Petition for a Writ of Certiorari — American Well & Prospecting Co. v. Commissioner

2 2A hse MHD ow

Re JOHN T. FEY, ~

IN THE

Supreme Court of the United States

OcToBER TERM, 1956

No. 298

AMERICAN WELL AND PROSPECTING

COMPANY,

Petitioner,

against

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE THIRD CIRCUIT

GeorGE G. TYLER,

Counsel for Petitioner,

15 Broad Street,

New York 5, N. Y.

Hoyr .\. Moore,

Of Counsel.

July 12, 1956.

PAGE

NE TNE oo 4 bees Ska keaa nent thaeeens Ras 1

PE Sis 5 ok i SKS nic Kae eA Y CxS AA REE OOS 2

OT ey. ere ror ria se 2

Statutes and Regulations Involved ................ 3

NE i Fins 5 ee Ra eh CAS RAR WENO CK CREA 3

Reasons for Granting the Writ ................... 5

PR Sy Sree ee ep ns ering ate 13

A EN ee Pree ney ee ome ee ee et atk 14

CASES CITED

ABC Brewing Corp. v. Commissioner, 224 F. 2d 483

4 ES Ot. | Rares rpg nny reer Cera 7

A. B. & Container Corporation, 14 T. C. 842 (1950) 8

Acampo Winery & Distilleries, Inc., 7 T. C. 029

fo Pe eee rey Cunt eee 7

Alprosa Watch Corporation, 11 T. C. 240 (1948)... 8

Aluminum Products Company v. United States, 101

. Sp Ste 002. Ce TOU cs creak sas ivkewns 7

Arizona Concrete Company v. Stuart, 55-2 USTC par.

BOGS EB AP eee aa ce ees cea eek oaks 7

Bochm v. Commisstoner, 326 U.S. 287 (1945) ..... 12

Bowman v. Glenn, 84 F. Supp. 200 (W. D. Ky. 1949),

aff'd 184 F. 2d 670 (6th Cir. 1950) ............ 6

Brainard v. Scofield, 140 F. Supp. 754 (W. D. Tex.

PISS ix cuckav ac eae dues UAk ses Ges renee 7

ii

Jos. Capps, Inc. v. United States, 86 F. Supp. 712

CO 7

Choate v. Commissioner, 324 U. S.1 (1945) 22.0... 12

Coca Cola Bottling Co., 19 T. C. 282 (1952) ....... 7

Commissioner Vv. Allegheny Broadcasting Corporation,

ify ©, a0 O44 (3rd Cir, 1950) . 2.0... 000000000, 8

Commisstoner v. Scottish American Investment Co..

Pani Us wy BE OULOOR) 0 occ ccs asaccncsacas 12

Diamond A Cattle Co. v. Commissioner, 56-2 USTC

par, 9629 (10th Cir, May 17, 1956, not yet otticially

reported) reversing 21 T.C. 1 (1953) ........... 5

Eastern Grain Elevator Corp. ve. McGowan, 95°F.

ee I, Ws SIOOD ans cen cascaewace 7

SE ee ans x uaeaucacs vue caved 8

Helvering v. Kehoe, 309 U.S. 277 (1940) ......... 12

Helzvering Vv. F. & R. Lasarus & Co., 308 U.S. 252

rea PENA UA UWS SAAR ONE 40S Osan cee 12

Justice Motor Corp. v. McGowan, 97 F. Supp. 570

Ne Sa OE Dc he Nast eh skin ue ass sa Se

a |

Mesaba-Cliffs Mining Co. v. Commissioner, 174 F. 2d

RN aE EE gk Cnn be daa dinw 04a snes ae ss 8

Myers v. United States, 52-1 USTC par. 66,031 (EE. D.

I rar a ae gag eae 7

O'Sullivan Rubber Company (in Dissolution) v. Com-

missioner, 120 F. 2d 845 (2nd Cir. 1941) 2.2. ...... 9

Rite-Il ‘ay Products, Inc., 12 T. C. 475 ( 2) re 7

Union Bus Terminal vy. Commissioner, 179 F. 2d 399

(5th Cir. 1950) affirming 12 T. C. 197 (1949) .... 8

United States v. Kingman, 170 F. 2d 408 (Sth Cir.

SNOT Gu hee en cbackenbaee see VeRO ER ERK AWAO a J

ili

PAGE

WAG &, ite. 19 T. C. OO9 CIGSS’) cacccccscsccces 8

Westover Co. v. Smyth, 99 F. Supp. 488 (N. D. Cal.

Boot), Sd USEC par. GOOD onc sccccacseses 7

Wheeler Insulated Wire Co., Inc., 22 T. C. 380 (1954) 7

Whitney Manufacturing Co., 14 T. C. 1217 (1950).. 7

Wier Long Leaf Lumber Co. v. Commissioner, 173

F. 2d 549 (5th Cir. 1949) reversing 9 T. C. 990

CRED Sk CAUSE K CNH ENESENEERAOOESECR5ORR COED 6

Wilmington Trust Co. v. Helvering, 316 U. S. 164

PRMD 5 od WAS xe Kedd ana GANS SURE EK CRORE OR 12

Winter & Company, Inc. (Indiana), 13 T. C. 108

CUE 4.55 < ROEEUSACVEAESATER EVER ARACEAE ER KAS 7

STATUTES CITED

Internal Revenue Code of 1939, 53 Stat., Part 1:

oo eo) yee Tare ee 4

SOE FOOLMICED (Aspe cae AA ON OASAARE ROHS 3

GRE SEU lak wsceski cen ccaGauauneeeawe 3

PRHUMRPEDSEALD cicdns ce eabrtacStcae ao

UR WUE ca haan kee ONie cakes scan kenes 3

Section 1254, United States Code, Title 28,62 Stat.928 2

Section 203, United States Code, Title 31,10 Stat.170 9

OTHER CITATIONS

Treasury Regulations 111:

SOCRN, DADAAE: cosine cenccactnsnseusencasss 3

Treasury Regulations 112:

SEI GOd WP OCE) cc ki vc cadaaceeneaesnnnnen 3

IN THE

Supreme Court of the United States

October TERM, 1956

AMERICAN WELL AND PROSPECTING

CoMPANY,

Petitioner,

against eee

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE THIRD CIRCUIT

To the Honorable The Chief Justice of the United States

and the Associate Justices of the Supreme Court of the

United States:

Your petitioner, .\merican Well and Prospecting Com-

pany, a Texas corporation, respectfully prays that a writ

of certiorari issue to review the judgment of the United

States Court of Appeals for the Third Circuit entered

March 22, 1956, which affirmed a decision of The Tax

Court of the United States. A certified transcript of the

record is furnished herewith in accordance with Rule 21,

Pars. 1 and 3, of the Rules of this Court.

Opinions Below

The opinion of the Tax Court (R. 3a)* is reported

in 23 T. C. 503. The opinion of the Court of Appeals (a

*Nine additional copies of the printed Appendix for the petitioner

in the Court of Appeals are furnished herewith in accordance with

Rule 21, Pars. 3 and 4, of the Rules of this Court. The record

references are to that Appendix.

2

copy of which is appended to this petition as Exhibit A)

is reported in 232 F. 2d 934.

Jurisdiction

The judgment of the Court of Appeals (a copy of which

is appended to this petition as Exhibit B) is dated March

22, 1956, and was entered on that date. A petition for re-

hearing which was filed with the Court of Appeals on

April 5, 1950, was denied on April 18, 1956. A copy of the

order of denial is appended to this petition as Exhibit C.

The jurisdiction of this Court is invoked under Title 28,

United States Code, Judiciary and Judicial Procedure, Sec-

tion 1254 (62 Stat. 928).

Questions Presented

1. If the petitioner, a Texas corporation, was in

existence during 1946 (as found by the Tax Court), is

it entitled to carry back to 1944 its unused excess profits

credit for 1946 in the amount of $74,909.27 under the provi-

sions of Section 710(c)(3)(A) of the Internal Revenue

Code of 1939, although in 1946 it was not engaged in the

business which produced its 1944 income against which the

carry-back to 1944 would be applied?

2. Was the finding of the Court of Appeals that the

petitioner was de facto dissolved and hence did not have

any existence for Federal tax purposes in 1946 a proper

one, particularly in view of the finding of fact by the Tax

Court that the petitioner remained in existence in 1946 for

a proper business purpose ?

3

Statutes and Regulations Involved

The pertinent provisions of the statute and the regula-

tions, namely, Section 710(b) (3), Section 710(¢) and Sec-

tion 712(a) of the Internal Revenue Code of 1939, See-

tion 29.52-1 of Treasury Regulations 111, and Section

35.710-3(a) of Treasury Regulations 112, are printed in

the Appendix, infra.

Statement

The tacts were stipulated (R. 12a-18a) and may be

summarized as follows:

The petitioner is a corporation organized in 1931 under

the laws of Texas and is existing and presently engaged

in business (R. 12a, 18a).

In 1931 through 1945, the petitioner was engaged in the

business of manufacturing and selling oil well equipment

and also in the manufacture of armaments for the United

States Government (R. 13a). Since 1944, all the petitioner's

outstanding stock has been owned by Bethlehem Steel Com-

pany, a Pennsylvania corporation, all the stock of which in

turn has been owned by Bethlehem Steel Corporation, a

Delaware corporation (R. 13a).

The petitioner's business was operated at a loss in 1945

(Exhibit 3-C).

As of the opening of business on January 1, 1946,

the petitioner sold all its transferable property, assets and

business for approximately $900,000 to Bethlehem Supply

Company, a Delaware corporation, which was also engaged

in the manufacture and sale of oil well equipment (R. 4a,

13a). The petitioner also agreed to collect its non-assign-

able assets and turn over the proceeds to Bethlehem Supply

Company (R. 3a, 24a). All the outstanding stock of

Bethlehem Supply Company was and is owned by Bethlehem

Steel Corporation (R. 14a).

4

Among the non-assignable assets owned by the petitioner

were certain claims against the United States in the amount

of approximately $300,000 (R. 4a, 13a). The major part

of those claims was collected in May and August of 1946

(R. 6a, I5a, loa). A’ further claim of approximately

$25,000 had not been collected at the time of the hearing

(R. 6a, 16a). The Tax Court found that the petitioner on

January 1, 1940, “ceased to operate a business but remained

in eNistence to cooperate with the purchaser [of its assets]

so that the latter might derive the benefit of certain con-

iracts and claims that were unassignable” (R. 3a).

During 1946 and 1947, the petitioner was also engaged

in settling claims by the United States against it (R.

loa); in purchasing and disposing of certain material and

machinery owned by the United States, but located upon

the property formerly owned by the petitioner (R. loa):

and in defending a suit for $219,000 brought against the

petitioner in June, 1946, by a former employee which was

not disposed of until 1948 (R. 17a).

The petitioner retained the $900,000 proceeds of the sale

of its assets during the entire taxable years 1946 and

1947. It never made any liquidating distributions to its

shareholders (R. 8a). No proceedings to dissolve the peti-

tioner were taken (R. 15a).

The petitioner filed Federal income tax returns for

1946 and 1947 (Exhibits 4-D and 5-E).

Annual meetings of the petitioner’s stockholders and

meetings of its directors were held in 1946 and 1947 (R.

27a-47a).

In 1948, the petitioner invested part of the proceeds

of the sale of its business in a drydock and has since been in

the business of renting the drydock (R. 17a, 18a).

The jurisdiction of The Tax Court of the United States

is based upon Section 272(a)(1) of the Internal Revenue

Code of 1939,

a

re

section 710(¢)(3)(A) of the Internal Revenue Code

of 1939 (set forth in the Appendix to this petition) provides

that if a taxpayer has an unused excess profits credit for

1940, such unused credit “shall be an unused excess protits

credit carry-back for each of the two preceding taxable

years’, in this case 1944 and 1945. The amount of the

petitioner's unused excess profits credit for 1946 is not

in dispute (R. 18a).

The Tax Court held that the petitioner was not entitled

toa carry-back of unused excess profits credit from 1946

to 1944 on the ground that the petitioner was not engaged

in 1946 in the business which produced the 19440 protits

against which the carry-back of unused credit for 1046 was

to be applied. In such a case the Tax Court held that the

Congress did not intend to permit a carry-back « R. 10a).

The Tax Court, however, expressly found that the petitioner

“remained in existence” in 1946 in order to collect its un-

assignable claims (R. 3a).

The Court of Appeals affirmed the decision of the Tax

Court, but upen the ground that the petitioner Was net in

existence during 1946, since it had been de facto dissolved

in January, 1946 (pp. 6, 9).* In so doing, the Court of

Appeals found (contrary to the finding of the Tax Court)

that there was no business reason fer continuing the

petitioner’s existence in 1946 ¢p. 9

Reasons for Granting the Writ

1. The Court of Appeals has rendered a decision in

contlict with the decisions of other Courts of Appeals on

ri same matter, namely, Dramond A Cattle Co. v. Com-

musstoner, 30-2 USTC par. 9629 (10th Cir. Mav 17, 1956,

*References are to the opinion of the ot Appeals « Exhibit A

to this petition).

6

not vet officially reported), reversing 21 T.C. 1 (1953):

Wier Long Leaf Lumber Co. v. Commissioner, 173 F. 2d

O49 (Sth Cir, 1949) [as to the year 1943], reversing 9 T. C.

990 (1947); and Bowman v. Glenn, 84 F. Supp. 200

(W. D. Ky. 1949), aff'd 184 F.2d 070 (Oth Cir. 1950),

Those decisions in the Tenth, Fifth and Sixth Cireuits

involved the exact question presented by the instant case,

namely, whether a corporation which has disposed of the

business trom which it made profits in’ prior years can

carry back to offset income of prior years in which the

business was operated an unused excess protits credit fora

period after it disposed of the business. Those three Courts

of Appeals held that the carry-back provision was manda-

tory. ‘They allowed the carry-back even though the corpo-

rations involved were avowedly in the process of | iquida-

tion, The business reasons for the continuation of the

petitioner's existence in 1940 were at least as great as

the reasons for the continued existence of the corporations

involved in those three cases during the years from which

earry-backs were permitted, and in which the corporations

were held to be in existence and not to have been de facto

dissolved,

2. This case presents a question of large and continu:

ing importance in the functioning of the Federal tax laws

which has not been, but should be, settled by this Court.

That question is: When does a corporate taxpaver cease

to be in existence for the purposes of the Federal tax laws?

The question has been the subject of considerable litigation

and has arisen in a number of different forms.

(a) One form which the question has taken is

whether a corporation’s existence has been terminated

*The Tax Court opinion in the Diamond 4 Cattle Co. case was

written by the author of the Tax Court opinion in the instant case

and is identical in reasoning with the latter opinion.

7

so as to bar its right to a carry-back of unused excess

profits credit (the precise point involved in Utis cass).

The large number of cases in which the question hes

been litigated shows its importance.*

(b) Another form which the question has taken

is whether a corporation’s existence has been termi-

nated during the period of its liquidation so as to bar

its right to a carry-back of operating losses. .fcanitpo

Winery & Distilleries, Inc., 7 T. C. 629, 639-40 (1946) ;

and Gorman Lumber Sales Co., 12 T. C. 1184, 1194

(1949), supra. Those cases hold that an operating loss

of a liquidating corporation which has disposed of all

its business assets that produced the income in prior

years may be carried back to offset the income of those

prior years.

cc) A further form which the question has taken

is whether a corporation's existence has ceased tor the

purpose of terminating the taxable vear. That question

has been litigated in several cases with a result generally

in contlict with the decision of the Court of Appeals in

the instant case: United States v. Kingman, 170 F. 2d

*In addition to the three cases previously cited, the question has

also been ligated with varying results in the following cases: 1 BOC

Brewing Corp. v. Commissioner, 224 F. 2d 483 (%h Cir, 1988);

Jos. Capps, Inc. v. United States, 86 F. Supp. 712 (S. D. Cal. 1949);

Eastern Grain Elevator Corp. v. McGowan, 95 F. Supp. 40 (AW. D.

N. Y. 1950); Justice Motor Corp. v. McGowan, 97 F. Supp. 370

(W. D. NX. Y. 1981); Westover Co. v. Smyth, 99 F. Supp. 4x8

“ D. Cal. ech [for opinion see $1-2 USTC par. gr fe Myers

_ United States, 2-1 USTC par. 66.031 CE. D. Ark. 19582): Brain-

na v. Scofield, 140 F. Supp. 754 (W. D. Tex. 1953) ; prem Con-

crete Company v. Stuart, 35-2 USTC par. 9345 (D. Ariz. 1953);

Rite-IVay Products, Inc., 12 T. C. 475 (1949): Gorman Lumber

Sales Co., 12 T. C. 1184 (1949) ; Winter & Company, Inc. (Indiana),

13 T. C. 108 (1949); Whitney Manufacturing Co.. 14 T. C. 1217

(1950): Coca Cola Bottling Co., 19 T. C. 282 i * 1) rele

Insulated Wire Co., Inc., 22 T. C. 380 (1954): cf. aAhaninim Prod-

ucts Company v. United States, 101 F. Supp. 373 (Ct. Cls, 105] i

8

408 (5th Cir. 1948); Union Bus Terminal v. Commiis-

stoner, 179 F, 2d 399 (5th Cir. 1950), affirming 12 T.C.

197 (1949); and Commissioner v. Allegheny Broad-

casting Corporation, 179 F. 2d 844 (3rd Cir. 1950).

Here again the Courts of Appeals have held that cor-

porations with no more activity than that of the peti-

tioner in 1946 in the instant case were not de facto

dissolved so as to end their existence for Federal tax

purposes.

(d) Still another form which the question has

taken is whether a corporation’s existence has been

terminated so that an excess profits credit may not be

used for later years, or operating losses of prior years

may not be carried forward against income of later

years, where there is an intervening period of compara-

tive inactivity. Great American Industries, Inc., 25 T.

C. No. 133 (March 8, 1956); Alprosa Watch Corpora-

tion, 11 T. C. 240 (1948); IV A G E, Inc., 19 T. C.

249 (1952); A. B. & Container Corporation, 14 T. C.

842 (1950). See also Mesaba-Cliffs Mining Co. v.

Commissioner, 174 F. 2d 857 (6th Cir. 1949). Here

again the rationale of the cases is contrary to the deci-

sion of the Court of Appeals in the instant case.

(e) Another form which the question has taken is

whether a corporation’s existence has terminated for

the purpose of determining whether it should have filed

a return and whether certain income is taxable to it

or to its shareholders. The Treasury Regulations have

for many years provided that a corporation is in exis-

tence for Federal tax purposes and is required to file

Federal income tax returns even though it ceases busi-

ness and dissolves (whether de facto or de jure), if it

retains valuable assets or claims. Thus, Section 29.52-1

of Treasury Regulations 111, effective during 1946,

provides as follows:

9

ee

... A corporation is not in existence after it

ceases business and dissolves, retaining no assets,

whether or not under State law it may thereafter be

treated as continuing as a corporation for certain

limited purposes connected with winding up its

affairs, such as for the purpose of suing and being

sued. If the corporation has valuable clatms for

which it will bring suit during this period, it has

retained assets, and it continues in existence... .”

(Emphasis added. )

Following that regulation, it has been held that a dis-

solved corporation which was engaged in liquidating

its assets is still a “corporation” within the meaning

of the Federal tax laws and is required to file returns

and pay taxes. O'Sullivan Rubber Company (in Dis-

solution) v. Commissioner, 120 F. 2d 845 (2nd Cir.

1941). That regulation and the cases construing it are

contrary to the decision of the Court of Appeals in the

instant case.

3. The Court of Appeals in rendering its decision has

so far departed from the accepted and usual course of judi-

cial proceedings as to call for an exercise of this Court's

power of supervision.

When the petitioner on January 2, 1946, sold all its

assignable assets to Bethlehem Supply Company, it had

other assets in the form of claims against the United States

which, because of the provision of 10 Stat. 170, as amended

(Section 203, Title 31, United States Code), were not

assignable; assignment of them rendered them absolutely

void.* Accordingly, the petitioner agreed to collect the non-

*The relevant part of 10 Stat. 170, as amended, Section 203.

Title 31, United States Code, reads as follows:

“All transfers and assignments made of any claim upon the

United States, or of any part or share thereof, or interest

therein, whether absolute or conditional, and whatever may be

the consideration therefor, and all powers of attorney, orders,

10

assignable claims which had arisen in its business and.

when it had finished collecting them, to transfer the proceeds

thereot to Bethlehem Suppiy Company. Che problem of col-

lecting non-assignable claims arises on a sale toa third party,

such as Bethlehem Supply Company «luted States y,

Shannon, 342 US, 288( 1952). Tf the petitioner had sold

those claims to Bethlehem Supply Company on January 2,

1946, they would have become void. The petitioner had not

finished collecting such unassignable claims by the end of

1946 (R. 13a, loa, 17a, 24a).

The Tax Court found that the petitioner

“remained in existence to cooperate with the pur-

chaser [of its assets] so that the latter might derive

the benefit of certain contracts and claims that were

unassignable.” (R. 3a)

The Commissioner of Internal Revenue accepted that

finding in his brief which he tiled with the Court of Appeals

and incorporated it in his statement of the question involved

on the appeal pursuant to Rule 24(2)(b) of the Rules of

that Court, stating that the petitioner

“remained in existence to cooperate with the pur-

chaser so that the latter might derive the benefit of

certain contracts and claims that were unassignable.”

(Br., p. 2

The Tax Court's finding of fact that the petitioner

remained in existence for the business purpose of cooperat-

ing with the purchaser of its assets in connection with the

collection of non-assignable claims is supported by substan

tial evidence. The Tax Court found that the petitioner had

or other authorities for receiving payment of any such claim,

or of any part or share, thereof, shall be absolutely null and

void, unless they are freely made and executed in the presence

of at least two attesting witnesses, after the allowance of such

a claim, the ascertainment of the amount due, and the issuing

of a warrant for the payment thereof. * * *”

11

claims against the United States. which arose out of the

business it had tormeriy conducted, in the amount of ap-

proximately S300,000 (R. 6a). Li the petitioner had sold

them to Bethlehem Supply Company. they would have, under

decisions of this Court, become void. The collection of non-

assignable claims arising out of its business which it owned

and which only it could collect was a part ot the orderly

winding up of the petitoner’s attairs. Certainly, counsel

ior the petitioner could not properly have advised that the

petitioner be dissolved prior to the collection of the non-

assignable claims against the United States. Prior to the

time all those claims were collected, the petitioner was

actively engaged in another business.

The Court of .\ppeals disregarded the finding of the

Tax Court that the petitioner remained in existence for a

proper business purpose. The holding of the Court of

Appeals is summed up in the following two sentences in its

opinion (p. 9):

“In any event, there could be only two reasons for

keeping a corporation alive under the circumstances

of the case at bar in 1940: to avoid taxes, or to have

a spare corporate charter conveniently ready for use

whenever desired by the parent corporation. Neither

is a sufficient business purpose of the taxpayer to

negate the Tax Court's finding that the taxpayer

in the case at bar was not entitled to an unused

excess proiits credit carry-back trom the tax year

1946.”

The extent to which the Court of Appeals disregarded

the finding of the Tax Court is also shown by the way in

which it attempted to distinguish the cases relied upon by

the petitioner as supporting the allowance of the carry-

back. The Court of Appeals distinguished those cases on

the ground that “the taxpayers involved were much more

than corporate shells kept alive only for purposes of tax

12

evasion” (p. 8). As stated above, the Tax Court found that

the petitioner was continued in existence for a proper busi-

ness purpose and the statement by the Court of Appeals in

its opinion that the petitioner was kept alive in 1946 for pur-

poses of tax evasion was not even suggested by the Com-

missioner of Internal Revenue at any stage in the proceed-

ing and is entirely unsupported in the record.

The disregard by the Court of Appeals of the proper

business reason why the petitioner remained in existence

during 1946, as found by the Tax Court, is such a departure

from the accepted and usual course of judicial proceedings

as to call for an exercise of this Court’s power of supervi-

sion. Commissioner v. Scottish American Investment Co.,

Ltd., 323 U. S. 119, 123-124 (1944). See also Choate v.

Commissioner, 324 U.S. 1 (1945); Wilmington Trust Co.

v. Helvering, 316 U. S. 164 (1942); Helvering v. Kehoe,

309 U. S. 277 (1940); and Helvering v. F. & R. Lazarus

& Co., 308 U. S. 252 (1939). That the Tax Court’s finding

was based on stipulated facts does not change the rule that

it is an abuse of the power of appellate review to ignore the

Tax Court’s findings of fact. Boehm v. Commissioner,

326 U. S. 287, 293 (1945).

The importance of a determination by this Court of

when a corporate taxpayer’s existence may be deemed to be

terminated for Federal tax purposes is apparent from the

number of litigated cases in lower courts which have in-

volved the question. Moreover, as stated above, the decision

ot the Court of Appeals is in direct conflict with the deci-

sions in three of those cases and contrary to the reasoning

of several others.

13

Conclusion

For the foregoing reasons the petition for a writ of

certiorari should be granted.

Respectfully submitted,

AMERICAN WELL AND PROSPECTING

COMPANY

Petitioner,

by

GEORGE G. TYLER,

Counsel for Petitioner,

15 Broad Street,

New York 5, N. Y.

Hoyt A. Moore,

Of Counsel.

July 12, 1956.

14

APPENDIX

STATUTES AND REGULATIONS INVOLVED

Internal Revenue Code of 1939, 53 Stat., Part 1:

Sec. 710. |MPosITION OF TAX.

(b) Definition of . ldjutsted Excess Profits Net In-

come.—As used in this section, the term “adjusted ex-

cess profits net income” in the case of any taxable year

means the excess profits net Income (as detined in sec-

tion 711) minus the sum ot:

(1) Specific Exemption...

(2) Excess Profits Credit... ; and

(3) Unused Lxcess Profits Credit—The amount

of the unused excess profits credit adjustment for the

taxable year, computed in accordance with subsection

(c).

(c) Unused Excess Profits Credit Adjustment.—

(1) Computation of Unused Excess Profits Credit

djustment.—The unused excess profits credit adjust-

ment for any taxable year shall be the aggregate ot the

unused excess profits credit carry-overs and unused

excess profits credit carry-backs to such taxable year.

(2) Definition of Unused foxrcess Profits Credit.—

The term “unused excess protits credit’ means the ex-

cess, if any, of the excess protits credit for any taxable

year beginning after December 31, 1939, over the ex-

cess profits net income for such taxable year, computed

on the basis of the excess profits credit applicable to

such taxable year. For such purpose the excess profits

credit and the excess profits net income for any taxable

year beginning in 1940 shall be computed under the law

applicable to taxable years beginning in 1941. The un-

used excess profits credit for a taxable year of less than

twelve months shall be an amount which is such part of

the unused excess profits credit determined under the

first sentence of this paragraph as the number of days in

15

the taxable year is ot the number of days in the twelve

mont!:s ending with the close of the taxable year. There

shall be no unused excess profits credit for a taxable

year beginning after December 31, 1946. ...

(3) mount of Unused Excess Profits Credit Car-

ry-Back and Carry Over.—

(A) Unused Excess Pr fits Credit Carry-Back.—

lf for any taxable year beoinning aiter December $i,

1041, the taxpayer has an unused excess profits credit,

such unused excess profits credit shall be an unused

excess profits credit ¢ rry-back for each of the two pre-

ceding taxable years, except that the carry-back in the

case of the first preceding taxable year shall be the ex-

cess, if any, of the amennt of such unused excess profits

credit over the adjusted excess profits net income for

the second preceding taxable year computed for such

taxable year (i) by determining the unused excess

profits credit adjustment \s ithout regard to such unused

excess profits credit, and (ii) without the deduction of

the specific exemption pr wwided in subsection (b) (1).

Sec. 712. Excess Prorits Crepit—ALLOWANCE.

(a) Domestic Corporations.—In the case of a do-

mestic corporation which was in existence before Janu-

ary 1, 1940, the excess profits credit for any taxable

year shall be an amount ¢ miputed under section 713 or

section 714, whichever amount results in the lesser tax

under this subchapter for the taxable year for which

the tax under this subchapter is being computed. In the

case of all other domestic corporations the excess profits

credit for any taxable year shall be an amount computed

under section 714. For allowance of excess profits

credit in case of certain re irganizations of corporations,

see section 741.

Treasury Regulations 111:

Sec. 20.52-1. Corporation returns. . - - A corpora-

tion having an existence during any portion of a taxable

year 1s required to make a return. If a corporation was

16

not in existence throughout an annual accounting period

(either calendar year or fiscal year), the corporation is

required to make a return for that fractional part of

a year during which it was in existence. A corporation

is not in existence after it ceases business and dissolves,

retaining no assets, whether or not under State law it

may thereafter be treated as continuing as a corporation

for certain limited purposes connected with winding up

its affairs, such as tor the purpose of suing and being

sued. If the corporation has valuable claims for which it

will bring suit during this period, it has retained assets,

and it continues in existence. A corporation does not go

| out of existence if it is merely turned over to receivers

| or trustees who continue to operate it. A corporation

| which has received a charter, but has never perfected

|

H

i

\

|

|

its organization, which has transacted no business and

had no income from any source, may upon presentation

ot the facts to the collector be relieved from the necessity

of making a return as long as it remains in an unor-

ganized condition. In the absence of a proper showing

to the collector such a corporation will be required to

make a return....

Treasury Regulations 112:

Sec. 35.710-3. Unused excess profits credit adjust-

| ment.—(a) Unused excess profits credit.—The unused

i excess profits credit tor any taxable year beginning after

December 31, 1939, is the excess of the excess profits

credit for the taxable vear over the excess profits net

income, if any, for such taxable year... .

A corporation may have an unused excess profits

credit for a taxable year beginning in 1946, which may

be carried back to the two preceding taxable years, even

though no excess profits tax is imposed for such taxable

year. The unused excess profits credit for a taxable

year beginning in 1946 is to be computed in the same

manner as though an excess profits tax were imposed

for such taxable year... . There will be no unused excess

profits credit for a taxable year beginning after Decem-

ber 31, 1946.

EXHIBIT A

UNITED STATES COURT OF APPEALS

For THE Turrep Circuit

No. 11,588

AMERICAN WELL AND PROSPECTING COMPANY,

Petitioner,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

APPEAL FROM THE Tax Court oF THE UNITED STATES

Argued October 7, 1955

Before Biaas, Chief Judge, and Maris and Gooprica, Circutt

Judges

OPINION OF THE COURT

(Filed March 22, 1956)

By Biaas, Chief Judge.

The taxpayer, American Well and Prospecting Com-

pany, is a Texas corporation organized in 1931. It was

engaged in manufacturing and selling oil well rotary drill-

ing equipment and accessories and in the making of arma-

ments for the United States for a number of years prior to

1946. Bethlehem Steel Corporation acquired all of the out-

standing capital stock of the taxpayer in 1944 and still

holds it.

On December 19, 1945, the taxpayer entered into a con-

tract with Bethlehem Supply Company (Supply), then and

now another wholly owned subsidiary of Bethlehem Steel

2

Corporation. Supply agreed to assume, pay and perform

all of the liabilities and obligations of the taxpayer as of

the opening of business on January 1, 1946, and also agreed

to perform for the taxpayer all of its obligations with re.

spect to certain contracts and leases relating to the ma-

chinery and equipment owned by the United States goy.-

ernment. It was further agreed that, if taxpayer purchased

any such equipment subsequently, it would resell the equip.

ment to Supply at cost, unless its agreement with the United

States prohibited such a course. The taxpayer agreed that

it would sell to Supply all of its transferable assets, save

its corporate records and franchise. Certain physical equip-

ment owned by the United States was, of course, excluded.

The contract also provided that, as soon as possible

after the closing date, Supply would pay to the taxpayer

for the properties to be sold an amount equal to the aggre-

gate net book value of the property less the aggregate book

value of the liabilities and obligations of the taxpayer as-

sumed by Supply. The taxpayer also agreed that if any of

the rights or interests or any of the obligations under any

of its contracts could not be assigned to Supply, the tax-

payer would seek to obtain the necessary consents to permit

such assignments. Under the terms of the contract the

taxpayer was required to cooperate with Supply, if the

necessary consents could not be obtained, to the end that

the obligations of the taxpayer should ‘‘be performed in

such manner that the value and benefits of the contract in

question shall be preserved and shall inure directly or indi-

rectly to the benefit of the Supply Company.”’

On January 2, 1946, instruments of conveyance dated

December 31, 1945, were delivered by the taxpayer to Sup-

ply; and Supply assumed all liabilities and obligations of

the taxpayer as of the opening of business on January 1,

1946. Among the assets owned by the taxpayer and cov-

ered by the agreement were claims against the United

States. Most of these were settled in 1946. The taxpayer

also had certain clean-up jobs which it was obligated to

3

perform tor the United States. In connection with these,

the taxpayer purchased from the United States material

and machinery owned by the government and located on the

property formerly owned by the taxpayer and sold by it

to Supply pursuant to the contract. The amounts neces-

sary to effect these purchases were furnished by Supply,

and Supply received the proceeds of the sale of the ma-

terial and machinery. In October 1951 the taxpayer set-

tled a claim asserted against it by the United States in the

sum of $1,300 for defective material delivered prior to Janu-

ary 1, 1946.

Negotiations for these settlements and the purchase of

machinery and supplies, hereinbefore reterred to, were con-

ducted by persons who were officers of the taxpayer but

were also officers of Supply, Bethlehem Steel Company and

Bethlehem Steel Corporation. These officers did not receive

any compensation from the taxpayer during 1946 and 1947

but were compensated by one or more of the other com-

panies referred to. No entries of receipts or disbursements

were made on any of the taxpayer’s books in connection

with the settlement or the purchases and sales referred to

during the year 1946. All receipts or payments in respect

thereto were received or made by Supply. A former em-

ployee of the taxpayer commenced an action in June 1946

for alleged unpaid compensation in the sum of $219,000.

The taxpayer filed an answer and took other action until

November 1, 1948, when the suit was dismissed following

the death of the plaintiff. The expenses of the litigation

were borne partly by Supply and partly by the former stock-

holders of the taxpayer from whom Bethlehem Steel Com-

pany had purchased the taxpayer's stock.

The net proceeds of the sale of the taxpayer's proper-

ties and assets amounted to $894,929. This amount was

credited to the taxpayer in the intercompany bank account

maintained by subsidiary companies of Bethlehem Steel

Corporation. No formal action to dissolve the taxpayer

was ever taken. In both 1946 and 1947 there were meetings

4

of stockholders and of the board of directors for the pur-

pose of electing directors and officers. The balance sheets

of the taxpayer as of the close of business on January 2,

1946, December 31, 1946, and December 31, 1947 were iden-

tical. The substance of these balance sheets is set out

below."

In 1948 the taxpayer acquired four sections of a dry-

dock for $800,000, and in 1949 the taxpayer purchased an-

other section. These drydock facilities represented an in-

vestment of approximately $1,500,000 at the time of the

hearing before the Tax Court. The taxpayer made a busi-

ness of renting the drydock.

The taxpayer did not have any excess profits net in-

come for the taxable year 1946. It is agreed, however, that

if the taxpayer is entitled to any unused excess profits

credit for the year, the amount would be $74,909.27,

The Commissioner determined a deficiency in excess

profits tax for the calendar year 1944 because of the dis-

allowance of the unused excess profits credit carry-back

from 1946. The Tax Court agreed with the Commissioner’s

determination, reasoning as follows: ‘* The petitioner, at the

beginning of 1946, disposed of the assets essential to the

continued operation of the business which it had conducted

with those or similar assets in 1944. Those assets were

used during 1946 by Supply to carry on the business there-

tofore conducted by the petitioner. The results of the op-

eration of that business during 1946 had no effect upon

the petitioner but there might he ve been no excess profits

credit to carry back to 1944 had the petitioner continued to

conduct the business during 1946. Where the business was

1 vissets

Accounts Receivable (intercompany bank account) $894,929.00

Capital

Capital Stock 100,000.00

Paid-in Surplus : , .o.. §6*906 513%

Earned Surplus bahen 748,415.44

$804 929.00

5

thus transferred to another and no longer operated by the

petitioner, the latter was not intended by Congress to have

the excess profits credit, wholly unnecessary for 1946, car-

ried back to offset income of a year when the petitioner had

operated the business . . . [citing cases]. It makes no

difference that after several years the petitioner began to

engage in a new and unrelated business.’’ 23 T.C. 503, 507

(1954). The petition for review followed.

Section 710(c)(3)(A) of the Internal Revenue Code of

1939 governs. It provides: ‘If for any taxable year begin-

ning after December 31, 1941, the taxpayer has an unused

excess profits credit, such unused excess profits credit shall

be an unused excess profits credit earry-back for each of the

two preceding taxable years... .” Section 710(e)(2)

states: ‘'The term ‘unused excess profits credit’? means the

excess, if any, of the excess profits credit for any taxable

year beginning after December 31, 1939, over the excess

profits net income for such taxable year, computed on the

basis of the excess profits credit applicable to such taxable

year. . . . There shall be no unused excess profits credit

for a taxable year beginning after December 31, 1946. The

unused excess profits credit for a taxable year beginning in

1946 and ending in 1947 . . . [shall be prorated to Janu-

ary 1, 1947].’’ The taxpayer’s taxable year 1946 was a

calendar year.

From the face of the statute, it would appear that, if

the taxpayer existed as a corporation for the entire year

1946, the carry-back is mandatory. Nonetheless, the courts

have held that the mere retention of a corporate shell, with-

out internal business substance, does not entitle a corporate

taxpayer to an excess profits carry-back ? or to spread the

profits of a partial year of business over the entire year, in-

cluding dormant months, to reduce its exeess profits tax or

2 ABC Brewing Corp. v. Commissioner, 224 F. 2d 483 (9 Cir. 1955);

Wier Long Leaf Lumber Cov Commissioner, 173 Fo 2d $49 (5 Cir 1949)

(as to the tax year 1944). Wheeler Insulated Wire Co. 22 T.C 380 (1954);

Winter & Co., 13 TC. 108 (1949), Gorman Lumber Sales Co, 12 T.C. 1184

(1999) ; Rite-Way Products, Inc, 12 T.-C 475 (IS?)

6

to create a carry-back.2 This is the de facto dissolution

doctrine. With few exceptions, however, the cases in which

courts have applied this doctrine concerned corporations

which were totally or almost completely liquidated.‘ In the

case at bar, taxpayer has never been liquidated but is in

fact now actively engaged in a different type of business

enterprise.

Let us lay aside for the moment this factual distinction

and determine whether the taxpayer would have been held

to have been de facto dissolved in 1946 had it eventually

been liquidated without acquiring any additional operating

assets. For if the taxpayer would not have been held to

have been de facto dissolved, it will be unnecessary to con-

sider the effect of the taxpayer’s subsequent drydock op-

erations on its tax year 1946.

The test of de facto corporate existence is well de-

scribed in Westover Co. v. Smyth, 99 F. Supp. 488 (N.D.

Calif. 1951), 51-2 USTC {| 66,019 at page 84,075,° as follows:

‘«. . . not the size of the activities but their nature and

purpose; not whether some other form of business organi-

zation might have sufficed but whether the form chosen was

bona fide; not whether the corporation might have dissolved

earlier, but whether during the period for which it is claim-

ing the carry-back it has engaged in corporate activities so

that its existence may not be disregarded.’’ The fact that

there was no liquidating dividend in the case at bar does not

preclude a finding of de facto dissolution. The courts have

had no difficulty in holding corporations to be de facto dis-

solved when funds still remained to be distributed to stock-

holders.* Here a few entries on the Bethlehem intercom-

pany ledgers would have reduced the taxpayer’s status to

a row of ciphers. Furthermore, all of the taxpayer’s ac-

3 Eastern Grain Elevator Corp. v. McGowan, 95 F. Supp. 40 (W.D. N.Y.

1950) ; Diamond A Cattle Co., 21 T.C. 1 (1953); Winter & Co., note 2 supra.

4 Cases cited in notes 2 and 3 supra, except Wheeler and Winter.

5 The opinion of the court does not appear at 99 F. Supp. 488, but only the

trial judge’s findings of facts and conclusions of law and the judgment.

6 See cases cited in notes 2 and 3 supra, except Eastern Grain Elevator.

7

tivities after January 2, 1946 relating to its original enter-

prise were conducted merely as agent for Supply. The

taxpayer incurred no costs in winding up its old business;

Supply paid all the bills, including the salaries of the tax-

payer's officers. The taxpayer acquired no additional in-

come during the winding up; Supply was entitled to such

income under its contract... For over two years the tax-

payer’s balance sheet remained exactly the same as it was

on January 2, 1946. In sum, the taxpayer existed only as

a name through which Supply completed its acquisition of

the taxpayer’s former assets, and‘as a page in the Bethle-

hem intercompany ledger. There is no decision holding a

corporate taxpayer entitled to an excess profits credit on

such facts; there are several decisions holding corporations

with considerably more business activity, whose balance

sheets were affected, not entitled to the eredit.*. Thus, un-

less the entry into the drydock business in 1948 changes

the result, the taxpayer in the case at bar would not be

entitled to an excess profits credit for the tax year 1946.

The Commissioner long contended that a corporate tax-

payer which changed the nature of its business was not

entitled to carry back an unused excess profits credit ac-

quired under its new enterprise to offset excess profits taxes

incurred under the old enterprise. The courts uniformly

7 In many respects, the transfer of all of the taxpayer's assets and lia-

bilities to Supply resembled a merger. And when one corporation merges into

another, its existence ceases for all excess profits tax calculation purposes.

Pepsi Cola Co. v. Commissioner, 155 F. 2d 921 (2 Cir. 1940).

8 ABC Brewing Corp. v. Commissioner; Wier Long Leaf Lumber Co.

vy. Commissioner, both note 2 supra; Eastern Grain Elevator Corp. v. McGowan,

note 3 supra; Gorman Lumber Sales Co.; Rite-Way Products, Inc., both note

2 supra.

Cases where courts have found sufficient business activity to entitle cor-

porations in liquidation to excess profits credits include: Commissioner v.

Allegheny Broadcasting Corp., 179 F. 2d 844 (3 Cir. 1980) ; Wier Long Leaf

Lumber Co. v. Commissioner, note 2 supra (as to the tax year 1943) ; Brainard

y. Scofield, 54-1 USTC { 66,066 (W.D. Tex. 1953); Myers v. United States,

62-1 USTC 966,031 (E.D. Ark. 1982); Justice Motor Corp. v. McGowan, 97

F. Supp. 570 (W.D. N_Y. 1981); Bowman v. Glenn, 84 F. Supp. 200 (W.D.

Ky. 1949), aff'd p-c., 184 F. 2d 670 (6 Cir. 1950) ; Roeser & Pendleton, Inc.,

18 T.C. 966 (1980). See also United States v. Kingman, 170 F. 2d 408 (5 Cir.

1948) ; Union Bus Terminal, Inc., 12 T.C. 197 (1949), aff'd Pc. 179 F. 2d 399

(S$ Cir. 1950).

8

disapproved the Commissioner’s contention.® In_ those

cases, however, the courts stressed the continuity of the cor-

porate taxpayer’s business activity, even though the nature

of the activity changed.’ During the years for which ex.

cess profits credits were allowed, the taxpayers involved

were much more than corporate shells kept alive only for

purposes of tax evasion.

In the case at bar a gap of over two years occurred

between the date the taxpayer disposed of those assets

necessary to carry on its old business and the acquisition

of the drydock sections in 1948. During the intervening

period, the taxpayer served occasionally as a funnel for

Supply, which had acquired all of the taxpayer’s assets

and liabilities, to dispose of claims arising out of the tax-

payer’s former operations. The hollow quality of the tax-

payer’s corporate existence during this period is borne out

by its balance sheets, which were identical as of the close

of business on January 2, 1946, December 31, 1946, and

December 31, 1947. It thus appears that after January 2,

1946, the taxpayer was little more than another corporate

charter lodged in the files of the Bethlehem Steel family

of corporations to await the moment when Bethlehem saw

fit to breathe life into it to serve some new business pur-

pose. In such a situation, can the drydock operations un-

dertaken in 1948 close the hiatus of corporate inactivity

during 1946, 1947, and part of 1948?

There is no case directly in point. There are, however,

two Tax Court decisions involving taxpayers whose char-

ters were similarly lodged in corporate family files. See

Wheeler Insulated Wire Co., 22 T.C. 380 (1954) and Winter

& Co., 13 T.C. 108 (1949). In the Wheeler case, the Sperry

9 Mesaba-Cliffs Min. Co. v. Commisioner, 174 F. 2d 857 (6 Cir. 1949);

Westover Co. v. Smyth, 99 F. Supp. 488 (N.D. Calif. 1951); Jos. Capps, Inc.

v. United States, 86 F. Supp. 712 (S.D. Calif. 1949); Whitney Manufacturing

Co., 14 T.C. 1217 (1950); Alprosa Watch Corp., 11 T.C. 240 (1948). Com-

pare Aluminum Products Co. v. United States, 101 F. Supp. 373 (Ct. Cl. 1951).

10 See, e.g., Westover Co. v. Smyth, note 9 supra, §1-2 USTC € 66,019 at

page 84,074; Jos. Capps, Inc. v. United States, note 9 supra, 86 F. Supp. at

713; Whitney Manufacturing Co., note 9 supra, 14 T.C. at 1221.

9

Corp. transferred the assets of a prosperous subsidiary,

Connecticut, to another subsidiary, Wheeler, so that

Wheeler’s excess profits credits could be used to offset Con-

necticut’s profits. Connecticut then attempted, unsuccess-

fully, to claim for its own benefit an unused excess profits

credit carry-back from its assetless years to its last year

of active business. It does not appear from the record in

the instant case whether Supply’s acquisition of the tax-

payer’s business assets resulted in a similar tax advantage

to Supply, although we are told that the taxpayer was op-

erating at a loss at the time of the transfer of its assets

and it is probable that Supply was operating at a profit.

In any event, there could be only two reasons for keeping

a corporation alive under the circumstances of the case at

bar in 1946: to avoid taxes, or to have a spare corporate

charter conveniently ready for use whenever desired by the

parent corporation. Neither is a sufficient business purpose

of the taxpayer to negate the Tax Court’s finding that the

taxpayer in the case at bar was not entitled to an unused

excess profits credit carry-back from the tax year 1946.

The decision of the Tax Court will be affirmed.

A true Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circust.

EXHIBIT B

UNITED STATES COURT OF APPEALS

For THE THIRD CIRCUIT

No. 11,588

AMERICAN WELL AND PROSPECTING

COMPANY, :

Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

On PETITION TO REVIEW A DECISION OF THE TAX Court

OF THE UNITED STATES

Present: Biccs, Chief Judge, and Maris and Goopricx,

Circuit Judges.

JUDGMENT

This cause came on to be heard on the record from the

Tax Court of the United States, and was argued by counsel.

On consideration whereof, it is now here ordered,

adjudged and decreed by this Court that the decision of

the said Tax Court in this cause be, and the same is hereby

affirmed.

Attest:

Ipa O. CRESKOFF,

March 22, 1956 Clerk

RECEIVED & FILED

Mar. 22, 1956

Ipa O. CrRESKOFF,

Clerk

EXHIBIT C

UNITED STATES COURT OF APPEALS

For THE THIRD CIRCUIT

No. 11,588

AMERICAN WELL AND PROSPECTING

COMPANY,

Petitioner,

VS.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

Sur PETITION FOR REHEARING

Present: Brocs, Chief Judge, and Maris and GoopricH,

Circuit Judges.

After due consideration the petition for rehearing in

the above-entitled case is hereby denied.

RecEIvED & FILED

Apr. 18, 1956

Ipa O. CRESKOFF,

Clerk

By the Court

Biccs

Chief Judge

Dated: April 18, 1956