Reply Brief — Doyle v. Helvering

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CHARLES ELMORE CRO

CLE

|

IN THE

Supreme Court of the United States

Ocroser Term, 1940.

No. 111

HARRY F. DOYLE and LUCY J. DOYLE

(Husband and Wife),

Petitioners,

v.

GUY T. HELVERING, Commissioner of Internal

Revenue,

Respondent.

On Petition ror A Writ oF CERTIORARI TO THE UNITED

Srates Crrcuir Court oF APPEALS FOR THE

Seconp Crircvult.

OOOO

PETITIONERS’ REPLY BRIEF TO RESPONDENT'S

BRIEF IN OPPOSITION.

OOOO

Tuomas M. WILKINS,

Attorney for Petitioners,

Union Trust Building,

Washington, D. C.

INDEX.

PAGE

Cases Cited:

Baird v. United States, 65 Fed. (2d) 911 ........ 4, 5,6

Blum v. Helvering, 74 Fed. (2d) 482 (1934) ...... 6

Board vy. Commissioner, 51 Fed. (2d) 73, 75 (1931

C. C. A. 6), Cer. Den. 284, U. S. 658, 52 S. Ct.

Oe cic en capes: ae Oke Cun Reena en kh 6

North American Oil Consolidated v. Burnet, 286

U. 8. 437, 438, 63 8. Ch G4, G6 .......... 3, 5, 6

North Jersey Title Ins. Co., Commissioner of In-

ternal Revenue v., 79 Fed. (2d) 492 .......... 6

Miscellaneous:

GO. Mi 1G AV—t ©. Bo 18 lsc cniccuene 6

IN THE

Supreme Court of the United States

Octoser Term, 1940.

No. 111

Harry F. Doyte and Lucy J. Doy.e

(Husband and Wife),

Petitioners,

v.

Guy T. Hetverinc, Commissioner of

Internal Revenue,

Respondent.

On PETITION FoR A Writ oF CERTIORARI TO THE UNITED

States Crrcurr Court or APPEALS FOR THE

Seconp Circuit.

PETITIONERS’ REPLY BRIEF TO RESPONDENT’S

BRIEF IN OPPOSITION.

1. The Respondent’s brief, in opposition, proceeds on

the erroneous theory that income is taxable in the year in

which some court may classify it, or determine its status,

and not in the year in which it was actually ‘‘derived.’’

The Act taxes income when it is ‘‘derived.’’ Neither the

language of the Act nor its spirit justifies the attempt to

tax in a later year ‘‘income derived”’ in an earlier year,

merely because some court may judicially announce the

‘‘classification or status’’ of the income in the later year.

The statute would have to be worded differently to permit

the postponement by litigation or anticipated litigation,

9

of taxation of income previously ‘‘derived’’ as contended

for by the respondent.

When would it be proper to tax this income if Peti-

tioners’ suit had never been brought?

2. We insist vigorously and with sincere confidence that

there is definitely a bona fide conflict between the decision

below and the decision of the United States Cireuit Court

of Appeals for the Third Cireuit in Commissioner v.

North Jersey Title Ins. Co., 79 Fed. (2d) 492.

We insist that what is important as to the existence of

a conflict here, is that litigation, which determined the

‘‘elassification or status of the cash payment’’ was in-

volved in both cases. In one ease litigation was held to

postpone taxability, and in the other it was held exactly

the opposite.

Respondent’s conclusion that there is no conflict is

predicated on fallacious reasoning and an obvious miscon-

ception of what was involved in the North Jersey case.

Respondent says (Res. Br. 6):

‘‘That case did not involve the question, here pre-

sented, as to the effect of a subsequent judicial de-

termination, which for the first time converts into

profit what had previously been a return of capital.”’

In both cases a cash down payment had been made and

suit for specific performance followed. In both cases, it

was not known until the litigation terminated whether all

of the cash payment would be regarded as income or a

part would be regarded as return of capital. We do not

believe that the Court decision in either case ‘‘converts

into’? one thing something which had previously been

‘‘something else.’’ But we insist that if litigation in the

one case leaves income or capital to be converted into

capital or income by the Court, the same is true in both

cases.

3

We most vigorously insist also that the North Jersey

case did involve ‘‘the precise question here presented, as

to the effect of a subsequent judicial determination, which

for the first time’’ decided what portion of the down pay-

ment was profit and what portion of it was return of capi-

tal. In both cases the ‘‘classification or status of the cash

payment’’ was not determined judicially until the Court

rendered its decision. The status of the fund would be

equally uncertain and the Court’s decision would have had

the same effect in both cases as to the part of the down

payment which could be ‘‘converted into’’ profit or return

of capital, either under the cash basis or under the ac-

crual basis. In none of these cases referred to in the peti-

tion does this difference in accounting methods become

material. See North American Oil Consolidated v. Burnet,

286 U. S. 417, 423, 52 S. Ct. 614, 615.

Respondent has offered no reason whatsoever as to why

these methods of accounting should be a material factor

here. It must be assumed therefore that there are no

such reasons applicable here, otherwise Respondent would

have attempted some answer to Petitioners’ contrary ar-

guments. (See Petition, bottom p. 7 and top of p. 8).

To say (Res. Br. 7), that the Court in the North Jersey

case was not concerned with ‘‘the classification or status

of the cash payment’’ merely avoids the true issue. In

that case, as in the instant case, the cash payment con-

tained a portion of capital and a portion of profit, and

should specific performance have not been decreed, as in

the instant case, all the cash payment and no more would

have been income. If specific performance were to be de-

creed, in both cases the cash payment would be ‘‘con-

verted’’ into return of capital in part and part would re-

main profit. In both cases, until the Court rendered its

decision, it was not known what part of the cash pay-

ment would be profit and what part would be return of

capital.

4

Clearly, in both cases, whether the Court decreed speci-

fic performance or forfeiture, the ‘classification or status

of the cash payment’’ as income or capital was not de-

termined until its decision was rendered.

If, as contended by the Respondent, the income is tax-

able in the year in which the ‘‘classification or status

of the cash payment’’ is determined by a Court decision,

Respondent’s statement (Res. Br. 7) that ‘‘in the North

Jersey case the Court was not concerned with the classifi-

cation or status of the cash payment”’ is inaccurate and

untrue. The conflict is clear.

Respondent’s denial of conflict between the decision be-

low and the decision of the United States Circuit Court

of Appeals for the Fifth Cireuit, in Baird v. United

States, 65 Fed. (2d) 911, is entitled to no weight because

it is predicated on a misstatement of fact indispensable

to Respondent’s tenuous ground of distinction. Respond-

ent states (Res. Br. 8) as to the Baird case:

‘“‘The Court there recognized that the payment

could not be classified as income in the year in which

it was actually received (1919) but decided that upon

the facts presented, the status became fixed in the

succeeding year (1920) when, following the default,

the seller elected to declare the payment forfeited.’’

(Italics ours.)

The truth which Respondent misstated is that, in the

Baird case, the seller did not elect to declare the pay-

ment forfeited until m 1921 when the suit was brought,

which, in that case resulted in annulling the contract. The

truth is also that under the agreement in the Baird case,

the seller had only fifteen days from the date of default

(February 8, 1920) within which, by written notice, he

was required to exercise his election to declare the con-

tract forfeited. (See pages 8 and 9 of Petition.) This

o

he actually failed to do and the suit he eventually brought

in 1921, later determined that only $150,000.00 of the

$500,000.00 received by him in 1919 could be retained by

him. In the Baird case, supra, the Circuit Court of Ap-

peals held the seller’s income taxable in 1920, not, as Re-

spondent states, because it was then (1920) that ‘the

seller elected to declare the payment forfeited,’’? which is

exactly what he did not do then, but in truth because on

February 8th, 1920, the seller’s rights arose to keep

$150,000.00 of the payment as the result of Flannery’s

failure to go through with the contract which the seller

was ready to perform. The Seller’s election in the Baird

case, as in the instant case, did not occur until suit was

brought. However, the Court in the Baird case ignored

such time of election in 1921 and held the income was

derived in 1920, the year of default. The Cireuit Court

affirmed the District Court’s specific holding that the

“‘choice’’ of the seller ‘‘was not exercised until January,

1921, when he determined to disregard that option and

sued for the dissolution of the contract * * *.” (3 Fed.

Supp. 947, 949). The conflict here is clear also.

Respondent’s denial of conflict (Res. Br. 8) between the

decision below and that of this Honorable Court in North

American Oil Consolidated v. Burnet, 286 U. 8. 417, com-

pletely disregards the fundamental principle and raises

‘‘a distinction without a difference.’? The question there,

as here, was as to the effect of litigation on income al-

ready ‘‘derived’’ and received. The fact that the income

there was merely called ‘‘earnings’’ and that here the

income is called ‘‘profits’’ is Respondent’s only excuse

for distinguishing the cases. Obviously, both ‘‘earnings’’

and ‘‘profits’’ are ‘‘income’’ and the distinction seems

wholly irrelevant and pointless. No reason for this sup-

posed distinction is offered. However, some of the ‘‘other

decisions’’ cited in the Petition (Pet. 11, 12) referred to

by Respondent (Res. Br. p. 8) as being ‘similarly dis-

tinguishable’’ involve ‘‘profits’? from sales rather than

cae

6

‘‘earnings.’’ See for example Board v. Commissioner, 51

Fed. (2d) 73, 75 (1931 C. C, A. 6), Cer. Den. 284, U..8.

658, 52 S. Ct. 35; G. C. M. 16730 XV—1 C. B. 179; Baird

vy. United States, 65 Fed. (2d) 911; and in Blum v. Helver-

ing, 74 Fed. (2d) 482 (1934), the Court of Appeals for

the D. C. in paraphrasing the words of this Honorable

Court in North American Oil Consolidated v. Barnet,

supra, actually substituted the word ‘‘yrofits’’ for the

word ‘‘earnings’’ to make the question apply to the situa-

tion there, clearly recognizing that the principle is funda-

mental and applies whether earnings or profits are in-

volved. The case of Commissioner v. North Jersey Title

Ins. Co., supra, also involved ‘‘profits’’ as distinguished

from ‘‘earnings.”’

The Respondent does not deny Petitioners assertion

(Pet. 9, 10) that the question herein involved is one of

substantial and general importance in the administration

of the income tax laws. Nor does the Respondent deny

the existence of uncertainty and confusion as to the ex-

tent to which the termination of litigation affects the tax-

ability of income already received and held under claim

of right. This seems tantamount to an admission of the

general importance of the fundamental question herein in-

volved and of the uncertainty and confusion existing in

this regard and justifies the granting of Certiorari by this

Honorable Court.

No attempt has been made by Respondent to answer

Petitioner’s argument (Pet. 13 to 15) that income is not

derived or created by Court decisions.

It is earnestly prayed, therefore, that the Writ of Cer-

tiorari be granted.

Respectfully submitted,

Tomas M. WILKINS,

Attorney for Petitioners,

Union Trust Building,

Washington, D. C.

June 29, 1940.

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