Swastika Oil & Gas Co. v. Commissioner of Internal Rev.
| Decision Date | 06 November 1941 |
| Docket Number | No. 8698.,8698. |
| Citation | 123 F.2d 382 |
| Parties | SWASTIKA OIL & GAS CO. v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Harry C. Kinne, of Chicago, Ill. (Kinne, Scovel, Robson & Murphy and Harry C. Kinne, all of Chicago, and Michael J. Sporrer, of Milwaukee, Wis., on the brief), for petitioner.
Louise Foster, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, and Louise Foster, Sp. Assts. to Atty. Gen., on the brief), for respondent.
Before HICKS, SIMONS, and McALLISTER, Circuit Judges.
The respondent determined a deficiency in the petitioner's income tax return for 1935. It was based upon the receipt by the petitioner of a sum in compromise settlement of litigation pursued by the petitioner in the courts of Michigan. Two questions arise. The first is whether the payment was income or the restoration of a capital loss. The second is whether the payment was income in the tax year when it was received, or, the taxpayer making returns upon the accrual basis, the payment was income in the year when the claim arose.
The petitioner, having title to oil lands in Muskegon, Michigan, entered into a contract on April 19, 1929, with one J. D. Wrather, for the building of a refinery thereon, to cost $75,000. By its terms the petitioner was to sell Wrather all the crude oil produced by its wells with an agreement that whenever the cost of the refinery should be paid out of the profits of its operation the petitioner was to receive a 35% interest therein, and if a corporation was organized to take it over, it was to receive 35% of its stock. Wrather built the refinery and transferred it to a corporation styled the Michigan Central Refining Company. The petitioner furnished it with oil until May 28, 1930, when Wrather and his fellow stockholders caused the Michigan Central assets to be transferred to the Roosevelt Oil Company, the refinery to be moved from Muskegon, Michigan, to Mt. Pleasant, Michigan, and the Michigan Central Refining Company to be dissolved. Later, Wrather and associates caused the Roosevelt Oil Company to enter into contracts for the sale and distribution of its products to other corporations which they controlled, resulting in large secret profits to them and their nominees.
At the time of the removal of the refinery from Muskegon, $39,000 of its original cost had been paid out of the profits of the Michigan Central Refining Company earned in 1929 and 1930. The remaining $36,000 was paid out of the profits of the Roosevelt Oil Company in the period 1930 to 1933. On May 19, 1931, the petitioner filed a bill of complaint in the Circuit Court of Muskegon County, Michigan, seeking to impress a trust upon the capital stock of the Roosevelt Oil Company to the extent that it was entitled to have received stock in the Michigan Central Refining Company. In the alternative it sought to set aside the dissolution of the Michigan Central, to procure the transfer to it of all of the Roosevelt Oil Company assets, and the execution and delivery to the petitioner of its agreed share of Michigan Central capital stock. It also sought an accounting on behalf of Michigan Central, of the secret profits made by the promoters in the transactions between Roosevelt Oil Company and other corporations. A decree followed on January 23, 1935, substantially granting the petitioner's claim to relief. The dissolution of the Michigan Central Refining Company and the sale of its assets were held null and void, and the plaintiff adjudged entitled to shares of Michigan Central stock and to an accounting of the profits of that company and the Roosevelt Oil Company.
The defendants in the state court litigation prepared to take an appeal to the Michigan Supreme Court, but later agreed upon a settlement pursuant to which the petitioner, in September, 1935, received a cash payment of $80,000 in full settlement of its claims. The respondent allowed a deduction of the legal and other expenses incurred in the prosecution of the suit, and asserted a deficiency in the petitioner's taxable income for 1935 of $53,146.52. This deficiency was contested before the Board of Tax Appeals and it is the order of the Board sustaining the Commissioner that is here sought to be reviewed and set aside.
We have no difficulty in determining that the amount received by the petitioner in settlement of its suit, after the deduction of its legal and...
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