# Brief for the United States — Nash v. United States > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386413_0186%3A5 ## Record - **Collection:** Supreme Court brief - **Document type:** Brief for the United States - **Published:** January 1, 1970 - **Citation:** 398 U.S. 1 ## Text ; : ' A 7 r a + ov Asceyeet Page Opinions below- ._-.=_---- $2 Swoosh e inurisdcsekssst «| JurindictiGn « - sac cose i se oloawulblsdt ude Sciesh - | é ‘Question presented... « .. 1.4... i¢2-e02 sin shee sce be SOB : _ Statutes and regulations involved. .22222- ossk sau ou): 9 Rak, Saath) at 4 Argument: : : L barat Introduction and summary--_. 4.2 -2--i-L-seusls. ASP The Commissioner properly applied the tax’ benefit \ rule in requiring restoration to income of the | Siysbe aren po he rr fat aseets) ee af? trolled rations... 22S. Oak. 7 A. The tax Denefit rule applies when a bad debt. e is no longer needed, whether or. not A feta ) there has been a cash collection of accounts a poothveable. » a a6 ~ Statutee—Continued ~ pie catres ; Internal Revenue Code of 1954 26U8C.)—Con. |. Page Seo, 364... .. 5-2 .c-+-2------ jekimssidens pou. 21, 26 Secs. 354-382_...--- gener enn c een n se eneee dalnivie 27 Sec. 398... Lisa s eos Bdicccdebsdcastnds 15, 28 : Set B68bc itis Act. jadbrebaw aa da su dass 22 Sec. 362.....----- gi 2 Ll gaa OO de 21, 24, 34 - ies BOBS Suk ccs es ccosees lwiietsditnds nota “21, 24, 26 Sec, 881. ..-----------2+------- 21, 22, 24, 25, 26, 31 ae I Si cian ec ecwhs ae . Sec. 446. 2nd 2 Lacs pasns emails on bunk? 81 Ses, 4002 jie 2 esis -ncdsiisesl-nssces 31 Secs. 531-537 ..2- 2 22a nono o econo eneensee 27 Secs. 541-547.......---------------------- pore 27 Bet. 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Simons, Intermediate Accounting (Ad od. 1088).in kav eeencene nee dsl. | 20 3% Paton, Advanced Accounting(1947 PMI A 16 - | | * ; | | ' pamed ; | s 4 | | ; ¢ ; e . 4 | . 7 , ' -” - r | ; O07 By | ‘ e ; sek 4 at : a. a sr P, 5 : . ° = a s | CC me } ’ . ‘ ! ; a ‘«* . : : ‘ . : , ‘ “ | | ' . | | . ~? " ‘ ° , * * : | | * : . “ : F / | | ’ | f 0 > . e. Fig ‘ . ’ ‘ ! | / . ” 4 eT. 3 he Sgrme on of he ed Sates | - Octosen ‘Tena, 1969 ait ! | No. 678 James G. NASH, -ET AL., PETITIONERS , - uv. A ’ A y : 3 UNITED States OF AMERIOA ON WRIT OF. OBRTIORARI TO THE UNITED STATES COURT oF Aan FOR THE FIFTH OIROUIT ‘ BRIEF-FOR THE UNITED STATES OPINIONS BELOW ll The findings of fact and conclusions of law of the ' district court (R. 12-13)* are: not officially reported. The opinion of the court of appeals (R. 16-19) is Te-. ported at 414 ¥’. 2d 627. | JURISDICTION | The yf of the court of appeals were entered - on July 2, 1969 (R. 20-22). The petition for a writ. of certiorari was filed on September 30, 1969, and certiorari was’ — on January 12, 1970 (R. 23). The jurisdiction | lof. this os rests on 28 U.S.C. 1254(1). ) : | TER? references m are to the record aa: a) > .. ie tax" benefit rule upon the transfer of the partner- eS: under Section 351 of the Internal Revenue Code. | QUESTION PRESENTED 9 Whether a partnership’s reserve for bad debts, representing in 1e tax deductions allowed in prior years, ghould restored to partnership income under ship’s accounts receivable to controlled corporations STATUTES AND REGULATIONS INVOLVED . ~The pertinent provisions of Sections 166, 351 and = 362 of the Internal Revenue | Code of 1954 and Section 1.1664 of the Treasury Regulations are set forth in the Appendix, in]e, pp. 33-36. STATEMENT ule 1960, petitioners * were members of a sal nership operating eight finance organidtions in Ala-’ bama and two-in South Carolina, The partnership reported its income on the accrua method of account- ing and used the reserve method of accounting for bad debts permitted by Section 166(c), of the Internal Revenue Code of 1954 and Treasury Regulations, Sec- tion 1.166-4. (R. 7.) . } . Under the reserve method ' of accounting for bad debts, a taxpayer includes in his income the fuil face , | _ amount of an account receivable jupon its creation. : He also maintains a reserve account, the balance of © | . which i is to.be adjusted at the end of each taxable year 4 ') that it equals that portion of current accounts re- 7 In addition to James G. Nash, petitioners are. Cecelia Nash, who is:a, party solely by reason of the filing ofa joint return; _ - Birmingham Trust National Bank, as Trustee of the Margaret. Nash Trust; and Birmingham Trust National Bank, as ‘Trustee under the James G. Nash, Jr. Trust (R. 15-16). . “ee o) - .° ™ - ~ * forth in the stipulation of facts (R. 7-11). a * _ eeivable which is \reé ably: cstnintiak to ‘becorhe worthless in subsequent ears; Any ‘additions’ neces- sary to increase the reserve to its required level ‘are currently deductible. When specific accounts receivable — 3 actually become worthless during the ‘year, the Téserve | account is decreased and no ‘addttiotial bree debt: ~ - duction is allowed. if be il As of May 31, 1960, petitioners’ partnership hooks ‘reflected accounts receivable for the Alabi orga- nizations of $486, 853.69 and a reserve fo a, . of $73,028.05 (R. 7)? On June 1, 1960, petitioners formied eight new cor- porations: and traasferred the . assets '. of the ak Alabama organizations, ineluding the -accoun _ eeivable, to these’ corporations in exchange for the latters’ stock. The transfer was within the terms ‘of — Section 351 of the Internal Revenue Code, which pro- vides that no gain or loss shall be recognized if prop-" erty is transferred to a corporation in ékchange for _ stock if, iminediately after the exchange, the trans- - ferors possess at least: 80 ee ‘control of the cor-” poration. (R. 7.) 2 : mt Upon examination of the. partnership sito 1 filed for the fiscal year ended January 31, 1961, the Com- missioner: determined that the partnership should have included in income the amount of the bad debt reserve. ($73,028. 05) applicable to the. accounts re- “eeivable transferred ‘to. the corporations on June 1, 1960, because the partnership no longer had heed of — * The exact amounts of the accounts receivable. reserves for bad debts of each of the.cight Alabama oganizati are et 880-620—70——-2 2 + 4 the reserve account. ‘This adjustment in the partner- | ship income: led to an increase in the di ibutive- shares of petitioners and resulting tax defi encies- for the calendar year 1961. (R. 11.)* Petitioners paid | - the deficiencies and brought suit in the district court _after denial of their refund claims (R. 11). - Zs The district court held that the amount of the out. . standing reserve. for bad debts did not lave to be restored to petitioners’ income as of the end cae” ‘partnership’s fiscal year in. which the transfer oc- curred (R. 12-13). On the *government’s appeal, the . Fifth Cireuit reversed (R. 16-19). To resolve a square conflict of decisjons between the Fifth and Ninth Circuits on this Ssue, this Court - 4 granted the taxpayers’ petition for certiorari on Jan- uary 12,@970 (R. 28) : INTRODUCTION AND SUMMARY sis Shidiie the reserve method of. accounting for bad debts, a taxpayer is permitted to take a current deduc- tion for the amount of tts accounts receivable which it is. estimated will become worthless in subsequent taxable years.” The problem preserited in this case is *The deficiencies determined against petitioners were. as fol- ‘lows (R. 11): James G. Nash and Cecelia. Nash—$48,473.14 ; . Birmingham Trust National Bank as Trustee for James G. +) Nash, Jr. —$1,042.96; and Birmingham Trust National Bank, me: Trustee for Margaret Nash—$1,041.52. 5The reserve method is to be contrasted with the specific: charge off method. under: which a deduction for bad debts is. allowed only as and when a specific account becomes worthless. | The use of either method is authorized in: Section 166. of the Internal Revenue Code... ‘ - e; ry. ‘ . atic «4 8, te y : By , ‘e.. es a : the proper tax sank. clincedddiemmi a partnership when it transfers all of its iassets to a. ~ corporation in exchange for the latter’s stock ina; _ transaction. described in Section’ 351. of the Internal * Revenue Code. Because a bad debt reserve represents anticipated . future losses that have not. in. fact -been - * sustained, the possibility exists, if: adjustment is not ‘made for the bad debt’ reserve, that the identical bad - debt loss would be’ allowed twice—once to the partner- _ ship when it established the, reserve and a second time ~ to the corporation which will actually suffer the bad - "> debt loss on the accounts receivable transferred. _ Petitioners recognize the necessity for avoidance of a double deduction of the ‘same bad debt loss (Br. 5-6, 20-31). They. can do no less, for decisions of this Court extending over a period of more ,than four decades—the most recent, of which was ‘announced Aare only last Term—make it clear that “the Code should — not be interpreted to allow \* * * ‘the practical equiv- alent of double deduction,’ * * * absent, a clear. dec- peas of intent by. Congress. 2? United States. v. kelly Oil. Co., 394 U.S. 678, 684. See United States se Ludey, 274 U.S. 295, 301; Burnet v.. Aluminum. Goods Co., 287 U.S. 544, 551; ifeld Co. v. Hernandez, 292° US. 62, 68.° | 7 Wie ¢ The policy agin a alloiands of double deductions is reflected. in- various provisions of the Internal Revenue Code (Sections 164(e), 642(e), 642(g), 1811-1815, 1841(b) (3) and 7852(c)) and the Treasury Regulations. (Sections 1.62-1(b), 1.161-1, 1.691(b)-1(b), 1.901-1(b) (2) (h) and 1.1016-6(a)) and = has been the basis of decision in numerous. lower court cases. See, ¢.9., Candy Bros. Mfg..Co. v. Commissioner, 17 T. ©. 298, 304, affirmed, 198 F. 2d 330 (C.A. 8) ; Eljer Co. v./Commissioner, ‘ ates. “gemeae ‘The dispute between the-parties thus is.not so much whether a Qouble deduction. is to be avoided, but: which of several possible rules should be applied to avoid a "double deduction. The Code does not speak’ explicitly - to the point. The position of the Commissioner of In ternal Revenue, which was approved by the court below but’ rejected by the Ninth Circuit in Estate of © ' Schmidt v. Commissioner, 355 F.2d 111, is set. out in - Rev. Rul. 62-128, 1962-2.Cum. Bull. 139. That ruling provides that since the Section 351 transfer makes it clear that the transferor will not suffer the losses represented by the earlier deductions, the balance of the reserve‘should be restored to income pursuant to the so-called “‘tax benefit’’ rule. Under this rule, the recovery ofan item—in this case the bad debt re- serve—which has produced an income’tax benefit in a prior year is to be added to income in the year of _ Tecovery. Consistently, the Commissioner would per- ‘mit the corporation to which the accounts receivable _are transferred to take an appropriate bad debt de- duction in respect of the receivables transfe Petitioners contend, on the other hand, that the tax | “ benefit rule does not apply here bécause the transferor - did not:collect the full face amount of the eo specie accounts receivable, and that, in any event/ its ‘appli- eation is barred by Section 351 of the Code, which provides that gain or ‘Joss shall not be recognized if property is transferred by a _partiership (or sole 134 F. 194 F. 2d‘ 251, 254-255 (C.A. 3) ; Edward Katzinger Co. v. Com: missioner, 44 B.T.A. 588, affirmed, 129 F. 2d 74 (C.A. 7); Doyles- - town & Easton Motor Qoach Co., v. Commissioner, 9 TC. 846, 850; Bush Terminal Buildings Co. v. Commissioner, 7 T.C. 798, 816- 817; Gould Coupler Co., 5 - T.A. 499, 518. ad 3 7: - proprietorship) to a ocutedlned corporation, "Petition- ers would solve the double, deduction problem gither “a “by requiring that the partnership's reserve be carried over to the corporate transferee, or by. reducing the : basis of the accounts receivablesby the amount of the * reserve. We will show Grst. that this is a proper ecasé in which to apply the tax ‘penefit rule because, when: the - - _ partnership terminated, there was no longer any need for maintenance of the resérve. This, we submit, is a sufficient recovery -to warrant application of the tax: benefit rule. We will. then show that application of the rule is in no way inconsistent with the proserip- tion of Section 351 against recognition of gain gr loss. With regard to petitioners’ proposed solutions) to the double deduction problem, we ‘contend — solution is prescribed in the Code. In the absénce of a Code directive requiring sana sesdete or a. reduction ) in basis, the Commissioner’s solution\must be upheld, because ‘it is reasonable and not inconsistent with the statute. ‘ turned in by its shareholders. _ . Third, the court erred in. refusing to consider the effect of its holding upon the corporate transferee i in Schmidt. It stated (355 F. 2d at 114): “We do not pass upon the right of the corporation, at the com- mencement of its business, to set up the same reserve as an offset to the receivables entered upon its books. The only question before ‘us is the liability of the individual taxpayer.” This refusal, although couched in traditional ternmis of judicial restraint, cannot be squared with this Court’s recent reaffirmance : of the principle that “the Code should hot be interpreted to allow * * * ‘the practical equivalent of double de-: ‘duction,’ * * *, absent a cleat declaration of intent by ‘Congress. ”? United States v. Skelly Oil Co., 394 : U.S, 678, 684. See pp. 5-6, supra. Whatever doubts may * _ have existed as tothe viability of this principle when © : Schmidt was Coenen 3 in 1966. were resolved by saciid Q.- er Oa in 1969: In approaching the question whether the tax benefit rule should have been applied in Schmidt, the court should have been mindful of the possibility that its. decision could lead to the “practical opreetent of ‘double. deduction’ 6 2” | There is, in sum, : nothingNin the Ninth Circuit’s opinion that’ justifies its failure to invoke the tax benefit rule. Petitioners advance only one. additional argument, in support of that ¢gourt’s economie¢ analy- - sis. They rely (Br. 34) on Treasury Regulations, Section 1.111-1(a)(2), which provides: “Recoveries* ~ /result from the receipt of amounts ‘in respect of the -- previously , deducted or credited section 111 ite such as from the collection, or sale of a bad actt, | refund or credit of taxes paid, or cancellation of taxes - . accrued. * * *’’ Petitioners contend that because wi , earn includes examples of what the Ninth Ci “—euit characterized as “economic? recoveries (355 F. 2d at ‘T18), only such recoveries can come within the tax benefit rule. This is not correct: The use of the words ~ “such as” in the Regulation makes it clear enough . that what are referred to as examples of recoveries’ are.only examples. Moreover, as we have noted (p. 13, © supra), petitioners do not dis ute that a recovery . occurs when a corporation ibutes its accounts receivable in liquidation, even though it. receives only . its. shareholders’ stock certificates in “return. The re- covery here is no different than that of a liquidating ; corporation and is sufficient to warrant »pplication of * the'tax benefit rule.” -s 12 Petitioners also contend (Br. 17) that the tax benefit’ rule does not apply here because “the bapegets need (for the bad yi A —e . ; é ‘5 . t%\ a 18 > None of petitioners’ remaining arguments in sup- , port « of their r interpretation of Section 351 have merit. « Their contention (Br. 17-18), that ifswould be “‘para- _ _ doxical’’ to restore the reserve to income in an other- wise tax-frée transaction under Section 351, suggests t the reserve would not be so restored in a taxable ; transaction. As we have previously shown (pp. 11-12, supra), however, restoration of the reserve would be required in either event, for application of the tax benefit rule does not turn-on. whether a transaction . is taxable, but simply ‘on whether the need for the | reserve has terminated. While petitioners are correct. in pointing out that. a taxable sale of receivables . would result in no nét income, that résult obtains not — beeause the tax benefit rule ‘is inapplicable, but be- cause the loss realized on the sale (the excess of the face amount of the receivables over #4 value) would - offset the amount restored to income. When petition- ers’ partnership transferred its accounts receivable to the controlled ¢orporations, petitioners realized a loss, . just as they would have in a taxable transaction: Pe- " titioners were barred from recognizing that loss, how- ever, by the non-recognition rule of Section 351. There is thus nothing “paradoxical” in applying the tax benefit rule in an otherwise tax-free .situation. . As the Fifth Circuit recognized below (R. 19), the. “paradox would arise if the rule were not applied, since petitioners would then in effect be recognizing the loss on ‘transfer. ofthe receivables which Section 351 says may not be recognized—along with any gains which -_@# ‘inhered i in the ee transaction. In aa petitioners are here seeking recognition of their losses, while their gains go unrecognized, which is not what Congress — provided. Section: 351 is sis ees applicable to gains and losses. ; The contentions. that;q¢—taxpayer’s need for a bad debt reserve continues in a tion. 351 isaction _ (Br. 17) and that application af Rev. Rul. 128, supra, would distort the income of both the transferor and the’ transfered in the transaction (Br. 18-19) as- sume the very point which is an issue. If, we con-— — tend (pp. 16-17, supra), Congress did not legislate as broad a non-recognition rule as it might have when it . enacted Section 351, the trahsferor and transferee cannot be considered the .same taxpaying entity with - respect to those items which do- not constitute prop- erty or are not capable of being transferred—includ- ~ a reserve for bad debts. This ‘being the’ cage, the ‘‘continuation of business’’ theory cannot apply -with respect to such items. Absent this theory, there would be no cortinuing need for the reserve, because, for - purposes of determining the adequacy of the reserve, the transferor would not be deemed a. continuing entity.” There would likewise be no distortion of the » _ income of either the- transferor or the transferee, since . - the former’s income would reflect all bad losses ac- tually sustained up to the time of the transfer, and . %Qnce this is recognized, it becomes aia standing petitioners’ contentions to the contrary (Br. 12, 17)— that the partnership’s reserve, determined on the’ assumption that the parfpership would continue to exist, was reasonable. ¢ 20 the latter’s-would reflect all such losses activally sus- _ tained thereafter." That the Commissioner first ruled on the oritetion here presented in 1962 (Rev. Rul. 62-128, supra) does _ warrant the inference drawn by petitioners (Br. 13, 26) that prior to 1962 he agreed with their pro- | ound interpretation of Section 351, Nor ean this in- ference be drawn from the fact that the question was _ first litigated in 1966 in Estate of Schmidt v. Commis- stoner, supra, as ‘petitioners suggest (Br. 15). We are advised by the Internal Revenue Service that during . the pre-ruling period the problem was handled on-an - ad hoc basis by revenue agents in the field. The ruling, which we believe to be completely consistent with. Sec- tion 351, was designed to provide a uniform rule for all taxpayers and one which would, in all events, effec- “tively prevent a double deduction. In these circum- stances,..there is no basis for interpreting the Commissioner’s failure to rule before 1962 as indica- . tive of his acquiescence in a rule contrary to that ‘which we urge here. 4 ¢. THE EXISTING FRAMEWORK OF CODE IS. NOT READILY ADAPT- ABLE TO EITHER OF PETITION % PROPOSED SOLUTIONS TO THE ° DOUBLE DEDUCTION PROBLEM Recognizing that a double deduction iis result if . the tax benefit rule does not apply (Br. , 29), peti- tioners argue that this problem can b roided by requiring that a partnership’s reserve for bad debts be carried over to a cqrporate transferee, or by recog- %° As noted above (p. 6, supra), the Commissioner would al- low the transferee corporation to comet bad debt losses on the : receivables transferred to it. ig ec eas ra | | A 21 nizing that the reserve reduces the basis for the re- - ceivables in the hands of the partnership. The first. alternative would preclude a corporate transferee from claiming the same bad debt deduction allowéd to the ‘partnership, since the reserve in respect of the trans- ferred receivables would be reflagted on, the corpora- - tion’s books without the allowance of any additional deduction. The second alternative: ‘would acgomplish _the same purpose, since the eepbrate ansferee would take the partnership’ s basis for the’ receivables pursuant to Section 362. While each proposed solution thus would prevent both parties to a Section -351 — transfer from claiming the same deduction, neither — solution 1 is in line with prior judicial authority or with the technical requirements of the Code. 1. Carryover of reserve for bad debts . Section 381 of the Code is the basic statute dealing ; with the carryover of certain specified “items” (Sec- tion 381(a)) from one taxpayer to another. By its terms,.i¢ provides for carryovers ‘only in cases involv- ing intercorporate transfers of preperty—certain liq- uidations of corporate subsidiaries (Section 381(a) (1)) and certain corporate réorganizations described in Section 368 (Section 381(a) (2)).’” It does: not pro- . vade for the carryover of “items” in a transaction de- -scrihed)in Section 351. si: : “ 17 These are-the reorganizations described in Section 368(a) (1) (A), (C), (D) and (F). In the case of Section 368(a) (1) (D) reorganizations, the carryover rules are applicable only if the requirements -of Section 354(b) (1)(A) and ‘(B) are . er SPY ge . - . = ¢ | _.. Among the items which aré to be carried over by ait ‘acquiring corporation ‘subject to Section 381 are the _ methods-of accounting of the transferor corporation, ‘including, where the transferor is using the reserve method of accounting for bad debts, its reserve for bad .debts. ‘See Section 381(¢) (4); Treasury Regula- tions, Section 1.381(¢) (4)-1(a) (1) (ii). Petitioners” maintain that the rule of Section 381(¢) (4) should apply here despite ‘‘the lack of specific statutory di- _. rection” (Br: 24). = 8 a : mn te To support this contention, petitioners again con- tend that the transfer from partnership to corpora- - tion constitutes nothing more than a mere change in» the form of ownership of a business. They point out that this theory also. underlies Section’ 361, which provides for nonrecognition of “gain or logs” upon the transfer of property from one corporation to another in a corporate reorganization; and conclude from this that bad debt reserves should, be car- - Tied in corporate organizations as well as corporate reorganizations. Ve ; (1) Petitioners’ conclusion ignores the well-settled Tule that the transferee corporation in-a Section 351 exchange is a new taxpayer and is entitled to adopt its own taxable year and its own ‘accounting ' methods, including, in this instance, the specific charge . Off method forsreporting bad debts." See, ¢.g., Ezo - 38 Petitioners argue to the contrary (Br. 25) in reliance on Treasury Regulations, Section 1.166-1(b) (1). While we do not agree that the Commissioner could prevent @ corporate trans- feree from using the specific charge off method merely because the’ transferor used the reserve method, nothing in the cited y, / J 2 pak, i) Fe 255 Tar ib. Products” Co. v. Commissioner, 37. T.C. 385, 393-394; D earpokn Gage Co. v.. Commissioner, 48 T.C. 190, 201, and cases cited therein. Indeed, the transferee is con- sidered to be a new taxpayer with respect to. depre- ciable assets received by it in the exchange and is therefore not entitled to use the accelerated methods - of depreciation that are available only to: original users of. property under Sections 167 (b) and (c). Rev.. Rul. 67-286, 1967-2 Cum. Bull. 101... ; Pies ‘Finally, to the extent that Congress has perthitted . gertain’carryovers of tax attributes in Section 351 i transactions, it has’ carefully delineated the jee ? overs. See Sections 47(b)(3), '1245(b) (3), 3S 1250(d)(3):2° Except as to these specific provisions, Congress has apparently seen fit to limit the carry- _over of a bad debt-reserve to certain’ types of cor- porate’ reorganizations and not the _ corporate organization encompassed in Section 35F.*° For the — Regulation empowers the Commissioner to insist on a carry- ; over of* the transferor’s reserve in order to avoid a double “~~. = deduction. | . eileen to petitioners’ contention (Br. 30), the enact- ‘ ment of these provisions is not indicative of any Congres- sional policy to treat Section 351 transfers and reorganizations in a “similar * * * fashion.” The legislative history of these spe- | _ + cific enactments dealing with the investment credit and the recap- | ture of depreciation reveals no such purpose. See H. Rep. No. 1447, 87th Cong., 2d Sess. pp. A15-A16, A109-A110; S. Rep. No. 1881, 87th Cong., 2d Sess., PP. 152, 282-983; H. ‘Rep. No. - 749, 88th Cong., 1st Sess. p. 105; S . Rep. No. 830, 88th Cong,, | 2d Sess., pp. 185-136. 2° Calawo, Inc. v. Cominiisenen, 304 F. 2d 650 (C.A. 9), and ©: 5 Home Savings and Loan Association v. United States, 293 F.' . Supp. 184 (S.D. Calif.), relied upon by petitioners (Br. 22, n. 22), are not: in point. Each of those cases involved transac- z "Ss fe “—— ] 24 only carryover bai ai of Section 351, as set forth in that provision, is the requirement that. the controlled corporation carry over the transferor’s basis in the property transferred. Sections 351(d) (2) and $62, Appendix, infra, pp. 34-35. , - Aecordingly, whatever abstract merit a carryover of _ the bad debt reserve in the instant case might have, \ it is plain, at the very least, that Congress has not \ authorized such a carryover. Under these circum-. - \ stanceé, the existing structure of the Code does not \ deeioniaet the bad debt reserve carryover for which peti- — - tioners’’ contend. As. Judge Raum explained in Schuster v. Commissioner, 50 T.C. 98, 102, which ap- proved the Commissioner’s Foes, as, applied in the instant case "— - The Code ‘is a highly ‘complex’ instrument, and. it would be inappropriate, in order to reach a seemingly equitable ‘result, to procéed upon theories that .depart from an established course of decision or that do violence to the statute. In a field that is governed by so specific es statutory scheme relating to nonrecognizable ' transfers, any logical departure therefrom must be based jon specific legislative ‘Modifications. The remedy is one that must be provided by — _ Congress, rathey than through a judicial re- , construction of a complex law. [Footnote \ omitted.] . tions—Calavo, a Section 332 liquidation, and Home Savings, a Section 368(a)(1)(A) reorganization—to which.the carryover . ules of Section/881 specifically apply. The Tax Court has adhered to its position in Hutton v. Commissioner, 53 T.C. 37. ee ee 25 This Court simitarly obset'ved in Commissioner v. “Gordon,*391 U.S. 83, 91-92,-in construing another technical provision of Subchapter:C, that ‘The ‘re- quireménts of the sections are detailed and specific, and myst be applied with precision.’ Since the terms _ of the Code do: hot expressly require the carryover of a bad debt reserve from_a partnership to a corpora- tion; the Commissionef’s Tile requiring a restoration of the reserve to income is more closely in harmony ‘ with the Code’s highly technical structure.” , . (2) Given the existing framework of the Code, petitioners’, contentiom that the Commissioner’s rule yield to their carryover solution to the double deduc- tion problem is unpersuasive. Not only do the highly articulated provisions . of the Code point toward the correctness of the Commissioner’s rule, but there is, in addition, no theoretical justification for .broadly 22 Petitioners rely (Br. 26-28) on the reasoning of the dis- - senting opinion in Schuster (50 T,C. at 103-104) to the effect that the legislative history of Section 381 indicates that it w not meant to be exclusive on the subject of carryovers of tax attributes. However, it should be noted that the Committee ‘Report references deal only with carryovers from predecessor to successor corporations and de’ not. ‘expressly refer to carry- overs from partnerships to corporations:in a Section 351 ex- change. While petitioners are correct (Br. Ww ) in observing that prior to the enactment of Section 381, the courts, in certain . nees, permitted -carryovers, those cases all involved. inter- corporate transfers. Furthermore, the results were by no m - uniform. Compare, Libson Shops, Inc. v. Koehler, 353 U.S. with Helvering v. Metro. Edison Co., 306 US. 522. Si cantly, petitioners do not advance any cogent a returning tothe era of court-made lay in this highly area, given the precise and detailed manner.in which ‘has established the ground ‘rules in Section 381. 7 - ness amalgamations accomplished either by statutory . 26: enabeiabs a Section 351 transfer to. a corporate reorganization. — \ ~All of: the corporate iedieieibiatleni to which the carryover provisions of Section 381 apply involve bisi- _Inerger or ‘consolidation (Section 368(a)(1)(A)) or by a transfer of substantially all of the assets of the transferor corporation (Section 368(a)(1)(C), (D), - and (F)).” This is likewise true of the. corporate liquidations to which the Section 381 rules apply. The _ carryover rules can apply only in the case of com- plete liquidations of subsidiaries under Section 332. A Section 351 transaction, on the other hand, may in- volve the transfer of a single asset. It-is thus entirely reasonable for Congress not to have carried the con-. tinuation of business theory as far in the corporate organization area as it did in the area of corporate reorganizations.™ ; 7 2° The Section 368(a) (1) (C) reorganization requires a trans- . fer of “substantially all of the properties” of the transferor. Similarly, the non-divisive Section 868(a)(1)(D) reorganiza- ' tion, by operation of Section 354(b) (1) (A), requires a transfer ? of “substantially all of the assets” of the ‘transferor. And, the Sectiqn 368(a)(1)(F) reorganization—“a mere change in iden- : tity, form, or place of organization * * *”—presupposes the transfer of an entire business organization. *4 Petitio: ask rhetorically (Br. 20) how the nest for a bad debt reserve can terminate in a Section, 351 transaction, so as to justify invocation of the tax benefit rule, while the need would not terminate in an otherwise comparable corporate re- organization situation. The answer to this questign is that in enacting Section 381, Congress determined that the need con- tinues in the latter-situation. Its failure to include Section 351 transactions“within the coverage 6f Section 381 indicates that. it made no such determination with — to corporate: organizations. . hd = ey eo wit 27 _ Further reason for the oi omipectiitt decision. may be found in the fact’ that although corporate re- organizations, lyylefinition, involve only corporations, a-Section 351 transfer may- involve a non-corporate party. The distinction between individual and cor- porate taxpayers is manifest throughout the Code. First, graduated tax rafes are imposed upon. in-' dividuals by Section 1, while corporatiens are subject to the normal tax and surtax under Section 112° In - addition, the assumption of corporate form triggers an entire body of detailed provisions (Sections 301- 318, 332-337, 354-382) and presents a variety of ben- efits and elective options (¢.g., Sections 243-246, 421- 425 and 1371-1378) and potential liabilities - (Sections | 841, 531-537, 541-547), none of which apply to non-— corporate taxpayers. All of this suggests that it would be inappropriate to draw a broad analogy between - the corporate organization, and a ataenne ee teen . sions of the Code.” ~ (3) Moreover, although a carryover of a bad debt — reserve would prevent the deduction of the same bad *°The Fifth Circuit regarded this difference in ‘tax rates as - significant (R.. 19) in upholding the Commissioner’s rule re alle 1) in connection with a transaction to which. section 351 (relating to transfer of property to or ~~ that there is received, in addition to the stock . (2): no loss to such recipient shall be Tecog- - i ‘4 eorporate transferor distributes part or all of | as _-- / (1) For special rule where another party to . property received in an exchange to which this © sults in a gift, see section 2501 and following. ~ CO. ration— . e corporation controlled by transferor) applies, ® (2) as paid-in surplus or as 3 contribution to capi 43 then_the basis shall be the same as it would be *° in the hands, of the transferor, increased in the _ amount.of gain recognized to the transferor on aati oneh: erveanis * . * p* Tenaaiy Regulations 2 eau (1964 Code) (26 C.F.R.):’ he ) Sec. .1.166-4. RESERVE For Bab } 4 (a) Allowance of ded —A taxpayer who has established the régerve method of treating bad debts and has mbintained proper ‘reserve accounts for bad. d or who, in ac- cordance paragraph adopts t serve. method of treating debts. ma ct/from gress income a reasonable additiori to a reserve for bad debts in lieu of © rs ae specific sete eee debt items. | Ro peiablowens of addition to reserve— re | a) le my! faétors.—What constitutes a rea- .° ‘wadftion to a reserve for bad debts shall . be di fete rmiffed in the light of the facts existin at the ‘close of the taxable year of the proposed: addition. The reasonableness of the addition | ' will vary as between classes of business and . 8B eect: with conaitions of business prosperity. It | depend primarily upon the total amount” of debts outstanding as of the close of the taxable - year, including those arising currently as well ; as those arising in prior taxable years, and the. as - total amount of the~existing reserve. > ° (2) Correction of errors.in ‘prior estimates. “Tn the event that subsequent realizations upon -outstanding debts prove to be more or less than -estimated at the time of the creation of the existing reserve, the amount of the excess or ingdequacy in the existing‘ reserve shall be re- S flected in the determination of th ‘ ‘addition necessary in the current nable year. §- b ee A. hl. j- —_—_ is “ . PA - 36 (e) Statement Fesotalt —A taxpayer using the reserve method shall file with his return a statement showing— (1) The volume of his charge sales or other business transactions for the taxable year and the percentage of the reserve to such amount; (2) The-total amount of notes and accounts receivable at the ginning and close.of the taxable year ; (3) The amount of the: debts which have be- come wholly’ or partially worthless and have been charged agamst the reserve account; and. - (4) The computation of the addition to the reserve for bad debts. (d) Special rules applicable to certain bank- .ing organizations.—For special ‘Trules for the - addition to the bad debt reserves of certain - mutual savings banks, domestic building and loan - associations, and cooperative banks, see §§ 1.593-1 through 1. 593-11. M4 i U.S. GOVERNMENT PRINTING OFFICE: 1970. ‘. . ‘s Le ee ’ ; ° ’ . ° 7 * ad . ’. ° --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386413_0186%3A5. Public record. Not legal advice.