# Brief for the United States — Dixon v. United States (No. 486) > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386411_0155%3A6 ## Record - **Collection:** Supreme Court brief - **Document type:** Brief for the United States - **Published:** January 1, 1964 ## Text & INDEX. , : Osten cs ore tec hs ca et CRs SA MR Ss oe et ee Questions ‘presented - - -. .- -- oh BAT AE OS RA AES Statutes and regulations inviivell~ J... 20... Statement _.. Hideboesee ee Z. CCUM i einen adinen Argument: wits A x ea Introduction and Summary. ---...--._-_-- I. The Commissioner’s acquiescence. in the |. Gaulkins decision had no legal force and is distinguishable in-any event?___/__. - II. ‘The amount promised to be paid on 4 note in excess of the amount for which it was: issued has historically- been treated as ae en A anny Aaa TS a _9 Conclusion... ------ Sxide ened wa wn Lacs wewcues Ses CITATIONS pie DPR een & Refining Co. v. United Usp Sraras ncaoang ale i - ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF ee FOR THE SECOND OIRcuIT _ \ ‘ i poe yeaa The opinion of the district court (R. 4-15) ‘is re- it _ ported at 224 F. Supp. 358. The opinion of the court of apepals. (R. 44-49) is reported at ™ F. 2d 1016, | : | JURISDICTION ; ; Thé judgment of the court of appeals was. entered ' -on June 19,°1964 (R.. 50). The petition for writ of certiorari. was filed on- -‘Septémber 11,-1964, and was granted on December 14, 1964 (R. 51). The juris- diction’ of this Court rests on 28 U.S.C. SS5E(T). ee QUESTIONS PRESENTED - Whether the excess of the face amount of a ‘he over the’ = atin ‘paid the resulting deficiencies and. in dne voutee brought this suit for refund (R.'46). Both the dis- trict court (R. 4-15) and the court Sf appeals (R. 44- .49) ‘upheld the Commissioner’s ; Retenpeinatioe’ and - ¥ a) % | - % “INTRODUCTION AND SUMM | -jdentieal to those involved in the co United States v. uM idland-Ross Corp., No. 628, and the 1 As the court of appeals noted (R. ay), “no question, has’ ‘been raised as to the propriety of taxing the indivi part- ners for notes held ‘by the partnership, and the taxpayers, have conceded that if the discount did represent ordinary income, that income was realized upon each of the thirty-three notes . held, and was not. dependent pon a sale”. / 7 e-' @ ", interest accruing on all 33 of the notes during the, - ‘ > . “ = c s ‘ - \ : 2 \ ’ e ; - ; a ; . hoe ' . o 4 * . Be - 5 . basic issue, is the same. We showed in our brief in that case that the amount to be paid on maturity of a note in excess of the. amount for which it was. issued is. equally. “interest” ‘paid for the use of mohey——and must he 80: taxed—whether it. is labelled as such.or— is given no‘ nate. No purpose would be served by Tepeating that argument here, and we respectfully ‘refer the Court to our brief in Mtdland-+Ross for 6 principal argument on the issue common to the cases. Our brief ingthis case will be confined (1) to answering petitioners’ alteynative argument that the Commissioner was estopp id to assert the. tax in-— volved in this case because of his acquiescence im Oaulkins y..Commissioner (an issue not raised in Mid- land-ku. and _ (2) to responding to paificular argu- | ments made », ~*cnondents which warrant special neg yaaa -- With respect to the estoppel issue, we argue, first, ' that an acquiescence in an erroneous decision cannot Bar ‘the United States from collecting ‘a: tax other- wise lawfully due, and that petitionér cannot chim _ to have been misled in this regard, since each Cumula- tive Bulletin carries a promirent warning that rulings and acquiescences do not have any binding effect. We further show that, even if the Commissioner were committed to. follow any decision in which he had acquiesced, the Caulkins decision in no event supports the treatment claimed by petitioners. bes In the second part of our\brief, we respond to peti- _ tioners’ contentions based pon (a) the legislative _ history of the Act of June ¥7, 1929: (exempting inter-__ est on Treasury bills); (b)\ the 1938 report of a -’ distinguishable.in any event. “his rulings :ean have only such force as 5 " subcommittee of the House Ways and Means Com- mittee; (e) the alleged redundancy of certain special _ statutory provisions if bond discount were generally treated as’ interest; and (a) the treatment of bond premiums. ) “} ae ‘THE COMMISSIONER’S ACQUIESCENCE IN ‘THE CAULKINS: e a . IN ANY EVENT | Petitioners contend that: “the Commissioner was ‘estopped to challenge their treatment of the note be- eause he had previously announced,’ and only later withdrew,’ his “acquiescence” in Caulkins v. Commis- stoner, 1 T.C. 656, affirmed, 144 RB. 2d 482 (C.A. 6). - The argument is insubstantial for two reasons: (1) an acquiescence has no binding force; and (2) Gonthine is .. 1 ‘The power to prescribe how transactio: chooses to give them.. There being no statute giving acquiescences the force of law, an acquiescence.in an erroneous decision cannot bar the United States from . collecting a tax otherwise Tawtally, due: * “the doctrine -. 91944 Cum. Bull.’5. *Rev. Rul. 119, 1953-2 Cum. Bull. 95; Rev. Bul. 55-136, “ PB. Cum. Bull. 7, 213, republished as Rev. Rul.+ 56-299, 1956-1 1 Cum. Bull. 603. - _ *Manhattan Co. v. Commissioner, 297 US. 129; Commis- sioner v. Acker, 361 U.S. 87; United States v. Calamaro, 354 US. 351, 855-359 ; Koshland v. Helwering, 298 U.S. 441, 446- * 447s Tomlinson v. "Miles, 316 F. 2d 710, 714 (C.A, 5), certiorari 166-948—-65—2 ——. . 6 of equitable éabincagl is not a bar to the correction by the Commissioner of a mistake of law.’’‘ é Nor can ‘petitioner claim to have een misled as to: _ the effect of an acquiescence, for each Cumulative Bulletin carries a prominent warning to taxpayers _ that rulings and acquiescences do not have any bind- %E “ing effect. The 1944 Cumulative Bulletin, for ex- ample—the one in which the acquiescence in Caulkins _. Was announced—stated on its front page that: The Xulings reported in the Internal Revenue Bullefin are for the information of taxpayers and their counsel as showing the trend of offi- ' cial opinion in the administration of the Bureau of Internal Revenue; the rulings other than ‘Treasury Decisions have none of ‘the force or effect of Treasury Decisions and do not commit the Department’ to any interpretation of the: law which has not beer formially approved and promulgated by the — of the Seen? * 1944 Cura. Bul. p. i. See also e.g., 1952-1 Cum. Bull, a pp. i; 1964-1 Cum. Bull. 3. In the face of that express disdlaser, there is no basis for-a claim by petitioners that they relied on the acquiescence in Caulkins as a denied, 375 U.S. 828; Carlton’s Estate v. Commissioner, 298 F. 2d 415, 419 (C.A. 2); Cahen Trust v. United States, 292 F. 2d 33, 39 (C:A. 7); Lubin v. Commissioner, decided: Octo- ber 24, 1963 (22 T.C.M. 1494), reversed on other grounds, 335_ F. 2d 209 (C.A. 2); Schwartz v. Commissioner, 40 T.C. 191. See also Lynn and Gerson, Quasi-Estoppel and Abuse of Dis- cretion as Applied Against the United States in Federal: Tax Controversies, 19 Tax. L. Rev. 487, 512-516 (1964) ; 10 Mertens, Law of Federal Income Tanation (Rev. 1964), Section 60.16. * Automobile Club of Michigan v. Centaten, 353 US. 180, 183. 7 binding assurance that their hoped-for capital gains treatment would not be challenged. See H were v. N.Y. Trust Co., 292 U.S, 455, 468.. * Since an acquiescence does not itself have any statu- - torily-pres¢ribed effect, the only way in which it can operate to relieve a taxpayer of a tax otherwise due i is through the Commissioner’s subgequent exercise of the | power expressly given him by § 7805 of the 1954 Code _ (§3791(b) of the 1939 Code) to “prescribe the extent, if any, to. which any ruling * * * shall be applied without retroactive effect.” What limits, if any, there may beon the Commissioner’s failure to exercise — the power given him by § 7805 need not be considered, in this case. Petitioners point to nothing that would distinguish this case from the revocation of any ac- quiescence, and their argument that it was an abuse * of discretion for the Commissioner not to give the rev- - ocation only prospective effect amounts to’ an argu- ment that revocations of acquiescences must always be given only prospective effect. That argument would . convert the discretionary power given the Commis- sioner by § 7805 into a mandatory duty and thus ' wholly subvert the limited purpose of that provision. 2. Even if acquiescences did commit the United States to follow the decision acquiesced in, petitioners — _ would still not be helped, for the Caulkins decision in _ ho way supports the treatment claimed by them. The Caulkins case was analyzed in detail in our brief in Midland-Ross (pp. 25-31). As we there showed, the decision was based, not on a distinction between orig- inal issue discount and stated interest, but upon a reading of:.§ 117(f) as specifically making all the pro- & 3 8 ceeds of a retirement-of certain kinds of evidences of indebtedness taxable only as capital gain whether or not some part of the proceeds constituted interest. . Not only was the Caulkins decision on its face based ‘specifically on §117(f) (retirements), but in later — cases the Tax Court itself‘ expressly, distinguished sales and held that the portion of the proceeds of a ale attributable to original issue discount was taxable “as ordinary income.’ Since the notes in this case were sold rather than retired, neither § 117(£) nor, hence, the! Caulkins decision has any-application. . Riga There is a further reason why Caulkins is even lens relevant to this case than it-was to Midland-Ross. In Caulkins, the taxable. event was a retirement of the obligation, and i in Midland-Ross the taxable event was treated as being the sale of the obligation. In this case, however, the partnership used tlie accrual meth- ‘od of accounting’: what the Commissioner asserted, and both courts below held, was that: the partnership was required to accrue the-compensation for the use . _* of its money whieh was earned during the year re- gardless of whether the note was sold (as 2U of them were) or was held beyond the end of the taxable year (as 13. of them were). The additional amount the borrowers“igreed to pay on maturity of the notes was | admittedly compensation for the use of petitioner’s *In pringiple, the Commissioner’s acquiescence was in the Tax - “Court’s decision in the Caulkins case, not in the Sixth Circuit’s decision affirming it. * See Paine v. Commiséioner,: 23 T.C. 391, 401, reversed on other grounds, 236 F, 2d 398 (C.A. 8); Shattuck v. Commis- sioner, 25 T.C. 416,.423; Stanton v. Commissioner, 34 T.C. 1, 6. , See, alo, Midland-Roes Br. 29-31, n, 21. | erie money, and it was undeniably earned ratably over the term of the notes. Nothing more is required to es- - tablish the duty to acefue the compensation’ as it is, _ earned. How the proceeds of a sale or retirement: of. - such a note would be taxed to a -basis taxpayer - who had not previously accrued th soe is wholly beside the point. | . The point just made may explai have chosen persistently to mi case as being the: treatment of ‘‘gain realized on the sale of notes issued at a discount” (Pet. Br. 2). .As- we had occasion to note in response to the same mis- statement in the petition, that is not the issue. The issue is whether petitioners were required to accrue why petitioners - the issue in this the discount as it was earned, (see §§ 41, 42(a)). The- - “gale.or exchange” (§ 117(a) (4)) .and ‘‘retirement”~ (§117(f£)) provisions—and the confusion about their application cteated by Caulkins—simply have nothing whatever to do with that question. " | pat eet wee ae me ‘THE AMOUNT PROMISED TO BE PAID ON A NOTE IN EXCESS OF THE AMOUNT FOR WHICH IT WAS ISSUED HAS HIS- TORICALLY BEEN TREATED AS INTEREST ‘The historical treatment of original-issue discount was developed in full in our brief in Midland-Ross . (pp. 23-45) anfl need not be repeated here. A few additional co nts are appropriate, howeyer, to .an- swer several specific contentions made by the peti- tioners in this case. | 1, As noted in our Midland-Ross brief. (pp. 34-35), the Act of June 17, 1929, 46 Stat. 19, 20, exempted ae age ‘‘interest” on Treasury bills from. taxation and ex- pressly provided that any discount at which such bills - were issued ‘‘shall be considered to be interest” for purposes of the exemption. Petitioners quote two statements by Senators Couzens and’ Reed in the de- bates on that bill as showing a Congressional under-. standing that gain .attributable to original-issue dis- _ count was generally treated as capital gain (Br. 14-- 15). When placed in their proper context, the-state- ments do not have the significance attributed to them, _ The bill initially proposed by the Treasury would have exempted not only the “interest” on Treasury " bills- but also “any gain from the sale or other dispo- sition’ of such bills, without’ distinguishing between . gains attributable to the discount at which the’ bills were issued ‘and gains attributable to fluctuations in . their market value due to changes in the prevailing interest rate (71 Cong. Rec. 2328): Senator Couzens objected to that version of the bill specifically because it failed to make that-distinction. He had no objec- ‘tion to the ‘‘interest” element, including discount, be- ing exempted so that federal bonds would be exempt * $f the same extent that State and niuni¢ipal bonds are exempt” (p. 2329),° but saw no reason why" a ‘‘capital gain” from such a~bill (p. 2330)—which he . later specifically identified as a gain attributable to . market. fluctuations (p. 2331)—should not be taxed. Senator Reed at first failed te recognize the distinc- tion between the two kinds of gain, but then immedi- - _ * For the treatment of original-issue discount on State bonds as exempt “interest,” see pp. 33-36 of our Midland-Ross brief. be ~, ; Me Sea ately went on—in, a vtatament not seul by peti- tioners—to- acknowledge the / distinction and to agree / that only the. ‘‘interest”’ eleme ent should be exempt and that “capital gains” should continue to be taxed (p. 2331)." In view of the agreement thus. reached _ that only ‘‘interegt” and not ‘‘capital gains” should / ‘be exempt fromy tax, the bill was Amended to delete the proposed éxem emption of any-‘tgain from the sale or other disposition” of Treasury ae and to substi- , tute the provision ultimately adopted making explicit the treatment of original-issue discount as interest. e position of the several Senators is ‘made plain in the ye ollowing colloquy, in which the statement of Senator Reed “ quoted by petitioners is italicized (71 Cong. Rec. 2331): Mr. Watsu of Montana. I understand that perfectly well; but if I discount a bill for $100 at the bank, and I get only $96, I am paying 4 percent interest, or substan- tially 4 percent; and the difference between the $96 and the ‘$100 is interest.” ‘It can not be designated in any other way. and that is the way it is understood. So when the Treasury discounts its bills at 4 percent, that 4 percent © represents the interest which the Government. pays. Té the interest‘is exempt, as provided i in the billfand the principal is exempt, as provided in the bill, if the pur- chaser of the bill sells it meanwhile, and makes a profit on _ .his sale, why should not that: profit be-taxable just the _ same as the profit he makes on the sale of stocks or any- ' thing else? Mr: Couzens. Mr..President, if the Senator will yield to me, is not this a simple illustration? If the Government - sells to you a $1,000 bond or certificate of. indebtedness on a.4 percent, basis, and you turn around and _sell it on a-3 percent basis, the difference is profit. Mr. Wats of Montana. Unquestionably. Mr. Covzens. That is the simple way of putting it. In other words, if the Government sells the certificate to one “individual on a 4 percent basis, and he turns around and ~ 4 ey : | There is nothing in that history, we submit, to sup- port petitioners’ statement that the bill was originally . opposed “‘because the Senate was of the opinion that discount when realized is capital gain and did not wish ‘to set any precedent which would exempt any capital gain from tax” (Br. 14). The only feature of the bill which was opposed was its failure; as origi- nally proposed, t6 distinguish between “interest”? in sells it on a 3 percent, or 2 percent basis, the difference’ is profit. \ Mr.*Wausn of Montana. Exactly. I want.4 percent on "my money, and I buy the bill; but I find some one who is | pérfectly content with Ye percent, and he will offer me a ‘premium for it. Mr. Reep. Mr. President, it seems to me these questions ~~ have ronepht the issue down to the real point. What: actually happens in the case of the transaction described by the Senator from Montana is that a negotiable instru- ment is bought at one price, and subsequently sold at an- other; and_the profit, taken in connection with the time the bill is held, is.a capital gain which is the equivalent of interest on that money. [Emphasis supplied.] | Mr. Couzens. Oh, no! - ¢ 2 Mr. Rzep. It is just a matter of definition. . Please’ in- dulge me until I finish the thought.. Now, if we can agree that the amount of the discount at which the bill was originally sold shall be considered as interest, and that _ shall be ‘nontaxable, while at the same time any trans- actions relating. in capital , gains pending the maturity of ‘the certificate should be taxed, I think we.shoild all be _ agreed on the situation. /All the Treasury wants is to-make that which is in good faith the equivalent of interest tax free, as it-is today on Treasury certificates; and I under- - stand that tne Senator has no objection to that. Mr. Watsu of Montana. Not at all. We ate agreed . about what ought to be done. It is simply a question as to the language in which our views ought to be expressed. ¢ Mr. Reep. It is-merely a matter of expressing that thought clearly; and we ought to be able to agree on that. . / / . . mn if . aot 13 | the form of Pee) Ary, ra everyone agreed should be exempt—and ee gain” attributable to market - fluctuations—which /everyone agreed should not be - exempt. ‘Phe only “preceden ” which the Senate did _ not wish to set was that of exempting-market. fluctua- tion gains; the exemption of interest in the form of discount was already well established for State bonds _and/the only thing the Act as finally adopted did was - to extend the same ‘rile to federal bonds. The true | sen of\the: 1929 Act i is simply that it was the with the question—that, original-issue di unt is in- terest and should be treated as such tax puirposes. 2. At pages 15-16 of their brief, petitioners quote at length from a 1938 report of a subcommittee = the Committee on Ways and Means in conn with a proposal (to eliminate’ the tax on capital gains) on which no further action was ever taken. ‘From the very. portion quoted, it is evident that the report “was speaking ° only of market discount, which has indeed generally been treated as giving rise only to ¢apital — gains (see pp. 18-20 of our brief in ‘Midland-Ross). - . 3. Petitioners list five provisions of the 1939 Code that allegedly would have been unnecessary if orig- inal-issue discount were generally treated as interest | (Br. 17). The first three (§§ 117(a)(1)(D), 42(b), and 42(c)) were considered in our Midland-Ross brief (pp. 40-43) and, as there shown, their addition proves - _ just the opposite. The remaining two, §§ 201(e) and — 207(d), added by the Revenue Act of 1942,” require 20 88 163 and 165, 56 Stat. 798. ‘ : me | : life insuranee companies and certain mutual insurance “companies to..ascrue Bond discount and to amortize. bond. premiums... ‘Those ‘provisions, it may be seen, served two very substantial purposes entirely apart from any question ofthe status of original-issue dis- _ eount as interest: (1) they required such nies to treat maritet discounts-or premiums as giving rise to ordinary ineome.or deductions ;* and (2)\they re- quired such items to be accounted for by secrual not- withstanding that life surance companies were at the time: generally ‘required, to-report their inchune on the cash basis.” ; “4; Potitienses’ -veliisice ‘on ‘the trestmnt of Komi” premiums (Br.-21-23) is equally misplaced.* Most of the litigation over the treatment of bond premiums,’ - and the statutory solution ultimately. adopted, was concerned primarily with the treatment of bonds pur- chased on the market at a premium,” which poses a question analogous to the treatment of market dis- count rather than of original-issue diseount. The only case cited by petitioners which direetly int volved the - treatment of bonds originally issued ata - A i ceeanensiinmmmnmensniaemmmenent 1 Seo Treas.’ Regs’ 111 (1989 Code), 'g8 29.001-9, 29.907-6.. ‘The requirement that market discount be accrued by such com- panies was eliminated by the Revenue Act of* 1964, § 228, 78 Stat. 19 (amending $§ 818(b) and 822(d)(2) of the 1954 Code}. The purpose was to put such companies back ‘on a par with pace 279 seb mek ngs. 20 yam x Seamed - count as capital gain and for o al-issue di t\as ordinary income. See S. Rep. No. 880, 88th Cong., 2d pp. 122-124. 12 See Massachusetts Mutual Life Ins. Co. v, United States, 288 U.S. 269; S. Rep. No. 1631, 77th. Cong., 2d Sess., p. ‘147. - 8 See, ¢.9., "New York Life Ins. Co. v. Edwards, 271 US. 109 - (Pet. Br. 21).. -_—-* nremne Oy 6 premium is Old Colony .. 08. v. Cominiseionor, 284 U.S. 552. The question there was whether a premitm — received by a corporation on-the issuance: of bonds / prior to 4913 had to be reflected én its tax returns for’ subsequent ‘years, either {a) under regulations charac- _‘Aetizing ‘such premium aé income and requiring it to be amortixed over the life of the bonds, or (b) as an offset to the stipulated interest paid to the bondhold- _ers and claimed by the corporation as a deduction. With respect to (a), the Court held that since the premium was received prior to the adoption of the ~ Sixteenth. Amendment, it could not be taxed as income . in later years notwithstanding the amortization re- | quiremént—a requirement which the Court noted, however, “may properly be applied to premiums po papper to March 1, 1913” (284 U.S. at 558).* to (b), the Court held that the issuer eould hom the ‘nominal’ interest payments in full even though ‘economically they represented, in part, a repay- -— ment of the amount received for the -bonds. rather . . than compensation for. the use of the lenders’ money. The significance of the latter holding is questionable _ in view of the Court’s explicit recognition that bond - premiums received after 1913 must be amortized as —ineome, since ‘the effect of such treatment is pre- - eisely the same as if a pro rata share of the premium ~~ were ‘subtracted from the “nominal’’ yearly interest * The regulation has in fact been $0 applied. See, e.g., Bayshore: Gardens, Inc. .v. ‘Comméssiéner, 267 F. 2d 55 (C.As, ‘2);. Treasury Regulations 111 (1939 Code), § 29.22 (a)-17 (2) (a); Treasury Regulations. on - Income Dax (1954 Code), ~ § 1.161-12(e) @) and (5). , what ; ~ of that ruling, it soon became clear that its. principle 6 eo | | PNA -.. in order to arrive at the true, or “effective” interest, 1 Ss But even. if the ‘Coui#’s rejection of ‘the “effective | Bs interest” approach is taken at face alue, # Kas i / bearing on the present case, its was limited to the treatment of premiums and was not tobe extended to the tment of discounts: in * the case of bonds issued at a‘discount, the