Supplemental Brief — Blackhawk-Perry Corp. v. Commissioner

Office - Supreme Court, U.S:

FILED

OCT 24 1950

| CHARLES ELMORE CROPLEY

OLE <K

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1950

No. 270

BLACKHAWK-PERRY CORPORATION,

Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

SUPPLEMENTAL BRIEF FOR PETITIONER

Cart H. Lampacs,

W. A. SuTHERLAND,

Counsel for Petitioner.

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1950

No. 270

BLACKHAWK-PERRY CORPORATION,

Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

SUPPLEMENTAL BRIEF FOR PETITIONER

The petition and the brief in support thereof point out

the distinction between this case and the Virginian Hotel

case and advance that distinction as a reason why the Court

should not consider itself bound by the Virginian Hotel

rule. Even if the Court should conclude that no such dis-

tinction exists, however, it should assuredly take this oppor-

tunity to overrule Virginian Hotel, the unfairness and

unreasonableness of which are here highlighted as never

before in actual litigation by the simple facts of this case.

Reduced to its essence, the present case presents the fol-

lowing picture : The taxpayer in 1935, relying upon an invalid

Treasury Regulation, attributed to its property then

acquired an erroneously high basis. There is no question

but that this basis was wrong as a matter of law from the

2

very beginning, in the light of facts then known. There-

after the taxpayer applied the correct rate of depreciation

to its erroneously high basis and entered the resulting

figures on its tax returns. The error resulted in no tax

benefit during the years 1935 through 1941 since the tax-

payer would have had a net loss for each of those years

even if only the correct depreciation deduction had been

shown. The Commissioner accepted the taxpayer’s returns

without question during those years, but asserted deficiencies

against the taxpayer for the years 1942, 1943 and 1944—the

first profit years—basing his determination on the disallow-

ance of depreciation deductions for those years.

He first established the correct basis of the property at the

time of acquisition in 1935, thus correcting the taxpayer’s

original error, and then concluded that that correct basis

should be reduced by the erroneously high depreciation fig-

ures which the taxpayer had entered on its books and tax

returns in the intervening years, although the error in those

figures resulted solely from the use by the taxpayer of the

incorrect original basis. The result was that in the taxable

years in question the Commissioner concluded that the

taxpayer had no adjusted basis left against which he might

apply any depreciation deduction. Thus the Commissioner

corrected the taxpayer’s error (which in reality was as much

his as the taxpayer’s) to the extent that the correction

worked in favor of the Government, but refused to correct

the error to the extent that the correction would have worked

in favor of the taxpayer. The Commissioner contended, and

both Courts below held, that the Virginian Hotel case estab-

lished the inflexible rule that in every case where a deprecia-

tion deduction is entered on a tax return and not challenged

it is ‘‘allowed’’ within the meaning of Section 113(b) (1) (B)

of the Internal Revenue Code.

It seems patently absurd to say that in any substantial

sense an erroneous depreciation figure is ‘‘allowed’’ by the

3

Commissioner and that consequently the taxpayer cannot

restore to basis the erroneous deduction when, at the first

occasion when it becomes of any importance, the Commis-

sioner disallows the very basis upon which the depreciation

is computed and when no benefit to the taxpayer or harm

to the Government resulted from the prior error. Either

the Virginian Hotel decision does not require any such result

or if it does, this Court would clearly wish to re-examine

the decision and lay down a rule which is not altogether out

of keeping with reason and common sense.

Petitioner frankly concedes that this Court has denied

certiorari in four cases which have raised the question of

the correctness of the Virginian Hotel rule. Commerce Co.

v. United States, 171 F. 2d 189, cert. denied 336 U. 8S. 972;

Bank of America v. United States, 168 F. 2d 399, cert denied,

335 U. S. 827; Repplier Coal Co. v. Commissioner, 140 F.

2d 554, cert. denied, 323 U. S. 736; and Piedmont Cotton

Mills v. Commissioner, 177 F. 2d 148, cert. denied, 339 U. 8S.

919. In all of those cases, however, the Government has

merely contended that, having once been decided, the Vir-

ginian Hotel issue should not be reexamined. It has never

met frankly the compelling arguments advanced by tax-

payers in support of their contention that the Virginian

Hetel decision should be overruled or limited. See for

example the petition and response in Piedmont Cotton Mills

v. Commissioner, supra. We submit that if the Government

addressed itself to the merits of this controversy, it would be

clearly apparent to the Court that it had promulgated an

erroneous rule which should be corrected.

In those instances in which it has sought to justify or mini-

mize the significance of the Virginian Hotel rule, the Govern-

ment has addressed itself almost exclusively to cases where

the depreciation figures entered on taxpayer’s returns

resulted from a determination of useful life of property

which was correct in the light of the facts reasonably

4

known to exist at the time the determination was made

and which turned out to be erroneous only in the light of

later facts. Such depreciation figures are ‘‘allowable’’? ©

and the question whether they have been ‘‘allowed’’ is

immaterial. The Government has thus evaded the issue

presented in a cuse such as the present where depreciation

is erroneous in the light of facts existing at the time the de-

preciation deduction is entered on the return.

In the present case the taxpayer has been denied the

right to correct an error, although, as the facts incontro-

vertibly reveal, it was a genuine error at the time it was

made, and although it resulted in no damage to the Gov-

ernment or gain to the taxpayer. And this although the

Government:is actually profiting from the mistake, since

it collected taxes for the years 1942-1944 to which it would

not have been entitled if the error had not occurred, not-

withstanding that the error caused no loss of taxes in the

earlier years. Such a harsh rule has never been applied

in any other instance in the field of income taxation from

1913 to date, and no reason has ever been suggested why

Congress would have intended to apply such a rule here,

The rule is attributable, we submit, to a misunderstanding

on the part of this Court and on the part of counsel for

the Government in the Virginian Hotel case, of the basic

principles of tax administration, which have universally dis-

regarded all errors in returns for prior years where there is

no basis for estoppel and have not permitted harmless errors

in prior years returns to distort income in a later year.

The rationale of the Virginian Hotel decision is that

if deductions are not ‘‘challenged’’ by the Commissioner

they are ‘‘allowed’’. The Court below squarely bases its

1See e.g., Brief for Commissioner, Virginian Hotel Corporation v.

Helvering, pp. 9, 21-22.

2 Commissioner v. Mutual Fertilizer Co., 159 F. 2d 470 (C.A. 5th, 1947)

(Citing relevant Treasury Regulations).

-—

decision upon that sole premise.* That premise overlooks

the fact that where the correction of an excessively high

depreciation deduction would result in no increase in tax

liability there is no procedure whereby the Commissioner

can challenge the deduction. His only authority is to make

corrections which are required for a correct determination

of tax liability. Where a correction would not affect tax

liability—and it is stipulated in this case that the use of

correct depreciation figures would not have resulted in

any taxable income for any of the years 1935-1941—the

Commissioner has no reason or authority to make any

correction. This the Government will freely admit. And

it is clear, therefore, that since the Commissioner has no rea-

son or authority to act, his failure to act can have no sig-

nificance. This Court, however has attributed great sig-

nificance to the Commissioner’s failure to exercise an

authority which he obviously does not have. A decision

based upon a premise so obviously false could not fail to

produce absurd results. Where, as in the case at bar, it

leads to a holding that the correction of a harmless error in

prior years’ returns is permitted for one purpose and

denied for another the result verges on the ridiculous.

In these times when taxes have recently been substan-

tially increased and will certainly be raised to extremely

high levels, it is of the utmost importance that their ad-

ministration be rational and just. With a view toward

the accomplishment of this significant end, we submit

that the Court should grant this petition and overrule its

decision in the Virginian Hotel case or explain the decision

as having a much narrower application than is attributed to

it by the Commissioner and by the Court below. By so

doing it will violate no principle of stare decisis; it will

5

“Tf deductions are not challenged (by the Commissioner) they cer-

tainly are ‘allowed’ ”, R. 43.

disturb no rights which have arisen in reliance on the

Virginian Hotel rule; it will simply eliminate an erroneous

and unfair rule of tax law for which no one has eve

offered a single valid justification. The importance to the

Government of the good will and respect of taxpayers is

difficult to exaggerate. Nothing tends more to destroy tax

payer morale than to make taxes depend upon rules which

are arbitrary and capricious.

Respectfully submitted,

Cart H. Lamsacnu,

W. A. SuTHERLAND, 4

Counsel for Petitioner. ~

(652)