# Appendix — White v. Commissioner > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386418_0542%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1956 - **Citation:** 351 U.S. 939 ## Text Docket Entries la APPENDIX A. Relevant Portions of Record on Appeal. Docket No. 44257. THE TAX COURT OF THE UNITED STATES HENRY P. WHITE and NANCY A. WHITE, AMENDED CAPTION: “HENRY P. WHITE, and ESTATE OF NANCY A. WHITE, DECEASED, T. LEO SULLIVAN, ADMINISTRATOR, C. T. A.,” Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. See order of February 3, 1955. DOCKET ENTRIES. 1952 Sept. 18—Petition received and filed. Taxpayers notified. Fee paid. Sept. 19—Copy of petition served on General Counsel. Sept. 18—Request for Circuit hearing in Cleveland, Ohio, filed by taxpayers. 10/2/52 Granted. Nov. 12—Answer filed by General Counsel. Nov. 18—Copy of answer served on taxpayers, Cleveland, Ohio. 1953 Sept. 17—Hearing set November 9, 1953, Cleveland, Onio. Nov. 11—Hearing had before Judge Opper, on merits. Briefs due January 11, 1954. Replies due Feb- ruary 10, 1954. Nov. 23—Transcript of hearing 11/11/53 filed. 1954 Jan. 11—Brief filed by taxpayers. 1/12/54 Copy served. Jan. 11—Brief filed by General Counsel. 1/12/54 Copy served. 2a Petition Feb. 11—Reply brief filed by taxpayers. Copy served. Oct. 19—Findings of fact and opinion filed, Judge, Opper. Decision will be entered for the respondent. Copy served. Oct. 19—Decision entered, Opper, Judge, Div. 14. Dec. 1—Entry of appearance of Edgar S. Byers as coun- sel filed. Dec. 16—Motion to withdraw as counsel William Patrick Clyne filed. 12/17/54 Granted. 1955 Jan. 18—Petition for review by U. S. Court of Appeals, Sixth Circuit, filed by taxpayers. Jan. 19—Proof of service filed. Jan. 21—Designation of contents of record with acknowl- edgment of service thereon filed by petitioners. Feb. 2—Motion to substitute personal representative for petitioner Nancy A. White, deceased, filed by taxpayers. Feb. 3—Order, amending caption to read, Henry P. White, and Estate of Nancy A. White, Deceased, T. Leo Sullivan, Administrator, C. T. A., en- tered. PETITION. (Filed September 18, 1952.) The above-named petitioners hereby petition for a redetermination of the deficiency set forth by the Com- missioner of Internal Revenue in his notice of deficiency (CLEVELAND IRA:90D) dated June 24, 1952, and as a basis of their proceeding allege as follows: 1. The petitioners are individuals, husband and wife, with residence at 2688 Landon Road, Shaker Heights, Ohio. The returns for the period involved were filed with the Collector of Internal Revenue for the 18th District of Ohio. MILI LITE LA ETI ILE IS GOOLE OLLIE SIE I ieee Petition 3a 2. The notice of the deficiencies (a copy of which is attached hereto and marked “Exhibit A”) was mailed to the petitioners on June 24th, 1952. 3. The deficiencies as determined by the Commis- sioner are in income taxes for the calendar years 1948 and 1949 in the following amounts: Year Deficiency 1948 $ 1,088.51 1949 10,014.28 making a total of $11,102.79, all of which is in controversy, and in addition thereto, the amount of $7,671.05 for the taxable year of 1948, previously overpaid by the petition- ers is also in controversy. 4. The determination of tax set forth in said notice of deficiency is based upon the following errors: (a) The Commissioner erred in the disallowance of losses sustained and deducted by the petitioners in the amount of $18,624.82 in their income tax return for the calendar year 1948. (b) The Commissioner erred in failing to order a refund of income taxes paid by the petitioners as a result of the overstatement of taxable income in the amount of $14,414.40 in their 1948 income tax return. (c) The Commissioner erred in failing to order a re- fund of taxes paid by the petitioners as a result of the understatement by the petitioners on their 1948 Declara- tion of Estimated Tax on their 1948 income tax return in the amount of $1,092.07. (d) The Commissioner erred in the disallowance of losses sustained and deducted by the petitioners in the amount of $18,521.02 in their income tax return for the calendar year 1949. 5. The facts upon which the petitioners rely as a basis of this proceeding are as follows: (a) That the petitioners’ business is engineering and as such employ subordinates, and purchase materials and supplies necessary and essential to its conduct. a SOM ALLE RGR SDL LRTI OSORNO da Petition (b) That all of the deductions claimed and disallowed for the years 1948 and 1949, were in connection with the operation of their engineering business. (c) That the petitioners understated their estimated tax paid in their 1948 income tax return in the amount of $1,092.07. (d) That the losses sustained and deducted in their income tax return for the year of 1948 in the amount of $18,624.82, and for the year 1949 in the amount of $18,- 521.02, were ordinary and necessary business losses in- curred in the operation of their business. (e) That the petitioners in filing their income tax return for the year of 1948, overstated their taxable in- come in the sum of $14,414.40 and paid the tax thereon as a result of an arithmetical error in the preparation and filing of the return. Wuenreror:g, the petitioners pray that this Court may hear the proceeding and determine that there is no de- ficiency in income tax due for the years 1948 and 1949; and that the petitioners are entitled to a refund for the calendar year 1948 in the amount of $7,671.05; and that the Court may grant such other and further relief as the nature of this case warrants. Wruu1aM Patrick CLyve, Counsel for the Petitioners. Henry W. Rosewater, Certified Public Accountant. (Verification omitted.) _ a -_ Exhibit A to Petition Sa EXHIBIT “A.” U. S. TREASURY DEPARTMENT Office of Internal Revenue Agent in Charge 404 Hanna Building Cleveland 15, Ohio Internal Revenue Service CLEVELAND IRA: 90D Jun 24 1952 REGISTERED Mr. Henry P. White and Mrs. Nancy A. White, Husband and Wife 2688 Landon Road Shaker Heights Cleveland, Ohio Dear Mr. and Mrs. White: You are advised that the determination of your in- come tax liability for the taxable year(s) ended December 31, 1948 and 1949, discloses a deficiency of $11,102.79, as shown in the statement attached. In accordance with the provisions of existing internal revenue laws, notice is hereby given of the deficiency or deficiencies mentioned. Within 90 days from the date of the mailing of this letter you may file a petition with The Tax Court of the United States, at its principal address, WasHINcToN 4, D. C., for a redetermination of the deficiency. In counting the 90 days you may not exclude any day unless the 90th day is a Saturday, Sunday, or legal holiday in the District of Columbia, in which event that day is not counted as the 90th day. Otherwise Saturdays, Sundays, and legal holidays are to be counted in computing the 90-day period. Should you not desire to file a petition, you are re- quested to execute the enclosed form and forward it to this office for the attention of IRA: 90D. The signing and filing of this form will expedite the closing of your re- turn(s) by permitting an early assessment of the de- ~~ Exhibit A to Petition ficiency or deficiencies, and will prevent the accumulation of interest, since the interest period terminates 30 days after receipt of the form, or on the date of assessment, or on the date of payment, whichever is earlier. Very truly yours, Joun B. Dunuap, Commissioner, By (Signed) R. C. Cake Internal Revenue Agent in Charge Enclosures: Statement Form 1276 Agreement Form MEC: nmh STATEMENT CLEVELAND IRA: 90D In re: Mr. Henry P. White and Mrs. Nancy A. White, Husband and Wife 2688 Landon Road Shaker Heights Cleveland, Ohio Tax Liability for the Taxable Year Ended December 31, 1948 and the Taxable Year Ended December 31, 1949 Income Tax Year Deficiency 1948 $ 1,088.51 1949 10,014.28 Total $11,102.79 In making this determination of your income tax liability, careful consideration has been given to the re- port of examination dated May 10, 1951, to your protest dated September 20, 1951, and to the statements made at the conference held on October 18, 1951. a Exhibit A to Petition Ja On March 19, 1951 you filed a claim for refund on Form 843 for the taxable year ended December 31, 1948 in the amount of $7,671.05 based on the contention that you made an “arithmetical error on page 2 of return” in the amount of $14,414.40 and you further contend that the amount of estimated tax as having been paid and shown on page 1 of the return was understated in the amount of $1,092.07. Investigation discloses that both contentions are cor- rect. However, another adjustment has been made result- ing in a deficiency of income tax; therefore, your claim for refund of income tax will be disallowed. If a petition to The Tax Court of the United States is filed against the deficiency proposed herein, the issues set forth in your claim for refund for the taxable year ended December 31, 1948 should be made a part of the petition to be considered by The Tax Court in any re- determination of your tax liability. If a petition is not filed, the claim for refund will be disallowed and official notice will be issued by registered mail in accordance with section 3772 of the Internal Revenue Code. A copy of the statutory notice of deficiency, together with a copy of this statement, has been mailed to your representative, Mr. David H. Shook, Terminal Tower Building, Cleveland 13, Ohio, in accordance with the au- thority contained in the power of attorney executed by you and on file with this office. ADJUSTMENTS TO NET INCOME Taxable Year Ended December 31, 1948 Net income as disclosed by return $46,192.72 Unallowable deductions and additional income: (a) Business loss ; 18,624.82 Total $64,817.54 Nontaxable income and additional deductions: (b) Arithmetical error 14,414.40 Net income adjusted $50,403.14 me ba Exhibit A to Petition EXPLANATION OF ADJUSTMENTS (a) Under Schedule C of your return for 1948 you claimed a deduction for expenses of $18,624.82 incurred in the operation of an alleged business of “Ordnance En- gineer.” It is held that such expenses were not ordinary and necessary expenses of carrying on a trade or business deductible under section 23(a)(1)(A) of the Internal Revenue Code, and furthermore, said amount is not de- ductible in accordance with section 24 of the Internal Revenue Code. (b) On page 2 of your 1948 income tax return, you made an arithmetical error of $14,414.40 in reportable income. Net income is reduced $14,414.40 to correct the error made. COMPUTATION OF TAX Taxable Year Ended December 31, 1948 Alternative tax: Net income adjusted $50,403.14 Less: Exemption 2,400.00 Net income subject to tentative tax $48,003.14 One-half of net income $24,001.57 Tentative tax on $24,001.57 $ 9,560.93 Less: Partially tax exempt interest 11.25 Balance of tentative tax $ 9,549.68 Tax reduction: $68.00 plus 12% of $9,149.68 1,165.96 Partial tax on one-half of net income $ 8,383.72 Total normal tax and surtax (2 x $8,383.72) $16,767.44 — Exhibit A to Petition 9a Less: Income tax payments to a foreign country $ 119.40 Income tax paid at source on tax free covenant bond interest 39.62 159.02 Income tax liability $16,608.42 Less: Tax paid on account of dec- laration of estimated tax $11,092.07 Tax assess on return 4,427.84 $15,519.91 Deficiency of income tax $ 1,088.51 ADJUSTMENT TO NET INCOME Taxable Year Ended December 31, 1949 Net income as disclosed by return $60,675.33 Unallowable deductions and addi- tional income: (b) Business loss 18,521.02 Net income adjusted $79,196.35 EXPLANATION OF ADJUSTMENTS (a) Under Schedule C of your return for 1949 you claimed a deduction for expenses of $18,521.02 incurred in the operation of an alleged business of “Ordnance En- gineer.” It is held that such expenses were not ordinary and necessary expenses of carrying on a trade or business deductible under section 23(a)(1)(A) of the Internal Revenue Code, and, furthermore, said amount is not deductible in accordance with section 24 of the Internal Revenue Code. 10a Exhibit A to Petition COMPUTATION OF TAX Taxable Year Ended December 31, 1949 Alternative tax: Net income adjusted Minus: Net capital gain Ordinary net income Less: Exemption Net income subject to tentative tax One-half of net income Tentative tax on $32,773.77 Tax reduction: $68.00 plus 12% of $14,562.96 Partial tax on one-half of net income Partial tax on total income (2 x $13,147.40) Plus 50% of net capital gain ($11,248.81) Alternative tax Total normal tax and surtax Less: Income tax payments to a foreign country Income tax paid at source on tax free covenant bond interest $122.13 175.03 Income tax liability Income tax liability disclosed by return Deficiency of income tax $79,196.35 11,248.81 $67,947.54 2,400.00 $65,547.54 32,773.77 $14,962.96 1,815.56 $13,147.40 $26,294.80 5,624.40 $31,919.20 $31,919.20 297.16 $31,622.04 21,607.76 $10,014.28 ANSWER. (Filed November 12, 1952.) Comes Now the Commissioner of Internal Revenue, by his attorney, Cuartes W. Davis, Chief Counsel, Bureau of Internal Revenue, and for answer to the petition filed herein, admits and denies, as follows: 1 and 2. Admits the allegations contained in para- graphs 1 and 2 of the petition. 3. Admits that the deficiencies as determined by the Commissioner are in income taxes for the calendar years 1948 and 1949 in the following amounts: Year Deficiency 1948 $ 1,088.51 1949 10,014.28 making a total of $11,102.79, all of which is in controversy; denies the remaining allegations contained in paragraph 3 of the petition. 4. (a) to (d), inclusive. Denies that, in the deter- mination of the deficiency herein, the respondent erred in the manner and form as alleged in subparagraphs (a) to (d), inclusive, of paragraph 4 of the petition. 5. (a) and (b). Denies the allegations of fact con- tained in subparagraphs (a) and (b) of paragraph 5 of the petition. 5. (c). Admits the allegations of fact contained in subparagraph (c) of paragraph 5 of the petition. 5. (d) and (e). Denies the allegations of fact con- tained in subparagraphs (d) and (e) of paragraph 5 of the petition. Denies generally each and every allegation contained in the petition not hereinbefore specifically admitted, qualified, or denied. 12a Appearances WHEREFORE, it is prayed that petitioners’ appeal be denied and that the respondent’s determination be in all respects approved. Cuartes W. Davis, Chief Counsel, Bureau of Internal Revenue, Counsel for Respondent. Of Counsel: Tuos. F. CALLAHAN, District Counsel, | James F. Kennepy, Jr., ) Special Attorney, Bureau of Internal Revenue. PROCEEDINGS BEFORE THE TAX COURT OF THE UNITED STATES. November 11, 1953—10: 30 a.m. (Met pursuant to notice.) BErore: | HonoraB_Le CLARENCE V. Oppsr, Judge. APPEARANCES: Wri1aM Patrick Criyne, Ese., NBC Building, Cleveland, Ohio, appearing for the Petitioners. James F. Kennepy, Jr., Ese., 1017 Euclid Building, Cleveland, Ohio, (Honorasce Eart HEmMAN, Chief Counsel, Bureau of Internal Revenue) , ap- pearing for the Respondent. Petitioners’ Opening Statement 13a (3) The Court: Docket No. 44257, Henry P. and Nancy A. White. State your appearances for the record, please. Mr. Clyne: William Patrick Clyne for the Petitioners. Mr. Kennedy: James F. Kennedy, Jr., for the Re- spondent. The Court: Before we go any further, I didn’t ask you a few minutes ago, what is your estimate of the time in this case? Mr. Clyne: Two and a half to three hours. The Court: Does that include cross examination? Mr. Kennedy: Yes, your Honor. The Court: You say you have no witnesses? Mr. Kennedy: I have no witnesses. The Court: Proceed, please. Openinc STATEMENT ON BEHALF OF THE PETITIONERS. Mr. Clyne: If the Court please, Petitioner in this case, particularly Henry P. White, is a graduate engineer and licensed in Ohio and in Maryland and who since 1936 was operating a research laboratory in Cleveland in late years in Maryland. The principal part of the engineering field that Mr. White’s activities related to related to guns and ammuni- tion (4) and kindred or associated engineering products. Mr. White holds himself out for use and hire to both Governmental Agencies and private industry and has served them both. In addition to the personal service that he has ren- dered directly for hire to both industry and Government, he has published works that are the keystone of identifica- tion in ballistics. In the conduct of this business, he has a number of employees who aid and assist in the research and the performance of the services rendered to anyone who has a right to the information that his laboratory produces. The issues involved in the case are simple. The same issue presents itself in both years. We believe and will prove that all of the expenses that have been disallowed a i a a a nail OO ORG OF PLEO OT Re IF OTT a l4a Petitioners’ Opening Statement : by the Commissioner are ordinary and necessary expenses and should have been allowed under the Revenue Act. The disallowance and the contention of the Government was that these were not expenses such as were contemplated by the Statute. I believe that the Government as well will agree that the mathematical amounts involved in the dis- allowance in both years are accurate and that they repre- sent expenditures made by Petitioners in the conduct of their business during the years that are involved. This will simplify the proof, if the Court will permit us to treat the issue of usefulness and deductibility of these amounts both years as one issue. The Court: I’m not sure I understand your sugges- tion. (5) Do you want the witnesses to testify at the same time about both years? Mr. Clyne: Your Honor, the disallowance on the basis—the contention of the Government, turning it around in simple words, is that they have disallowed this on the basis that it was a hobby and not a useful business purpose, We contend that it is and has been and the reason for the disallowance that the Government dis- allowed these items as a deduction was the same reason in both years and we propose, if the court will permit us, to prove out our case as to the usefulness and business pur- pose of this laboratory on a broad basis, rather than par- ticularize it for each year, because the same work was conducted by the laboratory in broad general terms in both years that are involved in this case. The Court: Well, I’m afraid I still don’t follow what it is that you are asking about; but is it a fact that that is something that will arise as the proceeding goes along? Mr. Clyne: Yes, sir. The Court: Rather than something I have to rule on now? Mr. Clyne: Yes, your Honor. The Court: Now, coming to your Assignments of Error, your Assignment of Error “c’”—well, first of all, (6) Assignment of Error “b” determined the failing to PO LEG CE CLT LI ION IEG FEF ICU LE DIOL DELS 6 PE PFS ——————— _— Petitioners’ Opening Statement 15a order a refund. Is that by way of stating the claim of overpayment? Mr. Clyne: Yes, your Honor. Mr. Kennedy: Your Honor, the Statutory Notice says that they are entitled to that over statement, because the deficiency was not refunded. The usual instructions in the Statutory Notice make it a part and include it, so I believe he was following the instructions. That has nothing to do with the issue of returns. It is just that the payment was held up because an ultimate deficiency was determined. The Court: These taxes are for other years? Mr. Clyne: It’s one year. Mr. Kennedy: It’s an arithmetical mistake, the re- fund is based on. The Court: What about the next one, the $1,092.07? Mr. Kennedy: That again is the $1,092.07. The Statu- tory Notice indicates such: “You further contend that the amount of estimated tax having been paid as shown on Page 1 of th. return was under-stated in the amount of $1,092.07. Investigation discloses that both contentions are correct. However, another adjustment has been made resulting in a deficiency of income tax. Therefore, your claim for refund has been denied.” The Court: You say something was understated? (7) Mr. Kennedy: Apparently on Page 1 of his in- come tax return, he understated the payments he made on the estimated tax. He actually paid more than that. The Court: You mean the installments paid are greater than the income tax? Mr. Kennedy: That is correct, your Honor. The Court: I understand between you gentlemen there is no dispute as to Assignments of Error “b” and “c”, that being conceded by the Respondent, as I understand. Mr. Kennedy: That’s correct, your Honor. They will be conceded by the Respondent. Assignments 4-b and 4-c are factually correct. The Court: 4-b and 4-c, so that leaves only “a” and “d”, which relate to the deductions that Mr. Clyne has been referring to. —_— — — — a en one —— s 8 4 % # ¥ 4 4 ; Ae. Paw Samnisss Respondent’s Opening Statement; C. H. Goddard, Direct Mr, Kennedy: That’s correct, your Honor. Mr. Clyne: That’s right, your Honor. The Court: That concludes your statement? Mr. Clyne: Yes, your Honor, The Court: Do you have anything? OpeNING STATEMENT ON BEHALF OF THE RESPONDENT. Mr. Kennedy: I think, your Honor, Mr. Clyne has accurately stated what the issues are, except what the Government contends. We do not exactly contend that this man’s operations are a hobby, nor that it does not serve a useful (8) purpose. We think that the evidence the Petitioner will put on will show it did serve a useful purpose. We do say, however, that the business was not operated for a profit and therefore the losses cannot be allowed; and secondly, that notwithstanding the first con- tention, the expenses were not ordinary and necessary to produce an income, the gross income which was reported for these years for these activities under Section 24, under which this latter contention is being made. It is covered in the Statutory Notice. I think more argument would be better saved for the brief, however. The Court: Well, it’s a matter of getting the issues clarified, so both sides will know how to proceed with the case. Proceed. Mr. Clyne: Call Calvin Goddard. Whereupon, Catvin H. Gopparp called as a witness for and on behalf of the Petitioners, having been first duly sworn, was examined and testified as follows: The Clerk: Have a seat, please, and state your name and address, please. Drrect ExaMINATION by Mr. Clyne. (9) Q. Will you state your name, please? A. Calvin H. Goddard. _ Calvin H. Goddard, Direct Examination lia Q. And your address, please? A. 3533 Quebec Street, N. W., Washington, D. C. Q. What is your present connection with the Govern- ment, Colonel? A. I am a Colonel presently commissioned in the Medical Corps in charge of the preparation of the history of the U. S. Medical Department in World War II. Q. When was your association with the Army, when did it commence? A. I was commissioned a First Lieu- tenant in 1915, went on active duty in 1916. Q. You are a graduate medic, are you not? A. Yes. Q. When you went into the service in 1916, what service were you connected with? A. I was in the Medical Corps at that time. Q. How many years did you stay in the Medical Corps, Doctor? A. Until 1920. I resigned in June, 1920. Q. And immediately after that, what work did you do? A. I became a medical administrator. I was for some years assistant director of Johns Hopkins Hospital in Baltimore and of the Cornell Clinic in New York City. (10) Q. Following that, what service did you have? A Following that I resigned from Cornell and indulged a desire I had always had to go into experimental work in small arms. Q. And where did you engage in that? A. I joined with three others to form what we designated the Bureau of Forensic Ballistics in New York City. Q. What was the nature of the work you were at- tempting to do in that laboratory? A. We were attempt- ing to develop instruments and techniques whereby it would be possible to identify positively a given bullet or empty cartridge case to the weapon that had fired it. Q. How many years were you engaged in research with that? A. I did some research in it before I went to New York on my own about a year and while I was in Baltimore and then the three of us, the four of us worked together from 1924 to the end of 1926. Then I worked on alone after that. Q. Did you devise such a method? A. We did. ELLIO POLLE LLL OT IO LT ET 18a Calvin H. Goddard, Direct Examination Q. What was the method that you used that finally came into existence? A. Well, we applied an instrument which had long been known, called the comparison micro- scope. We applied this instrument (11) to the study of fired bullets and cartridge cases. That gave us immedi- ately the means of making these identifications. Q. And is that system used now in the world? A. Throughout the civilized world, yes. Q. And that ull came as a result of your research that you and your associates did in New York? A. Yes, sir. Q. When was it first used, was it in the Valentine murders in Chicago? A. No, we had been using it since the spring of 1925. The Valentine murders were in Febru- ary, 1929. Q. And is that, for instance, the same method that is used by, let’s say, the Federal Bureau of Investigation and all large and small police departments in the United States? A. It is. Q. Would you tell us, if you could, please, after you had devised this method by which shells and bullets were identified, what return, if any, did you get from trade or business or Government agencies for your method? A. What return? Q. Yes, in money. A. None. Q. Now, following your period of research and the development and spreading of the use of this method that you had devised, (12) where did you next work? A. Well, as I said, we started applying this instrument in the spring of 1925 and scientific advance travels relatively slowly, so it was probably some time in 1927, I think, before Prose- cutors began to become interested in employing me as a consultant on cases involving firearms and after a be- ginning had been made, the work increased very rapidly and this Valentine day affair in Chicago to which you have referred brought it so prominently in the public eye, that from that time on it was a complete success scientifically and police departments undertook to instruct specialists in using the comparison microscope and the other equipment DP POLINA SORES LE NOLIN RIE OI ELLE IL NO NL GG GEE ELE OBL N Ke dl Calvin H. Goddard, Direct Examination 19a that goes with it and all major police departments now have arms identification laboratories throughout the world, so as I say, the Valentine day affair was the one that really put it on the map. Q. Did you after that become associated with any school? A. Yes, a very wealthy man in Chicago who had been foreman of the Coroners Jury investigating the Valentine day massacre was so impressed by this new de- velopment in police procedure that he asked me if I would set up a laboratory in Chicago to render service without charge to all police agencies in the Chicago Area, service in any cases involving firearms, and that was to be his con- tribution to society, and I suggested that if he wanted to do that much, why not establish a complete (13) crime de- tection laboratory patterned on those which had been in existence overseas for generations. He had never heard of such a thing, but he thought the idea was good and he sent me to Europe and I spent sev- eral months visiting the outstanding police laboratories and medical legal institutes in 13 West European Countries, and when I returned, based on the information I had brought together, he put up the money to establish the scientific crime detection laboratory of Chicago, first in affiliation with and then absorbed by Northwestern Uni- versity of Chicago as a function of its Law Department. Q. And did you have an assignment on the teaching staff, and if so, what were you on the teaching staff? A. From 1930 until my resignation some years later, I was professor of police science of the law faculty of North- Western University. Q. Isn’t it a fact that during the time you were a professor at Northwestern in that Division, that the lie detector that is commonly used in the United States was developed and perfected? A. In a measure; yes, sir. I engaged Leonarde Keeler, the developer of the lie de- tector, for my staff in the crime laboratory in the summer of 1930, and he was with me as long as I was there. he. ety P et, pete > CODE A OER EE EO NPE LE DIOL AM AA MLE (ATCO ALENT Ee RR mt ty a 20a Calvin H. Goddard, Direct Examination (16) By Mr. Clyne: Q. Are you familiar with the nature of the work that is being done by the H. P. White Laboratory by Mr. White and his associates? A. I am familiar with the general nature of their operations, probably with not all of their activities. Q. From your experience as it is identified with arms and ammunition, what is your opinion as to the need and necessity for a privately-operated laboratory in America today? A. I think there is a need for such a laboratory. Q. Would you tell us why? A. Because most of the advance in small arms research over the years with which I have been familiar with it has resulted from the individ- ual efforts, of you might say, dedicated persons who became convinced that they had a new and good idea, and that it should be developed, ordinarily from a patriotic stand- point, for the benefit of the nation. But in periods be- tween wars nations are not especially interested in ord- nance development, at least they have not been in the past and these individuals receive very little encourage- ment. They are not offered the facilities of ordnance estab- lishments for testing and improving design. The commer- cial manufacturers are ordinarily not interested, unless the design involves something which can be made more cheap- ly than of current models, or something which they feel they might take (17) over and sell to a Government. So, the individual is left to his own resources to carry out all the engineering steps in connection with the de- velopment of his ideas and unless his resources are very, very great, he is not able to carry the idea forward. Given an organization, such as the White Laboratory, a man with modest resources aided by the engineering know-how of White and his associates could readily per- fect something that might be of extreme value nationally or, commercially. So, I feel that the laboratory does fill a spot which did not previously exist. Q. Do I understand you correctly that were I to man- ufacture a gun or a shell and wished to avail myself of the Pk Gets EE ALS BACILLI SLI ILE DEIIC NE EGIY SOILD LIDLEP AGEL LES IED = | Calvin H. Goddard, Direct Examination 21a services of the engineering departments of the recognized large or small manufacturer of arms or munitions, that they do not aid or assist private individuals, unless it had some gain to themselves beyond just being compensated for their time? A. That’s my general reaction to the ex- periences I have had or experiences others have had who have been interested in ordnance development. Q. Isn’t it a fact that most of the inventive genius of Americans who have invented arms and munitions who were not part of the big group, that they have been almost compelled to sell their inventions to foreign nations be- cause of the (18) unwillingness of Americans to absorb them? A. Many such instances exist, yes. Q. Now, in the current market, I am talking about as of now, in the development in the last five or six years, has there been any activity from a group known as Self- Loaders? A. Well, you mean by that people who already load their own ammunition? Q. That is correct. A. Those people have been active for three-quarters of a century, but they have been un- usually active in the past few years by reason of the pro- hibitive, almost prohibitive cost of ammunition, the small arms ammunition if you buy it over the counter these days. A man that is not wealthy can’t afford to keep in practice. Q. Coming back to the time you were professor at Northwestern University in charge of that division that related to crime detection, did you have a library of guns? A. We had about 2,000, as I recall. Q. Did that represent one of each type of gun, or more than one in each classification? A. We tried to get one of _ every make and model and calibre in every length of barrel in which it was made. Q. Did you also have shells? A. We had thousands of loaded cartridges, empty primed cartridge cases and the separate bullets as a reference library. (19) Q. Is that a necessary adjunct to rendering a service such as you were doing at Northwestern or White does? A. It’s very definitely necessary for crime detection as ONLI RT ITN ee SI Wi, cet ate Ba) te pid ees oaks Mi ed 7 ai erin 2b Testimony of Henry P. White..................20.- 3b CITATIONS Cases: Cheney v. Commissioner, 22 B.T.A. 672...........+.. 5 Coffey v. Commissioner, 141 F. 2d 204................ 5 Ewing v. Commissioner, 213 F. 2d 438.............. 5 Helvering v. Nat. Grocery Co., 304 US. 282........ 5 Morton v. Commissioner, 174 F. 2d 302.............. 5 Thacher v. Lowe, 288 Fed. 994..........++0seeeeeee. 5 United States v. Gypsum Co., 333 US. 364, rehearing PN Ee. ae GE ci ehasdadsdcvdenricphcenserver 5 Wright-Bernet v. Commissioner, 172 F. 2d 343........ 5 Statute: Internal Revenue Code of 1939, Sec. 23 (26 USC. SE OR TO, BP veh cd news chisecstodcecosecosiios 11 (ut) In the United States Court of Appeals for the Sixth Circuit No. 12, 445 Henry P. Wuire, anp Estate or Nancy A. Wuite, DECEASED, T. Leo SULLIVAN, ADMINISTRATOR, C. T. A., PETITIONERS “a COMMISSIONER OF INTERNAL REVENUE, RESPONDENT ON PETITION FOR REVIEW OF THE DECISION OF THE TAX COURT OF THE UNITED STATES BRIEF FOR THE RESPONDENT AND APPENDICES COUNTER STATEMENT OF FACTS The taxpayers in their statement of facts (Br. 1-9) have ignored the findings of fact made by the Tax Court and have instead attempted to summarize the testimony presented to the Tax Court. For this reason, the Com- missioner deems it necessary to submit a counterstate- ment of the facts. The Tax Court made findings of fact (R. 65a-69a) ' which may be summarized as follows: In 1934, Henry P. White was graduated from Cornell University with a degree in engineering and was li- Record references are to the Appendix of taxpayers’ brief. (1) 2 censed as a mechanical engineer by the States of Ohio and Maryland. He sold automobiles for the remainder of 1934 and was employed by a bank in Cleveland in 1935. In 1935 he became the beneficiary under a trust of approximately two million dollars. (R. 65a-66a.) In 1936, he opened a ballistics laboratory in Cleve- land, Ohio, specializing in guns and ammunition re- search. He employed others to assist him in such work. The laboratory was operated under White’s direct supervision until he went into the armed forces; while he was absent from the laboratory and in the armed forces, the laboratory was operated under the supervi- sion of his first assistant. On his return from the serv- ice, White again assumed the direction and management of the laboratory and it has continued under his super- vision through the years in question. The laboratory is now located at Bel Air, Maryland, in proximity to Army and Navy Proving Grounds. (R. 66a.) Operation of the laboratory included research and preparation for the publication of two books concerning pistol and revolver cartridges. One of these books was published in 1948 and the other in 1950; income from the sales of the first book did not exceed $500 during the taxable years. No attempt was made during the taxa- ble years, to segregate expenditure*properly attributa- ble to producing the copyrighted publications and lab- oratory research library data, although most of the en- deavors of White and his associates were connected with such activities. (R. 66a.) White devoted about one-half of his time to the pres- ervation and conservation of his estate during 1948 and 1949. The general manager of the laboratory also spent one-half of his time on White’s personal affairs. White — 3 used an arbitrary method of allocating the general man- ager’s salary according to the time which was spent on the laboratory affairs and White’s personal affairs. (R. 66a.) The joint income tax returns filed by White and his wife reported income and expenses ca to the op- eration of the laboratory as follows rv 1948 1949 Income $ 730.10 $ 2,502.26 Expenses $19,354.92 $21,023.28 (less administration of investments Net Loss $18,624.82 $18,521.02 Of the $730.10 income received from the operation of the laboratory in 1948, $625 was acquired in fees for writing articles for the National Rifle Association. (R. 68a.) The laboratory served and benefited a limited number of persons and organizations, but was not capable of producing income in amounts sufficient to offset the usual expenses. White has never made a profit from the operation of the laboratory; rather its operations have resulted in losses in each of the 17 years from its inception in 1936 to the time of the trial in 1953. The joint income tax return filed by White and his wife for the year 1951 disclosed a loss of $33,369 from the lab- oratory operations. (R. 68a-69a.) Subsequent to the taxable years White made an in- vestment of $300,000 for the construction of a new lab- oratory in Maryland. In determining whether his new enterprise would be profitable, he did not take into ac- count any amount for interest on that investment or for 4 the value of his own services. He had no real expecta- tion of any net income for years subsequent to the tax- able years. (R. 69a.) White did not operate the laboratory as a business or with the intention of making a profit during the years 1948 and 1949. The claimed expenditures were neither ordinary and necessary expenses of carrying on a trade or business nor losses within the meaning of Section 24 of the Internal Revenue Code of 1939. (R. 69a.) These findings of fact were filed together with the Tax Court’s opinion on October 19, 1954. (R. 65a.) The Tax Court’s decision was entered on the same day. (R. 72a.) ARGUMENT Was the Ballistics Laboratory Owned by the Taxpayer, Henry P. White, Operated During the Taxable Years With the In- tention of Making a Profit So as to Enable the Taxpayers to Deduct Expenditures in Excess of Income Incurred in Its Operation as Ordinary and Necessary Expenses of Trade Or Business Or as Losses Incurred in a Transaction Entered The taxpayers are claiming deductions from gross income for amounts purportedly representing expendi- tures incurred in the operation of the ballistics labora- tory owned by Henry P. White, during the taxable years, 1948 and 1949. There is no dispute that the amounts claimed were actually spent by the taxpayers. The only question is whether these amounts represented expenses incurred by the taxpayers in the operation of a trade or business or whether they can be considered to represent losses incurred in a transaction entered into by the taxpayers for profit within the meaning of Sec- — 5 tion 23 of the Internal Revenue Code of 1939 ( Appen- dix A, infra). It is clear that the criterion for determining whether or not an expenditure was incurred in the operation of a trade or business is that the enterprise must have been entered into with the intention of profiting from its op- eration. Helvering vy. Nat. Grocery Co., 304 U.S. 282, 289, fn. 5; Thacher v. Lowe, 288 Fed. 994 (S.D.N.Y.); Cf. Ewing vy. Commissioner, 213 F.2d 438 (C.A. 2d). It is also clear that an incidental expectation or hope of profit from the enterprise is not sufficient to cause the undertaking to be considered a ‘‘trade or business”’ within the meaning of the statute. Cheney v. Commis- sioner, 22 B.T.A. 672. Rather, the intention to profit must be the primary and dominant purpose of the tax- payers’ endeavor. Coffey v. Commissioner, 141 F.2d 204 (C.A. 5th), and Ewing v. Commissioner, supra. Whether the requisite profit intention is present id a question of fact which is primarily a determination to be made by the lower court to which Congress has given the respon- sibility of making findings of fact. Morton v. Commis- sioner, 174 F.2d 302, 303 (C_A. 2d), certiorari denied, 338 U.S. 828. And such findings are not to be disturbed by an appellate court unless they are found by the ap- pellate court to be clearly erroneous.’ United States v. Gypsum Co., 333 U.S. 364, 395, rehearing denied, 333 U.S. 869; Morton v. Commissioner, supra, and Wright- Bernet v. Commissioner, 172 F.2d 343 (C.A. 6th). The instant case must be considered with these principles in mind. The Tax Court found that Henry P. White *‘did not operate the ballistics laboratory as a business or with 2 See also Section 7482(a) of the Internal Revenue Code of 1954. 6 the intent of making a profit during the taxable years 1948 and 1949.”” (R. 69a.) The taxpayers’ contention is that the only evidence supporting that finding by the Tax Court is that Henry P. White is a wealthy man and that the business had never made a profit. (Br. 11.) The Commissioner, however, submits that the evidence is compelling to support the Tax Court’s finding and that its decision must therefore be affirmed. Henry P. White commenced the operation of his bal- listies laboratory in 1936, shortly after he had inherited a substantial amount of money. Although he had re- ceived a degree in engineering in 1934 and was licensed as a mechanical engineer in two states, he apparently did not utilize this training during the remainder of 1934 and 1935. (R. 42a-45a.) The record is devoid of any evidence that White had any knowledge of or train- ing in the field of ballistics. Previous to receiving his inheritance, White had been working as an automobile salesman and later in a bank. (R. 44a.) His earnings were small and he had been receiving financial assist- ance from his family. (R. 43a.) From these facts, it may reasonably be inferred, that once his financial prob- lems were eliminated (as a result of his inheritance) and it was no longer necessary for him to concern him- self with the tasks of supporting himself and his family he turned his attention to a subject which interested him for reasons entirely apart from economic motiva- tions. His entrance into the field of ballistics and am- munition research can be thus explained. Moreover, the manner in which the laboratory was operated from its inception to the time of the Tax Court hearing is evidence of the fact that the laboratory was not being operated as a true business or with the inten- 7 tion of making a profit. This is graphically illustrated by the testimony of E. W. Kronbach, one of the taxpay- ers’ witnesses. Mr. Kronbach testified that for work performed for his company by the laboratory in 1940 or 1941, although time and labor were involved, his com- pany was billed only for the instruments installed. He further testified that his company paid ‘‘comparatively little’? for the work and that the laboratory ‘‘didn’t make much money on it.’’* (Appendix B, infra.) Fur- thermore, a large part of the time of certain of the lab- oratory ‘‘employees’’ was spent handling the personal affairs of Mr. White. Indeed, during the taxable years, White himself used one-half of his time in managing his personal matters. (R. 48a, 59a-60a.) And no rec- ords were maintained showing the exact amount of time that was used by White’s chief laboratory assistant in attending to White’s personal affairs. (R. 60a.) But rather, the arbitrary amount of one-half of the salary paid to this assistant was allocated to laboratory work for the purposes of the claimed deductions. (R. 60a.) Arbitrary allocations of expenses to the personal affairs and claimed ‘‘business’’ affairs of Mr. White indicate that it was not of extreme importance to White whether a profit was in fact being realized from the operation of the laboratory.‘ 3 Similarly, only a “nominal amount” was received for work performed by the laboratory for the Treasury Department. (R. 53a.) *It should also be noted that no deductions for depreciation on the property occupied by the laboratory was claimed by the tax- payer for the taxable years. (Exs. 4 and 5). On brief (p. 24) the taxpayers state that the Commissioner should not complain be- cause claimed deductions were kept to a minimum. The taxpayers fail to realize, however, that this merely furnishes another indica- tion that White was unconcerned with whether the laboratory was 8 Although the financial success of the enterprise is not the only factor to be considered in determining whether a profit motive existed, it is certainly most relevant whether losses were being realized and whether a rea- sonable man could conduct the undertaking with a real expectation of profit. Thacher v. Lowe, supra; Morton y. Commissioner, supra. The evidence on this point, too, sustains the Tax Court’s finding that the laboratory op- eration was not a ‘“‘trade or business’”’ within the mean- ing of Section 23 of the Code. From 1936, when the lab- oratory was founded, and continuing for each year until 1953, when the hearing before the Tax Court was held, the laboratory’s expenses exceeded its income and a loss was realized. (R. 68a-69a.) Moreover, the amounts of the losses rather than decreasing, as the laboratory be- came older, increased. (Testimony of White, Appen- dix B, infra.) The claimed amounts for deductions for the taxable years, 1948 and 1949, were $19,354.92 and $21,023.28, respectively, as contrasted with gross income in those years in the amounts of $730.10 and $2,502.26, respectively. (R. 67a-68a.) And the loss from the oper- ation of the laboratory in 1951 was $33,369.98. (Testi- mony of White, Appendix B, infra.) In view of such a long history of increasing losses from 1936 until the taxable years, it would require more {han optimism to engage, in good faith, in the operation of such an enterprise during the taxable years with the intention of making a profit. In disallowing the claimed deductions, the Commis- producing a profit or loss. Such lack of interest in the financial success of the laboratory is also shown by White’s statement that he was “not concerned enough with my immediate operating figures” to be able to predict whether the laboratory would operate at a profit for the year 1953. (R. 57a.) =—_— 9 sioner has not made a determination that the laboratory operated by White has not served a useful purpose. On the contrary, all of the evidence in the record points to the fact that the undertaking was a meritorious one and satisfied a need existing in the arms and ammunition making industries. But this case cannot turn on the rel- ative merits or demerits of the taxpayers’ undertaking. The sole question is whether the Tax Court’s finding that the undertaking was not a trade or business or a transaction entered into for profit has support in the evidence. And in this connection it must be remembered that the burden of proof in the Tax Court was on the taxpayers. That they did not satisfy this burden is clear from the record and was so stated by the court below. (R. 70a.) It is true that Mr. White testified that he intended to make a profit from the operation of his laboratory when he first engaged in the undertaking. (R. 40a, 41a.) And the taxpayers contend that this testimony is uncon- tradicted and that no question as to credibility is raised. The Commissioner presented no witnesses in the Tax Court, but he did cross-examine the taxpayers’ wit- nesses. And the assertion of the deficiency itself chal- lenges White’s self-serving statement that he estab- lished the laboratory with the intention of making a profit.” In the circumstances, the Tax Court, as the trier of fact, was entitled not to believe and apparently did not believe the statements of Mr. White. Cf. Hel- vering v. Nat. Grocery Co., supra, p. 295. 5 In this connection it should be noted that White did not testify that he operated the laboratory with the intent to make a profit during the taxable years. ay 10 As shown above, there is ample evidence in the record to support the Tax Court’s findings of fact. The burden of proving that the laboratory was operated during the taxable years with the intent to make a profit was on the taxpayers. The evidence introduced by the taxpay- ers was not sufficient to overcome the presumption of correctness which attached to the Commissioner’s de- termination that the laboratory was not operated with a profit motive and the decision of the Tax Court must, therefore, be affirmed. Respectfully submitted, H. Brian HOLLAND, Assistant Attorney General. Euuis N. SLACK, Marvin W. WEINSTEIN, Special Assistants to the Attorney General. 11 APPENDIX A Internal Revenue Code of 1939: Sec. 23. Depuctions rrom Gross Income. In computing net income there shall be allowed as deduc- tions: (a) [as amended by Sec. 121, Revenue Act of 1942, c. 619, 56 Stat. 798] Expenses.— (1) Trade or business expenses.— (e) Losses by Individuals.—In the case of an indi- vidual, losses sustained during the taxable year and not compensated for by insurance or otherwise— (1) if incurred in trade or business; or (2) if incurred in any transaction entered into for profit, though not connected with the trade or busi- ness; or (26 U.S.C. 1952 ed., Sec. 23.) TESTIMONY OF CALVIN H. GODDARD 1b Testimony of Calvin H. Goddard (Tr. 20] Cross EXAMINATION By Mr. Kennepy: [Tr. 22-23] Q. Did you have as much investment in your laboratory as Mr. White has in his? A. No, I should say I have personally about $10,000 and what White had, I don’t know. He was the fellow into whose good will I bought. Q. Did you need a laboratory as extensive as Mr. White’s in order to do the work that the Bureau of Forensic Bal- listies was set up to do? A. No, we didn’t, because you see, White’s work is in a different field, a collateral field. White’s resources put him in a position to do all this computation work in criminal cases, which he does not do. I have frequently been requested since I went back on active duty many years ago to take criminal cases and I will not, because I feel that my military status would make it very embarrassing for me to go into such an enterprise and on many occasions I have tried to get the White Company to accept a criminal case and they won’t do it. They have the resources, they have a comparison micro- scope and have the photographie equipment, but they pre- fer to do developmental work in the field of small arms, de- veloping a new type of cartridge or improving on an old type or testing a new type of weapon to determine whether the pressures developed by the load are within normal lim- its and safe limits and so forth. The work, as I say, although collateral, is not identical, and in the erime laboratory it doesn’t need all the equip- ment that they have. 2b TESTIMONY OF E. W. KRONBACH Testimony of E. W. Kronbach (Tr. 40] Cross EXAMINATION By Mr. Kennepy: Q. Mr. Kronbach, when was this work done for you by White, what year was that, if you know? A. As I recall, it was late 1940 or early 1941, we put this in. Q. Do you recall what you paid Mr. White for the service? A. We paid comparatively little. I don’t recall what the instrument was, but I know this, that they came over every time we called them to re-adjust or make a change here and there. I think a good deal of that time, I think none of that time was paid for. I know they never billed us and the only thing they billed us was the original instruments, I think. We bought one in 1941 and one a short time later. Q. Do you know whether those instruments were billed to you, to the White Company, or what? A. I wouldn’t know that. I know they didn’t make much money on it. Mr. Kenwepy: That’s all. Mr. Ciyxe: That’s all, thank you very much. TESTIMONY OF HENRY P. WHITE 3b Testimony of Henry P. White {Tr. 71] Cross EXAMINATION By Mr. Kennepy: [Tr. 76-81} Q. In 1938 you actually received the corpus of this? A. In 1939. Q. Half or the full corpus? A. Half the corpus. Q. Mr. White, you have never made a profit, have you, from this operation of the laboratory? A. No, sir. Q. Do you have any recollection of the amounts of re- sources that you had between 1938 and the present time? A. No, sir; I don’t have my figures at hand, I’m sorry. Q. You do have such figures? A. I do not have them. Q. I mean, you do have them someplace? A. Well, I rather imagine back in some file box, we've got them. Q. Would about $5,000 be the amount of loss in 193817 A. I’m sorry, I can’t answer that, I really don’t have any recollection of it. Q. In the years 1948 and 1949, the tax returns, Exhibits 4 and 5, your losses were approximately $18,000? A. Yes, sir, between $18,000 and eighteen-five. Q. For each year, were your losses earlier than 1948 less or greater than that amount, that is, 1947 and earlier years? A. My recollection was that they were less, but how much less they were, I don’t recall. Q. According to Exhibit 5, which is your joint income tax return of you and your wife for the year 1948, you had gross income from the operation of the H. P. White Company of oe 4b TESTIMONY OF HENRY P. WHITE $730.10. Now, do you recall from what source or sources that $730.10 was made up? A. I’m just trying to remember back now. Q. Well, perhaps—let me again refresh your recol- lection— A. Thank y ”. Q. My recoris show here that from the Franklin Stone Ware Velocity Test Cartridges you received $24, do you recall that? A. Vaguely. Q. Would you know how much time was spent by that by either you or Mr. Munhall or some other employee of yours that made the test? If you don’t remember specifically from your experience, would you be able to recall how much— A. As I recall that particular job, I rather imagine it took up in the neighborhood of three hours to perform that particular test. Q. I also have a record you received $25 from the Liberty Mutual Insurance Company for the preparation of a report whether a rifle was faulty and caused an injury to a hunter, that was in 1948. A. No, I don’t recall. They frequently call us and ask our opinion on that as to the probability of their liability under some particular insurance clause or something like that. Q. Would that require the service of either you or Mr. Munhall? : A. Yes, it would. Q. About how long would it take you to undertake such a test? A. Well, that particular item there, I don’t imagine probably wasn’t even testing. I don’t recall a particular item itself. It most likely was a conference. Q. A conference which might have taken an hour or less? A. Probably met for a couple hours or something like that. Q. It says, ‘Preparation of report.’’ You wrote a report on it? A. Well, I don’t recall it. Q. Well, how long do your reports on such a matter take? = TESTIMONY OF HENRY P. WHITE 5b A. Well, that kind of question is like asking how long is the tail of a dog? You don’t know. Q. It was only $25, you know. A. Well, it evidently was. Q. Then you received $14.90 from the sale of surplus cart- ridges. I don’t suppose you would remember that. A. Well, we would have quite a surplus of collectible ma- terial that we were endeavoring to realize money on, so that we wouldn’t have to care for them. They were of no fur- ther use to us, so we sold them. Q. Then my records show that you received $7 from the Cleveland Skating Club for preparation of special blanks for some ice review. . Yes, I recall that. How long did it take to prepare the blanks? . About half an hour. Did you prepare them? No. Did Mr. Munhall prepare them? . Either him or one of the assistants. . I see. You have $10 for consultation on whether your services would be valuable to a murder trial. Do you recall that? A. No, I don’t. Mr. Munhall took most of the legal phase of the work. I have qualified, of course, before the State of Ohio, as an expert in the line of mechanical engineering. He has handled most of the identification work. Q. Then I have a fee here that says, $16.20 for sale of surplus books You were selling books on occasions? Q. Yes, I have. I have mentioned earlier in the testimony we acquired a tremendous mass of material immediately following the war, one of the largest bulk of it, some 5 tons of it, as a matter of fact, including books and cartridges and pertinent mechanical portions of guns, we purchased from a chap on the West Coast and we catalogued that stuff and we incorporated into our reference collection what was needed and what was not needed we disposed of as the oc- casion would permit. We didn’t catalogue it for general sale, because frankly, it would bave been too long, a tedious O>Oororear 6b TESTIMONY OF HENRY P. WHITE job, but when some people of associated interest would come in and there was a surplus, we would say, ‘*Take what you want,’’ and it was that kind of a transaction. (Tr. 91-93] Q. What is its source of income? A. Primarily the source of ineome is from its annual sub- scriptions. I believe it’s $5 a year now. Maybe it’s four, but I believe it’s $5 a year now. Of course, they have a good many life members and they are the only ones entitled to a vote at the annual meeting. It is very similar to other na- tional organizations encompassing other lines of endeavor. Q. That $5 fee, what cost does that defray for the Ameri- can Rifle Association, does that entitle the member to a magazine? A. It entitles him to a magazine, it entitles him to a con- sideration of questions he might send to their technical department regarding his weapons or ammunition or closely allied items. It also entitles him to a certain amount of information about gun and game laws and so on, some of the finer interpretations thereof. It entitles him to partici- pate in a great many of their actual target matches and it also entitles him, and this is a vague benefit and one which I am not entirely in sympathy with, through the Director of Civilian Marksmanship of the United States Army, mem- bers, and only members alone of the National Rifle Associa- tion may purchase through the Director of Civilian Marks- manship rifles and components for the purpose of promot- ing marksmanship in the United States. Q. $5 is used for the purpose of defraying costs of mem- bership? A. Yes. Q. You don’t know if they have any trust funds set up? A. They have several trust funds set up. Q. Without going into the details, do you happen to know the amount of the total assets of the association? A. No, I don’t know that, I know the director of that association. —— TESTIMONY OF HENRY P. WHITE 7b Q. Do you know whether they would be able to purchase your organization and pay back your investment? A. Well, as I say, I don’t know. There has been no amount mentioned. . . . . . (Tr. 102] RECROSS-EXAMIN ATION. By Mr. Kewwepy: . . . . . (Tr. 104-106] Q. Do you recall what your returns were in 1950 from the operation of the H. P. White Company? A. No, sir; I do not. Q. Would about $20,000 be close to that loss? A. I don’t recall the figures. The figures are entirely out of my head. Q. But you did have a loss? A. Yes, sir; we did. Q. About the same as the amount you lost in 1948 and 19497 A. I don’t recall. Q. Do you recall what your loss was in 1951? A. No, I don’t. The Crerx: Offered for identification Exhibit D. (Thereupon, the document above referred to was marked Respondent's Exhibit D.) Q. I show you, Mr. White, what has been marked as Re- spondent’s Exhibit D, and I ask you if you can identify that. Is that your joint income tax return for the year 1951? A. Yes, sir. Q. I call your attention to Schedule C on Page 2 of that return, entitled, ‘‘Profit or Loss from Business or Profes- sion,’’ and I ask you to read the resultant figure. A. Where is that? Q. Schedule C. SSSR PLOT VET IC 8b TESTIMONY OF HENRY P. WHITE A. Net profit or loss, Line 4, less Line 5, close parentheses $33,369.98. Q. That was loss for that year, is that correct? A. Lassume that it was, I am not too very good at figures. Q. Well, that figure of $33,000 is in parentheses. A. May I ask, may I consult my counsel about this? I don’t know what losses you are talking about, sir. Mr. Ciyne: May I take it? The Witness: Yes, surely. Mr. Ciyne: There are your losses, that $33,000 figure. Will you state your loss for counsel? The Witness: $33,369.98. By Mr. Kennepy: Q. That was the loss on the operation of the H. P. White Company for the year 1951, was it not? A. Yes, that was incurred due to the fact that we were getting ready to move to Bel Air. Q. Just one more question, Mr. White. You have testi- fied you are doing better this year, in 19531 A. Yes. Q. You do have records, don’t you? A. Yes, sir. Q. You don’t wish to put any of those records in to show how much better you are doing? A. No, I don’t. I believe we have taken in about twice as much as we did last year, but I think we have done maybe even a little bit better than that, I don’t know. Q. Do you have those records with you? A. No, I do not. Q. Didn’t you think they might be helpful in this trial? A. Well, frankly, to be frank with you, I do deal with mathematies all the time, but I’m afraid these tax matters rather confuse me. Perhaps I should have brought them. If I should have and haven’t, I’m awfully sorry. WU. S. GOVERNMENT PRINTING OFFICE. 1958 s3eee8 i208 APR 9 1956 B. WILLEY, Clerk In the Supreme Court of the United States OCTOBER TERM, 1955. No. . > ae HENRY P. WHITE, and ESTATE OF NANCY A. WHITE, deceased, T. LEO SULLIVAN, ADMINISTRATOR, c.t.a., Petitioners, Vv . COMMISSIONER OF INTERNAL REVENUE, Respondent. PETITION FOR WRIT OF CERTIORARI To the United States Court of Appeals For the Sixth Circuit. Tuomas V. Koyxkxka, Frep D. Kipper, 1144 Union Commerce Building, Cleveland 14, Ohio, Epcar S. Byers, 701 N. B. C. Building, Cleveland 14, Ohio, Counsel for Petitioners. April 5, 1956. _ ——_—__—— THE GATES LEGAL PUBLISHING CO., CLEVELAND, OhIO-——-MAIN 1-5647 eka ne FMRI WELT IY A OIL AIOE, TABLE OF CONTENTS. PeTITION FoR Writ oF CERTIORARI --------------- TI iin nc scecinin ene hind caiianeiiaealicaes (i) Nature of the Laboratory --_---------- (ii) What the Laboratory Does ------------ —Basis of Decision Below __------------------ REASONS FOR ALLOWANCE OF WRIT --------------- I. Srxtn Circurr Is ms Conriict WitH ANOTHER 1. Sixth Circuit Imported Profit Test from Statute Not Controlling Here --------------------- 2. Sixth Circuit’s Construction Gives Statute Alarming Turn —-.--~-------------------- —(a) Decision, Not Statute, Lets Commis- sioner Bar Venture if He Thinks it Is TO CI an enn I i ccnecscwcsdeninintneetodoaninanatenannniee 3. Sixth Circuit’s Decision Is Hostile to Reading Given Statute in Other Circuits ______------ Il. Tuts Court’s Decisions LEAvE QuesTION UN- I ee Ac a Le CSO LE CEDAR Sie LLL ANC POET re OL i ED il EG APPENDIX: Findings of Fact and Opinion of Tax Court ------ 21 Opinion of the United States Court of Appeals for the Sixth Circuit _.__-------------------- 28 Judgment of the United States Court of Appeals for the Sixth Circuit _-_.------------------ 30 Order of the United States Court of Appeals for the Sixth Circuit Denying Rehearing -------- 30 TABLE OF AUTHORITIES. Cases. Cecil v. Commissioner (4C. A., 1939), 100 F. 2d 896__ 15 Cecil, Cornelia (1938), 37 B. T. A. 904 ----------- 15 Deputy v. du Pont (1940), 308 U. S. a 17, 18 Doggett v. Burnet (App. D. C., 1933), 65 F. 2d 191__ 8, 9 Ewing v. Commissioner (2 C. A., 1954), 213 F. 2d 438 11 Higgins v. Commissioner (1941), 312 U. S. 212____12, 17 McDonald v. Commissioner (1944), 323 U.S. 57 ---- 17 Thacher v. Lowe (S. D. N. Y., 1922), 288 F. 994---10, 11 United States v. Pyne (1941), 313 U. S. 127 ------ 12, 17 Whitney v. Commissioner (3 C. A., 1934), 73 F. 2d eee ae 16 Widener, Commissioner v. (3 C. A., 1929), 33 F. 2d TN ceeieuienniednbinipanansnnatte 16 Wilmington Trust Co., Helvering v. (3 C. A., 1941), 194 98 156 2. nnn 18 Wilmington Trust Co. v. Helvering (1942), 316 U.S. Ye aS aR art eatin ena en meena nen ne 18 Texts. Froman, Principles of Economics, Revised Edition, I cic otek tetnonntinnnitacmps 12 4 Mertens, Law of Federal Income Taxation (Zimet & Diamond Revision) § 25.15 _____-_----------- 11 Paul, Taxation in the United States (p. 368) _------ 13 Statutes. Internal Revenue Code of 1939: ee CE 5 ee eeeaaeene 2, 3, 8, 10, 11, 15 NR TRIE. Shadcciia tenia doce mnie 11, 12 ae Eee SEARLES SAE. et he 13 Internal Revenue Code of 1954: Sp Re Sees Peer 2, 3,8 a aR AE ERY es epee enna nee oe 11 I ig chine ce ccc papectahacenciatinienls eetieeninte 13 Revenue Act of 1926, Sec. 214(a)(1) _------------ 8 Be Se reece ee = 5 ee te actecceectinnecenciienteneiniannicnceenengantie 2 28 U. S. C. 2101(c) _----------- Wee ae 2 — In the Supreme Court of the United States OCTOBER TERM, 1955. | eee HENRY P. WHITE, and ESTATE OF NANCY A. WHITE, deceased, T. LEO SULLIVAN, ADMINISTRATOR, c-t.c., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. PETITION FOR WRIT OF CERTIORARI. To the Honorable Earl Warren, the Chief Justice of the United States, and the Associate Justices of the Supreme Court of the United States: Petitioner, Henry P. White, and the Estate of Nancy A. White, T. Leo Sullivan, administrator c.t.a., pray that a writ of certiorari issue to the United States Court of Ap- peals for the Sixth Circuit to review the judgment entered by that court in cause No. 12,445. OPINIONS BELOW. The opinions of the courts below may be found: Opinion of the Tax Court, by Judge Opper, is reported in 23 T. C. 94, and is printed in the appendix hereto, page 21. Opinion of the United States Court of Appeals for the Sixth Circuit (Judges Martin, Miller and Stew- art) is reported in 227 F. 2d 779, and is printed in the appendix, page 28. 2 JURISDICTION. The judgment presented for review is dated and was entered December 16, 1955; petition for rehearing was de- nied January 13, 1956. This Court has jurisdiction to review under 28 U.S. C. § 1254(1) upon petition for certiorari filed within the 90 days prescribed by 28 U. S. C. § 2101(c). QUESTION PRESENTED. The question presented is: Whether the Court of Appeals has established an er- roneous standard for determining what is a “trade or business” under § 23(a)(1)(A) of the Internal Reve- nue Code of 1939 [a statute which continues as § 162(a) of the present Internal Revenue Code of 1954]. STATUTE INVOLVED. Decision in this case turns upon the proper construc- tion of a “trade or business” under § 23(a) (1) (A) of the Internal Revenue Code of 1939, which reads: “SEC, 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: (a) ExPEeNsEes.— (1) Trape or Business ExPENSES.— (A) In Generar.—All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or busi- ness, * * _ 1 \ ‘The same provision continues in the present Internal Reve- nue Code of 1954, § 162(a), in the following form: “There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *.” OI ITS ae ; RA SRL TIE OOS GE AS PO: CB dll 3 STATEMENT OF CASE. The taxpayer, Henry P. White (who, with his wife, Nancy A. White, now deceased, filed the joint income tax returns for the years 1948 and 1949, here in question) operates, as an individual proprietor, a ballistics labora- tory engaged in testing, research and development of fire- —The Issue. The courts below—because they applied an erroneous standard—held the laboratory was not operated with “a profit motive” and was not a “trade or business.” Both courts so held on the ground there was no: “reasonable possibility of the laboratory’s ever gen- erating gross income sufficient to offset its expenses.” (Court of Appeals, Appendix, p. 29; see also, Tax Court, Appendix, p. 25.) Both courts allowed deduction of the expenses of operating the laboratory up to the extent of the income re- ceived in each of the two years in question; they disallowed all expenses incurred in excess of the income received in those years. Both courts thus made the success of the venture con- trol the extent to which expenses shall be allowed under § 23(a) (1) (A) of the Internal Revenue Code of 1939 [and §162(a) of the present Code}. This gives to an important statute, which affects sub- stantially every business return filed, a strange and alarm- ing turn. —How Issue Arises. To measure the mischief the decision below does to the statute, and to gauge its consequences on the reading of revenue laws, it will be useful to note what, in the Sixth Circuit, no longer qualifies as a “trade or business.” EIT OS ONT “7 4 (i) Nature of the Laboratory. The laboratory was established in Cleveland in 1936 by Henry P. White, then a young man of 27, two years out of Cornell, where he had received his engineering degree in 1934. (Tr. 54, 71, 76.) During all of the intervening years the taxpayer has continued the operation of the laboratory. He has en- larged its facilities and services. In 1953, outgrowing the Cleveland quarters, and for better access to army and navy proving grounds and the New York and New England arms manufacturing district, the taxpayer moved the laboratory to Bel Air, Maryland, where it now is located. (Tr. 53-54, 114.) The laboratory now is equipped to do not only research and development in small arms and am- munition, but also mechanical development, testing and analysis not directly allied with the field for which the laboratory was established. (Ex. 1, Tr. 52, 62.) ) (ii) What the Laboratory Does. Whether the laboratory is a “trade or business,” the taxpayer believes, must, under the statute, turn on what it | does and not on anyone’s prophecy as to its “reasonable possibility” of earning a profit. These—and there is no dispute about this—are the activities in which the laboratory engaged: Published three technical books based on research done by the laboratory. The books, although they have enjoyed only limited sale because of their specialized nature, are important contributions, and are a source of continuing income. (Tr. 89.) They are: Catalog of Cartridge Manufacturers and Base Marks, published in 1944, sold at $50 per vol- FILED LATED Ad oie 5 ume to the armed forces and to law enforce- ment agencies including the FBI. (Tr. 60, 94- 95.) Center Fire Metric Pistol and Revolver Cartridges, published in 1948, and publicly sold on a roy- alty basis. (Ex. A, Tr. 85, 86, 89, 96.) Center Fire American and British Pistol and Re- volver Cartridges, published in 1950, most of the work for which was done in 1947 and 1948, and likewise publicly sold on a royalty basis. (Ex. B, Tr. 86-87, 96.) Published numerous magazine articles and technical papers (Ex. 1, Tr. 52, 62, 87-88) for compensa- tion. (Tr. 89.) The revenue from these sources was $625 in 1948 (Tr. 81) and $825 in 1949. (Tr. 89.) Held contracts with the Navy, involving both guns and ammunition (Tr. 54, 61, 99, 102-103), and with the Treasury in identification and evaluation of seized illegal weapons (Tr. 54-55, 94). The lab- oratory is, and since 1939 has been, designated as a research laboratory by the Treasury under § 4(5) of the Federal Firearms Act, 15 U. S. C. § 904. (Ex. 2, Tr. 54, 55, 56, 63.) Performed services for the National Rifle Association, a national organization with 300,000 members. (Tr. 20, 56, 91.) Performed services for individuals and companies in connection with litigation. (Tr. 57, 78, 80, 89.) Rendered services to “hand loaders,” small arms enthusiasts who prefer to load their own ammu- nition for greater accuracy (Tr. 19-20, 28-30, 42- SP AEGEIOO OA AP IS A PTD 6 45, 47-48, 61), of whom, it is estimated, there are 20,000 in the country. (Tr. 30.) This is a group which appears to be growing in numbers (Tr. 28-29, 44, 61.) Negotiated with the National Rifle Association for en- larged services to its members in examination and certification of arms akin to the work done by Good Housekeeping magazine in connection with its seal of approval. (Tr. 63-64, 101-102.) Performed ballistics tests and analytical work for private industry (Tr. 78, 81, 89), developed highly useful tests of armor plate for tank manu- facture (Tr. 36-37) and engaged in work for Remington Arms Company. (Tr. 93.) Solicited business. (Tr. 98-99, 111, Ex. 1, Tr. 52, 62.) Negotiated with a sports magazine for purchase of the laboratory's services. (Tr. 102.) Prepared the lessons in firearms identification used by the Institute of Applied Science in Chicago, graduates of which staff 800 law enforcement identification bureaus. (Tr. 49-51.) Plainly, by all indicia, the laboratory is a “trade or business. But, it did not earn a profit. It had income, $730.10 in 1948, and $2,502.26 in 1949. But it did not—in the view of the courts below—have enough income. The courts below, therefore, allowed deduction of expenses only to the extent of the income earned. —Basis of Decision Below. The Tax Court “commended” the taxpayer “for the devotion of his time and effort in a worth-while endeavor” (Appendix, p. 27) and for the services rendered “not only to industrial producers but to local and even Federal government.” (Appendix, p. 29.) So did the Court of Appeals. (Appendix, p. 29.) But both courts ruled the laboratory could not be a “trade or business” because, in their view, it never could be operated profitably. The taxpayer did not share this belief. Before start- ing the enterprise, the taxpayer consulted eminent and qualified persons concerning the need for the services of such a laboratory and to see “what business might be ex- pected.” (Tr. 66.) He intended “to sell * * * services to the public” (‘fr. 66)—and did, as has been seen—and said he “went into this to make a profit.” (Tr. 68.) In 1953, confident of success, he established a vastly ex- panded plant in Bel Air, Maryland, involving a capital investment of $300,000. (Ex. 1, Tr. 52-53, 62, 114.) He believed he would be in the black in 1954. (Tr. 100.) Because the taxpayer did not in fact turn a profit, and because the laboratory in the Tax Court's view “was not capable of producing income in sufficient amount to offset the usual expenses” (Appendix, p. 25), the Tax Court held the taxpayer (Appendix, p. 27): “could not in good faith reasonably have expected or intended to operate his ballistics laboratory profit- | ably.” The Sixth Circuit agreed. It held the laboratory offered no “reasonable possibility” of profit. (Appendix, p. 29.) This makes success the test. The statute does not so provide. Nt OD Re nit nA ee (Pitter em nee awe . ; 8 REASONS FOR ALLOWANCE OF WRIT. The Court should grant the writ to restore to an important revenue statute the meaning, language, con- text, history and common sense demand. I. SIXTH CIRCUIT IS IN CONFLICT WITH ANOTHER CIRCUIT. The command of the statute, § 23(a)(1)(A) of the Internal Revenue Code of 1939 (as well as of the present statute, § 162(a) of the 1954 Code) is that “there shall be allowed” as deductions in computing income subject to tax: “All the ordinary and necessary expenses paid or in- curred during the taxable year in carrying on any trade or business * * *.” That is all there is. The statute does not say expenses shall be allowed only to the extent of the income earned, or only if there is (Appendix, p. 29): “reasonable possibility of * * * generating gross in- come sufficient to offset * * * expenses.” The condition the Sixth Circuit has read into the statute is in conflict with the construction put upon the statute by the Court of Appeals for the District of Colum- bia in Doggett v. Burnet (App. D. C., 1933), 65 F. 2d 191. The court in Doggett had before it § 214(a) (1) of the Revenue Act of 1926. It read precisely as does the present statute.’ 2 The statute in Doggett, § 214(a) (1) of the Revenue Act of 1926, provided, as does the statute here in question (65 F. 2d at 193): “In computing net income there shall be allowed as deduc- tions: (1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *.” pe — a MG RGR a >" 9 In Doggett, the taxpayer, while in England, became interested (p. 192) “in the writings and teachings of Jo- anna Southcott, a religious teacher and prophetess, who died in 1814.” The taxpayer (p. 192): “read the sixty-five works of Joanna Southcott which were in the British library. The remaining works of Joanna Southcott are supposed to be sealed in an ark in the custody of the British Parliament, and her followers believe that the ark will be opened by the twenty-four bishops of the House of Lords. The ark was to be opened in 1914, or whenever the nation’s troubles demanded that it be opened.” Miss Doggett returned to this country and undertook the publication of the works of Joanna Southcott (p. 192): “for the benefit, as she alleges, of the American people, and also with the expectation of deriving a large profit from the sale of the books after the ark is opened.” She spent $38,000 on the task. But, as the court noted (p. 192): “The sale of the books has been limited, and about 200,000 are stored in San Diego.” The Board of Tax Appeals denied to Miss Doggett deduction of expenses incurred in the prosecution of the work on the “reasonable possibility” of profit reading of the statute the Sixth Circuit here has espoused. The Board (p. 193): “denied the deduction on the ground that appellant has failed to show that the alleged business of publishing and marketing the books of Joanna Southcott has been profitable, or that there is prospect that it will be profitable.” The Court of Appeals for the District of Columbia reversed. It rejected the construction given the statute by 10 the Board—and here adopted by the Sixth Circuit. The court said (p. 193): “We think this is too severe a limitation to be placed upon the determination of what constitutes a business within legal contemplation.” The court ruled (p. 193): “to hold that the legal test of whether or not an occupa- tion constitutes the doing of business, depends on whether it is profitable or has prospects of being profitable, is too restrictive an interpretation of the revenue act.” The “better test,” the court went on to say (p. 194): “ss whether or not the person engaged in a legitimate enterprise shows a willingness to invest time and capital on the future outcome of the enterprise, whether it be successful or unsuccessful.” 1. Sixth Circuit Imported Profit Test from Statute Not Controlling Here. It is easy to see how the Sixth Circuit fell into its profit-test rendering of the statute. The court quarried the profit-standard from another statute. And then it imported that standard into the statute the court had before it. The Sixth Circuit was led into this, taking from one statute and adding to another, by the Tax Court. The Tax Court, as its opinion shows, relied principally on Thacher v. Lowe (S. D. N. Y., 1922), 288 F. 994. But Thacher, as the opinion shows, turned on a dif- ferent statute. It dealt with a statute which, unlike present § 23(a) (1) (A), concerned, as the court pointed out (p. 994): -_ 11 “ lawful business carried on for gain or profit. The profit-standard which was in the statute the court had before it in Thacher has its counterpart in § 23(e) (2) of the 1939 Code (and § 165(c) (2) of the present Code) which allows deduction, in the case of individuals, of “losses”: 9993 “if incurred in any transaction entered into for profit * * #” The fact that Congress wrote the test of profit into one statute is no ground for importing it, as both the Tax Court and the Sixth Circuit here have done, into another statute where Congress omitted it. As is pointed out in 4 Mertens, Law of Federal Income Taxation (Zimet & Diamond Revision) § 25.15: “It is necessary but not easy to distinguish between losses and business expenses. The necessity of such distinction arises from the fact that the Code contains separate provisions dealing with deductions for losses and those dealing with deductions for business ex- pences.” The Sixth Circuit’s failure to discriminate between statutes is evident from the fact that when the court, in Note 1 of its opinion, quoted the statute it was construing (Appendix, p. 28), it omitted entirely § 23(a) (1) (A)— the statute which controlled the case before it—and quoted instead § 23(e) dealing with losses in a “transaction en- tered into for profit.” The Sixth Circuit’s failure to discriminate is evident also from its reliance not only on Thacher but on Ewing v. Commissioner (2 C. A., 1954), 213 F. 2d 438, which like- wise dealt, not with the statute here in question, but with RAGE TE RAMEN: SAE TY Oe eae supplied throughout the brief except as otherwise noted. 12 § 23(e) (2), allowing losses from a “transaction entered into for profit.” The Sixth Circuit has fed into the statute dealing with the expenses allowed a “trade or business” a condition Congress lodged in a different statute. Such construction by osmosis this Court has con- demned. Higgins v. Commissioner (1941), 312 U. S. 212, 217; United States v. Pyne (1941), 313 U. S. 127, 131. 2. Sixth Circuit’s Construction Gives Statute Alarming Turn. The “reasonable possibility” of profit test the Sixth Circuit has written into the statute gives the statute an alarming turn and almost certainly violates congressional policy: —(a) Decision, Not Statute, Lets Commissioner Bar Venture if He Thinks It Too Costly. Congress could not have intended to empower either Commissioner or the courts to allow or disallow expenses according to their belief concerning the “reasonable pos- sibility” of profit in a “trade or business.” The law, as written, leaves it, not to the Commissioner or the courts, but to the taxpayer to say how long he shall persevere in what to others may appear a fruitless effort.’ It is well to bear in mind, as is pointed out by Professor Lewis A. Froman, Principles of Economics, Revised Edition, 1946, that (p. 544): 4In the present case, for example, Col. Calvin H. Goddard who organized the Bureau of Forensic Ballistics in New York in 1924 (Tr. 10) and the Crime Detection Laboratory at North- western University in 1930 (Tr. 13) testified that after the Satur- day Evening Post published two 10,000 word articles on his laboratory in 1925 he expected to be overwhelmed by business. (Tr. 24.) The revenue for the entire year following the publi- cation turned out to be $50. (Tr. 24, 32.) a 13 “it is the rule, rather than the exception, for a relatively large number of businesses to operate at a loss each year.” Professor Froman points out, from a study of corpo- rate returns as reported by the Treasury (p. 545) “For the period 1922-29, which is usually considered to be one of at least average, if not glowing, prosperity,” that (p. 545): “approximately 40 per cent of all corporations reported no net income during each of the years.” ° The statute does not demand success and the court had no right to say it does. —(b) Decision Short-Circuits “Hobby Loss” Statute. The Tax Court and the Sixth Circuit appear to have treated the laboratory as if it were a hobby. Treating the laboratory as a hobby, which it most surely is not, the decision still would be wrong under the hobby loss statute which Congress wrote into the law in the Revenue Act of 1943. It is § 130 of the 1939 Code (and § 270 of the pres- ent Code). It says that if deductions exceed income by more than $50,000 “for five consecutive taxable years” the deductions “shall be allowed only to the extent of $50,000 plus the gross income * * *,.” Of this statute Randolph E. Paul, in Taxation in the United States, says (p. 368): “One item of intense debate on the Senate floor was a Committee ‘anti-hobby’ amendment, popularly known as the ‘Marshall Field amendment,’ which provided for a restriction on the deduction of losses in a trade or business where the losses continued for five consecutive years. Under this provision, as finally enacted, loss deductions were restricted to 5 The italics are Professor Froman’s. 14 $50,000 a year where the taxpayer’s losses exceeded that amount for the five years. The provision was not effective for any taxable years beginning prior to January 1, 1944. Democratic Senator Clark of Mis- souri had been for this amendment because Marshall Field had been ‘engaged in the activity of starting newspapers and other publications around over the country for the purpose of influencing and, as some of us think, corrupting, the public mind, simply as a device to reduce his income taxes.’ The Senator changed sides when he learned from Senator Barkley that the amendment would not apply to Field because he had incorporated his newspaper enterprises, and would apply principally to persons like his late father- in-law who had lost money in the enterprise of im- proving the breed of Guernsey cattle. Republican Senator Danaher continued his floor fight for the amendment in a debate which exhibited great learn- ing on the subject of breeding cattle. Senator Barkley warned that the amendment would affect oil operators and others who had losses in the early years of opera- tion of a risky business, and Democratic Senator El- mer Thomas of Oklahoma feared for persons like Henry Ford who had daringly experimented with soy- beans. However, the Senate voted favorably on the amendment 37 to 26. Later, in the House debate on the conference re- port Democratic Representative Cochran of Missouri pointed out that the amendment put a penalty on progress as well as science. ‘Great benefits accrue from hobbies,’ said the Congressman, who went on to cite cases in support of this generalization. In addition to ‘fine beef and dairy cattle,’ the ‘finest breed of hogs, chickens, and other agricultural products, the finest thoroughbred horses in the world,’ there were Thomas Edison and his hobbies; moreover, the Diesel engine had originated in some hobby financing by Adolphus Busch and a Mr. Sulzer of Switzerland.” a 15 If the “hobby loss” statute controls, the decision be- low is manifestly wrong because the taxpayer’s expenses’ did not exceed the limit fixed by the statute. But if the “hobby loss” statute does not control, it is itself a token of congressional policy which the decision at hand frustrates. In short, this statute visits on the individual whose “trade or business” runs in the red by more than $50,000 for five years an additional penalty for his want of success. Here the court has visited on this taxpayer the same penalty but without allowing to the taxpayer the deduc- tions the statute says he shall have. 3. Sixth Circuit’s Decision Is Hostile to Reading Given Statute in Other Circuits. The Sixth Circuit’s construction of the “trade or busi- ness” provision of § 23(a) (1) (A) is also at odds, although short of square conflict, with the reading given that statute in the Third and Fourth Circuits. For example: Cecil v. Commissioner (4 C. A., 1939), 100 F. 2d 896, involved denial by the Board of Tax Appeals of deduction for expenses incurred by the taxpayer in operating her ancestral home, on a very large estate in Buncombe County, North Carolina, as a museum, because the Board, Cornelia Cecil (1938), 37 B. T. A. 904, had found that (p. 914) “all petitioner intended to do was to try to break even.” The Fourth Circuit reversed. Although the court did not wholly exclude the element of profit, the court said (100 F. 2d at 901) “In de- ciding the case on the view that the enterprise could not as a matter of law be considered a ‘business’ unless the taxpayer intended and ex- 16 pected a net profit, we think the Board adopted too narrow a concept of the word ‘profit? * **.” | The court considered it enough that the taxpayer put the property (p. 899) “to the use and enjoy- ment of the public for compensation * * *.” Whitney v. Commissioner (3 C. A., 1934), 73 F. 2d 589, and Commissioner v. Widener (3 C. A, 1929), 33 F. 2d 833, both held the operation of racing stables, which never had shown a profit, | ; constituted a “business.” In Whitney, rejecting the conclusion of the Board of Tax Appeals that (73 F. 2d at 592) “the pleasure in owning a stable was the primary interest of the petitioner,” the Third Circuit reversed, noting that, as here, the enterprise (p. 591) “was run on a business basis.”° In Widener the court affirmed the Board’s holding that the operation of the stable was a business even though (33 F. 2d at 833) “petitioners were wealthy enough to afford a hazardous occupation in which they found pleas- ure despite discouraging losses.” Plainly, unanimity of view on the meaning of “trade or business” does not prevail in the circuits. *The White Laboratory operated on regular hours, 8 a.m. to 4:30 p.m. daily (Tr. 56-57), employed subordinates (Tr. 83- 84), used time cards (Tr. 57), maintained a cost system. (Tr. 57.) Except for the four years he was in military service when the laboratory was operated by subordinates (Tr. 68) and except for time required for personal matters, the taxpayer devoted all of his time to the operation of the laboratory. (Tr. 66.) "4 Al i a a i ee el ee PRP We 6° ass. 17 Il. THIS COURT’S DECISIONS LEAVE QUESTION UNSETTLED. This Court has four times had before it the question of what is a “trade or business” under this statute. The decisions leave the controlling test in doubt. The cases in this Court where the question has arisen | are: j Deputy v. du Pont (1940), 308 U. S. 488, where five Justices assumed, for purposes of decision, but found it unnecessary to decide, that the tax- payer’s activities in buying and selling stock to aid his corporation constituted a “trade or busi- ness”; two Justices concluded this was not a “trade or business” and two Justices believed it was a “trade or business.” Higgins v. Commissioner (1941), 312 U.S. 212, where the Court held that management of one’s own investments is not a “trade or business.” United States v. Pyne (1941), 313 U. S. 127, where the Court reversed the Court of Claims for want of adequate findings to show whether executors in carrying on the affairs of an estate were or were not engaged in a “trade or business.” McDonald v. Commissioner (1944), 323 U. S. 57, where the Court was unable to muster a ma- jority for any one view. The Court divided as follows: Four Justices (Mr. Justice Frankfurter, Mr. Chief Justice Stone, Mr. Justice Roberts, and Mr. Justice Jackson) concluded that the taxpayer, a judge, was engaged in a “trade or business” within the meaning of the statute, but that he PERE 18 M7, a LL AT IE OM IE COG CRETE BELG OTE A CBA DE 8 By 5 The laboratory served and benefited a limited number of persons and organizations, but was not capable of producing income in amounts suffi- cient to offset the usual expenses. White has never made a profit from the operation of the laboratory; rather its operations have resulted in losses in each of the 17 years from its inception in 1936 to the time of the trial in 1953. The joint income tax return filed by White and his wife for the year 1951 disclosed a loss of $33,369 from the laboratory operations. (Pet. 25.) Subsequent to the taxable vears White made an investment of $300,000 fir the construction of a new laboratory in Maryland. In determin- ing whether his new enterprise would be profit- able, he did not take into account any amount for interest on that investment or for the value of his own services. He had no real expectation of any net income for years subsequent to the taxable years. (Pet. 25.) On these facts the Tax Court found that White did not operate the laboratory as a business or with the intention of making a profit during the years 1948 and 1949. It concluded that the claimed expenditures were neither ordinary and necessary expenses of carrying on a trade or busi- ness nor losses within the meaning of Section 23 of the Internal Revenue Code of 1939. (Pet. 25.) The Court of Appeals, in a per curiam opinion, affirmed. (Pet. 28-30.) ? are a | SATIS ts ge 6 ARGUMENT There is no basis for further review of this case. ‘The issue presented is one of fact and was correctly decided by the Court of Appeals and the Tax Court. 1. In order that an expenditure be incurred in the operation of a trade or business, within the meaning of the Code, it is necessary that the op- eration be entered into with the primary intention of profiting therefrom. Helvering V. Nat. Gro- cery Co., 304 U. S. 282, 289 (fn. 5); Thacher v. Lowe, 288 Fed. 994 (S. D. N. Y.); Coffey v. Com- missioner, 141 F. 2d 204 (C. A. 5); Morton Vv. Commissioner, 174 F. 2d 302, 303 (C. A. 2), certiorari denied, 338 U. S. 828; cf. Ewing v. Commissioner, 213 F. 2d 438 (C. A. 2). Whether such an intention exists is a factual question to be determined by the trier of fact. Coffey v. Com- missioner, supra; Morton v. Commissioner, supra. This test was applied in the instant ease by both the Tax Court (Pet. 25-28) and the Court of Appeals (Pet. 28-30). After a careful review of the evidence each court below resolved this ques- tion adversely to the taxpayers. This concurrent finding is entitled to finality, in the absence of unusual circumstances. Cf. Comstock v. Group of Investors, 335 U. S. 211, 213-214; Allen v. Trust Co., 326 U.S. 630, 636; Tennessee Coal Co. vy. Muscoda Local, 321 U. 8. 590, 605. 2 There is no conflict with Doggett v. Burnet, 65 F. 2d 191 (App. D. C.). In the Doggett case 7 the Board of Tax Appeals (see 65 F. 2d 191, 193) had taken the view that the claimed deductions must be disallowed since the taxpayer had failed to show that the enterprise was profitable or would be profitable. This test the Court of Ap- peals rejected as being too narrow, citing with approval (p. 193) Judge Learned Hand’s state- ment in Thacher vy. Lowe, supra, that ‘The test appears to me to be only of his actual intention.” The Court of Appeals stated (65 F. 2d 191, 194): The proper test is not the reasonableness of the taxpayer’s belief that a profit will he realized, but whether it is entered into and carried on in good faith and for the purpose of making a profit, or in the belief that a profit can be realized thereon, * * *, [Emphasis supplied. ] The holding below is plainly not in conflict with this... On the contrary, the court below stated (Pet. 29-30) : ‘In this connection, Chaloner vy. Helvering. 69 F. 2d 571 (C. A. D. C.), a later decision of the Court of Appeals for the District of Columbia Circuit, should be noted. In that case, on the facts presented, the Court of Appeals applied the same test and disallowed the deductions claimed by the taxpayer since the necessary profit motive was not present. The taxpayers admit (Pet. 15) that Ceci] v. Commissioner. 100 F, 2d 896 (C, ; a 4th) 4 Whitney Vv. Commissioner, 72 F. 2d 589 (C. A. 3d): and Commissioner v. Wide ner, 33 F, 2d 833 (C, A. 3d), relied on by them, fall “short of a square con- flict.” The latter two of these cases were distinguished by the court below on the ground that on the facts presented in those cases “a profit motive could reasonably be found to exist.” (Pet. 30.) In Cecil v. Commissions vr, supra, the OE a A EI EAE 8 It is true, as the Tax Court took pains tto point out, that the taxpayer through this ballistics laboratory performed worthy and useful services for private industry and for the federal government. The es- sential that was missing, however, was a profit motive on the part of the taxpayer. CONCLUSION The petition for a writ of certiorari should be denied. Respectfully submitted, Simon FE. Sosevorr, Solicitor General. Cuarves K. Rice, Assistant Attorney General. Lee A. JACKSON, Marvin W. WEINSTEIN, Attorneys. May 1956. Poe stair “profitt motive” test was applied, as in the instant case, but on the: facts present therein a different result was reached. The taxpayers state (Pet. 17) that cases decided by this Court. (Deputy v. du Pont, 308 U.S. 45%: McDonald vy. Com- missiomer, 323 U.S. 57; United States v. Pyne.213 U.S. 127; and [Higgins v. Commissioner, 312 U.S. 212) leave the defini- tion of “trade or business” in doubt. These cases, however, arise in completely different contexts from that of the in- stant case and in none of them is doubt cast on the validity of thee applicability of the “profit motive” test in cireum- stancees such as are present here. GO 5S GOVEONMENT PRINTING OF FICE 1996 Pope Sk 5 +g "ay &'s - Z & \ : e . * : - - 4 : et ee Se 4 A) fee in Ua- © ee ee ry ; ij , 4 a" v= i ea Oe ‘« . tenths + Se Te . Fray BaF v42 as 13 : a 4 A ‘: i See / the of 1 In : y ‘ ' le ony » 7 : + , . Fe m . ‘ os oe ie 4 2 . pp. < DPE HENRY P. WHITE, and ESTATE OF NANCY A. WHITE, deceased, T. LEO SULLIVAN, ADMINISTRATOR, c.t.c., PETITIONERS’ REPLY BRIEF In Support of Petition for Writ of Certiorari To the United States Court of Appeals For the Sixth Circuit. Tuomas V. Koyxxa, Frep D. Kipper, 1144 Union Commerce Cleveland 14, Ohio, Encar S. Byers, 701 N. B. C. Building, Cleveland 14, Ohio, Counsel for Petitioners. May 15, 1956. —~_—oo ll I ~S=__=_=_=_=—=_=—=—=—=—=—=—== THE GATES LEGAL PUBLISHING CO., CLEVELAND, OHIO—MAIN 1-5647 In the Supreme Court of the United States OCTOBER TERM, 1955. No. 841. HENRY P. WHITE, and ESTATE OF NANCY A. WHITE, deceased, T. LEO SULLIVAN, ADMINISTRATOR, c.t.a. Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. PETITIONERS’ REPLY BRIEF. Respondent, resisting review, relies on the wrong statute. Quoting the “Statute Involved,” Respondent (p. 2) sets forth § 23(e) and omits § 23(a). Where a taxpayer claims a “trade or business” de- duction under § 23(a)(1)(A)' it will not do to answer with rules applicable to a different statute, § 23(e). (As the Court will recall, § 23(a) (1) (A) allows “All the ordi- nary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business;” the only statutory reference to “profit” occurs in § 23(e) (2), which Respondent quotes, and which allows, to an indi- vidual, losses “incurred in any transaction entered into for profit.”’) Having launched the argument from an erroneous premise and upon the wrong statute, Respondent says the ‘Internal Revenue Code of 1939; the same provision is in the present Code, § 162 (a). Qe eve re I Eas a RS HES case raises only an issue of fact. Respondent is in error. ¢ The facts are not in question. The case raises only the question of law whether the court below has applied the wrong standard in construing an important revenue statute by reading into it the “profit” standard Congress put into a different statute, but omitted from this. The question is an important one. The reports of the Courts of Appeals show contrariety of view. (Pet., pp. 8-10, 15-16.) The decisions of this Court leave the question unresolved. (Pet., pp. 17-18.) The question should have the attention of this Court. The writ should issue. Respectfully submitted, Tuomas V. KoykKka, Frep D. Kipper, 1144 Union Commerce Building, Cleveland 14, Ohio, Epcar S. Byers, 701 N. B. C. Building, Cleveland 14, Ohio, Counsel for Petitioners. May 15, 1956. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386418_0542%3A2. Public record. Not legal advice.