Chiquita Mining Co. v. Commissioner of Internal Rev.

• Decision Date: 03 May 1945
• Docket Number: No. 10759.,10759.
• Citation: 148 F.2d 306
• Parties: CHIQUITA MINING CO., Limited, v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

148 F.2d 306 (1945)

CHIQUITA MINING CO., Limited, v. COMMISSIONER OF INTERNAL REVENUE.

No. 10759.

Circuit Court of Appeals, Ninth Circuit.

March 9, 1945.

Rehearing Denied May 3, 1945.

A. P. G. Steffes, of Los Angeles, Cal., for petitioner.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, A. F. Prescott, and Harold C. Wilkenfeld, Sp. Assts. to Atty. Gen., for respondent.

Before MATHEWS, STEPHENS, and BONE, Circuit Judges.

BONE, Circuit Judge.

Petition for review by this Court was filed by the taxpayer July 6, 1943 and involves Federal income and excess profits tax liability of the Chiquita Mining Company, Ltd., a corporation, for 1936 to 1938.

The Tax Court entered its decision against petitioner (corporation) on April 8, 1943 ordering and deciding that there are deficiencies in income tax for 1936 and 1938 in respective amounts of $2131.39 and $3279.96 and deficiency in excess profits tax for 1938 in the amount of $1817.79.

Two issues were raised in the pleadings in the Tax Court. The first dealt with proper allowance for depletion. The second dealt with the proper amount to be allowed for depreciation.

The depreciation issue was decided in favor of the taxpayer (petitioner) and is not before us for review.

The property involved in this case consists of certain mining claims acquired by the taxpayer in 1932, in consideration for which it had issued shares of its capital stock to the owners of the claims. The Commissioner of Internal Revenue determined that the taxpayer's mining property, upon which cost depletion was computed, had been acquired in a tax-free exchange and that the basis of the property in the hands of the taxpayer was the same as that of the transferors. In order to sustain the burden of overcoming the Commissioner's determination, it was incumbent upon the taxpayer to prove (1) that the property was not acquired solely in exchange for the taxpayer's stock and that transferors were not in control of the taxpayer immediately after the exchange (§§ 112(b)(5), 113(a)(8) and 114(b)(1) Revenue Act of 1928, 26 U.S.C.A. Int.Rev.Code, §§ 112(b)(5), 113(a)(8), 114 (b)(1); and (2) the fair market value of the property.

The Tax Court made no findings of fact with respect to the depletion issue, stating in its memorandum opinion that "no evidence was offered on the first (depletion) issue and respondent's determination on this point is consequently approved."

During August, 1942, the case was set for trial on October 12, 1942. At trial, counsel for taxpayer asked for subpoenas for two witnesses important to its case. Both were then under indictment on charges growing out of taxpayer's affairs. They appeared and both refused to testify and were thereupon excused by counsel. Neither claimed exemption on the ground that such testimony would incriminate. Counsel for taxpayer (Steffes) then asked for a continuance "until final disposition of the indictments" against these two witnesses. This request was denied by the Tax Court on the ground that it was neither timely nor meritorious. The case had been set for a long time and there was no showing that other witnesses on the same issues could not have been produced. It appears that Steffes was also counsel for one of the witnesses in the said criminal proceedings then pending. Exception was entered against the court's ruling. Counsel for taxpayer subsequently conceded that the two witnesses had been called to testify on the issue of depreciation, a question decided in favor of the taxpayer.

This left only the question of depletion in the case. In answer to a query by the court regarding witness on this point, Steffes said: "The witness to prove the cost are sic the records of the corporation which Mr. Sandrich¹ has here or can produce within probably ten minutes — his office is only a couple of blocks from here — showing the determination of that cost upon two occasions." Sandrich then stated to the court that "these documents we speak of, your Honor, my files, my working papers covering that particular period of time do constitute the only existing record of those transactions."

It appears that the record thus offered to the court consisted solely of the files and working papers of an audit made by Sandrich several years after the events under consideration had taken place, and that they did not include the original corporation records.

The court ruled that in order to sustain its case, provide necessary proof of details of the original transactions involved in the hearing and to show the legal status and various interests of the parties involved, taxpayer should produce in court the original written agreements and company papers executed by parties to the transactions, including stock books and minutes of the corporation, also to produce witnesses who were parties to the relevant transactions to properly identify and explain the exhibits.

Taxpayer then attempted to make a showing of inability to produce in court the original corporation records, this for the purpose of laying a foundation for the introduction of secondary evidence concerning the contents of such original agreements and documents. Steffes offered to testify on this point from his personal knowledge of said records. Sandrich stated that Steffes had personally prepared or redrafted some of them. The documents in question were in existence. Some were in Nevada; some in the hands of the Treasury Department; and some with the S.E.C. All could have been reached by subpoena anywhere in the United States.

Being of the view that a satisfactory showing had not been made, the court rejected the offer of proof by secondary evidence thus tendered since it was evident that the records in question would not and could not be produced at the hearing.

One of the claims of petitioner is that on two prior occasions tax liability had been determined by the "Internal Revenue Department" against the taxpayer in matters related to the value of its mining properties and the contention was that these prior determinations were inconsistent with the Commissioner's position in the present proceeding. These prior determinations apparently involved the tax on the transfer of securities. The court held that such prior determinations "were utterly immaterial", the Tax Court proceedings being de novo; and that the existence of prior determinations was a matter for negotiation with the Government and not the Tax Court, the Commissioner being a party litigant before the Tax Court.

Sandrich asked the Court if a letter from the Revenue Department in which, after examination, they had decided that those mining claims were worth a certain amount of money, would be admissible, to which the Court replied: "It is not admissible in this tribunal. You might get Government counsel to agree with you. That is a different thing. But it has no probative weight otherwise."

The Tax Court then closed the record and allowed the parties 30 days to file memoranda in support of their position.

The Tax Court's memorandum opinion was entered on January 5, 1943, holding for the taxpayer on the depreciation issue but sustaining the Commissioner's determination on the depletion issue because of the taxpayer's failure to submit any evidence thereon. On February 4, 1943, the taxpayer filed with the Tax Court a motion to reopen cause for the presentation of evidence upon the depletion issue. As ground for the motion it was stated that by reason of "surprise, misfortune, and excusable neglect" the taxpayer had not been heard on the issue. The motion was accompanied by affidavits, one of which was from Mr. Steffes reciting the facts of his illness immediately prior to and at the time of the hearing. Another was from a physician reciting the physical troubles of Mr. Steffes. A third affidavit was from Mr. Sandrich.² It clearly appears from this affidavit that one of the attorneys for the taxpayer had arranged to procure and produce at the hearing the documentary evidence necessary to the successful presentation of the case and that he had not done so. This documentary evidence consisted of contracts and agreements, together with escrow papers and other instruments evidencing the acquisition, and manner thereof, of the mining claims acquired by ...