Denver & Rio Grande Western Railroad Co. v. United States

• Decision Date: 07 June 1963
• Docket Number: No. 425-57.,425-57.
• Parties: The DENVER & RIO GRANDE WESTERN RAILROAD COMPANY, a Corporation v. The UNITED STATES.
• Court: U.S. Claims Court

318 F.2d 922 (1963)

The DENVER & RIO GRANDE WESTERN RAILROAD COMPANY, a Corporation v. The UNITED STATES.

No. 425-57.

United States Court of Claims.

June 7, 1963.

Stanley Worth and Jules G. Korner, III, Washington, D. C., for the plaintiff. Korner, Doyle, Worth & Crampton, Washington, D. C., were on the briefs.

Thomas A. Troyer, Denver, Colo., with whom was Asst. Atty. Gen. Louis F. Oberdorfer, for the defendant. Lyle M. Turner and John F. Palmer, Washington, D. C., were on the brief.

Before JONES, Chief Judge, and WHITAKER, LARAMORE, DURFEE and DAVIS, Judges.

DAVIS, Judge.

Plaintiff is one of a large number of railroads which banded together in the late 1940's to buy the Pullman sleeping car business. As a result of a Government antitrust suit, Pullman, Inc., the parent company of the Pullman interests, was required in 1944 to divest itself of either its car manufacturing business or its sleeping car activities. It chose to retain the former and therefore approached various railroads to purchase the assets or stock of The Pullman Company, the subsidiary which operated the sleeping car business. The interested roads formed the Railroad Buying Group which worked out the arrangements for the transfer of The Pullman Company and the assets of the sleeping car business. The Company's stock was purchased for over $40,000,000, with the shares distributed pro rata among the buying roads. It was also agreed that the Company, once it was in railroad hands, would issue to the owning roads so-called "car notes" (the subject of this suit).

Plaintiff, which is on the accrual basis, received its "car note" in August 1947. The note was not assignable or transferable. The Pullman Company agreed to pay on June 30, 1948, the sum of $98,863, with interest at 3% from July 1, 1947. The principal sum was to be paid either in heavyweight sleeping cars (at a fixed value) or in cash out of a separate fund to be accumulated by the debtor. The cars could be obtained immediately or at any time up to December 31, 1948; if the railroad receiving the note chose to obtain cars it would have to lease them back to The Pullman Company until December 31, 1948 (but not thereafter). If cash were chosen, it could not be obtained before June 30, 1948, and was payable only to the extent money was available in the separate fund. This plaintiff decided, in 1947, not to take sleeping cars but to await the cash payment. In February 1949, The Pullman Company redeemed all outstanding car notes in cash, and at that time plaintiff received $98,863 — the face amount of the note. Interest was paid by The Pullman Company, as provided in the note, in 1947, 1948, and 1949. The plaintiff reported this interest as income but did not report the principal amount of the note at any time.

The Commissioner of Internal Revenue assessed and collected income tax, for 1949, on the $98,863 received in that year from The Pullman Company. Plaintiff paid the deficiency (and interest) and now sues for a refund.

The parties have narrowed the controversy to the single issue of the proper year in which the $98,863 was taxable, 1947 or 1949 (or perhaps both). Both sides assume (at least for this case) that the distribution by The Pullman Company was a taxable dividend; but they differ as to the time when that dividend was received. The taxpayer opts for the earlier year while the Government asserts that the Internal Revenue Service correctly chose 1949.

The Internal Revenue Code of 1939 defined a "dividend" as "any distribution made by a corporation to its shareholders, whether in money or in other property" (Section 115(a)), and the regulations required a taxable distribution by a corporation to "be included in the gross income of the distributees when the cash or other property is unqualifiedly made subject to their demands" (Treas.Reg. 111, § 29.115-1). There is, of course, no problem as to the amount to be included in gross income where the dividend is paid in cash; with respect to valuation of a dividend in kind, Section 115(j) of the Code provided that "if the whole or any part of a dividend is paid to a shareholder in any medium other than money the property received other than money shall be included in gross income at its fair market value at the time as of which it becomes income to the shareholder." Under this governing law — established by the Code and the regulations — we must decide three points: first, what was the distribution made by The Pullman Company to plaintiff, i. e., the car note or the cash payment; second, in what year (1947 or 1949) was this distribution unqualifiedly made subject to plaintiff's demands; and, third, what was the amount of the distribution to be included in gross income. Though theoretically separable, these three problems are closely intertwined in this case, and we shall discuss them together.

Plaintiff obtained its car note in August 1947. It says — and defendant denies — that this note was valuable "property" in itself, received at that time. Promissory notes are usually such property, or the equivalent of cash, in the hands of the obligee (cf. Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462, 468-469, 53 S.Ct. 257, 77 L.Ed. 428 (1933); Wolfson v. Reinecke, 72 F.2d 59 (C.A.7, 1934); Cowden v. Commissioner, 289 F.2d 20, 24 (C.A.5, 1961); Turner v. Commissioner, 303 F.2d 94, 96 (C.A.4, 1962) cert. denied, 371 U.S. 922, 83 S.Ct. 289, 9 L.Ed.2d 230), but that proposition is not universally true (cf. Schlemmer v. United States, 94 F.2d 77 (C.A.2, 1938); Cowden v. Commissioner, supra; Hudson v. Commissioner, 11 T.C. 1042, 1050-1051 (1948), aff'd per curiam, Hudson Engineering Corp. v. Commissioner, 183 F.2d 180 (C.A.5, 1950); Crosby v. Commissioner, 14 B.T.A. 980 (1929)). Here, we believe, the note was so framed that it did constitute property in taxpayer's possession as soon as it was received.¹ At that moment the taxpayer was in a position to demand valuable heavyweight sleeping cars in payment. The note was the equivalent of a declared dividend of sleeping cars which could be taken at any time in 1947. Under the Code and the regulations, the immediate availability of those cars gave rise to present income. Treasury Regulations 111, § 29.115-1 called for the inclusion in shareholders' gross income of property distributed by the corporation whenever it is "unqualifiedly made subject to their demands." Regulations 111, § 29.42-2, establishing a general rule for determining when income has been received, likewise fits this case:

"Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited or set apart to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and must be made available to him so that it may be drawn at any time, and its receipt brought within his own control and disposition * * *."

The sleeping cars referred to in the note were "made available" to the taxpayer in 1947 (subject to leasing back to The Pullman Company for a temporary period). They could be drawn in that year and their receipt was thus brought within the taxpayer's own control and disposition at that time.

The defendant objects to this conclusion on three main grounds. It says, first, that the sleeping cars were not made available "without any substantial limitation or restriction" (as Treas.Reg. 111, § 29.42-2, supra, provides) because plaintiff was required, by its agreement with the other railroads, to lease back the cars to The Pullman Company until December 31, 1948, and to allow the Company to operate them during that period. But this minor requirement for a lease-back of no more than 17 months did not so fetter the taxpayer's use of the property as to remove its distribution from the category of income. The Commissioner of Internal Revenue recognized this himself when he decided (see finding 11(b)), in responding to a request for a ruling by other participating railroads, that "the railroad companies were in receipt of dividend distributions at the time they elected to claim assigned sleeping cars by the surrender of their car notes" — even though these companies had also agreed to the lease-back arrangement.

Secondly, defendant urges that plaintiff cannot have received income in 1947, through the availability of the cars, because it decided in that year not to take cars but to demand cash. This, too, is no answer since the cars were always available in 1947 under the terms of the note; the taxpayer's internal decision not to exercise the option — subject, of course, to change until December 31, 1948 — would not mean that the cars did not remain "unqualifiedly * * * subject to its demands." A taxpayer's own choice to leave untouched money or property which is otherwise subject to his call does not ordinarily defer the receipt of income. See 2 Mertens, Law of Federal Income Taxation (1961), §§ 10.01, 10.05, 10.06; cf. Corliss v. Bowers, 281 U.S. 376, 378, 50 S.Ct. 336, 74 L.Ed. 916 (1930); Williams v. United States, 219 F.2d 523 (C.A.5, 1955).

Thirdly, defendant insists that the car notes had no independent significance but were issued only as part of the mechanics of a distribution by The Pullman Company among its stockholders of the sleeping cars (or their cash equivalent). We have been given no adequate reason why the notes should be disregarded. They are unusual in form and designed to meet an unusual situation, but nothing in the law of taxation directs the compulsory elimination of uncommon obligations. Nor is there any rule that notes with a present value are to be overlooked simply because they are non-negotiable and non-assignable.² In form and substance, these were promissory notes,...