'l confirmed ‘by ‘the dissenting. opinion

f

“=, The decision of ‘the Circuit Court _ of Appeads was

enter el December 22, 1944. This petition, in accordance with

3)

ST ATEMENT OF THE C. ASE ;

The “Statement of the Matter Involved;” found at pages

respectfully incorporate it by reference.

‘The pertinent provisions of. the petitioner's notes, with ‘

referencés to the full text as it appears at a 19-23 of ‘the .

printed record, are as " follows : :

(a) The unqualified promise to” pay a fixed sum in’

dollars at maturity on December 1, 1964 (R. 19).

~ (b) The agreement to pay thterest at now less than

~~ 1964 (R. 20).

2% and not more than 10%, and, within that range at

the rate’ (to, the nearest WJ.) which a sum equal to

two-thirds (53) of the Petitioner’s net, earnings for. thee

fiscal year would rep: esent upon an assumed principal of

$400,000 (R. 20). | :

(e) The agreement to pay interest iinadin ‘certain:

- circumstances at the flat rate of 6% (R® 20, 21, 22).

(ad) The power of the Petitioner. to defer payment of

’ interest; only as the Directors in good faith determine

to be necessary, and in ho event beyond December 1,

ri

cissued, is seg out in the record (R. 10-13 5 13,19 ; 26-28 ; 36-39; °°. ve

“os

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* "> (e@) Acceleration of maturity in event of bunkruptey

andthe like (R21). 0 Bes ;

(f) The power 6f the Petitioner to effect Subopdina- — *

tions to. other - obligations maturing” not tater _than-——.

December 1, 1964. Note £ there was"o general sub--

conditions, terminate) subordinations (R.- 21-22); *

(gj. The power to call and retire the notes (R. 22-22),

ordination; only.a pow to make (and,- under proper.

(li) The power of three-fifths (4) of the noteholders ” ,

obligations (R. meee Fe ates et

(i) Provisions alfecting. transferability {R. 24).

The recapitalization, in the courge of which the notes were

to gonsent. to changes, hot affecting the fundamental

41-45). if iy ‘#0 °

Certain specific subordinations, since ‘terminated, are set

out.in the’ record (R. 14;°29-35; 44-45; 46-47; PA OER

z

" Bee... 23. DEDUCTIONS FROM GROSS INCOME’

The statute under which” ther deduction ‘is claimed is as

follows) Boe

\

INTERNAL REVENUE CODE

oe

In computing net income there shall be allowed as

deductions: ER Sten, ned are, ;

ees |e Jnterest—Alt interest paid or accrued within the

taxable year on indebtedn S88, except’. .” (Exception

not material)’ - Fea iS ga <

_ SPECIFICATION OF ERRORS: ue

The Petitioner specifies, and will urge fipon the granting of -

the writ, the following errors committed by the Circuit Court - -

. of Appeals, ; eer

¥

1.. The Court erred in holding that the sums accrued as.

interést ‘upon the Petitioner's outstanding. registered lotes

Were not deductible a3 interest under- Internal Revenue Code, |

Section 23 (b).” 5 a,

4

.

10

2. The-Court — in hia: a vale which makes oe

—— some ‘inferest upon some indebtedness deductible, whereas”

.the statute grants a deduction to all interest oom; ‘indebted:

,

3. The Court erred - in 1 failing to consteee - the term |

“interest” in said statute as including the amounts accrued.

upon ‘tlie ‘Petifioner’s registered ‘notes.

4. The Court erred in failing to attribute ‘to the terms

“interest” and “indebtedness” in said statute their plain and

natural meaning as reflected in common usage and general.

law. oe .« '

5. The Court erred in, faiiing to construe the term

“indeLtedness” in the statute’ as including the principal

: obligation created,by the Petitioner’s registered nptes.

6. The Court erred in construing the statute by the appli.

cation of an untenable distinction between “loans” and

“capital investments.”

7. The Court erred in using extrinsic evidence to contra}

the méaning of Petitioner's nctes. . 3

8. The Court-erred in applying criteria, appiicabie ‘only

in cases of alleged sham and the like, to a casein which there’

was in fact no"questicn and ao issue but that the. Petitioner's |

notes were genuine and sarees to be enforced according to

4. ‘their’ terms.

- 9. The Court erred in holding in effect that interest, to

. be deductible unter the statute, must not be at a rate

measured with reference- to profits. |

10. The Court erred in regarding and ee the basis

of its decision such factors as:

; (a That the Petitioner's notes were issued in

exchange for stock; _ ' we

_ (b) That. the. Petitioner's notes provided for: a aged

‘* able rate of interest; te ae 2. a

(e} That the Petitioner’s notes /Pageun no wew

capital into the corporation ;

(d)° That the Petitioner’s notes were capable of being

subordinated to claims of other- enece os .

; % ° a | ra

(e) That under, the provisions of Petitioner’s’ notes: -

payments of interest’ might be deferred ; ;

_ (f) That Petitioner’s notes-were held by persons. who

were also stockholders : ine i

- "by blood or marriage. —

11. The Court. erred in regarding and making the basis - -

of its decision, the circumstance that a tax advantage was g

principal parpose of the recapitalization in which Pet;.

tioner’s. notes were issued; eres: |

12. The Court erred in treating: the indebtedness actually

created by the Petitioner's notes as if it were “form” instead

~ “substance” in a. case in. which there was neither evidence >

Lor suggestion of sham or unreality, or of a temporary expedi-

eat (Cf. Gregory Vv. Helvering, 293 U8. 465), or of a trans- .

‘tion for security only or to achieve some other unrelated:

“ad. (Cf. Wiggin Terminals v. 1 ‘nited States, 36 F. 24 893;

Arthur R. Jones Syndicate v. Commissioner, 23 F: 2 833).

13. The Conrt erred in failing to apply, the rule’ of con-

struing tax statutes in favor of the taxpayer, in a case where

the application 0" such rule merely required giving to the

- aig uage of the Statute its plain, straightforward. meaning:

1. The Court erred in applying the rule’ of Dobson vy, *

Commissioner, 320 U.S. 489, in a case in which the funda.

. Mental issues involved Were issues of law and not of fact.

SUMMARY OF ARGUMENT ©

. It is respectfally submitted that this Court should consent

_ to review this case because of its importance in ,the adminis-.

tration of the révenne laws,: its importance with respect to”

past, present and future dealing? of business organizations

throughout the Country with respect to’ their financial

arrangements, and finally its importance with respect to the’

jadicial process itself. it oe ae Babes,

"The decision of the Cireuit.Court of Appeals for the First

', Circuit is in.essence inccmpatible with the leading case, upon

« like subject matter in the Second Circuit.

Le eer

: ie . g. ‘ : : . : in idee

(g) That the holders of Petitioner's notes were related ;

“

a7

\

In reachiiig { its decigion, the Cireuit, Court of Appeals of

necessity violates clear principles set out in the decisions of:

this’ Court with respect ‘to the construction and interpreta:

tion of statufes;.the meanings of the ternis “interest” -and

“indebtedness” ; the duty of courts not to vary the clear

meaning of a genuine unambiguous written instrument ee

recourse to so-called: “evidence aliunde the contraet”; thé

right of citizens to arrange, their affairs with a view to the

minimum incidence of taxation; the duty of the courts to.

refrain from “judicial legislation” ; and the reviewability. of

. decisions of the Tax Court upon issues of law.

: The Petitioner protests against a judicial technique which,

with the almost palpable objective of defeating the Petition-

er’s purpose to minimize the incidence of ta7 ation, Cisregards

the express language of the statute. tre ats a’genuine business

arrangement as if it were a sham although no issue of sham

exists; disregards applicable rules for the construction of:

statutes, in effect asserts the existence of a common law of

taxation with a right t6,contrl and alter the stét utes enacted

by Congress, discriminates agaiast the Petitioner because it:

is owned by a few people instead.of by many, and in general -

deprives it and all others similarly sitvated of their clear

rights under the law. That the Petitioner is aggrieved, may —

by’ itself be no basis for the issuance of the writ. But the__

interests imparied by the establishment of any grossly errone- —

ous judiciat techuique are the nnearents of the whole people.’

e

¢

ARGUMENT

eae | THe Decysi0N’ OF THE me ulr Covrr.or APPEALS cor

“THE First Cracuir 1s IN CONFLIC. WITH Commissioner v¥:

O.P.P. Holding Corporation, 76 F. 2d 11, DEecIDED IN 1985, .

BY THE Circerr Covert OF APPEALS FOR THE SECOND CIRCUIT.

In the case mentioned-above, the debenture konds in quies-

tion obligated the corporation to pay fixed_sums of money.

at a definite maturity date. The interest thereon’ was held to

be deductible in spite ofthe facts that (a) two-thirds of the

ores | ta, 9 bonds night extend ae m turity | date for all;

————-tan

.

6: RR ce trek le

a

(by the bonds were subordinated to the ‘claims of general*

creditors; and (c) the Company

. or defer the payment of interest

might at its option suspend ©

provided it. whs not ;

of “the cbligation: to iy the Same ‘at some future time.” It

; 3 pi !

was held that. the interest ‘upon

and the emphasis of the Court w

upon the central fact that: the

these bonds Was deductible

as correctly placed, at p. 12,

creditor was entitled to be

“paid eventually from the debtor's property, regardiess .of — .

a Whether there should be a surpl

us. '. “le 4

- In the present case, the Tax Court ind the Circuit Court -

of Appeals havé ignored ‘this eentral feature, Which is the .

dominant characteristic oF an indebtedness, and have placed

~ there was no “proper” indebtedness. : : :

Distinctions drawn between the two cases, merely because

exactly the same set of Subordinate features was not present

in both cases,’ cannot properly account for the differerice in,

the results. Further, any attempt to rest the distinction solely

| _ upon the fact that the present

‘a variable rate of interest would

_of this qurt {see pp. 1415, infra).

Il, Tue Deciston OF THE CircvuirT Cc

THE First CIRCUIT Is IN PROBABL

DECISIONS OF THIS CouRT.

Pétitioner’s ‘notes contained |, —

be unsound under decisions .

OURT OF APPEALS FoR

E CONFLICT WITH NUMEROUS - a

ry >

A. The. meaning of: “interest on indebtedness: —Herein

of the variable rate af interest.

i.

‘For example the-0.P.P: Holding Company case did not

contain the element of a variable rate of interest or the ele-. °

ment of notes having been issued in exchange for stock. On the

~ other hand, the Talbot-Mills notes dia not authorize two-

thirds of the bonds to extend the maturity date and did net .

provide an absolute. subordination to the elaims of other |

creditors but only an authority to vote and terminate specific.

subordinations, °-

\

a

W4.- 2

‘Ie Dabdiinn Dupost, 308 v. 8. 438, 84. Ea. 418 (1940),

_ this Court said:

means comupennntion t for the use or forbearance of money.

te absence of clear evidence to the contrary, we assumé

that- Congress hase used these words in that sense. In

" sam, we ‘cannot sacrifice the ‘plain, obvious and rational ©

ese of the statute even for ‘the exigency of a hard |

‘. se.’” 308 U. 8. p. 498; 84.1. Ed. p.'424. \

The carefully selected words “compensation for the-ase—

or Yorbearance of money” definitély exclude from considera-

‘tion the question whether thé debt was incurred as the pur-

—_—__chase_price of the debtor’s own stock, Obyiously there _ is

“forbearance of money” so “long as the creditor, voluntarily

6r in aceordance with his written contract, forbears to re -

ceive from the debtor the sum owned. And a sum may be- 0%

come owing for.any valuable consifieration. Manifestly the

surrender of the Petitieyer’s stock in the present case was

such a valuable consideration. * ,

In Meehanv. or menn 145'U. S. 611, 86 L. Ed. 835, this

* Court said; as follows: Se 4

“y “In whatever form the rule’ i is 5 expressed. ‘it is uni-

aes Versally held that an agent or servant, whose: compensa:

tion is measured by certain proportion, of the profits of -

_ the partnership busiaess, is not thereby made a partner,

in any sense. So an agreement that the lessor. ofa hotel

‘shall receive a certain portion of the profits thereof by

‘>. way of rent does not make him a partner with the lessee.

. And it is now equally well settled that the receiv: *

ing of part. of the profits of a commercial partnership,

in lien of or in addition to interest; by way of compensa-.

- tion for a loan of money, has of itself no ‘greater effect. >

145 U.S. p. 624; 36 LE. ‘Ed. p. 841. f oF

It seems perfectly clear. that it isa legitin ate, and may be

a Wise, arrangement for a creditor to make with a debtor that

the rate of pay which he-is to receive for hits-forbearance of

“2 See dissenting! opinion of Magruder, J. (R. 102)...

_ money” be related to: the success of the debtor during the

_term of. forbearance. And if

~.pattnership, which is net a Separate legal entity; does not

' make the creditor a, partner, a fortiori such an arrangement:

; with a. corporation, which is a legal “entity, can hardly of its +2

own force render the creditor a stockholder. ® Even the Tax . °°

- Court itself has field that interest, may properly be measured |

in relationship to the débtor’s earnings. See Kena, Inc., 44

4 Hy. i Was Ot proper Tor the-Courd below to

rest its-decision upon the feature of the varjable rate of in-

terest: Nor would it be according due regard to the decisions

of this Court, to say. that this feature, in. combitation with

other features, every one of which are common permissible ar-

. fahgements in connection with - an indebtedness, turts a

3 = creditor into a stockholder when each feature by itsel? has

“> nO lawful tendency to do 80, ‘! igi Se ous Be

ie Rules _ for the . construction of.” stati:tes—Ordinary

meanina of terms—Constructign: in tarpayer’s favor, |

In Deputy vy. / pont, supra, this Court said;4: oe

‘“And when it Comes to construction of the statutory °

provision under Which the deduction is sought, the gen-

'. eral rule that ‘popular or feceived import of words fur-

. hislies the general rule for the interpretation of pyblic

'. laws,’:... : is applicable.” 308 U8. p. 493; 84 L. Ed. p.

Thereupon, as an illustration of. this. princip’e; the Court

_ «Offered thé definition of interest quoted above (seep. 14, .

Supra), : sar) pe eet, ad per

Internal Revenue Code, Section 23 (b). in the strongest.

possible terms, grants a deduction ‘for “all interest ; . . on:

indebtedness.” One may well ask how Congress conld have

made che language stronger—unless, indeed; it is to be held

the duty of the legislative, when trying to attain inclusive-

a

o

8 See dissenting opinion of Magruder, J. (R. 101-2, 104). *

_- ‘Accord, Old Colony Railroad ‘Co. vy. Commissioner, 284

Ts. £52, 560, 76 L. Ed. 484, 489 (1982), ~ ise

. < a : Q l . : ; / °

Q ri e 0 4 a ‘ : ; .

Ne

ae

ia y a

ness, to ‘clutter up the statutes with such expréssions. as “ of

all kinds, manners ‘and descriptions whatsoever. Ms

- It is s0 obvious as fo need no argument,, and.indeed to be

almost incapable of argument, that in cenimon parlance as

well as general law the Petitioner's notes, with their central

unqualified obligation to pay a fixed sui at a fixed maturity, |

- were the written, eyidences of an indebtedness. Ank, if they

-were, it: necessapily follows that the amount paid to service

the debt was interest, however fragile, qualified or compli:

eated the interest: terms might be. Interest is\no necessary |

feature of an indebtednesg. There are ‘debts which “do not °

bear interest. And, if tinat, is so; then, given a debt, it, fgl-

lows that any not unlawful. stipalation: with: ‘respect to the

; compensation to be paid for forbearance of the debt is inter- ‘

est. It is in/possible. ‘to arrive at the’ result reached by the

Tax Court and the Cire uit € ‘ourt of Appeals without —

in conflict with Deputy Vs: Dupont, supra,

In. Gould v. Gould, 245. U. 8.151, 62 L Bd. 211 (19st),

this Court said, cee BS

“In case of doubt? tax statutes “are panies most

strongly against. the government, and in fiivor of . Khe

7 This rule is thoroughly capable of being reconciled with the

. Fule of “strict construction” of exemptions, ¢redits, deduc-

‘ ag and tlie like, found in such cases as Woolford Reatty

citizen.” 245 U, 8. p. 153; 62 L. Ed. p. 228.

1

Ca. V. Rose; 286 U.S. 319, 76 L. Ed. J428 (1932).

. Careful examination. of cases. of the jatter sort 5 will show

5 New Colonial Ice Co. y. Helvering, 20, U. 8. 435, 78 L.::

Ed, 1348 (1934) ise

White v. United States, 305 U.S. $81, a1. Ed. 172 (1938)

. Deputy ¥. DuPont, 308 U: S. 488, si. L. Ed. 416 (1940)

’ Helvering v. Northwest Steel Rolling oe 311 U. 8. 45,

85,.L. Ed. 29 (i940) ; £24"

: Helvering y. Ohio Leather Co, 317.U..8 - 102 87 i Ed.

118 (1942). E : aie

— Life Assurance Society Vv. Commissioner,

, U: 8S. 88, me. 603: (1944) -

Ane

. . &

"that they have never expressly overruled the ‘decisions for

. ‘

construction in the taxpayer's favor, that they have never

_ used the “strict construction” Tule to’ deprive a taxpayer

of the. benefit of Plain, fair, ordinary theaning of a provision

establishing a deduction, and that. the rule of strict con.

eo

-Nelying a‘ federal question by reason of being raised in

struction has only been used to deny elaims for the extension

or expansion, by implication® of detuction sections, op tore. |

fute arguments which ‘would haye precluded the Court from ~

eXercising iis -Proper judicial] function in the resolving of ;

-. It takes little more than lip service to the principle enunci-

ated in Gaifd y. Gould to teach she conclusion in the present

Case that a Statute providing for the deduction of ali interest

on indebtedness may not. by judiéial construction be ext *

down intd“a deduction of some typés of interest en Some in- |

_ debtedness.. Unless and wntil the Princinde of Gould ¥: Gould whet

is expressly ‘overruled by Alfis Court: the. decision below

4 RE rary aS 3¥

stands in inescapable COmMict with it\ are

ay, fhe, ise cf “evidence aliunde the contract.”

Nand. Hamilton vy. Li verpool, ete. Ins. Co., 136 U8. 242, 34.

L. Ed: 449 (1890>, this Court said that coustruction of the

correspondence in writing between. the parties presented a

pure truestion of law’ to be decided by the Court:@ 3; the |

present case, there is a complete dnd integrated doctiment

— ° The general proposition here adduced may be Viewed. as"

an-important question of general law: and not merely as in.

this ‘ease in conjunction with the application“of a federal

siatute.—Nee in. further support: of the principle. bs ee

Commissioner y. Coastwisd Transportation Corp., 71

F.2d 104, 105, (C.6.4. Ist, coseiat Tete! ne dees be

Brown v. J.C. Shaffer Grain Co., 15 F. 2d 514 (C.C.A.

ME ig ins ead Re RR PR at gee ea

8.8. Kresge Co, 'y. Sears, 87. F: 2d 135, 138, 140 (C.C.4.

lat, 10B6} >. eee a hE

Union State Bank & Tr. Co. v. Northwestern Life Ins. -

. Co., 55 F. 24 1070;-1072 (C.C.A. 5th, 1932) >

?

aay

»

‘3 &

.

° eee oes vo .. :

of the.sort with respect to which loose oni are never inten-

; tionally left and whie h, by virtue of intended. transferability,

is the least.subject to be controlled by extrinsic evidence. °

The Court below, in the célirse of reaching a articular -

‘tax result, has talked about “consideration of the relevant

facts,” about looking to. ‘tactualities of the situation,” about

looking to see: whether - intérest, may be regarded ‘as the: —

“further distribution of profits” “and about “exalting form ~

. above substance. ” We freely concede that if there had been

precipitated an issue with respect to whether the notes were

not genyine but a sham (or any other like issue involving

the unreality of avpearances ) ,7 all such lanzuage might have.

been relevant, but we atso submit that- upon this record there

is’ neither any evidence upon which sueh an issué coald have

heen based nor any prenausee ef the purpose’ of the govern.

ment to, raise such an issue:® a

It was therefore completely erroneous fer the Tax Court |

and the Circuit Court of Appeals:.to hold themselves: en-

_ titled ‘to consider such facts as that the. Petitioner was

_ owned by a few stockheiders (R. 74, 80, 94, 98), or that

eae stockholders were relatives. (R. 74, 80, 94, 98), or that

-*the noteholders acquired their notes through giving up

S..H. Kress Co. v. Fisher, 65 F. 2d 682, 683 (C.C.A, 4th,

| 4933) ge Mee

Merinos V.esca Y Compania y. Pan hawibin P € T

0., 55 F, 24-1670, 1072 (C;C.A. 5th, 1932) ads

Naticral Surety-C orp V. Ellison, 88 F, 2d 399, 403 (C.C.A.

. Sth, 1937) : 4

7 An example of such a case is Arthur R. Jones + Syndicate

Vv. Commissianer, 23. F. 2d 833. (C.C.A. 7th, 1927). To such

a case the language in Commissioner vy. Proctor Shop, Tne.

| $2 F. 2d 792, 794 (Ce, A. ‘9th, 1936) would properly’ be ap:

plicable ; but the use ‘made of ‘that language by the Tax Court,

in the present case (R. 80) and by the Ci renit Court of

Appeals (R..99) is utterly unw arranted bec ause of the funda:

mental difference between the situations presented. fie

‘8 See — — of Magroter, Jo (KR, 108).

= . : e ) ae

ee fas

stock (R. 79, 80, 98), or that the holders of the notes also

-continued to-hold their remaining stock (R. 80, 98), or that

_4 small amounte rather than a large amount ever changed.

tP> 4

hands (R. 80, 96,99); and upon the b 6 such considera: me

tions.arrive at the conclusion that fore eses of taxation

- the notes were not the evidences ‘of in ent dness Which for

-. every other purpdse in general law and ordinary business life

ins 1 ae :

they were. eee as . oof

_ .D. Aeto the right of the Petitioner to rearrange its affairs:

with frank regard to minimizing the incidence of taxation.

this Court said, - eee ? ee ine,

"J fe (p>. not speak of evasion, bécause; when the law

draws a liné, a case ison One side of it or the other, and

if-on the safe side. is none the work legally that a»

party has availed himself fo the full of what the law per-

mits. When an act is condemned as an.evasion, what.-is

meant. is that it is on the wrong side of the line indicated

_ by the poliey if not by the mere letter of the law.” 240

U.S. p. 630-431, 60-1. Ed. p. 835. oenos

_ The concern. of the Tax Court and of the Circuit Court of

Appeals with: the Petitioner's so-called “tax motives” ‘Was

improper under. the latiguage quoted above and, in effect if

hot in form; was a flat denial of the Petitioner's right to de. .

dict the interest on notes outstanding if such notes were

issued with tax objectives in mind ee ae

Counsel have relied upon the famous words of. Mr. Justice

Holmes for man y years: Constantly they have advised clients:

In Bullen y. Wisconsin, 240 U. 8. 625, 60 L. Ed. 830 (1916),

é

that they might so rearrange their affairs as to present the °:

least exposure to ¢ xation under the laws, provided only &

.

that in 80 doing their arrangements were genuine and durable

and not false frorits for other underlying arrangements af |

yd

. >

tariance or temporaty devices like the scaffolding that sur-

"rounds a building (Cf.. Gregory vy. Helvering, 293. U. 8. 465).

‘The citizens of this Country. are entitled to.know from this

Court. whether that principle still prevails in its former in- |

tegrity. Se oe

hte manifest that if the ‘circumstance of “tax motives”

»

; ; , '\

rae

a

PS SP

.

i , 3 Bars ieee

: 20.

pi tate ; 3 Po” ee ane ‘ _ SSS

may rae by the courts in the manner in, which it was

“utilized in the opinions below, the words of Bullen v. Wis.

consin become simply a trap- to? the unwary. ,

We recognize what is said about the “polic?, if not . : re |

mere letter-of the law.” But the: policy of a ‘tederal t tax,

statute is te be- found in the statute itself, possilty illu--

minated by its. history, anid not in the policy-making tenden-

cies of judges. It is sotable that in the decisions below there

wes not -made even ‘the faintest attempt -to: ‘interpret the

words of I. R. C..Section 23 (b) in the light of context or of

other portions of the statute or of previous enactments or of

legisiative history.® ‘Brstead the words were. ignored and the

policy was summoned into existence out of sa judicial.

imagination.

In this latter srespect, the courts Melew- have flown in the

face’ of the admonitions against judicial legislation“found in’

decisions of this Court and ef she Circuit Courts of: —

as wells . : /

- 175

; een v. United States, 270 U, S. 245, 251 ee 70 :-

“Ed, 566, “69-70

Western & Southern Life. Ins. C3. V. Hue, 116 F. 2d

. 1008, 1010 (C.C.A. .6th,; 1941)

Forstman i 7 Régers, 128 F. 2d 126, 129 (COA a4, |

= ~~ ° 1942). AE .

Noteman v. Welch, 108 F. ™ 206, 208, 215 (C.C.A, ist,

(1939), on

ead Corporation v. | Commissioner, 116 F. 2d 187, 191°

(C.C-A. 3d, (1940), hae Ss it

E. The inapplicability of Dobson *. ‘Gostuenaaak “ot

* We are: prepares to show that the history of the tate

the Court’s ‘construction brings confusion into other beaaeke

of the tax statute. And see dissenting opinion of pores ts J.

(R. 105). Seer

j ‘

- Crooks v. Harrelson, 2 282 UL 8. 55 (1930), a5 A. ha. 156, -

»

In Dobson y. Commissioner, 320 U. 8. 489, 88 L. Ed. 179

(1943) this Cours, said, %

. : - he : : : % ,

“It is contended that the appliceble Statutes and regu-

lations property interpreted forbid the method of calen-

“lation followed by the Tax Court.--If this were true, the

Tax Court's, decision would not be ‘in accordance with:

law’ antl the Court would be empowered to. niodify or

reverse it. Whether it is true isa clear-cut question of law

and is for decision by the courts +” 320 U. 8. p.-

88: L. Ed. p. 182. s. rae

_ The case related to whether certain transactions in separate

Fears, relating to the same subject matter, should be treated

. for tax accounting purposes as a single transaction or asa

Series of Separate transactions, This Court held that the:Tax®

Court’s determination of this issue should stand because

the. issue presented essentially a question of fact. Thé de-

_ cision accords new pmphasis to the: fir

sions of questions of fact by the. Tax Court are entitled

when supported by substantial evidence. But, as the above

- juotation shows, it does not impart immunity to errors of

_ law cominitted by the Tax Court, ” |

What constitutes sound accounting practi¢e is an issue.

iality to which deci:

Of fact. There is little law about accounting, Ifa man promises. °

- to pay money based on certain operating results, to be ascer-

tained in accordance ‘with, sound: accounting practice, the |

issue of how much is due from him would be almost com-

’ pletely a question of fact. But “Andebtedness” and “interest”

“are-very strongly legal conceptions, ‘There. is a great deal of

~ law about them and it is far more likely that Congress used

these words in the deduction section with referénce to the

“Comnon ‘understanding of their meaning—than that it used

them, in some new and strange sense,’ peculiarly related

to taxation, which only: “fan administrative body haying

nena. Fl 5

1°08, Gommlisionar +. Raphael, 133'F. 24 442, 445 (CCA.

OOP Se ke ang er ea oe

a

as

o ay -_*

22

special competence to el with, the ey matter would

have the insight to interpret and apply.”*)

In. the present conn practically all material acti are

stipulated. There ‘is. a: clear, complete and tnambiguous

-” instrument. to be analyzed and a direct and categorical pro.

_ vision of the statute to be construed and applied’ to it, There

is no evidence or suggestion of the notes being a sham, or

- temporary expedient or instrumentality. for accomplishing an

: entirely distinct purpose. Hence, no substantial issue of fact: ;

is presented ‘upon’ which a finding supported by evidence -

would ‘be final.!4eThe only dispute of fact ‘which the Tax

Court opinion.even contemplates is the issue made by the

Tax Court with respect. to “intent,” which npon anaiysis is

nothing but an improper concern With a.question of “motive.”

The meaning of the words‘in the deduction section; whether

the deduction Section is absolute or subject to the reading in —

of implied exceptions ; whether -the meaning of the ‘section :

'. may be varied by applying a distinction between “loans”: and

. “Capital investments”; whether the notes do or do. not:-evi- :

dence debts; whethen or not the annual sums agreed to. be

‘paid thereon to service the debts are pay ments of the type

which-the law knows as interest; whether a complete and

. unambiguous written instrument may be distorted from its —

true intendment by extrinsic evidence and discussions of -

“motive” ; whether a confusion of “intent” and “motive” is:

* erroneous and prejudicial! ; whether it may be held that every |

feature of an instrument is a permissible feature of a debt and

+ yet that all features together make the instrument not a debt,.

notwithstandi ng that the central feature is ‘an nnqualified

promise to. pay ‘a fixed sum at a fixed. maturity ;" whether a

purported statutory constriction, implied in:a decision,

amounts practically to judicial legislation; whether a par-

' tieular application of a statute would violate established

- canons of construction ; all these are questions of law’and not

of fact and on each one of these the Tax Court (and the Cir

11 See dissenting opjnion of Magruder, J. (R. 105-106).

. ; op i : ®. . fies . : ;

23 3 : ; apts ‘o 7

cuit Court of Appeals ) arrived at an erroneous conclusion or

it could‘not have reached the result it did. | Ah.

It follows thu. the use made of the Dobson éase is in conflict

. With that ‘decision and,. as: pointed out by ‘the. dissenting

plicitly authorized by this Court,

- . OL Tae QUESTIONS oF LAW PRESENTED ARE OF. IMPOr-

TANCE AND SHOULD BE DECIDED py THIsCouRT..

A.. The issues are in portant in the administration of the

POveNNe Mame, se eh Sf aea so ON Reese ss 55

Certiorari has often been‘granted for this reason and often . .

ii cases which were certainly of no wider interest or impor-

. twnee than the present case, Theré are now q large number of ;

decisions of tk - Cireuit Courts ei Appeals and other Courts °

endeavoring to deal with’ thé distinetions between indebted-|

hess and stock in so-called’ borderline cases (thany of which ;

are nade borderline cases only by-the Courts’ own gratuitous

assumptions with respect to what rule they are administer-

mg). In the entire case literature upon this subject we have

found no direct word from this Court. eee es eee

The use of loose criteria, the straying away froni respectful |

adherence td the text of the Statutes, the assumption that

unambiguous documents may -be control] ~by-extrinsic evi.

dence, the blurring .of “intent” with “motive,” the ‘too wide

assumption of” latitude in searches for “substance” to replace

“form,” haye resulted in a body of decisions which are difficult

of some. of which decisions, 13 we frankly question, to extreme

or ee eee rer

Seg. Commissioner vy. Proctor Shop, 82 F. 2d 792 (C.C.A. ?

Vv

a

9th,-1926) ae . Set as

Helvering v. Richmond F. & P. R. Co., 90 F, 24 ‘971,

(C.C.A. 4th, 1937) a = @:

*

>

-:

cases in favor of the Commissioner as —— in the

present case.**. :

_ The rule to be applied: in these cases ene to be settled ie

and its boundaries defined by this Court. It is moreover neces-

‘sary, if the case of Dobson v. Commissioner is. not to ereate |

confusion i in the law far greater than the compass of any addi- —

. tion which it has made to the law, ‘that this Court pass upon

ite appTreabttity-tm-teme-like-the present, ‘wheré the extent

of genuine factual ‘issues is almost zero and — of law

are presented by the handful.

B. ‘The issues are imiportant to the security of commercial

transactions. ee > ae

- When after careful consideration. the decision to ‘issue.

these notes. in exchange for gfock was’ reached in the year

1939, the conclusion that interest thereon would be deduct.

ible was clearly. warranted ‘by the express language of the

statute, which has not since changed, and by every. decision .

~ which the industry ‘of counsel could unearths ©

Iti is natura! and unavoidable that under pressures of taxa-.

’ . tion, people will seek té” arrange their affairs to keep its

incidence upon ‘them at a minimum. Indeed, the complexity —

of tax-laws, and the variety of circumstances under which —

° they pow impinge upen every move a man’can make with re-

. spect to pro yroperty have actually resulted in exaiting the pre

diction of- tax consequences above the exercise of normal good

sa

. Guaranty Savings ¢ Loan Co., 14 BTA 72 . -¥

Palmer, Staey-Merrill, ‘Inc., 39 ia 636, Affmd. ‘s.

- ’ iy ae oe ‘

Diamond Celk- Horse Shoe Co. -v. United. States,

_D.C.D.Minn. 7/20/40, CCH Par. 9641, Appeal

RS Dismissed on Stipulation 116 F. 2d 284 ae

A ete _ Meridian and Thirteenth Realty Co., 44 BTA 865.

See Ai.o H. R. Demilt Co.,7 BTA 7

ye .14 It may also be’of interest to examine Johit, Kelley Co,

* -1'T.C. 457; reversed in Commissioner: v. John Kelley Co., 146-

F. 2d 466, (C. ‘C.A. Tth, 1944), with respect: to which we =e:

stand certiorari is a being sought. -

*

25

_made-with respect. to property. “4p pn BRS

No one concerned with corporate finiince or with the settle-

ment of the affairs of an individual can todity give primary

_ consideration to desired economic objectives. It is neGessary

judgment as 10 busihess arrangeinents or dispositions to be

‘to consider first what may be done without the incurring of

(ax consequences so heavy ‘as to prohibit the pursuit of those.

objectives, If, upon top of this, one is obliged to wade through

a welter of conflicting enunciations of principles by the va-

rious lower federal courts, without clear guidance from this:

’ Court, transactions are handicapped to a preposterous degree. -°

There is nothing. to distinguish the present case frum the

', Becond Circuit ease of O.P.P. Holding Company,!® in real

substance, except that the Talbot Mills notes bear a variable

rate of interest, And. yet, this provision for a variable rate of.

interest is. indistingyishable in principle from the variable

raté of interest. provided for in the General-Mortgage Income - _—

410% : Borids -f the Evie Railroad Company, issued ‘in re-

organization under court supervision, an excerpt from which

is appended fo this brief as. Exhibit A. If the Erie Bond in--

terest is not“@eductible in_ computing the taxable income of

that Company, we think it ay with complete safety be ‘as.

sumed that the consequences upon the revenue available for

the Igrie stock will obliterate assumptions legitimately made’ |

in formulating the terms of the Erie reorganization, |‘.

?

“76 F.2d 11 (CGA. 2nd, 1935)

* he) : a

a

¢

°

' cotinsel, has been. none the worse for that and ‘has weepie S

no issue of public importance with respect to the judicial tech-

nique. ; is case, we submit, stands upon another footing.

It seems _imposstble, reading the majority decision in the

‘Cireuit.Court of Appeals and the Tax Court decision, to avoid

the conclusion that these tribunals.in effect legislated against:

‘the Vetitione? because of the belief that the Petitioner had:

substituted notes for stock to obtain a tax benefit to it.** Yet:

_ the Petitioner was thoroughly entitled: to seek this result, in.

reliance wpon what ygs said by this Court in Bullen v. Wis.

' consin and it*is common knowledge that’ everyone does it

2/ whenever feasible. ~. ie

. obligation to pay at least . per cent. interest in any event and

- an equally absolute obligation to pay as much more as ‘might

he determined by applicatton of the interest fortula. No issue

‘of sham, temporary devic e or the lize was'or could have been

~prigie and permissidte only where. substantia} issues. of fact

- of the type last-mentioned are presented, the Courts in effect

, 80 doing they. viewed as material for that purpose the “tax

| fact that there was but few stockhidtdérs; the fact that these

lying arrangement, incurred the -heavy res} wasibility Of far.

The Petitioner went’ about the matter openly, issued notes —

that were absolutely genuine and vitiated by mo secret under. -

ing a problem of refinancing at maturity and incurred a fixed

presented. =;

Nevertheless, using judicial techniques which are appro-

denidd the reality. of what the Petitioner had really done. In_

motive,” the fact that noteholders were also stoc kholders, the

persons were related by. blood or marriage and other like cir-

cumstances having nothing to do with the meaning and legal

interidment of.the Petitioner’s #: m contract.

Is there one law for corporations. with 15 stockholders and

another law for corporations with 15,000 stockholders? ~

Is there one law for corporations whose security holders

16 See, similarly, Commissioner v. Jenn Kelley Company

146 F. 24a 466, “68 towards the end of the page.

7

3 “|

"4 - '. 27

s

are related and another law for corporations whose security.

holders are mnrelated? $60.23: nea eRe

’ Is there one law for the Erie Railroad and another law for

~ the Talbot Mills? :

May the emphatic words of Congresy be disregarded and. “*

policies legislated in their stead by the Courts?

May a case with stipulated facts, with ‘an ‘unambiguous -

instrument to construe, and-a statute to be interpreted and |

, Siretching the conception of what is “fact” te cover them? .

‘ Was not the Petitioner clearly entitled" to a judgment

( Operating upon principles. of law as exemplified by the dis-

senting opinion in the Circuit Court of Appeals? _ (oe

_’ And are not these issues of sufficient general importance

tO receive the attention ofthis Court?’ shee

_ Respectfully submitted,

| . . MELVILLE F. WESTON, .

ae ee os Ei rbd Counsel for Petitioner.

ix 3 TALBOT -MiLLs.

v

Powers & Hawn. Si Sek : -°

' Of Counsel, Peet Geert presets .

EXHIBIT A

‘ries A, due January 1, 2015

“2. to: pay iliterext on said sum from the date hereof until “cc

tally only issues of law, find shel ter under the Debson case by °

gue from Erie Railroad Company 41% % Income Bond.

Ww

P. “the pay ment of said principal sum at the abi of four and one- .

- 2014, and on January 1, 2015 (in each instance through tke

_ December 31 next preceding), and to pay an amount equal to

Rut, except az otherwise provided herein or in the Indenture

ing prior to materity (exclusive of interest earned as pro-—

~ payable thereafter if earned as provided in the Indenture or,

declaration or otherivise.” ‘(Italics supplied )

oo lengthy to quote herein, deal with

-. able net income,” provide for nnmerqus deductions therefrom

+ elaborate and include otherdrestrictions or oN ‘of

é-

28

half per cent. (4Vy% ) per annum, beginning April 1, 1942,

on April 1 of each year thereafter, to and including April 1,

interest\at such rate from January 1,°1940, to the date hereof;*

hereinafter’ me.tioned, anly if ‘and to the extent that the

dmounts applicable thereto under the provisions of the Inden-

‘ture: are sufficient to.make such: interest’ payments and until -

the maturity of this Bond cnly upon presentation and surren-.

. der of the appropriate coupons as provided. in the Indenture.

<B/ npaid interest will ace umulate 1 to an amount not exceed:

“vided in the Indenturée\but unpaid) 131%,% of the principal

hereof at any one time and such accumulated interest will be

in any erent; at-.the matdvity. of this Bond awhethtr 3”

-Provisions of: Article 5 of t e mortgage indenture, too

1e determination of “ayail-

for various purposes.and state that “ahky then remaining avaik

able. net income shall be applied to the payment of, interest On

the bonds.” Other lengthy provisions may be summarized as

providing that interest for each year shall ‘crue and. become

owing as a debt only if and to the extent, that the amounts

applicable to the payment thereof; under the \fovisions just

mentidned above, shall suffice ‘therefor, Th ovisions are

the obligation.

v

. . : - 2 . ¥

+ a : * - 2 . ° \

-

* It will be noted that only rasa years’ waenraal intere

becomes unqualifiedly pay able out of 74¥ears that the bo

has to run to maturity.”

%