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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1947
- **Citation:** 332 U.S. 767

## 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,

8
5
9
9
7
5
8
8
5
5
5
5

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,

2
oe

InN oaaoo o

_
eo

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)

II

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)

2

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,

es

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

4

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-

5

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

6

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.

7

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

8

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

9

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)

11

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.

12

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

13

(B) Income constituting an amount pay-
able under a contract the performance of
war required more than 12 months;* or

(C) Income resulting from exploration,
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.

14

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 |

16

(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.

17

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

18

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).

al

19

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

20

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-

21

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

22

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:

23

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-

26

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386416_1273%3A3. Public record. Not legal advice.