BANKERS TRUST COMPANY v. United States, 89-67.

• Decision Date: 12 May 1972
• Docket Number: No. 89-67.,89-67.
• Parties: BANKERS TRUST COMPANY et al. v. The UNITED STATES.
• Court: U.S. Claims Court

459 F.2d 484 (1972)

BANKERS TRUST COMPANY et al. v. The UNITED STATES.

No. 89-67.

United States Court of Claims.

May 12, 1972.

David W. Richmond, Washington, D. C., Attorney of Record, for plaintiffs. M. Robert Gallop, Jesse Climenko, Anthony J. Napodano, New York City, Robert L. Moore, II, and Miller & Chevalier, Washington, D. C., of counsel.

Milan D. Karlan, U. S. Dept. of Justice, Tax Div., Washington, D. C., with whom was Asst. Atty. Gen. Scott P. Crampton, for defendant. Philip R. Miller, Washington, D. C., of counsel.

Before DAVIS, Acting Chief Judge, LARAMORE, Senior Judge, and SKELTON, NICHOLS, KASHIWA and KUNZIG, Judges.

ON DEFENDANT'S AND PLAINTIFFS' MOTIONS FOR PARTIAL SUMMARY JUDGMENT

LARAMORE, Senior Judge.

Plaintiffs in this case are, as the title indicates, transferees of the assets of the Mesabi Iron Company. The Mesabi Iron Company, hereinafter referred to simply as "Mesabi", was organized and incorporated under the laws of the state of Delaware on December 12, 1919. In 1961, Mesabi was dissolved and its assets were transferred to the Mesabi Trust pursuant to the Complete Plan of Liquidation and Agreement of Trust instituted to facilitate dissolution of the Mesabi Iron Company. Said Agreement of Trust provided, at section 1.4 thereof, that

if any liability shall be assessed against the trustees as the transferees of the Trust Estate, on account of any liability of or through the Company Mesabi, the trustees may use such part of the Trust Estate as may be necessary in contesting any such liability and in payment thereof.

As will hereinafter be described, a liability was assessed against the trustees and thus the contesting of that liability is in the name of the trustees but on behalf of the assets of Mesabi Iron Company.

The events leading up to the assessed liability began when Mesabi filed its corporate income tax return for the calendar year 1960. On that return, Mesabi indicated an income tax liability of $3,836,611.86. However, after audit by the Internal Revenue Service, additional taxes were assessed against Mesabi for the taxable year of 1960 in the amount of $3,016,132.64, plus interest of $239,596.61. The deficiency, plus interest, was paid by plaintiffs on November 30, 1962. Following said payment, an additional assessment of $65,983.07 was made against Mesabi, also for the year 1960, which was subsequently paid by plaintiffs on April 1, 1963. On March 19, 1963, plaintiffs herein timely filed a claim for refund for the taxable year 1960 in the amount of $7,092,341.11, comprised of $6,852,744.50 in taxes and $239,596.61 in interest paid. This claim for refund asserted that the 1960 deficiency was erroneously assessed and that Mesabi had correctly computed its tax liability for 1960.

The above-noted deficiency was assessed against plaintiffs by the defendant, through the Internal Revenue Service, upon the theory that in 1960 Mesabi received, as ordinary income for Federal tax purposes, certain shares of its own capital stock in payment of certain claims for royalties on lands leased to Reserve Mining Company (Reserve), and that such stock should be valued at $12,799,352.50. Defendant, therefore, claims that plaintiffs should include into ordinary income $14,335,274.80 as the total amount received from Reserve in settlement of plaintiffs' claims for royalty income. Said total figure is comprised of the $12,799,352.50 previously noted as the total fair market value of the capital stock received by Mesabi, together with $1,535,922.30 of Minnesota royalty taxes payable by Reserve on behalf of Mesabi.

As for plaintiffs, they claim that the assessment was erroneous because the total value of the capital stock received was not as defendant claims, but instead the total fair market value for the 163,570 shares transferred was only $5,908,966, rather than $12,799,352.50. Correspondingly, the Minnesota royalty taxes payable by Reserve should also be reduced to $709,075.95, rather than the larger figure based on the government's assertion as to the fair market value of the capital stock.

The rather ominous difference in the fair market value for the 163,570 shares of Mesabi stock is attributable to the difference in opinions as to the precise date upon which the stock is to be valued. This difference, in turn, stems from the parties' disagreement as to the proper accounting procedures to be followed in this situation. Those differences arose under the following circumstances.

On February 19, 1960, the officers of Mesabi and Reserve agreed to recommend to their respective Boards and stockholders a settlement of certain controversies wherein Mesabi was contending, inter alia, that Reserve had not fulfilled its obligations to pay Mesabi approximately one-third of the net profits from the sale of taconite removed from lands leased to Reserve by Mesabi. These claims, according to plaintiffs, amounted to approximately $16,000,000 and were attributable to the failure of Reserve to pay over royalties on the production by Reserve of taconite for the years 1956 through 1959.¹ In settlement of those claims the officers and directors of each company arrived at the following terms for settlement of their differences: (1) Reserve would pay Mesabi $400,000 in cash; (2) Reserve would transfer the 163,570 shares of Mesabi's capital stock owned by Reserve to Mesabi; and ...