author: SCHOOHMAKER, District Judge. PER CURIAM.

text:
    In re ZIEGLER PRINTING CO., Inc.
    No. 18573.
    District Court, W. D. Pennsylvania.
    Jan. 12, 1934.
    Schlesinger & Schlesinger, of Pittsburgh, Pa., for petitioning creditors.
    J. B. Greer, of Butler, Pa., for referee.
    Stonecipher & Ralston, of Pittsburgh, Pa., for bankrupt.
   SCHOOHMAKER, District Judge.

An involuntary petition in bankruptcy was filed in this ease, and on December 12, 1933, the petitioning creditors, through their counsel, Isadore Schlesinger, petitioned the court for the appointment of a receiver. That petition was referred to John B. Greer, one of the referees in bankruptcy, as special master, with power and authority to appoint a receiver, if he deemed the appointment of a receiver necessary, with power and authority to approve a receiver’s bond, if a receiver be appointed, or to approve bond of the petitioning creditors, unless the same be waived.

The application for a receiver was contested by the alleged bankrupt, who filed an answer to the petition for the appointment of a receiver on December 27, 1933, and January 4, 1934, the special master sat to hear the petition for the appointment of a receiver. The petitioning creditors did not appear, either in person or by counsel. The special master had before-'him. a request from the petitioning creditors, asking that the meeting be postponed until January 11, 1934. The special master refused this request, and then, notwithstanding the objection of the alleged bankrupt, called a witness, George I. Won-er, vice president of the Ziegler Printing Company, and, after hearing him, the referee made an order appointing a receiver. The order for the appointment of a receiver was conditioned upon the petitioning creditors filing an indemnity bond in the sum of $500. The referee’s certificate showing the proceedings before him on the appointment of a special master was filed with this court on January 5-, 1934, and on January 6, 1934, the Ziegler Printing Company filed exceptions to the master’s report, contending:

(1) That the referee, as special master, was without jurisdiction to make the order in the premises.

(2) That under the bankruptcy law, no receiver can be appointed at the request o£ the petitioning creditors, unless they have filed a bond approved by the court, conditioned for the payment of all costs, expenses, and damages occasioned by seizure of the property of the bankrupt.

At the request of the alleged bankrupt, this day was fixed for hearing of the exceptions. The petitioning creditors did not appear, and their counsel, Hymen Sehlesinger and Isadore Sehlesinger, wrote a letter to counsel for the alleged bankrupt, Frank Stoneeipher, stating that they had no objections to offer on the argument of exceptions. This letter was presented to the court, and is filed as a part of the record in this ease.

After hearing counsel, and on due consideration of the exceptions, we find that the second exception should be sustained, because no bond of the petitioning creditors has been filed, conditioned as required by the Bankruptcy Act, § 3 (11 USCA § 21), for the payment, in case the petition is dismissed, to the respondent, his or her personal representatives, all costs, damages, and expenses occasioned by such seizure, taking, and detention of the property of the alleged bankrupt. The filing of such a bond is a necessary prerequisite to the appointing of such a receiver. The referee made the order conditioned upon the petitioning creditors giving such bond, but, in our judgment, the conr ditional order should not have been made, because, as we view the law, the filing of a bond is a condition precedent to the power of the court to appoint a receiver on the petition of the petitioning creditors in bankruptcy. The second exception therefore will be sustained.

PER CURIAM.

Order of Court.

Now, January 12,1934, this case came on to be heard on exceptions to the order of the referee in bankruptcy, as special master, appointing a receiver for the Ziegler Printing Company, Inc.

After hearing counsel for exceptants, and the filing of a letter from counsel for.the petitioning creditors that they did not care to be heard with reference to these exceptions, the court proceeded to hear the matter.

And on due consideration thereof, it is hereby ordered that exception No. 2 be sustained, and that the order of the referee, as special master appointing a receiver in this case, be vacated and set aside.


source: Caselaw Access Project

author: WILLIAMS, Judge.

license: Public Domain

text:
    EATON AXLE & SPRING CO. v. UNITED STATES.
    No. K-162.
    Court of Claims.
    May 7, 1934.

      Frank S. Bright, of Washington, D. C., for plaintiff.
    Elizabeth B. Davis, of Washington, D. C., and Erank J. Wideman, Asst. Atty. Gen. (James A. Cosgrove, of Washington, D. C., on the brief), for the United States.
    Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
   WILLIAMS, Judge.

This is a suit to recover a refund of excise sales taxes in the amount of $21,066'.18, paid by plaintiff on the sales of automobile bumpers and springs during the period from August 1, 1923, to March 31,1925. The taxes were collected under the provisions of section 900 (3) of the Revenue Act of 1921, and section 600 (3) of the Revenue Act of 1924P respectively.

The taxes were paid by plaintiff on the basis of the prices at which its subsidiary sold the articles to the retail trade or to the ultimate consumer. Sales by plaintiff to its? subsidiary are conceded to have been absolute and at prices and under terms such as ordinarily obtained in sales made by plaintiff to car manufacturers at wholesale. The defendant concedes that the taxes should have been computed on the basis of the price at which the articles were sold by plaintiff to? its subsidiary, and that plaintiff is entitled to a refund of $17,633.56. The controversy relates to the balance claimed, $3,432.62 ; the sole question being whether the tax should be computed on 5 per cent, of the total sales price from August 1, 1923, to July 1, 1924, and at 2% per cent, from July 1, 1924, to March 31,1925, or on ¥21 and ¥n of the sales price for these two periods, respectively.

While plaintiff computed the tax on the basis of ¥21 or Mi of the invoice price of the sales by the subsidiary to its customers* there is nothing in the record to show how the subsidiary invoiced its customers. Neither does the record show how the plaintiff invoiced the subsidiary. In these circumstances, the mere fact that plaintiff computed the tax on sales to the subsidiary on the basis of ¥21 and ¥n of the sales price by the subsidiary did not amount to notice to the subsidiary that the sale price to it represented 1/21 and 1/41 of the list price, respectively. There is no proof that the plaintiff, in sales to the subsidiary, quoted the selling price and the tax in separate and exact amounts, or rendered! invoices segregating these amounts within the requirements of article 3 of Regulations 47 (revised December 1921 and August 1924). Article 3 of Regulations 47, therefore, has no application, and the tax is properly computable on the basis of 5 per cent, of the actual sales price to the subsidiary. Upon this basis of computation plaintiff has overpaid its taxes in the amount of $17,633.-56, and is entitled to judgment in that amount, with interest as provided by law.

Judgment in the amount stated is ordered to be entered.

BOOTH, Chief Justice, and WHALEY, LITTLETON, and GREEN, Judges, concur.


text:
    BROOKS v. UNITED STATES.
    No. 42594.
    Court of Claims,
    May 7, 1934.
    Jacob Mertens, Jr., of Washington, D. C., for plaintiff.
    Brien McMahon, of Washington, D. C., for defendant.
    Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
   WILLIAMS, Judge.

The material facts admitted by tbe demurrer are:

•' Tbe plaintiff duly filed income tax returns for tbe years 1927, 1928-, and 1929, and paid tbe taxes shown due thereon. Included in gross income on the returns for these years were the respective amounts of $33,254.58, $37,100, and $37,310.41, which were received by plaintiff from a trust created by the will of his grandmother, Emma Louisa Higgins. The trust provision is as follows:

“Sixth: I give and‘bequeath to my executors the sum of two hundred thousand dollars-in money, or in securities, to be selected and-taken 'from my estate, at their market price, in trust, nevertheless, to invest and keep the same invested and to collect and receive the interest, income, dividends, and profits thereof and apply the same to the use of my grandson Reginald Brooks during his natural life, and npon his death to assign, transfer, and set over said principal sum to his children him surviving. * * * ”

The trust thus created is still in effect, its fair market value as of March 1, 1913, being . not less than $482,599.37. On March 1,1913, plaintiff was 41 years of age, and had a life expectancy of 23.511 years. The value on that date of his right to receive income from the trust was not less than $286,876.68.

The total income payments received by plaintiff from the trust, from March 1, 1913-, to December 3-1,1929, amount to $498,091.20.

The plaintiff duly filed claims for refund of taxes paid for the years 1927, 1928, and 1929, upon the grounds -that $12,201.81 of the amount received from the trust fund for each of those years represented a return of capital and was therefore not taxable income. Tbe refund claim for tbe. year 1927 sought a refund of $2,128.05', the claim for the year 1928 sought a refund of $1,067.05, and the claim for the year 1929 sought a refund of $2,133.67. These claims were rejected by the Commissioner of Internal Revenue.

The question raised by the demurrer is: Were the payments received by plaintiff from the trust funds income in their entirety or did a portion of such payments represent a return of capital?

The challenged taxes were collected under the Revenue Acts of 1926 and 1928. Section 213 (b) (3) of tbe Revenue Act of 1926, 26 USCA § 954 (b) (3), and section 23 (b) (3> of tbe Revenue Act of 1928,- 26 USCA § 2022 (b) (3) in identical language provide that tbe value of property acquired by gift, bequest, devise, or inheritance -shall not be included in gross income and shall be exempt from taxation but that the income from such property shall be included in gross income. This provision in substance has been carried in every Revenue Act since the adoption of the Sixteenth Amendment. The courts have uniformly held that the entire income received by a beneficiary ‘of a trust for a term of years or for life with remainder over, as in this ease, constitutes taxable income, without any deductions by way of return of capital, exhaustion, or depreciation, and this is true without regard to whether tbe trust was created prior or subsequent to March 1,1913. Irwin v. Gavit, 268 U. S. 161, 45 S. Ct. 475, 476, 69 L. Ed. 897; Drexel v. United States, 61 Ct. Cl. 216; W. R. Verner, Ex’r, v. United States, 62 Ct. Cl. 574; Codman v. Miles (C. C. A.) 28 F.(2d) 823, 824; Heiner, Collector, v. Beatty (C. C. A.) 17 F.(2d) 743, affirmed by Supreme Court in a per curiam decision, March 5, 1928, 278 U. S. 598, 48 S. Ct. 319, 72 L. Ed. 723; Helvering v. Butterworth, 290 U. S. 365, 54 S. Ct. 221, 222, 78 L. Ed. -. The Board of Tax Appeals has likewise held such income taxable in its entirety. Appeal of Sophia Gr. Cose, 5 B. T. A. 260; George D. Widener v. Com’r, 8 B. T. A. «651.

In all these cases the direct subjeet-matter in suit was the taxability of income received by beneficiaries from testamentary trusts. In Irwin v. Gavit, supra, where the trust was created subsequent to March 1, 1913, the court said:

“The language quoted leaves no doubt in our minds that if a fund were given to trustees for A for life with remainder over, the income received by the trustees and paid over to A would be income of A under the statute. * * ~ Apart from technicalities we can perceive no distinction relevant to the question before us between a gift of the fund for life and a gift of the income from it.”

In Codman v. Miles, supra, where the trust was created prior to March 1,1913, the court said:

“It is true that in a sense the income conveyed to the plaintiff for life is properly designated as property, but it clearly retains its character as taxable income, and there is no provision in the law, nor any terms employed in the statute, to indicate an intention upon the part of Congress to relieve such income from the normal tax levied upon incomes merely because its payment ceased after a term of years. * * * What the plaintiff received and was entitled to receive was not the corpus of the property but the increment annually accruing therefrom. It is nowhere suggested that the corpus of the property, from which the income was derived, was in any way depleted.”

In Irwin v. Gavit recovery was sought on the ground that the income from the trust Was a legacy or bequest and as such was not subject to the tax. In Codman v. Miles recovery was sought on the ground that because the income ceased on the death of the beneficiary she was entitled to have a- deduction of the tax because of exhaustion. While the contention made here that part of the payments received represented a return of capital was not made in these cases, the broad question as to whether the payments were taxable as income was carefully considered in each ease, and the reasoning in the opinions and the logical inferences to be drawn therefrom justify the conclusion that the decisions would not have been different had that contention been made.

In George D. Widener v. Com’r, supra, the Board of Tax Appeals held that no part of the payments received from a trust, simi: lar in every respect to that of the instant case, represented a return of capital. The trust was created subsequent to Mareh 1, 1913. The Board said:

“The petitioners argue that, irrespective of the statutory exemption of bequests, the full amount of distributions is not income because out of such distributions they are entitled to recover, as capital, the value of the right to receive them. This is the theory — - that because the right had a value which would serve to measure a legacy tax it was capital of .petitioners thenceforth, that it is thereafter being diminished, that the diminution is in some way brought about by the distributions of income, that such distributions are the only means to offset the diminution, and hence to the extent of such offset the distributions are a ‘return of capital.’ We may pass the question whether in the true sense this ‘right to receive income’ is capital— whether the capital, if any, is not represented only by the interest in the fund which produces the income — whether it is not subversive of the entire concept of income to say in turn that a gratuitous right to receive it is capital and hence the realization upon that right is recovery of capital. * * * But suppose it is capital, wherein is it impaired or diminished ? It persists in full force. It begins at death as a right to receive income from, and thus an interest in, the fund, and continues throughout in as great a measure as it began. To be sure, the lapse of time affects the probable number of future payments, but how can this change the nature of the payments as income when received? Suppose they were to go on forever, would they be more capital because of longer expectancy, or less capital because beyond the formula of valuation? Nothing invades the interest in the fund and no receipt of the distributable income reduces it — a complete distinction from the situation in Doyle v. Mitchell Bros. Co., 247 U. S. 179 [38 S. Ct. 467, 62 L. Ed. 1054], 3 Am. Eed. Tax Rep. 2979, cited by petitioners. Why then should any part of the distributable income be left untaxed, since it takes nothing from the right to receive it? Income it is called in the trust instrument and income it is, and hence within the language and intendment of section 213 (a) [Revenue Acts 1918, 1921, 40 Stat. 1065, 42 Stat. 237], This is substantially in accordance with Appeal of Ernest P. Waud' et a!., Executors, 6 B.T.A. 871, and with the obiter of Ernest M. Bull, Executor, v. Com’r, 7 B.T.A. 993, which in effect say that income is no less income because it is received pursuant to a preexisting valuable right.”

In Vemer, Executor, v. United States, supra, a testator who died in 1912 left the residue of his estate in trust, by the terms of which the net income was to be paid to his widow during her natural life. It was stipulated that the value of the widow’s right to receive the income under the trust was $653,-935.02 on March 1,1913. The widow for the years involved returned as income and paid taxes on the entire amounts received by her from the trust. The suit was for the refund of taxes paid for the years 1916 and 1917. The contention was made that the payments received by the widow were payments of bequests and as such were exempt from income tax until she had received or withdrawn amounts equal to the March 1,1913, value of her right to receive the income. The court in deciding against the claimant said :

“It is not questioned that the statute does not exempt the income from property received by devise,or bequest. If the bequest had been to her of the residuary estate for life it could not be contended that the income arising from it would not be subject to income tax. Does the circumstance of the intervention of executors or trustees to hold and administer the trust so change the situation that the same ‘income’ is not taxable? We do not think Congress so intended. The questions raised are settled by the ease of Irwin v. Gavit, 268 U. S. 161 [45 S. Ct. 475., 69 L. Ed. 897], which is not distinguishable from the present ease.”

In the recent ease of Helvering v. Butter-worth, supra, the Supreme Court said:

“Prior to Warner v. Walsh (C. C. A.) 15 F.(2d) 367, United States v. Bolster (C. C. A.) 26 F.(2d) 760, 59 A. L. R. 491, and Allen v. Brandéis (C. C. A.) 29 F.(2d) 363, the Commissioner ruled that distributions from the income of a trust estate to the widow who elected to take under her husband’s will in lieu of her statutory interest were taxable to her. These cases held that by relinquishment of her rights, she came to occupy the position of the purchaser of an annuity. They decided that payments to her were not subject to taxation until her total receipts from the trust estate amounted to the value of what she relinquished- — her alleged capital. Thereafter, in similar cases, the Commissioner refused to give credit to the trustee for such payments and thus the present causes arose.

“We cannot accept the reasoning advanced to support the three cases just cited. The evident general purpose of the statute was to tax in some way the whole income of all trust estates. If nothing was payable to beneficiaries, the income without deduction was assessable to the fiduciary. But he was entitled to credit for any sum paid to a beneficiary within the intendment of that word, and this amount then became taxable to the beneficiary. Certainly, Congress did not intend any income from a trust should escape taxation unless definitely exempted.”

We have carefully considered the authorities cited by plaintiff. In none of them is the subject-matter-in suit the taxability of income received by beneficiaries from testamentary trusts. In the main they deal either with contracts which fixed in the claimants a clear and definite property right prior to March T, 1913, representing an investment, such as a right to receive income for services, royalty rights in mines, patents, etc., accruing prior to March 1, 1913, but received during subsequent years, or to dividends declared prior to March 1, 1913, and received by shareholders in years subsequent to- that date. The essence of the holding in all the cases cited is that a capital interest existing prior to March 1, 1913, when received subsequent to that date is not income, but a return of capital, and that only the increase in value of such capital interest constitutes taxable income. The rule announced is not applicable to- the facts in the instant ease as stated in the petition. The taxes in question were imposed on the income arising from the corpus of a trust fund, which remained intact throughout the entire period of the trust, with remainder over. The payments received by plaintiff in no way impaired or diminished the fund, which upon his death passed in its entirety to the remainderman. Conceding that plaintiff’s right to receive the income from the trust had the March 1, 1913, value alleged in the petition, that value, in our opinion, was not such a capital interest as would entitle him to its return free from tax. As was held in Vemer, Executor, v. United States, supra, the situation as to the taxability of the income received by plaintiff from the trust is no different than if he had been willed a life interest in the fund, in which ease the income from the life estate would have been subject to the tax.

The petition does not state a cause of action against the United States. ■ The demurrer is therefore sustained, and the petition is dismissed. It is so ordered.

BOOTH, Chief Justice, and WHALEY, LITTLETON, and GREEN, Judges, concur.


author: WHALEY, Judge.

text:
    MOORE v. UNITED STATES.
    No. 41864.
    Court of Claims.
    May 7, 1934.

      Theodore B. Benson, of Washington, D. C., for plaintiff.
    Joseph H. Sheppard, of Washington, D. C., and Frank J. Wideman, Asst. Atty. Gen. (Elizabeth B. Davis, of Washington, D. C., on the brief), for the United States.
    Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
   WHALEY, Judge.

The plaintiff brings this suit to recover income taxes paid for the calendar years 1918, 1919, and 1920.

It appears that the plaintiff was engaged in a variety of business activities — making loans at a discount, dealing in real estate, stocks and bonds, and in promoting business enterprises. The nature of plaintiff’s vocations and assorted avocations was of such character and color that he did not undertake to keep books reflecting clearly the actual income, whether on a cash receipt and disbursement or accrual ■ basis. Some items were studiously entered which in no way reflected income or loss. Others were entered without any attempt to show accruals. Accruals of rent were sometimes entered as cash and stocks of corporations taken in payment of promotion fees were entered without any present value. Large bonuses received from the discount of notes were disregarded because the notes were slow in payment or were paid in installments in subsequent years.

The plaintiff filed his income tax returns for the years in question. The Commissioner of Internal Revenue caused three examinations to be made of the three years’ returns made by the plaintiff, and as a result of these audits his taxes were greatly increased. It was discovered during the course of the audits that it was impossible to ascertain the income on a cash receipt and disbursement basis or on an accrual basis. The books were not kept on either basis but on a combination of both. Although every attempt was made by the revenue agents to analyze each item so it could be definitely placed in the cash receipt and disbursement class, nevertheless, after most painstaking efforts, it was found impossible to arrive at the net income under this method. It was the duty of the plaintiff to keep his books according to some method of accounting which would truly reflect his actual income. The Commissioner had to take the books as he found them.

Section 212 (b) of the Revenue Act of 1918 (40 Stat. 1064) provides: “The net income shall he computed * * * in accordanee with, the method of accounting regularly employed in keeping the hooks of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. * * * ”

An examination of the books of the plaintiff, which have been placed in evidence, conclusively shows that no particular method of accounting was regularly employed which would clearly reflect the income.

The Commissioner assessed additional taxes for the years in question; payment was made by the plaintiff; refund claims were filed and duly rejected.

In a suit to recover income taxes illegally collected, the burden of proof is on the plaintiff to show by the .preponderance of the evidence that the decision of the Commissioner is incorrect and should be reversed by the court. The decision of the Commissioner stands unless the plaintiff can sustain this burden. Johnson Motor Co. v. United States (Ct. Cl.) 6 F. Supp. 123, decided March 5, 1934.

The evidence of the plaintiff has been most carefully considered, and it totally fails to impress the court with its weight or accuracy. Its whole tenor is merely to throw doubt on certain items which have been included by the Commissioner as income and to give rise to an inference that certain other items should have been excluded as losses. There is a significant lack of effort to clear the chaos in which these books exist so that a definite, clear, unmistakable income can be established upon which to place the tax. The state of the record is such that the court is unable to say what plaintiff’s taxable income was, and it may reasonably be inferred that plaintiff is now unable to establish it.

There is lacking any evidence which brings a conviction that the Commissioner is in error in deciding that plaintiff’s income is what he determined it to be for tax purposes. We have here a ease where the true income cannot be determined in any satisfying way except by the setting up of an entirely new set of books for the taxable years in question. Plaintiff had no voucher system, and memoranda used as authority for bookkeeping entries have been destroyed. It is apparent that a reliable set of books is now practically impossible to establish.

Plaintiff has failed to overcome the presumption that the Commissioner’s determination is to be taken as correct, and, in our opinion, his decision should be sustained.

The petition is dismissed. It is so ordered.

BOOTH, Chief Justice, and WILLIAMS, LITTLETON, and GREEN, Judges, concur.


author: LITTLETON, Judge.

text:
    WHITNEY et al. v. UNITED STATES.
    No. M-342.
    Court of Claims.
    May 7, 1934.

      John W. Fisher, of Washington, D. C. (Will R. Greeg, of New York City, on the brief), for plaintiff.
    Joseph H. Sheppard, of Washington, D. C., and Frank J. Wideman, Asst. Atty. Gen. (Elizabeth B. Davis, of -Washington, D. C., on the brief), for the United States.
    Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
   LITTLETON, Judge.

The question presented in this case has been decided adversely to the contentions made by plaintiffs in Stover v. McCaughn (D. C.) 28 F.(2d) 1005; Appeals of John Moir et al., 3 B. T. A. 21; Cunningham v. Commissioner of Internal Revenue, 9 B. T. A. 1050; Harkness v. Commissioner of Internal Revenue, 21 B. T. A. 1068, and Haussermann v. Commissioner of Internal Revenue, 23 B. T. A. 378. We agree with these decisions and no useful purpose would be served by a detailed discussion of the contentions of plaintiffs that in none of these cases was any consideration given to the fundamental merits- of the question dr to the intention of Congress, as indicated by the taxing system oyer a long period of years.

Section 222 (a) (1, 5) of the Revenue Act of 1921 provides that the tax computed under part 2, title 2, of that act should be credited with .the amount of any income, war profits, or excess profits tax paid during the taxable years to any foreign country, but that such credits should not be allowed in the ease of a citizen entitled to the benefits of section 262, and that in no other ease should the amount of credit taken under subdivision 5 of this section exceed the same proportion of the tax against which such credit is taken, which the taxpayer’s net income, computed without deduction for any income, war profits, or excess profits taxes imposed by any foreign country, from sources without the United States bears to his entire net income, computed without, such deduction, for the same taxable year.

Section 1209 (a) of the Revenue Act of 1924 provides that any taxpayer making a return for 1923 of taxes imposed by parts 1 and 2 of' title-2 of the Revenue Act of 1921 should be entitled to an allowance by credit or refund of 25 per centum of the amount of the tax shown upon his return. Subdivision (b) of the same section provides-that “If the amount shown as the tax upon the return has been, paid in full on or before tbe time of tbe enactment of this Act, the amount of the allowance provided in subdivision (a) shall be credited or refunded as provided in section 281 of this Act.” Any doubt arising from the language of subdivision (a) of section 1200 as to the manner in which the 25 per centum credit is to be allowed is clarified by subdivision (b) of that section, which shows the intent of Congress in the provision that, if the amount of “the tax upon the return has been paid in full,” the amount of 25 per eentum of the allowance shall be credited or refunded. In other words, subsection (b) shows that Congress considered that a taxpayer would pay as his tax the amount computed on the return less the credit of the foreign taxes paid. We are of opinion, therefore, that the words “the tax,” in subdivisions (a) and (b) of section 1200, refer to the net tax liability of a taxpayer after deducting foreign taxes paid.

The petition must therefore be dismissed. It is so ordered.

BOOTH, Chief Justice, and WHALEY, WILLIAMS, and GREEN, Judges, concur.


text:
    ANDERSON v. UNITED STATES.
    No. L-111.
    Court of Claims.
    May 7, 1934.

      Wallick & Shorb, of Washington, D. C.,for plaintiff.
    Joseph H. Sheppard and Elizabeth B. Davis, both of Washington, D. C., and Frank J. Wideman, Asst. Atty. Gen., for the United States.
    Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS and WHALEY, Judges.
   WHALEY, Judge.

The Commissioner of Internal Revenue refunded to plaintiff in 1924 the' income taxes paid by her for 1919 after certain deficiencies for the years 1917 and 1918 were deducted and this suit is brought to recover interest on the amount so refunded, alleging an informal claim for refund was made by the plaintiff through certain correspondence filed with the Commissioner in the years 1921 and 1923. The refund having been made before the passage of the Revenue Act of 1924 (43 Stat. 253) and that act not being retroactive, United States v. Magnolia Petroleum Co., 276 U. S. 160, 48 S. Ct. 236, 72 L. Ed. 509, section 1324 (a) of the Revenue Act of 1921 (42 Stat. 227, 316) is the applicable statute.

This statute provides:

“That upon the allowance of a claim for the refund of or credit for internal revenue taxes paid, interest shall be allowed and paid upon the total amount of such refund or credit at the rate of one-half of 1 per centum per month to the date of such allowance, as follows: (1) if such amount was paid under a. specific protest setting forth in detail the. basis of and reasons for such protest, from the time when such tax was paid, or (2) if such amount was not paid under protest but pursuant to an additional assessment, from the time such additional assessment was paid,, or (3) if no protest was made and the tax was not paid pursuant to an additional assessment, from six months after the date of. filing of such claim for refund or credit. The-term 'additional assessment’ as used in this section means a further assessment- for a tax of the same character previously paid in part.”

The plaintiff had a gift made to her in 1917 of .325 shares of Ford Motor Company stock. In 1919' she sold this stock for $12,-509 a share. In making her 1919 income tax return she valued the stock at the time of the gift at $12,500 a share; this being the same amount as that received by her when it was sold, there was neither gain nor loss to be taken on her return of income. When this item of value of the stock for 1917 came to the attention of the Commissioner, he wrote to plaintiff on January 31, 1921, requesting data to support the value of the stock in 1917 when it was received by her as a gift. Not receiving a substantive reply to this inquiry, the Commissioner again wrote to plaintiff on April 19, 1921, requesting prompt attention to* his previous letter. ■ In reply to this letter, on April 27, 1921, plaintiff stated to the Commissioner that she had in her possession affidavits fixing the value of this stock at $12,500, $14,420, and $14,000 per share. There is no claim in this letter of any refund which the plaintiff expected, but simply an affirmation of the value, at least of the amount, placed by her on this stock for the year 1917. It appears that in 1919' a decree of court was made requiring the payment of dividends by the Ford Motor Company which resulted in the plaintiff receiving during 1919 on her 325' shares of stock, $313,225.03. Instead of including this amount in her taxable income for the year 1919, the plaintiff amended her 1917 return and included this amount in that year’s income. On May 27, 1921, the Commissioner wrote to the plaintiff stating this amount, having been received in 1919, was taxable in that year and not in 1917. In this letter the Commissioner sets out an audit of her taxes for 1919 which resulted in a proposed additional assessment for the year 1919 of $192,276.48. Upon the receipt of this audit made by the Commissioner showing a proposed deficiency of $192,276.48, the plaintiff replied affirming her position that the dividend was correctly placed in the year 1917 because of the adjudication of the case in the court of the state of Michigan and expressing the desire to have the income tax unit give further consideration as to the year in which the additional dividend should be taken for tax purposes. There is no semblance of a claim for refund in this letter but simply a desire to. have a final decision by the tax unit of the bureau as to the year in which the dividend should be taken. In August, 1921, the plaintiff again wrote'to the Commissioner requesting a conference before any supplemental assessment was made by the Commissioner, and in this letter raised not only the question of the year in which the dividend should be included, but requested that the issue originally raised by the Commissioner as to the value of the Ford Motor Company stock in 1917 be given consideration, and asserted: “Very conclusive evidence can be presented that the value was very much in excess of that shown by your examining officer.” This is the first intimation on the part of the plaintiff that the value of this stock as fixed by her in her 1919 return, was more than the amount taken by her. On December 19, 1922, the Commissioner furnished the plaintiff an audit of her income tax returns for the years 1917, 1918, and 1919, which showed an overassessment for 1917 of $54,624.63 and additional assessments for 1918 and 1919; respectively, of $149.14 and $192;309.88, that is, a proposed net additional tax of $137,834.39. Upon receipt of this notice of additional assessment, the plaintiff on January 10,1923', wrote to the Commissioner, in seeking a delay of payment, stating: “Permit me, however, to kindly call your attention to the fact that in my own particular ease (unlike that of other stockholders) there is another issue involved affecting the amount of this 1919 tax which is not touched upon in your letter and to which I wish to draw your attention.

“It is the question of the loss sustained by me in the sale of this stock in July 1919; as compared with its fair market value when acquired by me, by gift, in January 1917.”

The plaintiff requested that.the 1919 income tax be audited for the purpose of having the value of the Ford stock in 1917 ascertained and furnished the Commissioner information as to its value which showed it exceeded the amount fixed by her in the 1919 return. She again asserts:

“I ask your kind consideration in regard to this item because, whereas I am taxed, as income, the amount of dividend received by me as the result of the Court decision- in the Dodge-Ford suit, this has not been offset in any way by the great' shrinkage in value in 1919; which was the direct result of this suit.”

The Commissioner, upon an audit of the plaintiff’s return, decided that the loss sustained by the plaintiff on the value of the stock when sold, more than oyefeame the proposed additional" tax and also resulted in the plaintiff not being liable for any tax in 1919. The amount paid by her for that year was accordingly returned to- her as an'overpayment after certain adjustments for previous years were made. This refund of the entire tax paid by the plaintiff in 1919 was due to the loss sustained by her on the sale of the stock.

The Commissioner duly paid the plaintiff the sum of $64,352.27. On April 25, 1928, a formal claim for refund of interest on the amount refunded was filed by the plaintiff in the sum of $9,421.85. This claim was rejected by the Commissioner because no claim for refund for any part of the tax for 1919 had been filed prior to the allowance of the overpayment.

The plaintiff contends that the letter of January 19, 1923, sworn to by the plaintiff, was sufficient compliance with the requirements of the statute to constitute an informal claim for refund to which the formal claim could be attached as an amendment.

Under the applicable provisions of section 1324 (a) of the Revenue Act of 1921, a claim for refund must be filed before interest can be allowed. The first intimation that the value of the stock received by the plaintiff as a gift in 1917 was in question, was raised by the Internal Revenue Bureau in a letter to the plaintiff. The entire correspondence with the Commissioner showed an endeavor on plaintiff’s part to avoid the payment of the proposed additional assessment caused by the additional dividend received by the plaintiff being placed in the year 1919, the year in which it was received, and not in the year 1917 as insisted upon by her and in which year she had placed it in her supplemental return for that year. The plaintiff’s whole object and aim were to avoid the payment of the additional tax caused by the receipt of this extra dividend. After exhausting all of the remedies provided by the bureau without success, and after the Commissioner had notified her of the additional tax for the year 1919, plaintiff then resorted to and claimed a loss on the sale of the stock and offered this alleged shrinkage in value as an offset or the equivalent of the amount of additional taxes which the Commissioner asserted was due. The evidence fails to show that at any time did the plaintiff expect to get a refund of taxes for 1919, but, on the contrary, it shows an effort on her part for a reduction or counterbalance of the proposed additional tax. There was never any assertion of a claim for refund or an intimation that, if the difference in values of the stock in 1917 and 1919' were taken into consideration, a shrinkage or loss would result in a refund to the plaintiff. This issue as to the value in 1917 was revived by plaintiff when all other efforts had failed to avoid the pay* ment of the additional tax caused by the inclusion of the additional dividend in the 1919 return. There is nothing in any of plaintiff’s letters whieh shows any basis on whieh she expected the return of any portion of the taxes.paid by her on her original return for"1919. In prder to constitute a claim for refund there must be brought to the attention of the Commissioner facts sufficient in themselves whieh, when followed by the Commissioner, would result in an excess payment by the taxpayer of taxes for the year in question. In other words, the taxpayer must take the initiative and supply facts to the Commissioner with the claim that, if these facts are taken into consideration, it will be found that the taxpayer has overpaid the amount of taxes properly due the government for the year in question.

This court in the ease of Lasher v. United States, 65 Ct. Cl. 295, upheld the plaintiff’s contention of an informal claim for refund but, in that ease, the letter on whieh the claim was founded set out the facts to the Commissioner on which he acted and claimed that if the facts were taken into consideration there would be an excess payment and there’fore a refund due to the plaintiff.

This was also true in the case of McKenny et al. v. United States, 49 F.(2d) 667, 52 F.(2d) 1063, 72 Ct. Cl. 195. In that case the plaintiff made an application for special assessment and stated in the application that, if it were granted, it would result in showing that the plaintiff had overpaid its tax.

The instant ease is more analogous to the ease of Philipsborn v. United States, 53 F.(2d) 133, 72 Ct. Cl. 545. In the latter case, as in this case, the plaintiff has attempted to amend by a formal claim for refund an alleged informal claim for refund. Without an informal claim, the formal claim is barred by the statute of limitations. We can find nothing in the record, either by inference or implication, which shows an assertion of a claim for refund of any part of plaintiff’s taxes for the year 1919 to which the formal claim for refund can attach.

The petition is dismissed. It is so ordered.


author: LINDLEY, District Judge.

text:
    J. L. HUDSON CO. v. THOMAS. SAME v. SCHRAM.
    Nos. 6107, 6108.
    District Court, E. D. Michigan, S. D.
    May 24, 1934.
    Beaumont, Smith & Harris, of Detroit, Mich., for plaintiff.
    Robert S. Marx, Lewis Levy, Frank E. Wood, and Wm. C. Kelly, all of Cincinnati, Ohio, for receivers.
   LINDLEY, District Judge.

These two cases grow out of similar facts and the issues are substantially the same. Consequently the court disposes of both in one memorandum.

Plaintiff issued its serial 5 per cent, notes to- the extent of $10',009,000'. Simultaneously it executed an indenture by virtue of which certain rights and obligations were imposed upon the trustee therein named for the note-holders. Action to recover upon the notes, prior to their maturity, in case of default, was thereby vested in the trustee, unless after such default and demand upon the trustee 'for action by it made by holders of 25 per cent, of the principal amount of notes then outstanding, the trustee should fail to act. In such ease, upon filing indemnity, the holders were vested with the right to sue.

The banks, now represented by defendant receivers, prior to their closing under the Michigan moratorium in late February, 1933', had purchased and owned parts of these notes as follows: The First National Bank, $252,000' of principal amount, and Guardian National Bank, $296^000. This ownership remained unchanged when, shortly afterward, the comptroller, because of insolvency of the two respective hanks, appointed the receivers. At the time of closing of the two institutions, plaintiff had on deposit at the First National, payable to it, $3,353,782.08, and at tbe Guardian, $195,038,401

Plaintiff now seeks in tbe one case' a decree applying upon its deposits by way of set-off the amount due upon the notes held by the First National, thereby working a payment and discharge of tbe notes and a reduction of the credit to it in the form of the deposit by an equal amount. In the other ease plaintiff seeks to have a decree setting off as against its deposit such part of the sums due from it upon notes held by tbe Guardian National as is equal to tbe amount of said deposit, thereby paying and discharging so much of said notes, wiping out tbe credit due it in the form of said deposit, and leaving plaintiff liable upon the balance of said notes not discharged by such set-off.

Inasmuch as none of these notes had matured when the banks closed, it is first questioned whether they can be set off as against tbe deposit account, which was payable on demand. I do not understand that the right to set off mutual cross-demands in equity is defeated by the fact that some part thereof has not matured. The postponement of date of payment here was intended for the benefit of plaintiff. Such privilege of paying later, being for its own advantage, may be waived, inasmuch as no damage accrues to defendants as a result thereof. The assertion of the right of one to waive something belonging to him requires no argument in support thereof. The rule is quite generally recognized in this country. Thompson v. Union Trust Company, 130 Mich. 512, 90 N. W. 294, 97 Am. St. Rep. 494; Searle v. Crampton, 118 Conn. 42, 170 A. 480. In State ex rel. Gray v. Alward, 44 Ohio App. 281, 185 N. E. 560, 562, the court said: “The depositor might have had a time certificate of deposit not yet due at time of insolvency. He could not sue to recover it until due, but to say he had not a legal demand would be absurd.”

Nor do I consider the fact that under the terms of tbe indenture rights of action upon the notes axe, under certain circumstances, confined to action by the trustee, sufficient to defeat the right of set-off. The notes, payable to bearer, are the property of tbe banks and due to them from plaintiff. Tbe deposit accounts axe owing by the hanks to plaintiff. Though in the indenture the right to sue is limited as hereinbefore observed, such limitation was manifestly intended as a protection to tbe common body of noteholders so that one or more might not pursue suits in attachment or segregation of assets upon execution ahead of and to the detriment of other holders who did not rush in with similar multitudinous, disruptive proceedings. It was not intended to serve as a weapon to> be turned against noteholders and thus to bring about inability to secure cancellation or discharge of notes, when such discharge would result to the benefit of all other noteholders.

That such was the intent of the covenants is apparent from tbe clauses giving note-holders the right to sue when and if the trustee should refuse to do so, as above indicated, and from tbe final proviso of the section, limiting tbe cause o-f action. That clause is as follows: “Provided, however, that nothing in this Indenture or in any of the Notes contained shall affect or impair the right, which is unconditional and absolute, of the bearer of any Note or coupon to enforce payment thereof at and after the date of maturity in said Notes or coupons expressed, or the obligation of the Company, which is also unconditional and absolute, to pay tbe principal of and interest on tbe Notes to the respective bearers of tbe Notes and coupons at the time and place in the Notes and coupons expressed.”

The obligation of tbe company is by this language made “unconditional and absolute,” to pay the amount due on the notes when they mature, “to the respective bearers.”

Courts of equity have reserved to themselves independent of statute "their original jurisdiction to compel set-offs of cross-de^ mands. “In applying the equitable rule, courts of equity, where there is a special equity to be subserved and particularly where there is the interposition of assignments, receiverships and insolvency, and no equity of third persons to- be injured, will, to prevent wrong and injustice, allow set-off to one with a right of action or of property, * * * although the ease is not within the terms of the statutes.” Gray v. School District (C. C. A.) 67 F.(2d) 141, 143. Many precedents are collected in Judge Wooley’s opinion in the case quoted from.

The test of the propriety of forcing set-off lies not in the right to sue, but in the right to assert one’s cross-demands in a suit brought against him by the other. State ex rel. Gray v. Alward, 44 Ohio App. 281, 185 N. E. 560. Consequently the fact that in some situations the trustee only may sue is of no relevancy here. The liability is an absolute one, and the holder thereof may not interpose as an objection against its own cause of action a provision obviously never intended to defeat the rule of equitable set-off.

Furthermore, we are dealing with equitable rights of set-off. Action at law upon the notes by the trustee may, under the indenture, be maintained but the recovery in such case is for the benefit of the several individual noteholders. They are in equity the real parti® in interest in accordance with their several holdings, and any sum realized upon the notes is in equity their property, even though the title to the action at law is in the trustee. It follows that in equity the several demands are individual in character and that mutuality exists under the facts of each case here dealt with. Consequently the eases cited by defendants where set-off was. denied because of difference in character of demands or difference in character of rights of action or of fnnds| are not applicable.

The same line of reasoning disposes also of the contention of defendants that inasmuch. as the indenture provides that “redemption” of an entire series of notes might he made but not of a part thereof, plaintiff may not now have a cancellation of a part of one series by set-off. This provisión was not an exclusive one; granting only one method of payment, discharge, purchase, or redemption of notes. The noteholders could not be forced to accept payment before maturity without tender of unmatured interest; hence this provision was intended only as a grant of a special privilege to plaintiff to anticipate maturities upon certain fair conditions, if it found itself able to do so. The limitation that such redemption should he of an entire issue, but not of. a part, was obviously meant to prevent preferences amongst individual holders of notes of the same series. There is nothing to indicate that the distinction between “redemption” and “payment,” pointed out in Morgan v. United Stat®, 113 U. S. 476, 5 S. Ct. 588, 28 L. Ed. 1044, and Pflueger v. Broadway Trust & Savings Bank, 351 111. 170; 184 N. E. 3.18-, was not recognized. At any rate, the provision does not take the situation out of the rule governing equitable set-off of cross-demands to the effect that it is mutuality of obligations which controls; not limitation upon the legal right of action. The chancellor looks behind the legal provisions to discover the true equities of the parties; it is forced to recognize that the proposed set-off injur® no noteholder but improves the position of every one still holding an unpaid note.

Nor will the proposed set-off bring about any r®ulting priority, preference, or realization o'f lien or advantage to any noteholder, forbidden by the indenture. In this connection the receivers again suggest as a bar to set-off a provision intended to protect and equalize noteholders. They urge it as a weapon to destroy 'that which would benefit all other holders of outstanding not®. This a court of equity will not permit.

We have here no preference, no resulting priority. We are dealing with set-off of mutual cross obligations which possesses none of the qualities of the two former terms. Those terms connote unfair advantage; and here there is no hint of such inequitable result. We are merely asserting the well-recognized ruló that if there is mutuality of obligation, cross-demands must be set off, one against the other.

The set-off should be made effective as of the date of the closing of the hanks. Dividends received by plaintiff should be returned or accounted for and the accounts charged one against the other in the manner and to the extent prayed.

Proper decree may be submitted.