United States v. Allen-Bradley Company – Oral Argument – December 13, 1956 (Part 2)

Media for United States v. Allen-Bradley Company

Audio Transcription for Oral Argument – December 13, 1956 (Part 1) in United States v. Allen-Bradley Company

del

Hilbert P. Zarky:

If the Court please, in my remaining time — no authority which we say exist for these partial certificates.

On pages — beginning at the bottom of page 60 and 61 of our brief in Allen-Bradley, appears in Section 124 (f) which is the crucial Section — this interpretation we disagree with on the Court of Claims.

That Section is entitled, “determination of adjusted basis of emergency facilities,” and says this, “In determining, for the purposes of subsection (a),” which is the basic definition, “the adjusted basis of an emergency facility,” that’s the basis on which you take your tax amortization.

“One, there shall be included only so much of the amount otherwise constituting such adjusted basis.”

As it’s properly attributable to such construction, reconstruction, erection, installation or acquisition after December 31, 1939, as either the Secretary of War or the Secretary of the Navy, and that now includes the WPB by transfer, has certified as necessary in the interest of national defense during the emergency period.

And the statute goes on to say, “It should be under regulations approved by the President.”

Now, we scarcely offer this section as a model of legislative draftsmanship.

It is not the clearest choice of language in the world, but we believe that the statute is broad enough to encompass the congressional intent.

Earl Warren:

Well, I — I — suppose we get some more of that point in the next case, will we?

Hilbert P. Zarky:

I hope to elaborate on it (Voice Overlap) —

Earl Warren:

Thank you.

Thank you, Mr. Zarky.

Mr. Peters.

Harvey W. Peters:

Mr. Chief Justice, may it please the Court.

In as much as the Government is here requesting whether determination and judgment granted the Allen-Bradley Company by the Court of Claims be reversed, I think it proper that we consider exactly what was before the Court of Claims in the case there.

Reading from the record, page 4, paragraph (c) of the Allen-Bradley Company petition states, “In connection with such expansion and pursuant to the provisions of Section 124 of the Internal Revenue Code of 1939, the plaintiff filed for and was issued nine necessity certificates.

In each and every instance, the duly designated certifying authority determined that the facilities described in the plaintiff’s application for a necessity certificate were necessary in the interest of national defense.

However, in three instances, the duly designated certifying authority certified less than 100% of the cost of the facilities described in and covered by the necessity certificate as amortizable under Section 124 of the Internal Revenue Code of 1939.

In other words, in our petition, we pleaded the fact that these facilities in every case had been determined to be necessary for national defense.

We pleaded also that the duly designated certifying authority cut the cost for amortization purposes to an amount less than 100%.

Now, in an answer filed by the Government which is contained beginning on page 11 of the record, reading there, “Admits the allegations of paragraph 6 (a), (b) and (c).”

The portion I quoted from just a moment ago is included in paragraph 6 (c) and was admitted to by the Government.

The Government filed its answer in the Court of Claims on November 15th, 1955.

In order to get the matter expeditiously taken cared of, we filed a motion for a summary judgment on November 21st, 1955 or less than one week after the answer was filed.

In our motion for a summary judgment, we emphasized the fact that the Government had admitted to all of the essential facts and the Government had offered no defense.

As a matter of fact, the only item even constituting a slight defense in the Government’s answer is the prayer wherefore defendant phrased that plaintiff take nothing from it in this suit and that the same be dismissed with cause against the plaintiff.

Now, in our motion for a summary judgment, we request that the facts are found as stated in the petition filed on behalf of the plaintiff, the Allen-Bradley Company.

And number two, that judgment shall be entered for plaintiff, the Allen-Bradley Company against the defendant, in the United States of America for the sum of $178,000 and so forth.

Well, at that stage of the proceeding, what did the Government do?

The Government filed an answer which the Government generally stated that the Government is still litigating the issue and believes its position taken in a week in so higher power and so forth to be correct.

Harvey W. Peters:

It pointed to the fact that the Tax Code Of The United States in the case of National Lead had decided the case adversely to the Government too and I am quoting now from the Government’s answer.

“However, an appeal was filed from that decision with the Court of Appeals for the Second Circuit which was argued on January 13th, 1956 but has not yet been decided by that Court.

If the Court of Appeals for the Second Circuit decides the issue in favor of the Government.

The question will undoubtedly be ultimately decided by the Supreme Court of the United States.

Again, nothing further by way of the defense other than the information that the litigation was continuing and that there was a possibility of review by the United States Supreme Court.

Now, the National Lead opinion, the National Lead case was decided by the Second Circuit Court of Appeals on February 14th, 1956.

And the case was submitted by the parties in the Court of Claims without argument on March 5th, 1956, at which time, again the Government filed a one-page defendant’s memorandum of additional authority citing the National Lead case decision by the Second Circuit Court of Appeals.

Now, the point I want to make is I do not consider the Supreme Court of the United States as a trial court.

I do not consider that the Government should be in the position of sitting back and stating nothing, giving no position, giving no authority, not even stating the grounds upon which it is seeking to defeat our claim until the petition for certiorari was filed with the United States Supreme Court.

And I might state in that respect that it is set forth in our brief, that is quite well-established and it is contained in the rules of the Court of Claims that if there is an affirmative defense, the matter should be raised in a pleading.

And in this particular case, I want to emphasize the fact that the Government cannot claim that it had no knowledge of the position that it would ultimately hope to advance in this Court, because as a matter of fact, the National Lead decision of the Second Circuit was almost one week short of a-month-old when the case was submitted without argument.

Getting to the matter of the —

Stanley Reed:

But what — I don’t quite grasp your point that the Government had filed the — the petition, had it?

And you — you had filed the man —

Harvey W. Peters:

The taxpayer had filed a petition with the Court of Claims in which we alleged that these certificates, that these facilities were found 100% necessary and the Government agreed with that contention.

We, of course, pointed out in our petition that the certifying authority did limit the cost for amortization purposes.

Stanley Reed:

Yes.

Harvey W. Peters:

Now, throughout all of these proceedings in the Court of Claims, the Government has never advanced the point as to why our certificate should be denied other than the law.

They have never — that the administrative authority, in other words, had the authority to issue fractional claims.

Now, in its brief before this Court, the Government, I — I get the point now that you’re asking, Mr. Justice.

The Government raises a point we’re guilty of laches, that if we had any relief, it was to go back to the certifying authority.

Now, for the first time, that point is raised.It was never raised before even though the — the Government had knowledge of the Second Circuit Court of Appeals’ opinion in the National Lead case.

Now, let’s go on to the matter of the law.First of all, in the briefs, there is some rather broad language dealing with the matter of the authority of the certifying authority to issue fractional certificates.

In the first place, we claim that isn’t at issue here.

We claim that the Government has admitted we had a 100% certificates even though the certifying authority limited us as to the amount of the cost.I think it important to specify.

And when we use language such as the alternative of issuing a certificate or of having the Government finance the facility, there are several other things that should be given some consideration.

In the first place, when an application was filed or when a certificate of necessity was granted, there was no knowledge as to ultimate cost.

The application gave the estimated cost.

For instance, as the record shows in our case on page 5, we filed an application with estimated cost of $927,000.

When the final cost was computed, the cost for amortization purpose was a $1,014,000 or approximately 10% more than the estimate.

Harvey W. Peters:

Now, there was no element of control over that, whether you put a — a percentage figure in there or not.

Again, on the record on page 6, we filed an application estimated cost $274,600, the eventual cost only $126,000.

And in like manner, the third certificate varied also as to the final cost in relation to the estimated cost.

Now, it has been stated here that the purpose of this partial certificate or partial cost certificates was to allow a certificate in cases where it was decided that a partial certificate was better than the Government financing and or the Government building the facilities.

Once again, I want to point out that in the case of our certificates, there were involved buildings which were immediately adjacent to the taxpayer’s buildings.

Now, I think the taxpayer might have had some question about putting an office building — or I mean a factory building connecting up with its own building, floor-by-floor.

Secondly, there was involved special machinery and that special machinery was entirely within the know-how of the Allen-Bradley Company.

It wasn’t the type of machinery that you could buy at commercial sources.

It could only be built by the Allen-Bradley personnel and under the supervision of Allen-Bradley engineers.

In other words, it wasn’t just the case of the Government going out and purchasing a milling machine.

There is also been made the comment that originally, 100% certificates were issued, but at later, our productive capacity was inflated to, or shall we say, increased to quite an extent.

And at that point, the War Production Board decided that we had enough of defense facilities acquired under certificates and perhaps this was the time in which the Government could consider the post-war usability and the amount of money that the Government could realize out of the sale of these facilities in the post-war world.

Now, let’s examine that a moment.

Could I ask you a question at this point —

Harvey W. Peters:

Yes, Mr. Justice.

— about the mechanics of these transactions.

When you first started on your facility, do you submit an estimate to the Government as to what it’s going to cost?

Harvey W. Peters:

You submit a physical description —

Physical description.

Harvey W. Peters:

— and an estimate of the cost.

I emphasized that first because that was the most important.

All right.

Now, at that stage when it’s approved, do you know whether you’re going to be — is there any discussion as to whether it’s going to be a 100% certificate or 35% certificate?

Harvey W. Peters:

When it is approved, they issued the certificate in the terms up to 80% of the cost.

There is no understanding, though, Mr. Justice as to the dollars of cost.

You see what I mean, whether it’s double or half or three-fourths, it’s 80% of whatever actual cost was finally incurred.

Why the 80%?

Harvey W. Peters:

Well, I wouldn’t — and of course it’s the question we’re asking too, but the theory behind it is that that is the excessive cost induced by the war.

Putting it another way that these facilities could have been purchased in 1939 for one-fifth of what they cost in 1942 and 1944, and the 80% is being subject to amortization.

But then later on — excuse me, later on then you get a further certificate which may be a 50% certificate or a —

Harvey W. Peters:

Well, we have three certificates, Mr. Justice Harlan.

We have one for 80%, one for 85% and the last one which is the smallest amount here at issue was only 35%.

Earl Warren:

When was that issued, Mister —

Harvey W. Peters:

The 35% certificate was issued in April of 1945, the 85% in March of 1944 and the 80% in December of 1943.

Earl Warren:

Why — why did you wait 12 years to bring this petition?

Harvey W. Peters:

Well, Your Honor, because in our opinion, this is a tax case.

It involves that statute but was described by Mr. Zarky, involves a direction to the Commissioner of Internal Revenue to — as to his method of computing the adjusted basis, the cost for tax purposes.

Earl Warren:

But still, I wonder why you would wait all that — all that time.

Was that the only explanation?

Harvey W. Peters:

Mr. Justice, I can give this explanation too.

If it wasn’t for a question of waiting, having been in tax practice all my life, I think the Government would in many instances that be cut short revenue.

In many instances, they based their contentions upon the basis of decisions and opinions and analysis of law that were not prevalent when the tax return was filed.

The question that I was — maybe I haven’t made it clear.

At the time that you agreed with the Government to go ahead with this facility, was there a representation by the Government that you were going to get a 100% — a 100% certificate?

Harvey W. Peters:

No, there was not, Mr. Justice.

There was not.

Harvey W. Peters:

These type of certificate issued in National Lead was — which we have discussed a few moments ago was the same type we have.

80%.

Harvey W. Peters:

Yes.

And you accepted that certificate and went ahead on that basis?

Harvey W. Peters:

We — we went ahead and built the facility, that is right.

And on — in our tax return, we amortized only 80% of the cost.

80%.

Harvey W. Peters:

And the contention here before the Court was raised by claims for refund filed later.

So, you — you went ahead with your construction accepting the 80%.

You filed your tax returns on the basis of the 80% and then later on, you sued for a claim — sued for refund.

Harvey W. Peters:

That is — that is correct.

What gave rise to that?

Harvey W. Peters:

Well, I would presume it was the Court of Claims action on the Wickes —

Government is trying to tax you on some other basis?

Harvey W. Peters:

— (Voice Overlap)

case.

I beg your pardon?

Harvey W. Peters:

I would presume it was the Court of Claims’ opinion in the Wickes case.

In other words, yes.

Harvey W. Peters:

Of course you must remember, Mr. Justice, those years were open under the statute of limitation —

I appreciate that.

Harvey W. Peters:

— which is a knife that cuts two ways.

Felix Frankfurter:

You found you — according to your view, you found that you had rights which another litigant has established.

Harvey W. Peters:

Had established for us, you might say.

Yes, Mr. Justice Frankfurter.

Stanley Reed:

Did — did I understand that they never gave a 100% certificate to anybody?

I — I’ve got the contrary impression from the Government’s argument.

Harvey W. Peters:

It is my understanding that after this change in the fall of 1943, they did not give 100% certificates, shall we say except in a few instances.

I know neither way.

Stanley Reed:

Yes.

Well, before 1943?

Harvey W. Peters:

Then, they were entirely 100% certificates.

Stanley Reed:

Well, why did they put the 100% in?

Harvey W. Peters:

Because that is how — this is my explanation.

That is how the certifying authority analyzed the law.

In other words, that the question was, what is the physical use of these facilities?

Stanley Reed:

But why would they —

Harvey W. Peters:

And if — if the physical —

Stanley Reed:

— give you a dollar?

Harvey W. Peters:

There’s no — no dollar question in (Inaudible) —

Stanley Reed:

It cost a billion dollars?

Harvey W. Peters:

Yes.

You would — you would give an estimate as to what the cost would be?

William J. Brennan, Jr.:

But because — because it was merely an estimate, they gave you the certificate when you began your work — before you began your work.

Harvey W. Peters:

Yes, Your Honor.

Stanley Reed:

So, they — they phrased it in percentage because they didn’t know what the cost is going to be?

Harvey W. Peters:

No, that is not correct because they didn’t know what the cost was going to be in the earlier days of this either and yet they gave 100% certificates.

Stanley Reed:

Well, I was thinking in the whole — during the whole period.

Harvey W. Peters:

No.

Stanley Reed:

They never knew what the actual cost is going to be and perhaps for years after they gave you the certificate.

Harvey W. Peters:

No, they did not.

As a matter of fact, it was the Commissioner of Internal Revenue who gave the final answer as the cost.

Because let’s assume — I think this might help explain it.

Let’s assume that a manufacturer purports to devote 100,000 square foot of area, the manufacturing gets a certificate, $2 million.

And then, the Commissioner of Internal — of Internal Revenue through his agents finds out that only one-fifth of that was devoted to manufacturing.

Let’s assume the other 80% was devoted to employ amusements, bowling alleys and what have you, the Commissioner could strike out the portion that was not devoted to war production.

In other words, the Commissioner of Internal Revenue through his agents was in fact the final fact finding person here involved.

And you see, I might point out one of the —

Stanley Reed:

Did you ever got a dollar certificate from him?

This is the only thing you’ve ever got.

Harvey W. Peters:

That is all.

And as a matter of fact —

Stanley Reed:

And from your own accounts, you determined what the cost was?

Harvey W. Peters:

Yes, subject to verification by the Commissioner, of course.

Stanley Reed:

I understand.

And — and subject to verification and then you’d — if you had a — what — what is the limit, 20% deduction per year?

Harvey W. Peters:

Five years.

Stanley Reed:

Five years.

Well that would be 20 —

Harvey W. Peters:

20%.

Stanley Reed:

You have 100%, you’d take off 20?

Harvey W. Peters:

That’s right.

I want to point this out though —

Stanley Reed:

Well, may I ask, did you ever get any suggestion when this change was made from 100% to the — less than 100% —

Harvey W. Peters:

There are only —

William J. Brennan, Jr.:

— and there’d be tax effect as a consequence?

Harvey W. Peters:

No, Your Honor.

Only in the respect that in correspondence as is shown by the record, they did point out in this first certificate here at issue that they were cutting down the certificates from 100% to something less.

And as a matter of fact, they suggested 25%.

William J. Brennan, Jr.:

But did they say anything?

My — my question is, was there any suggestion that that was going to make a tax difference, a difference in treatment for tax purposes?

When did you first learn that?

Harvey W. Peters:

Well, I presume we learned it by force of the fact that this certificate was addressed to the Commissioner of Internal Revenue.

It wasn’t addressed to us, and we got a copy of it.

William J. Brennan, Jr.:

Well, I — I still don’t quite understand when it was you first appreciated that —

Harvey W. Peters:

Well, I would presume when we received the certificate, the copy of the certificate.

William J. Brennan, Jr.:

And that was about the time before the construction was done or any of it?

Harvey W. Peters:

Yes.

That is correct, Your Honor.

William J. Brennan, Jr.:

And you had an idea then that there might be a different tax consequences.

Harvey W. Peters:

We would be shut down.

That is correct.

William J. Brennan, Jr.:

But you did nothing, I gather, until that time.

Harvey W. Peters:

We did nothing at that time.

Of course, one should appreciate that this company, like many others, was busy in producing these things and in getting the facilities created.

Now, if I could, I’d like to speak just a moment on the alleged reason for this change of principle.

Felix Frankfurter:

May — may I —

Harvey W. Peters:

Yes, Mr. Justice.

Felix Frankfurter:

— trouble you by interrupting to ask?

Did I understood you right — the right to say that the Commission of Internal Revenue could have made the reductions.

Harvey W. Peters:

He could to the extent that we didn’t follow our original application, Mr. Justice Frankfurter.

Felix Frankfurter:

But he couldn’t, on the merit, to say this is not for war purpose or certainly not as the dollar —

Harvey W. Peters:

Yes.

As a matter of fact, he did in one case.

Felix Frankfurter:

And you have acknowledged that he has such power?

Harvey W. Peters:

Oh, yes.

In the case of Arkansas — let me cite this, Arkansas-Oklahoma Gas Company 12 — Tax Court 1208.

The taxpayer had a certificate of necessity covering intangible drilling and development cost of gas wells.

Nevertheless, the Tax Court held amortization of such cause was not allowable even though the taxpayer had a certificate because it didn’t fit of the description of the law.

Felix Frankfurter:

Well, if I will be a little bit that the Commission of Internal Revenue should have that power?

And yet, it should be denied to the body peculiarly adopted to make such a decision instead of an existence in part for determining such facts (Inaudible)

I mean, whatever the statute that doesn’t allow it doesn’t allow.But in construing the statute, I must say I should be influenced by the statute.

The Commissioner of Internal Revenue influence or (Inaudible) —

Harvey W. Peters:

Your — Your Honor —

Felix Frankfurter:

— what that body was (Inaudible)

Harvey W. Peters:

— there is no doubt in my mind that the Commissioner of Internal Revenue had the final authority to decide whether or not you complied with your application, what your cause were.

In other words, it is easy to be presumed that some taxpayers might have loaded this facility cost and tried to charge everything in there.

And it — it was the — within the discretion of the Commissioner to take out whatever didn’t belong in there, particularly, where your building.

As I mentioned before, the Allen-Bradley Company was building a special machinery in its own shops.

Well, obviously, there’s quite an accounting question there as to what part of cost were applicable to those machines.

Stanley Reed:

But that doesn’t mean that the Commissioner had any authority to determine whether they were appreciable or not, assuming that they had lived up to the certificate.

Harvey W. Peters:

It is our position that that is the distinguishing element.

The Commissioner of Internal Revenue had nothing to do with the determination of the physical necessity in the facilities.

That is the point exactly.

Now, we are not denying, and I’d like to emphasize that.

We are not denying that the certifying authority had the right to say that certain of these facilities were partially — partially necessary for the war effort and partially not necessary.

To explain that, let’s assume we had 100,000 square foot of factory floor area and 25% was going to be an employees recreation room.

They might have said, “Well, that part is not a defense facility,” but that has nothing to do with the cost factor that’s here involved.Now finally, in 1943, they say that because we had such an inflation in our productive facility that the Government decided there were some post-war use they want to capture.

Now frankly, I submit that’s somewhat awkward if not ridiculous.

If in 1940, our productive facilities were overbuilt and Congress recognized the fact, well what was it in 1943 or 1944 when 10 or 12 billion more had been added?

And just how could we ascribe a post-war use after seeing the 10 or 12 billion more of facilities added to the pile.

One last point.

There has been some comment in the briefs that this is unfair.

Now, what was the incentive under this amortization privilege?

Harvey W. Peters:

It was the possibility of having a usable plant after the war was over.

I’m not going to deny that.

I’m going to insist upon it, because the Second Revenue Act of 1940 said, “We will take every cent of your income above normal.”

In other words, if you are a corporation or some other employer and you’re going to put five million more in — in additional plant, the Second Revenue Act and succeeding Revenue Act said, “We are going to take every cent of that income.”

Well, where was the incentive for building a million dollar plant?It was exactly in this amortization provision.

In other words, since your income was 85% taxable anyway, you could, by building a million dollar plant have an actual cost of $150,000.

At the end of the war, that plant might be useless, but at least you would have suffered nothing but that you would have had a new plant at a cost of $150,000.

Thank you.

Earl Warren:

Mr. Zarky.

Oh — oh pardon me.

Pardon, I thought that — is there more time here to —

(Inaudible)

Earl Warren:

Oh, oh, on the other side.

Yes, of course.Of course, the case is the other way, it isn’t this time.