Warren E. Burger: Mr. Levenson, you may proceed when you are ready.
Daniel D. Levenson: Mr. Chief Justice and may it please the Court. This case focuses on Sections of the Internal Revenue Code, dealing with personal holding companies and corporations which unnecessarily accumulate income. These special provisions have been placed in the code to deal with the shareholders of those companies who wish to accumulate income in a corporation. Such accumulation would thereby shield the corporate profits from the second tax at the high tax rates imposed upon the recipients of dividends. Until 1921, Congress dealt with these shareholders directly by taxing them on their pro rata share of corporate earnings, regardless of whether or not those earnings were distributed to them. However, after this Court’s decision in 1921, in the case of Eisner v. Macomber, doubts arose as to the constitutionality of such a direct taxing scheme. Therefore, Congress provided an alternative method. It allowed the shareholders to determine if they wish to account for their corporate profits and their incomes directly whether or not distributed, but failing that, Congress created an incentive to encourage corporations which had been determined to be unnecessarily accumulating their income to actually make distributions of the unneeded income to their shareholders which could then be taxed at the individual rates. Congress did this by imposing what it thought to be a virtually confiscatory tax on the undistributed income of these corporations and then by providing a deduction for dividends distributed to shareholders which directly reduces the income subject to the additional tax. It is this dividends paid deduction which is at issue in this case. Specifically, the question involves the determination of the amount of the deduction when a corporation distributes a dividend consisting of property rather than cash. The government maintains that the fair market value of the property at the date of distribution should be totally disregarded, even though the shareholder who receives the property is taxed in full on that value. The government has done this by promulgating Treas. Reg. 1.562-1 (a), the regulation involved in this case, which regulation states that when property is distributed by a corporation, the dividends paid deduction shall equal the properties adjusted basis, not its fair market value. We maintain that this regulation as it pertains to this case is inconsistent with the Internal Revenue Code, is arbitrary, totally without statutory or legislative support and leads to irrational results. For those reasons, we submit that the regulation should be declared to be invalid.
William H. Rehnquist: Do you know when this regulation was promulgated Mr. Levenson?
Daniel D. Levenson: In 1958, the final regulation, Your Honor. The basic thrust of both the personal holding company and accumulator earning taxes has always been the same to force distributions from the business to be taxed again in the hands of the shareholders
Speaker: But this rule has always been the same too, has it not?
Daniel D. Levenson: No, it has not it Your Honor.
Speaker: I thought the rule before the 54 code was the same?
Daniel D. Levenson: The rule prior to the 1954 code was to allow a deduction for the lesser of the adjusted basis or the fair market value of the property distributed.
Speaker: So it would work the same in this case?
Daniel D. Levenson: In this particular case, the regulation, the law --
Speaker: The rule came before the 54 code as it is known?
Daniel D. Levenson: Yes, but not in general.
William H. Rehnquist: Pre 54, you had to take the worse, the worst of the two deals, the tax payer; post 54, according to the government, you take the adjusted basis whether it is higher or lower then the fair market value?
Daniel D. Levenson: Yes, Your Honor and that is what we will elaborate on further in our argument, that in fact the government’s rule does not create more tax, does not create more equity, but in fact we will demonstrate that it creates a loophole through which corporations and shareholders who are the owners of those corporations with highly depreciated property can create a tax loss --
Speaker: And there the revenue, you should have a greater deduction in this case?
Daniel D. Levenson: No, Your Honor, that is not the basis for our argument. Our argument will be based upon the meaning of the code as we have divined it from the committee reports, not having to do with the equity or inequity of any particular rule.
Speaker: In view what you say, why do you suppose the government is taking a position it is in this case?
Daniel D. Levenson: We have fought long and hard on that Your Honor and we think without any way to prove its correctness that the government regulation, writing the treasury in 1956 when these regulations were proposed, saw the typographical error in the committee reports dealing with Section 562. That typographical error has been referred to in our briefs and in particular in the opinion of the district court judge in this case. The typographical error refers in a senate report to Section 312. That was the original Section in the House Bill that dealt with “definition” of a dividend. When the senate did its work on the code, it changed the numbering, changing the numbering of that particular Section dealing with the dividend from 312 to 316. Somehow the reference to 312 remained in the report. Now, what we have also done is to track down in the actual senate amendments which can be found in the Congressional record, the technical wording of the amendment which said regarding Section 562 change all references 316 to 312. So to answer your question specifically, I do not know the reason. I can only guess that someone was confused by the Section 312 reference, saw the provisions of Section 312, which talks about the reduction of earnings and profits only by adjusted basis and wrote the regulation accordingly.
Speaker: 312 should be read as 316, should not it?
Daniel D. Levenson: In the committee reports it should be read as 316 we maintain, yes. To relieve the corporation of a penalty tax by providing a dividends paid deduction to the same extent that a shareholder receives taxable income is not only symmetrical, but also accurately reflects the basic statutory purposes of these laws in a specific statutory relationships of the 1954 code. If the deduction is greater then the amount taxed to the shareholder then there would be no incentive to distribute the full amount intended to be distributed by Congress. A deduction for less then the amount taxed to the shareholder would require corporations to distribute property with a value in excess of the amount subject to tax. We submit that neither result is consistent with Congressional purpose. Now, it is clear from the legislative history of the 1954 code that Congress envisioned a coherent, integrated system of corporate shareholder taxation. As part of this scheme, it refined the definition of the term dividend to be a very precise term of art. It might be useful to think of a dividend as a molecule, having several atomic components, each of which is absolutely necessary to the character of the final product, namely a dividend. First there has to be a distribution. That distribution must be a distribution covered by Section 301 of the code. Then there must be -- that distribution must be of property as that term is defined in Section 317 A of the code. The amount of the distribution must be determined as set forth in Section 301 (b). Finally the corporation must have earnings and profits calculated as indicated in Section 312.
John Paul Stevens: Mr. Levenson, on that point, supposing the corporation has earnings and profits that exceeded the adjusted spaces of the dividend that are not as great as the market value of the dividend, would the dividend be permissible under your theory?
Daniel D. Levenson: It would be fully, if the earnings and profits exceed the fair market value.
John Paul Stevens: No, the other way around. The fair market value exceeds the earnings and profits, but the earnings and profits exceed the adjusted basis?
Daniel D. Levenson: Then that portion of the appreciation on the property arising from the adjusted basis level to the earnings and profits level that amount will be taxable as a dividend to the extent that there is an excess of appreciation.
John Paul Stevens: You say taxable as a dividend?
Daniel D. Levenson: To the shareholder.
John Paul Stevens: For the whole, under your theory the whole market value is taxable under either way?
Daniel D. Levenson: Only to the extent of earnings and profits Your Honor.
John Paul Stevens: I see.
Daniel D. Levenson: This point in fact is recognized by the government in its regulations under Sections 316 and 312, which are foot noted on page 4 of our reply brief and from those regulations you can see the inter-relationship of these various terms in both of those two code Sections and you see how the relationship of earnings and profits, fair market value and adjusted basis relate to each other in determining the tax consequences to the shareholder.
John Paul Stevens: Let me change my example. Assume the earnings and profits are sufficient to exceed the market value, what kind of an accounting adjustment does the corporation make on its books to keep the balance sheet, the assets and liabilities equal when they distribute more then the book value of the --
Daniel D. Levenson: If the earnings and profits exceed the market value, then the earnings and profits account would be adjusted only for the adjusted basis of the property distributed.
John Paul Stevens: Right, and what happens on the corporate books to the difference between the adjusted basis and the market value under your view?
Daniel D. Levenson: There would be no adjustment on the accounting records of the corporation because the appreciation on the property was never reflected on the balance sheet of the corporation
John Paul Stevens: But they get a deduction as I understand you for the full market value of the asset?
Daniel D. Levenson: Only to the extent of the earnings and profits, Your Honor.
John Paul Stevens: But I am assuming the earnings and profits are greater?
Daniel D. Levenson: That is correct. They get a deduction for this special tax.
John Paul Stevens: It seems to me that your asset and liability ratio may change by the difference between adjusted basis and market value?
Daniel D. Levenson: For the purpose of the normal taxation of the corporation and the calculation of its earnings and profits account, the result would be as I indicated, only the adjusted basis of the property would be reflected as a diminishment of the earnings and profits. For this special tax which has nothing to do with the normal corporate accounting, that is the balance sheet that you might read at the end of the year, it has no effect.
John Paul Stevens: So there have to be really a difference in tax accounting and normal accounting to carry out your theory?
Daniel D. Levenson: For the purpose of the special tax, it certainly would be. Our point is that if it is not a distribution covered by Section 301, it cannot be a dividend. If there are not any earnings and profits, it cannot be a dividend. If the distribution is not of property, it cannot be dividend. Every requirement has to be met. Each of the component Sections can only be understood by reference to the others. It was this unitary integrated concept that Congress referred to in Section 562, when it stated that for the purpose of a dividends paid deduction, the rules of Section 316 encompassing all of these concepts of that go to make up a dividend, that the rules of Section 316 would be used to determine what is a dividend, specifically for the purposes of defining what would be included as a dividend paid deduction. Now, this scheme of statutory inter-relationships is made even clearer by reference to the statutory history of 316 in 1954 code, which is discussed in part 2 of our main brief. The government has not yet replied to the arguments contained in Section 2 of our brief, possibly we will hear it on reply. Also as I mentioned before, the regulations promulgated under Section 316 and 312 further indicate the integrated nature of these code Sections. There is no reason indicated in the Internal Revenue Code or in the committee reports why the valuation of a dividend for the purposes of the personal holding company or accumulated earning taxes should be different from the normal rules applicable to corporate distributions quite to the contrary, instead of annunciating a separate rule, as under the Internal Revenue Code of 1939, Section 562 refers to Section 316 as stating the basic criterion of whether or not a distribution qualifies for the dividends paid deduction. The adjusted basis rule which is the rule urged by the government in its treasury regulation is completely irrational. The fact of the matter is that the adjusted basis of property bears no consistent relation to a corporation’s earnings or realized investment income. Not all assets purchased by the corporation or owned by the corporation are purchased by the corporation. Assets may be acquired by contribution to capital. They may be acquired by tax free reorganization or in a myriad of other ways. For example, the basis is often reduced each year of depreciable property by that bookkeeping adjustment which we know is depreciation. The rate and method of depreciation, however, can often be elected by the tax payer within certain parameters set out in the Internal Revenue Code.
Warren E. Burger: Is there any way of escaping this kind of artificiality and this sort of process?
Daniel D. Levenson: We suggest Your Honor that the way to escape the artificiality of this process is to allow a dividends paid deduction for the value of the property which in fact is distributed, whether that property is marketable, whether that property is not marketable.
Warren E. Burger: But the tax payer may properly and lawfully take steps and take decisions which will minimize or even avoid tax liability, may he not?
Daniel D. Levenson: Of course he may and we are suggesting that he be given the opportunity to determine which property to distribute from a corporation based upon only the criterion that the property have the value necessary to carry out the equivalent of the corporations improperly accumulated income, be it a personal holding company or a corporation subject to the accumulated earnings tax. We say that property with the same market value, but with vastly different adjusted basis can be distributed by two different corporations. The tax impact on the corporation should not be dissimilar when the tax impact on the shareholders is the same. As I mentioned earlier in our argument, the government's rule creates a significant loophole.
John Paul Stevens: Mr. Levenson that kind of fundamental proposition, why is that so, in the normal case the tax impact of a dividend is zero with respect to the corporation, but it creates a tax obligations on behalf of the party receiving the dividend? Why is there this need for dissimilarity that is crucial to your case?
Daniel D. Levenson: Because of the nature of the special tax Your Honor. The tax as we indicated was enacted first in the 1913 Revenue Act and consistently thereafter to force corporations to distribute out income to the shareholders. Now, after 1921, the vehicle used were these taxes which were designed to impose a penalty of such an amount as to force the corporations or induce the corporations to distribute the money out by allowing a dividends paid deduction. It is that incentive that is at work here that we wish to have the market value of the property be the measure of the dividend paid in property. We feel that that satisfies the statutory and historical philosophy behind these taxes.
Speaker: What is directly at issue here is whether or not there remained undistributed personal holding company income after this stock was paid out as a dividend?
Daniel D. Levenson: Yes sir, Your Honor.
Speaker: Within them -- as I phrase, is defined in the law?
Daniel D. Levenson: In this case what actually happened as shown in the appendix is that the stock holders of our client received marketable securities of a value in access of their cost to the corporation, paid the normal income tax, allocable to --
Speaker: As shareholders --
Daniel D. Levenson: As shareholders based upon the value of the property when it was distributed.
Speaker: Right.
Speaker: But the enhancement of the property had never been reflected on the corporate books as income?
Daniel D. Levenson: It had never been reflected on the corporate books as income.
Speaker: And if you – and the income that has been made and has been reflected on the corporate books will not be taxed, will not be distributed if you get this deduction at the market value?
Daniel D. Levenson: The second part of your statement Your Honor, I do not believe is the way that Congress intended to look at these taxes. Congress was intending not to -- was intending to tax the shareholders on an amount equal to the amount which the Internal Revenue Service determined was improperly accumulated.
Speaker: Right.
Daniel D. Levenson: That amount is set --
Speaker: But the earnings that are then accumulated on the books and reflected on the books remain in the company?
Daniel D. Levenson: Our point is that the earnings reflected on the books are reflected only on the books, that is they are a bookkeeping entry.
Speaker: But they have been earned?
Daniel D. Levenson: They have been earned, but they have been invested in other assets Your Honor. They have been invested in real estate, in stocks, in equipment, machinery whatever and that --
Speaker: But they are subject to the ordinary corporate income tax?
Daniel D. Levenson: Yes, they are.
Speaker: And they remain in the company undistributed?
Daniel D. Levenson: But they – although they remain the company undistributed, they nevertheless are available to be distributed upon a subsequent distribution. There has been no overall tax avoidance by the shareholders by giving effect, if you give effect to the rule for which we contend.
Speaker: The other way of looking at it would be had those earnings been paid off, then this capital gain would have remained in the company undistributed?
Daniel D. Levenson: The capital gain was never intended to be taxed by the Congress. In fact, Section 311 of the Internal Revenue Code specifically states that property may be distributed by a corporation, the general rule is that the property may be distributed without the corporation, without --
Speaker: Without recognition of gain or loss?
Daniel D. Levenson: And that was a valued judgment made by Congress in 1954 following a decision of this Court I believe in the General Utilities case in the 40’s or 30’s, I am not sure which.
Speaker: What’s the Ivan Allen case had to do with your case, does it help you or hurt you?
Daniel D. Levenson: We believe that the Ivan Allen case helps us Your Honor because the majority of this Court in that case recognized that the value of the marketable securities held by Ivan Allen company were be considered in determining whether or not income had been accumulated beyond the reasonable needs of the business. We believe that the recognition of the fair market value in Ivan Allen for purposes of computing what should be taxed that that should also apply to the other side of the coin in determining the value of the dividends being paid out by the corporation. We find a symmetry in the reasoning of the majority in that case and our position in this case. I would like to call to the Court's attention the loophole created by the government's rule which can best be recognized by referring to the General Securities case which we cited in our main brief. That being a case in 1930’s where property with a very high basis was just and a low value was distributed, the Court prior to the 1936 Act, this is the distribution occurred prior to 36 Act, the Court refused to give a credit for the basis of the property and rule that the fair market value was the basis for the credit to be given to the Court, to the distributing corporation. The adjusted basis rule argued for by the government has never appeared in any statute and as we pointed out in our brief, it is quite different from the rule that was in existence prior to 1939. I might also call the Court's attention to the explanation in the case of C. Blake McDowell, of the concurring judge, it is a tax court case, judge Gogh (Ph) reported that 27 (d) came into the law in order to plug a loophole involved -- which involved inter-corporate distributions of property, that was the reason why 27 (d) -- [Recess]
Warren E. Burger: Counsel you may continue.
Daniel D. Levenson: Mr. Chief Justice and may it please the Court.
Speaker: Mr. Levenson may I ask you is there any special reason for making this distribution in property rather than cash?
Daniel D. Levenson: The reason was Your Honor that the value of the property was sufficient to take out all of the personal holding company income determined by the government. The failure to sell the property of course saved the corporation the capital gains tax that would otherwise they have had to pay.
Speaker: And it kept cash in the company?
Daniel D. Levenson: Yes, it --
Speaker: Other assets?
Daniel D. Levenson: It kept other assets in the company, but that would have been the case if these assets --
Speaker: (Voice Overlap) in the company?
Daniel D. Levenson: Your Honor, I would like to go back to the comments that you made concerning earnings a short while ago, questions. A distribution can never be traced to a specific earnings account. An earnings account in that nature just does not exist. We discussed that point in our reply brief and would like to again call your attention to the point that we made in footnote 1 on that issue. Earnings and profits are not a separate bank account, they are not a separate piece of property than us, nor a separate anything. They are historical record of corporate success or failure. Any distribution stuck to shareholders is, the taxation of any distribution to shareholders is based upon that historical record, that is what earnings and profits are. Whether the money that or property which is actually distributed came originally from earnings or from stock subscriptions or from property acquired in a tax free re-organization, that is completely irrelevant.
Speaker: But you know that the appreciation in this property has not been reflected in that historical record?
Daniel D. Levenson: That is correct Your Honor, but Congress made the valued judgment in Section 311 of the code not to tax appreciation on property distributed by corporations. So that it is not, it is not a tax avoidance maneuver that is -- was engaged in by this tax payer in making such a distribution.
Speaker: It is prior to 54 Congress had made a judgment that in circumstances like this, on these facts the deduction would be at the book value?
Daniel D. Levenson: To fully understand --
Speaker: Is that not true?
Daniel D. Levenson: That is true Your Honor.
Speaker: And you suggest that there is evidence that Congress did not intend that into the 54 code?
Daniel D. Levenson: We submit that Congress did not intended in the 54 code, but to answer your comment more specifically, I think it is important to note the reason why 27 (d) was incorporated into the Internal Revenue Code prior to that time because that has obviously given everyone a great deal of trouble in the consideration of this case.
William H. Rehnquist: This is in the 39 code?
Daniel D. Levenson: Well, it came into effect in 1936, carried over in the 39 code which was merely a recodification of all its existing internal revenue loss at the time. It did not involve a value judgment in compiling the 39 code which Sections were good and which were bad as did the 54 code. There is a provision, there was a provision in the law which allowed corporations to distribute property to another corporation. The recipient corporation would receive that property as a dividend, take it into account, take as its basis the market value on the date of distribution, pay no tax upon that inter-corporate dividend distribution because of an inter-corporate dividends received credit, sell the appreciated property, thereby taking, having no tax imposed upon all of the gain. What Congress chose to do in 1936 in the context of the undistributed profits tax that was enacted in that year was to restrict the dividends paid deduction to the lower of the adjusted basis or value. Now, in the 54 code what Congress did to achieve exactly the same result was to distinguish between the tax effects to a corporate and a non-corporate distributee upon receipt of a dividend from another corporation.
Speaker: Was this any corporate distributee or an affiliated corporation?
Daniel D. Levenson: Any corporate distributee.
Speaker: Any corporate distributee?
Daniel D. Levenson: Yes sir. We would like to conclude that the rule advocated by the government is neither reasonable nor consistent with the intent of Congress. It is not justified by the provisions of the code. It is not justified by resort to legislative history. In short, the regulation in question we believe represents an arbitrary extension of administrative authority and should be struck down as an attempt to legislate by regulation. The statutory direction is that for all purposes of the Internal Revenue Code, a dividend is defined by Section 316 and its component parts, thank you.
Warren E. Burger: Mr. Paup?
Michael L. Paup: Mr Chief Justice and may it please the Court. The only issue here is whether Section 1.562-1 (a) of the regulations is valid. These regulations of course provide that a personal holding companies, dividends paid deduction with respect to a distribution in kind should be determined by the corporation's adjusted basis, generally it is investment in the property distributed. We submit that the First Circuit below was entirely correct in holding that the regulations we are consistent with the objectives and terms of the revenue act and were indeed consistent with congressional intent. To begin with, this Court has often held that great difference should be accorded to interpretations given a statute by the officers charged with its administration. Indeed this Court has held that treasury regulations must be sustained unless plainly inconsistent -- unless unreasonable and plainly inconsistent with the revenue statutes. The present regulations cannot be held deficient under those standards. In our view the whole of petitioners argument that these regulations are invalid is premised on an unhistorical and over simplified view of the personal holding company and accumulated earnings taxes. Essentially, petitioner's argument begins with a premise that personal holding company and accumulated earnings taxes were designed to discourage the use of corporate vehicles as a means of avoiding the progressive tax applicable to shareholders. It then notes that individual shareholders are taxable upon the full fair market value of the property they received from corporations as a distribution in kind. The argument then jumps to the conclusion that the only measure appropriate for determining the corporate dividends paid deduction is the measure used to determine the amount includable in shareholder income. That argument cannot be squared with history. Historically the personal holding company tax and the dividend paid deduction first came into the code in 1934. At that time, the Congress did not define specifically the effect a distribution of property in kind would have with respect to the corporations dividend paid deduction. The 1936 Act, however, soon filled that gap. In 1936, the Congress passed Section 27 (c), a Section later recodified as Section 27 (d) of the 39 code and in that Section it explicitly provided that a corporation's dividend paid deduction with respect to a dividend in kind should be determined by the lesser of basis or fair market value. That rule enacted by Congress in 1936 then would provide exactly the same result as the rule under the regulations would effect with respect to this tax payer. As part of the same Revenue Act, the Revenue Act of 1936, Congress also defined exactly the effect a distribution in kind would have upon individual shareholders, shareholder recipients. In section 115 (j) of the 36 Act, Congress explicitly provided that shareholder recipients of distributions in kind should include those distributions in their income to the full extent of the fair market value of the property received. In the face of this history, it is a little difficult to conceive how petitioners can now argue that the purpose of the personal holding company tax would be fully served by a rule that keys corporate dividends paid deductions to the amount includable in shareholder income. Obviously, when Congress faced the question in 1936, it concluded that such a rule would not fully serve the purpose of the personal holding company to tax, Specifically, these taxes, the personal holding company tax and the accumulated earnings tax attached an undistributed or accumulated taxable income. Those income items specifically encompass only fully realized income items, income items realized and recognized at the corporate level. The rule tax payer advocates here would permit a deduction with respect to those realized, fully recognized income items with respect to income items that have never been realized at a corporate level.
Speaker: Is it your position that the basis should be taken as the value of the distribution whether the basis is higher or lower than the present market value?
Michael L. Paup: That is what the regulation provides, Your Honor, yes.
Speaker: Why is the -- is there any fiscal advantage to the government in the position you are taking?
Michael L. Paup: Well, clearly the law applicable under the 1936 Act would generate more revenues particularly with respect to distributions of property that it depreciated in value while held by the corporation so it is fiscally disadvantageous, but we think it is consistent. The --
Speaker: So you are just up here upholding regulation as a matter of law and legal duty?
Michael L. Paup: Well, no. I think it is logically consistent with the focus of the tax, it is in accord with congressional intent, it is consistent with the treatment of distributions at the corporate level for various other tax purposes as well. It is --
Speaker: Right, both briefs speak intent of the personal holding company tax and of the accumulated earnings tax. Is it necessary to analysis of this problem to consider them together or would it not be easier to isolate this tax, so what we are talking about here is whether or not they remained undistributed personal holding company income within the meaning of the statute after this distribution, that is the precise question?
Michael L. Paup: That is the precise question here involved, Your Honor.
Speaker: Yeah.
Michael L. Paup: And I think --
Speaker: Whether he is rather complicated than petitions of the Internal Revenue Code and under none other?
Michael L. Paup: That is true. That is precise question here involved, but I think it is instructive to know that the dividend paid deduction also applies to the accumulated earnings tax and equally had this been an accumulated earnings tax problem, the corporation here faced accumulated earnings would have remained accumulated at the corporate level.
Speaker: For different tax there would be different problems, but we are dealing here with a personal holding company tax?
Michael L. Paup: Oh! The result is same though in either case, Your Honor .
Speaker: We are dealing here with what is in effect a Confiscatory Tax upon a corporation defined as a personal holding company tax, that if a personal holding company, unless the corporation makes distributions to its shareholders and we all know what the purpose of it was back in 1934, was to get away from incorporated yachts and race horses and so on?
Michael L. Paup: And pocketbooks yes Your Honor. In our view, the only thing, the only hope tax payers have of winning this case is to convince the Court that somehow the thrust of the personal holding company tax changed drastically in 1954. We do not think that anything they have cited either in brief or in oral argument indicate such a drastic shift in the focus or the intent of the tax. Quite clearly nothing in the literal statutory language of the 1954 code evidences an intention to shift the focus of the corporate dividend paid deduction away from the effect that distribution has on the corporation to the effect that distribution has upon shareholder income. Indeed such a --
Speaker: The rule did change in 54, did it not?
Michael L. Paup: The regulation provided a slightly different rule from --
Speaker: Not for this case, but --
Michael L. Paup: Not for this case, no.
Speaker: Well, a quite different rule--
Michael L. Paup: Quite different rule for distributions with respect to property that it depreciated.
William H. Rehnquist: Before the tax payer got the worst of whichever world there was --
Michael L. Paup: That is exactly right.
William H. Rehnquist: Now, he gets a fixed one whether it be better or worse than the other?
Michael L. Paup: That is right.
Speaker: Now, did they -- in publishing their regulation, apparently the government divined that this was the congressional will or just that this sort of an interpretation of the statute was permissible?
Michael L. Paup: Well, specifically I think they divined that this interpretation of the statute was permissible and I think further --
Speaker: But – well, there is a difference in there as well as this was specifically was Congressional intent, was the Congressional intent or whether Congress intended to give an area of discretion in drafting the regulation?
Michael L. Paup: Well, I think basically, the shift in the regulation in our view is that the legislature history underlying the 54 code indicates that Congress intended to carry over Section 27 (d). Now, there are certain counter indications.
Speaker: But that is not what the regulation indicates?
Michael L. Paup: No Your Honor, these -- there are --
Speaker: What is it -- what in the legislative history do you submit indicates that Congress intended to change the rule a little bit as you say?
Michael L. Paup: Specifically, in discussing the dividend paid deduction, the Senate Report makes a reference to Section 3 (12) of the code. Now, we do not give that reference to Section 3 (12) of the code as a mere typographical error. There are certain ambiguities in the legislative history will grant. Section 3 (12) of the code of course provides for an adjustment at the corporate level, exactly the same as and exactly equal adjustment at the corporate level with respect to distributions in kind as does the present regulation. Further we think that the rule adopted by the regulation is consistent with really the thrust of the taxes involved as you have pointed out. The thrust of the taxes involved is looking towards a distribution of personal holding company income to the extent a corporation distributes property in which it has invested personal holding company income presumably. It effects the distribution exactly equal to the amount of this investment. Therefore, we think the regulation not taking into account depreciations and value, is entirely consistent with --
Speaker: Even where it depreciates?
Michael L. Paup: Yes, that is right Your Honor because that depreciation has never been reflected on the corporate books.
Speaker: Yes, but although it reflects an investment of income at the amount that the property costs?
Michael L. Paup: That is exactly right. It is carried on the corporate books at exactly its cost basis.
Speaker: Does the tax payer encompass any other avoidance by distributing in property rather than cash, then the capital gains tax that you concede that you would?
Michael L. Paup: Well, under the facts of this case, it appears not.
Michael L. Paup: It is just the capital gain tax, although other records are little vague.
Speaker: And this is one where he wins or not on the valuation question?
Michael L. Paup: Well, that is true, yes. Inevitably he is going to avoid capital gain tax at the corporate level, Section 3(11) and this Court’s opinion in General Utilities make it clear that no income is recognized to the corporation upon the distribution.
Speaker: Unless he also avoids personal holding company income, does he not, he avoids distributing it?
Michael L. Paup: Oh! He avoids distributing personal holding company income, well, only if he wins.[Laughter] If he looses then the tax will attach to the amounts of personal income, an income which we say remains undistributed. Well, so return to the 54 code revision, the statutes themselves, the literal terms of the statute do not preclude adoption of the “adjusted basis” rule, petitioners even concede that on brief. Neither Section 562 of the code nor Section 316 of the code provides a rule for valuing the effect of the distribution in kind at the corporate level. There is certainly nothing in the committee reports that reflects an intention on the part of the Congress to shift the emphasis or the focus of the dividend paid deduction, completely away from the corporation. Indeed there are certain contrary indications as I have pointed out, specifically the reference to the 300 code provisions, we think and more particularly the reference in the Senate Committee Report to Section 3 (12) gives certain legislative warrant for applying the Adjusted Basis Rule under these circumstances. And more to the point, as a practical matter that is the logical rule that should be applied, that is the distribution out of the corporate channel, for both accounting and tax purposes, other tax purposes.
William H. Rehnquist: Well, then you say 27 (d) was illogical?
Michael L. Paup: 27 (d) we think reflects a punitive, almost a punitive go with respect to distributions of property that had depreciated. The net effect of that Section is to require either that personal holding company realize losses at the corporate level and actually realize a diminution in corporate assets or distribute more of its invested property, more of its invested earnings than it has undistributed personal holding company income in order to obtain a deduction equal to the amount of its personal holding company, undistributed personal holding company income. So in effect it reflects a Congressional goal to see the ante of these personal holding companies.
Speaker: Well, the -- the whole personal holding company, all of the provisions are punitive in a sense and they take away any incentive to incorporate your (Inaudible).
Michael L. Paup: Oh! There is no doubt about that.
Speaker: And in that sense at least there were punitive provisions?
Michael L. Paup: Well, they are healthy inducement to distributions of realized personal holding company income.
Speaker: And remove any incentive whatsoever really to incorporate --?
Michael L. Paup: Practically speaking, yes. We do not find anything in either the legislative history or in this Court’s opinion, in Ivan Allen which runs contrary to our position here. And I --
Speaker: But you think the bearing of the Ivan Allen case --
Michael L. Paup: On the specific problem here, there is no direct bearing, but I think certain dictum in the Court’s opinion clearly supports the result here. This Court was --
Speaker: Both you and your brother on the other side of the table, at the other table, more or less rely on Ivan Allen, each of you thinks it gives you at least some support?
Michael L. Paup: Yes Your Honor, I think it does give us some --
Speaker: And how and why?
Michael L. Paup: As this Court pointed out, the accumulated earnings tax specifically involved in Ivan Allen attaches only to realized income items, on realized appreciation figures, not of the all in the computation of actual tax liabilities. We think almost by partitive reasoning that unrealized appreciation ought not to figure any deduction in that it is critical to the computation of a tax, attaching only the realized income items. Now, under this Court’s opinion in Ivan Allen unrealized appreciation is important only in determining whether a corporation has a reasonable business need to accumulate fully realized income items. That effects only the purpose of the accumulations, not the computation of the taxes involved. We think the clearly indicates that unrealized appreciation ought not to figure in the computation of the taxes and under our rule that under unrealized appreciation does not figure in the computation. Petitioner’s rule on the other hand would permit a deduction from realized income items for appreciation that is --
Speaker: Unrealized?
Michael L. Paup: That is never been realized, never reflected on the corporate books.
Speaker: It would permit a deduction for unrealized?
Michael L. Paup: Exactly.
Speaker: Not realized?
Michael L. Paup: No, I am sorry, I intended the say unrealized.
Speaker: But Ivan Allen does stand to the proposition that in computing accumulated earnings and profits, the tax payer must take into account the unrealized appreciation of the security --
Michael L. Paup: I do not think it really stands with that proposition, Your Honor. It stands for the proposition that in determining whether a tax payer has reasonable business need to accumulate any further fully realized earnings and profits, certain unrealized appreciation in investment --
Speaker: Must be taken into account?
Michael L. Paup: Can be taken in to account.
Speaker: Well, must be I think?
Michael L. Paup: Yes, must be, provided only that it is readily liquid --
Speaker: Right.
Michael L. Paup: But it -- that unrealized appreciation does not figure into the measure of the accumulated taxable income subject to the tax, as this Court’s opinion carefully points out, and we think since it does not figure in the computation of the income subject to the tax, equally it ought not to figure in a corporate deduction which operates to reduce that sort of same tax.
Speaker: (Inaudible)
Michael L. Paup: Yes, it is --
Speaker: In a manner of speaking, in a manner of speaking --
Michael L. Paup: Well, it is relevant only to the motive underlying the accumulation of fully realized income. In sum I guess, it is our view that the regulations here represent a reasonable interpretation of the revenue statutes involved. They are consistent with their history. They are consistent with the purpose. That purpose being to force a distribution of unrealized personal holding company income. They are consistent with the terms and focus of the tax involved, that focus being on only realized income items. They are finally consistent with the tax treatment accorded corporate distributions in kind for other purposes, general accounting purposes, accounting for purposes of earnings and profits under Section 3 (12). In our view the First Circuit was correct in sustaining them and we would submit that its decision ought be sustained.
Warren E. Burger: Very well. Mr. Levenson do you have anything further? You have about three minutes left.
Daniel D. Levenson: A comment was made that, a question was asked rather whether Congress intended to give to the treasury an area of discretion in promulgating regulations under the statute. I would like to plan out to the Court that in the Internal Revenue Code in particular when Congress intents to give broad discretionary power to the treasury, it specifically indicates such as in the consolidated return regulations, allocation of income and deductions between tax payers and other broad areas where Congress has stated its policy and says to treasury you fill it in. Those are known as legislative regulations and are usually given great weight by the Courts. My brother says that we, tax payer’s counsel agree that nothing in the code dictates how a dividend in property is to be valued at the corporate level. That is not correct. We do not agree that the code is silent on that. In fact, we state that the code indicates the Unitary integrated concept about which we referred and that this is the same method of evaluation valuing a dividend at the corporate level as at the shareholder level. The regulation does not require that we prove that the property has been purchased with personal holding company income. The corporation can distribute property that has been acquired in any manner. The “adjusted basis” rule does not necessarily reflect personal holding company income, that is the adjusted basis of property. For example, if I had ten central stock of high basis and low value and had a personal holding company, I could, under the government’s rule contribute that stock to the corporation, a non-taxable event, the following year or even may be the same year have that corporation distribute out that high basis property and take away the personal holding company tax potential. And that is the way that adjusted basis can be utilized to defeat the intention of Congress and what should be the intention of the treasury. A comment was made that prior to 1936 there was no valuation rule. We believe that prior to 1936 the courts believed that the value of the dividend was to be the value of the property distributed and it was only in the context of the undistributed profits tax in 1936 that the rule was changed. That it was not changed because Congress looked and thought hard on this issue, but rather it was changed to accomplish the closing of the loophole that I referred to in the main portion of my argument.
Speaker: Well, basically unless you got into inter-corporate distributions, it did not make any difference, did it, for an ordinary corporation because it was not a corporation prior to the penalty on distributed earnings? Could declared dividends out of its earnings and profits in any amount in the discretion of the board of directors?
Daniel D. Levenson: But then the nature of the undistributed --
Speaker: And it was clear that the value to the shareholders was the fair market of what was distributed, it is always been clear, is it not?
Daniel D. Levenson: Where the adjusted, Oh! Excuse me, yes Your Honor.
Speaker: To the shareholders, to the shareholders it is a fair market value of what is distributed from the point of view of their income?
Daniel D. Levenson: That is correct, but the nature of the undistributed profits tax in 1936 was a completely different animal than either of the normal income tax or the penalty taxes.
Speaker: My Point is that before 1936, it did not make any difference. How could it arise from the -- to the corporation as a tax payer?
Daniel D. Levenson: Yes, Your Honor, you are correct.
Speaker: Did not make – it could not -- the issue could not arise vis-a-via the corporation's tax returns, could it?
Daniel D. Levenson: Not under the statutes existing prior to 1936.
Speaker: That is right, that is right.
Daniel D. Levenson: Yes sir.
John Paul Stevens: Mr. Levenson, on your loophole argument, even under the government’s view could not tax the corporation that has stock that has a market value of less than its basis. Simply sell the stock and take the loss and then distribute the money, would it not all come out the same? Am I missing something there?
Daniel D. Levenson: No, if the corporation distributed the residue left after sale --
John Paul Stevens: Right and it took the tax loss because it is selling for less than basis?
Daniel D. Levenson: It might take the tax loss against its normal corporate income tax, but it will not thereby be able to take out all of the accumulated taxable income or personal holding company income under the government’s rule because it will be distributing cash, the proceeds of the sale --
John Paul Stevens: But it would also reduce its income by the loss on the stock?
Daniel D. Levenson: Not under the way, the different ways that capital gains and ordinary income as they --.
John Paul Stevens: Oh! Because the capital loss would not be 100 cents on the dollar?
Daniel D. Levenson: It would not be 100 cents on the dollar, Your Honor.
Warren E. Burger: Thank you gentlemen. The case is submitted.


Earl Warren: Publishers' Association of New York City, et cetera, Petitioner versus New York Mailers' Union Number Six. Mr. Hughes you may continue your argument.
Andrew L. Hughes: Mr. Chief Justice, may it please the Court. At the close of yesterday's session, Mr. Justice Black, you asked me to distinguish between the applicability of Sections 4 and 7, and I think that that really goes to the heart of the merits of the case here. Certainly, Section 7 is broader than Section 4, but I do not think that as Judge Hayes in the Circuit Court felt that Section 7 covers all other cases in labor disputes where something called an injunction by whatever name its known is involved. Because if that were so, then the Lincoln Mills decision of this Court was wrong. It was prohibited by Section 7 and this Court considered that and -- and rejected it and found that there was an area where there could be an injunction in the labor dispute that is not proscribed or regulated by Section 7. I think another case is -- is the Drake Bakeries case of this Court. Now, there was no discussion in this Court of Norris-LaGuardia's application. But there too, we had a labor dispute, we had a stay of a court damage action. And if Section 7 applies to all kinds of stays or injunctions, it would've prevented the Court from issuing the stay of the damage action in Drake Bakeries. The Syres case in this Court where it involved certainly a labor dispute but it involved elements of racial discrimination an injunctive order was allowed in that case again without regard to the applicability of Section 7. The Allen Bradley case where it involved labor unions plus some incidence of the antitrust law was another circumstance. The Virginia Railway System Federations case is another example. So we say that there is an area where injunctive orders, stays and so on can be issued without the scope of the Norris-LaGuardia Act either Section 4 or Section 7. So, we say that the decision in this case on the merits and the -- in our favor here in the Circuit Court reversed on this point without an overruling of -- of the Sinclair case. We -- we say Sinclair should be limited to its precise facts. It should be limited to a true Section 4 case. It should not be extended. The Section 7 application, shouldn't be extended as Judge Hayes extended it to cover all other kinds of injunctions. We think that there are injunctions in proper cases where the Norris-LaGuardia Act has no application because it doesn't come within the kind of things that the Norris-LaGuardia Act was designed to meet and -- and to cope with. Now, I'd -- I'd like to turn to this -- this question of mootness and say a few words with respect to that. The claim of mootness that we have here was created by the union right at the eve of argument, it came after our brief was filed. The member of the Union had filed the charge against the foreman, wrote a letter or signed an affidavit for his Union and said, "I withdraw the charge." But the promise there doesn't run to us. We have no way of enforcing it. We're not parties to the Union proceedings. If they violate that promise, we would have no redress to enforce it except by going back to the Federal District Court where we would have, you know, precisely the same issue that we had here. And the Union did not accept the propositions on the merits that we urge here. They didn't say that they're not going to discipline the foreman. They did not say as we would like them to do and to say that we will not proceed with disciplinary proceedings against the foreman until the issue of the right or wrong of it is decided by an arbitrator. That issue was still alive and we're still very much in dispute over the -- the real issue with this case, the applicability of the Norris-LaGuardia Act. So, we -- we don't have the classic mootness situation where there are in any adverse parties. We have very adverse parties. We -- we have a very strong difference of opinion on the real issue in the case the applicability of Norris-LaGuardia. And, we think that this doctrine of mootness is one that should be applied in the discretion of the Court and should be set aside and not applied wherein all of the circumstances, it's not warranted. And we think that -- that this is such a case. We think this case is very much like the Yellow Transit case that was before the Court at the same time as the Sinclair case. And there, the injunction that had been granted by the Circuit Court or affirmed by the Circuit Court by its own terms would've expired with the running out of the collective bargaining agreement which contained the no-strike provision which was being enforced by the -- the order there. And the collective bargaining agreement did run out and the injunction did by that passage of time expire before the case was before this Court. And instead of remanding the case and -- vacating the judgment of the Circuit Court on the mootness ground, this Court on the merits reversed the decision and -- and we say that that should be done here.
Speaker: (Inaudible) referring on mootness, it had transpired since the case before the Court of Appeals.
Andrew L. Hughes: In -- in our case here?
Speaker: In this case.
Andrew L. Hughes: Yes. What happened was that, after our brief was filed here, the Union either called in the charging party, Mr. Kelly, and Kelly signed an affidavit which is in the Union suggestion of mootness and -- and sort of announced to the Union that, "I withdraw my charge against Kelly". And we say, "Well, there's nothing to stop them from reinstating it if -- if mootness is declared here and -- and (Inaudible)."
Speaker: Yes, I agree.
Andrew L. Hughes: Thank you.
Earl Warren: Mr. Sugerman.
Sidney Sugerman: Mr. Chief Justice and members of the Court. If I may, I should like to address myself at once to the answer just given by Mr. Hughes to Justice Harlan's question. The mootness as we contend occurred on February 4th, 1964 after certiorari had been granted and after the petitioner's brief had been filed immediately before our own brief had been filed. And it occurred by reason of a letter written by I should say, signed by because the wording of it was prepared by myself in my office in the presence of the president of the Local Union. I had called both Mr. Kelly and the president into my office after I've been informed that Mr. Kelly had no further interest in prosecuting the charge against his fellow member, Mr. Rowan and some 15 months having gone by since the incident which gave rise to the dispute between those two gentlemen. And their friendship having been restored, he just had no further interest in the matter. We thought we should call this to the attention of the Court. In it, it said that he not only withdrew the charge but moreover and this appears at page -- page 7 of the suggestion of mootness that he request the Union to cease any further processing of his charge and to terminate all proceedings against member Rowan in connection therewith. Moreover, I shall not make any grievance against member Rowan under the collective bargaining agreement with the Publishers in connection with those incidents. And then appended to that was an affidavit again which I prepared for the president of the Local Union reciting the withdrawal of the charge, the fact that he was dissolving the investigating committee which had been created. He was terminating all internal union proceedings in connection therewith. And in his concluding paragraph, the president of the Union says that Mr. Kelly having assured the Union that he will initiate no further proceedings against member Rowan in connection with or growing out of the incident that he will make no grievance thereon under the collective bargaining agreement. The Union will entertain and take no further proceedings of any kind, whatever against member Rowan, all the Publisher in behalf of member Kelly and in that connection. I don't know a more explicit way of saying that this matter in dispute as between Kelly and Rowan, and out of which grew the dispute between the Publisher and the Local Union was finally at an end and irrecoverably at an end. It could not be reinstituted. The Union so stated it would not process the matter and copies of these were immediate of this letter and that the affidavit were immediately delivered to the Publisher's attorney suggesting to them that the matter has become moot. At any rate, if I may put this case in its --
Speaker: Can I ask you a question?
Sidney Sugerman: Surely sir.
Speaker: Supposing the employee changed his mind, would the Union had to turn to a new complaint?
Sidney Sugerman: It would not sir. The president of the Union has said that he would not -- that the Union would not entertain or take any proceedings upon any further charge growing out of the incidents of August 12, 1962 which had given rise to this matter. Of course it had not pledged itself, never again to process a charge against a foreman member of the Union brought either by Kelly or by anyone else growing out of new incidents. So that the ultimate question the Publisher would like to have decided once and for all is still an open question but one could be decided as we now acknowledge by an arbitrator. And why this Court should be bothered with this question is beyond me frankly. That matter has been arbitrable for the past 16 months. Judge Murphy had ordered the case to arbitration on November 20th, 1962. The Union took an appeal from that portion of Judge Murphy's order as well as from the order enjoining the internal union proceedings. But we had no stay. The arbitration was not pushed by the publisher as it was privileged to advance it. And on May 20th, 1963, the Circuit Court of Appeals affirmed that portion of Judge Murphy's order which compelled arbitrations. We took no appeal from that and we have been awaiting the day the publisher would carry the matter to arbitration. Now, the only substantive question as to whether or not, the mere filing and entertaining of a charge against the member is a violation of that provision in our collective bargaining agreement that we shall not discipline a foreman member for carrying out the management's instructions. The substantive question is one which shall be determined by an arbitrator when and if we ever get to that day. But this, it seems to me and I have suggested this in our papers right along is not what the Publisher desires. It doesn't want the substantive question decided it or else it could've had it decided a year ago. It wants an injunction. That is the end in itself as it appears to us. And notwithstanding and I have difficulty following the contentions of the Publisher from time to time. It says in its -- in its brief and in its petition for certiorari acknowledges that the action that instituted under Section 301 sought the main relief of an order compelling arbitration to which the so-called stay or injunction was merely incidental. Now, it comes to this Court after the mootness question arose and says, "Well, that isn't what we want ultimately. We want to know by a declaration of rights by this Court that we may get an injunction in this type of case." And as Justice Goldberg put it in his question yesterday to Mr. Hughes, it seems that what the publisher wants here is an advisory opinion for the Government of the future affairs between this Local Union and the Publisher in respect to possible disciplining of a foreman and whether or not, the mere filing of the charge constitutes such discipline. Now, we are confident that before an arbitrator, if we ever get there, that will be held that the mere filing of the charge and ministerial investigation of the charge so as to sift the facts and determine whether or not it is what the Union's constitution calls cognizable that is on its face whether the charge is worthy of trial and then ultimately whether it should go to a trial. That that question of whether the processing of the charge in that state is an act of discipline in violation of Section 20 (c) of the contract is something which, as I say, we're confident an arbitrator will decide in our favor. But -- and I say this notwithstanding what I have referred to I believe as a gratuity on the part of Judge Murphy which you'll find in his opinion in the record on page 4, in the last two sentences of the second whole paragraph on that page. Judge Murphy said, this is an extremely broad arbitration clause and certainly broad enough to include the present dispute plus the fact that Section 20 (c) prohibits the disciplining of plaintiff's foreman. Certainly he said, "This must include the filing of charges against him." Well, that's the ultimate question of course for an arbitrator and Judge Murphy should not have made the law of the case so to speak that would govern the arbitrator. But, Judge Murphy notwithstanding and with all respect stated otherwise. We are confident that the proceeding in its nature within the Union is such that the mere filing of a charge, the mere investigation of the charge is not an act of discipline contemplated by the contract. And an act of discipline in any case or possibly an act of discipline which this Court or any federal court are to concern itself with in -- in merely aiding the arbitration process for the Court intrudes itself into the merits of the arbitration dispute when it so much as enjoins for the time being pending arbitration. The very Act which is alleged to be a violation of contract and contrary wise as alleged not to be a violation of contract does not frustrate the collective bargaining agreement. It is not something which is at the heart of the contract. It is -- I should like to say this. The dispute on the substantive merits in our view is a premature dispute which as we contended on successfully was not even right for arbitration. And perhaps, it is best left to an arbitrator to decide that it is not right for arbitration rather than for a Court to bother to say so.
Speaker: (Inaudible)
Sidney Sugerman: Yes sir.
Speaker: Are there any other charges of this kind pending now before the Union?
Sidney Sugerman: No. This is the first time this Local Union has ever had a dispute with the Publisher over this. There are no charges filed by Mr. Kelly against any foreman. I know of no charges that have been filed. The last I heard of was back in September 1962 filed against any foreman at any newspaper. And I might --
Speaker: Is there -- is there any suggestion that the withdrawal of these charges were stimulated by the Union?
Sidney Sugerman: No.I shouldn't say that they were stimulated by the Union. The matter was brought to my attention for the first time on February 3rd or 4th. It was brought to my attention by the president of the Local Union who told me that -- you know, Kelly isn't interested in this case anymore and he doesn't care and I think it all arose a question of whether Mr. Kelly would come down here to hear the argument in the case in which he had had this little bit of contributory interest. And -- well Kelly isn't interested anymore. Kelly and Rowan who would huff and puff at each other one night on August 14th, 1962 are good friends again. As a matter of fact Your Honors just done him a favor and Kelly is going to get nothing out of this. Now, routinely when a Kelly, a member of the Union or a member of a bargaining unit covered by our contract has a beef if you will, against the foreman or against the management routinely and this has occurred over the 65 years or so of our effective and cajoled collective bargaining relations with these publishers. They file grievance in the regular way. Grievance is processed and if necessary goes to arbitration. It is only when a -- an employee conceives himself to be wronged by a foreman who was his only point of contact with management. Contract provides that the foreman has exclusive authority in the mailroom. When he feels himself aggrieved by a foreman acting outside his apparent authority or his expressed authority and the sense of aggrievement cannot be vindicated through the collective bargaining processes -- arbitration that he may feel himself compelled to run to the UNion and file a charge against the brother member for not behaving as a good brother. That was what this was about. Now actually, after the huffing and puffing that night when Mr. Rowan, the foreman found something had gone wrong in his mailroom and had balled out a group of employees not specifically identifying Kelly. Kelly got into an argument with him, "Are you threatening me?" And as I say they huffed and puffed and then in the idiom, Mr. Kelly asked for it and he got it. He was given one week disciplinary suspension without pay. And -- just to correct one minor error of fact that Mr. Hughes made yesterday, I'm sure quite inadvertently that Kelly went after Rowan and said, "I will charge you at the Union." Well, that doesn't appear anywhere in the record at pages 13 and 14, I beg your pardon, 12 and 13 of the record, you have the charge and supporting papers and on page 47, Mr. Rowan's reply to it within the Union. And Mr. Rowan simply -- simply recites the facts and says that Kelly is -- in its final paragraph on 47, Mr. Kelly is under the opinion that he got the week off for his neglect of duty. However, his attitude and insubordination contributed greatly to the week off. Now --
Tom C. Clark: (Inaudible)
Sidney Sugerman: I must say that there is nothing in the Constitution and bylaws of the Union which says that a charge once made and withdrawn may not be refiled.
Tom C. Clark: It had to be filed (Inaudible)
Sidney Sugerman: Well, apart from the technicality and the Union as you might imagine within its own domain and processes probably is not that technical that it would require preparation in filing of new papers. There might be some -- some proceeding imaginable under which they would reviolate proceeding on a proper showing.
Arthur J. Goldberg: (Inaudible)
Sidney Sugerman: With prejudice. Yes sir. I should've said that.
Tom C. Clark: Actually refiled it.
Sidney Sugerman: I beg your pardon?
Tom C. Clark: -- I read that in your brief. I -- I just wondered, I thought you said that he couldn't -- of course he could refile anything (Voice Overlap) --
Sidney Sugerman: I suppose -- yes.
Tom C. Clark: (Voice Overlap)
Sidney Sugerman: If you want to --
Tom C. Clark: -- in court but --
Sidney Sugerman: (Inaudible)
Tom C. Clark: -- I wondered if he -- he could get anywhere re-filing whether the Union or whoever the proper authority wouldn't say that, "Well, you dismissed it with prejudice."
Sidney Sugerman: Sir, I would -- I would conjure up any situation. If you wanted to charge the president of the Union with having coerced him into it or the attorney for the Union myself for having twisted his arm, I suppose it would make these charges. I'm satisfied personally, I represent to you as attorney at your bar that I specifically question Mr. Kelly as to whether or not he was under any instructions, coercion, any kind of pressure at all to withdraw the charge.
William J. Brennan, Jr.: But Mr. Hughes I think --
Sidney Sugerman: Absolutely none at all.
William J. Brennan, Jr.: Notwithstanding that, have you just said to us whatever maybe the reason, picked or otherwise that if we file the charge, you can't tell us that the processes for the handling of those charges would not be followed on a re-filing, can it? There's nothing I gather in the Union constitution of bylaws which says that if he does re-file that he's not entitled to have the pros -- have it processed as the original one would've been processed.
Sidney Sugerman: In all honesty, I must say to you that even if Mr. Laura, the President of the Union who says, "I accept this withdrawal with prejudice and the Union will not process the matter." Our Local Union is that democratically run that if the matter will put to the membership on the floor, I suppose the president of the Union could be overruled. And of course, he comes up for reelection next November and if he is not elected, I don't know what the next president would do.
William J. Brennan, Jr.: Oh, I'm just -- I'm just --
Sidney Sugerman: It might be Mr. Kelly himself.
William J. Brennan, Jr.: I'm just wondering in that circumstance, can we really say that it's moot in the sense that we ought just forget this issue and expunge the record below. Now we -- only a few weeks ago, we refused to do that in a case, a state case I believe, where it was represented to us with an injunction.The one who got it no longer wanted it and we refused to vacate on mootness and so they actually expunged the injunction because of it.
Sidney Sugerman: I --
William J. Brennan, Jr.: -- if this is not much different from that.
Sidney Sugerman: Yes. I -- but I -- I should think that they're ought -- ought to be and as I have sensed from your cases generally, there has been some threat or likelihood of a revival of the matter or recommission of the Act enjoined complaining that.
Byron R. White: The only threat in that -- the only threat of the case Mr. Justice Brennan mentioned was that somebody might change his mind.
Sidney Sugerman: Well then I don't know what -- how you could ever be sure of mootness. I -- I suppose no matter what were presented to you to satisfy you that the matter was moot conceivably, it might be undone on a showing of fraud and overreaching pressure and so on. I -- I didn't think and I am assure the Court is not looking for business that much that it wants cases unless affirmatively and conclusively to be shown that the case ought to be --
William J. Brennan, Jr.: Well, I don't know.
Sidney Sugerman: -- rejected by it.
William J. Brennan, Jr.: I don't know about that Mr. Hughes, (Inaudible) we wouldn't take a State's determination of mootness. We made a determination for ourselves and held there was no mootness and went on to reach and decide the merits --
Sidney Sugerman: I think that was on the basis that there was an injunction bond on which there was a continuing lia --
William J. Brennan, Jr.: But you don't give us anything --
Sidney Sugerman: -- liability.
William J. Brennan, Jr.: You give us nothing to -- not to suggest that you did the same as quite contrary. As I understand you that this still could be reopened, still could be processed even if we were now to go with you on the --d
Sidney Sugerman: I am -- I am just -- I am not saying that it can be and then I don't think I'm giving you nothing with the -- complete as frankness, I am conceiving what might happen if the matter were put again to the Union by Mr. Kelly on charges now that he had been put upon and coerced into withdrawing. I just can't imagine really that it would happen and possibly, my answer to you should have been a more practical one, not less frank but a more practical one. No, it couldn't happen in real life.
Hugo L. Black: And I suppose every case is settled for considerations and if you can come before us and we accept that settlement making it moot. It really, you say not for or ordained that can't be raised again because the settlement could be a fact on the ground, the problem later.
Sidney Sugerman: So it seems to me. And I -- I think it is --
Hugo L. Black: This is a really interesting question and I frankly have not thought about it and (Inaudible)
Sidney Sugerman: I think in a work or day life, you've got to act on certain practical assumptions and -- in this area and I just cannot conceive that this matter and frankly, I have a little concern, no little concern I should put it that way rather, as to my professional role in mooting this case so to speak or participating in the mooting of it as I thought I was doing.
Hugo L. Black: But your argument leads to the idea that this Court frequently hold cases moot when they are -- it may turn out not to be moot at all, leaves the idea in my mind that the Court does --
Sidney Sugerman: Well, that --
Hugo L. Black: -- besides the (Inaudible) of discretion and I thought you were required, the people to go. You show that there's mootness within a certainty.
Sidney Sugerman: Yes. And I -- I would think -- now I -- let me say this as far as Mr. Kelly is concern, when we turned over to the Publishers' counsel, the Kelly letter and the Tom Laura affidavit concerning the mootness. We said that while this -- in our judgment moots the case before the Supreme Court, of course it does not moot the underlying substantive question as one of historical interest. Did the Union by having accepted the charge and undertaken to investigate it violate Section 20 (c). As to that, we're ready to go to arbitration. Now, that in itself it would seem to me has the Publishers with what I should suppose be proper cooperativeness in the pursuit of its own interest. He should've advanced to arbitration. And we've had this matter all closed for one thing if an arbitrator had ruled adversely or would've ruled adversely to the Publisher and hold that the mere filing and investigation of the charge do not constitute forbidden discipline on a foreman member. That would be the end of this question forevermore. Now, one may say of course, you don't have stare decisis in the arbitration lore. And it's true. I suppose the Publisher could file for arbitration again and we say we are not bound by the last arbitrator's decision. It's not as in Court that we don't have that convention. Although, we arbitrators say that we look at other arbitrator's decisions for their possible persuasiveness are not bound by them. But --
Tom C. Clark: (Inaudible)
Sidney Sugerman: -- this question could've been --
Tom C. Clark: As I understand you say that (Inaudible) file again that you would recommend or rather view (Inaudible) by the Union to arbitrate that (Inaudible) that complaint?
Sidney Sugerman: The -- the original question?
Tom C. Clark: They have filed -- suppose they filed -- this man filed its complaint again and --
Sidney Sugerman: Within the Union?
Tom C. Clark: Yes. What would you do then?
Sidney Sugerman: Oh, I would -- I would advice that the Union reject the charge and not let it -- and that the president in his ministerial capacity who otherwise under the Constitution is obligated to bring the charge and the answer before the next regular membership meeting for consideration of its cognizability, prima facie showing of possible a case. I would advise the president in his ministerial capacity do not bring it to the membership floor. You have made an affidavit in which you said the Union will not process this. Again, to -- suppose a member gets up on the floor, makes emotional rule to bring the matter up even though the president hasn't put along the agenda. But you know, this -- this case and -- of the prematurity of it in any event if I may get back from the mootness which relates to the deadness of the matter to what we have referred to as the prematurity of it, this -- this case had its inception in a premature birth of something which indeed if not still born had no such viability as to outlast the inactivity of the Publisher and not advancing the case to arbitration. But, the Publisher on learning that a charge had been filed within the Union by Kelly against fellow member Rowan who was the Publishers' foreman protested that the charge should not be entertained at all. It should not be investigated and so on. And the Union -- and said otherwise will make a grievance of this and take you to arbitration. And the Union responded to that by saying that your letter is both presumptuous and premature. You are intrudingly -- you don't belong. You have no legitimate concern in the internal affairs of the Union. It's time and up for you to be concerned and until then, it's a vicious intermeddling on your part. But it's time enough for you to be concerned only when and if having investigated the matter, having brought Mr. Rowan to trial if this should happen. And Mr. Rowan having been found guilty and Mr. Rowan having been disciplined or some imposition made upon him, time enough for you then to tell us that we're violating Section 20 (c). Well, they have a right to contend before an arbitrator that I suppose if Mr. Kelly had as Mr. Hughes mistakenly said, if Mr. Kelly had said to Mr. Rowan, "I will file a charge against you." I suppose they could say that was -- that would discipline the foreman in itself. They can say what they want to before an arbitrator so long as it's arbitrable, you can make any preposterous or sound or meritorious, non-meritorious contention you want to. That isn't the same as saying that when you get into Court for an injunction in effectuation of the arbitration process, the Court is going to weigh the merits of the matter and -- and hold the conduct for the time being to abide the outcome of arbitration. For that puts the Court right back in the business of doing that which Norris-LaGuardia and the strengths of the Court in general have decided in our system the courts would not get into. And as Justice Goldberg put it yesterday if the Union members could refuse to work with Foreman Rowan because he was unbrotherly if you will, and so they struck. This Court would not entertain jurisdiction of the matter. Now, I don't think I haven't suppose the rationale Sinclair to be so finely confined to the fact that -- well, it's a strike and a strike is something which shouldn't have joined. But the whole rationale of Sinclair was that the courts are not in the injunction business anymore.
Arthur J. Goldberg: (Inaudible) If you would look at page 33 of the record filed, the possibility (Inaudible) maybe charged under the circumstances here (Inaudible)
Sidney Sugerman: Well --
Arthur J. Goldberg: (Inaudible)
Sidney Sugerman: Yes -- yes sir. I -- I'm frank to say. I -- I concentrated my own attention more upon the --
Arthur J. Goldberg: (Inaudible)
Sidney Sugerman: -- the local bylaws and --
Arthur J. Goldberg: (Inaudible)
Sidney Sugerman: And --
Arthur J. Goldberg: (Inaudible)
Sidney Sugerman: Oh yes. Yes of course. The local laws are -- are supplemental only and in large partly, they carry over the same provisions but not always. But where they don't, the vacuum is filled in by the --
Arthur J. Goldberg: (Inaudible)
Sidney Sugerman: Sir --
Arthur J. Goldberg: (Inaudible)
Sidney Sugerman: I -- I think -- I think this is so -- I shouldn't want to have to rely upon this if Mr. Kelly for some crazy reason filed a charge and I -- I just can't be any franker about it than I -- I have been, it can't, it won't, and if called upon as counsel for the Local Union should he file a charge in this connection, I would undertake to defend against him even if he proceeded against this in the Landrum -- under the Landrum-Griffin or otherwise for not giving him fair representation and so on.
Earl Warren: Very well.
Sidney Sugerman: Thank you.