Brief of Amicus Curiae — Arrowsmith v. Commissioner

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3 Ocroper Term, 1952 ; a

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F. DONALD ARROWSMITK.and RUTH R. BAUER,

Executérs of the Last Will and Testament of FRED.

ERICK R. BAUER, Deceased, and RUTH BAUER,

ET AL., :

Petitioners.

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CC COMMISSIONER OF INTER NAL TAL REVENU Ke By ee, :

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Question — uc ieee cas eter reyes. 5

“Statement ” sig ved Gee ae ne ,

“Summary of Argument Serco Sree Cae 2 Sys

~ Argument: Me Cede Hei plete he |

3 I—The Court of Appeals erroneo oysly yiade anim- —

ae 4 plicit findisig of faet contrary to ‘Be United > :

- States Tak Court ose. leiseetcowaecss # “

3 II—No facts support the decision of the Court of |

aes Appeals... a Ta E EEX ERYE REE aaa

y ‘TTe Tax Court’ S deinrmiaation should be rein- * :

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begs ate Pg eee fevewevece ce PAS Ce EN Sta eae pad

Appendix See nee i adgceg esp ae ee es eee | | :

Consents pursuant to Soe 27 (9) ewe es Moca, Peta, f

5 t CITATIONS eee Sa Mier

Dare hei Ye 3 s a Rent

Pervit y, pres 283 U. S: 404 GME nent 4

Culbertson, Commissioner ve 337 U.S. 733° (1949) S:

| _ Cumberland Public Service Co., U: & Y., 338 ‘U.. S. ie .

CARIOOD Sevecsae kh ET ae epw tele ep nsate erases cers ad

ii INDEX be Le - :

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Dobson v. ‘Commissioner, 320 U. S. 489 ( 1943), rehear- |

ing denied -321 U. BS. ZS (TORG) «0s oe vee cee ss ek

‘ John Kelley Co. v. Commissioner, 326 U. 8. 521 (1946) a ee

oe "Logan, Burnet v., 283 U.S. 404 (1931) o4 eta Pesbtse

. “Smith; Commissioner v., 324 U. ‘$.177 (1946) .... 058 ‘.

) - Switlik v. Commissioner, 184 Fed. 2d 399 . A. 3d,”.- -

Ne. 1980) «0.0.0... ee aN Gaase ss) sa sceataireys's as gesecen i 5

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Internal Revdime Code, | i at oe hate |

| _ See. 117 (a) (3) and (5),..-+++.+, isabaciwcseacele

. _ See. 1141 (a) its LE OOo ee Sees Pa

ae Bee oes on j | - MiscenLaxzous kee ne |

“Rule 52 (a) of Rules of Civil Préoédure for the Dis-

trict. Courts of the United BNO Fie V ka sins scace 2a

Lasser, Handbook of Tax Techniques 1061: woe S$

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.. Sripteme Court of the United States

a] tee a Ocronzr Term, 1952

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¥. Donat ArrowsMitH and Ruin R. Bauer, Exedutors of

. the Last Will and Testament of Freverick. R. Baver,

__ * -Deegased, and Ruta ‘Baven, er ab. ; ty,

_ Comanssioxen o Inrenat, Revenue,

be ii a ane pees LV ae Respondent.

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On Warts or Cerriorarr fo THE Unrrep States Court

-OF APPEALS FOR THE SEconpD Crrcvir’_

BRIEF OF, AMICUS CURIAE) | -

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Opinions Below.

_ The findings of fact and opinion of the Tax Court are |

' ‘reported in 15 T. tif (R., pp..4 to 8) The opinion of

_ the Ceurt of Appeals is reported in 193 Fed. (2d) 734 (R.,

pp. 19 and 20), .

Jurisdiction <

‘ The opinion and' judgment of the Couit of ‘Appeal i

_were entered January 10, 1952 (R., pp. 19-21). A petition

_ Sor rehearing wag denied on February: 11, 1952 (R., p. 24).

The petition for writs of certiorari was filed on May 6; -

1952 and, was granted on June 9,.1952 (R., p. 25; 343 U.S.

976). Jurisdiction is conferred on this Court by See. 1254

of Title 28, United States Code. : oe

Seales’ SEAS

Where a: judgment against a dissolved cordotatien be:

- comes-final in 1944 and the former shareholders, ag trans-

ferees, pay the judgment pro rata in 1944, the: corporation |

* having. been dissolved and liquidat in the years 1937 |

temage 1940, are the resultant oats capital losses.

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"Statement

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The faéts are , set forth i in pages 2 to 5 5 of petitioners”

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| Suramary of Argument,

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The judgment of the Gon of Appeals now bing re-

viewed heid that the petitioners ‘suffered a capital loss.

This implies that the loss resulted from-a sale or exchange. .

This is a question of fact which tha Tax Court decided in

favor of the .petitioners herein, holding the loss was an —

‘ordinary loss. .The Court of Appeals had no power to re- ,

_ verse this implicit finding of fact and nothing in the record

supports the appellate court’s finding. Policy considera-

tions require that the Tax Court ’s deter mination be rein-

stated. |

POINT 7,

The Court. a Appeals ta abauale ‘ade an ‘implicit A

finding of fact ‘contrary we the United States Tax Court.

Internal. Reverie. Code. “‘Rection 117 (a) (9) defines a

long term® capital loss as follows:

“<The ‘term ‘long- term capital ‘loss’ means’ Joss’

from the sale or exchange of:a capital asset held for

more. than.6 months, if and to the extent such loss

is taken ‘into account in ‘computing pet income ; ‘i,

When the Court ‘of Aviowale held, that the 1944 losses

were capital losses, it necessarily decided that they re-

suited ‘‘from’”a sale or excliange. It is clear that there

was no sale or exchange in 1944. It is also clear that there

" were a series of exchanges from 1937 to 1940 (whereby °

petitioners. received assets for their stock). The onty ques-

tion then was whether-the 1944 loss was ‘‘from’’ the earlier

‘exchanges. In other words, should the 1944 payments be’

regarded as a separate transaction or as a part of/an inte-

- grated transaction beginning in 1937. This Court has held

that this is a question of fact for determination by the

, Lax Court. In Dobson v. Commissioner, 320 U.- S$. 489

" (1943), rehearing He 321 Uz 4 231 (1944), this Court

said: ; {

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sedges Net Whether an apparently integrated trans-

’- action shall be broken up intg several separate steps

_ and whether what apparentiy are several steps shall ’

be synthesized into one whole: transaction is’ fre-

quently a necessary determination im deciding tax”

_ consequences. Where no statute or regulation con-

pa trols, the Tax Court's. selection-of the course to

follow is no.more reviewable than any - other ques-

-tien of fact.’’

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. * Short term capitai losses are similarly defined except ¢ that the statute there

refers to.assets held for not more than 6 months, TRC Section 117° (a) (3).

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Internal Revenue Code Section TM41 (a), as amended Jane _

25, 1948, does not change this ral Inder Rule 52 of the

Rules of Civil Procedure, the Court of Appeals may. not

. substitute its judgment for that of the lower court in de-..

termining a question df fact. The appellate coirt can only ° ,

v reverse: if the lower court’s bce is ‘*¢ eaty erroneous”.

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POINT ie eo :

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No facts support the decision of the Court of:

Appeals. y Ces ee

- The 1944 payments can pennies ie avid as ad-

justments to the 1940 liquidation exchange only if the 8

1940 liquidation Was -not. a-¢elosed transaction. .

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‘This’ Court has already answered, the basic question

presented here; ‘except ‘that in the prior case the subse-

. quent transaction involved a gain tather than a.loss. In

Burnet v, Logan, 283 U. 8. 404 (1931), a taxpayer in 1914

had sold eapital stock of an iron mine. company for cash

~ plus.a royalty of all iron ore later mined. In later ‘years

taxpayer received these: royalties: as the ore was removed.

The Commissioner: claimed they were taxable to -her as

ordinary income. ‘This Court held the payments. were. -

capital gain because the 1916 sale was not a closed transac-

: tion® , Saying: ras ieee

“The stiaideration for the vale was $2,200,000 in *

cash and the promise of future money payments

‘wholly contingent upon:-facts and circumstances not.

- possible to. foretell with anything like fair certainty.

The promise was in no. proper sense’ equivalent: to

_cash. It had no ascertainable fair market value.

_. The transaction was not a closed one,”’ Sach U. S.

at 413, italies supplied.) -

- » * Similar facts’ are required to keep a non-capital transaction ‘ ‘open’ vo the

purpose of eae are: its consummation ‘in a later year, see C ommissioner V.

"* Smith, 324 U. 177 (1945), at ages 181-2. ;

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Thus the essence of the transaction was looking to the-

future. Even so this court relied on the fact of presently. -

-unéertainable value of the promised royalty to prevent the

| transaction from closing immediately.

‘Here, the essence of the eartier transaction was comple- °

tion—liquidating and dissolving the cérporation. Petition-

ers herein never agreed to pay Trounstine any ‘amount to

” be fixed later. As the Tax Court pointed out, 15 T. C, at p.

878, the Trounstine glajm was denied and actively re-

sisted unti! 1944, tous after the liquidation:was com- © |

pleted. eo a 3

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- POINT Hil

The Tax Court’ s determination should be reinstated.

The rule: which the Court of Appeals has asserted

herein. would keep every liquidation exchange open in-

definitely. The only fact that Court relied on in reaching

its decision is that the Mabilities of the petitioners ‘‘ would

not have existed except for’’ the corporate. liquidation,

193 Fed. 2d 734 at 735. In conflict with the workable rule.

of Commissioner v.: Switlik, 184 Fed: 2d 299 (CA 3d, 1956),

the respondent: herein urges -a rule which is first, danger-

ously ‘impractical, and second, irrational. . ae

: It is dangerous because the same ‘rule applied to gains ia

is an invitation. to widespread tax avoidance.. Any cor:

poration with assured prospects of substantial ordinary

income could dissolve, and: the shareholders would realize

the income as capital gains which they ‘twould not have

received except for”’ the liquidation."

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*A recent volume contains the essay “How to Convert Ordinary. Income to

" Capital Gain”, Lasser, Handbogh af Tox nb es grame Prentice Hall, 1951 -(at

pane 708). | ae oe

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It is irrational because it adopts a “sine qua non theory

ae of proximate cause which is welll known to be fallacious,

as in tort: cases. < :

_ We recognize clearly that the courts wut prevent this

| theory from being carried to absurd? extreé es. But the

prevention of. abuse of this doctrine or of. ‘the contrary

“Switlik”’ rule lies with the eourt which is to decide the

facts ‘in ‘each case-here the United’ States Tax Court.

That is the court Congress has designated tor determine .

the facts and which can pftoperly piece out a workable rule.

‘Proper regard for good tax administration demands that

the intermediate federal courts ‘respect its furiction.

This Court has rightly stressed the importance of final-

ity of the trial-court’s determination in this kind of prob-.

» jem,’ Commissioner v. Culbertson, 337 U. 8.733 (1949).

The samé method has been prescribed in John K élley Co. v.

Commissioner; 326 U. S. 521 (1946), and U: S. v. Cumber- ©

land. Public Service Co., 338 U. S. 451 ).:

CONCLUSION Weis cy

The United States Court of Appeals erred in revers-

ing the Tax Court’s ‘determination because it implicitly

substituted its contrary finding of fact without basis, —

in disregard of sound Principles of judicial tax admin- ;

istration.

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Hoek esate Respectfully submitted, ie

eee W. Burke,

Amicus Ciibide: :

ted 7 APPENDIX

ote Statutes and Regulations Involved ° ae

Internal: Revenue Code.

"See. uz Capital Gains and Losses. a pie ie a 2 ee

(a) Definitions. eee

(3) Short-Term Capital Loss The term Sghort. ‘<

evs ‘capital loss”’ means loss from the’ sale or ex- |

os e of a capital asset held for not more. than 6

‘mont 8, ‘if and to. the extent such loss i is taken into

account in computing net income ;_" | :

: Bt is aN as gee ene 2) ! eae =

(5) Long thes Capital Scie: —The ‘tert ‘long: |

term capital loss’’ means loss from the sale or ex-.

change of a capital asset held.for more than 6 moriths °

if and to the extent such loss is taken into atcount

in computing net income; - fear! NS

See. 1141. Courts of Review. ere

(a) TAs nthanded by Bon: 36 of the her of done

25, 1948, °c. 646, 62. Stat. 869.] . Jurisdiction—The

courts of- appeals shall pA exclusive jurisdiction .

» to review the decisions of Tax Court, except as”:

provided in Section .1254 of Title 28 of the. United |

States Code, in the;same manner “and to. the: same >

extent as decisio the district .courts in. civil

actions ‘tried without a jury; and the j idgment. of

any sueh court shall be final, except that it shall be |

' subject to review by the Supreme Yourt of. the

. United States upon-certiorari, in thé manner pro-. °

vided in Section, 1254 -of Titles28 of the vs eieie

‘States Code: / Betis ears -

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Rules of Civil Procedure for the District Courts of the:

United States as Amended-- 2 4

-. sRule 52(a)—Findings by’the .Conrt. “AN. / ae

.* : : Ree ee may ‘ ere pene ae

Effect. In all actions tried upoh the faets with-

- out a jury’or with an advisory jury, the court shall |)

_ find the facts specially and state separately its con- ~

: _¢elusions of law thereon and direct the-entry of the |

‘s . appropriate ‘judgment; and in granting or refusing

‘ *~+ interlocutory injunctions the court''shall similarly - .

set forth the findings of,fact and conclusions of law -

‘which constitute the grounds of its action. .Requests —

for findings are not necessary for ‘purposes of -re-

¥iew: Findings’ of. fact shall not be set aside unless |

clearly erroneous and-due regard shail be given’ to

. the ‘opportunity of the trial court to judge of the _

© credibility of the-witnesses.* * * ate

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Consents Pursuant t to Rule 27 ( 9)”

_ We hereby consent, iatouea to Rule 27 (9), that the

abéve amicus curiae brief may. “be filed in ‘this proceeding

with. the Ac ia Cqur of the United States. :

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Counsel for Petitioners. -

3 peeeae | tee ~ > Ropsrt L. Stern;

} Acting Solicitor General,

-: | + Counsel for Respondent. .

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