Burns, Stix Friedman & Co. v. Comm'r of Internal Revenue

• Decision Date: 16 December 1971
• Docket Number: Docket No. 4798-69.
• Citation: 57 T.C. 392
• Parties: BURNS, STIX FRIEDMAN & CO., INC. (FORMERLY SEMPLE, JACOBS & CO., INC.), PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

57 T.C. 392

BURNS, STIX FRIEDMAN & CO., INC. (FORMERLY SEMPLE, JACOBS & CO., INC.), PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 4798-69.

United States Tax Court

Filed December 16, 1971.

Henry C. Lowenhaupt, for the petitioner.

St. Clair Reeves, for the respondent.

The United States Tax Court as established under the Tax Reform Act of 1969, secs. 941-962, is an article I or ‘legislative’ court. The exercise by it of the jurisdiction conferred upon it by that Act, and prior law, does not violate article III of the Constitution of the United States.

OPINION

DRENNEN, Judge:

On July 21, 1970, petitioner filed a motion requesting this Court to take no further action in this case on the basis that (1) the transfer of its cause from ‘an independent agency in the Executive Branch of the Government'¹ to a ‘court of record’ established ‘under Article I of the Constitution of the United States'² is a transfer without due process of law, or (1) any action taken by this Court would be an exercise of judicial power which can only be exercised by a court established under article III of the Constitution. Respondent filed an objection to the motion and a hearing on the motion was held after which the Court took the motion under advisement. Both parties filed briefs in support of their respective positions.

At the hearing and on brief petitioner, abandoned its argument that the transfer of its cause from the Tax Court of the United States to the United States Tax Court³ was a transfer without due process of law.⁴ Thus, the only issue before us is whether this Court is prohibited from taking action herein since it is not established pursuant to the provisions of article III of the Constitution.

Petitioner is a corporation with its principal office being located in St. Louis, Mo., at the time it filed its petition herein. Petitioner filed its Federal corporation income tax return for its fiscal years ending May 31, 1965, and May 31, 1966, with the district director of internal revenue, St. Louis, Mo.

An August 14, 1969, respondent issued a notice of deficiency to petitioner in which he determined deficiencies in petitioner's income tax for its fiscal years ending May 31, 1965, and May 31, 1966. Petitioner filed its petition herein on September 22, 1969, which date was prior to the effective date (December 30, 1969) of the Tax Reform Act of 1969, Pub. L. 91-172 (hereinafter Tax Reform Act).

Section 951 of the Tax Reform Act amended section 7441, I.R.C. 1954, to change the status of this Court from that of an ‘independent agency in the Executive Branch of the Government’ to a ‘court of record’ established ‘under article I of the Constitution of the United States.’ Petitioner contends that by virtue of that legislation Congress established this Court as a judicial tribunal to adjudicate ‘cases and controversies' arising under the laws of the United States and thus to exercise ‘judicial power.’ Petitioner further contends that since the exercise of ‘judicial power’ is restricted by virtue of section 1 of article III of the Constitution to courts established under the provisions of article III, this Court, being established under article I and its judges not having the life tenure and undiminishable compensation provided by article III, ⁵ may not, and its judges should not, exercise such ‘judicial power.’ Thus, essentially, petitioner contends that Congress exceeded its authority in creating this Court as a ‘court of record’ under article I of the Constitution without regard to the sanctions of article III.

Section 1 of article III of the Constitution states:

The judicial Power of the United States, shall be vested in one Supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish. The Judges, both of the supreme and inferior Courts, shall hold their Offices during good Behaviour, and shall, at stated Times, receive for their Services, a Compensation, which shall not be diminished during their Continuance in Office.

Section 2 of article III states:

The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority; * * * to Controversies to which the United States shall be a Party; * * *

Section 1 of article I of the Constitution states:

All legislative powers herein granted shall be vested in a Congress of the United States, * * *

In section 8, clause 9, of article I, Congress is given the power ‘To constitute Tribunals inferior to the supreme Court.’ It has been said, however, that this power ‘plainly relates to the ‘inferior Courts' provided for in Art. III, Sec. 1,‘ and ‘it has never been relied on for establishment of any other tribunals.’ Glidden Co. v. Zdanok, 370 U.S. 530, 543 (1962).

There is no other section in article I which expressly grants Congress the power to create courts. However, in Ex Parte Bakelite Corp'n., 279 U.S. 438, 449 (1929), the Supreme Court stated:

While Article III of the Constitution declares, in section 1, that the judicial power of the United States shall be vested in one Supreme Court and in ‘such inferior courts as the Congress may from time to time ordain and establish,‘ and prescribes, in section 2, that this power shall extend to cases and controversies of certain enumerated classes, it long has been settled that Article III does not express the full authority of Congress to create courts, and that other Articles invest Congress with powers in the exertion of which it may create inferior courts and clothe them with functions deemed essential or helpful in carrying those powers into execution.

The ‘other Articles' referred to above which Congress has used to create courts without regard to article III are article I and article IV. Article IV has been interpreted to give Congress the power to create courts in the territories, American Insurance Co. v. Canter, 1 Pet. 511 (1828), while article I has been interpreted to give Congress the power to create courts to assist it in carrying out its powers under article I. Ex Parte Bakelite Corp'n., supra; Williams v. United States, 289 U.S. 553. Those courts created by Congress pursuant to the power granted in article I, section 8, clause 9, and article III have come to be referred to as ‘constitutional’ or ‘article III’ courts, while those created under other powers vested in Congress under article I are referred to as ‘legislative’ or ‘article I’ courts.⁶

In article I, section 8, clause 1, Congress is given the power to lay and collect taxes and in clause 18 thereof the power to make all laws necessary and proper to carry into execution that power. It was in the exercise of that power that Congress in 1924 created the Board of Tax Appeals, Revenue Act of 1924, 43 Stat. 253, 336, in order that taxpayers would have a forum in which they could have deficiencies in their taxes determined to be owing by the Commissioner of Internal Revenue redetermined prior to payment of the additional tax.⁷ In 1942 Congress changed the name of the Board to the Tax Court of the United States and made its members judges, in recognition of the fact that the Court performed only judicial functions. Its basic jurisdiction, however, was not changed, and it remained an independent agency in the Executive Branch of the Government.

Court decisions have sustained the constitutionality of the Board of Tax Appeals and the Tax Court of the United States in the exercise of the jurisdiction conferred upon them by Congress. Nash Miami Motors, Inc. v. Commissioner, 358 F.2d 636 (C.A. 5, 1966), certiorari denied 385 U.S. 918; Martin v. Commissioner, 358 F.2d 63 (C.A. 7, 1966); Willmut Gas & Oil Co. v. Fly, 322 F.2d 301 (C.A. 5, 2963), certiorari denied 375 U.S. 984; Standard Hosiery Mills v. Commissioner, 249 F.2d 469 (C.A. 4, 1957). Cf. Flora v. United States, 362 U.S. 145; and the discussion in Dobson v. Commissioner, 320 U.S. 489.

Did the provisions of the Tax Reform Act of 1969 so change the status and function of the Tax Court that it is now exercising the ‘judicial powers' referred to in article III and must be established as an article III court with its judges having the tenure and compensation protection provided in section 1 of article III? We think not.

As hereinafter noted the Tax Reform Act of 1969 did not change the basic jurisdiction of the Tax Court. ‘The United States Tax Court * * * is a continuation of the Tax Court of the United States as it existed prior to the date of enactment of this Act * * * and no loss of rights or powers, interruption of jurisdiction, or prejudice to matters pending in the Tax Court of the United States * * * shall result from the enactment of this Act.’ Sec. 961, Tax Reform Act of 1969. It is clear from the statutory language and the Senate committee report (S. Rept. No. 91-552, 91st Cong., 1st Sess., p. 302, 1969-3 C.B. 614) that Congress removed the Tax Court from the Executive Branch and established it as an article I court primarily for the purpose of recognizing its status as a judicial body and disposing of any problems that its status as an executive agency sitting in judgment on another executive agency might pose.

As heretofore noted, it has long been recognized that Congress has the power and authority to create ‘courts' that do not meet the requirements of article III. American Insurance Co. v. Canter, supra (territorial courts); Ex Parte Bakelite Cor'n., supra (Court of Customs Appeals); Williams v. United States, 289 U.S. 553 (1933) (Court of Claims); O'Callahan v. Parker, 395 U.S. 258 (1969) (Court of Military Appeals). Cf. Donoghue v. United States, 289 U.S. 516.⁸ Petition argues that because in the Tax Reform Act the Tax Court was removed from the Executive Branch and made a ‘court of record,‘ and it was specifically given the power to punish for contempt, and review of its decisions are now made by ‘appeal’ rather...