Brief for the Respondent in Opposition — Estate of Hull v. Commissioner

Page

Opinions below : i ‘ 1

Jurisdiction — ~~ -- 1

Question presented ; , 2

Statute and regulations involved F 2

Statement 5

Argument _ - 8

CITATIONS

Cases:

Colorado Bank v. Commissioner, 305 U.S. 23 - ¥ 3

Elmhurst Cemetery Co. v. Commissioner, 300 U. 8. 37_---- 8

Helvering v. Kehoe, 309 U. 8. 277 8

Helvering v. Lazarus & Co., 308 U. 8. 252 8

Helvering v. Nat. Grocery Co., 304 U.S. 282 -- 8

Wilmington Trust Co. v. ITelvering, decided April 27, 1942__ 8

Statute:

Revenue Act of 1936, ¢. 690, 49 Stat. 1648:

Miscellaneous:

Treasury Regulations 94:

Art. 26 (@)—1...--- ; —e Sey eae 2

Bit. So (6) Sve ake nce ee Ce ie elk ad ee Ae 4

45938 20—42

nthe Supreme Court of the United States

OcToBER TERM, 1941

’

No. 1155

Esratre or WituiaAmM S. Hui, Deceasep, MESSRS.

JoNATHAN W. Hun, anp WiLuiAM Haroip Car-

PENTER, SURVIVING EXECUTORS, PETITIONER

U.

Guy T. HELVERING, COMMISSIONER OF

INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE SECOND

CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The memorandum opinion of the Board of Tax

Appeals (R. 13-22) is unreported. The opinion

of the Cireuit Court of Appeals for the Second

Cireuit (R. 104-107) is reported at 124 F. (2d) 503.

JURISDICTION

The judgment of the Cireuit Court of Appeals

was entered January 23, 1942 (R. 107). The peti-

(1)

2

tion for a writ of certiorari was filed April 17, 1942.

The jurisdiction of this Court is invoked under

Section 240 (a) of the Judicial Code, as amended

by the Act of February 13, 1925.

QUESTION PRESENTED

Was there substantial evidence to support the

determination of the Board of Tax Appeals that

the stock of Primal Realty Corporation did not

become worthless in 1936?

STATUTE AND REGULATIONS INVOLVED

Revenue Act of 1936, ¢. 690, 49 Stat. 1648:

Sec. 23. Depucrions FROM GROSS INCOME.

In computing net income there shall be

allowed as deductions:

* * * * *

(e) Losses by Individuals—In the ease

of an individual, losses sustained during

the taxable year and not compensated for

by insurance or otherwise—

(1) if incurred in trade or business; or

(2) if incurred in any transaction en-

tered into for profit, though not connected

with the trade or business * * *

Treasury Regulations 94, promulgated under

the Revenue Act of 1936:

Art. 23 (e)-1. Losses by individuals.—

Losses sustained by individual citizens or

residents of the United States and not

compensated for by insurance or otherwise

3

are fully deductible if (a) incurred in the

taxpayer’s trade or business, or (b) in-

curred in any transaction entered into for

profit, or (¢) arising from fires, storms,

shipwreck, or other casualty, or theft, and

a deduction therefor has not prior to the

filing of the return been claimed for estate

tax purposes in the estate tax return, or

(d) if not prohibited or limited by any of

the following sections of the Act: Section

23 (g), relating to wagering losses ; section

24 (a) (6), relating to losses from sales or

exchanges of property between members of

a family or between a corporation and its

shareholders; section 112, relating to recog-

nition of gain or loss upon sales or ex-

changes of property; section 117, relating

to limitation on losses recognized by see-

tion 112 upon the sale or exchange of

‘apital assets; section 118, relating to

losses on wash sales of stock or securities ;

section 251, relating to income from sources

within possessions of United States; and

section 252, relating to citizens of posses-

sions of United States. See section 213 as

to limitation upon losses sustained by non-

resident aliens.

In general losses for which an amount

may be deducted from gross income must

be evidenced by closed and completed

transactions, fixed by identifiable events,

bona fide and actually sustained during the

taxable period for which allowed. Sub-

stance and not mere form will govern in

determining deductible losses. Full con-

4

sideration must be given to any salvage

value and to any insurance or other com-

pensation received in determining the

amount of losses actually sustained. See

section 113 (b).

* * * * *

ArT. 23 (e)-4. Shrinkage in value of

stocks.—A person possessing stock of a

corporation ean not deduct from gross in-

come any amount claimed as a loss merely

on account of shrinkage in value of such

stock through fluctuation of the market or

otherwise. The loss allowable in such eases

is that actually suffered when the stock is

disposed of. If stoek of a corporation be-

comes worthless, its cost or other basis as

determined and adjusted under section 113

is deductible by the owner for the taxable

year in which the stock became worthless.

provided a satisfactory showing is made of

its worthlessness. Federal or State au-

thorities incident to the regulation of banks

and certain other corporations may require

that stock be charged off as worthless or

written down to a nominal value. If, in

any such ease, the basis of the requirement

is the worthlessness of the stock, such

charging off or writing down will, for in-

come tax purposes, be considered prima

facie evidence of worthlessness; but if the

charging off or writing down is due to

market fluctuations, or if no reasonable

attempt has been made to determine worth-

lessness, no deduction for income tax pur-

poses of the amount so charged off or

written down can be allowed. For dealers

in securities, see article 22 (¢)-5. For

5

limitations on deductions for losses from

sales or exchanges of capital assets gener-

ally, including stocks and bonds, see

section 117.

STATEMENT

The Commissioner of Internal Revenue deter-

mined a deficiency in the income tax of the dece-

dent, William 8. Hull (hereinafter called tax-

payer), for 1936. The determination was based

upon disallowance of a deduction for stock of the

Primal Realty Corporation, alleged to have become

worthless in 1936 (R. 8-11). The Board of Tax

Appeals sustained the Commissioner’s determina-

tion (R. 13-23), and the Circuit Court of Appeals

affirmed (R. 104-107).

The following evidentiary facts were found by

the Board of Tax Appeals. In 1929 taxpayer pur-

chased one-third of the stock of the Primal Realty

Corporation for $18,200. The balanee was sub-

seribed for by several other individuals. Primal

Realty Corporation thereupon purchased six con-

tiguous parcels of real estate on the corner of

Eighth Avenue and West 115th Street, New York

City. The price was $157,500 of which $54,600

was paid in cash and the balance was represented

by mortgages. ‘Taxpayer himself held the first

mortgages, aggregating $64,000, on four of the six

parcels. ‘There was also a second mortgage on the

properties which was paid off in 1932. Each of

the properties was improved by a five-story tene-

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6

ment building with a store on the ground floor (R.

13-15).

So far as appears from the record Primal Realty

Corporation has never given up title to or aban-

doned these properties. They continue to be man-

aged for Primal Realty Corporation by O. D. and

H. V. Dike, real estate agents, who own one-third

of the stock of Primal (R. 15, 20-21).

The results of the operations of Primal for the

years 1933 to 1937, inclusive, are as follows (R.

16-17):

Year Grmnene | Meme | Demet te

1933 _ _ $14, 326. 00 $5, 065. 20 $10, 508. 72

1934 13, 270. 30 7, 475. 32 16, 468. 62

1935. - 15, 489. 73 3, 612. 06 20, 000. 68

1936. - 16, 374. 94 6, 255. 70 26, 336. 36

I Sw ctcuiibdbigcemeincs Cons 17, 406. 25 399. 61 27, 326. 13

The balance sheet of Primal as at the end of 1936,

appended to the corporation’s income tax return

for that year, showed assets of $146,709.57 and lia-

bilities, exclusive of capital stock, of $118,445.95.

The fair market value of the properties was $99,000

in 1936 and had been the same in 1933, 1934, and

1935 (R. 16-17).

In 1933 the new Eighth Avenue subway began

operation. In 1936 a change from white to colored

occupancy Was in progress. Both of these factors

had a tendency to improve the rental value of the

properties (R. 14-15, 19). It was the opinion of

real estate men that conditions would improve, and

Tea IS Re PL IY Ra GB A NS ig BOM LYE TM ID SO, ERLE AMES

7

they did improve somewhat in 1937, although the

improvement was not such as to cause any material

increase in the value of the properties in the years

1937 to 1940 (R. 17).

In 1935 Primal assigned the income from each of

the properties to the holder of the first mortgage

on that property, and thereafter the rents were

paid by the agents directly to the mortgagees (R.

15-16, 20-22).'. In the summer of 1936 the city

gave notice to Primal of violations of the Multiple

Dwelling Law by reason of lack of fire-retarding

and sanitary installations. An expenditure of

about $2,000 for each parcel was required to remove

the violations. These expenditures were made and

the work was done in 1937, 1938 and 1939. Receipt

of the notices in 1936 was of no especial significance

both because they were not complied with in that

year and because the violations which they listed

had existed for some time prior to 1936. (R.

16, 20.)

On the basis of these evidentiary findings, the

Board held that there was no showing of an identi-

fiable event clearly indicating worthlessness of the

Primal stock in 1936, that any indicia of worth-

lessness in 1936 had been present for several years

prior to 1936, and, consequently, that the taxpay-

er’s estate had failed to show that the Primal stock

1 Although the evidence is ambiguous as to whether the as-

signment to the taxpayer, which was oral, was made in 1985

or 1936, the Board found that the assignment occurred in the

latter part of 1935 (R. 21-22),

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porennnneematons CEN OAR KY BREE RIE EE

became worthless in 1936. It concluded that the

right to a deduction for loss realized in 1936 had

not been established (R. 18-22). The Circuit

Court of Appeals held that the Board’s findings

were supported by substantial evidence and accord-

ingly affirmed its decision (R. 106-107).

ARGUMENT

The facts recited in the Statement show that

there was substantial evidence to support the

Board’s finding that the shares of Primal Realty

Corporation did not become worthless in 1936,

Accordingly, the court below correctly affirmed the

Board’s decision. Elmhurst Cemetery Co. v. Com-

missioner, 300 U. 8. 37; Helvering v. Nat. Grocery

Co., 304 U.S. 282; Colorado Bank v. Commissioner,

305 U.S. 23; Helvering v. Lazarus & Co., 308 U.S.

252; Helvering v. Kehoe, 309 U. 8. 277; Wilming-

ton Trust Co. v. Helvering, decided on April 27,

1942, No. 775, present Term. There is obviously

no occasion for further review by this Court.

Respectfully submitted.

CHARLES Fany,

Solicitor General.

SAMUEL O. CuLaRK, Jr.,

Assistant Attorney General.

SEWALL Key,

ArtHuR A, ARMSTRONG,

Special Assistants to the Attorney General.

Aspean, 1942.

MAY

U. S. GOVERNMENT PRINTING OFFICE: 1942