H. Liebes & Co. v. Commissioner of Internal Revenue

• Decision Date: 14 June 1937
• Docket Number: No. 8366.,8366.
• Parties: H. LIEBES & CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

90 F.2d 932 (1937)

H. LIEBES & CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 8366.

Circuit Court of Appeals, Ninth Circuit.

June 14, 1937.

Joseph Haber, Jr., of San Francisco, Cal., for petitioner.

Robert H. Jackson, Asst. Atty. Gen., and Sewall Key, Norman D. Keller, and E. W. Pavenstedt, Sp. Assts. to Atty. Gen., for respondent.

Before WILBUR, GARRECHT, and HANEY, Circuit Judges.

HANEY, Circuit Judge.

The Board of Tax Appeals decided that there was a deficiency in the income tax paid by petitioner for the fiscal year ending January 31, 1930, in the sum of $11,906.43. Petitioner filed a petition asking review by this court of that decision.

Certain facts related in Whitelaw v. United States (D.C.Cal.) 9 F.(2d) 103, are helpful, historically, to an understanding of the facts before us. After the United States had purchased Alaska from Russia, these two countries divided jurisdiction as to taking seals in the Bering Sea between them, and each government claimed to have absolute jurisdiction over its entire share, outside as well as within the 3-mile limit. British and American subjects carried on sealing operations in that sea. An arbitration tribunal decided later that jurisdiction of the United States did not extend beyond the 3-mile limit. The United States thereupon compensated for seizure by it of British vessels beyond the 3-mile limit. Likewise, Russia compensated for American vessels seized by it, beyond the 3-mile limit.

A decision of this court held that the jurisdiction of the United States did not extend beyond the 3-mile limit, so that vessels owned by citizens of this country, seized by the United States, were seized unlawfully. Whitelaw v. U. S. (C.C.A.9) 75 F. 513, 21 C.C.A. 434. No remedy was afforded such owners, however, until the Act of June 7, 1924, 43 Stat. 595 (28 U. S.C.A. § 52), was passed. By the terms of that act, jurisdiction was conferred on a California District Court to hear and determine such claims "for damages or loss occasioned by or resulting from the seizure, detention, sale, or interference with their voyage 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."

It appears from the stipulation of facts that the surviving trustee of Pacific Trading Company, a California corporation which had been dissolved, sued on a claim for interference with sealing operations of its vessels, case No. 17,540. In case No. 17,541 petitioner sued on a claim for interference with such operations of its vessels. In case No. 17,543, the surviving trustee mentioned and others sued for interference with the sealing operations of a vessel, an 11/16 interest in which was owned by Pacific Trading Company, and the remainder by others.

On May 23, 1927, judgments were rendered for the plaintiffs in cases numbered 17,540 and 17,543, and the judgments were paid on August 22, 1928. On September 14, 1928, certain heirs at law sued in the state court alleging that their intestate was the owner of ½ of the capital stock of Pacific Trading Company and entitled to ½ of the net amount of the judgments in actions 17,540 and 17,543. The personal representative of a decedent intervened, claiming that her intestate was the owner of some of such stock. Petitioner intervened claiming to be the owner of all the stock. The judgment in the state court action was rendered on February 19, 1929, and sustained petitioner's claim, and petitioner received on February 28, 1929, the net amount of $70,061.94.

On December 28, 1928, petitioner recovered judgment in case No. 17,541, which was paid May 31, 1929. The net amount received by petitioner was $36,455.17.

In its income tax return for the fiscal year ending January 31, 1930, petitioner did not report any amounts received from the judgments mentioned. Respondent audited the return, adjusted the net income to include $106,517.11 (the total of the net amounts received), and assessed a deficiency in the tax paid by petitioner in the sum of $11,906.43. Petitioner, by petition to the Board, asked a redetermination of the deficiency. The Board sustained the assessment made by respondent, and the petition for review, now before us, was then filed.

In its opinion, the Board said: "* * * 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." In its brief, here, petitioner says that it "accounted on an accrual basis." Respondent says in his brief: "* * * it may be stated that the evidence, i. e., the stipulation of facts, does not state that petitioner kept its books on the accrual basis. In the absence of proof it cannot be presumed that a taxpayer kept its books on such basis. See Niles Bement Pond Co. v. United States, 281 U.S. 357, 361 50 S.Ct. 251, 252, 74 L.Ed. 901. * * *"

It is true that the record does not disclose upon which basis petitioner accounted, that is, whether it used an "accrual" basis, or a "cash" basis. If petitioner made its returns on a "cash" basis, it is obvious that the Board's decision was correct for the income was received during the fiscal year ending January 31, 1930. On the other hand, if petitioner reported on the "accrual" basis, then we must decide whether or not the income received during the fiscal year ending January 31, 1930, also accrued during that year.

The Revenue Act of 1928, c. 852 (45 Stat. 791), provides in section 41 (26 U. S.C.A. § 41 and note) that a taxpayer may report net income on the basis of the annual accounting period used, that is for a fiscal year, or for a calendar year; it also provides that the computation shall be made "in accordance with the method of accounting regularly employed in keeping the books of such taxpayer."

Article 91 of Treasury Regulations 74, promulgated under the Revenue Act in question, provides in part:

"Any claim existing unconditionally on March 1, 1913, whether presently payable or not, and held by a taxpayer prior to March 1, 1913, whether evidenced by writing or not, and all interest which had accrued thereon before that date, do not constitute taxable income, although actually recovered or received subsequent to such date."

Article 331 of those regulations provides in part:

"* * * If a person sues in one year on a pecuniary claim or for property, and money or property is recovered on a judgment therefor in a later year, income is realized in that year, assuming that the money or property would have been income in the earlier year if then received. * * * Bad debts or accounts charged off subsequent to March 1, 1913, because of the fact that they were determined to be worthless, which are subsequently recovered, whether or not by suit, constitute income for the year in which recovered, regardless of the date when the amounts were charged off * * * Such items as claims for compensation under canceled Government contracts constitute income for the year in which they are allowed or their value is otherwise definitely determined."

First. Petitioner contends that compensation for an injury is not income and is not taxable as such. We believe the statement to be too broad. Recovery for injury to capital "is never income, no matter when collected." U. S. v. Safety Car Heating & Lighting Co., 297 U.S. 88, 98, 56 S.Ct. 353, 358, 80 L.Ed. 500. But the same case also says (297 U.S. 88, at page 93, 56 S.Ct. 353, 356, 80 L.Ed. 500) that "Congress intended, with exceptions not now important, to lay a tax upon the proceeds of claims or choses in action for the recovery of profits, unless the right to such recovery existed unconditionally on March 1, 1913, the effective date of the first statute under the Sixteenth Amendment."

Was petitioner's recovery for injury to capital, which in a sense would be a return of capital, or was it for profits? Respondent determined that the recovery was taxable. The presumption of correctness attending respondent's determination Buck v. Commissioner (C.C.A.9) 83 F. (2d) 786, and cases cited carried with it a presumption that the recovery was for profits. The burden was on petitioner to overcome that presumption. Buck v. Commissioner (C.C.A.9), supra. It made no attempt to do so. The only thing touching the point is the stipulated fact that the suits were brought for damages caused by "interference by the United States with sealing operations of" vessels owned by the respective plaintiffs. But recovery for such interference included profits. See Bird v. United States (C.C.A.9) 24 F.(2d) 933, 936; United States v. Laflin (C.C.A. 9) 24 F.(2d) 683, 684. We may assume that interference could also include injury to capital, but after the determination of respondent, the burden was on petitioner to show that the recovery was for injury to capital. Since that burden has not been sustained, we must hold that the recovery was for profits.

In Farmers' & Merchants' Bank v. Commissioner (C.C.A.6) 59 F.(2d) 912, 913, the recovery was for "the injury inflicted to its taxpayer's banking business generally." In that case the court said "that the true measure of damages was compensation to be determined by ascertaining how much less valuable its business was by reason of the wrongful acts of the Reserve Bank" from which the recovery was had. In Strother v. Commissioner (C. C.A.4) 55 F.(2d) 626, 632, recovery by a lessee of coal lands, for trespass and removal of coal from such lands was held to be "in effect a return of capital," or, as stated (page 633), for "a loss of capital investment." Both of these cases, so strongly relied on by petitioner, show that damages recovered for injury to capital is not income. The difficulty in considering these two decisions as controlling with respect to the instant case lies in the fact that it does not...