In re Acme Traffic Signal Co., 35751-M.

• Decision Date: 25 February 1941
• Docket Number: No. 35751-M.,35751-M.
• Citation: 37 F. Supp. 352
• Court: U.S. District Court — Southern District of California
• Parties: In re ACME TRAFFIC SIGNAL CO.

37 F. Supp. 352

In re ACME TRAFFIC SIGNAL CO.

No. 35751-M.

District Court, S. D. California, Central Division.

February 25, 1941.

Robert B. Powell, of Los Angeles, Cal., for George Goggin, trustee.

Wm. Fleet Palmer, U. S. Atty., E. H. Mitchell, Asst. U. S. Atty., and Eugene Harpole, Sp. Atty. of Internal Revenue Department, all of Los Angeles, Cal., for the United States.

McCORMICK, District Judge.

The Collector of Internal Revenue presents a claim in this bankruptcy proceeding for the aggregate sum of $202, alleged to be due from the bankrupt as capital stock tax for the year ending June 30, 1940.

Acme Traffic Signal Company was adjudicated bankrupt on May 13, 1940. Upon the trustee's refusal to sign a return prepared by the Collector for the capital stock tax for 1940, the Collector, under authority of Section 3612 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 3612, made the return. In it the Collector started with the adjusted declared value of $198,412.46, reported in the company's 1939 capital stock tax return. This 1939 return was made by the officers of the Acme Traffic Signal Company, a corporation, prior to the filing by the bankrupt of the initial bankruptcy proceeding in this matter under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. From this amount $13,446.20 was deducted as amount of loss occurring during previous income tax year, according to the taxpayer's books. Thus an adjusted declared value of $184,966.26 was arrived at for the year ending June 30, 1940. Capital stock tax of $184 was computed and assessed for 1940, and as Section 205 of the Revenue Act of 1940, 26 U.S.C.A. Int.Rev.Code, § 1200(c) enacted after the preparation of the claim herein, provided for an increase of the amount of the tax by 10%, the total tax for which claim is made against the bankrupt is $202.

One further conceded fact before the referee is that the capital stock of Acme Traffic Signal Company had an actual fair market value at less than $184,000 on June 30, 1940, and that the trustee in bankruptcy was able to obtain no more than $5,100 from the sale of all of the bankrupt's assets.

The referee allowed the claim of the Government, and the trustee in bankruptcy has petitioned for review of the referee's order of allowance dated October 15, 1940.

The question for decision as propounded by the referee's certificate is thus stated: "Is the `adjusted declared value' of the capital stock of Acme Traffic Signal Company the proper and correct value to be used for measuring the capital stock tax due from the bankrupt for the taxable year ending June 30, 1940, or should that tax have instead been measured by the value of the corporation's assets?"

We think a faulty yardstick has been used in measuring the tax chargeable to the bankrupt estate and to its trustee.

Preliminary to a discussion of the problem in this review, it is to be observed that the briefs of the attorneys for both sides of this controversy concede, and we think necessarily so under the weight of authority, that the bankruptcy court has full power under Section 64, sub. a of the Bankruptcy Act, 11 U.S.C.A. § 104, sub. a, to hear and determine whether the value which forms the basis for the assessment of the disputed capital stock tax was a proper and correct value as provided by Section 1200(a) et seq., of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 1200(a) et seq. See In re Florence Commercial Co., 9 Cir., 19 F.2d 468; Dickinson v. Riley, 8 Cir., 86 F.2d 385. But whether the determination of the question under consideration is under Section 64, sub. a, or under Section 62 of the Bankruptcy Act, 11 U.S.C.A. § 104, sub. a, and § 102, as an expense of administration, the power of the bankruptcy court to decide the matter is coextensive in either situation.

It is clear from the record before us, in fact it appears from the financial statement in the original petition for reorganization under Chapter X which terminated in the later bankruptcy adjudication, that the 1939 return did not declare or reflect a true or reasonably correct capital stock value. Under such circumstances, the fictitious evaluation is not binding upon the trustee.

In this review we are not dealing with a return made by a taxpayer who had previously made a declaration of capital stock value in an earlier return, nor are we considering a return made by a trustee in bankruptcy either with or without bankruptcy court authorization. Here we find a bankrupt corporation at no time subsequent to May 13, 1940, "carrying on or doing business," but where all of the activities of its trustee are directed to the liquidation and distribution in accordance with the ordinary processes of the Bankruptcy Act. In such a case, under the express authority of Section 64, sub. a, of the Bankruptcy Act an obviously arbitrary and fictitious value as the basis of a tax against the trustee is not conclusive against him. By reason of the broad investiture of power under the bankruptcy act, the bankruptcy...