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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for a Writ of Certiorari
- **Published:** January 1, 1956
- **Citation:** 352 U.S. 840

## Text

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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386418_0735%3A1. Public record. Not legal advice.