Appendix — Murray v. Commissioner

Appendix A

STATUTORY PROVISIONS.

Internal Revenue Code of 1939:

See. 22. GROSS INCOME.

(a) General Definition. *Gross income’’ includes

gains, profits, and income derived from salaries, wages,

or compensation for personal service, of whatever

kind and in whatever form paid, or from professions,

vocations, trades, businesses, commerce, or sales, or

dealing in property, whether real or personal, growing

out of ownership or use of or interest in such prop-

erty; also from interest, rent, dividends, securities, or

the transaction of any business carned on for gain

or profit, or gains or profits and income derived from

any source whatever. * * *

2

Appendix B

United States Court of Appeals

For the Ninth Circuit

FE. J. Murray,

Petitioner,

vs. No. 14,579

Commissioner of Internal Revenue, Mar. 30, 1956

Respondent.

On Petition to Review a Decision of the Tax Court

of the United States

Before Stephens, Healy and Pope, Circuit Judges.

Pope, Cireuit Judge.

This is a petition to review a decision of the Tax

Court which approved the Commissioner’s determina-

tion of a deficiency in income tax for the year 1947.’

The opinion of the Tax Court is reported at 21 T.C.

1049 where the facts of the case are stated at greater

length and in more detail than we find necessary here.

In 1928 the petitioner and his wife acquired certain

real estate in Klamath Falls, Oregon. They borrowed

$64,000 from a savings and loan association which

they used to finance the construction of a building

upon the property and secured the loan by a mort-

'Deficiencies were determined for both 1946 and 1947, but the

1946 deficiency is not in queston here.

“y

eons

3

gage thereon. In 1932, when there was a balance due

of $57,000 upon the mortgage debt, petitioner and his

wife conveyed the building, subject to the mortgage,

to a corporation whose sole stockholders were Wiley

and D’Albini, petitioner’s attorneys, and to the wives

of Wiley and D’Albini. In 1934, the savings and loan

association brought suit to foreclose its first mortgage

and the property was sold pursuant to the foreclosure

decree. On the last day of the statutory redemption

period, the property was redeemed from the fore-

closure sale by certain assignees of the Wiley-D’Albini

corporation. In 1948 the petitioner and his wife

brought suit in the Cireuit Court of the State of Ore-

gon against Wiley and [D’Albini and their assignees

and procured a sheriff’s deed therefor, and after trial

in that court and hearing upon appeal in the Supreme

Court of Oregon, the latter court on June 30, 1942,

upholding the contentions of the petitioner and his

wife, held that petitioner’s conveyance of the building

to Wiley and D’Albini was made merely to secure

petitioner's indebtedness to his attorneys; that their

corporation held the property as mortgagee in posses-

sion, and that the conveyance to the assignees who re-

deemed from the mortgage foreclosure was also sub-

ject to petitioner’s continued right to redeem the prop-

erty, and that petitioner was beneficial owner of the

property subject to the liens of the various defend-

ants, all of whom stood in the position of mortgagees

iN possession. x

The Oregon Supreme Court remanded the case to

the Cireuit Court for an appropriate accounting in

NAO LENS

4

which defendants would be given eredit for amounts

paid to redeem the property, for the amounts paid to

redeem from a federal tax lien, and for amounts owing

for the legal services of Wiley and D’Albini, subject

to certain named offsets. That court also ordered that

upon payment of the amounts of these liens as ascer-

tained by further accounting, the petitioner should be

entitled to a reconveyance of the property, and in its

decision (as revised on the petition for rehearing),

the Oregon Supreme Court adjudged that the defend-

ants should have credits in the ensuing aceounting for

their costs of management and repairs in the opera-

tion of the building while in possession thereof, and

that the proceeding before the court was a suit by a

mortgagor to redeem, not one to foreclose a mortgage.

It was directed that unless petitioner did redeem the

property from the liens the decree of the Cireuit Court

should determine and specify a reasonable time within

which petitioner might redeem from the liens or be

forever barred.

Upon the remand of the case to the Cireuit Court,

the accounting was taken as directed. A further ap-

peal to the Supreme Court followed, but the action

of the Cireuit Court, with one minor exception, was

affirmed on January 14, 1947. In the judgment thus

affirmed it was ascertained that after charging peti-

tioner with the amount of those liens and. interest

thereon, and erediting petitioner with the amount of

the rents received by the so-called mortgagees in

possession, and charging petitioner with the amount

of expenses of maintenance, the amount required to

5

be paid by petitioner to redeem was $10,630.41. He

paid that sum on February 28, 1947, and on that date

a final decree was entered adjudging that he had satis-

fied all hens on the property, and the defendants were

directed to reconvey to him within ten days or have

the reconveyance oecur through operation of the de-

eree. Possession of the building was thereupon sur-

rendered to petitioner.

Petitioner who is a cash basis taxpayer, had filed

no income tax return for any of the years 1937

through 1945. He had no income during those years,

but in July, 1947, he filed separate returns for all the

vears 1937 to 1946, reconstructing the income he would

have had from his property in those years had he

heen in possession,

The Commissioner determined a deficiency in peti-

tioner’s income tax for the vear 1947 based for the

main part on the further determination that as a re-

sult of the transactions culminating in the final court

decree above mentioned, petitioner had realized ordi-

nary income of $57,512.64 in that vear. This sum was

arrived at as follows: In the Circuit Court accounting

petitioner had been given credit and the defendants

there had been charged with $102,589.45 received from

rents on the building from 1936 to 1947. Interest had

heen added to this amount making the total credited

to petitioner from this souree $135,808.19. Against

these credits there was charged maintenance expenses,

interest on the mortgage, and other dishursements.

totaling $78,295.55. The balanee of $57,512.64 was the

ordinary income thus charged to the petitioner by the

Commissioner.

6

Petitioner contends that he did not realize any tax-

able income by reason of the state court litigation

mentioned. He points out that he did not in the year

1947 or at any other time receive any cash or money

as a result of the litigation and he asserts that the

mere fact that the eredits on account of the rentals

received from the Murray Building were used to re-

duce the amount which he was required to pay to re-

deem the property from the liens against it, does not

mean that this can be treated as income; that these

liens were merely encumbrances on the property, and

the amounts were not personal obligations of the peti-

tioner,

Petitioner relies upon the case of Hilpert v. Com-

missioner, 5 Cir, LoL F. 2d 929, as authority for his

assertion that the reduction, satisfaction or cancella-

tion of an indebtedness or obligation which is not a

personal obligation of the owner of property does

not result in taxable income to him. The Tax Court,

deeming the Hilpert case not controlling here, held

that the net proceeds realized by the petitioner in the

accounting proceeding were income to him; that the

fact that the rents were realized only after great de-

lay, did not change the character of the rent from a

tax viewpoint. It sustained the position of the Com-

missioner that petitioner realized this ordinary income

in the taxable vear 1947 as a result of the termination

of the litigation.

That the petitioner did realize ordinary income we

think is clear. The economic benefit which petitioner

realized and which grew out of the rents from the

7

building was within the rule recognized in Commis-

sioner v. Smith, 324 U.S. 177, 181; Helvering v.

Bruun, 309 U.S. 461, 469; and Helvering v. Horst,

311 U.S. 112, 115. It was stated in Commissioner v.

Smith, supra, (which dealt with an employee’s com-

pensation), as follows: ‘*Section 22(a) of the Revenue

Code is broad enough to include in taxable income any

economic or financial benefit conferred on the em-

ployee as compensation, whatever the form or mode

by which it is effected.”’

We agree with the Tax Court that there is nothing

in the Hilpert case which calls for a contrary con-

clusion.?

“There Hilpert had given one Markell a deed absolute in form

conveying rental property in Florida. In his tax return for

that vear (1931) Hilpert, following a ruling of the Collector, re-

ported this as a sale for the amount he received, $65,000, and

paid income taxes on a eapital gain of $49,209.69. As a result

of an action by Hilpert against Markell, the Florida courts held

the transaction to be a mortgage instead of a sale, and held that

Hilpert could redeem after an accounting of the rents. Hilpert

made an arrangement with Lawton Investment Co., whereby he

executed a deed to the latter placing it in eserow with an ar-

rangement that if his suit to redeem was successful, the Lawton

Investment Co., should have the right to redeem and acquire the

property, in which ease Hilpert was to receive $10,000 from

Lawton plus half the difference between $65,000, the amount

which the deed was given to secure, and any less sum which the

court should decree as the amount required to be paid to redeem.

After successful termination of the suit in 1940, Lawton. re-

deemed the property and paid Hilpert $10,000 plus half the

difference between $54,364.67, the amount fixed by decree as the

redemption sum, and $65,000, together with some commissions

agreed upon. Hilpert thus received $17,067.67, which he returned

as his ineome from the transaction. (The sum of $54,364.67

decreed to be the redemption sum, was arrived at by crediting

against the $65,000 mortgage paid, the sum of $10,635.33 of

net rentals which Markell had collected. )

The effort of the Commissioner then to charge Hilpert with a

capital gain measured by the difference between the sum of

$54,364.67 and $10,635.33 and the basis, or Mareh, 1913, value

8

This brings us to the second or alternate contention

of the petitioner which is that assuming taxable in-

come was realized as a result of the proceedings in

the Oregon courts, the Tax Court erred in holding that

all such income was realized in 1947, Petitioner’s argu-

ment is that the state court litigation established the

proposition that the mortgagees in possession of peti-

tioner’s property were in effect constructive trustees

for petitioners at all times when they were receiving

rents which, as the Oregon courts held, they were

obliged to eredit or apply for petitioner’s benefit. Peti-

tioner argues that henee they owed duties to him simi-

lar to those of an agent in possession of rental prop-

erty. Said petitioner: If the reeeipts were in faet

taxable income, they were taxable to the petitioner in

the years of collection by the mortgagees in posses-

sion, just as collections made by a rental agent would

be taxable to the principal in the years in which the

agent received them. Petitioner argues therefore that

at least as early as 1942, when the Oregon Supreme

Court's first decision was rendered, this relationship

hetween petitioner and the mortgagees in possession

had become established. Hence the rentals received up

to that time should have been taxable to petitioner in

1942, and the income thereafter received in the years

1942 to 1947 should have been taxable in those years

as and when received by those constructive trustees.

of the property, was properly overturned. The rentals there ag-

eregated only the $10,635.38. This was less than the amount

Hilpert reported. The $17,067.67 was all he could possibly be said

to have received. It is hard to imagine by what reasoning the

(‘ommissioner arrived at the claimed deficiency. The decision of

the eourt of appeals was plainly correct, but we find nothing

there which aids petitioner here.

9

We cannot accept this theory of the petitioner. The

assessment and collection of taxes upon income pre-

sents practical problems which Congress has seen fit

to deal with by the adoption of the annual accounting

concept. As a practical matter had the Commissioner

attempted to collect income taxes for the years 1937 to

1947, during which petitioner’s rights and claims were

in litigation, he would have confronted the impossi-

bility of determining whether petitioner was or was

not receiving income during that period, whether by

way of economic benefits or otherwise and when the

first judgment of the Oregon Supreme Court was

handed down im 1942, the amount of such economic

benefits was still uncertain.

While it is a hardship to petitioner to have all the

income here dealt with returned as received in 1947,

yet such appears to be the unavoidable consequence

of this annual accounting concept.2 As stated in Se-

curity Mills Company v. Comm’r., 321 U.S. 281, 286,

(quoting in part from Burnet v. Sanford & Brooks

Co., 282 U.S. 359): ** * All the revenue acts which have

heen enacted since the adoption of the Sixteenth

Amendment have uniformly assessed the tax on the

basis of annual returns showing the net result of all

the taxpayer’s transactions during a fixed accounting

period, either the calendar year, or, at the option of

the taxpayer, the particular fiseal vear which he may

adopt.” The rationale of the system is this: ‘It is the

essence of any system of taxation that it should pro-

3Petitioner’s hardship may well be that type which needs some

legislative help, such, for instance, as that afforded by former

Revenue Code § 107.

Nel a I

10

duce revenue ascertainable, and payable to the govern-

ment, at regular intervals. Only by such a system is it

practicable to produce a regular flow of income and

apply methods of accounting, assessment, and collection

‘capable of practical operation.” This legal principle

has often been stated and applied. The uniform re-

sult has been denial both to Government and to tax-

paver of the privilege of allocating income or outgo

to a vear other than the vear of actual receipt or pay-

ment, or, applying the accrual basis, the vear in which

the right to receive, or the obligation to pay, has be-

come final and definite in amount.”? Cf. Dixie Pine

Co. v. Commissioner, 320 U.S. 516, 519. Within that

principle, the right of petitioner here to receive in-

come by way of these economic benefits did not be-

come final and definite in amount until 1947. That

that was the first vear in which the Commissioner

could demand payment of tax is made plain by sueh

cases as Northern American Oil v. Burnet, 286 U.S.

417, where the court said at page 423: **The net profits

were not taxable to the company as income of 1916.

For the company was not required in 1916 to report

as Income an amount which it might never receive. ...

There was no constructive receipt of the profits by the

company in that vear, beeause at no time during the

vear was there a right in the company to demand that

the receiver pay over the money. Throughout 1916 it

was uncertain who would be declared entitled to the

profits. Tt was net until 1917, when the District Court

entered a final decree vacating the reeeivership and

dismissing the bill, that the company heeame entitled

to receive the money. Nor is it material, for the pur-

1l

poses of this case, whether the company’s return was

filed on the cash receipts and disbursements basis, or

on the accrual basis. In neither event was it taxable

in 1916 on account of income which it had not yet re-

ceived and which it might never receive.” To the

same effect see Seligman v. Commissioner, 7 eir. 207

F. 2d 489, 494, and Lynch’s Estate v. Comm’r., 2d eir..

150 F. 2d 747, 748.

What appears to us to furnish an unanswerable

demonstration that the income was not received by

the taxpayer until 1947 is the wording of the decisions

of the Oregon Court. After petition for rehearing

of its 1942 decision, that court supplemented its

opinion by an express holding that the proceedings

before the court was a suit by a mortgagor to redeem

and not by a mortgagee to foreclose, and therefore the

previous opinion would be modified to provide that

unless petitioner did redeem the property from the

liens, the decree of the circuit court should determine

and specify a reasonable time within which petitioner

might redeem from both liens or be forever barred.

Upon the next appeal the Supreme Court affirmed the

Cireuit Court by opinion dated January 14, 1947, on

all issues except that it directed that the decree he

“Moreover, and more important, these eases, consistent with

what we think is the universal rule, teach that realization of

taxable gain must oceur in the vear during which it is sought to

be taxed. This is so whether the realization comes from the re-

ceipt of eash, actual or constructive, or by the aequirement of

property, and in the latter ease the realization oeeurs ‘when the

last step is taken by which he obtains the fruition of the eco-

nomie gain whieh has already acerued to him.’ Horst. supra,

Tn any event, realization of economic gain as a prerequisite to its

taxability must he capable of ascertainment in extent or amount.”

modified to provide that the defendants have a lien

upon the mortgaged property in the amount of the

ascertained balance but eliminating the personal judg-

ment against petitioner. This was followed by the ac-

counting which showed the balance required for re-

demption which, as previously stated, was $10,640.31.

This amount was paid by petitioner to the clerk of the

Oregon court on February 28, 1947.

It is apparent from the foregoing that the Oregon

court took pains so to modify its decree as to make

it clear that it was adjudging petitioner to have the

right or privilege of redeeming but without any obli-

gation on his part so to do or to pay any sum, he being

given a reasonable time within which to redeem or

he forever barred. All requirement of a judgment

against petitioner was eliminated from the final de-

eree. This makes it clear we think that until the ae-

counting was completed on February 28, 1947, and

petitioner paid the amount then for the first time

ascertained, he was at liberty either to redeem the

property and thus reap the fruits of his litigation,

or, if the sum arrived at did not suit him, to walk

away and leave the property without redemption. We

apply here the general rule as stated in $42(a) of the

Internal Revenue Code of 1939, which, as amended

at the time here in question, was as follows: *‘The

amount of all items of gross income shall be ineluded

in eross income for the taxable vear in which received

by the taxpayer unless, under methods of accounting

permitted under section 41, any such amounts are to

he properly accounted for as of a different period.”

13

The Tax Court properly held that the income

realized by petitioner threugh the Oregon litigation

was received by him in the year 1947,

The judgment of the Tax Court is affirmed.

(Endorsed:) Opinion. Filed Mar. 30, 1956. Paul

P. O’Brien, Clerk.

3v reason of faets which came to his attention after

the submission of this case, Judge Stephens deems

himself disqualified and hence takes no part in its

decision.

14

United States Court of Appeals

For the Ninth Circuit

E. J. Murray,

Petitioner,

VS. . No. 14,579

Commissioner of Internal Revenue,

Respondent. |

JUDGMENT

Upon petition to review a decision of the Tax Court

of the United States.

This cause came on to be heard on the Transcript

of the reeord from the Tax Court of the United States,

and was duly submitted.

On consideration whereof, it is now here ordered

and adjudged by this Court, that the decision of the

said Tax Court of the United States in this cause be,

and hereby is, affirmed.

(Endorsed) Judgment

Filed and entered Mareh 30, 1956,

Paul P. O’Brien, Clerk.

15

United States Court of Appeals

For the Ninth Cireuit

Excerpt from Proceedings of Tuesday, May 15, 1956

Before: Healy and Pope, Circuit Judges.

ORDER DENYING PETITION FOR

REHEARING

On consideration thereof, and by direction of the :

Court, It Is Ordered that the petition of petitioner, i

filed April 28, 1956, and within time allowed therefor :

by rule of court, for a rehearing of above cause be, ¢

and hereby is denied. g

& at AYE

16

Appendix C

Cireuit Court of Appeals, Fifth Circuit.

Hilpert et al. v. Commissioner of Internal Revenue.

No. 11,307

Noy. 20, 1945.

Petition for Review of Decisions of the Tax Court

of the United States (District of Florida).

Proceedings on petition of Anna I. Hilpert and

others to review a decision of the Tax Court of the

United States, District of Florida, 4 T.C, 473, rede-

termining an income tax deficiency imposed by the

Commissioner of Internal Revenue.

Devision reversed.

H. M. Voorhis, of Orlando, Fla., for petitioners.

Frederic G. Rita, Sewall Key, A. F. Prescott and

Harold C. Wilkenfeld, Sp. Assts. to Atty. Gen,

Samuel O. Clark, Jr., Asst. Atty. Gen., and J. P.

Wenchel, Chief Counsel, Bureau of Internal Revenue,

and John M. Morawski, Sp. Atty., Bureau of Internal

Revenue, both of Washington, D. C., for respondent.

3efore Hutcheson, MeCord, and Waller, Circuit

Judges.

Waller, Circuit Judge.

Charles R. Hilpert and Minnie P. Hilpert are hus-

hand and wife, who, together with Anna I. Hilpert,

were co-partners and prior to March 1, 1913, acquired

come real estate in Orlando, Florida, the adjuster

17

value of which, for income tax purposes, was $15,-

668.25.

Prior to June 15, 1931, the Hilperts sought a loan

from Frank E. Markell in the amount of $65,000, to

be secured by a mortgage on the real estate. Markell

did not want a mortgage but agreed to let the Hil-

perts have the $65,000 in exchange for a warranty

deed, absolute in form, but with a side agreement to

permit the Hilperts to buy the property back on or

before June 15, 1933, for the price of $86,000 in cash.

The deed was duly executed and delivered, as was the

option to allow the Hilperts to repurchase.

On February 4, 1932, the accountant for the Hil-

perts wrote the Collector of Internal Revenue at

Jacksonville, Florida, stating the facts as to the trans-

action and requesting a ruling as to how it should be

reported in the 1931 tax return. The Collector replied

by letter as follows:

“It is stated that taxpayers wished only to borrow

$65,000 on the property, but the lenders insisted that

the property be eonveyed. You now wish to know

whether this transaction will have to be returned in

the income tax reports.

“Tt is the opinion of this office that this transaction

can be described only as a definite sale of the prop-

erty, and any profit represented from the sale shall

be reported as income.

“The property has been conveyed by warranty deed

and the taxpayers have no control over it except option

to purchase it, which may or may not be exercised.

=

&

18

“It is entirely clear that any profit shown in the

sales price of $65,000.00 is income to the sellers.”’

The Hilperts, following the instructions of the Col-

lector, reported the transaction as a sale in the cal-

endar year 1931 and paid income taxes on the resultant

capital gain of $49,209.69.

When Markell received the deed he went promptly

into possession, collected the rents, and made repairs

at his own expense. The Hilperts failed to exercise

the privilege of repurchasing the property on or be-

fore June 15, 1933, and Markell continued to treat

the property as his own until January, 1940, when he,

pursuant to the affirmance by the Supreme Court of

Florida of a decree of the Circuit Court of Orange

County, Florida,' reconveyed the property to as-

signees, or vendees, of the Hilperts.

The Cireuit and Supreme Courts of Florida each

held that the deed from the Hilperts to Markell, al-

though absolute on its face, was given as security for

money loaned and was, therefore, a mortgage. The

Court did not order foreclosure of the mortgage, so

declared, by the usual sale at publie auction, but fixed

a period of eighty-three days within which the plain-

tiffs would be allowed to redeem the property or else

be barred of all right, title, and interest in the real

estate involved.

The Court also took an accounting of the rents col-

lected by Markell and his vendees, who were decreed

to be in privity with him. After allowing Markell

IMarkell v. Hilpert, 140 Fla. 842, 192 So. 392.

19

interest at six per cent on the $65,000, and after de-

ducting the rents collected by Markell, the Court found

that the amount necessary to redeem was $54,364.67.

The net rentals collected by Markell paid the iaterest

and reduced the $65,000, which he had paid the Hil-

perts, to the sum of $54,364.67.

On the 10th day of May, 1937, the Hiiperts filed the

suit against Markell and his vendees, asking the Court

to decree the transaction to be a mortgage instead of

a sale and to permit them to redeem after an account-

ing by Markell of the rents. On the same day the

Hilperts placed, in escrow, in the First National

Bank a deed to the real estate, with Lawton Invest-

ment Company as grantee. The escrow agreement set

out, among other things: That the Hilperts were

instituting a suit in the Circuit Court in and for

Orange County, Florida, to redeem a mortgage evi-

denced by a deed from them to Frank E. Markell; that

they had agreed to sell the property to Lawton In-

vestment Company if the foregoing suit was success-

ful; that the terms of the sale were the redemption

price for the mortgage to be paid by Lawton Invest-

ment Company and $10,000 in cash to be paid to the

Hilperts, plus one-half of the difference between $65,-

0010 and any sum below $65,000 at which the decree of

the Court should state the mortgage could be re-

deemed. The eserow agreement instructed the bank

“* * * to deliver said deed to Lawton Investment

Company, a corporation, any time up to ten days after

favorable decree of Court becomes final, upon the pay-

ment to said bank of the sum of $10,000, plus one-

20

half the difference between $65,000 and any sum less

than $65,000 decreed by the Circuit Court of Orange

County, Florida, in the suit of Anna I. Hilpert, et al.,

versus Frank E. Markell, et al., to be the amount

necessary to be paid to redeem the above mentioned

mortgage; the amount collected to be turned over to

parties of the first part upon their receipt. Should

said deed be not taken up by Lawton Investment Com-

pany within ten days after favorable decree of Court

becomes final, then said deed is to be returned to

parties of the first part and this escrow shall cease

and determine.”’

After the suit was terminated in favor of the Hil-

perts, Lawton Investment Company redeemed the

property from the mortgage, paid Hilperts the sum

of $17,067.67 made up as follows: $10,000, plus one-

half of the difference between $54,364.67 and $65,000,

to-wit, $5,317.67, and the further sum of $1750 as

an agreed refund of commissions, and thereupon re-

ceived the deed to the real estate from the Hillperts.’

The Hilperts returned for income tax purposes the

sum of $17,067.67, or the amount of cash that they

2The computation is as follows:

Original amount of mortgage .....- 6.6... eee ee ees $65,000.00

Meee Ws DUN. oy 5 occ ns hhc chee etasesapnase 54,364.67

Difference ee accel ot ts are a ter

Chvinebit OF MOPONGD «cca ee hee eee ay ciee 5,317.67

Cash ‘amount named in agreement for deed ....... $10,000.00

One-half of difference of mortgage and amount to :

SN Gwen ERE AS AS Oh RS NS 5,317.67

Commission agreed upon by parties ..........6065 1,750.00

EMEP COTTE TT eer Ce L $17,067.67

21

had received as a result of the successful outcome of

the suit. The contract with Lawton Investment Com-

pany was made in anticipation of, and wholly eon-

tingent upon, winning the suit.

In the transaction between them and Markell the

Hilperts signed no note, or mortgage, or covenant of

any kind whatsoever, evidencing any obligation to

repay any sum of money. They executed only a deed

purporting to convey the said real estate.

The Commissioner held that in addition to the

$17,067.67 which the Hilperts had already returned

for taxation they were also liable for $10,635.33 of

net rentals collected by Markell which went to the

reduction of the mortgage indebtedness, plus $54,-

364.67, the amount paid by Lawton Investment Com-

pany to redeem, less, of course, the adjusted value

of the property in March, 1913, of $15,668.25. The Tax

Court sustained the Commissioner.

Although the Hilperts had acted on the advice of

the Collector of Internal Revenue and treated the

transaction as a sale in 1931 and had, for that tax

year, paid on a capital gain of $49,209.69, no credit

was allowed in the delinquency assessment by the

Commissioner or by the Tax Court for the taxes so

paid on the proceeds of the 1931 sale of the same prop-

erty, even though the 1940 transaction is but an after-

math, or a winding-up, of the 1931 transaction.

The Tax Court said:

“It follows that when the petitioners in the tax

year disposed of the property in what was an unmis-

22

takable sale, they did no more and no less than is done

by any vendor when he sells property covered by a

mortgage or other lien and receives in the purchase

price cash or other property. The difference between

his basis and the fair market value of the considera-

tion received is taxable. Accordingly, petitioners are

properly chargeable as capital gain with the difference

between their basis and the consideration for the sale,

“There is no dispute as to basis. The controversy

relates to the amount of the consideration. It is true

that all that petitioners received upon the sale was

the cash paid to them by the vendees. * * *”.

“* * * Only when the facts are so peculiar that the

mortgage neither constitutes a liability of the seller

nor is responsible for a part of the aggregate benefit

received can it safely be eliminated from the computa-

tion of gain.”’

We find no fault with the foregoing statement of

legal principles but only in their application to the

peculiar facts in this case. We think that the Tax

Court erred in its view as to what the Hilperts re-

ceived.

If the transaction between the Hilperts and Markell

had created an enforceable liability against the Hil-

perts to repay $65,000 loaned by Markell, the dis-

charge of that liability through the assumption and

payment by a purchaser would unquestionably have

heen a benefit received, a consideration paid, and

taxable as such, But in the present case the Hilperts

signed no note, no mortgage, no covenant, and made

no promise in writing, or otherwise, to repay the

23

loan. No action could have been maintained by

Markell against the H ilperts.

Under Mortgages, 49 C.J., § 224, the general law

is stated as follows:

“Absence of Covenant. If there is no such covenant

in the mortgage and no collateral obligation in the

way of a note, bond, or other evidence of the debt,

an action of debt will not lie on the mortgage, but

the property alone is charged with the lien and must

be looked to by the mortgagee as the sole source out

of which he is to make good his claim.”

In 37 Amer. Jur., page 24, §517, under Mortgages,

there is this statement:

“Where there is no personal obligation and no per-

sonal covenant in the mortgage, the only remedy is

against the property mortgaged.”

In Hoskins y. Black, 190 Ky. 98, 226 S.W. 384, 385,

the Court stated:

“It is generally held that an ordinary mortgage or

deed of trust, which contains no covenant for the

payment of the debt, is not evidence of indebtedness,

and where there is no personal obligation and no per-

sonal covenant in the mortgage, the only remedy is

against the property mortgaged. 19 R.C.L. 513. It is

sufficient to establish a personal liability against the

mortgagor, if the instrument contains admission of

indebtedness on his part, in which event a promise

Will be implied and a legal liability created. However,

to create a personal liability by implication, the ad-

mission of indebtedness contained in the instrument

24

must be sufficiently plain to show that such was the

express understanding of the parties.”

The fact that there was no covenant to repay the

money, evidenced either by note, bond, mortgage, or

other writing, would not prevent the enforcement of

the mortgage against the mortgaged property even

after the writing evidencing the debt had become

barred by the statute of limitation. Ellis v. Fairbanks,

38 Fla. 257, 21 So. 107, 109.

The land was put up purely as a pledge under such

circumstances that the Courts deem it to be a mort-

gage. Under the transaction petitioners had: (1) A

right to repurchase within two years; (2) a right

to have’the contract construed as an instrument to

secure the payment of money with the consequent

right of redemption; and their failure to resort to

either of these remedies would have eventually re-

sulted in the loss of the land, but in no wise was there

any personal liability which Markell could enforce

against the Hitperts, and the only reeourse that he

had was against the realty.

In Florida no debt was created by the transaction

but even if there had been, suit thereon would be

barred unless brought within three years under

§ 4663 (5), C.G.L., F.AS.A. § 95.11 (5), since there was

no promise in writing to pay Markell. Even if there

had been a note or a promise in writing, but not

under seal, the statute of limitations would have run

in five vears (§ 4663 (3), C.G.L.. F.S.A. § 95.11 (3).

There surely was no obligation under seal and the

statute of limitations had run against any suit on an

25

obligation not under seal long before 1940. The

Florida Supreme Court held in Bank of Wildwood vy.

Kearl, 138 Fla. 527, 189 So. 866, that a deficiency de-

cree cannot be made in foreclosure proceedings where

the debt secured by the mortgage is barred by the

statute of limitations.

That Court went further, in that case, and said

that even though there was a covenant in a mortgage

under seal providing that the mortgagor would pay

sums made payable by virtue of the note secured by

the mortgage, such a covenant in the mortgage was

not sufficient to bind the mortgagor personally for the

debt if the note itself was not under seal and was

barred by the five-vear statute of limitations. See also

the more recent case of Alropa Corporation v. Me-

Namee, 143 Fla. 785, 197 So. 514.*

3In Alropa Corporation v. McNamee, supra (143 Fla. 785, 197

So. 515), the Supreme Court of Florida said:

“Tt will be observed that by the covenant relied upon the

makers did not unconditionally promise ‘to pay the debt evi-

denced by the note but the promise was to pay all and singular

the principal and interest and other sums of money pavable

by virtue of the said promissory notes and this deed, or either.’

“This was not sufficient to constitute an unconditional inde-

pendent covenant to pay the debt but was a covenant to pay such

sums as might be required to be paid under the terms of the

notes. In other words, this covenant was an agreement to be

hound as far as the notes would bind the makers. Therefore, anv

defense applicable to the note would constitute a defense against

the enforcement of this covenant. * * *

“In the ease of Bank of Wildwood vy. Kerl et al., 138 Fla.

527, 189 So. 866, we had under consideration a ease in which

the record showed that the notes given to seeure the mortgage

were barred by the statute of limitations and the covenant relied

on contained in the mortgage was identical with the covenant

involved in the present suit, and there we held:

“*\ covenant within a mortgage under seal providing that

mortgagor would pay sums payable by virtue of note seeured by

mortgage was not sufficient to bind mortgagor personally for

26

In 37 C.J. 704, § 23, it is stated:

‘No deficiency judgment or decree can be made

in foreclosure proceedings where the debt secured by

the mortgage is barred by the statute of limitations.”

There is nothing in the case to suggest that there

Was any personal liability of the Hilperts to Markell,

and the record does not show that any effort was made

in the State Court by Markell to assert, or to seek to

enforce, any such liability. It further appears that

even if a personal liability could be implied, the Flor-

ida three-year statute of limitations would have barred

the right to reeover before 1940. Markell no doubt

realized that he had the right to proceed only against

the security.

Since there was no note, no covenant, and no agree-

ment to repay the $65,000, and no enforceable obliga-

tion against the Hilperts in the transaction, the Tax

Court was wrong in holding that the payment of the

$54,364.67 by Lawton Investment Company in re-

deeming the property was a benefit received by the

sellers out of that purchase. The case clearly comes

within the exception stated by the Tax Court that

when the mortgage neither constitutes a liability of

the seller nor is responsible for a part of the ag-

eregate benefit received it is appropriate that the

amount paid by another to redeem property from the

mortgage should be eliminated from the computation

of gain to the mortgagor.

the debt: and hence if note, which was not under seal, was barred

by five-vear statute of limitations. a deficiency judgment could

not be entered against mortgagor in foreclosure proceedings.

Comp. Gen. Laws 1927, § 46638, subd. 30°”.

i

27

Since there was no personal liability that could

accrue against the Hilperts, all that they got out of

the transaction was the $17,067.67, and looking at

the substance of the transaction rather than the form,

it would seem that they sold only a right of redemp-

tion, or a right of action. Perhaps it might be accu-

rate to say they sold a chose in action, or the right

to have the fruits of a suit upon making certain pay-

ments in the event the suit was won, for it was the

suit that produced the gain. The deed would have al-

ways been a deed if the suit had not resulted in its

being declared a mortgage.

The taxpayers paid the taxes on $49,209.69 which

they received out of this transaction in 1931 when

the taxing authorities ruled that a sale had been made.

The sellers received that sum but once, vet the effect

of the decision of the Tax Court is to tax them twice

on the same sum.

We agree with the dissenting opinion in the Tax

Court that the Tax Court’s holding seems to he en-

tirely unrealistic. The appetite for taxes is not so

voracious, the commands of the statute are not so

inexorable, as to require the doing of an injustice

when there is open another course that is more fully

consonant with law and reason and which course, if

followed, will lead neither to evasion by the taxpaver

nor extortion by the Government.

Under these views the holding of the Tax Court that

the petitioners are liable for the sum of $10,-

635.33, representing net rentals received by the mort-

gagee on the real estate and applied by the Court

28

as a credit on the mortgage, cannot be sustained. The

obligation to redeem, under the contract with Lawton

Investment Company, was not on the Hilperts, and

the allowance of that sum by the Circuit Court of

Orange County toward the reduction of principal and

interest afforded no gain to petitioners in excess of

the one-half of such amount which the Lawton In-

vestment Company paid to petitioners and which pe-

titioners returned and paid the taxes thereon. This

one-half was included in the total of $17,067.67 paid

by Lawton Investment Company to the Hilperts.

The judgment of the Tax Court is reversed.

HUTCHESON, Circuit Judge (dissenting in part

and in part concurring).

In the letter’ written by petitioners’ counsel to

the Collector, February 4, 1932, they stated that the

transaction between them and Markell, in the form

of a sale with an option to pay back, was in fact a

loan. In their suit brought in 1937, and in the escrow

agreement with Lawton made at the same time, they

asserted that the transaction between plaintiffs and

Markell constituted a loan of money to them with a

mortgage to secure it, and not a sale, The district

court so adjudged, and the Supreme Court affirmed.

There was nothing in the petition, in the decree,

“Tt is not the intent of the owner to sell this property at this

price, but simply to borrow this amount of money, and following

their preliminary negotiations for a loan they had made arrange-

ments for using the money, and it would have embarrassed them

greatly if the negotiations had fallen through. In consideration

of this fact, they consented to the lender's method. * * * The Hil-

perts are expecting to take advantage of this option before it

expires and do not feel that they should be taxed at this time

simply for borrowing money.”

29

or in the opinion of the Supreme Court indicating

or even suggesting that the Hilperts were not obligated

to repay the amount of the loan. Indeed, the decree

required Markell to execute an instrument reciting in

part, ‘‘and the said parties of the first part do fully

acknowledge full payment of the indebtedness owning

by parties of the second part’’. If, therefore, the lack

of personal obligation, of which the majority opinion

makes so much, were material here, and I think it

wholly immaterial, in determining whether the prop-

erty was sold to Markell in 1931, or, as the Tax Court

held, to Lawton in January, 1940, the record, so far

from showing that there was such lack of obligation,

shows quite the contrary. But whether there was a

personal obligation or lack of it, the record permits

no escape from the conclusion that in fact and in law

there was no sale in 1931, from which a capital gain

could arise, but a loan, and that in facet and in law

there was a sale in 1940, and a capital gain then aris-

ing. I think it clear, therefore, that the Tax Court was

right for the reasons that it gave in sustaining the

commissioner's determination as to the capital gains

tax due, and the majority was wrong in reversing that

determination.

On petitioners’ second pe at, that they ought not to

be taxed as ordinary income on $10,635, the difference

between the $65,000 borrowed in 1931 and the $54,365

required to redeem in 1940, I agree with them. The

Tax Court’s assumption that this difference was re-

ceived in 1940 as accumulated ordinary income then

paid over is, I think, without basis in the record. If

this amount were ordinary income received in that

ee eee

30

year, certainly petitioner should be taxed on it. Cer-

tainly, too, there would be no inconsistency in doing

this and also taking this amount into account in deter-

mining the amount they received under their contract

with Lawton, and, therefore, their capital gain. It

seems quite clear to me though that it is incorrect to

say that this sum, the net remaining after offsetting

receipts and disbursements for each of the years from

1931 to 1940, was a receipt of income in 1931. A decree

entered on June 1, 1938, adjudicated (1) that the

transaction was a loan and not a sale; (2) that peti-

tioners were entitled te redeem; and (3) that the cause

be referred to a master to ascertain and offset their

disbursements from 1931 to 1938, inclusive, and deter-

mine the amount necessary to redeem. The master’s

report having come in, the final decree of August 20,

1938, adjudicated that, as a result of offsets of receipts

and disbursements through the vears, the amount then

necessary to be paid to redeem the property was

$59,360.16, or $5,639.84 less than the original debt. The

decree affirmed, an accounting and offsetting for the

years 1938, 1939 and to January 20, 1940, determined

a further net reduction of $4,995.48. Of this amount

less that $600 was received in 1940. The balance was

the result of receipts and offsetting in 1938 and 1939.

Thus, of the total of $10,635, which reduced the orig-

inal loan of $65,000 to $54,364.67, only $600 was re-

ceived in 1940. While, therefore, petitioners ought to

have been taxed on this $600 as ordinary income re-

ceived in 1940, T do not think they could have been

taxed on the net receipts of other vears. I, therefore,

except as to $600, concur with the majority in revers-

ing the Tax Court’s judgment as to the $10,635,

INDEX

Page

eens GebOW ..... .. <~----05006---2- gener cata 1

eR eg eee d wk deen ot ee a ea ]

Question presented ._--.-...-.-------- error 2

Statutes and Regulations involved _ __---- 2

Statement __ - Pa one a eease a ' 2

Argument Pitwonees Kae ace takes. cere 5

Conclusion ; Sits ek hoe — 10

Appendix rere anes .. 11-12

CITATIONS

Cases: P

Arcadia Refining Co. v. Commissioner, 118 F. 2d 1010. 6

Burnet v. Sanford & Brooks Co., 282 U.S. 359 6,8

Commissioner v. Smith, 324 U.S. 177 7

Dixie Pine Co. v. Commissioner, 320 U.S. 516 7

Durkee v. Commissioner, 162 F. 2d 184 6

Healy v. Commissioner, 345 U.S. 278 7.8

Helvering v. Bruun, 309 U.S. 461 7

Helvering v. Horst, 311 U.S. 112 7

Fil pe rt v. Commissione r. 4 <i . a3... 9

Hil pe rt v. Commissioner, 151 F. 2d 929 S

Hort v. Commissioner, 313 U.S. 28 6

Liebes. H.,. & Co. v. Comm issioner, 90 F. 2d 932 6

Lynch's Estate v. Commissioner, 150 F. 2d 747. 7

North American Oil v. Burnet, 286 U.S. 417_- ; 7

Old Colony Tr. Co. v. Commissioner, 279 U.S. 716 7

Raytheon Production Corp. v. Commissioner, 144 F. 2d

110, certiorari denied, 323 U.S. 779 5. 6

Security Mills Co. v. Commissioner, 321 U.S. 281 8

Seligmann v. Commissioner, 207 F. 2d 489. ___- 7

Swastika Oil & Gas Co. v. Commissioner, 123 F. 2d

382. certiorari denied, 317 U.S. 639 6

Tripler Safety Glass Co. v. Latchum, 44 F. Supp. 435,

affirmed, 131 F. 2d 1023 _- 6

United States v. Lewis, 340 U.S. 590 7,8

United States v. Safety Car Heating Co., 297 U.S. 88- 6

3976565 — 56——1 (D

II

Statutes:

internal Revenue Code of 1939:

Sec. 22 (a) (26 U.S. C. 1952 ed., Sec. 22 (a))__-

Sec. 42 (a) (26 U.S. C. 1952 ed., Sec. 42 (a))__.

Miscellaneous:

Treasury Regulations 111:

Sec. 29.42-1 (a)________-

eB Benew ee eee ec eeweacaseeeccen eee eee eeeee

Gu the Supreme Court of the Gnited States

OcToBER TERM, 1956

No. 312

E. J. MuRRAY, PETITIONER

v.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The findings of fact and opinion of the Tax Court

(R. 51-77) are reported at 21 T. C. 1049. The opinion

of the Court of Appeals (R. 94-102) is reported at

232 F. 2d 742.

JURISDICTION

The judgment of the Court of Appeals was entered

on Mareh 30, 1956. (R. 103.) <A petition for re-

hearing was denied on May 15, 1956. (R. 104.) The

petition for a writ of certiorari was filed on August

11, 1956. The jurisdiction of this Court is invoked

under 28 U.S. C., Seetion 1254.

(1)

2

QUESTION PRESENTED

Whether, on the facts, the courts below correctly

sustained the Commissioner’s determination that the

rental income in issue was realized by petitioner, a

cash-basis taxpayer, in the year 1947.

STATUTES AND REGULATIONS INVOLVED

Sections 22 (a) and 42 (a) of the Internal Revenue

Code of 1939, and Sections 29.42-1 (a) and 29.42-2

of Treasury Regulations 111 are set forth in the

Appendix, infra, pp. 11-12.

STATEMENT

The facts are substantially undisputed and the

findings of the courts below may be summarized as

follows:

In 1928, E. J. Murray (the taxpayer) and his wife

acquired certain real estate in Klamath Falls, Oregon.

They borrowed $64,000 from a savings and loan asso-

ciation in order to finance the construction of a build-

ing upon the property, securing the loan by a mort-

gage on the premises. In 1932, when there was a

balance due of $57,000 upon the mortgage debt, the

taxpayer and his wife conveyed the building, subject

to the mortgage, to a corporation whose sole stock-

holders were Wiley and D’Albini, the taxpayer’s at-

torneys, and the wife of D’Albini. In 1934, the sav-

ings and loan association brought suit to foreclose its

first mortgage and the property was sold pursuant to

the foreclosure decree. On the last day of the statu-

tory redemption period, the property was redeemed

from the foreclosure sale by certain assignees of the

3

Wiley-D’Albini corporation. In 1938, the taxpayer

and his wife brought suit in the Circuit Court of the

State of Oregon against Wiley and D’Albini and their

assignees. After trial in that court and hearing upon

appeal in the Supreme Court of Oregon, the latter

court, on June 30, 1942, sustained the contentions of

the taxpayer and his wife. It held that the taxpay-

er’s conveyance of the building to Wiley and D’Albini

was made merely to secure the taxpayer's indebted-

ness to his attorneys; that their corporation held the

property as mortgagee in possession; that the con-

veyance to the assignees who redeemed from the mort-

gage foreclosure was also subject to the taxpayer’s

continued right to redeem the property; and that the

taxpayer was the beneficial owner of the property sub-

ject to the liens of the various defendants, all of whom

stood in the position of mortgagees in possession.

(R. 94-95.)

The Oregon Supreme Court remanded the case to

the Circuit Court for an appropriate accounting in

which the defendants would be given credit for

amounts paid to redeem the property, for amounts

paid to redeem from a federal tax lien, and for

amounts owing for the legal services of Wiley and

D’Albini, subject to certain named offsets. Its order

stated that, upon satisfaction of the liens as ascer-

tained by further accounting, the taxpayer would be

entitled to a reeconveyance of the property. In its

decision (as revised on the petition for rehearing),

the court also adjudged that the defendants should

have credits in the ensuing accounting for their

t

costs of management and repairs in the operation of

the building while in possession thereof, and that the

proceeding before the court was a suit by a mort-

gagor to redeem, not one to foreclose a mortgage. It

was directed that unless the taxpayer redeemed the

property, the decree of the Cireuit Court should spe-

cify a reasonable time within which he might do so

or be forever barred. (R. 95.)

Upon remand, the accounting was taken as directed.

A further appeal to the Supreme Court followed, but

the action of the Cireuit Court (with one minor ex-

ception) was affirmed on January 14, 1947. In the

judgment thus affirmed, it was ascertained that after

charging the taxpayer with the amount of the liens

and interest thereon, crediting him with the amount

of the rents received by the so-called mortgagees in

possession, and charging him with the expenses of

maintenance, the amount which he was required to

pay in order to redeem was $10,630.41. He paid that

sum on February 28, 1947. On that date, a final

decree was entered adjudging that he had satisfied

all liens on the property, and the defendants were

directed to reconvey te him within ten days or have

the reconveyance occur through operation of the de-

cree, Possession of the building was thereupon sur-

rendered to him. (R. 95-96.)

The taxpayer, who was on a cash basis, had filed no

income tax returns for any of the years 1937 through

1945, He had no income during those years, but in

July, 1947, he filed separate returns for the years

19387-1946 inclusive, reconstructing the income he

a 1 nick

aS

J

would have had from his property in those years had

he been in possession. (R. 96.)

The Commissioner determined a deficiency in in-

come tax for the year 1947 based, for the main part,

on his finding that, as a result of the transactions cul-

minating in the final court decree above mentioned,

the taxpayer had realized ordinary income of

$57,512.64 in that year. This sum was arrived at as

follows: In the Circuit Court accounting, the taxpayer

had been given credit for (and the defendants there

had been charged with) $102,589.45 received from

rents on the building from 1936 to 1947. Interest

had been added to this amount, making the total cred-

ited to the taxpayer from this source $135,808.19.

Maintenance expenses, interest on the mortgage, and

other disbursements, totaling $78,295.55, had been

charged against these credits. The balance of

$57,512.64 was the ordinary income thus charged to

the taxpayer by the Commissioner. The Tax Court

and the Court of Appeals sustained the Commis-

sioner’s determination. (R. 96, 69-74, 102.

ARGUMENT

1. The court below, affirming the Tax Court, held

that the taxpayer realized income in 1947 when, as a

result of the final accounting made and the decree en-

tered in that year in the state court litigation, he re-

ceived an amount which represented in effect, the net

rentals and interest derived from the property. The

decision is correct and embodies well established prin-

ciples of law. In arriving at the balance of $10,630.41

which the state court required the taxpayer to pay the

Rees

+ earners:

6

mortgagees in possession as a condition precedent to

redemption of the property, the taxpayer was given

eredit for $57,512.64, which represented net rentals

collected by the mortgagees during the period 1936

to 1947, inclusive, plus interest. The entire trans-

action was properly regarded as if the taxpayer had

recovered a judgment for $57,512.64 representing the

net rentals collected by the mortgagees in possession.’

See H. Liebes & Co. v. Commissioner, 90 F. 2d 932,

935 (CL A. 9th); Raytheon Production Corp. v. Com-

missioner, 144 F, 2d 110, 113 (C. A. 1st), cert orari de-

med, 323 U. 8. 779; Triplex Safety Glass Co. v.

Latchum, 44 F. Supp. 486 (Del.), affirmed, 131 F. 2d

1023 (C. A. 3d); Areadia Refining Co. v. Commis-

stoner, 118 F. 2d 1010, 1011 (C. A. 5th); Swastika Oil

& Gas Co. v. Commissioner, 123 F. 2d 382 (C. A. 6th),

certiorari’ denied, 317 U. S. 6389; Durkee v. Commis-

sroner, 162 F, 2d 184 (C. A. 6th); Burnet v. Sanford

d& Brooks Co,, 282 U.S. 359, 363-364; United States

v. Safety Car Heating Co., 297 U. 8. 88, 93-94; Hort

Vv. Commissioner, 313 U.S. 28, 30-31. The fact that

the taxpayer received no cash is immaterial. ‘‘See-

tion 22 (a) of the Revenue Act is broad enough to

include in taxable income any economic or financial

benefit * * *, whatever the form or mode by which

‘The Tax Court stated the point as follows (R. 71): “There

would be no doubt that, had he been in possession during this

period, and had actually received the rents, he would have been re-

quired to return them as ordinary income—offset, of course, by

permissible deductions. The fact that the rents were realized only

after great delay and then through the medium of a judicially

ordered accounting proceeding does not change the character of

rent from a tax viewpoint.”

Sh Beas

-

‘

it is effected.”” Commissioner v. Smith, 324 U.S. 177,

181. See also Helvering v. Bruun, 309 U. S. 461,

469; Helvering v. Horst, 311 U. S. 112, 115; Old

Colony Tr. Co. v. Commissioner, 279 U. S. 716, 729.

The entire amount of the $57,512.64 was properly

allocated to 1947, for it was not until that vear that

the taxpayer’s disputed right to receive any rentals,

and the amount thereof, became fixed and certain.

Cf. Dirie Pine Co. v. Commissioner, 320 U. S. 516,

519. See also North American Oil v. Burnet, 286

U.S. 417, 423; United States v. Lewis, 340 U. 8. 590;

Healy v. Commissioner, 345 U. S. 278; Seligmann v.

Commissioner, 207 F. 2d 489, 494 (C. A. Tth) ; Lynch’s

Estate v. Commissioner, 150 F. 2d 747 (C. A. 2d).

Until the accounting proceeding was actually termi-

nated, there was no definitive apportionment of the

income from the property between the taxpayer and

the mortgagees in possession. Nor was it at all cer-

tain that the taxpayer was entitled to any rents until

he voluntarily complied with the provisions of the

final decree, a conclusion which the Court of Appeals

considered unanswerably demonstrated by the fact

that (R. 101):

* * * he was at liberty either to redeem the

property and thus reap the fruits of his liti-

gation, or, if the sum arrived at did not suit

him, to walk away and leave the property with-

out redemption.

In the circumstances, the conclusion that the $57,512.64

constituted the taxpayer’s income in 1947 was, as the

Court of Appeals held (R. 99), ‘‘the unavoidable con-

on eh ly AE ERT FPO

Ss

sequence of * * * [the] annual accounting concept”

of reporting income. Healy v. Commissioner, supra,

p. 281; United States v. Lewis, supra, p. 592; Burnet

v. Sanford & Brooks Co., supra; Security Mills Co.

v. Commissioner, 321 U. S. 281, 286.

2. There is no direct confliet between Hilpert vy.

Commissioner, 151 F. 2d 929 (C. A. 5th), and the

decision below. In the Hilpert case, the taxpayers

conveyed property in 1931 by a deed absolute in form.

They reported the amount paid them on a capital

gain basis, and paid a tax thereon. Subsequently,

as the result of the taxpayers’ action, the Florida

courts held that the original transaction was a mort-

gage, not a sale, and that the taxpayers could redeem

after an accounting of the rents. The taxpayers

transferred their right to redeem to a third party.

After successful termination of the litigation in 1940,

the third party redeemed the property, and paid the

taxpayers an amount determined by a formula which

had been agreed upon between them. In substance,

the taxpayers returned that amount as income on a

capital gain basis, and paid tax thereon. One of the

consituent elements of the formula was the amount

which had been fixed by court decree as the redemp-

tion sum. The sum, in turn, had been arrived at by

crediting the taxpayer with the net rentals collected

by the mortgagee, as an offset against the amount of

the mortgage indebtedness. Although the Court of

Appeals did hold that the amount credited as net

rentals did not constitute income to the taxpayers,

it was careful to note (p. 933) that the case primarily

involved the sale of a right of redemption, and that

a

the taxpayers had reported and paid taxes on an

amount exceeding the net rentals for which they had

been given credit.

Judge Arundell, who had agreed with the dissenting

opinion in Hilpert (4 T. C. 4738, 477-478), which was

subsequently approved by the Court of Appeals for

the Fifth Circuit, stated, in deciding the instant case

in favor of the Commissioner (R. 72-73) :

The facts which influenced the Court of Ap-

peals in the Hilpert case are absent in the in-

stant proeedings and we do not think that that

decision should be regarded as at all binding

on us.

9

He noted that the taxpayers in Hilpert had treated

the origimal transfer of property as a sale and had

paid a tax on that transaction; that they had also

sold the property, after successfully contending be-

fore the Florida courts that the original transfer was

a mortgage, and had paid another tax on that trans-

action; and that the Fifth Circuit, accordingly, had

observed that the practical effect of the Tax Court’s

decision was double taxation.

The Court of Appeals agreed (R. 97) ‘‘that there is

nothing in the Hilpert case which calls for a contrary

conclusion” here. It noted that the taxpayers there

had reported more than the net rentals offset against

the claim of the mortgagees in possession, and that,

although the (R. 98) “decision of the court of ap-

peals was plainly correct, * * * we find nothing there

Which aids petitioner here.”

SA &

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10

CONCLUSION

For the reasons stated, it is respectfully submitted

that the petition for a writ of certiorari should be

denied.

Respectfully submitted.

J. Lee RANKIN,

Solicitor General,

JOHN N. STULL,

Acting Assistant Attorney General,

I. Henry Kutz,

Meyer RoTHwacks,

Attorneys.

SEPTEMBER 1956.

APPENDIX

Internal Revenue Code of 1939:

Sec. 22. Gross INCOME.

(a) General Definition— ‘Gross income” in

cludes gains, profits, and income derived from

salaries, wages, or compensation for personal

service, of whatever kind and in whatever form

paid, or from professions, vocations, trades,

businesses, commerce, or sales, or dealings in

property, whether real or personal, growing out

of the ownership or use of or interest in such

property; also from interest, rent, dividends,

securities, or the transaction of any business

carried on for gain or profit, or gains or profits

and income derived from any source what-

wer. * **

* am * * *

(26 U. S. C. 1952 ed., See. 22.)

Sec. 42 [as amended by Sec. 114, Revenue Act

of 1941, ¢. 412, 55 Stat. 687]. Prrtop In

Wuicu Items oF Gross [INCOME INCLUDED.

(a) General Rule—The amount of all items

of gross income shall be included in the gross

income for the taxable year in which received

by the taxpayer unless, under methods of ac-

counting permitted under section 41, any such

amounts are to be properly accounted for as of

a different period. * * *

* * * * *

(26 U. S. C. 1952 ed., See. 42.)

Treasury Regulations 111, promulgated under the

Internal Revenue Code of 1939:

See. 29.42-1. When Included in Gross In-

come.—(a) In general—Except as otherwise

(11)

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12

provided in section 42, gains, profits, and in-

come are to be included in the gross income for

the taxable year in which they are received

by the taxpayer, unless they are included as of

a different period in accordance with the ap-

proved method of accounting followed by him.

* * * Tf a person sues in one year on a pecuni-

ary claim or for property, hf money or prop-

erty is recovered on a judgment therefor in a

later year, income is realized in the later year,

assuming that the money or property would

have been income in the earlier year if then

received. * * *

* * * * *

Sec. 29.42-2. Income Not Reduced to Posses-

sion.—Income which is credited to the account

of or set apart for a taxpayer and which may

be drawn upon by him at any time is subject

to tax for the year during which so credited or

set apart, although not then actually reduced to

possession. To constitute receipt in such a case

the income must be credited or set apart to the

taxpayer without any substantial limitation or

restriction as to the time or manner of payment

or condition upon which payment is to be made,

and must be made available to him so that it

may be drawn at any time, and its receipt

brought within his own control and disposi-

tion. * * *