Becker v. Bemis

• Decision Date: 24 July 1939
• Docket Number: 11423.,No. 11422,11422
• Parties: BECKER, Collector of Internal Revenue, v. BEMIS. SAME v. SCHLAFLY.
• Court: U.S. Court of Appeals — Eighth Circuit

104 F.2d 871 (1939)

BECKER, Collector of Internal Revenue, v. BEMIS.

SAME v. SCHLAFLY.

Nos. 11422, 11423.

Circuit Court of Appeals, Eighth Circuit.

June 26, 1939.

Rehearing Denied July 24, 1939.

Harry Marselli, Sp. Asst. to the Atty. Gen. (James W. Morris, Asst. Atty. Gen., Sewall Key, Sp. Asst. to the Atty. Gen., Harry C. Blanton, U. S. Atty., of Sikeston, Mo., and Herbert H. Freer, Asst. U. S. Atty., of St. Louis, Mo., on the brief), for appellant.

H. M. Stolar, of St. Louis, Mo. (Lowenhaupt, Waite & Stolar, Henry C. Lowenhaupt, and William H. Charles, all of St. Louis, Mo., on the brief), for appellees.

Before SANBORN and THOMAS, Circuit Judges, and SULLIVAN, District Judge.

SANBORN, Circuit Judge.

These are two actions at law brought to recover alleged overpayments of income taxes made by William N. Bemis and August Schlafly (both now deceased) in the year 1928. The taxpayers filed claims for refunds, which were denied, and these actions were brought by the executors of their estates. The facts were agreed to and the cases were tried to the court. They were submitted and decided together. From judgments for the executors, the Collector has appealed.

On December 21, 1922, the taxpayers and others entered into a pool agreement with a trust company in St. Louis, Missouri, for the purpose of purchasing common stock of Piggly Wiggly Stores, Inc. The trust company agreed to purchase the stock from Clarence Saunders at $32 a share with funds deposited by members of the pool, and, unless the stock was sold within 90 days and the proceeds divided among the members of the pool, to deliver the stock to the members on the basis of their respective contributions. The taxpayers each deposited $32,000 with the trust company pursuant to the pool agreement; and on March 23, 1923, none of the stock purchased by the trust company having been sold, each received from it 1,000 shares of Piggly Wiggly stock.

Prior to the formation of this pool in St. Louis and on or about November 30, 1922, a pool had been formed in Memphis, called the "Piggly Wiggly Pool A", for the purpose of trading in Piggly Wiggly stock. The members of this Memphis pool advanced the funds for the pool operations, and Clarence Saunders pledged 7,700 shares of his Piggly Wiggly common stock to secure the members of the pool, other than himself, against loss. The funds of this pool were lost, and the members in the year 1923 took over the 7,700 shares of stock pledged by Saunders. At that time the market value of the stock was $11 a share. The Commissioner of Internal Revenue ruled that the members of this Memphis pool, who had invested $750,000 in the pool and had lost everything except the 7,700 shares of pledged stock, "sustained a loss measured by the difference between the amount of cash advanced for the purpose of trading on the market and the fair market value of the stock received by the members of the pool, as at the date of its receipt by such members, by virtue of the guarantee against loss made by Mr. Saunders."

Neither of the taxpayers was a member of the Memphis pool. Each of them, in his income tax return for the year 1923, claimed a deduction for a loss of $21,000 on the basis of the ruling of the Commissioner with respect to the members of the Memphis pool. Mr. Bemis took his deduction under "Bad Debts (Explain in Schedule G)". In Schedule G, the explanation given was: "Loss Piggly Wiggly Pool as per Memo attached, $21,000.00, a loss of $21.00 per share on 1000 shares". The "memo" attached was the letter of the Commissioner containing his ruling with respect to the losses suffered by the members of the Memphis pool.¹ Mr. Schlafly claimed his deduction under "Losses by Fire, Storm, etc. (Explain in Schedule F)". In Schedule F, under the heading "Kind of Property", he inserted "`Piggly Wiggly', Treasury Dept. letter 12/27/23, IT:E:RR:EWG — Copy herewith attached". Under "Date Acquired" he wrote "1922", and under "Cost, or Value March 1, 1913", he wrote $32,000.00". He also attached to his return the same letter of the Commissioner with respect to the losses of the Memphis pool.

The Commissioner, believing that the facts with respect to the St. Louis pool transaction were the same as those with respect to the Memphis pool, allowed the deductions claimed by the taxpayers, and closing agreements were executed in accordance with the provisions of § 1106(b) of the Revenue Act of 1926, 44 Stat. 9, 113.

Both of the taxpayers in 1928 sold the Piggly Wiggly stock received by them from the St. Louis pool. Each received, as the proceeds of the sale $49,960. On March 16, 1929, Mr. Bemis filed his income tax return for 1928 with the Collector showing a total net income of $47,700.90, and a tax of $4,149.57, which he paid. He reported a gain of $38,960 on the sale of his 1,000 shares of Piggly Wiggly stock, taking as the cost basis of the stock its market value of $11 a share on March 23, 1923, the time when he received it from the St. Louis pool. Mr. Schlafly, in his income tax return for 1928 showed a net income of $97,204.78, which included a gain of $38,960 from the sale of his 1,000 shares of Piggly Wiggly stock, which he computed upon the same basis which had been used by Mr. Bemis. Mr. Schlafly's tax was $9,903.68, and was paid. In his audit of the returns of both of these taxpayers, the Commissioner accepted as correct the gain reported by each of them from the sale of their Piggly Wiggly stock.

In December, 1930, each taxpayer filed with the Collector a claim for refund upon the ground that the actual cost of his stock was $32 a share, and not $11 a share as he reported. Mr. Bemis claimed an overpayment of income taxes for the year 1928 of $3,105.05. Mr. Schlafly claimed a similar overpayment of $3,039.90. Both claims were rejected.

By securing allowances of their claimed deductions for losses on Piggly Wiggly stock in 1923, the taxpayers effected reductions in their income tax liability for that year. Mr. Bemis reduced his tax by $6,256.15. Mr. Schlafly reduced his by $5,797.43. At the time the taxpayers filed their claims for refund of overpayments of income taxes for the year 1928, the collection of 1923 deficiencies in their income taxes was barred by limitations.

The Collector contends that each of the taxpayers, having claimed a deduction in his income tax return for the year 1923 of $21 a share upon 1,000 shares of stock received by him from the St. Louis pool and having by his representations induced the Commissioner to allow that deduction, was precluded, after the running of the statute of limitations, from using $32 a share (the actual cost of his stock) as the basis for computing his gain from the sale of such stock in 1928.

The executors of the estates of the taxpayers contend that the taxpayers were not estopped or in any way precluded from asserting that in 1928 their gain was to be measured by the difference between what the taxpayers originally paid for their stock in 1922 — namely, $32.00 a share — and what they sold it for in 1928, and that the failure of the Commissioner, within the period of limitations, to discover that in 1923 the taxpayers had secured deductions for losses which they had not suffered, is of no controlling importance in these cases.

The Revenue Act of 1928, c. 852, 45 Stat. 791, 815, 818, §§ 111 and 113, 26 U.S. C.A. §§ 111, 113 note, so far as here pertinent, provided that the gain from the sale of property should be the excess of the amount realized over cost.

The ruling of the District Court on the question of estoppel was as follows: "In our opinion, the facts as stipulated, fail to establish an equitable estoppel. There was not a false representation or concealment of material facts. The Deputy Commissioner's letter attached to the returns recited that members of the Memphis pool never owned any Piggly Wiggly stock; that they were to receive cash, not stock. The returns of the taxpayers do not assert that they were members of the Memphis pool or that they were members of a similar pool; the returns show on their face that the taxpayers had made deductions for losses on Piggly Wiggly stock; that they had purchased stock, not that they had contributed money. There is no showing that the taxpayers intended to mislead the Commissioner. The most that can be said is that the taxpayers made a representation of law that the same ruling should be made in regard to their transaction as was made in the Memphis transaction."

Upon the question as to whether the executors should be denied relief upon the ground that in equity and good conscience they ought not to recover, the District Court ruled that the case of McEachern v. Rose, 302 U.S. 56, 58 S.Ct. 84, 82 L.Ed. 46, stood in the way of the Government's taking any benefit from the underpayment of taxes by the taxpayers in 1923.

It is apparent that the taxpayers had no intention of defrauding the Government in making their 1923 income tax returns. They had each furnished in December, 1922, $32,000 to the St. Louis pool wherewith to purchase Piggly Wiggly stock. It is probable that they regarded the pool as a distinct entity, that they expected that the stock purchased by it would be sold, and that they did not expect that they would individually acquire any of it. The break in the market which caused their acquisition of the stock in March, 1923, when it had fallen to $11 a share, was, no doubt, regarded by them as having resulted in as great a loss to them as to the members of the Memphis pool. As a practical matter, there was perhaps little difference between the effect upon the two pools — but the taxpayers had acquired their stock because they were the owners of it and not because of any contract of indemnity, a distinction sufficiently apparent to those learned in the law, but perhaps not quite so clear to others.

Mr. Bemis, by his sworn return for the year 1923, stated that in that year he had sustained a loss of $21,000 — $21 a share...