H. Liebes & Co. v. Commissioner

H. LIEBES & COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. H. Liebes & Co. v. Commissioner Docket No. 68231. United States Board of Tax Appeals 34 B.T.A. 677; 1936 BTA LEXIS 665; June 5, 1936, Promulgated *665 Prior to petitioner's fiscal year ended January 31, 1930, the trustee of a corporation in which petitioner was the sole stockholder instituted two damage suits against the United States under an act of Congress conferring jurisdiction in such suits on a Federal district court. Petitioner directly instituted a damage suit against the United States under the same statute. In the suits by the trustee, payment was made to the trustee in 1928. In that year litigation arose, in which petitioner intervened, in local courts to determine who was entitled to the proceeds. That litigation terminated in petitioner's favor in the fiscal year ended January 31, 1930, and it received the proceeds in that year. In the suit brought by the petitioner it obtained judgment in 1928. The appeal period did not expire and no funds were available to pay the judgment until in petitioner's fiscal year ended January 31, 1930, when it received payment. The proceeds were not accrued on petitioner's books prior to payment. Held, that the proceeds did not represent accruable income in any prior year and that they were properly treated by the respondent as income in the year of receipt. Homer*666 H. Tooley, C.P.A., for the petitioner. George D. Brabson, Esq., for the respondent. ARVNDELL *678 The respondent having determined a deficiency in income tax of $11,906.43 for the fiscal year ended January 31, 1930, the petitioner brings this proceeding for the redetermination thereof, alleging error by reason of the inclusion in income of $106,517.11 representing the amount received by it during said period from the United States of America as damages resulting from the illegal interference by the United States with sealing operations of vessels operated by the petitioner and its subsidiary, the Pacific Trading Co., during the years 1891, 1892, and 1893. From the stipulation of the parties filed at the hearing we make the following findings of fact. FINDINGS OF FACT. The petitioner is a California corporation, with its principal office and place of business in San Francisco. On June 7, 1924, the President of the United States approved an act passed by the 68th Congress conferring upon the United States District Court, Northern District of California, Southern Division, jurisdiction to hear and determine the claims of American citizens, their*667 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. (43 Stat. 595.) In accordance with the provisions of said enabling act the three suits below entitled were commenced in said court for the benefit of those entitled, as follows: M. J. Lyon as the only Surviving Trustee of Pacific Trading Company, a California Corporation No. 17540 H. Liebes & Company, a California Corporation No. 17541 M. J. Lyon as the only Surviving Trustee of Pacific Trading Company, a California Corporation, W. H. Talbot, Elizabeth Kindlen, Alfred R. Fritschi, Marie Fritschi, Anna F. Borchert, E. J. Fisher, Christine Fisher, A. J. Fisher and Sarah W. Lorentzen. No. 17543 In Suit No. 17540 the plaintiff, as trustee of the Pacific Trading Co., a subsidiary of the petitioner, claimed damage for interference by the United States with the sealing operations of vessels owned by that company during the year 1893. *668 In Suit No. 17541 the petitioner sought damage for interference by the United States with sealing operations of vessels owned by the petitioner during the years 1891 and 1892. In Suit No. 17543 M. J. Lyon, as surviving trustee of the Pacific Trading Co., a subsidiary of the petitioner, W. H. Talbot, et al., *679 brought a joint action for damage sustained from interference by the United States with sealing operations of a vessel of which during the year 1893 eleven-sixteenths was owned by the Pacific Trading Co. and five-sixteenths by W. H. Talbot and the other claimants. The Pacific Trading Co. was incorporated January 4, 1893, and on January 11, 1893, it acquired the vessels involved in Suit No. 17540 and an eleven-sixteenths interest in the vessel involved in Suit No. 17543. At this time all of the capital stock of the Pacific Trading Co. was issued to H. Liebes & Co., the petitioner, which thereafter was the sole owner of said stock, as determined in Action No. 199181, Superior Court of California, City and County of San Francisco, hereinafter referred to. The Pacific Trading Co. was dissolved on October 14, 1905, for nonpayment of state taxes. At the time*669 of the institution of Suits Nos. 17540 and 17543, one M. J. Lyon was the sole surviving director of the Pacific Trading Co., and under California law was the sole surviving trustee for the corporation and its stockholders. The suits were, therefore, brought in his name. On May 23, 1927, judgment was rendered for the plaintiff in Suits Nos. 17540 and 17543 in the amount of $140,353.45 and $13,491.19, respectively. In each a writ of error prosecuted by the defendant, the United States, to the Circuit Court of Appeals for the Ninth Circuit was dismissed by mandate issued June 20, 1928, and filed June 25, 1928. On August 22, 1928, payment was made by the United States of the full amount of the judgments in Suits Nos. 17540 and 17543, being $153,844.64. The draft was payable to M. J. Lyon as surviving trustee of the Pacific Trading Co. On September 14, 1928, F. H. Behlow, Bertha C. Beard, and Anna C. Fisher as the heirs at law of one C. J. Behlow, deceased, brought Action No. 199181 in the Superior Court of the City and County of San Francisco, State of California, against M. J. Lyon, sole surviving trustee of the Pacific Trading Co., and Hart H. North and William H. Thornley*670 (attorneys for the plaintiff in Suits Nos. 17540 and 17543), alleging that C. J. Behlow was the owner of one-half of the capital stock of the Pacific Trading Co. and entitled to one-half of the net amount of the judgments rendered in favor of the plaintiffs therein. In this action the petitioner intervened by complaint alleging that it was the sole owner of all the capital stock of the Pacific Trading Co. and entitled to the entire proceeds of judgments rendered in favor of said corporation, less amounts due North and Thornley for services rendered, less the amount due Lyon as compensation, and less certain amounts held in trust for seamen based upon the number of pelts which might reasonably have been an average catch had there been no interruption in sealing operations. *680 In the same action, No. 199181, one Annie E. Kelly, as administratrix of the extate of Daniel V. Kelly, intervened by complaint alleging that Daniel V. Kelly was the owner of shares of stock of the Pacific Trading Co. The complaint in intervention of Annie E. Kelly was dismissed by the court on February 19, 1929, and judgment was rendered for the petitioner, H. Liebes & Co., the court finding and*671 decreeing that it was at all times from the incorporation of the Pacific Trading Co. the sole owner of the latter corporation's stock and as such entitled to the entire proceeds of the judgments in Suits Nos. 17540 and 17543, with the deductions above enumerated. Payment of the aforesaid $153,844.64, less legal expenses and distributions to other claimants, was made to petitioner on February 28, 1929, in the amount of $70,061.94. On December 28, 1928, judgment was rendered in Suit No. 17541 in favor of petitioner in the amount of $77,753.22. No appeal was taken from the judgment by the United States. Payment of the judgment was not made by the United States until May 31, 1929, due to the fact that payment could not be made until an appropriation of the amount was authorized by Congress, which authorization was approved on March 4, 1929. Of the amount of the judgment the petitioner received, after distributions to other claimants, the sum of $36,455.17. In its income tax return for the fiscal year ended January 31, 1930, the petitioner reported as income none of the amounts received by it on account of the judgments aforementioned. Respondent, in his audit of said return, *672 made adjustments on account of the judgments as follows: Suit No. 17540, judgment entered 5/23/27 $140,353.45 Suit No. 17543, judgment entered 5/23/27 13,491.19 Total damages allowed by court 153,844.64 Net cash received by taxpayer on 2/28/29 after expenses and distribution to other claimants $85,201.34 Legal fees paid by taxpayer 15,139.40 Net proceeds to taxpayer 70,061.94 Suit No. 17541, judgment entered 12/8/28 $77,753.22 Net cash received by taxpayer 5/31/29 after expenses involved and distribution to other claimants participating in the suit $38,890.06 Loss distributions made by taxpayer 2,434.89 Net proceeds from Suit No. 17541 36,455.17 Net proceeds from Suits Nos. 17540 and 17543 70,061.94 Total 106,517.11 *681 OPINION. ARUNDELL: The petitioner offers three points of argument, the first two of which are that the amounts received from the United States of America in liquidation of judgments arising out of the foregoing claims do not constitute taxable income at all because compensation for injury can not result in a profit, and, furthermore, such amounts do not constitute taxable income in the fiscal year under consideration, *673 January 31, 1930, because they would not have been subject to a Federal income tax had they been recovered during the years in which the damage was sustained. In answer to these arguments it is sufficient to cite , wherein we held a taxpayer, who sued under the same enabling act and under a strikingly similar set of facts and circumstances, to be taxable upon the sums which he received, in the year of receipt. No question was raised in that proceeding about the year in which such sums were taxable. Undoubtedly that petitioner, an individual, was upon the cash receipts and disbursements basis. Petitioner urges in the alternative that the net recoveries finally received by it in the taxable year were accruable in the years in which judgment was rendered, which in all three suits was prior to the taxable year. While the parties have not stipulated that petitioner kept its books and made its returns on an accrual basis, the arguments of both parties proceed on that assumption, which we accept for the purposes of this discussion. A brief restatement of the facts at this point should prove helpful. The Pacific Trading Co. instituted*674 two suits in the United States District Court and obtained a favorable judgment in May 1927. An appeal was taken by the United States to the Circuit Court of Appeals, which latter court dismissed the appeal by mandate issued in June 1928. On August 22, 1928, payment was made by the United States of the full amount of the judgment, payment being made to the surviving trustee for the Pacific Trading Co. Thereafter, on September 14, 1928, certain individuals brought suit in the local courts of California against the sole surviving trustee for the Pacific Trading Co., alleging their right to one-half of the net amount of the judgment rendered. The petitioner intervened in this case, claiming that it was the sole owner of all the capital stock of the Pacific Trading Co. and consequently entitled to the whole proceeds. Later another person intervened, claiming an interest in the sum received by reason of being a stockholder in the Pacific Trading Co. On February 19, 1929, judgment in this action was entered for the petitioner and on February 28, 1929, the money was paid over to it. We think the Commissioner correctly holds that the income is taxable in the fiscal year ended January 31, 1930. *675 It was not until *682 within that year that the right of the petitioner to the money became fixed and was in fact paid to it. Petitioner was not, in its corporate capacity, a party to the original suit against the United States, but was a stockholder of the Pacific Trading Co. There was no judgment in its favor in the proceedings in the Federal courts. It was not until the litigation in the state courts was concluded that its right to any of the proceeds of the judgment was established. If the decision in the intervention suit had gone against the petitioner, it would be absurd to require accrual while that suit was pending and then allow a loss in the later year of termination of the suit. While the intervention suit was pending petitioner's claim was contingent on its successful conclusion. "A mere contingent claim, especially a contested one, whether of gain or loss, may never be sustained or realized; it is too uncertain to be considered in making up an income tax return." . To the same effect are *676 , and . All of these cases involved sums concerning which there was litigation and the substance of the holdings is that during litigation the taxpayer's rights were too uncertain to warrant accrual. We do not read the case of , as opposed to the decisions above cited. In that case the taxpayer was awarded a sum by the War Department in 1919 for cancellation of a war contract. Due to some confusion in the War Department the check covering the award was not received by the taxpayer until 1920. There was no dispute or litigation concerning the award after it was made by the War Department, and the court, finding that "the adjustment made in August, 1919, was a final adjustment", held it to be accrued income in 1919. Similarly, in , the taxpayer accrued in 1928 the amount of an award by the Mixed Claims Commission, United States and Germany. *677 It received a substantial payment on the award in that year, and it does not appear that there was any contest, litigation, or other contingency respecting the taxpayer's right to the amount awarded. The Circuit Court sustained the accrual in 1928, quoting , that, "it is the right to receive and not the actual receipt that determines the inclusion of the amount in gross income." Here the taxpayer's "right to receive" was not established until February 1929, which was within its fiscal year ended January 31, 1930. In No. 17541 suit was brought directly by the petitioner and judgment was rendered for the petitioner on December 28, 1928. The parties stipulate that no appeal was taken by the United States. *683 However, they do not stipulate that any final settlement or agreement not to appeal was reached within the petitioner's fiscal year 1929. The appeal period of three months (§§ 226, 230 U.S.C.A.) did not expire until in petitioner's fiscal year ended January 31, 1930, and in the absence of any act by the parties the judgment would not become final until the expiration of that period. At the time*678 the judgment was rendered there was no appropriation available to satisfy it, and the funds were not appropriated until in petitioner's fiscal year ended January 31, 1930. Under these circumstances we are of the opinion that this judgment, like the others, was surrounded by too many contingencies and uncertainties to warrant accrual as income prior to the year of payment. Apparently the petitioner thought so too, as it did not accrue any of the items on its books and did not report them as income in the years in which it now says they were accruable. It is not without significance that these items were extraordinary and outside the scope of ordinary business transactions. Day to day business deals may well be accruable even though they involve some element of contingency. But in so unusual a situation as this, where the result depends on the unpredictable outcome of litigation and of legislation (cf. ), the contingencies are too many to warrant accrual, whether it be of gain or loss. Reviewed by the Board. Decision will be entered for the respondent. MORRIS MORRIS, dissenting: I disagree with the*679 views of the majority and am of the opinion that the petitioner should be sustained. The majority opinion attaches considerable importance to the fact that in the two suits instituted by the Pacific Trading Co. the petitioner was not a party and there was no judgment in its favor. The respondent conceded, however, that if claims had not been filed for part of the money all of it would have been taxable in a prior year, thus basing his determination solely on the adverse claims. Prior to the taxable year it had been determined that the Pacific Trading Co. was entitled to recover and the amount of the judgment had been actually paid to the surviving trustee. The liability was no longer contingent. The facts show that all of the capital stock of the Pacific Trading Co. upon incorporation was issued to the petitioner and it claimed ownership thereafter. Under such circumstances I think the amount of the judgment was accruable prior to the taxable year. See Lichtenberger-Ferguson Co. v. Welch, 54 Fed.(2d) 570. *684 In the other action judgment was rendered for the petitioner in the preceding taxable year and it was stipulated that no appeal was taken*680 therefrom. In my opinion the purport of that stipulation was to eliminate the principal ground upon which the conclusion of the majority is based, namely that the judgment did not become final until the taxable year. That the parties so regarded it is evidenced by the respondent's argument in support of his conclusion that the appropriation for the payment of the judgment was not passed until during the taxable year in question, therefore the amount thereof could not be accrued until that time. I disagree with that conclusion. It seems to me that when the United States Government specifically authorized the bringing of suits it recognized liability and tacitly promised to pay any successful litigant the sums found by the authorized court to be due. Payment is not essential under the accrual system of accounting. Where the liability is fixed it is only necessary that payment be contemplated in the ordinary course of events. The judgment rendered in the preceding taxable year definitely determined the amount of petitioner's recovery. Under the circumstances it was entitled to regard payment thereof as certain. I therefore think judgment should be rendered for the petitioner. *681