John Paul Stevens: We'll hear argument now in the case of Miller-El against Dretke. Mr. Waxman.
Seth P. Waxman: Justice Stevens, and may it please the Court: In Hernandez v. New York, this Court explained that there are exceptional cases in which the totality of evidence surrounding jury selection is so strong that a finding of no discrimination is simply too incredible to be accepted by this Court. This is that exceptional case, a case in which even on collateral review, the sheer weight of the mutually reinforcing evidence renders objectively unreasonable the State court's conclusion that race did not motivate even one of the prosecution's peremptory strikes.
Sandra Day O'Connor: Do we have to find that the strike of at least one African American prospective juror was race-based for you to prevail?
Seth P. Waxman: I believe so. You have to find, Justice O'Connor, that race was the but-for factor or the tipping factor, not the only factor, but the but-for factor for at least one to come within the four corners of Batson. Now, I could argue I think, if I needed to in this case, that the jury shuffle evidence alone, which is an unexplained, blatantly race-based means of racially excluding jurors from the venire, comes within Batson, the Batson proscription itself, or I could argue that case too.
Anthony M. Kennedy: Were there any... were there any State decisions, or Federal court decisions for that matter, justifying the shuffle on the grounds of... I don't know... professional class versus working class or something like that?
Seth P. Waxman: The State has in its brief in this case, on this trip to the Court... the State has cited the Court to one other case in which the Court of Criminal Appeals acknowledged the State's justification in that case, that it shuffled because there was a member of the probation office in the front row that they didn't want to embarrass and that jurors in the front had tended more to have ties than jurors in the back. That is... that was never claimed in this case. We have, from the very--
Anthony M. Kennedy: Were there... were there any State court cases said that... or even in that case you're referring to... that the shuffle usually is race-based?
Seth P. Waxman: --You know, I can't... the case is called Ladd v. State. There is... there's some... now some reasonably substantial Law Review commentary in the State of Texas. I cited the Court to... to one in the Houston Law Review or the Houston Bar Review when I was here last time, and there has since been one in the St. Mary's Law Review that says this is a procedure that is used to discriminate on the basis of visual preference. And what's particularly interesting about it in this case is there was a contemporaneous objection in week 2 and week 3 and week 4 that the State was doing this based on race, and the State offered no defense at the time. It offered no defense in the subsequent Batson hearing. It had no explanation before the magistrate, the district judge, the Fifth Circuit, in this Court or below, and now in this Court this time it says, well, there's this other case in which the reason given was that we didn't want to embarrass the probation officer and we didn't... and we had people who had ties in the front row. There is no evidence whatsoever in the record that would justify those excuses here. And the evidence in the... the only evidence in the record that seems to me compels the conclusion that this was done for the deliberate purpose of minimizing the number of African Americans on the jury. And it was done by prosecutors, each of whom... there were two prosecutors in this case, each of whom was found to have violated Batson in criminal... other criminal trials contemporaneous with this one. And--
Ruth Bader Ginsburg: And the... and the Fifth Circuit's answer to the jury shuffle was, well, the defense shuffled more times, as I--
Seth P. Waxman: --The Fifth--
Ruth Bader Ginsburg: --as I recall.
Seth P. Waxman: --The... the Fifth Circuit said that we... that they shuffled twice and we shuffled five times. Now, that is both factually wrong and legally irrelevant. They shuffled three times and they tried to shuffle a four times... a fourth time because, the Court will perhaps recall... this was discussed in the Court's last opinion... because they waived in the fourth week. The defense shuffled... the defense then shuffled and they tried to come in and back... back and shuffle again when a number of African Americans were advanced in the order. There... under this Court's Batson jurisprudence, the proscription against using peremptory strikes for a racial purpose or a gender-based purpose is proscribed to the defense, as well as the prosecution, but there... the one doesn't excuse the other, and there has never been a claim, nor is there a factual predicate laid in this case for a claim, that Mr. Miller-El's trial lawyers were doing the same. Even if it were true, it would not justify what they did. Now--
Anthony M. Kennedy: If... if we find or if there is a finding that the... that the attempted shuffle on this fifth try was race-based, does that win your case, even though the shuffle didn't take place?
Seth P. Waxman: --Well, it was the--
Anthony M. Kennedy: I mean, does it show the necessary animus so that it carries through the whole case?
Seth P. Waxman: --I think, if I needed to... I mean, we... we've argued that the shuffle, just like the race coding of the cards in the pre-Batson era, the disparate questioning on minimum punishment and the graphic script, all reinforce what we think the record shows with respect to each of the six peremptory strikes that we challenge-- But if we didn't have that, Justice Kennedy, I would be here arguing that if I could show a single strike that was made for the purpose of eliminating African Americans from being considered for jury service, that that ought to come within this Court's proscription of Batson. Now, we haven't made that freestanding claim because I don't think we need that freestanding claim. The jury shuffle is a practice that exists only in the State of Texas and, to my understanding, has ever existed only in the State of Texas. So it's a... it's a very peculiar phenomenon, but I think I could make the argument that, look, even if there weren't any of these six... let's say they shuffled it so successfully that no African Americans came up. There simply were no African Americans out of the 108 who were questioned. It seems to me that that in and of itself would violate at least a generous reading of Batson.
Antonin Scalia: Mr. Waxman, we really have to examine your... you know, your allegations, I suppose, one at a time. It makes it a very complicated case. The... the State's response to... to your argument that two of... of the State's attorneys involved in this case had been found to have made racially based strikes in the past... the State's response to that is that that was not part of the evidence presented in State court, and therefore, it... it is not a proper consideration in reviewing the State court decision. What... what is your response to that?
Seth P. Waxman: I think that's wrong. I think it's wrong, first of all, because those two cases had been decided by the Court of Criminal Appeals at the time it considered the Batson claim in this case.
Antonin Scalia: Was it brought to the attention of the court?
Seth P. Waxman: I... I am not sure. I don't have the... neither the transcript nor the briefs are available for that argument. But it's... the court... they are judicial decisions of that court. The Court can take judicial notice of them and they are evidence.
Antonin Scalia: Oh, my. You mean anything out there that... that a court could take judicial notice of can be... can be charged to the court? My goodness, no. I think it was the burden of the... of the defendant challenging the... the strikes to bring... bring that to the attention of the court. My goodness.
Seth P. Waxman: Even... I understand your argument. I can't tell you for sure... and I don't believe anybody can... whether those cases were or weren't argued before the Texas Court of Criminal Appeals because my understanding is... I don't... I have not seen the briefs that were filed in the Batson appeal, and I don't have the transcript of the argument.
David H. Souter: Were... were both of the cases cases of the Texas Court of Criminal Appeals?
Seth P. Waxman: Yes, yes.
David H. Souter: Decided by the court... the Texas Court of Criminal Appeals.
Seth P. Waxman: Yes. The... the very same court. And in any event--
Anthony M. Kennedy: Well, now, Nelson... there's Macaluso?
Seth P. Waxman: --Macaluso.
Anthony M. Kennedy: Macaluso and Nelson. Nelson wasn't involved in the jury selection in this case, was he? He came in--
Seth P. Waxman: He certainly was.
Anthony M. Kennedy: --I thought he came in after... after the jury had been selected.
Seth P. Waxman: No. That was Mr. Kinne had the chickenpox, so the jury was... the... the voir dire took place. Mr. Macaluso and Mr. Nelson alternated the voir dire examination in the case, and those were the two prosecutors, Mr. Macaluso in the other Miller-El... in the Chambers case and Mr. Nelson in Mrs. Miller-El's case. And interestingly, what the Texas Court of Criminal Appeals said with respect to Mr. Macaluso in the Chambers case is not only that he removed five out of five African Americans for reasons that violate Batson, but the Texas Court of Criminal Appeals also noted that he was using the same minimum punishment ploy that he used in this case in order to disqualify African American jurors. He... the court actually goes and says, you know, with three of these people, the State tried to disqualify them by asking them an open-ended question about what they thought the minimum punishment should be even though that's usually what the defense is concerned about. Precisely what happened in this case. Now, I'm not suggesting, Justice Scalia, that our case depends upon the... this 404(b) evidence or not, and I think it's quite--
Antonin Scalia: I mean, that's the problem. We've got to go through each one of them one by one.
Seth P. Waxman: --Well, I--
Antonin Scalia: And... and I'm... you know, I don't remember the names of people involved in... in prior cases in this Court. I... I... you know, if we said--
Seth P. Waxman: --Justice--
Antonin Scalia: --you had this same officer before you, my goodness, I... I wouldn't remember it.
Seth P. Waxman: --Justice Scalia, a... first of all, these... each of these cases was tried within months of Mr. Miller-El's case, and a finding by a... the State's highest court that a prosecutor has engaged in intentional, deliberate, race discrimination in the selection of a jury I respectfully submit... I certainly hope is not the kind of everyday finding that is easily forgotten. But in any event, you... yes. You have to go through all of the evidence in the case, and what the evidence in the case shows is that, first of all, as this Court observed the last time it was here, the State's proper race-neutral rationales for striking African American jurors pertains just as well to white jurors who were not challenged and who did serve. It's... you also have to look at the race-coding of the cards, race-coding that was done by prosecutors whom this Court observed last time were trained in an office culture suffused with bias against African Americans in jury selection. And you also have to look at, with respect, the remarkable disparity in the way in which African American and white venire members were questioned, both with respect to minimum punishment--
John Paul Stevens: May I--
Seth P. Waxman: --and with respect to the graphic script.
John Paul Stevens: --May I ask on the minimum punishment ploy? Did that ever work in this case or did any of... of the trial judges ever grant a... a challenge for cause on the basis of the use of the minimum punishment ploy?
Seth P. Waxman: Well, I can't speak to other cases. But what's truly remarkable about this case... I mean, there are many things that are truly remarkable about this case... the State not only used this minimum punishment ploy with 90... 7 out of 8 of the African Americans, as opposed to only 2 out of 36 of the whites, but it actually tried to remove 2 of the African Americans in this case: Rand and Kennedy. It submitted them for cause based on their answers to those questions. And then interestingly, when that was denied and the State had to justify its... to provide its race-neutral reasons for striking them, it didn't even mention it.
Antonin Scalia: Their response--
John Paul Stevens: But you... you haven't really answered my question yet.
Seth P. Waxman: Oh, I'm sorry.
John Paul Stevens: Does any... did any Texas trial judge, to your knowledge, ever fall for this ploy, ever grant a... a challenge for cause based on answers to the minimum punishment harangue?
Seth P. Waxman: I... I would defer to Ms. Bunn about that because I don't know about other cases, but--
John Paul Stevens: I didn't see any in this case.
Seth P. Waxman: --Well, what happened in this case was there was an effort to rehabilitate. The trial judge actually became quite energetic in trying to explain to the juror that, well, it's 5 years and you're not saying that you couldn't possibly consider 5 years. But... and that was true with respect to white jurors as well as African American jurors.
Antonin Scalia: --The respondent's reply to this... this minimal punishment argument is that in fact the... the two white prospective jurors who had... who had expressed antagonism towards the death penalty were subjected to the same questioning, and that the seven out of eight black prospective were seven who had expressed antagonism to the death penalty. Now, is that not true?
Seth P. Waxman: I think that if I... I believe that with respect to minimum punishment, as opposed to the graphic script, what the State is saying is last time we said there were 10 whites and 10 blacks who expressed hesitation. And this Court observed that, well, yes, but only two of the whites got it. Now, they filed a brief that says, well, the other eight were all either struck for cause or by consent. Now, that's... that fails for at least two reasons. One, they identified 10. In this Court and below, we identified 19 jurors who absolutely expressed hesitation about the death penalty, and they have still not accounted for them. Number one. Number two, with respect to the eight who they have accounted for in their brief, the fact that at the very end of voir dire, they were struck for cause, or there was an agreement at the end of voir dire to remove them hardly provides a reason not to give the minimum punishment ploy to jurors who fit the categorization that the State has described.
Antonin Scalia: Well, we have to go through each one of them and see if the degree of hostility expressed by the white jurors was the same as the degree of hostility expressed by the black jurors. And in fact, the degree of hostility by the black jurors was quite high.
Seth P. Waxman: Well--
Antonin Scalia: One said I really don't believe in it. I support it only in extreme cases, such as those involving mass killings or mutilation. And another one... another one said, well, right now maybe I do, but who knows later?
Seth P. Waxman: --I--
Antonin Scalia: Now, if... if there happens to be a different attitude towards the death penalty among the black jurors than there is among the white jurors, you cannot fault the... the attorneys for... for striking more of the black jurors.
Seth P. Waxman: --Justice Scalia, in the context of all of this other evidence, which is the context in which you need to weigh it and determine whether we have satisfied the stringent standard for review that applies, I respectfully submit that if you go through the... the voir dire questioning of Mr. Fields and Mr. Warren and Mr. Rand and the others that we've mentioned, and compare it, even leaving aside all of the other evidence, contemporaneous evidence, of race discrimination in the jury selection in this case, I think you will have to come to the conclusion that race was a but-for factor in these cases. In Mr. Fields... we've... we've mentioned him in our... we've described him at length in our brief. This is a man whom... I mean, forget the... the State on its questionnaire at the time, on page 14 of the joint lodging, wrote, quote, no reservations against the death penalty. Mr. Rand, who we've compared and... and your concurring opinion, Justice Scalia, the last time it was here said, well, yes, Rand and Mazza are very close, but it's a high burden you have to... you have to overcome here. It's a burden we can overcome here not only because of all of this other evidence, but because of what the State wrote on the questionnaire when Mr. Rand was being examined, page 30 of the joint lodging. This is the State's notes. Quote: could be enforced depending on the circumstances. Murder/robbery, type of offense. Think proper for death penalty. Yes, I can serve. This is a... this is a venireman who said that if he were Governor, he would set the minimum punishment for murder at 99 years. Mr. Fields was--
Antonin Scalia: Well, now, wait. He also said... when asked whether he could vote to impose the death penalty, he said, right now I say I can, but tomorrow I might not.
Seth P. Waxman: --He said--
Antonin Scalia: Do you think that's a strong--
Seth P. Waxman: --I'm... I'm not sure whether that's Rand or Warren, but I'm saying that if you compare Mr. Rand who thought that the death penalty might be applicable for all murder, who repeatedly... in our reply brief, we include the... the recitation... repeatedly said over and over and over and over again that he would answer the three questions yes, depending on the evidence, without any regard for his view about the death penalty, who testified that... I'm not saying that this is somebody whom, if this were a case in which there was nothing in this... we were just before this Court saying there's Rand and Mazza or there's Rand and Hearn and that's enough to satisfy our burden, I would be up here arguing it but it would be a much more difficult argument. Here, those... that comparison has to be taken in the context of not one, not two, but six jurors who are similarly situated who were treated to this questioning by people who engaged in racially disparate shuffling, racially disparate questioning--
Ruth Bader Ginsburg: Well, that's the question.
Antonin Scalia: --We have to deal with each of the six one by one, and... and they have arguments with respect to each of them. I don't care what Rand said. Those things that you said sounded very good. But if he finishes it off by saying, right now I say that, but tomorrow I might not--
Seth P. Waxman: --Well, I--
Antonin Scalia: --that doesn't strike me... and that... that's what respondent says Rand said, not... not one of the other ones. And you have to go down each of the other six, and they have a response for each one.
Seth P. Waxman: --And if this--
Antonin Scalia: I mean, and... and, you know, a buckshot attack on it has to be examined pellet by pellet.
Seth P. Waxman: --Justice... let me... let me switch your metaphor a little. The problem with the State's approach to this case... and it was the problem that... of the Fifth Circuit's analysis... is it is pointillistic. It is an analysis. It's like walking up close to a Seurat painting and looking at each dot and saying, well, it's red, but that might not necessarily be the handbag. Yes, you have... I mean, he had to paint with the dots, but as a reviewing court, you need to step back and look at this and ask yourself, with respect to, for example, Mr. Fields, who said not only would he have no hesitation about putting the death penalty in place, but he actually testified that he thought that in capital cases, the State was God's embodiment on earth.
Anthony M. Kennedy: Suppose that you have 10 white jurors and 10 black jurors. The 10 black jurors are all questioned much more extensively by the State, and in each of those cases, there is a plausible reason for excusing. A relative was... served time and so forth. Violation?
Seth P. Waxman: All in and of itself? I would say definitely not. I... I mean--
Anthony M. Kennedy: So... so then you admit that you have to go one by one. I had thought you would... would have said that if the black jurors are questioned in a different way and more intensively, that alone suffices even though the questioning in each case disclosed the basis, plausible, non-racial basis--
Seth P. Waxman: --No, I would give--
Anthony M. Kennedy: --for excusing them.
Seth P. Waxman: --I would give you a different answer, Justice Kennedy, if it's the jury shuffle because there's no plausible explanation available on the evidence in this case. If there is a plausible explanation for disparate questioning, which there is not in the statistics in this case, I wouldn't be arguing that that in and of itself, leaving aside individual, you know, side-by-side juror comparisons, would suffice. But here, we have, in addition to the disparate questioning that is not susceptible to a race-neutral explanation... we have things like the prosecutor's own notations in the... in the questionnaires.
Ruth Bader Ginsburg: Mr. Waxman, you were dealing with Fields, and the answer in Fields' case that the prosecution gives is he had a strong feeling about rehabilitation, and so he was... he thought that everyone could rehabilitated... rehabilitated. So that shows he... he wasn't like others who didn't entertain those doubts about rehabilitation.
Seth P. Waxman: Yes, Justice... Justice Ginsburg. He... he expressed an opinion that he thought that people could be rehabilitated, not as strong as those opinions by juror... white Juror Hearn and white Juror Duke who sat. But in Fields' case, he was absolutely unequivocal... I'm... I'm referring the Court to page 185 of the joint appendix... absolutely unequivocal that the ability or propensity for rehabilitation would not affect his willingness to... to put in the death penalty. I believe in the dissenting and concurring opinions in this case last time with respect to Mr. Fields, it was pointed out that he was a supporter of the death penalty who could put in the death penalty. And what's interesting about Fields is if you look at the transcript pages where the prosecutor justifies the strike, on page 197 of the joint appendix, the prosecutor says, well, he was... he... he... I... he... he said something about rehabilitation, and it goes on. And then two pages later... they have a discussion about something... a discussion about which questionnaires will or won't go into evidence. Two pages later, Mr. Nelson comes in and says, oh, yes, and he also had a brother who had had some involvement with law enforcement. Well, to say that that's an afterthought is really saying something. He wasn't questioned about it, as... as neither were... by the State, as neither were any of the four white jurors who sat who had family members who had been arrested or prosecuted. They didn't even ask these questions. May I reserve the balance of my--
Sandra Day O'Connor: Was there any evidence that the jury cards in this... in the actual trial were marked or noted on the basis of race?
Seth P. Waxman: --Oh, absolutely.
Sandra Day O'Connor: Where do we find that evidence?
Seth P. Waxman: The... the juror cards are in the joint lodging beginning on page 82, and every single card lists the gender and race, even the cards as to jurors that they never questioned. So we know that these were notations that were placed on the cards by the prosecutors at the time the venires were called. And the interesting thing about these is it's not just race and gender, it's were they fat, did they have a beard, did they have a mustache. If you map up what's noted on these cards with the Sparling training manual that said don't take minorities, don't take Jews, don't take women, don't take fat people... people who have mustaches and beards don't make good jurors. It's... these prosecutors were not only trained by that manual, they learned their lesson very well. May--
Antonin Scalia: All of those things are okay, right, except the race one.
Seth P. Waxman: --Well, I--
Antonin Scalia: I mean, maybe their right about beards and mustaches.
Seth P. Waxman: --We know that--
Antonin Scalia: I don't know. If they're right, good for them. Right? You... you... they ought to strike them.
Seth P. Waxman: --I... we're not here... if this were gender or race, this Court has said that can't be the but-for reason. Mustaches, overweight, you know, go with God. May I... may I reserve the balance of my time?
John Paul Stevens: Yes, by all means.
Seth P. Waxman: Thank you.
John Paul Stevens: Ms. Bunn.
Gena A. Bunn: Justice Stevens, and may it please the Court: The big picture. The majority of African Americans summoned for jury duty in this case were either opposed to the death penalty generally or unwilling to impose it, while the majority of white jurors had no qualms about the death penalty. Striking prospective jurors based on their case-related views which, after the fact, correlate with race is not unconstitutional. Essentially, though Miller-El has presented this case as one of disparate treatment, it is actually one of disparate impact. I will discuss first--
Anthony M. Kennedy: Would... would the statement that you gave... let's assume there was a... a working premise that blacks were more... were less inclined to impose the death penalty. Would that alone justify more intensive questioning of every black juror?
Gena A. Bunn: --No, Your Honor, it would not. And the record in this case actually does not support that that... does not support a proposition that black jurors were questioned differently. Most significantly, the minimum... the questioning on the graphic script. Of the six challenged jurors in this case, only two received the graphic... graphic script at the outset of their voir dire, Carrol Boggess and... and Wayman Kennedy, both of whom had answered the questions in their juror questionnaire indicating ambiguity regarding their views on the death penalty regarding their support for the death penalty. This fact--
Stephen G. Breyer: Now... now, as I understand it, this case was here before. We all read this and we went through it, and as a result of that, I... if I read the opinion... not the dissent, but the majority opinion... and it might be in my interest if people followed dissents more, but I think the law is we follow the majority opinion. So when I read the majority opinion, I read, number one, there was history in this county, at least 7 years earlier though, where they actually had a booklet which said let's keep all the African Americans out, here's how you do it. Then you had jury shuffling, which were two instances. In one of them, there are like 40 people. In my mind, you know, we have rows. In row 1 there are four black jurors and six white; row 2, three black and seven white; row 3, two black and in the last row one black, and the prosecution says, hey, let's shuffle it. All right? And the other time he did it, the only other time... it wasn't quite that bad... the same idea. Then the third thing that comes up is you find instances here... not everyone, absolutely right... but instances where black people who seemed really for the death penalty, say, like Mr. Fields manages to get knocked off, but Mrs. Mazza who seems quite uncertain is kept on. And then we have this disparate questioning that you're about to mention where it just turns out that almost every black is given this really... you know, bring them in a gurney, put... put... you know, real graphic description of the death penalty, and white people who also expressed hesitation aren't. Okay? So on the basis of that, the majority writes there is, indeed, a strong suspicion here that this was discrimination. So I want to ask you... and if I were to write something like that... I didn't write the words, but I would mean, well, I think that's what it is unless there's something later on that comes out to the contrary. So I'm asking you what was to the contrary. What came out in this Fifth Circuit that we didn't have in front of us the last time?
Gena A. Bunn: --Your Honor, the first time before this Court, the issue was whether, based on a threshold examination of the record--
Stephen G. Breyer: I know that was the issue, but I'm saying if I read the opinion to say... now, maybe you'll tell me I shouldn't. We should just go back and redo what we did. But I'm reading the opinion to say, well, unless something changes here, this is bad. It's discriminatory. Now, you can tell me, one, I'm wrong to read the opinion that way. I got that argument. But I want to be sure that that's what's in front of me. So I want to know is there something different in the Fifth Circuit that wasn't here the first time.
Gena A. Bunn: --Your Honor, I believe the most... the most important difference in the review of this Court the last time and the review of this... of the Court this time is that the Court did take a big-picture look at all of the pieces of evidence, but at this point, as the court of appeals did and as this... as this Court must do now, it must go, as Justice Scalia mentioned, juror by juror, the jurors who were challenged. Miller-El--
Antonin Scalia: We only speak to the issues before us, don't we? And the issue before us last time was not the issue before us here. It was simply whether there was enough evidence to require the issuance of a COA. Isn't that right?
Gena A. Bunn: --That is correct.
Stephen G. Breyer: Right. That's why I asked.
Antonin Scalia: And that's a good deal different. Whatever the majority might have said about other issues, it certainly was not binding on the court of appeals, was it?
Gena A. Bunn: No, Your Honor.
John Paul Stevens: I hate to say this--
Stephen G. Breyer: So that must be a different question--
John Paul Stevens: --to my colleagues, but I'm very much interested in hearing what Ms. Bunn has to say.
Stephen G. Breyer: --because that wasn't the one I asked. The one I wanted answered was the question of I understand that point, which we could say it was definitely not definite the last time. I'm asking you... it's a serious question... as whether there was something new or different that came up when the Fifth Circuit wrote this. Now, I gathered from your answer, it might be yes, and if the answer is yes, I want you to say what it is because I'm interested.
Gena A. Bunn: Yes, Your Honor, there was additional analysis, particularly of the six jurors Miller-El claims were discriminated against, which this Court did not review the first... in its first opinion specifically. And a review of Miller-El's purposeful discrimination claim must focus on these six jurors. And given the... the views expressed by these six veniremen, it is no surprise that prosecutors struck them. Each venire member peremptorily struck by the State had voiced views unfavorable to the State but were not subject to a challenge for cause. These reasons are race-neutral, case-related, and supported by the record, in fact, supported by the very words that the jurors uttered. Carrol Boggess indicated that her beliefs... on the questionnaire indicated her beliefs would impair... would impair her ability to impose the death penalty as a juror. She referred to her... an execution as a murder during her voir dire and other comments evincing hesitance regarding her ability to impose the death penalty.
John Paul Stevens: May I ask you this? There are two questions just generally. One, I'm curious about the answer to my question to... to Mr. Waxman. Did the minimum punishment ploy ever work? Did it ever succeed in getting a challenge for cause granted?
Gena A. Bunn: Your Honor, there are other cases that I'm aware of in Texas where the State did challenge jurors on this basis. Whether there was any questioning... any difference in questioning, I don't know. It's not apparent from the records.
John Paul Stevens: But have... and the challenges were granted?
Gena A. Bunn: Yes, Your Honor.
John Paul Stevens: Of course, none of them were granted in this case. Is that right?
Gena A. Bunn: That's correct.
John Paul Stevens: So it... it was true that this was... was a ploy adopted for the purpose of trying to make it unnecessary to use a... a peremptory challenge.
Gena A. Bunn: Yes, Your Honor. Yes, Your Honor, that is right.
John Paul Stevens: And do you defend that practice?
Gena A. Bunn: Yes, if it is a legitimate tactic, recognized... as an attorney, if there is a... some means that is available to use so that you do not have to use a peremptory strike--
John Paul Stevens: If you... if you can get the venire person to make a mistake in his answer, then you... you get... get him off easy.
Gena A. Bunn: --That's what... that's what voir dire is all about, and the defense counsel did it in many occasions--
Anthony M. Kennedy: And suppose... suppose you have a system in which that attempt to find cause is applied much more rigorously to black prospective jurors than to white prospective jurors.
Gena A. Bunn: --If it's not... the record shows that there's no difference in the views expressed by the jurors, yes. In this case that--
Anthony M. Kennedy: No. The... the white jurors don't express the views at all because they're not questioned intensively, so you don't know if there's cause for them or not. But the black jurors are questioned intensively, and you find cause or... or a... a race-neutral reason for the dismissal. Is there a Batson violation in... in that instance?
Gena A. Bunn: --No, Your Honor, not a Batson violation. Now, whether it's evidence of... of--
Anthony M. Kennedy: So... so you say that in any case you can question black jurors more intensively than white jurors and still succeed in excusing them if the result of that voir dire shows some race-neutral basis.
Gena A. Bunn: --Your Honor, if the questioning itself results in the views that are the basis of the strike, that would present a problem. That is not the case here, however, where the... the disparate questioning on minimum sentencing, for instance, was based on the views that were expressed.
Anthony M. Kennedy: Suppose... suppose you have a manual of... from the district attorney's office that says all black jurors shall be questioned more intensively than white jurors.
Gena A. Bunn: That would certainly be evidence that black jurors and white jurors were treated differently.
Antonin Scalia: You're saying that that is not what happened here.
Gena A. Bunn: Yes.
Antonin Scalia: It was on the basis of the questionnaires expressing hostility to the death penalty that more intensive questioning was given to some people than to others, and that the mere fact that a larger number of those people was black is not a violation.
Gena A. Bunn: Yes, Your Honor, that is correct.
Antonin Scalia: So the hypothetical, assuming that you... you just have blacks and whites with no difference in... in what they... in what they had said on the questionnaire, is a hypothetical that you say does not exist in this case.
Gena A. Bunn: Yes.
John Paul Stevens: Yes, but you don't know what the questionnaire showed as to most of the white venire persons, do you?
Gena A. Bunn: No, we don't, Your Honor.
John Paul Stevens: And how many white venire persons were there?
Gena A. Bunn: 48.
John Paul Stevens: 48. And how many were given this questioning? Two?
Gena A. Bunn: On the graphic script?
John Paul Stevens: Yes.
Gena A. Bunn: Two... three.
John Paul Stevens: And so are we to assume that all 46 of the other white venire persons were as tough on the death penalty as you'd like everybody to be?
Gena A. Bunn: No, Your Honor.
John Paul Stevens: We just don't know about those other 46, do we?
Gena A. Bunn: We do not know. We do not--
John Paul Stevens: But is it not a reasonable inference that some of them might have expressed doubt about the death penalty?
Gena A. Bunn: --That is... we do not know. There... even though we do not know--
Stephen G. Breyer: Well, if you don't know... if you don't know, you... there's an excellent way to know. Somebody says, you know, Mr. Prosecutor, you gave this terribly graphic script to all the black people and you really didn't give it to hardly any of the white people. Now, it's also possible... possible... that the reason he didn't was because from the answer to their questionnaires, which we've not seen, you didn't need to. That's possible. But if that were the case, wouldn't he have said to the judge, Judge, that's why I did it. I didn't ask them because I read the questionnaires. Wouldn't that be what you would do or any prosecutor would do if that were the reason?
Gena A. Bunn: --Yes, Your Honor, I would.
Stephen G. Breyer: And did the prosecutor ever do that here?
Gena A. Bunn: No, but significantly in this case, the arguments regarding disparate questioning were never raised until Federal habeas corpus proceedings. They were not raised at trial when the jury questionnaires still existed.
Stephen G. Breyer: Did the prosecutor not... was he there?
Gena A. Bunn: No, Your Honor. He was not--
Stephen G. Breyer: No. And did... was anyone there who had ever talked to the prosecutors?
Gena A. Bunn: --The prosecutors were contacted during that period, but the questionnaires--
Stephen G. Breyer: All right. So could then--
Gena A. Bunn: --no longer existed at that point.
Stephen G. Breyer: --But couldn't you have asked the prosecutors if that was the reason?
Gena A. Bunn: 20... 15 years after a case is tried--
Stephen G. Breyer: I mean, what are we supposed to do? I mean, what you've done is say... of course, I could think of reasons that could have been their reason, but unless there's some reason for thinking that was their reason--
Gena A. Bunn: --Well, Your Honor, in this case, the... the inmate Miller-El has the burden. He had the burden in the trial court. He had the burden to prove purposeful discrimination, and he could have put... he did put the questionnaires of the 10 challenged jurors in the record. He did not--
Anthony M. Kennedy: Well, on... on that point, this is not exactly like McDonnell Douglas, Burdine where you have some prima facie case, the person was equally qualified, but was of a different gender than the one that got the job, and then the... you go back to square one. Here, the prima facie case is immensely powerful because of the culture of discrimination in the manuals and so forth, and that... that, it seems to me, stays in this case.
Gena A. Bunn: --Your Honor, this evidence, however compelling a picture it draws of past injustice, simply cannot trump the State court's finding of no purposeful discrimination. It does not address--
David H. Souter: Well, don't we at some point have to have some reason to believe that the evidence of past practices become irrelevant? And if we... if that is so, do we have any such evidence here?
Gena A. Bunn: --There... there was evidence in the Swain hearing, and that... in fact, the cross examination by the prosecutors did indicate that practices that were in the past had been... had been vitiated, at least closer to the time of trial. But regardless of that--
David H. Souter: These are the same two prosecutors who in other cases had been found, in effect, guilty of... of racial discrimination and the same two prosecutors who were calling for the shuffle in these cases. Is it plausible to think that there had been this change of heart?
Gena A. Bunn: --Even assuming the evidence, the historical evidence... assuming its relevance, as the Fifth Circuit did--
David H. Souter: Well, I mean, I... I am assuming it is relevant, and I am asking the question, is there a reasonable basis to think that these particular individuals, engaging in the practice that they demonstrably engaged in, had had a change in heart in this case?
Gena A. Bunn: --Yes, Your Honor. The record in this case indicates that... for instance, with the use of graphic script questioning, the... of the six... again, of the six challenged jurors, four did not receive the graphic script at the outset of voir dire.
David H. Souter: Is that why they engaged in the shuffle twice--
Gena A. Bunn: Your Honor--
David H. Souter: --on... on a record that shows there were black jurors down front each time they engaged in it?
Gena A. Bunn: --The record shows that of 5 weeks of voir dire, the State requested shuffles three times. Two of those times, the defense counsel put on the record that there were a greater number of African American jurors in the front of the panel. They--
David H. Souter: And... and that evidence was not refuted. It was not denied, as I understand it.
Gena A. Bunn: --Your Honor, there was no response from the prosecutors. There was no objection made, no specific objection made as to... as to the State's exercise of a jury shuffle. But in this case to ask this... what... what Miller-El is asking this Court is to assume that the only discernible trait that could have been the basis for the State's exercise of a jury shuffle is race, and that is not... that is not the case.
David H. Souter: The... I... I don't think that's his argument at all. He is not arguing that there might not be other bases for making challenges or making peremptory strikes. What he is saying is those challenges exist for lots and lots of jurors. And what in fact there is is very strong circumstantial evidence that what tipped the prosecutors to make the peremptory challenges here... what he was referring to earlier in this argument as the but-for cause was racial. He's not saying nothing else could have been involved. He was saying race tipped it. And it's the circumstantial evidence, among other things, that indicates that race does. And that's the reason for my question. Is there some reason to believe that there had been a change of heart on the issue of race so that his argument is unsound?
Gena A. Bunn: Your Honor, again, Miller-El's claim of purposeful discrimination must focus on these six jurors, and in answer to your question, a review of these six jurors does show that these strikes were not based on race. This was not the tipping--
Stephen G. Breyer: --You think they're based, for example, on capital punishment. But now, let me give you two of them, and this is why... this is actually why I get somewhat concerned about this. Here is the answer of the white woman who served on the jury about capital punishment. Could you put Miller-El to death? Mrs. Mazza: It's difficult. I've had 2 days to think about it, and given my religious upbringing, et cetera, going on for a few sentences, I think I could. She serves on the jury. Okay? Here's Mr. Fields who is black and whom they got off. What I think, according to the Old Testament, people were killed if they violated His law. In its extended service, the State represents Him. I feel the State is God's extended person. In other words, the State represents God in today's time. Therefore, if the State exacts death, that's what it should be. That's the man they feel has the qualm, and the woman I told you who was white they feel has no qualm. Now, I look at that, and I say, you know, I mean, my goodness, it's pretty hard to see how you get yourself in that frame of mind.
Gena A. Bunn: --Your Honor, the... that was not the prosecutor's argument at trial and it's... it is not our position now that--
Stephen G. Breyer: No. I know. They then said that oh, you see, Mr. Fields was... is it a woman or a man? I'm not sure. Yes, he's a man I think. He... he's kept off, the black man, because of his views on rehabilitation. So I looked up what those views were, and that consists of his saying... my... my interpretation... well, I think any person, if he really believes in God, really believes in God, could be rehabilitated. At which point the prosecutor says to him, well, suppose you came to the conclusion that Miller-El really was touched by God, could you put him to death? Answer: Yes. Why? Because, well, it seems to me my job here is to follow the law. That's the man whom they think they are... they are kicking off because of his views of possibly not applying the death penalty, and the other woman, who is white, they keep on. Now, I think that's the whole story there. There was also the brother who was a drug... who was the drug... you know, he had had drug convictions, but that's scarcely mentioned. So... so I look at those two people and I think, gee, put that in context. My goodness. What... what's your response to that?
Gena A. Bunn: --Your Honor, as to Juror Billy Jean Fields, he did not express qualms about the death penalty in general, but he did state that it was his belief that no one... no one... no matter their background or what they've done, is beyond rehabilitation. Everyone can be rehabilitated. And this was a view regarding rehabilitation that no one, white or black, had expressed. It was a unique view, and in this case where jurors are asked to... to... the question, is this person going to be a continuing threat to society, is... is something that's going to go into their punishment inquiry. And if this person is one who the prosecutor believed could tend... if there's a repentant criminal defendant on the stand who testifies, that they would tend to believe that person and answer the question no. And... and again, this was not the only basis for the State's strike as well. The fact that his brother had been prosecuted in Dallas County numerous times, the same prosecuting authority, contemporaneous with the trial, numerous occasions, had served time, and contrary to Miller-El's assertions, the State did question Mr. Fields on this issue during voir dire, and it was a basis for the strike. There--
Ruth Bader Ginsburg: Ms. Bunn, before you finish, there... there are two pieces of this I hope you can give me an answer to. The race-coding. Is there any neutral reason for that? And when was that stopped, if it was?
Gena A. Bunn: --I... I don't... I don't have any information. There's no information on... in the record about exercising it in other cases, and I just... I just don't know. But the first part of the question, there could... as Mr. Waxman mentioned, there... there were other visual cues noted on the cards. Attorneys, especially--
John Paul Stevens: Is it not a fair inference that each of the cues noted on the cards was something that the prosecutors thought relevant to whether or not to challenge the juror? And if so, is it not... does... is that not uncontradicted evidence that the race of the venire person was a factor in the decision?
Gena A. Bunn: --Not necessarily. I mean, there were other... there was other--
John Paul Stevens: Well, why else would it be noted?
Gena A. Bunn: --There was... just to familiarize an attorney getting ready for voir dire of an extensive number of people--
Anthony M. Kennedy: Is... is there any--
Antonin Scalia: Maybe the prosecutors didn't want to come up with an all-white jury for fear it would be challenged.
Gena A. Bunn: --That's certainly--
John Paul Stevens: That may be, but is it not... is it not clear that this is one of the factors that was used to decide whether or not to exercise a challenge, just as the beard and the other things that are mentioned in the... in the manual were?
Gena A. Bunn: --No, Your Honor. The fact that it was noted on the race... on the... on the juror card does... does not necessarily indicate that. Again, it could be a cue for a... a litigant preparing for voir dire.
Anthony M. Kennedy: --Well, were the... were the cues on the card similar to the instructions in the manual?
Gena A. Bunn: There were some that could... that would correlate, but there were others that aren't noted on the juror cards--
Anthony M. Kennedy: Can you quantify the correlation or lack of correlation for me?
Gena A. Bunn: --The... for instance, occupations were... or addresses... perhaps not occupations, but I know addresses were... were noted. There could have been other things at that point that were not noted. There was a lot... information available at that point, whether visual or from the juror information cards.
Ruth Bader Ginsburg: I had asked you if they were still race and gender-coded. You hadn't gotten to that part of the question. These cards were race-coded and for other things too. Right now in the State, do the prosecutors code cards... cards for race and gender?
Gena A. Bunn: I do not know. I do not--
Ruth Bader Ginsburg: The other question I had, are these two prosecutors the same ones who were involved in other cases where it was determined that they had used tactics that violated Batson? Were those cases contemporaneous with Miller-El's or were they earlier in time?
Gena A. Bunn: --The record indicates that Prosecutor Macaluso was involved in jury selection in the Chambers case, and that case was tried months... I believe it was late 1985 when Chambers was tried.
Anthony M. Kennedy: Wasn't that 2 months?
Gena A. Bunn: 2 months? This was March, so it would have been probably 4 or 5 months, within a year certainly.
Antonin Scalia: Is it... is it unlawful to take sex into account in jury selection?
Gena A. Bunn: Yes. Yes, Your Honor, it is. That's certainly not alleged in this case. The jury actually consisted of seven women. But again, to... the... the race-coding issue... as far as whether it's exercised now, I mean, I wouldn't be particularly surprised if it were. A conscientious litigant... it's really necessary to keep track of the race of prospective jurors, as Justice Scalia noted, to be certain that you don't run afoul of Batson. But--
David H. Souter: Is... is that true with respect to weight and mustaches and things like that?
Gena A. Bunn: --That... that doesn't--
David H. Souter: They were... they were making notations of things like that, as I understand it, and they didn't have to worry about Batson there. But there does seem to be a correlation with the manual.
John Paul Stevens: And Batson hadn't been decided yet.
Gena A. Bunn: --Yes, that's true. I was referring to Justice Ginsburg's question about the... the practice, whether it continues. But again, regarding its use in this case, I would... I would say that it... it's not... does not necessarily lead to the conclusion that it was noted basically to treat African American venire members differently because the record actually--
David H. Souter: But I... I don't... I mean, I'd just like to go back to my question. I don't know why else? It's true if... if all they noted, if they had been prescient and had said, you know, Swain is going to give way to Batson and we're going to note Batson issues, you'd have an argument. But they were noting a lot of non-Batson issues too, and the one common characteristic of the Batson issues and the non-Batson issues were they were all correlated to a manual that says keep these people off the jury. And... and isn't that a sound train of reasoning that that's what they were trying to do?
Gena A. Bunn: --Your Honor, the... the notations, though, correlate as well to simply visual cues that a litigant will use just simply to familiarize himself with the manual.
David H. Souter: The manual had said there are certain visual cues that indicate jurors you don't want on the jury. You don't want black jurors. You don't want women jurors. You don't want Jewish jurors. You don't want fat ones. You don't want bearded ones. And these are the things that they were noting. Isn't the reasonable inference that that's what they were noting them for?
Gena A. Bunn: Your Honor, there are other explainable reasons, there are other plausible reasons for noting those things. But even that aside, again, we must look at these six jurors and they all expressed views unfavorable to the State. And Miller-El has failed to identify a similarly situated white juror.
Ruth Bader Ginsburg: What about the Fifth Circuit said that comparing Rand's testimony... that that was in line with Mazza's. The Fifth Circuit seems to recognize that those two were closely comparable.
Gena A. Bunn: Justice Ginsburg, they recognized, as Justice Scalia had in his concurring opinion, that that was basically as close as it got. But at most, Mazza acknowledged that the decision whether to impose a death sentence would be difficult, not an easy one, kind of hard, but she simultaneously stated that it was a decision that she believed that she could make. She never questioned her ability to assess a death sentence in an appropriate case. She merely acknowledged that it was a decision that she would not take lightly. She also had served on another criminal jury in the last couple of years, a jury which had returned a guilty verdict. In contrast, Rand explicitly questioned his ability to assess a death sentence in any case. When asked whether he could impose the death penalty, he told prosecutors right now I say I can, but tomorrow I might not. He declined to describe himself as someone who believes in the death penalty and can serve as a jury... juror and assess the death penalty if warranted, stating that he was probably in between the first two categories described by the prosecutor. Notably, Mr. Waxman referred to the prosecutors' notes on the questionnaires. What he didn't mention was also noted on the... by the State at... at the joint lodging, page 30, is that Juror Rand had referred to the death penalty as a touchy subject and that he had described himself as a person falling somewhere in between the two categories described by the prosecutor, the first being someone who believes in the death penalty and can assess it, the second being someone who believes in the death penalty generally but cannot personally assess it as a juror. So the State did take note of the... of the expressions of ambivalence by Rand during his voir dire. Juror Mazza, again, never expressed this level of ambivalence. These are not similarly situated jurors. And the same is true of Miller-El's attempted comparison of Rand and... and Juror Sandra Hearn. She expressed hesitance on assessing the death penalty in a very particular circumstance, the... a first offense, and certainly this is not the case here. On the other hand, Rand had questioned his ability to assess a death penalty in any case and, against Hearn's State-friendly views, led to a defense challenge that was overruled. And the fact that the defense vehemently objected to her on direct appeal is further evidence that she's not similarly situated. Under Batson, Miller-El has the ultimate burden of proving purposeful discrimination. He has failed to satisfy that burden, and the State trial judge found that prosecutors in this case did not act with a discriminatory purpose. As this Court acknowledged in its earlier opinion, Miller-El is not entitled to habeas relief unless he can... he can show that the State court's rejection of his Batson claim was objectively unreasonable. He must produce clear and convincing evidence and he has failed to do that.
John Paul Stevens: Thank you, Ms.... Ms. Bunn. Mr. Waxman, you have about 3 minutes left.
Seth P. Waxman: I have just three points. The Fifth Circuit had precisely the same record before it that this Court had and the State submitted very nearly precisely the same brief that it presented to the Fifth Circuit the time before. Disparate questioning on the minimum punishment ploy was objected to by the defense during the voir dire and it was acknowledged. If you look at the Batson argument, it's either Mr. Macaluso or Mr. Nelson said some of the jurors were questioned disparately, but... and they gave the explanation that it had to do with views on the death penalty. So it was before the State courts. Now, on the graphic script, which is the disparate questioning that Ms. Bunn has focused the Court's attention on, the State now says, okay, we can't speculate about what we don't know about the questionnaires. Let's just look at the questionnaires that we do know about. Justice Stevens, it is... you are quite right that that tells you nothing about the dozens of other white jurors whose questionnaires we don't have, but we don't need to indulge in that speculation in this case because what we know from the questionnaire answers that we have is that every black who expressed anything that could be called hesitation on their juror questionnaire, including just not filling in either question... answering question 56 or 58, got it. Five whites who expressed hesitation did not. That is Juror Mazza, Juror Hearn, Juror Duke, Ms. Girard, who testified that she didn't... who acknowledged in her voir dire that she hadn't filled out one of those questions which got similarly situated African American jurors the graphic script, and Juror Whaley who... or Venireman Whaley who testified that her questionnaire expressed great hesitation about the death penalty. And what we also know is that the three jurors who got the graphic script, Troy Woods, the black juror; Mr. Gutierrez, the Hispanic juror; and Marie Sztybel, the only Jewish juror. If the Court has no further questions.
John Paul Stevens: The case is submitted.


Warren E. Burger: We’ll hear arguments first this morning in 73-9, Commissioner of Internal Revenue against National Alfalfa Dehydrating and Milling Co. Mr. Smith, you may proceed whenever you’re ready.
Stuart A. Smith: Mr. Chief Justice and may it please the Court. This income tax case comes here on a writ of certiorari to the United States Court of Appeals for the Tenth Circuit. It involves the questions whether amortizable bond discount, which is deductible as interest under Section 163 of the Internal Revenue Code, arose out of a transaction accomplished by the respondent corporation in 1957. Specifically, the transaction involved was an elimination of respondent’s outstanding $50, par 5% cumulative preferred stock, and a substitution for this eliminated preferred stock of an issue of $50 face amount, 5% bonds to be issued to the holders of the eliminated preferred on a dollar-for-dollar basis. The detailed facts underlying this transaction are briefly as follows. In 1957, respondent had two stock issues outstanding. First, an issue of $1 par common stock; secondly, an issue of 47,059 shares of $50 par 5% cumulative preferred on which there were, in 1957, dividend arrearages amounting to $10 per share. According to the certificate of incorporation, the preferred stock was redeemable according to a fixed downward sliding scale. So that, in 1957, the redemption price was $51 per share plus the $10 dividend arrearages. The preferred shares redeemed could not be reissued, but pursuant to provisions of the Articles of Incorporation, had to be canceled upon receipt or ultimately returned to the redeeming shareholders. On April 8, 1957, respondent’s directors proposed a three-part plan which they characterized as a reorganization of the company by way of a recapitalization. The three steps to the plan were as follows. First, the directors proposed a series of three amendments to the Certificate of Incorporation. Under the First Amendment, the preferred issue would be eliminated. Secondly, the par value of the common would be increased from $1 to $3, and an authorization of the number of common shares would be increased from some 763,000 to 1 million shares. Finally, the corporation was to be authorized to issue warrants for the purchase of common stock. The second part of the plan involve the issuance of 18-year bonds bearing a stated interest rate at 5% and a $50 face amount to the holders of the eliminated preferred. These bonds were to be subordinate to bank loans for inventory and to supply our obligations. The bonds were to be redeemable at par plus accrued interest and, like the preferred stock for which they were to serve a substitute, they were subject to a sinking fund redemption provision. Finally, the third step of the plan was to issue to the preferred shareholders a warrant enabling them to purchase common stock. The terms of the warrant were enable the prefer-- the holders of the eliminated preferred to purchase one-half of a share of common stock at $10 a share. This warrant was to be in lieu of the dividend the arrearages of $10 which existed in 1957. The shareholders approved the plan and the focus of this case is on the second step of the plan. That is, the issuance of bonds in substitution for the eliminated preferred stock. A total of some $2 million of face amount bonds were issued which was exactly equal to the par amount of the eliminated preferred. Thus, the capital of the corporation was reduced by some $2 million in the preferred stock account, and the bonds payable account was correspondingly increased by the same amount. At the time of this transaction in 1957, there had been sporadic transactions involving, but a few hundred shares on an over-the-counter market of respondent’s preferred stock. The price range of these transactions were bid ranging from $29 to $33 a share and an offering price of $32 to $35 a share. Respondent claimed discount deductions for the $17 difference between the face amount of each bond issued, that is, $50 and the asserted fair market value of the preferred stock which was eliminated, that is, $33. This case involves the propriety of that deduction.
Potter Stewart: There’s no argument about the $33--
Stuart A. Smith: No, there’s no argument that-- well--
Potter Stewart: -- of the accuracy of that figure?
Stuart A. Smith: Well, the accuracy of that figure is only questionable from the point of view of the sporadic nature of the transactions and since it only involved but a few hundred shares of the 47,000 shares outstanding, but for purposes of this case, there’s no argument that the fair market value could have been $33. The Tax Court upheld the commissioner’s disallowance of the deduction in a unanimously reviewed decision, but the Tenth Circuit reversed with one judge dissenting. In a series of decisions of this Court, this amortizable bond discount has been correctly recognized as essentially in the nature of interest. And, this Court has also defined in numerous decisions “interest” as the compensation for the use of forbearance of money which has long been deductible under the Income Tax Acts and which is currently deductible under Section 163 of the Code. The best way to understand how bond discount works, we believe, is by reference to the prototype transaction set forth in our brief at page 10. In this prototype transaction, a corporation issues a bond with a face amount of $1,000 bearing stated interest at a rate of 5% over a 10-year term. The bond is issued for $950. The stated interest of 5% produces an interest obligation of 5% of $1,000 or $50 a year. But because the issuer of the bond must pay back to the holder an additional $50 after the bond is retired, that additional $50 is also a cost of borrowing money and, as such, is deductible as interest. Because it is payable over the term of the bond, this Court and appropriate treasury regulations have permitted a ratable deduction over the term of the bond or amortization, if you will. Thus, the allowable deduction to the issuer on the prototype bond would be $55 a year and not $50 a year. The critical question in this case is whether this transaction is analogous to the prototype transaction. Here, we have a situation where the corporation issued a $50 debenture in substitution for a share of eliminated $50 par preferred stock. There’s no question that respondent, upon the original issuance of the preferred stock, received $50 in the corporate teal, so to speak. It has now transformed that preferred stock investment into a liability which will be payable over an 18-- at the end of 18 years. It originally received this $50 and it now promises to pay $50 out over the end of the term. This equivalence has been reflected in the journal entries of respondent which -- for they have reduced their capital account by the $50 par amount for each bond -- for each preferred stock share which has been eliminated and have increased their bonds payable account by a like amount. This simple substitution of one security for another does not involve an obligation to pay in the future any more than the $50 originally received for the preferred stock. And, we believe that as a matter of numerical equivalence there can be no discount in such a transaction. Now, respondent and the Tenth Circuit have focused on these sporadic sales of the preferred shares at $33 a share. It held that there was $17 of discount on the issuance of each debenture. But, recalling that discount simply involves an obligation to pay in excess of an amount borrowed just as the corporation in the prototype transaction has promised to pay $1,000 although it has only borrowed $950, we submit that there is no such excess in this case. For discount to exist in this case, the amount borrowed must be somehow analogous to the $33 in the same way that the $950 in cash is analogous to the amount borrowed in the prototype transaction. But unlike the prototype transaction where the corporation has fully available $950 of cash for its use in the business, here, all respondent has is a certificate of its preferred stock which is immediately canceled by the terms of the Articles of Incorporation. Thus, the so-called $33 fair market value of the preferred stock is meaningless to the respondent and in no sense, can it be said to have received $33 in a borrowing transaction. Now, respondent disputes this analysis. It argues that it only entered into this transaction because it did not have $33 in cash to redeem its preferred shares. As a result, it had to issue bonds in the face amount of $50 and the argument goes that the $17 of excess is interest or deductible discount. It analogizes its preferred shareholders through a so called financing medium, as it uses the term in its brief.
Potter Stewart: What was the life of the bond?
Stuart A. Smith: The life of the bond here was 18 years.
Potter Stewart: Eighteen.
Stuart A. Smith: But respondent’s argument assumes that it could have redeemed $33 for cash, but recalling that the preferred shareholders were entitled to a redemption price of $51 a share in 1957 plus the $10 of dividend arrearages, this is a $61 obligation per share to each preferred shareholder and not a $33 obligation. There is no basis for inferring that the excess over the asserted fair market value of the preferred stock is a cost for the use of borrowing money. Indeed, the inference that discount exists in this case becomes even weaker when we recall that the bonds themselves bore a stated interest rate of 5%. Indeed, if respondent had redeemed the shares for cash at any price, the cases are clear that it would be entitled to no income tax deduction at all. It therefore becomes apparent that it is simply absurd to infer a $17 deduction for deductible interest when the redemption price was possibly as much as $61.
William H. Rehnquist: Well, what if the respondent had sold the bonds to third parties, gotten cash from them, and used the cash to redeem the preferred stock?
Stuart A. Smith: Mr. Justice Rehnquist, that kind of analogy was one of the basis of the reasoning of the court below and, we feel that it is simply a variation, as I will point out, of respondent’s financing medium argument. The Tenth -- what the Tenth Circuit did was to analogize the transaction and to break it down into two elements: one, the issuance of a bond -- $50 face amount bond for $33 in cash and then the use of the $33 in cash to redeem the preferred shares. The court claimed that, looking at the transaction that way, that there would’ve been discount as a result of the first aspect of the transaction, but this analogy, we feel, is erroneous from several different perspectives. First of all, it is the transaction at issue here, the unified transaction which must be scrutinized and not a break down into what we regard as hypothetical nonexistent components, but there are also two factual misapprehensions about the analogy. To begin with, it is entirely unsupported in the record to make an assumption that respondent could have reissued a $50 -- if it had issued a $50 bond in 1957, it would have only received $33 in cash, especially unsupported in view of the fact that the bond itself carried a stated interest rate. But, as I’ve also pointed out, there is no basis for assuming that respondent could have redeemed its preferred shares for $33 in cash because the redemption price in 1957 was $61. And if this $61 obligation was settled for $50 which got put on the face amount of the bond, there is no reason to infer that any part of that $50 is the cost of borrowing. Now, even if respondent had --
Potter Stewart: But there was no obligation on the part of the corporation to redeem, is there?
Stuart A. Smith: There’s no obligation -- there was no obligation.
Potter Stewart: They could’ve redeemed at $61 --
Stuart A. Smith: They could have.
Potter Stewart: -- under the sliding scale of that --
Stuart A. Smith: Yes.
Potter Stewart: -- at that particular time.
Stuart A. Smith: Yes.
Potter Stewart: There’s no obligation, unlike the maturity of the bond, there’s no obligation at all.
Stuart A. Smith: Right.
Potter Stewart: What happened here was that each shareholder turned in a piece of property worth $33 in return for a $50 bond. Is that right?
Stuart A. Smith: Worth $33, but --
Potter Stewart: In the market?
Stuart A. Smith: In the market.
Potter Stewart: In the marketplace?
Stuart A. Smith: Right, but not worth $33 --
Potter Stewart: It was worth $61 because he had no right to compel redemption?
Stuart A. Smith: He had no right to compel redemption, but if redemption were to be affected as it was in this case, it had to be -- it could have -- the shareholders could have insisted on $61 per share.
Potter Stewart: If had there been redemption?
Stuart A. Smith: Had there been redemption.
Potter Stewart: But there wasn’t, there was an exchange --
Stuart A. Smith: Well, in exchange --
Potter Stewart: -- of a piece of property worth $33, i.e. the preferred stock of the company, in return for a $50 bond bearing a 5% rate of interest in 18-year bond, is that it?
Stuart A. Smith: That’s correct, but --
Potter Stewart: You don’t need to cut this thing and dichotomize it?
Stuart A. Smith: No, exactly and we feel that the Tenth Circuit, having done so, that it was error to have done that.
Potter Stewart: You think it is error.
Stuart A. Smith: Because this was --
Potter Stewart: Let’s assume it was error. Just look at it as a unitary transaction in exchange of property worth $33 for a bond with a $50 face value and a 5% interest rate with an 18-year maturity.
Stuart A. Smith: Okay. Well, if we look at it that way, the -- first of all, there was -- the corporation did not receive property worth to it $33 in the same way that the corporation, the prototype transaction, received an amount less than an amount which it obligated itself to pay in the future. There was no excess -- obligation to pay an excess over an amount borrowed. Here, the numerical equivalence is such that the corporation originally took in $50 for its preferred shares. It has transformed that into a $50 liability and we believe that the $33 to have -- that the reference to the $33 asserted fair market value of preferred shares becomes irrelevant because this is simply a substitution of one security for another.
Thurgood Marshall: It says the bookkeeping transaction?
Stuart A. Smith: A bookkeeping transaction in the sense that it is a reshuffling of one security for another, technically called a recapitalization.
Warren E. Burger: Well, they’re very different kinds of securities however, aren’t they?
Stuart A. Smith: They are different.
Warren E. Burger: One is debt and one is ownership?
Stuart A. Smith: They are different kinds of securities, but we don’t think that makes any difference in this case. In fact, the similarities, Mr. Chief Justice, far outweigh the differences because just as the bonds was subordinate to supply our obligations in bank loans, the preferred shareholders were also subordinate -- could only get their $50 upon a voluntary liquidation of the corporation, so to speak. So that, both really stood in somewhat the same position. We think that the similarities far outweigh the differences.
Warren E. Burger: Well, but the relationship of the parties very drastically changed, did it not, from ownership to --
Stuart A. Smith: From a corporate point --
Warren E. Burger: -- from ownership to a debtor-creditor relationship?
Stuart A. Smith: That is from a technical corporate point of view, that’s correct. But, we don’t think that should make any difference in this case where we have simply $50 going into the corporation through the par value of preferred stock. There’s no dispute that the corporation received $50 and then it simply promises to pay $50 in the future. Discount involves the existence of an obligation to pay something in excess of an amount borrowed and there was no obligation here to pay anything in excess of the $50 the corporation originally received on the issuance of its preferred stock. Finally, the Tenth Circuit’s analogy becomes -- flies squarely in the face, we believe, of this Court’s decision in Great Western Power Company versus Commissioner, specifically held that such a substitution of one security for another is a unified transaction and not a transaction involving a breakdown of the issuance of the second one for the cash and the elimination -- and then the use of that cash to eliminate the first security. Now, it seems to us that the Tenth Circuit misconceived the basic essentials of these transactions. So, what we have here is simply the substitution of one security for another and we submit that a corporation’s issuance of debentures for stock is simply a capital readjustment that does not give rise, with those facts alone, to an inference of the existence -- for the existence of discount. This -- thus, the $33 asserted market value of preferred shares becomes completely irrelevant. And the correctness of this proposition, we believe, is amply demonstrated by two things in this case where you have a dollar-for-dollar exchange and where, as a matter of corporate mechanics, the corporation received nothing upon the exchange because the stock was immediately canceled. Now, the Tax Court decided this case on the basis of a dollar-for-dollar exchange and in so holding, it followed the reasoning of a series of recent Court of Claims decisions which had also premised the nonexistence of discount in transactions like these on a dollar-for-dollar equivalence between the par value of the eliminated preferred stock and the face amount of the bond. Now, we think while this rationale is certainly sufficient to reverse the judgment below, there are other ramifications of this problem which we believe this Court should consider in formulating a basis for its decision. As I’ve said, as a general proposition, we do not believe that a capital readjustment of this type gives rise to amortizable bond discount. Consider the situation of the corporation having issued a $55 face amount bond for the $50 preferred stock. In such a situation, we still think that there is no basis for inferring bond discount. Now, the Court of Claims has suggested and two District Courts have more explicitly held that discount might arise in such a transaction. A District Court decision has proposed a formula for the measurement of discount in the following transaction which would be as follows. It would measure the difference between the face amount of the bond in the example of $55 and the greater of the following two quantities. First, the par value of the stock, here $50 or the value of the preferred stock to the corporation at the time of the exchange. Now, under the District Court’s formula, the value to the corporation of the preferred stock may be greater than the par value of the preferred stock, but could in no instance be less than the par value. Thus, for purposes of the example, under the District Court’s approach there could be as much as $5 of discount in this transaction in the $55 -- 50 transaction, but might be less.
Potter Stewart: How would the value to the corporation be measured? Would it be the $61 figure?
Stuart A. Smith: It’s not entirely clear, Mr. Justice Stewart, exactly what the District Court had in mind and that is one of our complaints about this test. We think that the concept of value to the corporation introduces as vague and meaningless term.
Potter Stewart: If they would’ve cost the corporation $61 in cash to redeem any one of these preferred shares as of the time of the conversion, would it not?
Stuart A. Smith: Yes.
Potter Stewart: So I would suppose that would be the “value” to the corporation, that’s what it would’ve cost the corporation to get it.
Stuart A. Smith: On a redemption.
Potter Stewart: Yes.
Stuart A. Smith: The problem with that kind of analysis is that --
Potter Stewart: Although the corporation could go out in the open market and buy it for $33.
Stuart A. Smith: Yes, but as -- simply, as a matter of realistic market mechanics, I would assume that if the corporation here attempted to buy up as many shares as it could on the open market --
Potter Stewart: I know.
Stuart A. Smith: -- it’s intention to retire the whole issue would’ve become apparent and the market price would’ve been pushed up toward the redemption price.
Potter Stewart: But you don’t understand, in other words, what the court meant by the alternative.
Stuart A. Smith: Well, it’s not entirely --
Potter Stewart: Either the -- it’s either the par value, assuming that par value had been the true amount paid in capital, or you say alternatively the value to the corporation and your representation is you don’t understand what that means --
Stuart A. Smith: Well, I don’t think the courts quite understand what the value to the corporation means because the Court of Claims has suggested that fair market value of the preferred stock is a relevant consideration for determining the value to the corporation, but it is not a determinant consideration. Thus, it seems that the courts know that they want to get away from this approach once they get away from fair market value which, of course, we also contend is erroneous, but it’s not clear to the courts exactly what this term “value to the corporation” is. Now, whatever it is, we submit that there still is no basis for an inference that discount arises in such a transaction. To begin with, if the term “value to the corporation” means what the corporation would be willing to pay for the preferred stock, then even under the District Court’s formula there would be no discount because there would be a face amount of $55 for the bond and the corporation would be willing to pay $55 for the stock. Thus, there would be no element of that $50 -- $55 figure would constitute a cost of borrowing. Indeed, there are many instances which we might call to mind to suggest why a corporation would be willing to purchase its preferred stock for more than its par value. There could be a call premium, or whatever, which might force the corporation to be required to pay from its shareholder more than the par value of the stock. So, if that value to the corporation means the price at which the corporation pays for the stock, there would be no discount. But, even conversely, if the face amount of the bond represents somewhat more than the corporation would be willing to pay for the stock, there is still no reason to infer the existence of discount. There are varieties of other corporate reasons completely unrelated to the cost of borrowing money which could form a basis for understanding why a corporation would enter into a transaction like this. For example, in this very case, respondent could have -- respondent wanted to eliminate the dividend arrearages. It could’ve decided that it wanted to transform nondeductible dividends on preferred stock into deductible interests. It could’ve decided it wanted to eliminate the preferred shares which were held by a dissident group. In any event, we submit that there are varieties of other independent reasons which would form the basis of a decision why a corporation would be willing to pay more for its preferred stock than the so-called market value or its value to the corporation which are totally unrelated to the cost of borrowing money.
Potter Stewart: What voting rights, if any, did the holders of the preferred shares have?
Stuart A. Smith: They did vote as a class and, in fact, voted on this very plan.
Potter Stewart: Share-for-share with the common shareholders?
Stuart A. Smith: I think as -- I think, simply, it was a much smaller class. I think it was share-for-share. I’m not exactly sure.
Potter Stewart: Many if you’re par view of shares.
Stuart A. Smith: Yes, par view of shares.
Potter Stewart: And no increase in voting power when there were arrearages?
Stuart A. Smith: No, not that I’m aware of. I see that I have little time left. I would like to save it for rebuttal if the Court has no further questions.
Warren E. Burger: Very well, Mr. Smith. Mr. Hess.
Charles White Hess: Mr. Chief Justice and may it please the Court. My name is Charles Hess. I’m an attorney from Kansas City, Missouri and with the firm of Lindy, Thompson, Van Dike, Fairchild, and Langworthy. We have represented the respondent National Alfalfa Dehydrating and Milling Co. for many years and have represented them throughout this litigation. Mr. Smith’s presentation of the facts has been relatively accurate. However, we cannot agree with the facts which he emphasizes nor with his characterization of the redemption or exchange transaction which occurred in this case as a substitution of securities. In its simplest form, National Alfalfa issued a $50 face amount 5% debt obligation, repayable in 18 years to its preferred shared holders in exchange for or redemption of each share of their preferred stock which had a fair market value of $33 at the date of the exchange. The preferred share holders retained no further equity interest in the corporation. The economic reality surrounding the exchange, which are substantiated in the record, dictated that the issue price of each debenture was $33 or the fair market value of the preferred stock. And, that the difference of $17 between the face amount of the debenture and its issue price of $33 represent a discount. The economic facts surrounding the transaction which dictated that $33 was the true and meaningful value to be attributed to the issue price of the debentures are numerous. The preferred stock for which each debenture was issued had a fair market value in the over-the-counter market of $33 per share. Seventeen --
Harry A. Blackmun: Is that stipulated?
Charles White Hess: Yes, it was a stipulated fact in the Tax Court.
Harry A. Blackmun: Did they stipulate to the extent that it would’ve been possible to purchase it on a market at that figure or just that it had a value?
Charles White Hess: There are two or three exhibits. The stipulation refers to the exhibits. One is the National Stock Summary which summarizes the activity in over-the-counter stocks and it’s used by the Internal Revenue Service for estate evaluation, that type of thing. And, we have all of the bid and ask -- and exchanges is made during two or three months around July of 1957. The other exhibit is a letter from Francis I. DuPont which was the chief market maker in the stock at that time quoting the bid and ask prices on 10 days either side of the date of the exchange. And the stipulation refers to this and states that the value was $33. In addition to the preferred being worth $33 in the market, there were four years of dividend arrearages on the preferred. National’s credit rating was so poor at that time that it could not borrow sufficient funds from banks to finance inventory requirements for its operations. National’s balance sheet and operating statement, which are reflected in the Tax Returns which are exhibits in our record, reflected that its prefer -- reflected that its overall financial picture was very poor. It did not have sufficient cash or liquid assets to redeem the preferred for $33 in cash. The fact that the preferred shareholders were to be removed by this redemption as equity owners in National through the redemption meant that the negotiations preceding the exchange and the exchange itself were arm’s length dealings, taking into account the relative positions of each of the preferred shareholders at the time of the exchange. The ruling letter issued by the Treasury prior to the exchange properly describing the exchange as a redemption and requiring the recognition by the preferred shareholders of gain or loss on the exchange clearly acknowledged the arm’s length dealing inherent in such an exchange which took into account the economic status of the parties at that time. Judge Phillips for the Court of Appeals recognized the economic realities existing in the transaction which lead him to the proper conclusion that the debentures were issued for $33 and that the $17 difference was interest in the form of discount. He recognized that the financial status and negotiating position of the parties in 1957 and the then current value of the preferred stock determined the face amount, the stated interest rate, and the discount on the debentures. All of which are variable factors depending upon the circumstances of any given exchange.
Harry A. Blackmun: Mr. Hess, I suppose if National Alfalfa had actually done that, gone out into the market and done what was supposed, you wouldn’t be here, there’d be no case?
Charles White Hess: That is true.
Harry A. Blackmun: Of course in tax law we have a lot of distinctions and cases depending on what actually was done, not on what might have been done, but you feel that what might have been done equates with what was done?
Charles White Hess: Very much so. I think his analogy, although it sets up slightly different facts, really explains the economic realities of what happened. If National had done that, I’m not sure exactly what would’ve happened. They may not have been able to sell their debentures for $33 cash. The discount may have been greater. There’s no guarantee that, in the marketplace, that they could’ve gotten $33. They might have gotten $25 and we’d have been asking for deductions for $25 instead of $17.
Harry A. Blackmun: Your Tax Court decision was reviewed by the Full Court, wasn’t it?
Charles White Hess: Yes.
Harry A. Blackmun: It’s a little surprising you didn’t pick up somebody in your favor among that array of tax judges.
Charles White Hess: The -- in all of the cases that had been cited on the variant issues here, the Court of Claims and the Tax Court are the only ones that had gone this direction. The Courts of Appeals have gone the other way, the various Circuit Courts of Appeal. And, I think that they’ve just gotten -- they got off on wrong intention and I can’t explain that, their decision, I think it’s wrong. They purposely refused to follow the decision of the Court of Appeals of the Tenth Circuit in (Inaudible) and Santa Fe case which was a decision that was made in 1970 which allowed bond discount in a railroad reorganization situation.
Harry A. Blackmun: Of course the Tax Court’s been wrong before. You hope they’re wrong again.
Charles White Hess: Right, I sure do.
William H. Rehnquist: Mr. Hess, in the real world of finance, are there many debentures with the face value of $50 that you would market for $25? I mean, is this something that happens with any frequency?
Charles White Hess: I’m not sure that I have the background to tell you that. I do know that from the calculations that Judge Phillips made, the actual dollar effect of this was that an additional 1.9% interest would be added to the stated interest rate of 5%. So although the discount in terms of $17 on $50 sounds high, if you recognize it in the form of 6.9% total interest, that’s not all that high.
William H. Rehnquist: Then a $5 discount, say $50 or $45 or $30, has just really a very insignificant effect on the stated interest rate if $17 would have that small?
Charles White Hess: Yes, I can’t calculate quite that fast, but I assume it would be much smaller than 1.9%. It might be 0.5, it might bring it up to 5.5.
Potter Stewart: But you get a very substantial discount sometimes depending upon the stated interest rate in the debenture. I mean, if it were 2%, say the debenture compared to today’s interest rates, there would be a tremendous discount and, plus the condition of the issuer. I mean, a debenture, by definition, is an unsecured -- basically, unsecured debt obligation as contrasted to a bond. And, that could amount to -- you could get a very substantial discount in that area of magnitude.
Charles White Hess: The discount will vary directly with the stated interest rate, it’s one factor and --
Potter Stewart: Stated interest rate and the secure --
Charles White Hess: Condition, right.
Potter Stewart: -- and the strength of the issuing company, the financial strength.
Charles White Hess: And National, at this time, was not strong. Judge Phillips noted that the preferred shareholders were acting as a financing medium to the extent of the $33 of actual value of the debentures received by them, an amount which National did not have in cash to pay them. Now underlying these economic facts, the Court of Appeals understood that the preferred shareholders upon receiving the debentures became creditors and that National’s relationship to them after the exchange was entirely different than before. First of all, there was the requirement for repayment of $50 at the maturity in 18 years. Secondly, there was a fixed interest payments that had to be made. The default provisions of the indenture exposed National’s assets in the event that the interest or principal were not paid. Restrictions in the indenture prohibited numerous financing in operational activities of National, and the establishment of and payments to a sinking fund further protected the debenture holders. In fact, the sinking fund was used entirely properly. It was funded at every point that it was supposed to be funded and the debentures have been retired in proper order. Now, in contrast to the economic analysis approach in our case which the Court of Appeals took, the Erie Lackawanna case which is a Court of Claims case takes an historical approach and it was mentioned by Mr. Smith. Now, Erie Lackawanna, being a Court of Claims decision, is the corner stone of all of the cases supporting the commissioner’s position, in this case and from which he has attempted to develop some theory which would prevent the use of fair market value of the preferred as the issue price of the debentures. The dissent in our case relied on the rationale of the Erie case. But the approach used in Erie has been termed the arithmetical equivalence theory or the numerical equivalence theory which Mr. Smith used today. Basically, it is -- that approach is that since $50 was originally received upon issuance of the preferred by National and, ultimately, many years later, National will pay $50 to a debenture holder, then the corporation has not been hurt. The total inadequacy of this arithmetical equivalence approach is three-fold. First, it ignores the basic qualitative differences between debt and equity instruments. Namely, the $50 face amount on the debentures must be paid back. The $50 par on the preferred is never required to be paid back. The debentures appear as a long-term liability on the balance sheet. The preferred -- the interest of the preferred holders appears in a stockholder’s equity account and these entries reflect the basic transformation that occurs in an exchange. The debenture holder is a creditor and not an owner. He has no residual interest in the corporation or its profitability. He has no voice in corporate policy and, he takes no risk. None of these are true with the preferred. The arithmetical equivalence theory also ignores the economic reality surrounding exchange. In spite of the fact that the economic facts at the date of the exchange determine the elements of consideration given by each of the parties to the exchange, the amicus Norton Simon set forth a hypothetical which I think is very appropriate in showing the impropriety of this arithmetical equivalence theory. If National’s preferred had been $10 par, but the fair market value at the date of the exchange was $50 and National went ahead and issued a $50 face amount debenture for the preferred, under the Erie Lackawanna case and the arithmetical equivalence theory, we would be entitled to a deduction or discount of $40, the difference between the $50 face amount of the bond and the $10 par value of the preferred. Obviously, this is not right. We would be giving up a face amount debenture worth $50 and receiving something of -- with a fair market value of 50, and I think these points out the weakness of that arithmetical equivalence theory. Now, the arithmetical equivalence theory finds no support in the Internal Revenue Code sections dealing with bond discounts. In analyzing the appropriateness of National’s deduction for interest in the form of discount, you must realize that the Internal Revenue Code contains counterparts of the interest deduction for amortized bond discount. These provisions provide the symmetry to the text elements of a transaction normally found in the Internal Revenue Code. The debenture holder reports the interest which is in the form of discounts as ordinary incomes. If a corporation repurchases its debentures in the market at less than face value, which National did in this case, the difference between the face value and the lesser price paid in the market is reported as ordinary income by the corporation on its tax returns. If, for policy reasons, the commissioner or others such as the court in Erie feel that a corporation should not obtain a deduction for discount in a case such as this where it is clearly authorized by the codes and sections dealing with interest deductions and where it is clearly supported by the economic facts in the situation, then we believe that the place for them to look is to Congress. However, it may be too late at this point because Congress in the 1969 Tax Reform Act resolved this problem for the future and, we believe, did so in a manner consistent with the decision of the Court of Appeals in this case. The Court of Appeals' decision in this case was appropriate. Respondent respectfully requests that the decision of the Court of Appeals for the Tenth Circuit be affirmed. Thank you very much.
Warren E. Burger: Thank you Mr. Hess. Do you have anything further, Mr. Smith?
Stuart A. Smith: Just a few points. Mr. Justice Blackmun asked about the fair market value of the preferred stock. The reference in this stipulation in the Tax Court is at page 27 of the record, paragraph 13. There was no stipulation between the parties with respect to fair market value. All the stipulation says, is attached hereto and marked as Exhibit 17, is a letter from Francis I. DuPont and company in which the bid and ask range prices are quoted. That’s the only thing in the record with respect to the fair market value of the preferred stock.
William H. Rehnquist: Did government put in any evidence contradicting that?
Stuart A. Smith: No, because from our point of view the fair market value of the preferred, whatever the fair market value of the preferred stock, doesn’t --
William H. Rehnquist: Didn’t make any difference?
Stuart A. Smith: -- Doesn’t make any difference. Since discount involves an obligation to pay an amount in excess of an amount borrowed, we don’t think that there was anything in excess of $50. With respect to the similarities and difference -- alleged differences, between the preferred stock and the debentures, let me just refer the Court to the discussion on pages 14 and 15 of our brief in which it is pointed out that both the preferred stock and the debentures were both subject to comparable sinking fund provisions which would retire both of them. I think that simply, as a matter of realism, both the preferred shareholders here and the debenture holders were both subject to the risk of the business. If the business didn’t make any money, then the debenture holders wouldn’t get paid nor would the preferred shareholder’s investment really be worth anything. I think in closing, what I simply want to emphasize is what the taxpayer is arguing for here is an automatic rule which would insist upon the existence of discount between the face amount of the debenture and the asserted fair market value of the preferred stock. We say, on those facts alone, there is no basis for inferring discount and that the basis of the lack of discount is graphically illustrated in this case by the equivalence between the par value of the preferred stock and the base amount of the debenture. The corporation took in $50 and promised to pay out no more than $50 over the end of the term. But simply, if the corporation had increased the face amounts of the debenture, we do not think -- it’s $55, we don’t think that there is a basis for inferring the existence of discount. We think that the taxpayer should be put to the burden of demonstrating that that excess really represents the cost of borrowing and that since that there are a variety of reasons why a corporation would want to enter into a transaction like this -- I see my time is up, I’ll just finish my sentence, we think that those reasons should control unless there is strong evidence inferring an additional cost of bond. Thank you.
Lewis F. Powell, Jr.: Mr. Smith, may I ask you a question. Do you attach any significance to the 1969 amendment to the code argued in the amicus briefs and also --
Stuart A. Smith: We do not think --
Lewis F. Powell, Jr.: -- in your reply brief?
Stuart A. Smith: We have filed the reply brief, Mr. Justice Powell, which discusses this point. Briefly, we do not attach any significant -- any really significance to the 1969 amendment. But, we do note that the approach of Congress in 1969 is parallel to the approach we would take in this case. That, as a general rule, when a corporation issues bonds for property, Congress has declared in 1969 that the issue price is equal to the face amount of the bond with only two exceptions, that either the bonds be traded on a public exchange, or that the stock be traded on a public exchange. Neither of those facts exists in this case, and we think that the general rule without the exceptions lend support and is parallel to the approach we take here.
Warren E. Burger: Thank you, Gentlemen. The case is submitted.