Court Opinion

ID: 8898547
Source: CourtListenerOpinion
Date Created: 2022-11-27 00:33:29.390377+00
Date Added: 2024-06-11T17:07:39.945162
License: Public Domain

LAY, Circuit Judge
(concurring).
Granting a directed verdict for the taxpayer on these facts was improper under § 482. I concur in the result reached by the majority.
However, I do not agree that the question of abuse of discretion by the Commissioner in reallocating income under § 482 is for the jury. The Commissioner’s decision under § 482 is not to be disturbed unless the taxpayer demonstrates it is “unreasonable, arbitrary or capricious.”1 Whether the Commissioner’s discretion has been properly exercised is, in my view, an ultimate question of law for the court.
The majority’s attempt to equate the Commissioner’s abuse of discretion in terms of unreasonableness with a jury’s finding of lack of reasonable care in a negligence case confuses what is properly a question of law with a question of fact. Reasonableness under negligence standards falls within the peculiar competence of a lay jury simply because the standard of due care is that of the reasonable person acting under similar circumstances. This is a nontechnical question of human conduct. See United States v. Kaiser, 363 U.S. 299, 304-05, 80 S.Ct. 1204, 4 L.Ed.2d 1233 (1960). How*780ever, whether the Commissioner’s allocation under § 482 is reasonable is a far different question. The jury has no special expertise or competence to guide them in this determination. The nontechnical definition of the reasonable person is alien to this determination.
Under § 482, many intricate factual and legal factors are called into play. More importantly, under § 482, in granting broad discretion to the Secretary of the Treasury and his delegate, the Commissioner, Congress obviously relied on the expertise of the Commissioner to determine whether and to what extent reallocation is necessary to clearly reflect income when enterprises are subject to common control. This explicit grant of discretion differentiates § 482 cases from other tax suits in which the Commissioner’s determinations merely carry a presumption of validity, as in the question of whether a purported business expense is “reasonable and necessary” or whether an employer’s payment is a gift or compensation for services rendered. Cf. Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960); Ferguson, Jurisdictional Problems in Federal Tax Controversies, 48 Iowa L.Rev. 312, 341-44 (1963). Where, on the other hand, Congress has expressly granted discretion to give scope to administrative expertise it surely did not intend that expertise to be nullified through substitution of the jury’s judgment for that of the Commissioner. This is the effect of the majority opinion.
The jury may have a limited role in § 482 cases. I agree with the majority that the jury may decide whether the factual prerequisites to a § 482 reallocation are present. Thus, with proper instructions, a jury could be permitted to decide: (1) whether there were two or more businesses; and (2) whether the businesses were subject to the same control. The taxpayer has the burden of proving that one or both of these prerequisites to reallocation did not exist.
Once these factual issues have been resolved, however, the court must determine their legal effect. If the taxpayer has successfully proved that one or both of the prerequisites was absent, then the court should enter judgment in the taxpayer’s favor for the reason that the Commissioner had no power to reallocate at all. If, on the other hand, the jury finds the prerequisites present, then the court should decide whether the Commissioner has abused his discretion (1) in deciding that some reallocation was necessary to clearly reflect income or to prevent evasion of taxes; or (2) in making a particular reallocation. The Commissioner need only arrive at a reasonable approximation of the income result of arm’s length dealing under the circumstances.2 If he has done so, the Commissioner’s finding is not arbitrary,3 and must be sustained even if the court, were it deciding the question in the first instance, might have acted differently.
The right of trial by jury in tax cases is not governed by the Seventh Amendment. Wickwire v. Reinecke, 275 U.S. 101, 105-06, 48 S.Ct. 43, 72 L.Ed. 184 (1927). The right to a jury trial on factual questions in refund suits was originally recognized by implication from a statutory reference to suits at law. Id. Today, the statutory grant is explicit in tax refund cases under 28 U.S.C. § 2402, enacted in 1954 as an amendment to the Tucker Act, 28 U.S.C. § 1346.4 Where Congress gave specific discretion to the Commissioner as under § 482, it logically follows that his determination was not intended to be nullified by jury review.

. “Abuse of discretion”, “unreasonable” and “arbitrary and capricious” are treated as different methods of stating the same standard under § 482. See Liberty Loan Corp. v. United States, 498 F.2d 225, 229 (8th Cir.), cert. denied, 419 U.S. 1089, 95 S.Ct. 680, 42 L.Ed.2d 681 (1974); Pauline W. Ach, 42 T.C. 114, 125-26 (1964), aff’d, 358 F.2d 342 (6th Cir.), cert. denied, 385 U.S. 899, 87 S.Ct. 205, 17 L.Ed.2d 131 (1966).

. See Liberty Loan Corp. v. United States, 498 F.2d 225, 229 (8th Cir. 1974); B. Forman Co. v. Commissioner of Internal Revenue, 453 F.2d 1144, 1157 (2nd Cir.), cert. denied, 407 U.S. 934, 92 S.Ct. 2458, 32 L.Ed.2d 817 (1972).

. Any jury verdict to the contrary would have to be set aside under a judgment notwithstanding the verdict. See Brentwood Homes, Inc. v. United States, 240 F.Supp. 378 (E.D.N. C.1965), aff’d sub nom., J. R. Land Co. v. United States, 361 F.2d 607 (4th Cir. 1966).

. Act of July 30, 1954, ch. 648, § 2(a); 68 Stat. 589.