Petition for Writ of Certiorari — Tennessee Life Insurance v. Phinney (No. 482)

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Supreme Cinrt of the United States

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PETITION TOR A WHEE OF CERTIORARI re

PHE CNEL IY SPATE S COURT OF-AVPPAPS

Po. te a etm Gee Gp ies | eet aay

- [NDEX.-

OPINIONS OF THE COURTS BELOW

JURISDICTION |

QUESTIONS PRESENTED FOR REVIEW

“ST \TUTES AND REGULATIONS INVOLVED

STATE MENT OF THE all

REASONS RE 1. IF DON Par THE AL LOW ANCE OF THE

WRIT

CONCLUSION

APPENDIX A

Internal Revenue Code of 1929

Sec. 23 (¢)

Sec. 41

Sec. 43

Sec. 4d

Sec. 47 (a)

Sec. iS (a)

Sec. 122

Sec.. 31)

Internal Revenue Code of 1954

sec. 164 (a)

Sec. 164 (d)(1)

‘Sec. 482

Regulations 118 Income Tax

Sec. 3945-1

APPENDIX R

Opinion of the court below

Judgment of the court below

Denial of petition for refearing

APPENDIX C

Comtheting Sixth Circuit opinion

“40

CITATIONS

CASES PAGE

Allen v. Atlanta Stove Works. Inc., 1388 F.2d 452), 2

American Liberty Oi} Co. v. Comm'r.. 483 BTA 76 3

Citizens Hotel Co. v. Comm’r., 127 F.2d 229 12

Dillard Waltermire, Inc. v. Campbell, 255 F.2d 433 . 14

Jud Plumbing & Heating. Inc. vy. Comm'r., 153 F.2d &s1 = 4

Magruder v. Supplee. 136 U.S. 394 "BS fa

Murphy, Simen J.) Co. v. Comm’r.. 221 F.2d 639 °° 2. 9, 20. 11

Texas Coen Cola Bottling Co. v. Comm’r.. 30 BTA 736. ae

, STATUTES

Internal Revenue Code of 1929

See. 15 ‘ m9, 20,21, 13.24: 15.16

Sec, 47 (g) 12

Sec. 48 (a) . 12

Internal Revenue Code of 1954

Sec. Wt cad) 3

See. 482 9,16

REGULATIONS

Regulations 86. Art. 45-1 14

Resulations 118, See. 39.45-] - 14

RULINGS

(CM. 6272. VIIA Cum. Rul 176 1]

IN THE

‘Supreme Court of the Rnited States

October Term, A. Dz, 1960 é

TENNESEE LIFE INSURANCE COMPANY, Petitioner

R. L. PHINNEY, DISTRICT DIRECTOR OF

INTERNAL REVENUE AT AUSTIN, TEXAS,

Respondent -

-_— - -

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Petitioner Tennessee Life Insurance Company, a Texas

corporation, prays. that a writ of certiorari issue to re-

view the decision of the United States Court of Appeals

for the Fifth Circuit -in this cause (No. 18,160 below)

affirming the judgment of the United States District Court

for the Western District of Texas. Petitioner respectfully

shows unto the Court:.

Ll us

Opinions of the Courts Below

The majority and dissenting opinons of the Court. of |

Appeals (R. 71), es hereto as Appendix B, infra,

p. 27, ate reported at ___F. 2d. -_..” .

"The Findings of Fact and Conclusions of Law eae by

~the United States District Court for the Southern District

of Texad are set fourth at pp. 52-60 of the Record, but

are not + officially reported. |

“IL.

_., Grounds on Which the Jurisdiction -of This Court

7 | Is Invoked

(a) The judgment of the Court of Appeals was entered

on June 13, 1960 (R. 82), and was issued as and for the

mandate of the Court of Appeals on August 4, 1960.

(b) The order of the Court of Appeals denying the

petition for rehearing filed in the case ws entered on July

15, 1960 (R. 99).

* (c) Jurisdiction of this cause is conferred upor this |

Court by U.S.C. 1958 ed., Title 28, § 1254 (1), p. 5014.

| Ill.

Questions Presented. for. Review

The primary question presented for review in this case is:

Whether a deduction for ad valorem taxes which under

the Internal Revenue Code of 1939 -could not be allo-

The -conflictirg decision of the United States Cotrt of Appeals

for the Sixth Circuit in Simon J. Murphy Co, v. Comm’'r., 231 F 2d

G39 (1956), relied upon herein as a basis for certiorari. is appended

hereto for convenience as- Appendix C. infra. p 40°

: "a.

cated between unrelated taxpayers may under Sec. 45 of

the Internal Revenue Code of 1939 be allocated between

related taxpayers.

A subsidiary question 1s:

Whether an accrual basis taxpayer, owning realty on the

date current ad valorem taxes become a lien thereupon and

the personal liability of such taxpayer, may accrue such

taxes where such taxpayer disposes of the realty in: question

before the assessments of such taxes are entered -on the |

tax, rolls. .

IV.

Statutes and Regulations Involved

The principal statute to be construed is Sec.. 45, Internal

Revenue Code of 1939. Sec. 482 of ‘the Internal Revenue |

Code of 1954 is substantially identical with it. § 392 45-1

of Regulations 118 is the regulation directly involved.

Such statutes and regulations, and the other statutes less

directly involved are all set forth verbatim in Appendix A

hereto, infra, pp. 17-26." All such statutes and regulations

are cited as follows:

2: Whereas Sec. 164 (d)(1) of the Internal Revenue Code of 15)

permits apportionment of ad valorem taxes:on realty bet ween

sellers and purehesers. such apportionment is limited to circum

stances where the realty. is ‘sold. Thus the question here presented

is equally appliccble unde: the Internal Revenve Code of 195% to

ad valorem taxes imposed on real property where disposition

thereof after the taxing date oecurs, as in the instant case. other

than through.a sale. .

Various statanes of the State of Texas ‘and ordinances of the

City of Houston Texas were originally submitted solely ta) show

the fixation of January 1 of eae h vear as the date of lien and ter

sonal liability for taxes in Texas. These statutes are not here se!

forth hecause of the recognition given to and admission of this

circumstance by the Court of Appeils in its opinion, Appendix B

infra pp 2) and 32

U.S.C. 1952 ed., Title 26 (Internal Revenue Code of -

1939. as amended), §. 23 (c), p..3295; § 41, p. 33173"

§ 43, p. 3319; § 45, p. 3320; § 47(g), p. 3321; § 48.

(a), p. 3322; § 122, pp. 3382-3384; § 311, p. 3464.

U.S.C. 1958 ed., Title 26° (Internal Revenue Code of

1954), § 1644, p. 42873/6 164 (d) (1), p. 4287; 39.482,

p. 4368.

Code of Federal Regufations, Title 26, Part 39, Re-

vised 1953 (Regulations 118, Income Tax), § 39.45-1,

pp. 520-521.

‘Statement of the Case

. Jurisdiction

This action was ios to recover certain income taxes *

" assessed against Building Corporation for 1952 which were

_ paid. by petitioner. Original jurisdiction was vested in

the. District Court of the United States under U.S.C.

Title 28,.§ 1340, and venue was laid under the U.S.C.

Title 28, § 1391(b) in the judicial district in which de-

tendant R. L. Phinney resided. “The cause was tried upon

petitioner’s complaint gR. 1), respondent’s answer (R.7),

respondent’s request f§r admission of facts (R. 11) and

the amendment thereto (R. 15), petitioner’s response there-

to (R..16) and the objections of petitioner to certain

of.such- requests (R. 22), the stipulation of facts and

the exhibits thereto (R. 25) and the additional stipula-

tion (R. 46).

Following entry of the judgment of the District Court:

dismissing petitioner’s complaint on October 16, 1959 ~

(R. 49), petitioner filed its-notice of appeal to the United

States Court of Appeals for the Fifth Circuit on October

24, 1959 (R. 50),.and jurisdiction vested in such Court

under U.S.C. Title 28, § 1291. . f

b. Material . Facts |

‘This case involves the taxable income of Tennessee Gas

-. Building Corporation (Building Corporation) for its tay-

- able year which began January |, 1953 and ended with its

dissolution on January 23, 1955 (herein referred to as

the “short year 1953”). Tennessee Life Insurance Com-

pany (Life Company), petitioner herein, brings this action

and is an actor herein only because it, as the transferee

of the assets of Building Corporation on its liquidation

and dissolution, paid the taxes for which refund has been

‘claimed in this proceeding (R. 52). ;

Building Corporation from the inception of its organiza-

tion to January 19, 1953 was a wholly owned subsidiary

of Tennessee Gas Transmission Company, herein called

TGT (Stip. par. 2, R. 26): -Life Company was organized —

on November 25, 1952, and. from its inception this cor-

poration has been a wholly owned subsidiary of TGT (Stip.

par. 1, R. 25). On January 19, 1953, TGT transferred

the capital stock of Building Corporation tgLife Company

as.a contribution to its capital. Thereafter on January 19,

1953, Building Corporation adopted a plan of liquidation

‘and dissolution under which, on that date, Building Car-

poration transferred all of its assets, subject to its liabilities

to Wife Company. - Building Corporation was thereafter

formally dissolved on January °25, 1953 (Stip. par. 5,

R. 26).

On Januarv 1, 1955, Building Corporation was the

owner of the Commerce Building and certain other proper-

. 6

_ ties situated in Houston, Texas (Stip. par. 6, R. 27). In

1953 an official of Building Corporation rendered the

Commerce Building in the name of Building Corporation.

Pursuant to such rendition, the ad valorem taxes for the

year 1953 on the Commerce Building were assessed to

Building Corporation (Stip. par. 12, R. 28). State of

Texas and Harris County and City of Houston and Hous-

ton Independent School District ad valorem taxes for the

calendar year 1953 totalling $143,570 were -assessed to

Building Corporation in respect of the properties which it

owned on January 1, 1953 (Stip. par. 6, R. 27). These

taxes are shown on Exhibit C attached to the stipulation -

(R. 45).

Building Corporation throughout its existence maintained

its books of account and reported its taxable income on

the accrual basis of accounting (Stip. par. 7, R. 27). On

December 31, 1951 and December 31, 1952, the close of

Building Corporation’s taxable years 1951 and 1952, re-

spectively, ‘there was accrued as a liability on the books

of account of Building Corporation the ‘respective ad

valorem taxes assessed against its properties for the calendar

years 195] and 1952 (Stip. par. 9, R. 28). During each

of those taxable years 1951 and 1952, Building Corporation

made monthly entries on its books of account for the pro

rata estimated expenses for ad valorem taxes of each

monthly period. Monthly statements of profit and loss of

Building Corporation, reflecting the entries made to its

books of account were prepared, but were not communi-

cated to any third party or published (Stip. par. 10, R. 28).

On January 19, 1953, just prior to its liquidation, there

was accrued on the books of account of Building Corpora-

tion wan estimated liability the amount of $152,340 for

—

ad valorem taxes which would be assessed for the calendar

year 1953 against the Commerce Building and other prop-

erties which Building Corporation held on January 1, 195 s.

The amount of such ad valorem taxes actually assessed was

$143,570 which represented ,ad valorem. taxes assessed “by |

the State of Texas, Harris County, the City of Houston

and the Houston Independent School District. The assess-

‘ments were entered on the tax rolls by the appropriate

officials subsequent to January 23, 1955 (Stip. par. 8,

R. 27).

Building Corporation did not itself actually pay the

ad valorem taxes of $143,570 assessed against it for the

calendar year 1953. Upon its liquidation, Building Cor-

poration transferred to Life Company funds out of which

such ad valorem taxes could have been paid (Stip. par. 15.

R. 29).

Life Company caused Building Corporation to file cor-

porate income tax returns for its taxable calendar year

1952, and for the short year 1953, that is the taxable

year commencing January 1, 1953 and ending with the

dissolution of Building Corporation on January 23, 1953.

In the return for the short year 1955, Building Corpora-

tion reported the rentals paid by Commerce Building tenants

for the entirety of the month of January and claimed a de-

duction for the total amount of $143,570 of 1993 ad

valorem taxes which were assessed in 1993 against the

properties: Building Corporation owned on January !, 1983.

In the return for the short year 1953 Building Corpora-

tion claimed a net operating loss principally as a result

of the ad valorem taxes which it deducted therein (Fdgs.

pars. 17 and 18, R. $7).

The 1952 income tax return of Building Corporation showed oS

a tax liability of $61.) 58.34. aftér deducting from the

taxable income set forth on such return as a Net Operating

_ loss carry-back the amount of the net operating loss shown

on the return for the short year 1953, Subsequently the

net operating loss deduction claimed by Building Corpora-

tion on said return for 19$2 was disallowed by respondent,

and the resulting ‘deficiency assessment of $43,417.40 plus

interest was paid on March 6, 1956 (Fdgs. pars. 17 and 18,

R. $7). This spit was brought for refund of that deficiency

assessment. 7

In disallowing the net operating loss deduction claimed

by Building Corporation on jts 1952 return, the respondent

allowed as a deduction on the return of Building Corpora-

tion for the short year 1953 omly $7,080 as a deduction

for ad valorem taxes in that year. Such amount represented

18/365 (representing the 18 day period during 1953 pre-

ceding the liquidation of Building Corporation on January

19, 1953) of the total amount of $143,570 of Texas ad

- Valorem taxes assessed in 1953 against the properties owned

‘by Building Corporation on January 1, 1953 (Fdgs. par

-20, R. 58).

Substantially theee same facts Were recited as the material

facts by the Court of Appeals in its decision; Appendix B.

infra, pp. 27 through 30,

VI.

Reasons Relied on for the Allowance of the Writ

There are three compelling reasons why review on writ

of certiorari should be granted in this case. They are as fol-

lows:

The majority decision of the Court of Appeals is in®

direct and admitted conflict with the decision of the

Court of Appeals for the Sixth Circuit in the case of

Simon J. Murphy Ce. v. Comm’r., 231 F. 2d 691

- (1956).

The majority decision ot the Court of Appeals is in

conflict with the decision of this court in Magruder

v. Supplee, 316 U.S. 394 (1942).

The majority decision.of the Court of Appeals en-

tirely abrogates the historic standard of arm's length

conduct between uncontrolled taxpayers prescribed

by the Commissioner of Internal Revenue to be fol-

lowed in the administration of Sec. 45,. Internal

Revenue Code of 1939. Because of the consequences

of such abrogation on the administration of the sub-

stantially identical Sec. 482 of the Internal Revenue

Code of 1954, the majority decision presents an ex-

tremely important question of Federal law not hereto-

fere considered by this Court.

Conflict With Sixth Cireuit Decision.

The decision of the majority of the Court of Appeals is

in direct and admitted conflict with the decision of the

Court of Appeals for the Sixth Circuit in the case of Simon

J. Murphy Co. 2. Comm’r., 231 F. 2d 639 (1956), Appen-

dix C, infra, p. 40. Admission of this conflict ‘is noted in

the majority opinion as follows: : :

“We are constrained to agree with the position taken

by the Commissioner supported by the judgment of the

Trial Court. In concluding as we do we recognize that

we must differ, however reluctantly, with the decision

of the Court of Appeals for the Sixth Circuit in

“Simon J. Murphy Ca. v. Comm’r., 6 Cir., 231 F.2d

639.”

The opinion of the dissent in the Court of Appeals even

more succinctly points out this conflict. It is there stated as

follows: :

“The Court of Appeals for the Sixth Circuit had be-

fare it a case fdentical-with this one in the legal

‘principles involved, Simon J. Murphy Co., Etc. v.

Commissioner of Internal Revenue, 1956, 231 F.2d

639. The Commissioner raised every point in that case

which appellee relies upon here and every point was

decided in favor of the taxpayer. It is the only case

cited by either party which applies to the facts before

us.sThe majority declines to follow the Murphy case.

but I find its reasoning unanswerable and we should

follow a.”

The conflict of the majority in the instant case with the

decision in the Murphy Co. case exists on two broad fronts.

First, the majority here held that Sec. 45 of the Internal

Revenue-Code of 1939. permitting the Commissioner to

allocate income and deductions between related taxpayers,

permits the allocation to a related taxpayer of a deduction

it would not be legally entitled to claim if unrelated. The

Court stated:

ee se we oh

we are satisfied that the right of the Commis-

sioner to apportion or distribute deductions or income

under Section 45 is not restricted to:such apportioning

or distribution as would be permissible for two un-

related taxpayers under existing taxing statutes.” Ap-

pendix B, infra, p. 35. |

In so holding, the majority abrogated the standard of arm's

length conduct between uncontrolled taxpayers pte-

scribed by the Commissioner for the administration of Sec.

45 from the inception of the appearance of “that section

in the income taxing statutes. The impoggance of this mat-

ter will be more fully discussedunder point 3 of these

reasons.

Second, the majority held the tact that Texas ad valorem

taxes become a lien and: become the personal obligation ot

the owner of realty on, January 1 of each year does not

mean that such taxes ‘may be accrued as a ‘deduction for

income tax purposes as of such date. In the Murphy Co.

case the ad valorem taxes also became a lien on'the proper-

ties there in question and a debs of the owner thereof on

January 1, and accrual was held to be proper: The Court

of Appeals in the instant case reasons that accrual is im-”

proper because the taxes were not finally determined in

amount or formally entered on the tax rolls until after

dissolution of Building Cotporation on January 23. *

The Commissioner has consistently recognized the lien

date of ad valorem taxes as the date of their accrual for

the purpose of denying any deduction for such taxes to

any party other than the ow oer of the property on the lien

‘date. In GCM 6272. VIT-1 Cum. Bul. 170, which ruling

Kas never been revoked or. questioned, the Commissioner

held January 1 to be the accrual date of ad valorem taxes

in Texas, even though he recognized that the amount of

the taxes was not “ascertainable on that date.” .

Ad valorem taxes in Texas cre assessed for the cal-

endar year in which on January 1 they become a lien.

Building Corporation maintained its records on a calen-_

dar year accrual basis. Petitioner has never denied that

Building Corporation for purposes of ‘its internal account-

‘ing records dyring 1951 and 1952 charged to expense

each month one-twelfth of its estimated ad valorem ‘tax

liability for each such calendar year, adjusting” its ac-_

counting records at the end of each such accounting

year to reflect its actual ad valorem ‘tax liability for that

years Thus, in eoch one of those calendar years 1951 and

1952, Building Corporation xccrued that particular cal-

endar year’s ad valorem taxes. Obviously no part of the ~

1953 taxes could be appottioned back to the year 1952.

If Building Corporation’ was to obtain 2 deduction for

the 1953 taxes, the only period in which it could obtain

such a deduction was in its short year 1953 ending with

its dissolution on January 23, 1953. In Citizens Hotel

Co. v. Commissioner. 127 F. 2d 229 (5th Cir., 1942)

and Allen v. Atlanta Stove Works, Inc., 138 F.2d 452 (Sth

Cir., 1943), relied upon by the majority in the instant

case, there was no disposition of the property in question

-and the only point for decision was to determine she

proper year of a single taxpayer for the deduction of the.

taxes. Here there was a disposition of she property and

of it the dissenting judge said:

“There is no contention that the transaction here’ in-

volved was not bona fide in every respect and that

it did not serve 2 useful purpose.”

The short year 1953 was a taxable year. Secs. 47(g)

and 48(a), Internal Revenue Code of 1939, Appendix A,

infra, pp. 18 and 19. Consistent with its practices in its

taxable year: 1951 and 1952, Building Corporation at the

end of its short year 1953 accrued its liability. for the

entirety of the 1953 taxes. If Building Corporation had

sold the property within its short vear 1953 to an en-

-—

‘tirely unrelated party and then dissolved, denial to x

during its short year 195% of the right to accrue the ad

valorem taxes would simply have amourted to a denial!

of a deduction for such taxes. Denial of the accrual where

the properties were distributed in liquidation to a related

party is similarly simply a demal of a deduction for the taxes

unless allocation thereof under Sec. 45 shall be permitted.

2. Conflict with this Court's decision:

The decision of the majority of the Court of Appeals

directly conflicts with the decision of this Court in Ma-

gruder v. Supplee, 316 U.S. 394 (1942) wherein thy

Court held that ad valorem taxes on realty could be de-

ducted only by the person owning the realty on the dite

such taxes became a lien against it and a liability of such

Owner.

In-his press for application ‘of the rule of the Magruder

r. Supplee case, the Commissioner of Internal Revenue

has heretofore denied any deduction claimed by a related

successor owner for ad valorem taxes which became a lien

against the property in the ‘hands .of a predecessor. His

position was upheld by the Board of Tax Appeals in two

cases involving Texas ad valore fm taxes: In Texas Coca

Cola Bottling Co. v. Commissioner, 30 BTA 736 (1934),

the parties were’ intensely related. Partnership propertic:

were transferred to a corporation in .a transaction upon

which the Court held no gain or loss was, recognized to

the transferors. Yet the successor corporation was denied

any deduction for the taxes it paid on properties acquired

March 1. which were subjected to the tax lien on the

prior January 1. Again in American Liberty Oil Co. 1.

Commissioner, 4% BTA 76 (1940), the properties were

acquired in May in a non-taxable reorganization, but the

successor corporation was denied any deduction for the

taxes -it paid which became a lien on the preceding Jan-

uary | on the transferred properties.

3. Substantive hetnislin c of the Decision of the

Court of Appeals

The standard of arm’s length conduct between unre-

lated parties prescribed by the Commissioner for the ad-

ministration of Sec. 45 has been abrogated by the majority

decision of the Court of Appeals. In their citation of

Jud Plumbing % Heating, Inc. v. Comm’r., 153 F, 2d

681 (5 Cir., 1946) and Dillard Waltermire, Inc., v.

Campbell, 255 F.2d 433 (5 Cir.,.1958), as support for

this proposition, the majority misconceive the nature of

the allocation made An those cases. In both, a portion of

the income realized’ by a related successor party upon the >

completion of contracts, transferred to the successor while

work thereon was in progress by the predecessor organiza-

tion, was allotted to the predecessor organization. This action

recognizes only the fact that an arm’s length purchaser of

such contracts would have made a payment of the gctual

worth of the work done thereupon by the. predecessor

organization. The cases supply no suggestion that arm’s

length ‘standards between unrelated parties may ‘be vio-

lated by allocation to a related successor organization

of a deduction denied by law to any party other than its

predecessor.

This arm’s length standard has been prescribed under

the income tax regulations from the inception of Regula-

tions 86 (1934), the first to deal with Sec. 45 of the

Revenue Acts, through all of the intervening regulations

down through Regulations 118 (1953). Under section

45-1. subdivision (a) (6) has provided as_ follows:

15 |

Raed

“The term ‘true net income” means? in the case of

a controlled taxpayer, the net income (or as the

case may be, any item or element affecting net in-

come) which would have ‘resulted to the controlled

taxpayer,. had it. in the conduct of its affairs (or,

as the case may be, in. the particular contract, trans-

action, arrangement or other act) dealt uath. the

other member or members of the group at arm’s

length.” (Emphasis supplied)

. Subdivision (b) (1) has provided:

“The purpose of section 45 is to place a controlled

_ taxpayer on a tax parity with an uncontrolled tax-

payer, by determining, according to the standard of

an uncontrolled taxpayer, the true net income from

the property and business of a controlled taxpayer.

+ * * The standard to be applied in every case 1s that

of an uncontrolled taxpayer dealing at arm’s length

with another uncontrolled taxpayer.” (Emphasis sup-

plied) , :

The last sentence of subdivision (c) has provided as

follows: gs

“The authority to determine true net income. extends

to any case in which either by inadvertence or design

the taxable net income in whole or in part, of a

‘controlled taxpayer, is other than it would have been

had the taxpayer in the conduct of his affairs been

an uncontrolled taxpayer dealing at arm’s length with

another uncontrolled taxpayer.” (Emphasis suppfted)

Fas

Thus. the Congress, time after time, has re-

enacted Sec. 45 of the Revenue Acts and-the Internal

Revenue Code in the light of regulatory specifications

“‘e

which required its provisions to be administered according

to the standards “of an uncontrolled taxpayer dealing at

arm’s length with another uncontrolled taxpayer.” Lan-

guage substantially identical with that found under Sec. 45

of the Internal Revenue Code of 1939 is contained undér

: Sec. 482 of the Internal Revenue Code of 1954. Regula-

tions under that Section, of the Internal Revenue Code of

1954 have not yet been promulgated. Allowing the decision

of the majority of the Court of Appeals in, the instant

case to stand will‘constitute a mandate to the Commissioner

of Internal Revenue to ignore and omit this standard of

arm’s length conduct when ,he proposes those regulations.

‘Conclusion

For the foregoing reasons, it is respectfully submitted

that this petition for a writ of certiorari should be granted.

Respectfully submitted,

ROBERT K. JEWETT

Attorney for Petitioner

1600 Esperson Building

Houston 2, Texas

Of Counsel:

BAKER, BOTTS, ANDREWS & SHFPHERD

1600 Fsperson Building

Houston 2, Texas

‘APPENDIX A

Internal Revenue Code of 1939.

Sec. 23. Drouctions Frou Gross INCOMF.

“In computing net income there shall be allowed as de- ”

ductions:

* ca *

"(c¢) Taxes Generally.

(1) Allowance in General. —Taxes paid or accrued with-.

in the taxable year, * * *”

"Sec. 41. GENERAL RuLr.

_ “The net income shall be computed upon the basis of

the taxpayer’s annual accounting period (fiscal year or

calendar year, as the case may be) in accordance with the

method of accounting regularly employed in keeping the

books of such taxpayer; but if no such method of ,account-

ing has been so employed, or if the method employed does

not clearly reflect the income, the computation shall be

made in accordance with such method as in the opinion of

the Commissioner does clearly reflect the income. If the tax-

payer’s annual accounting period is other than a fiscal

year as defined in section 48 or if the taxpayer has no

annual accounting period or does not keep books, the net

income shall be computed on the basis of the calendar

year.” ad

"Sec. 4¥: Pertop For WrHicn Drpuctions

AND CKEDITS TAKEN.

“The deductions and crédits (other than the corporation

dividend paid credit provided in section 27) provided for -

in this chapter shall be taken for the taxable year in which

“paid or accrued” or “paid or incurred,” dependent upon

the method of accounting upon the basis of which the’ net

income is computed,.unless in order to clearly reflect the

. income the deductions or credits.should be taken as a differ-

ent period. In the case of the death of a taxpayer whose net

income is computed upon .the basis of the accrual method of

accounting, amounts “(exgept amounts includible in com-

puting a partner’s net income under section 182) accrued

as deductions and credits only by reason of the death of

the taxpayer shall not be allowed in computing net income

for the period in which falls the date of the taxpayer's

death.” .:

"Sec. 45. ALLOCATION oF INCOME AND DeEpucTIONS.

“In any case of two of more organizations, trades, or

businesses (whether. or not incorporated, whether or not

organized in the United States, and whether of*not affli-

ated) owned or controlled directly or indirectly by the

same interests, the. Commissioner is authorized to distri

bute, apportion, or allocate gross income, deductions, cred-

its, or allowances between or among such organizations,

trades or budfhesses, if he determines that such distribution,

apportionment, or allocation is necessary in ordet to pre-

vent evasion of taxes or clearly to reflect the income of any

of such organizations, trades, or businesses.”

“Sec. 47. Returns For A Periop OF Lrss

THAN Twreive MONTHS.

ce + ©

“(g) Returrs Where Taxpayer Not in Existence for

Twelve Months.—In the case of a taxpayer not in existence

during the whole of an annual accounting period ending on

19 ,

the last day of 4 month, or, if the taxpayer has no such

annual accounting period or does not keep books, during

the whole of a calendar year, the return shall be made for

the fractional part of the year during which the taxpayer

was in existence.” ee

{ ,

"Sec. 48. . DEFINITIONS ?

“When used in this chapter-— :

“(a) Taxable Year.—" Taxable year” means the calen-

dar year, or the fiscal year ending during such calendar

year, upon the basis of which the net income is computed

under this Part. “Taxable year” means, in the case of a

“return made for a fractional. part of a year under the pro-:

visions of this chapter or under ‘tegulations prescribed’ by

the Commissioner with the approval af the Secretary, the

period for which such return is made.

* + +

"Sec, 122: Net OPrRATING ‘Loss DEDUCTION.

"(a) Definition of Net Operating Loss.—As used in

this section, the term “net operating’ loss” means the excess

cf the deductions allowed by this chapter over the gross

‘income, with the exceptions, additions, and limitations pro-

vided in subsection (d).

"(b) Amount of Garry-Back and Carry-Over.-—

"ay Net Operating ‘Loss Carry-Back.—

“(B) Loss for Taxable Year Beginning After 1949,—

If for any taxable year beginning after December 31, 1949,

the. taxpayer has a net operating loss, such net Operating

loss shall be a net operating loss carry-back for the pre-

ceding taxable year.

“(c) Amount of Net Operating Loss Deduction—The °

amount of the net operating loss deduction shall be the ag-

gregate of the net operating loss carry-overs and of the net

operating loss carry-backs to the taxable year reduced by

the amount, if any, by which the net income (computed

with the exceptions and limitations provided in subsection

(d), (1), (2), (3), and (4)) exceeds, in the case of a tax-

payer-other than a corporation, the net income (computed

- without such deduction), or, in the case of 3 corporation,

‘the normal-tax net income (computed without such de-

duction and without the credits piovided in section 26(h)

and (i); |

“(d) Exceptions, Additions, and Limitations.—The ex-

ceptions, additions, and liinitations referred to in subsec -

tions (a), (b), and -(c) shall be as follows:

“(1) The’ deduction for depletion shall not exceed the

-amouiit which would be allowable ,f computed without

reference to discovery value or to percentage depletion

under section 114(b), (2), (3), or (4);

“(2) There shall be included ir, computing gross in-

came the amount of interest’ received which is wholly .

exempt from the taxes imposed by this chapter, decreased

by the amounc of interest paid or accrued which is not.

allowed as a deduction by section 23(b), relating to in-

terest on indebtedness incurred or continued. to purchase

Cr carry certain tax exempt obligations:

"(3) No net operating loss deduction shall be allowed:

(4) The amount deductible 6n account of losses from

sales or exchanges of capital assets shall not exceed the

smount includible on account of gains from such sales or

exchaiges. The deduction provided in section 2%(ee) shall

not be allowed,

"(5) Deductions otherwise allowed by law not attribut-

able to the operation of a trade or business regtfarly car-

carried on by the taxpayer shall (in the case of a taxpayer

other than 2 corporation) he allowed only to the extent of

the amount of the gross income not derived from such trade

or- business. For the purposes of this paragraph deductions

and gross income shall be computed with the exceptions and

limitations specified in paragraphs (1) to (4) of this subsec-

tion. This paragraph shall not apply with respect to deduc-

tions allowable for losses sustained after December 31, 1950,

in respect of property, if the losses arise from fire, storm,

shipwreck, or other casualty, or from theft:

ce £+ ©

“(e) No Carry-Back to.Year Prior to 1941.—As used

in this section, the term “preceding taxable year’ and the

term “preceding taxable years” do not include any taxable

year beginning prior to January 1, 1941."

“Sec. 311. TRANSFERRED Assets.

“(a) Method of Colfection.—The amounts of the fol-

lowing liabilities shall, except as hereinafter in this section

provided, be assessed, collected, and paid in the same man-

ner and subject to the same provisions and limitations as in

the case of a deficiency in a tax imposed: by this chapter -

(including the. provisions in case of deliquency in payment

after notice and demand, the provisions, authorizing dis-

traint and progeedings in courts for collection, and the

provisions prohibiting claims and suits for refunds):

“(1) Transferees.—The liability, at law or in equity.

of a transferee of property of a taxpayer, in respect of th.

tax (includife interest, additional amounts. and additions

to the tax provided by law) imposed upon the taxpayer -by

this chapter,

“* 2 ©

Any such liability may be either as to the amount of tax

shown on the return or as to any deficiency in tax.”

Internal Revenue Code of 1954

“Sec. 164. Taxes. A eS

“(a) General Rule. — Except as otherwise provided in

this section, there shall be allowed as a deduction taxes

paid or accrued within the taxable. year,

a * >

“(d) Apportionment of Taxes on Real Property Be-

tween Seller and Purchaser.—-

(1) General Rule.—For purposes of subsection (a),

if.real property is sold during any real Property tax

year, then—

(A) so much of the real Property tax as is property

allocable to that part of such year which ends on the

the day before the date of the sale shall be treated

ds a t2x imposed on the seller, and

* (B) so much of such tax as js Properly allocable to

that part of such year which ‘egins on the date of

the sale shall be treated as a tax imposed on the pur-

chaser. .

n * ”

PDe

"Sec. 482: ALLocation or INcoxte AND Dipuctions

AMONG TAXPAYERS. :

“In any case of two er more organizations, trades, or

businesses (whether or not incorporated, whether or not

organized in the United States, and whether or not afhliited)

owned or controlled directly or indirectly by the same

interests, the Secretary or his delegate may distribute, ap-

portion, or allocate gross income, deductions, credits, or

allowartces between of among such organizations, trades,

or businesses, if he determines that such distribution, appor-

tionment, or allocation is necessary in order to prevent

evasion of taxes or clearly to reflect the income of any of

such organizations,.trades or businesses.”

Regulations 118, promulgated under the Internal

: Revenue Code of 1939. _ °

(Code of Federal Regulations, Title 26, Revised

1953, Part 39)

“Sec. 39.45-1 Determination of the taxable net income of

a controlled taxpayer—(a) Definitions. When used in this

Section:

“(1} The term “organization” includes any organization

of any kind, whether it be a wole proprietorship, a partner-

ship, a trust,.an estate, or a corporation (as each is defined

or understood in the Internal Revenue Code or regulations

in this part), irrespective -of the place where organized.

where operated, or where its trade or business is conducted,

ond regardless of whether domestic or foreign, whether

exempt, whether affiliated, or whether a party to a consoli-

dated return.

“(2) The terms “trade” or “business” include any trade

or business activity of any kind, regardless of whether or

where organized, whether owned individually or otherwise,

and regardless of the place where carried on.

“(3) The term “controlled” includes any kind of con-

trol, direct or indirect, whether legally enforceable, and

however exercisable or exercised. It is the reality of the con-

trol which is decisive, not its form or the mode of its exer-

cise. A presumption of control arises if income or deduc-

tions have been arbitrarily shifted.

(4) The term “controlled taxpayer’’ means any one of

two or more organizations, trades, or businesses owned or

controlled directly or indirectly by the same interests.

“(5) The terms “group” and “group of controlled tax-

” . “Ey ° J

Payers” mean the organizations, trades, or businesses owned

ar controlled by the same interests.

(6) The term “true net income” means, in the case of

a controlled taxpayer, the net income (or, as the case may

be, any item or element affecting net income) which would

have resulted to the controlled taxpayer, had it in the con-

duct of its affairs (or, as the case may be, in the particular

contract, transaction, arrangement, or other act) dealt with

the other member or members of the Sroup at arm’s length.

It does not mean the income, the deductions, the ‘credits,

the allowances, or the item or element of income, deduc-

tions, credits, or allowances, resulting to the controlled

taxpayer by reason of the particular contract, transaction,

or arrangement, the controlled taxpayer, or the interests

controlling it, chose to make (even though such contract.

transaction, or arrangement be legally binding upon the

parties thereto),

. ‘ ‘

“(b) -Seope and purpose. (1)-The purpose of section 45

is to place a controlled taxpayer on a tax parity with an un-

controlled taxpayer, by determining, according to rhe

standard of ‘an uncontrolled taxpayer, the true net in-

come from the property and business of a controlled tax-

payer. The interests controlling a group of controlled tax-

Payers are assumed to have complete power to ¢ause each

controlled taxpayer so to conduct its affairs that its trans-

actions and accounting records truly reflect the net in-

come from the property and business of each of the con-

trolled taxpayers. If, however, this has not been done, and

the taxable net incomes are:thereby understated, the statute

‘tontemplates that the Commissioner shall intervene, and.

by making such distributions, apportionments, or allocations

as he may deem necessary of gross income, deductions,

credits, or allowances, or of any item or clement affecting

net income, between or among the controlled taxpayers

constituting the group, shall determine the true net income

of cach controlled taxpayer. The standard to be applied

in every case is that of an uncontrolled taxpayer dealing

at arm’s mage with another uncontrolled taxpayer.

ia) Section 45 and this section apply to the case of any

controlled taxpayer, whether such taxpayer makes a sepa-

rate or a consolidated return. Ti a controlled taxpayer makes

a separate return, the determination is of its true separate

net income. If a controlled taxpayer is a party to a con-

solidated return, the true consolidated net income of the

affliated group and the true separate net income of the

controlled taxpayer are determined consistently with the

principles of a consolidated return,

(3) Section 4§ grants no right to a controlled taxpaver

to apply its provisions at will, nor does it grant am, right

to compel the Commissioner to apply such provisions. It is.

not intended (except in the case of the computation of con-

solidated net income under a consolidated return) to effect

in any case such a distribution, apportionment, or alloca-

tipn of gross income, deductions, credits, or allowances, or

any item of gross income, deductions, credits, or allowances,

3s would produce a result equivalent to 2 computation of

consolidated net income under section 141.

“(c) Application. Transactions between one controlled

taxpayer and another will be subjected to special scrutiny

to ascertain whether the common control is being used to

reduce, avoid, or escape taxes. In determining the true net

income of a controlled taxpayer, the Commissioner is not

restricted to the case of improper accounting, to the case

of a fraudulent, colorable, or sham transaction, or to the

case of a device designed to reduce or avoid tax by shifting

or distorting income, deductions, credits, or allowances.

The authority to determine true net income extends to any

case jn which cither by inadvertence or design the taxable

net income, in whole or in part, of a controlled taxpayer,

is other than it would have been had the taxpayer in the

conduct of his affairs been an uncontrolled taxpayer dealing

at arm’s length with another uncontrolled taxpayer.” —

5»7-

APPENDIX B

IN THE

Huited States Court of Appeals

FOR THE FIFTH CIRCUIT

No. 18160

TENNESSEE LIFE INSURANCE COMPANY,

Appellant,

versus

R. L. PHINNEY, District Director of Internal Revc-

nue at Austin, Texas, - Appellee.

Appeal from the United States District Court for the

Western District of Texas.

(June 13, 1960.)

Before TUTTLE, CAMERON and JONES, Circuit Judges.

TUTTLE, Circuit Judge: This appeal tests the:-cor-

rectness of the Internal Revenue -Commissioner’s de-

nial of a deduction of real estate taxes to one of two

io A

-’

wholly owned subsidiaries under the provisions of Section

- 4§ of the Internal Revenue Code of 1939 as Amended, 26

U.S.C.A., Internal Revenue Code of 1939. §45, when the

owner corporation, on January Ist, the date the lien for

taxes attached, conveyed the property under a liquidation

on January 19th to the second wholly owned subsidiary

corporation. |

—

The facts are not in dispute. On January 1, 1953,

Tennessee’ Gas Transmission Corporation (T.G.T.)

owned two subsidiaries, Tennessee Gas Building Corpo-

ration (Building Company): and Tennessee Life Insar-

ance Company (Life Company). On that date Building

Company was the owner of the Commerce Building in

. Houston, Texas. The Life Company was a “life insur-

ance company” within the meaning of the Internal

Revenue Code of 1939. On January 19, 19) . F.G.T.

transferred all of the outstanding capital stock of Build-

“ing Company ta the Life Company as a contribution to

capital. On the same dav Building. Company adopted a

plan of complete liquidation and dissolution under which,

on that date, it transferred all of its assets, subject to its

liabilities, to Life Company. It was formally dissolved

on January 23, 1953, ae

It was stipulated: between the parties:

“During each of its said taxable years 1951

and 1952, Building Corpo.ation made monthly -

entries on its books of account for the profrata °

estimated expenses for’ ad valorem taxes of

each such monthly period. Monthly statements

of profit and loss of Building Corporation, re-

flecting the entries made to its books of ac-

count, were prepared, but were not communi-

cated to any third party or published.”

On January 19, 1953, just prior to its liquidation,

there was entered on the books of account of Building

Corporation an estimated liability of $152,340 for ad

_valorem taxes which would be assessed for the calendar

year 1953 against the propgrties held by it on January

1, 1953. The amount of such ad valorem taxes later act-

ually assessed was $143,570.. Although the assessments were

not made until sometime subsequent to January 23rd,

is not disputed that under the Texas law 1953 ad v wae

taxes became a lien on the property and became the per-

sonal liability of the owner of the property on January Ist

of that year. .

In the tax returns filed by Building Company for the

short year commencing Janugry Ist and ending on January

23,-1953, Building Company reported income represented

by rents from tenants of the Commerce Building for the

month of January, 1953. It claimed a deduction of the

total amount of $143,570 of ad valorem taxes assessed in

-1953 for that calendar year.’ Building Company claimed a

net operating loss for the short year, principally as a re-

sult of the large. item of a year’s ad valorem taxes when

matched against one month’s income from the building.

The Commissioner adju-ted Building Company’s re-

turn for the short year 1953 by adjusting the rentals so

as to include 18/31sts thereof and by allowing a de-

duction for ad valorem taxes in the amount of $7,080. This

represented 18/36Sths of the total amount of $143,570 of

ad valorem taxes for the year. 1953.

‘See 23. Deduction from Gross Income

In computing net income there shall be llowerd

is deductions:

(. Taxes Genera!!v

1) Allowance in general—Taxes paid ot

accrued within the taxable *em

10 ’

Thereafter, Life Company, as transferee of Building

Company, filed a claim for refiand of income taxes paid

in respect to Building Company’s taxable year 1952 on

the ground that Building Company had sustained a net

operating loss foe the short year $953, and was thus

entitled to carry the loss back to 1952. This claim was

disallowed, and this suit for refund followed.

The District Court sustained the Commissioner, -hold-

ing that the adjustments as made were warranted under

the provisions of Section 45 of the Internal. Revenue Code

of 1939 in order clearly to reflect the income of the two

wholiy owned subsidiaries.

Appellant -here argues that until modified by the pro-

Visionstep f the 1954 Internal Revenue Code” only the

taxpayer that owned real property on the date a par-

ticular year’s taxes became a lien or became the per-

‘sonal obligation of the taxpayer could take a dedaction

for ad valorem taxes; that, therefore, as between non-

associated taxpayers, dealing at arm’s length, it would

not be possible for the transferee, here represented

by the Life Company, to take a deduction for that- part

of the reel estate taxes ‘corresponding with that part

of the year 1953 following the transfer on January 19th;

therefore, the Commissioner’s attempt to “allocate” the

ad valorem tixes by disallowing all but 18/36S5ths of the

1953 taxes amounted to a dis:!!owance of much the greatest

part of the tax deduction rather than an allocation as

between the Building Company and the Life Company.

This follows, appellant contends, since, under the 1939

Code, only the taxpayer of record on: January Ist could

take a deduction for 11! estate taxes, the Commissioner

we Rese V3 164 and § 441(e)01)

° x1

did not have the power to ‘give this deduction to the

transferee corporation under the allocation section.

The government does not dispute the basic premise,

that is, under the 1939 Code where two unrelated corpo-

rations dealt with real property in Texas during an ad

valorem tax year (here the calendar year 1953), the

purchaser of the property could not take as a deduction

any amounts which it paid to discharge the ad valorem

tax lien against the property, whether such payment

was made by it by agreement. between the parties or

in order to prevent a foreclosure of the tax lien. The

Supreme Court case of Magrfider v. Suppler, 316 US.

394, clearly establishes this proposition.

The government contends, however, that the authori-

ty granted to the Commissioner by Section 45 is in-

tended to permit allocations as between related tax-

payers when necessary to reflect the true income as

between: such taxpayers, even when the result of such

allocation is*to allocate either income or deduction to

a taxpayer which, under other sections of the Internal

Revenue Code, would not legally be entitled to give it

such treatment. In other words, the Commissioner con-

tends that the principle of Magruder v. Supplee is

binding only absent a reallocation of deductions under

the authority of Section 45.

We are constrained to agree with the position . taken

by the Commissioner and supported by the judgment

of the trial court. In concluding as we do we recognize

that we must differ, however reluctantly, with the de-

cision of the Court of Appeals for the Sixth Circuit in

‘Simon |. Murphy v..Commissioner, 6 Cir., 231 F.2d 639.

In addition to the ground principally urged by the

Commissioner and made the basis of the trial court's

decision, we feel that we are bound’ by two previous

decisions of this Court to conclude, contrary to the -

‘wews of the Court in the Murphy case, that the Texas

ad valorem taxes here involved were neither “paid or

ecerued” during the short tax year, except to the extent

allowed by the Commissioner. These’.two cases are

Citizens Hotel Co. v, Commissioner of Internal Revenue,

‘$§ Cir., 127 F. 2d 229, a Texas case, and. Allen, Collector

1. Atlanta Stove. Works, Inc., § Cir., 138 F. 2d 452, a

Georgia case involving the same state tax principles.

We think the basic error in the’ contention of the

appellant is its assumption that because Texas ad va-

lorem taxes became a lien and became the personal obli-

gation of the Building Company on January 1, 1953,

they “accrued” on that date. We have expressly held to

_the contraty in Citizens Hotel Company, supra. It is un-

disputed that the taxes were not “paid” during the. short

year. The only other basis for Building Company’s. right

to deduct them, therefore, would be their “accrual” prior

_to Janusry 19, 1953. We think it clear that the terms

“pay or accrue” relate to the method of accounting used

,by a taxpayer. In order for a cash basis taxpayer to be

permitted to deduct taxes he must have actually paid them

during the tax year. In order for an.accrual basis taxpayer

to be permitted to deduct them, he must, under the accrual

system of accounting, accrue them on his books. Here, to

be sure, Building Company ‘entered the estimated amount

of the entire 1953 ad valorem taxes on its books prior to

dissolution’ on January 23rd. This. however, was incon-

sistent with the accrual method of accounting which tax-

yy.)

payer had followed in the previous years of its existence,

It is stipulated that during the years 1951 and 192 tax-

payer accrued 1/12th of the estimated ad valorem tax on

its boéks each month. . This is strictly in accord with the

accrual method of accounting as described in Judge Sib-

ley’s opinion in the —— Hotel Company case, supra.

There the opinion stated:

“The taxpayer's books are kept on a_ general

accrual basis,~and this annual tax charge is dis-

tributed by months over the year. The amount

* of it has to be estimated until the tax is de-

termined, and an adjustment is made - there-

after. This is conceded to be good accounting -

practice, and we think it clearly ‘reflects the

true income for a period less than a year.”

In that case the Commissioner sought a holding that

in Texas the entire ad valorem tax accrued on January

Ist. We expressly rejected that proposition by stating:

“Tt is true that in Texas property taxes are a

. personal liability of the owner’ measured by the

‘value -of the property which he. owns on Jan- '

uary 1. The assessments of values are made up

at a later time in*the vear, as are the rates of

County and City tax for the year, and then the

amount of tax due by each taxpayer is arrived

at and put on the tax rolls. The County tax rate

was not fixed in this instance tif] August 16,

1937, and the City tax rate September 29, 1937.

If a strict date of accrual must be adhered to, it

would have to fall after the -tax rates were

fived, for until then a necessary ingredient of

the tax liability was lacking, .and no tax de-

mand could be formulated. But we think no

such strict date can be insisted on. As is fully

explained in United States v. Anderson, 269

U.S. 422, 46 S. Cr. 131, 133, 70 L. Fd. 347, the

‘accrual basis for income tax returns was intro-

duced tp’ facilitate ‘a ‘true reflection of business

incomes according to sound ‘accounting prin-

ciples; and the taxpayer's bookkeeping, if in

accordance with such principles and truly re-

flecting net income, is allowed to be used as a

basis of returns.” (Emphasis added.)

In a Georgia. case where the law as to the creation

of a lien and the creation of the personal liability is

identical with that in>Texas, we ‘held precisely the same

thing in, the Atlanta Stove Works case, supra. In an

opinion, also written by Judge Sibley, this Court held:

: ef

"Until his tax rate is ‘ixed, the tnchoate tax

lien and debt cannot be said to have accrued.”

Whatever may be understood under the Texas law to

be the effect’ of the obligations and liabilities: created as

“against real estate and its owners on January Ist, we

think it clear that this Court has expressly held that

there has been no “accrual” of an entire year’s taxes in

the sense in.which ‘the term is used in the, Internal

Revenue Code except as such taxes are “distributed by

months over the year,” since this is truly an accrual

method of accounting. It is not disputed that this tax*

payer was on an accrual basis.

We are thus forced to the conclusion that only such

part of the annual tax burden for 1953 as. would be

®own to be due under the usual method of accounting

adopted by Building Company comes within the deduction

of “taxes paid or accrued” within the tax vear.

ey ..

Moreover, even on the broader ground, we are satjs-

fied that the right of the Commissioner to apportion or |

distribute deductions or income under Section 45 is not

restricted to such apportioning or distribution as would

be permissible for two unrelated taxpayers under existing

taxing statutes. This is implicit in the holding of this

Court in Jud Plumbing and Heating Co. v. Commissioner,

§ Cir, 153 F. 2d 681, and Dillard-Waltermire, Inc., 5

Cir., 255 F..2d 433. In both of those cases the taxpayer

had consistently followgd the “completed-contract” method

of accounting. There was no doubt about the ‘right of

those taxpayers to follow that, method of accounting, In

fact, once having adopted that method they could not,

without the consent of the Commissioner, change it. What

the corporations did, in. transferring partially. completed

contracts to related persons without accounting for any

of the. subsequently receivéd payments on completion

would thus have been required under the applicable statutes

if the transferors and trarisferces’ had been unrelated per

sons. The transferor could not have reported the income

which, under its accounting. system, it had not becom«

entitled to. But, since the control over the transferor and

transferee in each case ‘was held by one who could effect

this obvious distortion ,of income, this Court held that

Section 45. gave the Commissioner’ the power to reallocate

the income in a way that unrelated parties could not have

done.

We think the authority granted in Section 45 permits

the Commissioner to deny to one of two related taxpayers

‘uch part of a deduction as is necessary te prevent the

true taxable income to be distorted, and to allocate a a de-

duction ' toa taxpaver which, absent the authority of See

‘tion 45, would -hot be entitled to claum such deduction.

There is nothing in the Magrader x. Supplee case that is

inconsistent with this holding.

We, therefore, conclude that the judgment ot the Di-

trict Court was right. It is AFPIRMED.

CAMERON, Circuit Judge, Dissenting:

I respectfully dissent from the opinion of the majority

ofirming the judgment of the district court. The cas

of Maxruder 1. Supplee, May 1942, 316 U.S.- 394, is, in

my opinion, directly controlling in the. case before us.

This is inescapably true, unless it is the purpose of the

tax officials that nobody shall receive the benefit of de-

duction of the large amount of taxes actually paid on thi.

real property. ,

~The Court of Anpeals for the Sixth Circuit ‘had before

it a case identical with this one in the legal principles

involved, Simon |. Murphy Co. Fle. 1. Commissioner

of Internal Revenue, 1986, 231 F.2d 639. The Commis-

sioner raised every point in that case which appellee relic:

upon heres and every point was decided in favor of the

taxpayer. It is*the only case cited by either party which

applies to the facts before. us. The majority declines to

follow the Murphy case, but I find its reasoning unanswer-

able and T think we should follow it.’

That decision was rendere! nearly two vere befiy

‘his osetion wos begun onmd-the Treasury Departmen filed

Cae ertior ar thytre ’ eth; luitescine r ‘ iy y

The cases cited by the majority’ do not, in my opinion,

apply to ‘the facts before us nor tend to dilute the doc-

trines of Supplee and Murphy. There is no contention

that the transaction here involved was not bona tide

every respect and that it did not serve 9. useful purpose.

Upon principle and the authority of these two cases. |

think the appellant is entitled to recover and that we

should reverse the judgment of the district court and

render ane here in appellant’s favor.

. .

Citizens Hotel Cos Commissioner ~~ © ry

i ‘ , . , e

rise 2a Alien. Collector Athinftas Stowe Work -~ ity

Cir. Te. ig Bod $52: Jud Plumbing & Heating Co (

Tis toned » Cir it, 12% Fd GNI ered Evid tel Worlrers

me .v' Comphell Jr Dietriet Direreor % Cir 1

JUDGMENT.

Extract from the Minutes of June 13, 1960.

TENNESSEE LIFE INSURANCE COMPANY,

No. 18160. versus

R. L. PHINNEY, District Director of Internal

Revenue at Austin, Texas.

This cause came on to be heard on the transcript of the.-

record from the United States District Court for the

Western District of Texas, and was argued by counsel:

ON. CONSIDERATION W HEREOF, It is now here

ordered and adjudged by this Court that the judgment of

the said District Court in this cause be, and the same is

hereby, affirmed.

“Cameron, Circuit Judgye, dissenting.”

IN THE |

Hited States Court of Appeals

FOR THE FIFTH CIRCUIT

No. 18,160

TENNESSEE LIFE INSURANCE COMPANY

Appellant,

versus

R. Lo. PHINNEY, District Director of Internal

Revenue at Austin, Texas,

Appellee.

Appeal from the United States District Court

for the Western District of Texas.

(July 15, 1960)

ON PETITION FOR REHEARING

3efore TUTTI F, CAMERON and JONES, CIRCUIT

JUDGES. ‘

-9ER CURIAM:

It is ORDERED that. the petition for rehearing filed

n the above styled’ and numbered cause be, and the same

< hereby, DENIED.

“CAMFRON, Circuis Judee. dissenting.”

APPENDIX C

SIMON J. MURPHY COMPANY AND

Social Research Foundation, Inc..

Petitioners,

¥.

COMMISSIONER OF INTERNA@ REVENUE,

. Respondent

No. 1249.1.

United States Court of Appeals

- Sixth Circuit.

April 2, 1956.

Proceeding by dissolved corporation and exempt, non-

profit foundation against Commissioner of Internal Reve-

nue on petition for review of decision of the Tax Court

of the United States, 22 T.C. 1341, Approving -assessments

of income tax deficiencies. The Court of Appeals, Shack-

elford Miller, Jr., Circuit Judge, held ‘that, where founda-

tion purchased all stock of corporate taxpayer, and trans-

action, by which corporation claimed, as deduction for

income tax purposes, all real estate taxes which accrued on

January 1, even though corporation had only an il day

tax period for the year beginning January 1, was entered

on books of foundation and corporation in accordance with

approved accounting methods, and there was nothing in

transter of corporation's realty to foundation that could

be successfully challenged, commissioner would not be per-

mitted to allocate between corporation’ and foundation a

net income diferent from that reflected in the books.

‘

Judgment reversed, and case remanded for further pro-

ceedings consistent with opinion.

ec ‘

“Before Simons, Chief Judge, and Allen and Miller,

Circuit Judges. |

“Shackelford Miller, Jr., Circuit Judge.

The petitioners seek a redetermination of income tax

deficiencies assessed by the Commissioner for the years

1949 and 1950. The assessments were approved by the

Tax Court in the amount of $8,338.06 for year 1949

and in the amount of $6,094.84 for the year 1950,

which ruling is-now before us for review.

“The facts are stipulated and are summarized as fol-

lows: The Simon J. Murphy Company, hereinfter

called Murphy Company, was a Michigan corporation

which prior to, its dissolution in 1950 owned and suc-

cessfully operated several parcels of improved com-

- mercial real estate in downtown Detroit. It consis-

tently prepared its corporate income tax returns on

the accrual basis of accounting. Social Research Foun-

dation, hereinafter called*$pcial Research, is an exempt.

non-profit foundation incorporated as such under the

laws of Michigan.

“In 1949, Social Research acquired all of the out-

standing capital stock of Murphy Company (126,000

sharés), as follows: 3,900 Shares were received as a gift

from Charles -B. G. Murphy; 30,800 shares were pur-

chased from the estate of Fred T. Murphy at.a price

-* Of $31.80 per share: and on December -29, 1949.

91.300 shares were purchased from the other stock-

hoklers at a price of $72.63 per share. Accordingly,

Social Research became the sole shareholder of Murphy

Company on December 29..1949. !

“On January 11, 1960, Murphy Company filed with

the State of Michigan a certificate of dissolution there

ilies

$2 X;

by completing its liquidation under and pursuant to

a plan of Liquidation adopted on January 9, 1950,'in

the course of which Murphy Company transferred to

Social Research all its real and personal property, sub-

ject to any and all debts and liabilities, which Social

Research assumed and agreed to discharge, and Social

Research surrendered to Murphy Company for com-

plete cancellation and redemption all of the capital

stock of that Company.

“Subsequent to the liquidation and pursuant to the

Plain of Liquidation, City of Detroit real estate taxes

in the amount ef $227,077.32, and Wayne County

real estate taxes in the amount of $41,666.97, on the

transferred real estate were paid by Social Research ia

the total amount of $268,743.39. Copies of the tax

bills, pursuant to which said payments were made,

show the following assessed valuatipns of the trans-

ferred real estate: Marquette Building $402,990.00.

Murphy Building $201,050.00, Telegraph Building

$203,490.00 and Penobscot Building $6,011,680.00.

The Penobscot Building was encumbered in 1928 with

a mortgage to the Northwestern Mutual Life Insur-

ance Company in the amount of $7,000,000.00, the

unpiid balance being $2,540,000.00 on December 29.

1949,

séenne+ ‘ . ; *s

"With certain minor of irrelevant exceptions all -

items of income and expense in connection .with the

ownership and operation of the transferred real estate

were for tax and accounting purposes apportioned as

to time between Social Research and Murphy Com-

pany as of Jsnuary 11, 1950, except that’ the items o!

City of Detroit and Wayne County real estate taxes

Were accrued in their entirety as deductions by Mur.

phy Company as of January? 1, 1950. This treatment

accorded with the past practice of Murphy Company

ny deductine real estote taxes in the taxable vear whe:

they accrued and became a debt. It is not disputed

that under the Michigan statute and Detroit Ordinance

the real estate taxes accrued on January 1, 1950.

“In its final corporation income tax return filed on

June 15,1950, with respect to the taxable period

January 1-11, 1950, Murphy Company included all

rentals accruable during said taxable period, namely,

$73,823.81. It deducted City of Detroit real estate taxes

in the amount of $227,077.34, but did not deduct the

Wayne County taxes. In its claim for refund and be-

fore the Tax Court it increased the deduction for: real

estate taxes to $268,743.39, so as to include Wayne

County taxes.

“In order to protect itself against penalties for ngn-

filing-in the contingency that it was not ruled exempt,

Social Research, on or about June 15, 1950 filed a

corporate income tax return for the period Aprit- 19,

1949 through March 31, 1950, made upon the accrual

basis. In this return it deducted real estate taxes in

the amount of $58,876.91. {t artived at this figure by

estimating the aggregate City of Detroit and Wayne

County real estate taxes for the periods covered (the.

exact months being then unknown) and then prorating

them on a time basis for the period January 12, 1950

through March 31, 1950, :

“Based upon a deduction of $268,743.39 for real

estate taxes Murphy Company ‘sustained a net operat-

ing loss of $234,469.11 for the taxable period January:

through li, 1950. It thereafter filed 4 timely claim

for refund with respect to over payment of its 1949

‘tcome taxes, which claim was based upon a net op-

erating loss carry-back from the period January |

through 11, 1950 in the amount of $234,459.11. With-

gut formally ruling on the chim for refund the Com-

missioner subsequenth determined the deficiencies in

the 1949 and 1950 income taxes, which are the cub-

ject of this litigation. A deficiency assessment was also

made against Social Research, as transferee. The assess-

ments ere” based on the Commissioner’s ruling that

the City>et Detroit taxes’ were allowable as a deduction

in the 11-day period ended January 11, 1950 in

amount not in excess of $6,843.42, and that the Wayne

County taxes were allowable as a deduction for the

same ‘period in an amount not in excess of $1,255.69.

This was an allocation of the taxes on the basis ot

11/36Sths to Murphy Cogtpany and 354/36Sths to

Social Research,”

“In the Tax Court, petitioners challeriged the right

of the Commissioner to make such an allocation. They

contended that the taxes became accrued liabilities on

the part of Murphy Company on January 1, 1950 and

under its accrual method of accounting were proper,

deductions in their entirety\even though the corpora-

tion was 4'ssolved on January 11, 1950. The Commis-

sioner contended that the income of Murphy Company

for the 11-day tax period in 1950 would be distorted

and not clearly reflected if the Company was allowed

tosdeduct the real estate taxes for 365 days while its

income and other deductions reflected operations: of

only eleven days, and that he was authorized under

Sections 41, 43 and 45 of the Internal Revenue Code,

26 U.S.C.A. §§41, 43, 45, to apportion or allocate the

taxes between Murphy Company and Social Research -

in order to. reflect clearly the income of each. The Tay

Court held that the sections relied upon applied to

deductions generally, including taxes; that section 4°

applied even in the absence of fraud or deliberate t1\

avoidance: thar the action of the Commissioner in

allocating 11/365th of the total tax to Murphy Com-

pany for the 11-day period was proper: and thar the

allocation was also necessary to dissolve the fiction

that the operation of the Company was unprofitabl

during the first cleven davs of Tanuarv 1950

“The following well recognized principles are appli-

cable to this case, concerning which the parties appar-

ently have no dispute.

(1) Section 23(c) (1), Internal Revenue Code of

1939, 26 U.S.C.A. §23(c) (1), provides that-in com-

putting net «income there shall be allowed as deduc-

tions— “Taxes paid or accrued within the taxable

year * * *." Where the taxpayer’s books are kept on

the accrual basis the taxes are deductible in the year

of accrual rather than in the year in which they are

paid. United States v. Anderson, 269 U.S. 422, 46

S. Cr. 131, Commissioner, 6 Cir., 111 F, 2d 330, cer-

tiorari denied, 311 U.S. 665..61 S, Ct. 22, 85 L.Ed. 425:

Commissioner of Internal Revenue v. Cpftral United

National Bank, 6 Cir., 99 F. 2d 568.

(2) It logically follows from this general rule

that the owner of real estate at the time when the

real estate tax accrues, if he is on the accrual basis, is

entitled to take the accrued tax as a-deduction in the

year in which it accrues, although it is not paid by him

in that year. H. H. Brown Co., 8 B.T.A: 112, 117:

Arcade Department Store, Inc., 18 B.T.A. 1172, 117.7:

Edward C. Kohlsaat, 40 B.T.A. 528: Gooledee, 40

B.T.A. 1325; Ohmér Register Co. v. Commissioner, 6

Cir., 131 F. 2d 682, 686, 144 A.D.R. 1164.

"(3) Petitioners contend that under United States

v. Anderson, supra, 269 U.S. 422, 46 §. Cr. 131, 70

L.Fd. 347, and Magruder v. Supplee, 316 U.S. 394, 62

S. Ct. 1162, 86 L.Fd. 1555, the accrued taxes against

the transferred reat estate were properly charged as

a tax liability and tax deduction against Murphy Com

pany tor its taxable year 1950 and that it could not

be taken as a tax deduction in 1950 by Social Research

even though the tax was later paid by Social Reseaach.

It was held in Magruder v. Supplee, supra, that when the

owner of refl estate against which a tax has accrued

trinster. title to a purchaser who thereafter pays the.tas

46°

such payment by the purchaser can not be used by him

_as a deduction for income tax purposes, bur must be

considered 2s increasing the cost hasis of the properts

purchased. Fhe rule has been applied in this Circuit.

Walsh-McGuire Co. v. Commissioner, 6 Cir., 97 F. 2¢

983; Gilken Corp. v. Commissioner, 6 Cir., 176 F. 2d

141. Ip Magruder v. Supplee, supra, the Supreme

Court refused to allocate any portion of the tax to

“the purchaser. This Court likewise refused to allocate

any portion of the tax to the purchaser in Walsh-Me-

Guire Co. ¥. Commissioner, supra. In Gilken Corp. v.

Commissioner, supra, we approved and followed the

ruling in Walsh-McGuire Co. v. Commissioner. Ac-

cordingly, we agree that the tax liability was on Jan-

uary 1, 1950 properly accrued on the books of Mur-

phy Company as an income tax deduction for’ it

taxable vear 1950 and that a subsequent sale of the

real estate to an independent purchaser:in the regular

course of business would not have cancelled this deduc-

tion or allocated any part of it to the purchaser.

“The controversy arises by reason of Sections 41, 43

and 45. Internal Revenue Code, 1939; under the’ provi-

sions of which the Commissioner acted so as to change

the result reflected bv the taxpayer’s books. The sec-

tions are related ones dealing with accounting methods.

and for the purposes of this case Section 45 appears to

be the one under which the Commissioner's action

stands or falls. Tt was not involved in Magruder v.

Supplee. supra, or in Walsh-McGuire Co. v. Commis-

sioner, sup?a. Tt provides: “In any case of two or more

organizations, trades, or businesses * * * owned or con-

trolled directly or indirectly by the same interests. the

Commissioner is authorized toe * * * apportion or allo-

cate gross income, deductions, credits, or allowances

between or among such organizations. trades. or busi.

nesses. if he determines that such * * * aportionment

or allocation’ is necessary in order to: prevent evasion

of tates ar cteark to reflect the income of any of

such organizations, trades, or businesses.” To what ex-

tent, if any, Section 45 changes the rule of Magruder

y. Supplee, supra, is the. question presented.

"It should be noted in passing that the issue in this

case will not exist in later taxable years,governed by

the Internal Revenue Code of 1954. Section 164(d) of

the 1954 Code, 26 U.S.C.A. §164(d), provides statu-

tory authority for allocation of taxes on ceal-property

between the seller and purchaser.

“The background of the statute is important. The

consolidated returns provision of the Internal Revenue

Law was limited to corporations as distinguished from

individuals or partnerships. It was recognized that

there was among related businesses a considerable

amount of arbitrary shifting of profits from one busi-

ness to another, resulting in distortion of income and

the avoidance of taxes., To remedy. this situation Con-

gress enacted in 1921 a consolidated accounts provision

applicablp to two or more related trades or businesses,

whether iNcorporated or. unincorporated. Its purpose

was to place a controlled taxpayer on a tax parity with

an uncontrolled taxpayer, by determining, according

to the standards af an uncontrolled taxpayer, the true

net income of the property and business of a controlled

taxpayer. Section 4§ had its e@rigin in that legislation.

Asiatic Petroleum Co, v. Commissioner, 2 Cir., 79 F.

2d 234, certiorari denicd, 296 U.S. 645, 56 S. Cr. 248,

80 TL. Fd. 459, rehearing denied, 296 U.S. 664. 56 S.

Ct. 369, 80 L. Ed. 474: Welworth Realty. Co,. 40

B.T.A 97; Mertens, Law of federal Income Tax ation,

Vol. 8. Secs. 46.68 -46.69.

“Litigation under the statute shows that the Section

has been aplied to circumstances involving an im-

Proper manipulation of financial accounts, an improper

jugeling of the Agcouats between the related organiz.

TONS, AN Improper “milkine” of one business for the

henefr. of the ether. or some similar abuse of proper

financial accounting, all made possible by the control

of the two businesses by the same -interests. When the

Commissioner determined that a-iransaction between

the controlled parties was not “at arm’s length,” an al-

location would be justified in order to refleet the truc

net income which would have resulted if one uncon.

trolled taxpayer had dealt at arms length with another

uncontrolled taxpayer. Substance has been substitute:

for form. Asiatic Pteroleum Co. vy. Commissioner,

supra; Birmingham Ice & Cold Storage Co. v. Davis,

§ Cir, 112 F: 2d 453; National Securities Corp v.

- Commissioner, 3 Cir., 137 F. 2d 600: Hugh Smith, Ine.

v. C.LR.. 8 T.C. 660 affirmed, 6 Cir. 173 F. 2d 224:

Advance Machinery Exchange vy. Commissioner, 2 Cir.,

196 #. 2d 1006; G.ULR. Co. v. C.LR., 41 B.T.A. 223

affirmed, 7 Cir., 117 F. 2d 187; Welworth Realty Co.,

40 B.T.A. 97. —

(4) There are numerous cases in which the action

of the Commissioner in attempting ‘to alloeate ner

income between controlled organizations was held not

justified under Section 45. The Commissioner may not

create income, where none exists. Tennessee-Arkanscas

Gravel Co..v. Commissioner, 6 Cir., 112 F. 2d sos,

. 516: Texsun Supply Corp., 17 T.C. 433, 445. He mai

not. disallow in its entirety a deduction. authorized by

other provisions of the Revenue Act. Hypotheck Land

Co. vy. Commissioner, 9 Cir.,-200 F. 2d 320, 396. He

may not combin : or consolidate the éeparate income of

twu or more separate, although controlled organizations.

Cedar Valley Distillery. Inc., 16 T.C. 870,876; Seminole

Flavor Co., 4 T.C. 1218, 1232-123¢. Where the two

separate business entities, although owned or controlled

by the same interests, deal with each other at arms

‘length as they would deal with strangers in the respec-

tive courses of their business activities, allocation i

not permitted. Koppers Co. T.C. 1§2: Palm’ Beach

Aern Corp.: 17 TC. 1169; Friedlander: Corp., 25

+A. : Briggs-Killian Corp.. 40.B.T.A. R95: Fesex

Broadcasters, Inc., 2 T.€. 523; Buffalo Meter Co., 40

T.C. 83; Epsen Lithographers v. O'Malley, D.C. Neb.,

67 F. Supp. 181, 190-191,

"(5,6) The foregoing cases point out the basic pur-

pose of the statute to recognize the normal tax effect of

bona fide business transactions between separate or-

. Sanizations, even ‘though controlled by the same in-.

terests, but to enable the Commissioner to change the

bookkeeping effect of a transaction between controlled

taxpayers when, by reason of the relationship, thes;

arbitrarily or improperly shift. income or ‘deductions

from one organization, to the other. As stated by the

- Tax Court, the application of Section 45 is not limited

to cases of fraud. But, on the‘other hand. it does not

automatically apply merely because the: two. organiza-

tions ave controlled by the same interests, The Com-

missioner is not, authorized to transfer income or de-

ductions from one controlled organization to another,

unless, by reason of the relationship the original dis-

tribution between the two entities, a¢ reflected by the

books, is in substance a fictitious one. improperly re-

flecting form instead of substance. In Koppers Co..

supra, the Tax Court said 2 T.C. at page 157; ‘It is

true that the taxpayer here was a controlled corpora-

tion. Nothing, however, was taken from it or convevell

to it over and above what would have passed betwegyn

petitioner and an uncontrolled corporation in a similar

transaction.’ In holding Section 45 inapplicable, the

Tax Court further said, «at page 158: ‘Then followed

the transaction under-which these bonds were redeemed

by the taxpayer and which respondent asserts resulted

in a shifting of profits and was ‘fictitivas.’ We find,

however, nothing fictitious in the transaction, Ir was

the same transaction, in so far as the consideration

- paid by the taxpayer for the redemption, as it would

have been had it been carried out by the taxpaver with

the public owners of the bonds prior to their acquisition

by petitioner,’

“In the present case the transaction was a bona fice

‘one.. Since Social Research owned all the capital crock

of Murphy Company, tie consideration involved is no:

subject to attach as inadequate or fictitious. The trans

action was entered on the books of the parties in ac-

cordance with approved established accounting meth-

ods. There was no juggling of accounts, no iMproper

shifting of income or deductions from one company to

the other, no ‘milking’ of one corporation for the bene-

fit of the other, in fact there was nothing in the transte:

of the real estate from one corporation to the other, and

the accounting entries in connection therewith, tha:

could have been successiully challenged by the Com-

missioner. The action of the Commissioner rests upon

the dissolution af the selling corporation following th:

transfer. But the rule in Magruder y, Supplee. supr:.

under which an accrued tax liability of the vendor ot

real estate can not be treated as a tay liability of the

vendce who later pays the tax, is not changed because

the vendor is dissolved or liquidated after the transter

Brudno v. Commvsioner, 6 Cir. 138 F. 2d 779. Cf

Mercharts*Bank Bldg. Co. v. Helvering, 8 Cir.. 84 F. 23

4°78 481. 5 :

“(7-9) fe as true that che dissolution of Murphy

Company had tax consequences unfavorable to the

Government. But as shown by the cases hereinabove

reterred to that does not augherize action under Section

45. Nor was dissolution illegal, improper er fraudulen:

It was permissible corporate action which could hav.

been taken by any corporation, li Murphy Company

had sold its real estate to a diferent uncontrolled pur

chaser tor cash, and used the eash to buy up its stack

trem Sonal Rescarch or whomever its stuckhol J. rs

might be ard then dissolwed. there would have beer

Ho IMpPropriety iy demng ow. ror would Section 46 hi

been aprheable. What it could properly do in a trans

Wwiten with an uncontrolled saxpaver. it can alk

} : eh *aeee ee a 7

Brapris ay with a controlled tanpaver without aoe

jecting itself t6 the provisions of Section 45. Mertens,

Law of Federal Income Taxation, Seg. 46.69. The fail >

ure of the 1950 return to clearly reflect what the Com-

missioner considers & the actual net ingome of the tav-

payer is not duc to the control of one + cnn over

the other, but to the inherent. natuge of the accrual

method of accounting, which, admittedly in this gave,

has been 2 recognized, approved method used by the

"taxpayer consistently over a period of many years.

United States v. Anderson, supra: Sharp v. Commis.

sioner, 6 Cir., 224 F. 2d 920, 924. We do not find in

the transaction here under review the collusive or im.

proper conduct between controlled taxpayers which 1s

necessary to permit the Commissioner to make an al-

lecation af net income different from what was prop-

erly and legally reflected by the books.

‘The Tax Court and the Commissioner’ rely in’ part

upon Jud Plumbing & Heating v. Commission. § Cir..

183 F. 2d 681; Standard Paving Co. v. Commissioner,

10 Cir, 190 F. 2d 330: and Central Cuba Sugar Co. v-

Commissioner, 2 Cir., 198 F. 2d 214. certiorari denied

444 U.S. 874, 73 S.Ct. 167, 97 1.Fd. 677. No one of

these cases involved the question of real estate tax-s.

The two cases first cited dealt with the proper account -

ing of income, and-appear .o be applications of the rule

now well established in such cases as Gregory v. Helver-

ing, 293 U.S. 465. $5 S. Ct. 266, 79 1. Fd. $96; Helver-

ing v. Clifford, 309 U.S. 331. 60S. Cr. $54. 84 1. Ed.

788: Helvering v. Horst. tL1 US. 112, 61 §. Cr. 144.

$6 I. Fd. 7%: Commissioner of Internal Revenue v.

Court Hold ng Co.. 324 U.S: 335. 69 $.C20 7A7, S90

[. Fd. 981, and Commissioner of Internal Rev enue v.

Tower, .327 U.S. 220. 64 > €3%, tw. 90 |. Fd. 470

The third case involved operating expenses, rather

thon real estate .anes accruing at a definite time as 4

matter of law and controlled by the rule in Masruder

v. Supplee. supra, For these reasons. we do net con

vider them applicable to th Present issue, |

10) The Commissioner also contends. that See-

tion i22 of the 1939 Code, 26 U.S.C.A §122, under

Which the loss carrv-back to 1949 is Claimed. 1 j:muited

to cases where the taxpayer has sutiered a real economic

loss, and does not authorize a loss carrv-back where

the loss 1s the resut oft book keeping entries, and iS not

a hardship case. Diamond A. Cattle Go.. 21. T.C. 1:

Wheeler Insulated Wire Co.. 22 T.C. %80. This issue

was not raised by the Commissioner at the hearing

betore the Tax Court and was apparently an after-

thought presented: in the Commissioner's brief filed

with the Court at a later time. The Tax Court found

iC unnecessary to decide the issue, but referred to the

two cases above cited as being against the ‘taxpayer.

The rulings in those cases may be justified under the

particular facts involved in each case, where income

ind deductions Were handled in such 2 Wav as {to fre-

flect a paper loss when actually no loss was incurred,

In the present case there was a liability created by

tute, which was just as real an obligation as any

perating vapense.. It was properiy entered on the

books of the taxpayer as an accrued liability. United

States w. Anderson, supra. Under the ruling in this

mains so, Under taxpayer's approved accrual’

thod of reperang net income or operating loss for

taxes itis a bona fide. legal lability, and the

t in actual loss, We find nothing in

wording of the statute that exempts from. its

1? ul} loss pDrope.\ proven ind shown for

me tax purp by a recognized approved me-

dd of accounting. Althouch Section 122 is Nmited

splication 1 umb ‘ ‘ e\-

¢ OVISIONS, tat f hy

( Ty) wn u re.

"The Judgement of the Tay Court is reversed ind the*

ease remanded for further proceedings consistent with

\ pressed | T

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