COMMISSIONER v. GILLETTE MOTOR CO.

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Argument of Wayne G. Barnett

Chief Justice Earl Warren: Number 359, Commissioner of Internal Revenue, Petitioner, versus Gillette Motor Transport, Incorporated.

Mr. Barnett.

Mr. Wayne G. Barnett: Mr. Chief Justice, may it please the Court.

During World War II, the Government seized and operated, for a short period, a number of motor carriers in the Midwest that were closed down by strikes.

The respondent is one of those carriers whose properties were in the federal control for about 10 months.

The respondent is now, been given an award of just compensation for that seizure measured by the rental value of his equipment for the 10-month period.

The question is whether that award is ordinary income, as we contend that it is, or whether it is capital gains.

The Tax Court held that it was ordinary income.

The Court of Appeals for the Fifth Circuit -- it was capital gains.

That decision which was in direct conflict with the decision of the Eighth Circuit involving another carrier, is here on certiorari.

The facts of the seizure are relevant here only as background and can be briefly dealt with.

In August 1944, the over-the-road drivers of a 103 motor carriers in the Midwest went out on strike.

The strike was prompted by a refusal of the carriers to pay a wage increase recommended by the War Labor Board.

Because of the emergency, President Roosevelt promptly directed the Office of Defense Transportation to take possession and control of those lines and restore them to operation.

That was accomplished by a series of orders and directives in that effect of which was that the carriers were required to pay the wage increase and resume normal operations subject to all of these to an ultimate federal control.

Now, the federal control was relinquished as to the respondent in June 1945, it was approximately 10 months after they were first seized.

After the war, Congress established the Motor Carrier Claims Commission to determine whether the carriers were entitled to just compensation under the Fifth Amendment for that seizure and if so to determine the amount as the word of that Commission to the respondent that is an issue here.

The Commission held in this case and in other cases that the dominion exercised by the Government over the carriers was efficient to constitute a constitutional taking of the temporary use and possession of the physical properties.

It held that in the case of a temporary taking, the proper measure of just compensation as the rental value of the property for the period that was taken.

And since the respondent here would have been free to lease out its equipment, trucks and trailers individually, that rental value should be measured here by the rental value for each item of equipment and the Court determined that those rental values added them up and the total was the award made.

Now -- and that award represented a net rental.

That is to say, the rent that respondent could have obtained for its trucks in excess of all operating expenses, all depreciation, as those cost had already been recovered out of the operating revenues.

So in -- in effect, this award represents pure rent.

It's a return on investment to the petitioner for the use of his property for the 10-month period.

Justice Charles E. Whittaker: Is there any real good reason, Mr. Barnett, was characterizing this award as to rents, besides what you've mentioned?

Mr. Wayne G. Barnett: I -- I don't think it makes any difference how it is characterized.

I will come to that.

I -- I simply wanted to explain how the Commission arrived at its figure.

Justice Charles E. Whittaker: Yes.

At least it isn't a war that damages -- you call it a register or what not.

Mr. Wayne G. Barnett: Yes, yes.

Justice Charles E. Whittaker: That it makes no difference, you think?

Mr. Wayne G. Barnett: Right.

Justice Charles E. Whittaker: All right.

Mr. Wayne G. Barnett: For the loss of the use of property for a 10-month period.

Justice Charles E. Whittaker: I see.

Mr. Wayne G. Barnett: The total award arrived in that basis with $190,000.

The parties later agreed to reduce it to a $130,000 and $7000 which represented the operating income during the tenure period was credited against that to produce a net award of a $123,000.

Interest was also allowed in that award of 4%.

Now, we think it is clear that in all events that interest element is taxable as ordinary income regardless of how you treat the principal amount of a $123,000 and so we can limit the discussion here to the -- the principal and not of the award.

But we do not, in any way, challenge the Commission's award.

We accept the determinations on which it was based namely that there was a taking.

There was a taking of a temporary use of the property and that the rental value was a fair measure of the value of the interest taken, namely, the right to occupancy for 10 months.

Our position is simply that what one receives has compensation for the use of one's property, whether you call it rent, whether you call it just compensation, whatever you call, it is ordinary income and not capital gains.

Now, the respondent's contention is that the proper -- that the gain, this capital gains under Section 117 (j) of the Internal Revenue Code of 1939.

That provision treats as capital gains, any gain from the involuntary conversion of property into money and respondent, in effect, argues that the -- a right to the temporary use of the property is, itself, property.

It's a property interest and since that right was involuntarily converted, the requirements of 117 (j) are met -- are met.

I would like first to avoid the particular problems of involuntary conversions and take a case of a voluntary transaction which essentially similar to this.

Assume a case of a homeowner who conveys to a lessee a 10-month leasehold of his home in exchange for $1000.

Now, I take it that even the respondent will agree that that is not capital gains, that the -- the $3000 they received in exchange for the 10-month leasehold is ordinary income.

It becomes important to identify the reason why that is not ordinary income.

Now, the general definition of capital gains is in Section 117 (a) of the 1939 Code which defines capital gains -- gain on a sale or exchange of capital assets.

Capital assets have been defined simply as property held by the taxpayer.

Let us say capital assets are property.

Justice Felix Frankfurter: Yes.

Mr. Wayne G. Barnett: There's no further definition.

There some minor exclusions which aren't relevant here.

So if and my hypothetical example, we treat the leasehold interest that the homeowner conveys to a 10-month lessee, has a property interest at which he exchanges for $3000, there has been exchange of property and therefore, literally it ought be capital gains.

Now, how to avoid that result? One way to say that is not really a sale or exchange is really a lease.

But that -- that really assumes the answer to the question of what is the property that you're talking about if -- if by property there, you mean the house and there's no doubt that they haven't sold the house, and it's only leased.

But if it is permissible to speak of the short term right of occupancy for 10 months as itself being a property interest, then that interest, the right of occupancy for 10 months, he has sold -- sold or exchanged and is not leased.

So the problem is -- is what things you treat as property for purposes of the capital gains provisions.

What kinds, nature of and duration of interest qualified as property?

Now, as I -- I suggested there are many purposes for which you would treat a temporary right of occupancy as property, for example, to require the payment of just compensation for its taking.

But if Congress meant property in a capital gains provisions in that all inclusive sense, there would be nothing else but capital gains, because virtually everything we think of -- and as ordinary income, usually involves a property interest of that sort that would be the subject of a sale or exchange.

For example, a -- a stockholder could each year sell his property right to receive the dividends for that year and if that is property for some purposes and if it's property for purposes of capital gains provision, that would mean that all dividends can be converted into capital gains.

So Congress did not use property in -- in that broad sense and the courts have very properly limited the application of the capital gains provisions to transactions which involved a more or less, complete conversion of the taxpayer's investment in the underlying asset and they denied capital gains treatment to lesser estates, lesser temporal short-term estates, which are -- are as it where carved out of that fee interest, which the taxpayer retains.

Justice Potter Stewart: Up to now you've been telling us about purely voluntary transactions --

Mr. Wayne G. Barnett: Yes.

Justice Potter Stewart: -- at the part of the taxpayer --

Mr. Wayne G. Barnett: Yes.

Justice Potter Stewart: -- which, of course, they're not involved here at all.

But we're in -- concerned with is that whether it's a special statute relating to involuntary conversions.

Mr. Wayne G. Barnett: Well, I -- I'm coming to that right now, because it's important to know why the things would not qualify as voluntary transaction.

Justice Potter Stewart: I think we can all accept that rent is not a capital gains, it's ordinary income.

Mr. Wayne G. Barnett: Well, yes, all right.

Now, their -- their argument is the result is given because the transaction's involuntary.

Now, there's no difference however, between 117 (a) and 117 (j) in the nature of the interest that maybe the subject of the conversion to produce capital gains.

Now, there's not even a difference in -- in the language.

117 (a) applies to a sale or exchange of property and 117 (j) applies to an involuntary conversion of property, but the same word is property which appears in both and is the controlling issue here, of what is property that can be sold or exchanged?

Justice Potter Stewart: What others say an involuntary sale or exchange?

Mr. Wayne G. Barnett: Well no, but -- but -- we agree that this is a -- an involuntary conversion, but I -- I --

Justice Potter Stewart: But that had to be end of it then, if you agree to that shouldn't it?

Mr. Wayne G. Barnett: No, no.

It has to be an involuntary conversion of property and just as it has the requirement that under 117 (a) there'd be a sale or exchange of property and when I sell a 10-month leasehold, there is a sale.

The problem is not one of its being a sale, these is a sale.

It's a problem of what is sold not being a sufficient interest to qualify as property for purposes of the capital gains' definition.

Justice Charles E. Whittaker: Does that encouraged you to say what was involuntarily converted, was merely used?

Mr. Wayne G. Barnett: Yes, that is right.

That is right.

But a -- that is really the -- because we say that the right of use for the 10-month period is not accorded to the dignity of property, though it is just compensation purposes, it is property for which you have to pay just compensation in a lot of other groups.

Justice Potter Stewart: It -- it's conceded isn't it that the -- this money was given these taxpayers because of a -- of a governmental taking on -- and that they were entitled to compensation under the Fifth Amendment?

Mr. Wayne G. Barnett: Yes, that is right.

A -- a governmental taking of the use of their property for 10 months.

Justice Potter Stewart: What suffice the man would say, use of property to the (Inaudible) --

Mr. Wayne G. Barnett: That's right and I -- I agree with you that the use of property for the right of occupancy -- the right of use of property for a 10-month period is property for many purposes.

So primarily, this property for purposes of Fifth Amendment, but it is not property within the meaning of that term as used in 117 (a) or 117 (j).

If it were, every time that I purported to sell voluntarily, a 10-month leasehold, it would still be property.

But you can't define property differently for the -- for the two provisions of the capital gains section -- but now, I can clarify this somewhat I think by -- 117 (j), the part of the difficulty is, serves three entirely different purposes and I think I can show you that it had nothing to do with this kind of problem of -- of the kinds of interest that are involved in the -- in the disposition or conversion.

Now, the first purpose of 117 (j) which was added in 1942, the first purpose related to the treatment as a capital asset of property -- of depreciable property used in the trade or business, machines, buildings and the like.

Now, before 117 (j) as of now, 117 (a) had excluded such property from the definition of capital assets.

The reason for that was to allow businesses to take ordinary loss deductions when they sold property that had been depreciated and part of this was justified on the ground that the loss probably represented inadequate depreciation deductions in the past and they ought to be allowed to recover that in full.

Now, in 1942, Congress was prevailed upon and persuaded that that was no reason not to treat as capital gains, any gain on the sale of depreciable business property.

So that was the main purpose of 117 (j), was to have preserving the capital of the ordinary loss treatment on sale of the business property to grant capital gains treatment on a gain.

In effect, it made business property, depreciable business property, capital assets par excellence.

They're capital assets for gain purposes, but not for loss.

Now, the second problem -- the second purpose which is most relevant here was to extend the same kind of preferential treatment to losses arising involuntarily.

Now, most involuntary conversions do qualify its sales or exchanges -- a condemnation does in foreclosure.

Before 117 (j), all such involuntary conversions that qualified as sales or exchanges were treated as capital transactions, both loss and gain wise as capital gain or capital loss.

Of the -- the thought seems to have been that it was unfair not to allow a full deduction for a loss that's involuntarily incurred by a condemnation or seizure.

The main purpose of the involuntary conversion provision in 117 (j) is to allow full deduction of the loss.

We say it didn't change at all the problem of -- when you're entitled to capital gain treatment on gains.

And I should say that there is finally one of the other minor purposes served by this provision.

There were some kinds of involuntary conversions that did not qualify as sales or exchanges.

Primarily that was the destruction of a house and the receipt of insurance proceeds.

That was not a sale or exchange, now that produced the anomalous result that if I sold a house, $50,000, I had capital gain.

To a burn down, I get $50,000 insurance, it was ordinary income.

One purpose was to overcome that by treating that kind of conversion also as one giving rise to capital gain and under the preferential loss provisions of 117 (j), loss in the case of a loss.

Now, we think none of those purposes of 117 (j) go at all to the problem of what kinds of interest have to be converted in order to give rise to capital gains, i.e., what Congress meant by property used in that section and used in 117 (a).

And we think that the -- the terms mean the same thing in the two sections in (j) and (a) and the question of, if the interest is of such duration that upon a sale of it would not give rise to capital gain, then likewise when an involuntary conversion of it, it does not give rise to capital gains.

Justice William J. Brennan: At the time of this taking, of course, that nobody knew whether it was going to be 10 months or 10 years?

Mr. Wayne G. Barnett: Yes, sir.

Justice William J. Brennan: That -- that's correct, isn't it?

Mr. Wayne G. Barnett: That -- that is right.

Justice William J. Brennan: It's also correct that this taxpayer wasn't in the business of renting its property insofar as the record shows had no desire to rent his property?

Mr. Wayne G. Barnett: Well doesn't -- doesn't entirely accurate.

The reason they've got this large award was his claim that he could've rented his property.

Justice William J. Brennan: Well, that was the measure of damages, is that it?

Mr. Wayne G. Barnett: Yes, yes.

Well no, no.

Justice William J. Brennan: That was the --

Mr. Wayne G. Barnett: And in -- that was accepted because he claimed that he would‘ve been able to rent his property, the equipment.

But the Government argued in the compensation case that it should be measured by going concern value, which would've been a very small award in comparison to this $195,000 award and to really odd, this is kind of a -- a backtrack into their position.

I don't think it makes any difference.

This would even be in lieu of rent in order to be compensation.

This is a payment for the use of property and we say that a payment for the use of property is ordinary income regardless of what it's in lieu -- what else he might have gotten in fact, but for the taking.

Now, in the Court, we -- we respectfully submit that the decision should be reversed.

Chief Justice Earl Warren: Mr. Maun?

Argument of Joseph A. Maun

Mr. Joseph A. Maun: Mr. Chief Justice, Members of the Court.

Prior to now and these cases in the lower court, the Commissioner of Internal Revenue had resisted what they apparently now, concede before this Court and that is that there was a taking and that there was an involuntary conversion and that the award was not received as anything except rent.

I take it now that they concede that the amount received was merely measured by rental value which, of course, is exactly what the Motor Carriers Claims Commission held and, of course, it's obvious under the Fifth Amendment, award cannot be as a result of income, it has to be something that is awarded on account of a property interest converted.

Now, what the Government is claiming here is exactly the same thing that they claimed before the Motor Carriers Commission.

And in the petitions to that Commission which was set up specifically by Congress for the purpose of hearing these claims, the -- each of these 103 carriers claim that the Government took their property and the answer of the Government in each and everyone of these cases was there was no taking of the petitioner's property under the Fifth Amendment and the Motor Carriers Commission held that each and everyone of these cases that as of 1201, on August 12, 1941, the petitioner's property, its transportation system, all of its properties were taken for public use by the United States, which require the payment of just compensation under the Fifth Amendment and I think, of course, that this is not the place to go and do whether the amount of the award was too low or too large.

At least that was determined by this Commission specifically set up for that purpose.

Justice Charles E. Whittaker: Mr. Maun, I didn't understand you that the two words you said, they -- they found that the property was taken then for what?

Mr. Joseph A. Maun: That exact terminology of the order as of 12:01 a.m. on August 12th, 1944, that the petitioner's transportation system and all of its property were taken for public use by the United States.

Justice Charles E. Whittaker: All properties --

Mr. Joseph A. Maun: The Government has, of course, argued in the lower court as they did here that this constituted nothing but regulation or control of the petitioner's property or the use of petitioner property.

Now, that also was a -- was a claim that the Government made before the Motor Carriers Commission and the Motor Carriers Commission specifically passed on that question and doing so it stated, “The Government says that such interference this petitioner may have encountered from government action did not amount to a taking of its property, but merely to regulation.

To place any such construction on the said acts done by the federal manager would be to belie the statements contained in the Executive Order and the orders issued there under.

Now this case, just exactly like cases that this Court considered during World War II, where there was federal seizure of the coal mines for instance in the John L. Lewis case are exactly the same statement was made in that case by the Government -- by the representing case of Mr. Lewis and this Court held that the fact that private managers need in control of the mines did not in anyway, whatsoever, limit the fact that Government was testing the property.

Chief Justice Earl Warren: We'll recess.

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Argument of Joseph A. Maun

Chief Justice Earl Warren: You may proceed.

Mr. --

Mr. Joseph A. Maun: Mr. Chief Justice, the opinion of the Eighth Circuit in this case adopted the same view that the Government has pressed and that is that the -- what Government did in this case was merely take over control in regulation of these carriers.

In the Eighth Circuit opinion, it states, “It -- it took limit to possession in control of petitioner's transportation system and other property used therewith.”

But it specifically left titles to the properties and in the other assets.

Now, that is the very same argument made in the Mine Workers case and I'll just quote to you just a statement made -- made by Justice Black in that case and he said that, “The fact that it -- it, talking about the Government, utilized the managerial forces of the private owners does not detract from the Government's complete authority for whatever control, the Government agents delegated to the private managers, so as the agents have full power to take away and exercise themselves.”

Now, perhaps the Eighth Circuit was misled.

I argued the case there and in the Fifth Circuit and I would concede that I did not brief it as well in the Eight Circuit as I did what I got to the Fifth.

The argument had made -- has been made time and time again that this, an involuntary conversion provision, the 117 (j), cannot apply because title or it wasn't taken, all he had was use.

Well, this Court has recognized in many cases.

That are two ways in which a Government can proceed when it takes property under it's -- even their main authorities, in the (Inaudible) cases, these cases were -- was rules are set forth.

One way, the Government can enter into -- and take property by seizure as it did in this case.

And this is typically a case of seizure as pointed out by Justice Frankfurter in the Youngstown case where he specifically states that Midwest takeover cases -- this typical case of seizures.

The other way is that the Government can follow ordinary court procedures, go in and take a declaration and have a declaration of title made through that way.

On the latter situation, of course then, there is a sale or exchange title passes.

But in either case, the Government has taken power, a property under its eminent domain authorities.

Now, there was a time as government counsel pointed out that there had to be a sale or exchange in order for the involuntary conversion provisions of 117 to apply.

This Court in the (Inaudible) case held that proceeds derived from insurance policies, as result of fire, were not entitled the capital gain treatment.

Well, as a result of that decision, Congress amended the law and at that time we were in the brink of going into World War II and there were hearings in Congress on what was happening to private property as a result of war time seizures and requisitions?

And our brief contains a considerable amount of materials relative to those hearings, but the fact is Congress is cognizant of the fact there would be seizures and there would be requisition as a result of World War II and it was right at that time that at 117 (j) was adopted as amendment to 117 generally.

Now, Congress specifically established the Motor Carriers Claims Commission for two purposes.

One purpose was to determine if there was a taking of properties.

And the other purpose was to determine if properties were so taken, what should be the amount of the award?

Now, the Commission specifically set up for this purpose heard these cases and it came to the conclusion that property was taken and that award under the Fifth Amendment should be granted.

Now, we believe that the cases hold that you shouldn't look to the nature of reward as made by the Commission set up for that purpose in order to determine what the tax consequences are.

We do not say that the Motor Carriers Commission's determination in (Inaudible) do -- can determine the tax consequences, but we do say you must look to that award to find out whether it was something received because of the conversion of property by the United States Government.

And that authority did so determine that.

Now, on the (Inaudible) case in the Second Circuit where there was a recovery for antitrust damages, capital gain treatment was accorded, are results of a goodwill being destroyed.

Now, the Court didn't say that the antitrust suit settlement, itself, determined capital gain treatment should be accorded, but it did say that the decision in the lower court which hadn't set up to make that determination did determine the nature of the judgment or the nature of the award.

And in this case, the Motor Carriers Commission has determined that this award was for property values transferred from this petitioner to the Government.

Justice Felix Frankfurter: Suppose the leasehold interest was seized by the Government, so that be a capital gain?

Mr. Joseph A. Maun: I think it's the leasehold interest that were seized from the lessee under the terms of 100 --

Justice Felix Frankfurter: With this, yes.

Mr. Joseph A. Maun: Yes.

And I would assume it would be a capital gain.

Justice Felix Frankfurter: Why -- why would it -- that so far as the leasehold in the -- in the possession of the lessee is concerned, the renter -- the rental, of course, would be property, but does that make it a capital gain because leasehold is property too?

Mr. Joseph A. Maun: Well, as I understand in the Fifth Amendment, compensation can only be made as the result of the taking of property.

Now, if there's a contractual arrangement, either it could never be a suit under -- under the Fifth Amendment for just compensation.

Just compensation in decision after decision and held can be awarded only for a property.

Justice Felix Frankfurter: Yes, I understand that.

Mr. Joseph A. Maun: You take it.

Justice Felix Frankfurter: But the fact that it's property, does that make no difference?

The nature of the property is the rental value in displacing the real lessee and making the Government the lessee?

Mr. Joseph A. Maun: To my notion, it makes no difference.

Justice Felix Frankfurter: You seem to suggest that because it's -- because compensation must be paid for under the Fifth Amendment, therefore, it's capital gain.

Is that -- that's the equation, isn't it?

Mr. Joseph A. Maun: That is right.

Justice Felix Frankfurter: Why is that so?

Mr. Joseph A. Maun: Because Section 117 (j) says that if the taxpayer received money as a result of the involuntary conversion of property into money, then capital gain laws provision apply.

Justice Felix Frankfurter: Although -- although the amount you may get maybe just what he would be paying out in order to get another piece of the property which he -- for which he pays -- which he left on a lease?

Mr. Joseph A. Maun: That is right.

I think we have that situation in many -- in many examples of it.

Justice Felix Frankfurter: Well, that -- that must be so as a matter of -- just --

Mr. Joseph A. Maun: Just as the matter of statute.

Justice Felix Frankfurter: -- statutory -- statutory construction.

Mr. Joseph A. Maun: Yes.

Justice Felix Frankfurter: Doesn't got any inherence then, as you think.

Mr. Joseph A. Maun: I think it does as I will demonstrate it here a little bit later that because of the unusual situation in which these people will have their property seized by the Government finds himself, I think Congress have that in mind.

Now -- and the Government here urges this Court to consider this as rental rather than as a -- as an amount paid for property taken.

It's really asking this Court to relitigate this whole issue of what this taxpayer received.

Now, the R-B case such as tried before the Motor Carriers Commission took seven months to try.

There are -- or 1000 exhibits and there were 100 witnesses.

I don't think that this stage of proceedings, we should put go back in to relitigate what happened before the Motor Carriers Commission.

Motor Carrier Commission has said there was a property that's converted and it is awarded damages because of that conversion.

To me, that should end the matter.

Justice Charles E. Whittaker: Mr. Maun, may I ask you that I was taking (Inaudible)

Mr. Joseph A. Maun: Well, I don't know if I can visualize every taking, but the once I could think of would be -- would come within the meaning 117 (j), yes.

It -- it specifies seizures, requisitions, fire, theft, even if you -- someone stole your purse and -- or something like that kind you -- capital gain loss provisions would apply, provided there's a recovery or some kind.

Justice Charles E. Whittaker: (Inaudible)

Mr. Joseph A. Maun: That's right.

Justice Charles E. Whittaker: (Inaudible)

Mr. Joseph A. Maun: Well, then you would have, of course, the same as you had in the Westinghouse case during the war time where the lessees in her term was abolished and then you get into -- I would say, yes.

The same rule would apply, yes.

Justice Felix Frankfurter: Although the amount -- although the amount that the Government has to pay is the rental value that the original lessee paid and the only thing that's happened is that the Government becomes the lessee instead of the displaced value.

Mr. Joseph A. Maun: Well, of course the --

Justice Felix Frankfurter: I guess that's the capital gain.

Mr. Joseph A. Maun: No, no (Voice Overlap) --

Justice Felix Frankfurter: The statute -- if the statute says so, that simply means that the Government -- that Congress has made that kind of a tax provision.

Mr. Joseph A. Maun: That's right.

Because there are many cases where there's a loss because of the fire and the Government consistently heard the position that here is the deduction restricted by the capital loss provision or need that she were in the other foot.

It works -- work both ways.

Chief Justice Earl Warren: Suppose it was a vacant building and the Government preempted it and kept it for 10 months and then turned it -- turned it back, would that be a capital gain to the owner?

Mr. Joseph A. Maun: If the -- I doubt that it would be a capital gain if the reduction cost basis readily an ordinary income because probably he wouldn't get as much as this cost in the building, but he would be given a capital gain or loss treatment.

In other words, if the building cost $100,000 and the award let's say, $10,000, it reduced the cost basis by $10,000.00 and, of course, they will only have $90,000 left to depreciate.

The Government would not come out barely on that kind of arraignment.

Justice Charles E. Whittaker: (Inaudible)

Mr. Joseph A. Maun: I don't know of any statute under which the Government could take an involuntary lease.

Justice Charles E. Whittaker: (Inaudible)

Mr. Joseph A. Maun: Well then, I'd say it would go -- you have to go back to Fifth Amendment compensation, the only way it could -- it could work out under the decisions.

Justice Charles E. Whittaker: (Inaudible)

Mr. Joseph A. Maun: Well, I think this Court had said so in its opinion, but in the Kimball Laundry Company case out of Omaha during World War II.

This -- Army seized the laundry down there for a year at the time.

And this Court held that the -- it should be paid at rent on basis of the year at time plus additional amounts for taking or abolition of its routes and I would think that again would -- could have -- would have necessarily to be a -- just a minute compensation and capital gain treatment will be accorded to it, or loss such ever turn of the --

Justice Charles E. Whittaker: (Inaudible)

Mr. Joseph A. Maun: Yes, sir.

Justice Charles E. Whittaker: (Inaudible)

Mr. Joseph A. Maun: I think --

Justice Charles E. Whittaker: (Inaudible)

Mr. Joseph A. Maun: Yes.

Justice Charles E. Whittaker: (Inaudible)

Mr. Joseph A. Maun: I think it's definitely a taking of property.

I think it's the only power the Government has is to take property and I've -- as this case as the Mine Workers case and all of those pointed out, they held.

They didn't just take control.

It took the whole facility, the whole mines and that's why in -- in cases of John L. Lewis, the Court was able to reach the decision that it reached because of the fact that it became a facility that is complete as if the Government owned it and seized simple title.

That's what this Court opinion says in the -- in that very case.

And that view which I believe is correct.

Justice Felix Frankfurter: There is any doubt in the -- in the Laundry case, Kimball was it?

Mr. Joseph A. Maun: Yes, Kimball.

Justice Felix Frankfurter: Was there any doubt that property was taken?

All -- all that he had was taken --

Mr. Joseph A. Maun: That is right.

Justice Felix Frankfurter: -- from year to year.

But is the statute -- does the statute make that equation on which the whole argument rests?

Mr. Joseph A. Maun: I believe --

Justice Felix Frankfurter: Has any exercise of the eminent domain power, that the consequences of any such exercise constitute the capital gains.

Mr. Joseph A. Maun: Well, no.

It says it shall be treated as a capital --

Justice Felix Frankfurter: Shall be treated --

Mr. Joseph A. Maun: -- treated with such.

Justice Felix Frankfurter: Yes.

Mr. Joseph A. Maun: -- but very well as a result of a loss too.

Justice Felix Frankfurter: Well --

Mr. Joseph A. Maun: They'll go both ways.

Now --

Justice Felix Frankfurter: What are the words that make that -- that require me to hold that?

Just because I don't think they would, as you get anywhere in disputing whether this was a property, of course, it was property any of the (Voice Overlap) --

Mr. Joseph A. Maun: Entering --

Justice Felix Frankfurter: Do you think -- disputable that this was a compulsory taking?

Now, that it goes (Inaudible)

Mr. Joseph A. Maun: If during the taxable year, the recognized gains of what you're saying --

Justice Hugo L. Black: What are you reading from?

Mr. Joseph A. Maun: I'm reading from the Government's brief page 31.

“If during the taxable year, the recognized gain upon sales or exchanges of property used in trade or business plus the recognized gains from a compulsory or involuntary conversion as a result of destruction in the whole or in part, theft or seizure or an exercise of power of requisition or condemnation or the threat or eminence thereof, of property used in a trade or business and capital assets held for more than six months into other property or money, then it shall be considered as gains and losses from sales or exchange.”

Justice Felix Frankfurter: Was the -- was the recognized gains nearly means the money you get?

Is that all that it means?

Mr. Joseph A. Maun: That's right.

Justice Charles E. Whittaker: (Inaudible)

Mr. Joseph A. Maun: I say that it's a conversion of property into money because we have stipulated that these trucks were depreciable property.

They stipulated that they were used in a trade or business and there's isn't a question in my mind that the Government took these trucks.

They retained them.

They retained them as if owned and there isn't any question in my mind that after 10 months of use, seven days a year in a commercial operation or the severe role or over the roads in a severe Midwest winter, where the Government gave back wasn't what it took.

These trucks have been consumed.

They used them.

They exhausted them and perhaps as Justice Brown said, some of them may have been returned as junk.

So, something was going out of that truck.

They didn't bring back what the Government took.

They consumed property.

They converted that property and they converted it into money, that as result of the award given by the Motor Carriers Claims Commission.

Justice Charles E. Whittaker: (Inaudible)

Mr. Joseph A. Maun: I believe the decisions were uphold in their -- the Motor case in the Second -- the Seventh Circuit is right squarely in point is that if the taxpayer did take depreciation on it, it was not entitled to it.

Because the Government, once it seizes property must sustain any -- bear any loss for exhaustion, depletion or wearing out of the property.

That's -- that's the reason for a Fifth Amendment award is to replace what the Government has done to that property.

The record here shows they did take depreciation.

The record also shows the profit which they made, they took in income.

They shouldn't have done either and hindsight, of course, we can see now what should have been done for those are hurry up days and that's what happened.

Now, they should not have taken depreciation.

And they should not have taken the profit in the income because this Court held in the -- in the Pee Wee Coal Company case that when a Government seizes the facility, it must bear the losses and it's entitled to the property.

Some are exactly the same Executive Order under which these trucks were seized.

Justice Hugo L. Black: How do you compute the capital gain?

Mr. Joseph A. Maun: Computed on the basis of the cost basis of the truck plus what you'd get.

You will first reduce the amount of the cost basis and if there's anything left over and above that, the balance is subject to the capital gain treatment.

Justice Hugo L. Black: I don't exactly understand this.

Mr. Joseph A. Maun: Supposing the truck costs $10,000, let's say and the --

Justice Hugo L. Black: And the Government has seized it for six months.

Mr. Joseph A. Maun: The Government has seized it and for that truck, you say we received $15,000, then --

Justice Hugo L. Black: (Inaudible)

Mr. Joseph A. Maun: Suppose we received $15,000 for that particular unit, then the capital gain would apply there between the $10,000 and the $15,000 on the $5000.

Justice Charles E. Whittaker: (Inaudible)

Mr. Joseph A. Maun: Why you take into account your -- the adjusted cost basis of the truck on your books, but I just assumed for this purpose is $10,000, which would be the salvage or whatever the -- whatever the adjusted cost of basis happened -- happened to be.

It might be more or less what you got from the Government.

Justice Hugo L. Black: You mean if you have a truck that's worth $2000, the Government takes it six months and how would you -- how would --

Mr. Joseph A. Maun: The Government takes --

Justice Hugo L. Black: (Voice Overlap) what you gain when they return it back --

Mr. Joseph A. Maun: Supposing the Government gives you a $1000 for that six months use.

You would reduce your cost basis on the truck by $1000.

In that case, there would no -- not be any tax at that time, but you would get less depreciation.

You'd only be entitled to depreciate on $1000 then, instead of $2000.

What it would amount to.

Justice Felix Frankfurter: But suppose in a lease case, suppose in the Westinghouse case.

I've forgotten what the facts were but, suppose an outstanding lease of 10 years and the Government takes a lease exercising of power eminent domain, take a lease from -- beginning with 1941 from the time we have entered the war, year by year, to say, how would you deal with that problem?

Mr. Joseph A. Maun: That's exactly what happened in the General Motors case.

It took --

Justice Felix Frankfurter: Yes.

Well now, how do you deal with it under this statute?

Mr. Joseph A. Maun: Under the statute, I would say that the lessee would have his lease which is property involuntary that's converted into cash.

Again, I don't think that he'd have any gain or loss because on question, the Court would probably give him just what he was paying the landlord.

That would be the best evidence of what the damages were.

Justice Felix Frankfurter: But suppose that -- suppose the lease -- suppose the interest which the Government which is exactly from the Government, it's a little more than he would have had to pay, if he kept it in under his own lease, then that would be of capital gain?

Mr. Joseph A. Maun: That would be a capital gain and then one of the cases before this Court, the Government paid less than be with the General Motors, then the lessee had to pay.

(Inaudible) this Court held that was all right and, of course, in that case, the Government insisted it was a capital loss.

He wouldn't get a full deduction for it.

Now, they've argued that this is control in this case.

So the fact is that the R-B case was a test case and it was stipulated and then we'll find it in our record that this case was the follow up principles of R-B case.

Now, in the R-B case just to show you how far the Government went, they used Government employees.

They fixed the amount of the wages.

They discharged employees.

They ordered discontinuous of routes.

They've paid the employees out of Government funds.

They registered these trucks as Government property and they sought and obtained exemption from State taxes for the licenses of these vehicles.

Now, that's how far the Government went in this case.

They treated this property as their own property in every sense of the word.

Now, under those circumstances much more than control in regulations actually taken over these particular units and I -- I think as -- as there any policy consideration of its Eighth Circuit says it prevents the application of 117 (j) to this case, the all around (Inaudible) the taxpayer.

Here is the person who is dispossessed of his entire superior route 103 of them in the Midwest area.

Never knowing when they were going to get them back, not knowing whether these vehicles are going to be returned intact or as junk.

Certainly, someone who has his property seized is not like a voluntary lessee or lessor which the Government points out.

The situation is entirely different and this Court itself pointed out in those cases during the seizure of World War II that the seizures forced an indefinite period should be given more adequate consideration than the lessor or lessee cases.

Now, this taxpayer didn't receive his money until 1952, eight years after the trucks were seized.

It's now 16 years since this property was seized and the taxpayer still doesn't know where he's at.

And it seems to me this is a typical situation for alleviation of the hardships that are imposed on a taxpayer, and that is exactly what this statute was intended to do.

I think Mr. Justice Frankfurter's statement in the Kimball case is right in point wherein he says with no relation to the tax features about the Kimball case, but relationship to the amount of damage that should be awarded in temporary seizure in the (Inaudible).

The temporary interruption as opposed to a final severance of occupancies will greatly narrow the range of alternatives open to the condemned need that is substantially increases the condemned owner's obligations to him.

It is the difference in degree wide enough to require a difference in result and I think that's exactly what we have here.

I think Congress knew that when it adopted 117 (j).

But did it just as we're going into the war, just as the time it was enacting many seizure and requisition statutes.

Justice Hugo L. Black: And I still have another question.

I'm still puzzled.

What -- by what standard do you determine that everything they get there is a capital gain?

Mr. Joseph A. Maun: They can only determine it by the whole 100% as a capital gain.

We started -- I only say that --

Justice Hugo L. Black: Not that -- if you have rented it, you'd have no -- for the same amount.

Mr. Joseph A. Maun: If I rented it for the same amount it would be ordinary income, but I wouldn't know how --

Justice Hugo L. Black: I -- I'm forgetting the question of ordinary income.

What is your capital gain though?

How do you compute that standard?

How do you use the standard of what you get?

Mr. Joseph A. Maun: Well, the --

Justice Hugo L. Black: From being a capital gain which means if you get that much more money, capital that --

Mr. Joseph A. Maun: You -- you have that much more money, but you have --

Justice Hugo L. Black: -- out of the same piece of property.

Mr. Joseph A. Maun: Well, you don't have the same piece of property the more.

The Government used up some of the property.

Justice Hugo L. Black: It comes back.

Mr. Joseph A. Maun: What's that?

Justice Hugo L. Black: It comes back.

Mr. Joseph A. Maun: Part of it comes back, but a truck that's used in -- over the roads for years isn't the same truck they took the first place.

And you -- so, the Government theoretically, what they should've paid for is that part of the truck which they used up during that year, not that part they brought back.

They didn't pay anything for that, but the part that they took.

They actually took it.

It was so held and they had to pay for it and what they paid was award for property converted.

Justice Charles E. Whittaker: That was capital in character.

Mr. Joseph A. Maun: That was capital in character.

That is right.

Justice Charles E. Whittaker: (Inaudible)

Mr. Joseph A. Maun: Theoretically, they should all set one another, but they wouldn't let (Inaudible) cases I don't know.

But theoretically, that's the purpose of limiting the main award.

It's the offset of what was taken.

Justice Felix Frankfurter: You don't -- you do not find any significance or at least, nothing like the significance that Judge (Inaudible) found in the phrase, “capital asset.”

Meaning by that, as we found, that the capital asset is really the exclusion of the whole world from that piece of property.

Mr. Joseph A. Maun: Well, that's -- that's the view he took of it, but --

Justice Felix Frankfurter: What does he -- what I want to know is why doesn't the very phrase, capital asset, conversion of capital asset were usually associated with capital assets exclusiveness of -- for the rest of the world, enjoyment excluding the rest of the world and the ultimate permanence of construction of property and not a temporal use.

Mr. Joseph A. Maun: That -- that's probably the -- as I believe your opinion in the General Motors case that that's a shorthand way of looking at it, but these trucks had only had one year life left and the Government came and took them.

There wouldn't be -- the Government would never argue about it --

Justice Felix Frankfurter: That was -- that wouldn't be a problem.

Mr. Joseph A. Maun: -- because they took off the first year of its life.

They said that makes for a different situation, meaning they -- they've taken a one year of the life light in this truck, whether on this end or whether it was over in this end.

Justice Felix Frankfurter: Well, that doesn't make a difference if I lease the truck for a year which has a normal life of what, four year, whatever it is.

Mr. Joseph A. Maun: Right.

Justice Felix Frankfurter: Certainly, that -- I wouldn't -- I wouldn't say that the enjoyment of that property for a year was where the voluntary or involuntary conversion of a capital asset to my use, wasn't it?

Mr. Joseph A. Maun: Well, the -- as far as the Motor Carriers Commission here has specifically held, there was a -- a taking here and it had to be a taking of a capital asset regardless of what the nature of the property is.

It's still a capital asset whether it's a use or wherever it is, it only argued.

Justice Felix Frankfurter: Do the trucks belong to the United States thereafter?

Mr. Joseph A. Maun: The trucks -- they --

Justice Felix Frankfurter: Would they do -- would they do what they will with them?

Mr. Joseph A. Maun: They -- they put their own license plates on.

They didn't pay state taxes.

They certainly --

Justice Felix Frankfurter: They will do that first.

They might do all that for a year.

Mr. Joseph A. Maun: They could do that --

Justice Felix Frankfurter: But as a normal course of life, the truck had four years.

And the Government says release this for a year.

You wouldn't say that was an acquisition of a capital asset would you?

Mr. Joseph A. Maun: Yes, I would.

Justice Felix Frankfurter: You would?

Mr. Joseph A. Maun: If it was involuntary taken because then --

Justice Felix Frankfurter: Well, but whether it's voluntary or involuntary can't determine whether it's the capital.

Mr. Joseph A. Maun: Thank you.

Chief Justice Earl Warren: Mr. Barnett.

Argument of Wayne G. Barnett

Mr. Wayne G. Barnett: Just a few very brief comments.

One, what the Motor Carrier Claims Commission held and all that it held was that the taking of the temporary use was something that you had to take just compensation for.

It is the temporary use in itself property, principle under the Fifth Amendment.

Our problem is what property means in Section 117 and it doesn't necessarily mean the same thing and in fact, it cannot mean the same thing.

Justice Charles E. Whittaker: (Inaudible)

Mr. Wayne G. Barnett: Yes, yes.

Well, he is entitled in all events to recover his depreciation whichever way you view it.

I -- in fact, they took depreciation at the time that he now -- they now plan that they were not entitled to.

If they were not entitled to take the depreciation -- depreciation at the time, the way that this award should properly have been figured was to take the net award that the Commission gave them, add on the depreciation to the award and that is his award against which he's entitled to offset depreciation.

So he comes out with the same net figure.

Now, I'm just saying that the improper treatment of this depreciation item washes out.

The award that he got was net of depreciation.

The $123,000 is a -- exclusive of depreciation.

That was a net return upon the use of his investment for the 10-month period.

Justice Charles E. Whittaker: (Inaudible)

Mr. Wayne G. Barnett: Yes.

There maybe a question about the time that he takes it.

Under his theory, he would -- he would offset that depreciation in the year the brief takes the award into income.

In fact, they took it back in 1944 and as I understand their position now, that was improper.

But if that were improper, he would be entitled to take it in the year 1952 when they got the award to offset the depreciation against that receipt, but that would wash out.

Justice Charles E. Whittaker: (Inaudible)

Mr. Wayne G. Barnett: Yes.

Yes.

Oh, yes.

Justice Charles E. Whittaker: (Inaudible)

Mr. Wayne G. Barnett: Yes, yes.

He recovers depreciation in full before we tax anything on either theory.

I -- I would like to -- to clarify this relationship of involuntary dispositions and voluntary dispositions.

If you take an ordinary capital asset in one's home, if you voluntarily sell it then your gain is capital gain and your loss if any, where you wouldn't be -- let's take a -- a share of stock.

Your gain would be capital gain and your loss would be capital loss.

Now, if that were involuntarily converted, the Government seized your stock holdings.

The difference is that while your gain would still be capital gain, any loss would be ordinary loss and that is the only difference between a voluntary disposition and an involuntary disposition and there is not a word in the legislative history or in the statute about 117 (j) is that to -- purports to make any other distinction on a basis of voluntary and involuntary dispositions.

Justice Felix Frankfurter: The contrary argument -- the contrary argument changes the term.

It makes the term capital gain the equivalent of any involuntary conversion.

Mr. Wayne G. Barnett: Any -- any receipts.

Justice Felix Frankfurter: Any --

Mr. Wayne G. Barnett: Any receipts upon an involuntary --

Justice Felix Frankfurter: Any receipts upon --

Mr. Wayne G. Barnett: -- seizure.

Justice Felix Frankfurter: -- propulsion.

Mr. Wayne G. Barnett: Yes, yes.

And there's nothing to suggest that was the purpose.

Now, as I say the crucial problem here is what is meant property in 117?

Now, the statute doesn't define it, the courts had to do that for themselves.

They've looked to the underlying purpose of the capital gains provisions which is to alleviate the tax burdens on a long term appreciation in the value of an underlying asset, not a current return on the use of one's investment.

The return given to the respondent here was a return for the use of his capital investment for the 10-month period and in our view, that cannot be a capital gain.

Thank you.