Opposition Brief — James F. Waters, Inc. v. Commissioner

Supreme Court brief1947

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Text

- Questions presented

- Btatutes and regulations involved

6. ee

CITATIONS

Allis v. La Budde, 128 F. 2d 838

Brushaber v. Union Pac. R. R., 240 U.S. 1-_-------------

Helvering v. Ind. Life Ins, Co., 292 U. 8. 371

Kaufman v. United States, 131 F. 2d 854

King Plow Co. v. Commissioner, 110 F. 2d 649

Lockerty v. Phillips, 319 U. S. 182

McCardle, Ex parte, 7 Wall. 506

Missouri v. Missouri Pac. Ry. Co., 292 U. 8. 13

New Colonial Co. v. Helvering, 292 U. 8. 435

Pohatcong Hosiery Mills v. Commissioner, decided May 23,

Premier Products Co. v. Commissioner, 2 T. C. 445

Slider, E. T., Inc. v. Commissioner, 5 T. C. 263

Southwestern Oil & Gas Co. v. Commissioner, 6 T. C. 1124_-

Stimson Mill Co. v. Commissioner, decided July 21, 1947--

Stroud & Co. v. Commissioner, 45 B. T. A. 862

Welch v. Obispo Oil Co., 301 U. S. 190

Williamsport Co. v. United States, 277 U.S. 551

Statutes:

Act of June 30, 1945, c. 211, 59 Stat. 295, Sec. 2 (26 U.S. C.

1940 ed., Supp. V, Sec. 732)

Act of December 29, 1945, c. 652, 59 Stat. 673, Sec. 203 (26

U. 8. C. 1940 ed., Supp. V, Sec. 732)

Excess Profits Tax Amendments of 1941, c. 10, 55 Stat. 17,

InN oaaoo o

Internal Revenue Code:

Sec. 22 (26 U.S. C. 1940 ed., Sec. 22)

Sec. 710 (26 U. S. C. 1940 ed., Sec. 710)

Sec. 711 (26 U. 8. C. 1940 ed., Sec. 711)

Sec. 721 (26 U. S. C. 1940 ed., Sec. 721)

758358—47——_-1 q)

Statutes—Continued. Page

Revenue Act of 1942, c. 619, 56 Stat. 798:

Sec. 110 (26 U. 8. C. 1940 ed., Supp. V, Sec. 22)-..--. ll

Sec. 221 (26 U. 8. C. 1940 ed., Supp. V, Sec. 721) ._--- 16

Sec. 222 (26 U. S. C. 1940 ed., Supp. V, Sec. 721) -.--- 13

Sec. 504 (26 U. 8. C. 1940 ed., Supp. V, Sec. 1100) .._. 16

Miscellaneous:

‘H. Rep. No. 146, 77th Cong., Ist Sess., pp. 9, 14-15 (1941-1

Cum. Bull. 550)..--------------------------------- 5,6

Magill, Taxable Income, p. 383------------------------- 9

1 Mertens, Law of Federal Income Taxation:

Sec. 6.27..-------------------------------------- 8

Ben. 6.83... o-oo none on con noon ce nas on en- noes 8

7A Mertens, Law of Federal Income Taxation, Sec. 42.49___ 5

S. Rep. No. 75, 77th Cong., Ist Sess., pp. 15-16 (1941-1

Cum. Bull. 564)..-.------------------------------- 6

§. Rep. No. 1631, 77th Cong., 2nd Sess, p. 69 (1942-2 Cum.

Bull. 504)_...-------------------------------------- 8

S. Rep. No. 399, 79th Cong., Ist Sess., pp. A eau s on. 18

Treasury Regulations 103, Sec. 19.22 (b) (2) (A)-3-------- 7, 24

Treasury Regulations 109:

Sec. 30.721-1_..--------------------------------- 18

Sec. 30.721-2___--------------------------------- 19

Sec. 30.721-3__..-------------------------------- 20

nthe Supreme Gourt ofthe Whited States

OctoBER TERM, 1947

No. 224

James F. WATERS, INC., A CORPORATION, PETITIONER

Vv.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE NINTH

CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The memorandum findings of fact and opinion

of the Tax Court of the United States (R. 39-51)

are not reported. The opinion of the Circuit

Court of Appeals (R. 286-293) is reported at

160 F. 2d 596.

JURISDICTION

The judgment of the Circuit Court of Appeals

was entered on March 19, 1947 (R. 293). Rehear-

ing was denied on April 25, 1947 (R. 294). The

petition for a writ of certiorari was filed on

July 23, 1947. The jurisdiction of this Court is

invoked under Section 240 (a) of the Judicial

(1)

Code, as amended by the Act of February 13,

1925.

QUESTIONS PRESENTED

1. Whether the Congress can make final a de-

cision of the Tax Court insofar as it relates to

a question determined solely by reason of Section

721 of the Internal Revenue Code, as amended,

which provided special administrative relief from

the provisions of the excess profits tax.

2. Whether the net proceeds of certain insur-

ance policies on the life of an individual, which

were received by the taxpayer corporation by

virtue of an assignment for valuable considera-

tion, are includibie in its gross ncome under Sec-

tion 22 of the Internal Revenue Code, and

whether, if so, Section 22, as so applied, is

constitutional.

STATUTES AND REGULATIONS INVOLVED

The material provisions of the statutes and

Treasury Regulations are set forth in the Ap-

pendix, infra, pp. 10-26.

STATEMENT

The facts, as stipulated and as found by the

Tax Court (R. 40-49), may be summarized as

follows:

James F. Waters, an individual, was the presi-

dent and the principal stockholder of the tax-

payer, a California corporation, from the date of

its organization until his death on May 10, 1941,

and of the James F. Waters Securities Corpora-

tion, a California corporation (hereinafter called

Securities), from the date of its organization

until it was merged into the taxpayer on or about

October 31, 1938 (R. 40).

James F. Waters procured certain policies of

insurance upon his life at various dates between

1927 and 1930 (R. 40-41). He thereafter pro-

cured certain other policies of life insurance at

yarious times (R. 41-42).

Waters transferred and assigned the insurance

policies to Securities for the sum of $6,222.32,

being the aggregate cash surrender value of the

policies after payment of all premiums becoming

due in 1935, minus the aggregate amount of the

unpaid premiums due on all of the policies during

1935 and after April 26, 1935 (R. 41, 42).

On or about October 31, 1938, Securities merged

with the taxpayer, and there were then trans-

ferred to taxpayer, by operation of law, all of the

insurance policies heretofore described. Neither

the taxpayer nor Securities recognized any gain

or loss upon the transfer of such insurance poli-

cies to taxpayer. (R. 43.)

The taxpayer failed to pay premiums on the

policies commencing in 1939 and the policies, in

accordance with their respective provisions, be-

came converted into various types of paid-up or

term insurance (R. 46-47).

James F. Waters died on May 10, 1941, and

the taxpayer received a total of $141,693.77 under

the various policies held by it which were still

in force (R. 44-45).

The Tax Court held that the net insurance pro-

ceeds were includible in the taxpayer’s gross in-

come under the specific provisions of Section 22

(b) (2) (A) (R. 49-50), and that such proceeds

did not constitute abnormal income attributable

to prior years under Section 721 of the Code

(R. 51). The court below sustained the hold-

ing of the Tax Court that the net insurance policy

proceeds were includible in gross income and

further held that it was without jurisdiction to

review the Tax Court’s holding with respect to

the Section 721 issue because of the express pro-

hibition against such review in Section 732 (c) of

the Code (R. 288-293).

ARGUMENT

1. Section 732 (ce) of the Internal Revenue

Code (Appendix, infra, p. 16), provides that if

in the determination of tax liability under the ex-

cess profits tax law, the determination of any

question is necessary solely by reason of Section

721 (Appendix, infra, p. 12), the Commission-

er’s determination of such question shall not be

reviewed or redetermined by any court except the

Tax Court. The court below sustained the Com-

missioner’s contention that it was without juris-

diction to review the decision of the Tax Court

that the proceeds of the insurance policies here

involved did not constitute abnormal income at-

tributable to prior taxable years under Section

721 (b) and (¢) of the Code, and under the per-

tinent Treasury Regulations (Appendix, infra,

pp. 18-24.

The now-repealed excess profits tax was im-

posed by sections of the Internal Revenue Code

commencing with Section 710. Section 721 is a

relief provision granting special relief from tax-

ation where abnormalities in income occur. Pohat-

cong Hosiery Mills v. Commissoner, (C.C. A. 3rd),

decided May 23, 1947 (1947 P-H., par. 72470) ;

Southwestern Oil & Gas Co. v. Commissioner, 6

T. C. 1124; Premier Products Co. v. Commissioner,

2'T. C. 445; H. Rep. No. 146, 77th Cong., Ist Sess.,

p. 9 (1941-1 Cum. Bull. 550, 556), TA Mertens,

Law of Federal Income Taxation, Sec.’ 42.49.

Like Section 722, it is a special relief pre-

vision “‘reminiscent of sovereign gracious clem-

ency’’. Stimson Mill Co. v. Commissioner (C. C,

A. 9th), decided July 21, 1947 (1947 C. C. B.., par.

5914). Such relief is allowed by Congress only as

a matter of grace and it may be conditioned, lim-

ited or denied entirely. Helvering v. Ind. Life

Ins. Co., 292 U. 8. 371; New Colonial Co. v. Hel-

vering, 292 U. 8. 435; Brushaber v. Union Pac. R.

R., 240 U. S. 1. Congress may eliminate or with-

hold entirely the appellate jurisdiction of the in-

ferior federal courts and even of the Supreme

Court itself. Lockerty v. Phillips, 319 U. 8. 182;

Ex parte McCardle, 7 Wall. 506, 512-514; ef. Mis-

souri Vv. Missouri Pac. Ry. Co., 292 U. 8.13. This

ee ee Y

oe wt cae

Congress did in Section 732 (c) of the Code.

That Section provides that there shall be no re-

view of a determination by the Tax Court of a

question under Section 721 by any other court or

agency. The review which the taxpayer sought

below was intentionally prohibited by Congress in

clear and unmistakable terms under Section 732

(c). H. Rep. No. 146, 77th Cong., 1st Sess., pp.

14-15 (1941-1 Cum. Bull. 550, 560); S. Rep. No.

75, 77th Cong., Ist Sess., pp. 15-16 (1941-1 Cum.

Bull. 564).

Congress was acting well within the scope of

its recognized power and authority when it so

limited review of the relief afforded by Section

721, and the court below correctly decided that

there was no violation of Article ITI of the Con-

stitution as urged by the taxpayer (Pet. 7-9),

and that it was without jurisdiction to review

the Section 721 issue. That there is no right

to judicial review of an administrative determina-

tion under a relief statute of the type involved

here was settled by this Court in several opinions

interpreting the First World War excess profits

tax law even though Congress did not, in that

statute, expressly limit review to the Board of

1 The decision of the Tax Court that the insurance policy

proceeds here involved did not constitute abnormal income

attributable to other years under Section 721 (b) and (c) is

correct. The Tax Court has consistently so held in cases

presenting a similar situation. Premier Products Co. v. Com-

missioner, supra; E. T. Slider, Inc. v. Commissioner, 5 T. C.

263.

Tax Appeals. Welch v. Obispo Oil Co., 301 U. 8.

190; Heiner v. Diamond Alkali Co., 288 U. 8.

502; Williamsport Co. v. United States, 277 U.S.

551. The language quoted by the taxpayer from

the opinion of this Court in the Diamond Alkali

ease (Br. 15-16) was directed not to the question

of the power of Congress to limit judicial review

but rather, at most, to the question of whether

Congress had, in fact, done so.

2. The Tax Court and the court below have

correctly decided that the proceeds of the life

insurance policies here involved constitute taxable

income in the year of receipt under Section 22 of

the Internal Revenue Code (Appendix, infra, pp.

10-11) and the applicable Treasury Regulations.

Sec. 19.22 (b) (2) (A)-3, Treasury Regulations

103 (Appendix, infra, pp. 24-26). The case

falls within the provision contained in Section

22 (b) (2) (A) of the Code, the effect

of which is to provide that, in the case

of a transfer of life insurance policies for

a valuable consideration, the proceeds of the

policies received by the transferee upon the

death of the insured are exempt only to the ex-

tent of the consideration paid for the policies

upon the transfer and the premiums subsequently

paid. Here, the insured transferred the policies

for a valuable consideration to Securities, and it

would seem clear that if Securities had collected

upon the policies it would have received taxable

income. When the taxpayer acquired the policies

758358—47——_2

Pee tar MD: A A

aa A Ai DEAE ES EI

from Securities in the tax-free merger, it stepped

into the shoes of Securities, and the proceeds

of the policies are taxable to it to the same ex-

tent that they would have been taxable to Securi-

ties. The last sentence of Section 22 (b) (2) (A),

stressed by the taxpayer (Br. 39-41), is intended

to exempt from taxation the proceeds of in-

surance policies, which are transferred by one cor-

poration to’ another in a tax-free reorganization

only where the proceeds would have been exempt

if received by the transferor. See 8. Rep. No.

1631, 77th, Cong., 2d Sess., p. 69 (1942-2 Cum

Bull. 504, 558), wherein it is stated that ‘‘where

a corporation transfers an insurance policy to a

successor corporation in a tax-free reorganization,

the proceeds received under the policy will be

exempt from taxation when received by the trans-

feree if they would have been exempt if received

by the transferor’, Congress was undoubtedly

acting within the scope of its power and authority

in thus limiting the exemption afforded to tax-

payers by Section 22 (b) (1) so as to subject life

insurance proceeds to taxation under Section 22

in circumstances such as are presented here.

Kaufman v. United States, 131 F. 2d 854 (C. C. A.

4th) ; Allis v. La Budde, 128 F. 2d 838 (C. C. A.

7th); 1 Mertens, Law of Federal Income Tasxa-

tion, Sees. 6.27, 6.32. Such proceeds have been

included in gross income and taxed in a number

of cases without discussion of the constitutional

question. King Plow Co. v. Commissioner, 110

F. 2d 649 (C. ©. A. 5th); E. T. Slider, Ine. v.

Commissioner, 5 T. C. 263; Premier Products

Co. v. Commissionér, supra; Stroud & Co. v. Com-

missioner, 45 B. T, A. 862. The insurance pro-

ceeds received by this taxpayer were not indemni-

fication for loss of a capital asset but were in the

nature of income, a profit or returfi on an invest-

ment, or an indemnification for the pessible loss

of future earnings or profits. Magill, Taaable

Income, p. 383; cf. Golden v. Commissioner, 113

F. 2d 590, 593 (C. C. A. 3rd); Cummings vy. Com-

missioner, 73 F. 2d 2d 477, 480 (C. C. A. Ist).

The Tax Court (R. 49-51) and the court below

(R. 287-293) properly disposed of the many other

contentions raised by the taxpayer in its petition

(Pet. 7-13) and argued in its brief (Br. 11-51).

CONCLUSION

The decision below is correct in all respects.

No novel principle is involved nor is there a con-

flict of decisions. The case does not call for fur-

ther review and it is respectfully submitted that

the petition should be denied.

/ Pui B. Prauman,

Solicitor General.

THERON L. CAUDLE,

——- Attorney General.

WALL Key,

/ A. JACKSON,

Austin Hoyt,

Special Assistants to the Attorney General:

Aveust, 1947.

APPENDIX

Internal Revenue Code:

CHAPTER 1—INCOME TAX

Sec. 22. Gross INCOME.

(a) General definition.—‘Gross income”’

includes gains, profits, and income derived

from salaries, wages, or compensation for

personal service, of whatever kind and in

whatever form paid, or from professions,

vocations, trades, businesses, commerce, or

sales, or dealings in property, whether real

or personal, growing out of the ownership

or use of or interest in such property; also

from interest, rent, dividends, securities, or

the transaction of any business carried on

for gain or profit, or gains or profits and

income derived from any source what-

ever. * * *

(b) Exclusions from gross income.—The

following items shall not. be included in

gross income and shall be exempt from

taxation under this chapter:

(1) Life inswrance—Amounts received

under a life insurance contract paid by

reason of the death of the insured, whether

in a single sum or otherwise (but if such

amounts are held by the insurer under an

agreement to pay interest thereon, the in-

terest payments shall be included in the

gross income) ;

(2) [as amended by Sec. 110 (a) of the

[Revenue Act of 1942, c. 619, 56 Stat. 798]

Annuities, etc. * * * In the case of a

transfer for a valuable consideration, by

assignment or otherwise, of a life insur-

(10)

ance, endowment, or annuity contract, or

any interest therein, only the actual value

of such consideration and the amount of

the Fig ame and other sums subsequently

paid by

taxation under paragraph (1) or this -

graph. The preceding sentence not

apply in the case of such a transfer if such

contract or interest therein has a basis for

determining gain or loss in the hands of a

transferee determined in whole or in part

by reference to such basis of such contract

or interest therein in the hands of the

transferor ;*

* = * *

(26 U. 8. C. 1940 ed., Sec. 22.)

CHAPTER 2—ADDITIONAL INCOME TAXES

Subchapter E—Ezcess Profits Tax

[As added by Section 201 of the Second

Revenue Act of 1940, c. 757, 54 Stat. 974,

which provided that the new subchapter

may be cited as the ‘‘Excess Profits Tax

Act of 1940’’]

Sec. 710. La PposiTION OF TAX.

(a) Imposition.—There shall be levied,

collected, and paid, for each taxable year

beginning after December 31, 1939, on the

adjusted excess profits net income, as de-

fined in subsection (b), of every corpora-

tion (except a corporation exempt under

section 727) a tax as follows:

7 *

* * *

(26 U.S. C. 1940 ed., Sec. 710.)

2 The last sentence quoted, which was added by Section

110 (a) of the Revenue Act of 1942, by Section 110 (b)

thereof was made applicable with respect to taxable years

beginning after December 31, 1940.

Sec. 711. Excess PROFITS NET INCOME.

(a) Taxable years beginning after De-

cember 31, 1939.—The excess profits net

income for any taxable year beginning after

December 31, 1939, shall be the normal-

tax net income, as defined in section 13

(a) (2), for such year except that the fol-

lowing adjustments shall be made:

* * * * *

(26 U. S. C. 1940 ed., See. 711.)

Src. 721. ABNORMALITIES IN INCOME IN

TAXABLE PERIOD.

(a) [as amended by Sec. 5 of the Excess

Profits Tax Amendments of 1941, ¢. 10,

55 Stat. 17] Definitions—For the purposes

of this section—

(1) Abnormal income.—The term ‘“‘ab-

normal income’’ means income of any class

includible in the gross income of the tax-

payer for any taxable year under this sub-

chapter if it is abnormal for the taxpayer

to derive income of such class, or, if the

taxpayer normally derives income of such

class but the amount of such income of

such class includible in the gross income

of the taxable year is in excess of 125 per

centum of the average amount of the gross

income of the same class for the four pre-

vious taxable years, or, if the taxpayer was

not in existence for four previous taxable

years, the taxable years during which the

taxpayer was in existence.

(2) Separate classes of income.—Each of

the following subparagraphs shall be held

to describe a separate class of income:

(A) Income arising out of a claim,

award, judgment, or decree, or interest on

any of the foregoing; or

(B) Income constituting an amount pay-

able under a contract the performance of

war required more than 12 months;* or

discovery prospecting, research, or develop-

ment of tangible property, patents, formu-

lae, or processes, or any combination of

the foregoing, extending over a period of

more than 12 months; or

(D) Income includible in gross income

for the taxable year rather than for a dif-

ferent taxable year by reason of a change

in the taxpayer’s accounting period or

method of accounting; or

(E) In the ease of a lessor of real

property, income included in gross income

for the taxable year by reason of the

termination of the lease; or

(F) Income consisting of dividends on

stock of foreign corporations, except

foreign personal holding companies.

All the income which is classifiable in more

than one of such subparagraphs shall be

classified under the one which the tax-

payer irrevocably elects. The classification

of income of any class not described in sub-

paragraphs (A) to (F), inclusive, shall

be subject to regulations prescribed by the

8 Section 222 (f) of the Revenue Act of 1942 made Section

721 (a) (2) (B) inapplicable to taxable years beginning after

December 31, 1941. Section 222 (d) of that Act added Sec-

tion 736 to the Internal Revenue Code to provide relief for

taxpayers with income from long-term contracts, which new

provision, by Section 222 (e) of the Act, was made applicable

to taxable years beginning after December 31, 1941, unless

the taxpayer elected to have it apply to all taxable years be-

ginning after December 31, 1939.

Commissioner with the approval of the

Seeretary.

(3) Net abnormal income.—The term

‘net abnormal income’’ means the amouht

of the abnormal income less, under regu-

lations prescribed by the Commissioner

with the approval of the Secretary, (A)

125 per centum of the average amount of

the gross income of the same class deter-

mined under paragraph (1), and (B) an

amount which bears the same ratio to the

amount of any direct costs or expenses,

deductible in determining the normal-tax

net income of the taxable year, through the

expenditure of which such abnormal income

was in whole or in part derived as the

excess of the amount of such abnormal

income over 125 per centum of such aver-

age amount bears to the amount of such

abnormal income. —

(b) [as amended by Sec. 5 of the Excess

Profits Tax Amendments of 1941] Amount

attributable to other years.—The amount

of the net abnormal income that is attrib-

utable to any previous or future taxable

year or years shall be determined under

regulations prescribed by the Commissioner

with the approval of the Secretary. In

the case of amounts otherwise attributable

to future taxable years, if the taxpayer

either transfers substantially all its prop-

erties or distributes any property in com-

plete liquidation, then there shall be attrib-

utable to the first taxable year in which

such transfer or distribution occurs (or

if su¢h year is previous to the taxable year

in which the abnormal income is includible

in gross income, to such latter taxable

year) all amounts so attributable to future

Bt)

taxable years not included in the gross

income of a previous year.*

(ce) [as amended by Sec. 221 (a) of the

Revenue Act of 1942, c. 619, 56 Stat. 798]

Computation of tax for current taxable

year.—The tax under this subchapter for

the taxable year, in which the whole of such

abnormal income would without regard to

this section be includible, shall not exceed

the sum of:

(1) The tax under this subchapter for

such taxable year computed without the in-

clusion in gross income of the portion of the

net abnormal income which is attributable

to any other taxable year, and

(2) The aggregate of the increase in the

tax under this subchapter for the taxable

year (computed under paragraph (1)) and

for each previous taxable year which would

have resulted if, for each previous taxable

year to which any portion of such net ab-

normal income is attributable, an amount

equal to such portion had been included in

the gross income for such previous taxable

year.

(d) [as amended by Sec. 221 (a) of the

Revenue Act of 1942] Computation of tax

for future taxable year —The amount of the

net abnormal income attributable to any

future taxable year shall, for the purpose of

this subchapter, be included in the gross

income for such taxable year.

* * * * on

« By Section 17 of the Excess Profits Tax Amendments of

1941, the amendments made by that act of subsections (a)

and (b) of Section 721 were made effective as of the date of

enactment of the Excess Profits Tax Act of 1940. (See, how-

ever, the preceding footnote (No. 2) with respect to Section

721 (2) (2) (B).)

2 NOTA TENE TTE ONE AMOI

aeereernnntimemnt |

(e) [as amended by Sec. 221 (a) of the

Revenue Act of 1942] Application of sec-

tion.—This section be applied only

for the purpose of eomputing the tax under

this subchapter as provided in subsections

(ce) and (d), and shall have no effect upon

the computation of base period net in-

come; © * *

* * * * *

(f) [as amended by Sec. 221 (a) of the

Revenue Act of 1942] Abnormal income

from exploration, etc.'— * * *

* ~ ~ * a

(26 U. S. C. 1940 ed., Sec. 721.)

Sec. 732. Review OF ABNORMALITIES BY

Boarp or Tax APPEALS.*

(a) [as amended by Sec. 9 of the Excess

Profits Tax Amendments of 1941, c. 10, 55

Stat. 17] Petition to the Board.—If a claim

for refund of tax under this subchapter for

any taxable year is disallowed in whole or

in part by the Commissioner, and the dis-

allowance relates to the a plication of sec-

tion 711 (b) (1) (A), (D), (J), or (K),

section 721, or section 722, relating to ab-

normalities, the Commissioner shall send

notice of such disallowance to the taxpayer

by registered mail. Within ninety days

after such notice is mailed (not counting

Sunday or a legal holiday in the District

* By Section 221 (b) of the Kevenue Act of 1942, the

amendments made by Section 221 (a) of that Act of subsec-

tions (c), (d), (e), and (f) of Section 721 were made appli-

cable with respect to taxable years beginning after December

31, 1939.

* Name changed to Tax Court by Section 504 of the Reve-

nue Act of 1942.

of Columbia as the ninetieth day) * the tax-

payer may file a petition with the Board

of Tax Appeals for a redetermination of

the tax under this subchapter. If such pe-

tition is so filed, such notice of disallow-

ance shall be deemed to be a notice of

deficiency for all purposes relating to the

assessment and collection of taxes or the

refund or credit of overpayments. |

(b) [as amended by Sec. 9 of the Excegs

Profits Tax Amendments of 1941] Defi-

ciency found by Board in case of claam.—If

the Board finds that there is no overpay-

ment of tax in respect of any taxable year

in respect of which the Commissioner has

disallowed, in whole or in part, a claim for

refund described in subsection (a) and the

Board further finds that there is a de-

ficiency for such year, the Board shall have

jurisdiction to. determine the amount of

such deficiency and such amount shall, when

the decision of the Board becomes final, be

assessed and shall be paid upon notice and

demand from the collector. .

Profits Tax Amendments of 1941] Finality

of determination.—If in the determination

of the tax liability under this subchapter

the determination of any question is neces-

sary solely by reason of section 711 (b) (1)

(H), (1), (J), or (K), section 721, or sec-

tion 722, the determination of such question

™ By Section 203 (a) of an Act of December 29, 1945, c. 652,

59 Stat. 673, the language in the parentheses was changed so

as to read “(not counting Saturday, Sunday, or a legal holi-

day in the District of Columbia as the ninetieth day) ,” and

by Section 208 (b) of that Act the change was made effective

as of September 8, 1945.

cect NADAL ALLL ARAB AA ALLA AREA

shall not be reviewed or redetermined -by

any court or agency except the Board.‘

(d) [as added by Sec. 222 (ce) of the

Revenue Act of 1942] Review by special

division of Board—The determinations

and redeterminations by any division of the

Board involving any question arising un-

der section 721 (a) (2) (C) or section 722

shall be reviewed by a special division of

the Board which be constituted by

the Chairman and consist of not less than

three members of the Board.’ The deci-

sions of such special division shall not be

reviewable by the Board, and shall be deem-

ed decisions of the Board. (26 U. 8. C.

1940 ed., Sec. 732.)

Treasury Regulations 109, promulgated under

the Internal Revenue Code, as amended by T. D.

5045, 1941-1 Cum. Bull. 69:

Sec. 30.721-1. Abnormalities in income

in taxable year—Section 721 provides re-

lief where abnormal income (as defined in

section 721 (a)) for any excess profits tax

taxable year is attributable to other taxable

years. The term ‘abnormal income”’

means income of any class includible in the

gross income of the taxpayer for any ex-

* By Section 17 of the Excess Profits Tax Amendments of

1941, the amendments made by that Act of Section 732 (a),

(b) and (c) were made effective as of the date of the enact-

ment of the Excess Profits Tax Act of 1940.

® By Section 2 of the Act of June 30, 1945, c. 211, 59 Stat.

295, Section 732 (d) was amended so as to add the words

“with respect to any taxable year” after the words “section

722.” This change was to correct “a technical error in Sec-

tion 222 of the Revenue Act of 1942 * * *. The effect

of the amendment is that the review provision will apply to

all taxable years beginning after December 31, 1939.” S. Rep.

No. 399, 79th Cong., 1st Sess. (pp. 1-2).

cess profits tax taxable year (A) if it is ab-

normal for the taxpayer to derive gross

income of such class, or (B) if the taxpay-

er normally derives gross income of such

class but the amount of such income of such

class is in excess of 125 per cent of the av-

erage amount of the gross income of the

same class determined for the four previ-

ous taxable years or, if the taxpayer was

not in existence for four previous taxable

years, the taxable years during which the

taxpayer was in existence. It is abnormal

for a taxpayer to derive income of any

class only if the taxpayer had no gross in-

come of that class for the four previous

taxable years. For the purpose of deter-

mining abnormal income under this -

graph the gross income of the class for the

previous taxable years is not to be increas-

ed or decreased by any allocation under the

provisions of section 721. Abnormal in-

come is to be determined by considering

classes of income, and not merely particu- -

lar items. As to the classification of in-

come, see section 30.721-2.

= * ~ = *

Sec. 30.721-2. Classification of income.

—Section 721 (a) (2) (A), (B), (©), (D),

(E), and (F) sets forth six separate class-

es of income. Income which does not fall

within those provisions may be grouped by

the taxpayer, subject to approval by the

Commissioner on the examination of the

taxpayer’s return, in such other classes as

are reasonable in a business of the type

which the taxpayer conducts, and as are

appropriate in the light of the taxpayer’s

business experience and accounting prac-

tice.

* * * * *

AE IR RS SEE a EEE LON TT

. te AEP i

Seo. 30.721-3. Amount attributable to

other years—The mere fact that an item

ineludible in gross income is of a class ab-

normal either in kind or in amount does

not result in the exclusion of any part of

such item from excess profits net income.

It is necessary that the item be found at-

tributable under these regulations in whole

or in part to other taxable years. Only

that portion of the item which is found to

be attributable to other years may be ex-

eluded from the gross income of the tax-

payer for the year for which the excess

profits tax is being computed.

Items of net abnormal income are to be

attributed to other years in the light of the

events in which such items had their origin,

and only in such amounts as are reason-

able in the light of such events. To the

extent that any items of net abnormal in-

eome in the taxable year are the result of

high prices, low operating costs, or in-

ereased physical volume of sales due to in-

creased demand for or decreased competi-

tion in the type of product sold by the tax-

payer, such items shall not be attributed to

other taxable years. Thus, no portion of

an item is to be attributed to other years

if such item is of a class of income which

is in excess of 125 per cent of the average

income of the same class for the four pre-

vious taxable years solely because of an

improvement in business conditions. In

attributing items of net abnormal income

to other years, particular attention must be

paid to changes in those years in the fac-

tors which determine the amount of such

income, such as changes in prices, amount

of production, and demand for the product.

No portion of an item of net abnormal in-

come is to be attributed to any previous

year solely by reason of an investment by

the taxpayer in assets, tangible or intang-

ible, employed in or contributing to the

production of such income.

* * * * »

Sec. 30.732-1 [as further amended by

T. D. 5264, 1943 . Bull. 761]. Review

of abnormalities by the Tax Court of the

United States.—Section 732 provides that,

in addition to its jurisdiction to redeter-

mine a deficiency, The Tax Court of the

United States shall have jurisdiction to re-

view the Commissioner’s disallowance of a

claim for refund of excess profits taxes, if

such disallowance involves the determina-

tion of any question relating solely to the

application of section 711 (b (1) (8), (4),

(J), or (K), relating to abnormal deduc-

tions during the base period, section 721,

relating to abnormalities in income in the

taxable period, or section 722, relating to

general relief from excessive and discrim-

inatory excess profits taxes. The taxpay-

er’s petition must be filed with The Tax

Court within 90 days (not counting Sunday

or a legal holiday in the District of Colum-

bia as the ninetieth day) after the sending

by registered mail of the notice of disallow-

ance of the claim for refund.

Where the taxpayer has filed such a peti-

tion the notice of disallowarice of its claim

for refund is considered to be a notice of

deficiency for all purposes relating to the

assessment and collection of taxes or the

refund or credit of overpayments. If The

Tax Court finds that there has been no

overpayment of tax with respect to the tax-

able year involved, and further finds that

there is a deficiency for such year, The Tax

A CE OREM HUI I

Court will determine the amount of such

deficiency and such amount shall, when the

decision of the Tax Court becomes final, be

assessed and paid upon notice and demand

from the collector.

The extent and the finality of The Tax

Court’s jurisdiction with respect to ques-

tions involving the sections dealing with

abnormalities and general excess profits tax

relief are set forth in section 732 (c) and

(d). If the ascertainment of the excess

profits tax liability for a taxable year is de-

pendent in whole or in part upon the de-

termination of any question which is nec-

essary solely by reason of section 711 (b)

(1) (HB), (D, (J), or (K), section 721,

or section 722, the determination of such

question shall not be reviewed or redeter-

mined by any court or agency except The

Tax Court. If the determinations and re-

determinations by any division of The Tax

Court involve any question arising under

section 721 (a) (2) (C) or section 722,

such determinations and redeterminations

shall be reviewed by a special division of

The Tax Court which shall be constituted

by the presiding judge and shall consist of

not less than three judges of The Tax

Court. The decisions of such special di-

vision shall not be reviewable by The Tax

Court, or by any court or agency, and shall

be deemed decisions of The Tax Court.

The application of section 732 (¢) and (d)

may be shown by the following example:

zample—A taxpayer, which is a do-

mestic manufacturing corporation, has filed

a claim for refund for a taxable year be-

ginning in 1942, and as a result of the Com-

missioner’s action with respect to such

claim, makes the following contentions:

first, that it is entitled to a constructive

average base period net income of $1,300,-

000 pursuant to an application filed on

Form 991 for relief er section 722 in-

stead of a constructive average base period

net income of $900,000 determined by the

Commissioner; second, that $100,000 of in-

come from a judgment based upon a claim

for patent infringement is net abnormal in-

come attributable under section 721 to prior

years whereas the Commissioner has at-

tributed only $60,000 to such years; and

third, that the amount of gross income de-

termined by the Commissioner is too large.

Since the taxpayer’s first contention is

predicated upon an issue arising under sec-

tion 722, the Commissioner’s determination

is reviewable only by The Tax Court, and

any determination or redetermination made

by any division of The Tax Court must be

reviewed by the special division constituted

by the presiding judge; the decision of such

special division is the decision of The Tax

Court and cannot be reviewed by The Tax

Court or any court or agency. The tax-

payer’s second contention is based upon an

issue arising under section 721; therefore

the Commissioner’s determination is re-

viewable only by The Tax Court. Since the

issue arises under section 721 (a) (2) (A),

and not section 721 (a) (2) (C), no further

review is required by the special division,

and the decision of The Tax Court is final

and cannot be reviewed by any court or

agency. The taxpayer’s third contention

does not arise under either section 711 (b)

(1) (H), (1), (J), or (K), section 721,

or section 722, but independently of such

sections. Consequently review of this issue

is not confined to The Tax Court.

SO PP TARAS Oe cop TE

pene ee rae

ss ee

Treasury Regulations 103, promulgated under

the Internal Revenue Code as amended :

Seo. 19.22 (b) (2) (A)-3 [as added by

T. D. 5194, 1942-2 Cum. Bull. 53, and as

amended by T. D. 5271, 1943 Cum. Bull.

92]. Transfers of life insurance, endow-

ment, or annuity contracts.—In the case

_of a transfer for a valuable consideration,

by assignment or otherwise, of a life in-

surance, endowment, or annuity contract,

or any interest therein, to which section

22 (b) (1) or (2) (A) applies, only the

actual value of the consideration given for

such transfer and the amount of the pre-

miums and other sums subsequently paid

by the transferee shall be excluded from

gross income, in lieu of the amounts pro-

‘vided in section 19.22 (b) (1)-1, section

19.22 (b) (2) (A)-1, or section 19.22 (b)

(2) (A)-2, to be excluded with respect to

payments under such life insurance, endow-

ment, or anny contract. In the event

of such a transfer (other than to the in-

sured, the rule stated in the preceding

sentence transforms the exemption appli-

eable under section 22 (b) (1) or (2) (A)

from that determined as in the case of

the insured or person to whom the policy |

was originally issued to an exemption de-

termined as in the case of a_ transferee |

for a valuable consideration. The exemp-

tion applicable in the case of a transferee

without valuable consideration or a donee

beneficiary is determined in accordance

with the rule applicable in the case of

its last transferor or last owner of the

policy. For the purpose of determining

gross income for any taxable year begin-

ning after December 31, 1940, in the case

of a transfer of a life insurance, endow-

ment, or annuity contract or any interest

therein, if such contract or interest therein

has a basis for determining gain or loss

in the hands of the transferee determined,

in whole or in part, by reference to such

basis of such contract or interest therein in

the hands of the transferor, the rule stated

in the first sentence of this section shall

not apply as to such transfer, and the rule

applicable under section 22 (b) (1) or (2)

(A) to a transferee without valuable con-

sideration (as stated in the preceding sen-

tence) shall apply as if the transfer from

such transferor to such transferee were

without valuable consideration. Thus,

where a corporation acquires a life in-

surance policy from a predecessor corpora-

tion in a tax-free reorganization, if the

proceeds received under the policy by

reason of the death of the insured would

be exempt from taxation in the hands of

the transferor, such proceeds received by

reason of the death of the insured will be

exempt from taxation in the hands of the

transferee for a taxable year beginning

after December 31, 1940, because the basis

is determined with reference to the basis

in the hands of the transferor.

The following examples illustrate the ap-

plication of the provisions of this section:

Example (1)—The A Corporation pro-

cures, for a single premium of $500, an

insurance policy in the face amount of

$1,000 upon the life of X, one of its officers,

naming the A Corporation as beneficiary.

If X dies during the time the policy is

held by the corporation, the proceeds of

the policy paid by reason of the death of

X will be tax-free to the corporation. If

the A Corporation transfers the policy to

the B Corporation for a valuable considera-

tion (for example, $600 in cash, and not

pursuant to a tax-free exchange or re-

organization), the proceeds paid to the B

Corporation by reason of the death of X ~

would be taxable to the extent of $400 —

($1,000 minus $600). Similarly, if before

the death of X, the B ap pape ee had

transferred the policy to the C Corporation

in a tax-free reorganization, the proceeds in

the hands of the C Corporation for taxable

years beginning after mber 31, 1940,

would be taxable to the extent of $400,

since $600, the consideration paid by Cor-

poration B for the transfer, would be

exempt.

Ezample (2).—In 1922, Y took out an

annual premium 20-year endowment policy

having a maturity value of $20,000. After

payment of premiums totaling $5,500, Y

assigned the policy to the M Corporation

for a consideration of $4,000. If the M

Corporation held the policy and paid the

premiums thereon, the $20,000 received

upon maturity of the policy (while A is

still alive) would be includible in the in-

come of the M Corporation, except to the

extent of the $4,000 consideration paid by

it and the premiums which it paid after

the transfer. If prior to the maturity of

the policy, the M Corporation transferred

its assets, including the policy, to the N

Corporation in a tax-free exchange for the

stock of the N Corporation and the N

Corporation held the policy until maturity

(1942), paying all premiums due thereon

after such transfer, the $20,000 received

by the N Corporation would be includible

in its gross income, except to the extent of

the $4,000 consideration paid by the M

Corporation for the transfer of the policy

from Y and the aggregate premiums paid

by the M and N Corporations upon the

policy.

U. S, GOVERNMENT PRINTING OFFICE: 1947

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.