Knowland v. Commissioner

J. R. KNOWLAND, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Knowland v. Commissioner Docket Nos. 45198, 60979. United States Board of Tax Appeals 29 B.T.A. 618; 1933 BTA LEXIS 913; December 21, 1933, Promulgated *913 The petitioner acquired by bequest in 1921 two claims against the United States arising out of the detention in 1892 of certain whaling vessels, on which he recovered judgment and received payment in 1926 and 1928. The recoveries were measured by the average price of the probable catch the vessels might have made if not detained. The crews were to be paid for their services certain shares of the proceeds of the catch. Held that the recoveries constituted taxable income and that in the absence of evidence showing that a segregation had been made of the shares of the crews and such parts held in trust, and in the absence of evidence showing that claims might be expected to be made, no reduction of the amounts recovered should be made. Hart H. North, Esq., and B. H. Hicklin, C.P.A., for the petitioner. Alva C. Baird, Esq., for the respondent. MARQUETTE *618 These proceedings were consolidated for hearing and involve the redetermination of deficiencies in income tax for the years 1926 and 1928 in the respective amounts of $416.54 and $1,005.08. The one error asserted is that the respondent has included in the petitioner's gross income*914 for 1926 the sum of $1,282.97 and in his gross income for 1928 the sum of $964.18, both received by the petitioner from the United States as damages sustained in 1892. *619 FININGS OF FACT. Joseph Knowland, an American citizen, was in 1892 the owner of a 2/8 interest in the whaling schooner Jane Gray and a 6/64 interest in the whaling bark Lydia. The Jane Gray cleared from San Francisco on March 12, 1892, for a whaling voyage in the Bering Sea and the Arctic Ocean. While on her voyage she was seized on June 24, 1892, on the high seas near Akutan Pass by the U.S.S. Yorktown, but was released June 30, 1892, and permitted to proceed on her voyage until July 16, 1892, when she was seized by the U.S.S. Mohican, in the Bering Sea and more than three miles from shore, on the charge of unlawful sealing in the Bering Sea, and was taken to Sitka, Alaska, where she arrived August 3, 1892. By reason of these seizures her whaling voyage was broken up for the remainder of the whaling season of 1892 in the Bering Sea and the Arctic Ocean. The Lydia cleared from San Francisco November 30, 1891, for a whaling voyage of 12 months in the Pacific and Arctic Oceans. She went first*915 in the South Pacific for sperm whale and then to Alaska, where she arrived at Dutch Harbor about July 27, 1892. There she was seized by the United States. She was thereafter released in the early part of the following September. Joseph Knowland died testate November 13, 1912. By his will his entire estate was devised and bequeathed to his widow, Hannah B. Knowland, who died testate February 20, 1921. By her will she devised and bequeathed her entire estate to the petitioner and his sister, Luch B. Hill. By a decree of the Superior Court of Alameda County, California, entered August 21, 1923, the estate of Hannah B. Knowland was distributed to the petitioner and his sister. Thereafter the petitioner, together with his sister and two other plaintiffs, brought their action pursuant to the Act of July 7, 1924, 43 Stat. 595, against the United States in the District Court of the United States for the Northern District of California, in which they sought to recover for the detention of the Jane Gray. The plaintiffs recovered judgment for the loss of their probable catch in tht total amount of $19,007, of which, after payment of attorney fees and other expenses, the petitioner*916 received in 1926 the sum of $1,282.97. The amount of the judgment was computed by the court as follows: In the year 1892 the Wright whales were plentiful in Bering Sea and the Bowhead whales were plentiful in the Arctic Ocean. The JANE GRAY had three whaling boats fully equipped and manned and carried the latest improved whaling guns. The hunting of whales in Bering Sea and the Arctic Ocean was a profitable remunerative business in which a large number of vessels were engaged. If the JANE GRAY had not been seized and interfered with and *620 her voyage broken up she would with all reasonable probability and certainty have captured one Wright whale in the Bering Sea and two Bowhead whales in the Arctic Ocean. The average weight of bone for a Wright whale is 1,200 pounds and its average amount of oil is 90 barrels; the average weight of bone from a Bowhead whale is 1,750 pounds of bone and its average amount of oil is 100 barrels. In 1892 the average market price of whale oil was 28 cents a gallon or $8.82 per barrel and the average price of whalebone was $3.40 a pound. In May 1926 the petitioner and his sister, together with the personal representatives or heirs*917 of eight other deceased owners, and the surviving trustees of a dissolved California corporation, all of whom together owned 63/64 of the Lydia, brought their action under the Act of July 7, 1924, against the United States in the District Court of the United States for the Northern District of California in which they sought to recover for the detention of that vessel. The plaintiffs recovered judgment in the total amount of 63/64 of $34,281.80, of which the petitioner received in 1928, after the payment of attorney fees and other expenses, the net amount of $964.18. The amount of this judgment was computed on the probable catch of the ship in the same manner as was the judgment in the action involving the detention of the Jane Gray, except that $500 was deducted on account of depreciation and cost of fitting out the vessel. In the action involving the detention of the Lydia, the question was raised whether the plaintiffs could recover that part of the value of the probable catch which represented the share of the crew (called the "lay") to which they were entitled under their shipping paper, and the court held that they had this right. The shipping paper of the Lydia, after*918 providing that in consideration of the share set opposite the name of each seaman or mariner, they severally agreed to perform the voyage and that the owners and master on their part agreed to hire such mariners and seamen for the voyage at such shares to be paid pursuant to the agreement, and, after providing penalties and forfeitures for certain offenses, contains the following: 9. Each and every Officer and Seaman who shall have well and truly performed the above mentioned voyage, complied with the regulations and duties herein specified, and committed no dishonest or unlawful acts, shall, on the return of said vessel to the port of San Francisco, be entitled to be, and shall be, settled with and paid in San Francisco, his share of the catch of said vessel at the following rates; whale oil at twenty cents per gallon; sperm oil at forty cents per gallon; whale-bone (in case the total catch of the whole whaling fleet of vessels sailing from or arriving at ports on the Pacific Coast for the season in the Arctic shall exceed two hundred whales) at one dollar and twenty-five cents per pound, but in case said total catch shall not exceed two hundred whales, then at one dollar and fifty*919 cents per pound; said settlement to be made for oil at the above named rates, and bone at $1.25 per pound as soon after the return of the ship as the quantity of her oil and bone can be ascertained, and the twenty-five cents per pound in addition thereto as *621 soon as it shall be ascertained that the total catch of the whole said fleet does not exceed two hundred whales. The shipping paper recites that the lays of the captain and the first and second mates were "as per agreement." It further provides what fractional part of the catch each man should receive and the amounts advanced to each. The crew whose lays were set forth numbered 38, and the total percentage or lay of these was 34.641 percent. The total amount advanced these same men was $3,300. The shipping paper of the Jane Gray was on the same printed form and contained the same agreements as that of the Lydia. The lays of the master and of the first and second mates were "as per agreement." The shipping paper further provides the lay or percentage of each of the remainder of the crew of 22 men. The total percentage of these 22 men was 22.058 percent. Against this, advances were made in the total amount of*920 $1,735. OPINION. MARQUETTE: At the time of the seizure and detention of the Jane Gray and of the Lydia, the United States was asserting jurisdiction over a certain part of the Bering Sea more than three miles from the shore. This claim was denied by Great Britain and resulted in arbitration between the two governments. An account of these matters may be found in the opinion in , decided June 29, 1896. In that case the Circuit Court of Appeals held that seizures such as those here involved were illegal. Since that decision it has been recognized that the seizures were made without right. Nevertheless the United States not only did not compensate American citizens who were owners of the ships detained, but it was not until the approval of the Act of June 7, 1924, 43 Stat. 595, the material part of which is copied in the margin, 1 that suit was permitted against the United States on account of the seizures. *921 Remedial bills were passed by the Senate on three occasions between March 1906 and June 1910, and passed by the House on two occasions between January 1907 and February 1908, but such bills never became law. On the state of facts set out in our findings, coupled with the historical facts we have detailed, the petitioner asserts that the amounts recovered are not taxable, since they constituted compensation for *622 losses suffered; that he, the petitioner, acquired these claims by bequest and therefore his recovery of them is not taxable to him; that it has been a recognized fact, at least since the decision in the Whitelaw case, that the seizures were illegal, and since the United States was at all times solvent, the claims when acquired by him had a value equal to the amounts recovered; and, lastly, that so much of these recoveries as represented the lays or shares of the crews should be deducted. The suggestion is made that the recoveries were of a capital nature to the extent that money had been expended to equip the vessels. With respect to the last contention, it may be pointed out that in the case of the Lydia the court made a deduction of $500 for cost of*922 equipment and depreciation. We have no evidence whatever before us on this issue with reference to the Jane Gray and therefore can afford no relief. The fact that it is probable that such evidence cannot now be obtained does not serve to entitle the petitioner to relief in the absence of evidence. . While the damages recovered were for compensation for losses, the losses were not of a capital nature. The damages were measured by the average value of the vessels' probable catches, or, in other words, their probable losses of gross profits. Such recoveries are subject to income tax. . Cf. , and . The petitioner acquired the claims against the United States in 1921 by bequest from his mother. The "value" of these claims was not taxable to him as income, but any income derived from the bequests is taxable. Sec. 213(b)(3), Revenue Acts of 1921 and 1926, and sec. 22(b)(3), Revenue Act of 1928. Such income may be made by a "sale or other*923 disposition" of the bequest and the basis for the computation of such income is, as to that part received in 1926, the fair market value of the bequest as of the time of his mother's death (sec. 204(a)(5), Revenue Act of 1926; ), and as to that part received in 1928, it being a general bequest, the fair market value of his claim at the time of distribution in February 1921. Sec. 113(a)(5), Revenue Act of 1928. When the petitioner recovered on his claims, he made a "disposition" of them within the meaning of that word as used in section 204(a) of the Revenue Act of 1926 and section 113(a) of the Revenue Act of 1928. . We know the amounts of the recoveries but we are not informed as to what was the fair market value of the claims as of the basic dates. If the estate of the mother was subject to Federal estate tax, then the appraised value for such purpose of the claim on which recovery was *623 received in 1926 would establish its fair market value as of the time of her death (*924 ), and would afford a reasonable measure of such value of the other claim as of date of distribution, it not appearing that there was any material change in conditions. These claims were for unliquidated damages. In 1921 the Government not only had not paid any part of them, but for 29 years had not permitted itself to be sued on them. These factors must have had a very depressing effect on their fair market value. The respondent has determined that the claims had no value on the basic dates. In the absence of any evidence as to such value, the respondent is affirmed on this point. In reaching this conclusion we have given no consideration to the fact that these claims may not have been assignable. In the alternative, the petitioner asserts that if we hold the recoveries are taxable to him, then the amounts recovered should be diminished by the amounts of the shares or lays of the crews. The nature of such claims is set forth in , which was an appeal from the judgment in the action relative to the detention of the Lydia. After stating that it was well settled that in whaling*925 ventures the sailors who are entitled to a lay or share of the proceeds of the voyage as wages are never regarded as partners with the owners; that the owners of the vessel are the owners of the products of the voyage; that such a crew is rather to be deemed hired seamen than partners or joint contractors; and that neither the officers nor members of the crews may join with the owners in an action for recovery of the proceeds of the voyage, the court said: In , it was said: "It is the right and duty of the owners to protect the products of the voyage, and if unlawfully taken by any one, to pursue and obtain them, and the seamen have then a right to share in the net avails. The owners must obtain and hold them for this purpose. Otherwise, the seamen could not get redress; they have no title to the property, and could maintain no action for it. If the owners neglect to take proper means to obtain indemnity, they would be responsible to seamen for that neglect. It is not for the respondents to say that the owners will not pay the crew. The respondents certainly have no right to their share; and an individual*926 might as well say, when sued by a guardian, that perhaps he might never settle with his ward." It is clear from the foregoing and other like decisions that the funds received by the owners in a case such as this are charged with a trust for the payment of the claims of the officers and crew of the vessel. It thus appears that an agreement by the master or owner of a vessel to pay seamen a share of the profits of the voyage does not give the seamen any ownership in or title to the cargo, with the result that when recovery is sought for its loss the owner or master has the sole right to sue, and, having recovered the value of the *624 cargo, to hold for each sailor his proportionate share of the recovery, to be paid to him on demand. The petitioner has participated in two recoveries and has recovered in his own name. It is not disclosed what disposition he has made of the parts of the recoveries which he now claims belong to the crew. It is not shown that he has segregated such parts and set them aside as trust funds for the benefit of the crews, they to receive the benefits of any income that may accrue from their shares. Income taxation is a very practical matter*927 and the facts disclosed by this record should be viewed from a practical standpoint. The voyages were made in 1892. About 40 years elapsed between the voyages and the hearing of these proceedings. How many of the 66 men who composed the crews of the two vessels may now turn up and claim against the petitioner personally or through their representatives, we do not know. At the time of the hearing the petitioner had been in receipt of one recovery for five or six years, and of the other for three or four years, but he did not offer to prove that he had paid a single seaman. For all we know, final settlement may have been made with some of them. Under the circumstances of these proceedings, we are of opinion that the money recovered by the petitioner in his own name, while impressed with the quasi-trust in favor of the seamen to whom he is or may be indebted, is taxable to him without diminution by reason of the shares of the sailors. Furthermore, it would be a very difficult, if not an impossible task, to compute the value of the lays. We know the gross fractional part to which the crews are entitled, but we do not know what, if any, may have been forfeited under the articles; *928 what settlements may have been made with the sailors; nor what was the total catch of whales of the Pacific Coast Fleet. Nor do we know what part the advancements would play in such a computation. Reviewed by the Board. Decision will be entered for the respondent. Footnotes 1. 1. That jurisdiction be, and it is hereby, conferred upon the United States District Court, Northern District of California, to hear and determine the claims of American citizens, their heirs and legal representatives, for damages or loss occasioned by or resulting from the seizure, detention, sale or interference with their voyages by the United States of vessels charged with unlawful sealing in the Bering Sea and water contiguous thereto and outside of the three mile limit during the years 1886 to 1896, inclusive, and to enter judgment therefor. ↩