Opposition Brief — Anderson v. Commissioner

z

mow Nh tw te

CITATIONS

Cases:

Bankers Coal Co. v. Burnet, 287 U. 8S. 308

Bardach v. Commissioner, 90 F. 2d 323

Blair v. Commissioner, 300 U. 8. 5

Coffey v. Commissioner, 141 F. 2d 204

Commissionér v. Sunnen, No. 227 decided April 5, 1948_.-

Commissioner v. Tower, 327 U. 8S. 280

Corliss v. Bowers, 281 U. 8. 376

Dawson v. Commissioner, 163 F. 2d 664

Doll v. Commissioner, 149 F. 2d 239, certiorari denied, 326

Douglas v. Willcuts, 296 U.S. 1

Eisenberg v. Commissioner, 161 F. 2d 506, certiorari denied,

332 U. S. 767

Emery v. Commissioner, 156 F. 2d 728, certiorari denied,

Harrison v. Schaffner, 312 U. 8. 579

Helvering v. Clifford, 309 U. S. 331

Helvering v. Stuart, 317 U. S. 154

Irwin v. Gavit, 268 U. 8S. 161

Lawton v. Commissioner, 164 F. 2d 380

Loggie v. Thomas, 152 F. 2d 636

Lowry v. Commissioner, 154 F. 2d 448, certiorari denied,

Marshall v. Commissioner, 57 F. 2d 633, certiorari denied,

287 U.S. 621

Miller v. Commissioner, 147 F. 2d 189

Overton v. Commissioner, 162 F. 2d 155

Plimpton v. Commissioner, 135 F. 2d 482

Richardson v. Smith, 102 F. 2d 697

Seifert v. Commissioner, 157 F. 2d 719

Sewell v. Commissioner, 151 F. 2d 765, certiorari denied,

327 U. S. 783

786193—48 (I)

Statutes:

Internal Revenue Code;: Page

SF ee Ss NE Rpt eareeneenmnerey a 2, 8,9

ie @- 2 S BD | Rares ere ey eee 12

Yuthe Supreme Court of the Wnited States

OcToBER TERM, 1947

No. 725

RatpeH R. ANDERSON, PETITIONER

Vv.

COMMISSIONER OF INTERNAL REVENUE

No. 726

HERBERT R. ANDERSON, PETITIONER

v.

CoMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR WRITS OF CERTIORARI TO THE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE SEVENTH

CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The opinion of the Tax Court (R. 79-89) is

reported at 5 T. C. 443. The opinion of the Cir-

cuit Court of Appeals (R. 139-145) is reported

at 164 F. 2d 870.

1 The cases were consolidated for hearing before the courts

below. (R. 79, 127, 139.)

(1)

2

JURISDICTION

_ The judgrneti®s of the Circuit Court. ot Afipe

were etitered December 17, 1947. (R. 145-148.)

Taxpayers’ pétition for rehearing was denied

January 9, 1948. (R. 147.) The petition for

writs of certiorari was filed April 8, 1948. The

jurisdiction of this Court is invoked under Sec-

tion 240 (4) of the Judicial Code, as amended by

the Act of February 13, 1925.

QUESTION PRESENTED

Whether the court below erred in affirming the

Tax Court’s decision that taxpayers remained the

substantial Uwiers of shires of stock transferred

of record to members of their families, and that

the incomé from sach sHares was accordingly in-

cludible in taxpayers’ gross incomes as defined

in Section 22 (a) of the Internal Revenue Code.

STATUTE INVOLVED

Internal Revenue Code:

Sec. 22. Gross INcoME.

(a) General definition. — ‘‘Gross__in-

come”’ includes gains, profits, and income

derived from salaries, wages, or compensa-

tion for personal service, of whatever kind

and in whatever form paid, or from pro-

fessions, vocations, trades, businesses, com-

merce, 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, divi-

bus ess ied < othe in _ a oe it, or

sin rried on for

gains or cares and role derifed from

any source whatever. btitins * (26 U.S.

C, 22.)

To ,

The material facts found by the Tax Court (B.

80-87)? may be summarized as follows:

In 1937, taxpayers Herbert and Ralph Ander-

son, brothers, owned respectively 388 and 360, or

a total of 748, of the 750 outstanding shares of

stock of Robert R. Anderson Company. Herbert

was married and had a son 14 years of age.

Ralph had 3 children (14, 8, and 7 years of age)

by his first wife, and remarried in 1939. (R. 80.)

On December 1, 1937, taxpayers through simul-

taneous transfers caused some of their shares to

be transferred on the corporate books to members

of their families. As a result, Herbert’s wife and

child became record owners of a total of 68

shares, corresponding to the number transferred

by him; while Ralph’s children became the record

owners of a total of 85 shares, corresponding to

the number transferred by him. The new certifi-

cates were placed in a safe of the company in

the care of one Christiansen, the secretary of the

company, with the knowledge and consent of the

* The Tax Court’s findings were amended by its order (R.

100-102) entered upon taxpayers’ Motion for Rehearing and

Reconsideration (R. 91-100). The statement incorporates

these amendments.

4

donees, who were fully apprised of the transfers.

Christiansen placed the certificates in envelopes

bearing the names of the donees. Ten days after

the transfer a dividend of $25 per share was de-

clared on the stock, and on the same day tax-

payers borrowed the dividends from the trans-

ferees and executed in exchange 6% demand notes

which were also kept in the office of the com-

pany. (R. 81-82, 101.)

On April 1, 1938, taxpayers caused more of

their shares to be similarly transferred on the

corporate books and the new certificates to be

placed with the others. As a result, the record

ownership of Herbert’s wife and chila was in-

creased to a total of 140 shares, corresponding to

the total number transferred by him; while the

record ownership of Ralph’s children was in-

creased to a total of 175 shares, corresponding to

the total number -transferred by him. (R. 82.)

A few days later another dividend of $25 per

share was declared, which taxpayers again bor-

rowed from the transferees in exchange for 6%

demand notes which were placed in the company

safe. (R. 82-83.)

On April 15, 1939, taxpayers caused additional

shares to be similarly transferred and the new

certificates to be placed in the company safe with

the others. The record ownership of Herbert’s

wife and child was thereby increased to a total of

228 shares, corresponding to the total number

theretofore transferred by him; while the record

5

ownership of Ralph’s children and second wife

was increased to a total of 307 shares, correspond-

ing to the total number theretofore transferred

by him. (R. 83.) Two weeks later a dividend

of $50 per share was declared, taxpayers again

borrowed the dividends from the transferees, and

again executed 6% demand notes which were

placed in the company safe. (R. 83-84.)

No interest was paid on any of the notes given

for the borrowed dividends. On December 31,

1941, taxpayers each executed new 6% demand

notes for the amount of interest then due. Each

taxpayer devoted the dividends he borrowed to

his own business or personal use, though not

for the support or maintenance of his wife or

children. Some of the dividend checks were en-

dorsed by taxpayers or by Christiansen in the

names of the payees. (R. 84.)

After the transfers taxpayers continued to man-

age and direct the affairs of the corporation in

the same manner as before. No formal stock-

holders’ meetings were held after the transfers

until November 9, 1940. (R. 85).

In 1940 taxpayers decided to convert the busi-

ness from a corporation to a partnership. With

the consent of all the members of the family it

was arranged that taxpayers and their wives

would acquire the stock standing in the names:

of the children in such proportions that each

would own one-fourth of the stock, in exchange

for notes to the children. Accordingly, on No-

6

vember 19, 1940, transfers were made on the cgy-

porate hooks placing the entire outstanding stock

in the names of taxpayers and their wives ip

equal amounts of 18714 shares each, and fax-

payers and their wives executed 6% demand notes

to the children in amounts based on the book

value of the shares. These notes were likewise

placed in the company safe. It was understood

that when the sons reached 25 or finished school ’

they could use the notes or proceeds to purchase

an interest in the partnership, while the daughter

would receive one-half of the amount of her note

when she reached 25 or married and the other

half when she reached 30. <A partial liquidation

distribution was made before the end of 1940,

and.the liquidation was completed in 1941. Qn

December 31, 1941, additional notes were given

to the children in the amounts of the unpaid

interest and were placed in the safe with the

others. At the same time taxpayers took credits

against the principal of the notes for income tax

payments and investments made on behalf of the

children, these credits being acknowledged in most

instances by appropriate endorsement on the

notes. (R. 85-86, 101.)

In 1941 taxpayers decided to create trusts for

the children, the corpora to consist of the various

notes which had been executed and were still in

the company safe. They caused a trust agree-

ment to be prepared, naming their brother-in-law

as trustee, and instructed Christiansen to destroy

7

the old notes and substitute new ones payable

_ to the trustee. The new notes were prepared,

but the old ones werp never destroyed. The trust

agreement was executed January 2, 1942, but

when the trustee later inquired about payment

of interest on the pew notes he was informed

that the trust agreement was void and would

be cancelled op the advice of taxpayers’ attor-

ney. - The trust agreement was marked ‘*void”’

and returned to taxpayers with the new notes.

(R. 87.)

The dividends on the transferred shares were

reported as the income of the wives and children.

The taxes were paid on their behalf by taxpayers.

(R. 84, 89.) The Commissioner determined that

the transfers were without federal income tax

effect and included in taxpayers’ gross incomes

for 1939 the dividends paid in that year on the

transferred shares, resulting in the 1939 defi-

ciencies in controversy. (R. 15, 28.) The Com-

missioner likewise disregarded the transfers in

determining the capital gain realized by tax-

payers upon the 1940 liquidation distribution, and

included in their gross incomes for that year the

gain attributable to the number of shares orgi-

nally held by them, resulting in the 1940 defi-

cencies in controversy. (R. 16, 29.) The Tax

Court concluded that the alleged gifts were not

bona fide (R. 87), that taxpayers did not intend

to relinquish dominion and control over the trans-

8

ferred shares (R. 88, 89), and sustained the Com-

missioner’s deficiency determinations (R. 90).

After the Tax Court’s opinion was promul-

gated, and on August 17, 1945, taxpayers filed a

“Motion for Rehearing and Reconsideration.”

(R. 91-100.) This motion was granted insofar

as it requested modifications in certain particu-

lars of the Tax Court’s findings of fact and in

all other respects was denied. (R. 100-102.)

Thereafter, on November 19, 1945, taxpayers filed

a “Motion for Special Leave To File Motion for

Further Hearing and Reconsideration’ (R. 102-

117), which was denied (R. 118).

The Cireuit Court of Appeals affirmed (R.

139-145), and taxpayers’ petition for rehearing

was denied (R. 147).

ARGUMENT

1. The decision below is in accord with the

established principle that a donor who retains

command or other economic benefits of ownership

of the donated property remains its real owner

for purposes of Section 22 (a) of the Internal

Revenue Code, supra. Commissioner v. Sunnen,

No. 227, decided by this Court April 5, 1948,

not yet reported; Commissioner v. Tower, 327 U.

S. 280; Helvering v. Clifford, 309 U. S. 331;

Corliss v. Bowers, 281 U. 8S. 376. It is immate-

rial whether the gift is made in trust (Helvering

v. Clifford, supra; Corliss v. Bowers, supra) or,

as in this case, directly to the donee (Commis-

9

stoner v. Sunnen, supra; Commissioner v. Tower,

supra; Gouldman v. Commissioner, 165 F. 2d

686 (C. C. A. 4th) ; Overton v. Commissioner, 162

F. 2d 155 (C. ©. A. 2d); Coffey v. Commissioner,

141 F. 2d 204 (C. C. A. 5th)). Nothing in the

controlling decisions warrants the view, upon

which the petition for certiorari is founded, that

the broad definition of gross income contained in

Section 22 (a) is to be circumscribed by refine-

ments of legal title or by local law concepts of

ownership; in that section Congress exercised to

the full measure its constitutional power to tax

income. Helvering v. Clifford, supra, p. 334;

Helvering v. Stuart, 317 U. 8. 154, 169; Douglas

v. Willcuts, 296 U. S. 1, 9; Irwin v. Gavit, 268

U. S. 161, 166. Indeed where, as here, we are

dealing with intra-family transfers, ‘‘special

scrutiny of the arrangement is necessary lest

what is in reality but one economic unit be multi-

plied into two or more by devices which, though

valid under state law, are not conclusive so far

as § 22 (a) is concerned.’’ Helvering v. Clifford,

supra, p. 335. See also Commissioner v. Tower,

supra, pp. 287-288.

The record unquestionably justifies the Tax

Court’s conclusion (R. 87, 88-89), sustaining the

Commissioner’s determination, that taxpayers re-

mained the substantial owners during the taxable

years of the portions of the stock holdings which

they purported, by a series of simultaneous criss-

cross transfers, to give to their respective wives

10

and children. The stock certificates were never

delivered to the donees; although taxpayers pur-

ported to transfer most of their stock interest

they continued, as before, to exercise all the righty

of controjling stockholders; shortly after each

transfer they caused the corporation to declare

substantial dividends which they immediately

their own use ; demand notes executed by them for

the borrowed dividends were never delivered to

the donees, and neither interest nor principal on

these notes was ever paid; the shares placed in

the children’s names were later reacquired for

the purpose of liquidating the corporation and

enabling taxpayers to form a partnership with

their wives; demand notes executed for the re-

_ acquired shares, like those executed for the div-

idends, were not delivered and remained unpaid;

taxpayers later ordered destruction of all the

notes and substitution of others payable to a

trustee, and then countermanded this order on

advice of their attorney. (R. 80-87.) Any one of

the foregoing features—which are uncontro-

verted—furnishes solid evidentiary support for

the Tax Court’s inference that the gifts were not

“bona fide’? (R. 87) and that taxpayers did not

intend to “‘relinquish dominion and control’’ over

the donated shares (R. 88). When they are

viewed in combination the evidentiary basis for

the Tax Court’ s conclusion is unassailable. Un-

der familiar rules governing the scope of judicial

i

review of Tax Couirt decisions, affirmarice of the

Tax Court’s décision by the cbtitt below was

cleutly cérrett. To permit the tax consequences

here to tiith upoh the paper rianeuvers employed

by taxpayers would sanction a type of forimalisin

Which the courts have repeatedly refused to

teedpriize as effectual to alter tax liability.’

2. The dévisidu below is not ih conflict with ap-

plicable decisions of this Court or of any of the

Cireuit Courts of Appeals. Taxpayers’ reliatice

(Pet. 11-12) tipon Blair v. Commissioner, 300

U. S. 5: Freuler v. Helvering, 291 U. 8. 35; atid

Sharp v. Commissioner, 303 U. S. 624, is tis-

placed: These cases furnish tio authority what-

ever for their asstimption that the validity of a

gift under state law precludes taxability of the

donor under Section 22 (a).‘ They presented

’ This case is a much stronger one than the Clifford case for

treating the donor as substantial owner for purposes of Sec-

tion 22 (a). In that case it was stipulated (p. 333) that the

income from the donated stock was used by the donee-wife

for the benefit of herself and the children; taxpayers here

continued to enjoy use of the income (as well as control over

the income-producing stock) by “borrowing” the dividends

(R. 81-84) and applying them to their own use (R. 84, 89).

What is more, taxpayers did not even purport to act in a

fiduciary capacity in exercising control over the donated

stock, as did the donor in the Clifford case.

*The “state law” upon which taxpayers rely (Pet. 2-3,

8, 9) consists of a declaratory judgment by the Superior

Court of Cook County, Illinois, obtained in proceedings com-

menced after the Tax Court’s opinion was promulgated (R.

102, 113). Four months after the filing of the opinion tax-

payers filed a “Motion for Special Leave” (R. 102-117) to

reopen the proceedings on the basis of the state court decree.

12

situations in which a settlor had parted with sub-

stantial (as well as titular) ownership of a trust

fund, and arose under the statutory provisions

dealing with the taxability of trust income to the

trustee vis-a-vis the beneficiaries.” They turned

upon local law merely for purposes of construc-

tion of the trust instrument. Thus in the Blair

case local law was held (pp. 10-11) determinative

of the power of the beneficiary to assign his in-

terest; in the Freuler case it was held (pp. 43-45)

determinative of the distributive rights of the

beneficiaries; and the Sharp case, involving the

question whether certain property belonged to a

decedent’s estate or a trust created by him, was

decided per curiam on the basis of the Blair and

No reason appears why the proceedings could not have been

instituted and the decree obtained “in ample time to present

it before the Board [now the Tax Court] had made and filed

its findings of fact and opinion.” -Bankers Coal Co. v. Burnet,

287 U. S. 308, 313. At any rate, even if the state court decree

had antedated the Tax Court’s opinion, it would not have

been controlling for federal income tax purposes. Doll v.

Commissioner, 149 F. 2d 239 (C. C. A. 8th), certiorari de-

nied, 326 U. S. 725; Sewell v. Commissioner, 151 F. 2d 765

(C. C. A. 5th), certiorari denied, 327 U. S. 783) ; Loggie v.

Thomas, 152 F. 2d 636 (C. C. A. 5th) ; Fisenderg v. Commis-

sioner, 161 F. 2d 506 (C. C. A. 3d), certiorari denied, 332

U.S. 767.

5 Sections 161 and 162 of the Internal Revenue Code (26

U. S. C. 161, 162), and corresponding sections of the prior

Revenue Acts. “These provisions have appropriate refer-

ence to cases where the income of the trust is no longer to be

regarded as that of the settlor.” Douglas v. Willcuts, supra,

p. 10. See also Harrison v. Schaffner, 312 U. S. 579.

13

Freuler decisions... The Circuit Courts of Ap-

peals cases upon which taxpayers chiefly rely for

conflict (Pet. 9-10) are of the same nature and

involved issues equally far removed from that

here presented.

As for,the cases relied upon by taxpayers (Pet.

12-13) which do deal with the question here pre-

sented, they turn as they must on their own facts

and present no conflict. Marshall v. Commis-

stoner, 57 F. 2d 633, certiorari denied, 287 U. S.

621, and Bardach v. Commissioner, 90 F. 2d 323,

decided by the Circuit Court of Appeals for the

Sixth Circuit, antedated the Clifford and related

cases, and are to be contrasted with later decisions

of the same court in cases bearing a closer factual

resemblance to the one at hand.’ Lawton v. Com-

®*In Helvering v. Stuart, supra, pp. 161-162, this Court

cited the Blair and Freuler cases for the proposition that

“The power to transfer or distribute assets of a trust is essen-

tially a matter of local law,” and proceeded to observe (p.

162) that “Once rights are obtained by local law, whatever

they may be called, these rights are subject to the federal

definition of taxability.” Far from departing from the

familiar doctrine that command over property or its income

marks the owner for purposes of Section 22 (a), this Court

(p. 169) remanded the John Stuart case to the Tax Court for

the purpose of determining whether the taxpayer-grantor

remained the substantial owner under the principles enunci-

ated in the Clifford case.

” See, e. g., Dawson v. Commissioner, 163 F. 2d 664 (C.C. A.

6th) ; Lowry v. Commissioner, 154 F. 2d 448 (C. C. A. 6th),

certiorari denied, 329 U. S. 725; Miller v. Commissioner, 147

F, 2d 189 (C. C. A. 6th). In Seifert v. Commissioner, 157

F. 2d 719 (C. C. A. 2d), the court expressly refused to con-

14

ihissioner, 164 F. 24 380, decided by the same

court, is patently distingtiishdble on its facts.

Plimpton v. Commissioner, 135 F. 24 482 (C. C.

A. ist); was distinguished by the véry court which

decided it in Emery v. Commissioner, 156 F. 24

728, 731-792, certiorari deiiied, 329 U. S. 772, on

grounds which also distinguish it from this case.

And Richardson v. Smith, 102 F. 2d 697 (C. C. A.

2d), confirms rather thari impugns thé correct-

ness of the decision below.

CONCLUSION

The decisibn below is correct. There is no con-

flict, and no occasion for further review. The pe-

tition should therefore be denied.

Respectfully submitted.

PuHItie PERLMAN, |

Solicitor General.

THERON LAMAR CAUDLE,

Assistant Attorney General.

Sewatt Key,

Rosert N. ANDERSON,

Harry Baum,

Special Assistants to the Attorney General.

Aprit, 1948.

sider the Marshall case as authority on the tax effect of intra-

family gifts.

U.S. GOVERNMENT PRINTING OFFICE: 1948

i SPREE LEAR PND :

CEP NE ARE SENN RGF :

Tie