CENTRAL TABLET MFG. CO. v. UNITED STATES
Legal provision: Internal Revenue Code
Argument of Larry H. Snyder
Chief Justice Warren E. Burger: Now, you may resume arguments in Central Tablet Manufacturing against the United States.
Mr. Snyder, you may resume.
Mr. Larry H. Snyder: Mr. Chief Justice and may it please the Court, to summarize Central Tablet versus the United States.
The question is whether an involuntary conversion by casualty for the purposes of the application of Section 337 occurs at the point of the casualty which in this case preceded the doctrine of the plan liquidation, or whether instead it occurs at the point that a non-conditional obligation to pay insurance proceeds on the part of the insurance carriers arises, which in this case post-dated adoption of the plan of liquidation.
I stated yesterday, it’s the position of the government that an involuntary conversion by casualty for the purposes of the application on Section 337 occurs in every case at the point of the casualty, and that an involuntary conversion by casualty is a single destructive event.
It’s our contrary position that an involuntary conversion by casualty is a gain or loss producing transaction.
And that the purposes of Section 337, that transaction is complete on an enforceable right to ensure its proceeds arises.
We submit that the casualty is much like an executory contract of sale.
In an executory contract of sale by treasury regulation, it is distinguished from a contract of sale.
A contract of sale in turn is defined as a contract in which there is an obligation on the part of the buyer to buy, and an obligation on the part of the seller to sell.
And, if it is not until there those obligations with the sale under treasury regulation is complete for the purposes of the application of Section 337.
And, we submit that the comparable event, the taxable event to that sale is an involuntary conversion when enforceable right to proceeds arises.
Unknown Speaker: Can I ask you what difference this makes this case, which it is held to be.
Mr. Larry H. Snyder: What difference this makes in this case, are you talking about dollar difference?
Unknown Speaker: That and what -- the --
Mr. Larry H. Snyder: Well, it makes approximately --
Unknown Speaker: Well, there would be two taxes.
Mr. Larry H. Snyder: Two taxes.
Unknown Speaker: One on the corporation and one on the --
Mr. Larry H. Snyder: Yes, there would be two taxes, one on the corporation and one on the stockholders.
Unknown Speaker: What is the rate on the corporation?
Mr. Larry H. Snyder: I don’t know of here.
Unknown Speaker: It would not be --
would not be the regular corporate rate?
Mr. Larry H. Snyder: Oh! Yes, it would be at the regular corporate rate.
Unknown Speaker: And, the rate of the shareholders would vary.
Mr. Larry H. Snyder: Would be vary depending on their shares, but yes, that’s the difference.
I thought you were asking about --
Unknown Speaker: Well --
Mr. Larry H. Snyder: In other words, there will be two taxes, one on the corporation and factor has been on tax of the corporation, this is a refund.
Unknown Speaker: What was -- what was the refund thing?
Mr. Larry H. Snyder: That was $80,000.00, now some part of that was a business interruption in charge with the question which it is not before this Court, it was not taken on appeal, but I would say approximately $70,000.00 is in issue here, and that’s the tax to the corporation which was paid under protest.
And of course there is a tax due that the time of a liquidation of the assets in the distribution of those assets to the stockholders.
This is of course a point that has already been complete.
Unknown Speaker: Mr. Snyder, what do you regard as the purpose of Section 337?
Mr. Larry H. Snyder: Well, it’s a remedial provision.
I think the purpose is to eliminate this kind of double tax in the situation in which there’s a single really gain or loss producing transaction.
We’re talking about the gains.
You have the same gain producing track transaction.
I think the purpose of the statute is to eliminate a tax from that single transaction on both the corporation and the stockholders when distribution is made in liquidation within the period of 12 months.
Unknown Speaker: How does your position here give weight or force to that purpose?
Mr. Larry H. Snyder: How does it give weight or force to that purpose?
Well, because under the facts of this case it would clearly fall within that.
There would be a tax on the corporation and a tax on the stockholder.
Unknown Speaker: Well, two or not but of course your casualty, it happened before the decision to liquidate have taken place.
Mr. Larry H. Snyder: The casualty happened, yes.
But I distinguish between the casualty and an involuntary conversion.
Well, I think, the statutes in treasury regulations distinguish between a casualty loss and an involuntary conversion.
Unknown Speaker: Well, wasn’t it the purpose of the statute as you say to enable corporations in this kind of a tax situation, as your corporation was with a low base to liquidate but of the hazards implied by the Court case, under the one that came down later depending on a slight difference in factual setup.
I was wondering, when this casualty is thrown upon you, and as you indicated yesterday was a vital factor in the decisions of liquidate rather than to carry on whether your posture here for on accrual basis taxpayer sponsoring that statutory purpose in anyway.
Mr. Larry H. Snyder: Well, because I can do no more than repeat my attempt to an answer before which is that this is the same kind of transaction.
The 337 was obviously on the surface designed to meet what is the difference between a casualty and on executory contract of sale.
The only difference is its thrust upon this taxpayer, he has no choice or it has no choice.
In an ordinary sale or an exchange, the taxpayer can take his own time in maneuvering negotiate, and then still has the remedial of fact of Section 377, that on an equity basis, I think it’s more equitable to include an involuntary conversion by casualties or this ordinary sale.
Mr. Chief justice I would like to resume on the remaining time for rebuttal.
Chief Justice Warren E. Burger: Very Well Mr. Snyder.
Argument of Stuart A. Smith
Mr. Stuart A. Smith: Mr. Chief Justice and may it please the Court.
I think it would be useful for the Court to focus on the text of this statute, which is set fort on page two of petitioner’s brief.
The statute provides that one, if a corporation adopts the plan of complete liquidation and then two, with in a 12-month period beginning on the date of the adoption of the plan, all of its assets are distributed in complete liquidation to it shareholders.
Then and only then shall no a gain or loss be recognized to the corporation from the sale or exchange by it of property within the 12-month period.
Statute mandates a particular time sequence of events.
First, a plan must be adopted thereby identifying the corporation as one which is commencing a liquidation process.
Secondly, once the plan is adopted, then a 12-month period begins to commence running forward in time.
The statute is a strict statute, it’s so far as sales or exchanges occurring before the adoption of the plan or sales or exchanges occurring after the 12-month period has run cannot be protected by the non recognition provisions of the statute.
Now, here, the sequence of events which have occurred in this transaction demonstrate that it is exactly the reverse of the situation that Congress intended to benefit by the statute.
Because first, we have here the file on September 10, 1965, at that point in time, the taxpayer did not evidence any intension to liquidate, indeed it has been discussed the file itself prompted the decision to liquidate in part because a major asset of a corporation was destroyed.
Then some more than eight months later on May 14th 1966, petitioner adopted a plan of complete liquidation by action of its Board of Directors and presumably by ratification of its shareholders.
Now, in order to place the gain accruing from the insurance proceeds, the petitioner must somehow place that gain after the adoption of the plan that is after May 14th 1966.
For it arises before, the statute cannot apply.
Now, it does this by arguing that what has occurred here after the plan was somewhat like in negotiation of sale, it dickered with the insurance company over the amount of the award, and ultimately, that was concluded sometime in August, after the adoption of the plan.
But, it is plain what occurred here was not a sales negotiation in any sense that term represents.
It was simply a compensation for loss which the insurance company pays pursuant to the contract of buyer insurance.
This post-buyer discussions which the petitioner had with its insurance company is simply directed to the amount of the compensation, and the fact that this transaction is not a sale, it’s well settled by this Court’s decision in flack Flaccus Leather Company.
Now, the fact that this is not a sale might be deemed to the end of the matter for we have a statute here that talks about a sale.
But, it is not the end of the matter because two Court decisions, the Court of Claims, and that Towanda Textiles case, and the Kent Manufacturing decisions of the Fourth Circuit have included within the context of Section 337, gains from involuntary conversions such as this, that is gains from the destruction of property.
But, the situation of those cases is entirely different insofar as those -- the facts that those cases can be fit within the time sequence mandated by Congress in the statute.
That is that the plan occurs first and then the gain arise afterwards.
Now, in the case involved in Towanda Textiles case, we had a situation where the corporation first adopted the plan of complete liquidation and then subsequent to that time, the fire occurred.
In that sense, one could say, as the Court of Claims did, that the fire interrupted the liquidation process, which had already been commenced by the operation of the plan pursuant to the statute.
And, it is the Court of Claims’ reason if the destruction had not occurred Towanda Textiles, the property would have been sold in the normal course of liquidation pursuant to the Section 337 plan within the 12-month period.
Justice Harry A. Blackmun: Mr. Smith, did the Government oppose that result in the Court of Claims?
Mr. Stuart A. Smith: The Government opposed that result in the Court of Claims on the ground that no sale or exchange occurred.
Justice Harry A. Blackmun: Suppose we have the adoption of the plan and then fire within the 12-month period, but the final insurance settlement 15-months after the adoption of the plan.
What is the Government’s position as to that?
Mr. Stuart A. Smith: Well, the Government’s position surely is that if all the assets of the corporation and not distributed within the 12-month period then the statute doesn’t apply, but that’s the kind of situation, Mr. Justice Blackmun which is easily remedied by a corporation in that posture simply by distributing the claim to its shareholders pro-rata.
So, there would be no problem with that arranging for compliance with the statute.
Justice William H. Rehnquist: The Commissioner acquiesces ultimately in Towanda.
Mr. Stuart A. Smith: The Commissioner acquiesces to the proposition of those cases, that a sale or exchange that gains -- that Section 337 gains includes gains from involuntary conversion.
But the point of those cases, Mr. Justice Rehnquist, is that the statutory time sequence was observed in those cases insofar as what the statute was meant to cover was a corporation identifying itself as a corporation in liquidation, and that without the adoption of the plan, such a corporation has not commenced a liquidation process.
And I think that those cases can best be explained in terms of the reason that prompt to their result by the fact that had the fire not occurred in those cases, the corporation surely would have sold the property pursuant to the normal kind of Section 337 plan that tax practitioners are well familiar with.
What we have here, at the time of the fire, the petitioner was not planning to sell its building pursuant to a plan of liquidation.
Its intension to liquidate was formed after the fire, and to that extent, we feel that the plan here should not relate back to the fire anymore than a subsequently within a plan should relate back to a prior sale.
Unknown Speaker: What taxes are at issue here?
For what year, the year of the casualty or the year of payment?
Mr. Stuart A. Smith: The taxes at issue here presumably of the year of the payment.
Unknown Speaker: Oh! You mean the Government -- do you think when a casual -- when a fire takes place in December ‘65, and the proceeds and finally paid in ‘66, and there’s a gain, the gain is accruable in ‘66.
Mr. Stuart A. Smith: Well, if you are an accrual basis taxpayer and all the events have been fixed, the gain would reportable in ‘65.
Justice Byron R. White: Well that is not what your colleague stated, and this will happen, isn’t it that the taxes at issue here are ‘66 taxes or not?
Mr. Stuart A. Smith: I think they’re ‘66 taxes but the point of that, Mr. Justice White that simply goes to when the tax is -- when that gain is realized for the purposes of reporting [Voice Overlap].
Justice Byron R. White: And if there had been a loss, let’s assume that there had never been -- let’s assume that the insurance proceeds didn’t pay off.
Mr. Stuart A. Smith: Yes.
Justice Byron R. White: In other words, it didn’t pay the basis.
The new building didn’t pay it, when would be the loss be approvable?
Mr. Stuart A. Smith: The loss would be approval presumably at a time when it became clear that the loss -- that there would be a loss.
But following that point to its conclusion, I think it should be pointed out that the net effect to the taxpayer’s position, in this case would be to foreclose its recognition of a loss under such circumstances.
Because if the loss arose as of the time that the insurance company finally decided not to pay off or to pay off not an excessive basis.
Then, petitioner’s position here that that loss should be recognized that time would result in the loss arising after the adoption of a plan.
Unknown Speaker: But, in this ordinary case where there’s no liquidation involved and there is a loss that the insurance doesn’t cover.
I think if you suggest the loss of the approval in the year of the proceeds would be.
Mr. Stuart A. Smith: Yes, certainly for cash basis taxpayer.
For the accrual base taxpayer, I would suggest that if it at the end of the year, let’s say on December 20, it became clear what the amount of the loss was but the check were not paid until in the next year.
Unknown Speaker: Not so here.
Mr. Stuart A. Smith: Apparently not so here.
Unknown Speaker: That’s all right.
Mr. Stuart A. Smith: Now, in view of the fact that the -- since the statute clearly would not apply to a situation where a sale took place and then the plan were adopted.
I think that the implication of the petitioner’s position here would be -- would be to give a preference to those taxpayers suffering a destruction of property that is not available to taxpayers simply selling corporate assets in the normal course of a liquidation.
Now, we think that the condemnation cases, the lines of positions involving condemnation offer a useful analogy at our on instructive as it correct results was to release -- which should be reached here.
What we have in this mind of decisions is a uniform holdings of all the Courts of Appeals to the effect that in s condemnation situation where the taking of the property takes place prior to the adoption of a plan of liquidation.
Then, the gain from that condemnation cannot be covered by Section 337 because the plan arose afterwards.
Now, this is the holdings of these cases not withstanding the fact that a condemnation proceeding may be litigated for several years, and the exact amount of the award may not be fixed for several years.
Justice William H. Rehnquist: Don’t you know at the time of taking under most State Law and under Federal Law have the right to draw down at least the right of the amount that condemners deposited so that you get some cash proceeds?
Mr. Stuart A. Smith: Mr. Justice Rehnquist, the situations are varied under both Federal and State Condemnation proceedings.
We saw the case called Dwight versus United States, a Second Circuit case which involved a State Condemnation.
In that situation is very much like a sudden event of fire. The Board of Estimate of New York City simply filed a damage map in the Court, and that resulted in the taking of property.
To let the condemnation proceeding to fix the amount of the just compensation stretched over many years without any payment.
And Second Circuit held in that case that notwithstanding, the fact that the condemnation was sudden and that the petitioner there could not -- the taxpayer there could not even finely adopt the plan even it had known of the -- because it did not know the event still, Section 337 did not apply to insulate these gains from corporate taxation.
And, there are other Federal Condemnation situations notably in the Likins-Foster Honolulu case which we cite, where there are deposits that paid in before then the condemnee can draw down on it.
But, I think that the situation -- the situation sufficiently vary that you can’t really make a general rule about the practice on the condemnation proceedings.
When the Second Circuit considered the Dwight case, it was based with the situation far more, shall we say “harsh” than this case, because the Board of Estimate simply filed this damage map, and that was the end of the matter.
The taxpayer simply did not have time to adopt the plan of complete liquidation.
The Second Circuit simply said the statute has strict requirements and if it is to be modified to cover all gains from involuntary conversions then Congress has to modify the statute.
As we point out in our brief, an advisory commission in 1959, so urge Congress to modify the statute to cover all gains from involuntary conversions whether they arise before -- whether the event arises before or after the adoption of the plan and Congress did not act on this proposal.
So, what you have here is a situation where taxpayers subjected to sudden events such as condemnation, clearly cannot have the benefit of this statute if they do not abide by the statutory time sequence of first adopting the plan and then within the 12-months experiencing this event.
What the taxpayer’s position here would lead to, we submit, would be a situation where taxpayers suffering destruction of insured property would be accorded to preference of a taxpayer’s suffering a sudden condemnation very similar to what happened in the Dwight case.
Now, what petitioner attempts to distinguished these condemnation cases, it says, condemnation creates an enforceable obligation to pay a certain amount of just compensation by the condemning authority.
But, the destruction of its insured property here gave rise, so it says, to simply a conditional or contingent claim.
But what are these contingencies that the taxpayer is relying upon to base its arguments to push forward to this positive event after the adoption of a plan in there.
It talks about the filing of a notice of loss, it talks about the filing of a proof of loss, and it talks about other proof complying with other procedural requirements under the contract of insurance.
But the record here indicates that these procedural requirements had already been met by petitioner prior to the adoption of the plan.
For example, a record indicates here that negotiation where the fire started, fire was on September 10th,1965, the negotiations that the petitioner commenced with insurance property began as early as October 8, 1965.
In fact, petitioner’s own counsel in the District Court, testify that the proof of loss in this case was filed prior to December 1965, again prior to the adoption of the plan.
Petitioner does not meet its own proposed test, and that is the test proposed by the District Court in Kinney case on which it relied.
But in any event, we don’t think that these procedural requirements under the insurance contract create the claim against the insurance company because just as a condemnation taking creates the claim under -- against the condemning authority.
So thus, the destructive event of the fire, we submit, creates the claim against the insurance company.
But as this irrevocable event of either taking by condemnation or by fire, which converts the property into the obligation running against the insurance company go with the authority.
Justice Lewis F. Powell: Would it make any difference to your submission if the casualty occurred in the absence of insurance and yet the owner of the building, for example which burned, so it had been caused by the negligence of someone whom he intended to sue, so that there was no contractual right arguably of any right to recover?
In other words, suppose the only claim was the contingent negligence suit, would that make any difference?
Mr. Stuart A. Smith: I don’t think it should make any difference, Mr. Justice Powell.
I think what you have here is a -- in effect an irrevocable transformation of property from a property which exists to a property which has been destroyed, and that creates in the case -- of your case of negligence, the case creates an obligation on the on the common law, I suppose for recompense, which will not elevate it to a contractual claim would nevertheless still represent the claim against the negligent party.
I don’t think that should make a difference.
Unknown Speaker: Well, I suppose, in my brother Powell’s hypothetical case, in the year of the fire, that would be a casualty loss to the corporation, wouldn’t it?
Mr. Stuart A. Smith: It would be a casualty loss to the corporation.
Unknown Speaker: And then a the year of the -- any subsequent year of recovery, it would be ordinary --
Mr. Stuart A. Smith: I can say that is -- well, it would be a casualty and loss unless it was covered under another provision Section 1231 of the code, which provides for netting of losses on involuntary conversions against gains which from the sale of capital assets.
So, I don’t think I could answer completely that that would be, you know, an ordinary loss, but if there were no other gains presumably it would be an ordinary one.
Unknown Speaker: It would be --
Mr. Stuart A. Smith: Absent such --
Unknown Speaker: It would be a casualty loss that’s an ordinary loss.
It’s not going to be under a capital loss --
Mr. Stuart A. Smith: Right.
Having such details and is depreciation of the kind.
Unknown Speaker: Right, and then in my brother Powell’s case in a subsequent year, the corporation should get a judgment against the negligent person who caused the fire, but will the tax apply beyond that?
Mr. Stuart A. Smith: They have to take that into income.
Unknown Speaker: Ordinary income.
Mr. Stuart A. Smith: That’s the principle --
Unknown Speaker: Well, his question was what if the corporation was under a 12-month plan of liquidation at the time of the recovery?
Mr. Stuart A. Smith: If we are on a 12-month plan of liquidation at the time of the recovery, I think that this question as to when you take something in to income are wholly a part from the question as to whether the plan applies.
I mean, if the casualty occurred prior to the Law, let’s say in the middle of the plan of complete liquidation then presumably, if that were a loss, that would be an uninsured loss, so to speak, then you would have a loss that wouldn’t be recognized.
Isn’t that right?
Because it would carry after the plan.
Unknown Speaker: I guess so.
Mr. Stuart A. Smith: So then, in the subsequent year when you get money into income since you have not deducted that loss, presumably, I would imagine that that should have to be taken into income since I can’t think of any reason why it shouldn’t.
Unknown Speaker: But maybe only the net over the loss.
Mr. Stuart A. Smith: Yes, well, this raises a question as to whether you are -- I suppose under the tax benefit rule, if you had not got any tax benefit from the loss, you don’t have to take that it into income.
I was imagining it would be only the net of the loss, I think that’s right.
Now, we think that this subsequent events upon which petitioner relies, that is its negotiations with the insurance company, its compliance with the procedural requirements of the policy simply go if an aid of the collection of the claim.
They do not create the claim against the insurance company.
Now, while the taxpayer recognizes that this transaction is not a sale here, it argues that into its reply brief, it has many of the characteristics of a sale.
What it says in effect is the insurance award is analogous to a sales price, and it assumes that you cannot have a sale without a determinable sales price.
Well, this assumption which was made by the Morton opinion as well, we think is erroneous.
There are many instances where you can have a sale not only for tax purposes but for any purpose without the existence of the determinable sales prices.
For example, a business can be sold for a percentage of future profits over a stated period of time, and the sales price in that situation is not determinable until the end of the period.
But no one would doubt it, there were a transfer of the benefits and burdens of ownership to that business, that there was a sale, clearly a sale occurs in that case.
And to that extent, we think that the petitioner’s analogy is false.
Alternatively, the taxpayer argues here that the payment by the insurance company could be a sale.
It talks about a situation where the insurance company will pay an adjustment for salvage, and presumably take over the ownership of the property.
Now, first of all, there’s no showing that it has occurred here, it didn’t occur here.
Well, this payment was simply compensation for a loss, but even if there was -- even in such a situation, we think that the compensation for the loss element of the payment would not be analogous to a sales price, so to speak, because that simply is a payment for a decrease in value of the damaged property, value which has disappeared.
That is -- can in no way, be analogize to an element of the payment which would be in the sales price.
And finally, as we point out in greater detail in our brief, we think that the net effect of the petitioner’s position here is contrary to settled rules governing the holding period of property.
Almost 40 years ago, this Court held in the McPhee case, that holding period -- the concept of holding period is coterminous with the concept of ownership.
And, as corollary to those cases, there are other cases which hold, that when property is destroyed, its holding period ends.
Now, those holdings were rendered in a situations involving sunken ships, but the lesson is equally instructive here.
In those cases, a taxpayer board a ship on January 1st and then it sunk on March 1st, to use the example.
The insurance proceeds however were not paid until July 15, and what the taxpayers in those cases argued was that the holding period -- their holding period should be stretched forward beyond six months to the point where the insurance proceeds were paid and in that way, to try to get long term capital gain.
Now, the Court rejected that notion.
The holding period ended when the ship sunk, when the destructive event occur.
So, we think that the -- we think that those holdings are instructive as to the error that petitioners making in this argument.
Because if petitioner’s argument is right that its so called “sale” under the statute did not occur until the insurance proceeds were paid, the implication of its argument is that a sale occurred long before after its coterminous holding period, an ownership have ended.
We think that’s wrong and we think that that’s simply another demonstration of the error of petitioner’s position and the reason why the Court’s judgment at Court of Appeals should be affirmed.
I have nothing further to say if the Court has no further questions.
Justice Lewis F. Powell: May I ask you another question, let us assume that the proceeds to this prior had been received by the party whose property was burned and he had plan to, and did carry on the plan of reconstructing the destroyed building.
Let’s assume the proceeds received within the statutory period that permits them to be received for reconstruction purposes were their recognition of gain.
Mr. Stuart A. Smith: Section 1033
Justice Lewis F. Powell: 1033, right, then let’s assume that the day after the building that reconstructed, a plan of liquidation was adopted, would there be any problem with that?
Mr. Stuart A. Smith: And then the property was sold?
Justice Lewis F. Powell: Yes.
Mr. Stuart A. Smith: I presumably, I don’t think there would be a problem because what you got there is simply the property sold after the adoption of the plan.
The fact that it took advantage of another provision of the Internal Revenue Code to reconstruct the property, and get a carry of the basis, I don’t think it would present any problem.
Justice Lewis F. Powell: You end up with what might be regarded as substantially the same result, don’t you?
Mr. Stuart A. Smith: Substantially the same result, yes.
But in the situation you posited, I think, Mr. Justice Powell, that the statutory time sequence in Section 337 is observed and so far as the property is restore, then the plan is adopted and then the property is sold.
Justice Lewis F. Powell: I understand that.
Mr. Stuart A. Smith: In many ways, a Federal Tax factor, that didn’t occur here.
Justice Lewis F. Powell: The Government just really wants to put the taxpayer all in that trouble, does it?
Mr. Stuart A. Smith: Well, I mean, we view the statutory requirements as precise.
It is a cliché but nevertheless, a somewhat with a ring of truth to it that you can’t be judged for federal tax purposes on the basis of what you didn’t or what they didn’t do that here.
I have nothing further to say.
Rebuttal of Larry H. Snyder
Mr. Larry H. Snyder: Yes, briefly --
Counsel professed his argument with a reference to the strict time sequence required by the statute, and he also this argument largely in the same vein.
And with that in mind, I would like to read Treasury of Regulation 14437-2A which says, “In ascertaining whether a sale or exchange occurs on or after the date in which the plan of complete liquidation has adopted the fact that negotiations were sale may have been commenced either by the corporation or insurer.” All of those are both shall be disregarded.
Moreover, in executory contract to sell is to be distinguished from the contract of sale.
Ordinarily, a sale has not occurred when a contract to sell has been entered into but title and possession of the property have not been transferred.
And this is the strict time sequence that counsel refers to.
The Government is committed to the proposition because it acquiesce by revenue ruling in it that an involuntary conversion by casualty is of sale or exchange, so it has to be treated that way, but they want to treat it differently.
They want to treat it differently from a sale.
They want to treat it as a single destructive event which it is not.
The whole thrust, the whole purpose of the Internal Revenue Code of Income Taxes is directed to the realization of gain or loss.
In a transaction which produces gain is not complete until this is some enforceable right to gain, and that doesn’t occur here.
Justice Byron R. White: But didn’t the Government on this case claim the gain, it was realized in fiscal year ’65?
Mr. Larry H. Snyder: Well, we still have that in the event that this decision is affirmed, it will go back to the District Court and goes through that.
Justice Byron R. White: Well --
Mr. Larry H. Snyder: Yes, I know --
Justice Byron R. White: But the thing consider it anyway.
It’s saying that the gain act was actually realized in ‘65 --
Mr. Larry H. Snyder: Right.
Justice Byron R. White: --better than ’66.
Mr. Larry H. Snyder: It is saying that the gain was realized in 65 --
Justice Byron R. White: As well as the 337 issue.
Mr. Larry H. Snyder: That’s right.
Justice Byron R. White: That is in the year of the fire.
Mr. Larry H. Snyder: That is in the year of the fire, and we have that -- we have that question as to business interruption insurance.
Justice Byron R. White: And what’s the difference?
Mr. Larry H. Snyder: Well, it is a question of the time of the accrual, is it not?
And we litigated that question on the Government draft that I think in all fairness, it drafted because it did not want to cloud this rather narrow issue, but there has been a Tax court case since which is held the business interruption insurance to the time of the recovery of the insurance is the time that it is reported that I doesn’t relate back.
Mr. Larry H. Snyder: Whereas the other cases that indicated what year that a gain that there should be realized, let us forget the liquidation.
Well, let us take Lucas versus North Texas Lumber Company.
You know that, that was an action of purchased timberland and it was --
Justice Byron R. White: How about in the fire case?
You have some cases like that?
Mr. Larry H. Snyder: You know fire case and casualty loss.
Justice Byron R. White: Casualty loss, when the insurance proceeds are paid in the following taxable year, which year --
Mr. Larry H. Snyder: The nearest thing that I have but I cannot say it to you or I think it is the nearest thing, Justice White is Helvering versus Hamel which is cited somewhere either in the petition for writ of certiorari in our brief, and that was a foreclosure sale.
And they said, this Court said that the sale was not reportable at the time of decree for foreclosure.
But, in the following year when the sale actually took place, that was the decision of this Court as to an accrual basis taxpayer, and I think that situation is similarly --
Unknown Speaker: Well you say, I take it -- you say I take it that if there have never been a liquidation here, then the proceeds have been paid exactly as they were paid here, that the company by good accounting practice and good tax accounting practice would have returned the gain in fiscal 66.
Mr. Larry H. Snyder: Yes, no question about that in my mind and I think this case that I have cited, I cannot cite you a higher case or casualty at hand.
But I think this line of cases Lucas versus North Texas Lumber Company which is also cited somewhere in the briefs, Helvering versus Hamel, they all hold to this effect.
That is at the time that an obligation arises even if it as to an accrual basis taxpayer that the gain is reported and not at the time of the incident whether it be a casualty or the exercise of an option, or a foreclosure sale on the petitioner’s file.
Unknown Speaker: On the condemnation?
Mr. Larry H. Snyder: Well, the condemnation occurs of course at the time of the taking, there is no question about that.
The only difference is on the cases that the Government cites are under we talked about and discussed yesterday are in those statute.
Those peculiar in the minority, I mean, fewer statutes, I’m sure.
Let’s say, under particular statutes that at the time the declaration is filed, the Government has the right to possession --
Unknown Speaker: And, that is the taking
Mr. Larry H. Snyder: That is the taking.
Unknown Speaker: Under those statutes.
Mr. Larry H. Snyder: But under a majority of statutes, that does not happen until the deposit is put up or until the decree is put up, and then that taking occurs.
But when you compare an involuntary conversion in those cases, you see, it is not the casualty itself; it’s the creation of the right to the obligation that compares to the taking and this occurred in this case after the adoption of the plan of liquidation.
Chief Justice Warren E. Burger: Thank you gentlemen.
The case is submitted.
Unknown Speaker: Mr. Snyder but there must be some law in this fire business, the casualty business of the loss in one taxable year and payment the next.
Mr. Larry H. Snyder: I’m sure there is but I cannot cite you by name and report number of the case.
We did -- this was involved in the District Court and we prevailed there, and it was not taken to the Court of Bills by the government.
I think in all fairness for the reason that I just said to you, I don’t think they want to cloud up this issue.
Unknown Speaker: But certainly, I take it as of here are now, you and the Government were at loggerheads on that issue.
Mr. Larry H. Snyder: Yes, as a matter of fact -- as a matter of fact, when the decision was handed down in the Court of Appeals in this case, and before we could file our petition, the Government filed a motion in the District Court to consider this very question.
So, I say that if we lose here, we’re going back to the District Court to argue that question, I have no --
Unknown Speaker: What question?
Mr. Larry H. Snyder: The question of when this --
Unknown Speaker: Whether the corporation must pay to 50 to 65, or 66.
Mr. Larry H. Snyder: Yes, in which year, and I don’t have any doubts as to how it is going to come out, I think we’re going to prevail, but nevertheless, they haven’t given up on this question.
Unknown Speaker: Well, isn’t that irrelevant to this case, is it?
To the --
Mr. Larry H. Snyder: Well, it’s relevant --
Unknown Speaker: You don’t think it’s an important point or not with respect to the --
Mr. Larry H. Snyder: Time of accrual, the time of accrual, yes, I think it is but I think that the true concur in this case.
I think that the involuntary conversion by casualty concurs with the accrual of the right to receive insurance proceeds.
So, it’s important to that extent, yes.
Justice William H. Rehnquist: Well, did the judgment of the District Court that was handed down here purport to finally adjudicate all of the tax liability involved in your refund claim?
Mr. Larry H. Snyder: I think that the Court’s body had but there is -- if I say again or repeat, if we lose here then we do have -- the Government has not abandoned that point.
And of course, holding that these proceeds or entitle a man recognition, the Court -- the District Court was not presented then with the question of when are these proceeds report.
So, it’s a -- as I say it hinges upon the decision of this Court as to whether that’s litigated.
Chief Justice Warren E. Burger: Thank you Mr. Snyder.
Thank you Mr. Smith.
The case is submitted.