Commissioner of Internal Rev. v. Alamitos Land Co., 9404.

• Decision Date: 10 June 1940
• Docket Number: No. 9404.,9404.
• Citation: 112 F.2d 648
• Parties: COMMISSIONER OF INTERNAL REVENUE v. ALAMITOS LAND CO.
• Court: U.S. Court of Appeals — Ninth Circuit

112 F.2d 648 (1940)

COMMISSIONER OF INTERNAL REVENUE v. ALAMITOS LAND CO.

No. 9404.

Circuit Court of Appeals, Ninth Circuit.

June 10, 1940.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Louise Foster, and Paul R. Russell, Sp. Assts. to Atty. Gen., for petitioner.

Melvin D. Wilson, of Los Angeles, Cal., and Thomas B. Irvine, of Long Beach, Cal., for respondent.

Before WILBUR, MATHEWS, and STEPHENS, Circuit Judges.

WILBUR, Circuit Judge.

Petitioner seeks to review a decision of the Board of Tax Appeals determining the taxable income of the Alamitos Land Company, respondent, for the year 1932. During that year, on July 8, 1932, the respondent collected a judgment of the Superior Court of Los Angeles County, California, against the Shell Oil Company, for $522,895.11, entered June 20, 1932.¹ Subsequently, on April 26, 1935, the Supreme Court of California reversed the judgment and remanded the case for retrial. Alamitos Land Co. v. Shell Oil Co., 3 Cal.2d 396, 44 P.2d 573.

Thereafter, on June 4, 1935, respondent repaid to the Shell Oil Company the sum of $522,895.11, together with two items of interest derived from its investment of $41,286.09 and $11,595.31, for the purpose of restoring to the Shell Oil Company the amount it had paid upon the judgment with the income derived therefrom during its possession by the respondent.

In 1938 the litigation was settled by the payment of $100,000 to the respondent. The Commissioner held that the amount paid upon the judgment was income to the respondent for the year 1932. The respondent petitioned the Board of Tax Appeals for a review of that determination. Its petition was sustained and the Commissioner petitions this court for a review of that decision.

The principal question for review is whether or not the amount of the judgment paid by the Shell Oil Company to the respondent was taxable income to it for the year 1932. The respondent contends that in view of the contingency of a successful appeal the fund paid to it was in the nature of a trust fund as to which it had only a qualified ownership which removed it from the domain of taxable income because, under the law of California moneys paid or collected or property transferred in compliance with the judgment of a lower court subsequently reversed is a trust fund to be held by the party subject to the results of the appeal. To support the contention that the money paid to the respondent upon the judgment was a trust fund the respondent proved that the money paid to it was at once placed in a savings bank at interest and that upon the books of the corporation it was set up as a fund reserved to be repaid to the Shell Oil Company in the event that company was finally successful in the pending litigation. Thereafter, in 1933, $252,000 of the fund was invested in United States Treasury notes. The question of whether or not money paid upon a judgment or order is taxable income of the judgment creditor for the year in which it was paid, notwithstanding the possibility of a reversal of the judgment or order had recently been considered by the Supreme Court in North American Oil Consolidated v. Burnet, 286 U.S. 417, 52 S.Ct. 613, 76 L.Ed. 1197, affirming the decision of this court (50 F.2d 752). In this case most of the points raised by the respondent herein were determined adversely to its contentions. It was held that the amount so paid was taxable income for the year in which it was paid, although the taxpayer claimed that it kept its books on an accrual basis. North American Oil Consolidated v. Burnet, supra, 286 U.S. at page 421, 52 S.Ct. 613, 615, 76 L.Ed. 1197. The Supreme Court held that it was immaterial whether the taxpayer filed a return on a cash or accrual basis for in neither event was it liable for a tax "on account of income which it had not yet received and which it might never receive". The court said: "The net profits earned by the property in 1916 were not income of the year 1922 — the year in which the litigation with the government was finally terminated. They became income of the company in 1917, when it first became entitled to them and when it actually received them. If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent. See Board v. Commissioner, 6 Cir., 51 F.2d 73, 75, 76. Compare United States v. S. S. White Dental Mfg. Co., 274 U.S. 398, 403, 47 S.Ct. 598, 71 L.Ed. 1120. If in 1922 the government had prevailed, and the company had been obliged to refund the profits received in 1917, it would have been entitled to a deduction from the profits of 1922, not from those of any earlier year. Compare Lucas v. American Code Co. 280 U.S. 445, 50 S.Ct. 202, 74 L.Ed. 538, 67 A.L.R. 1010, supra."

The respondent seeks to distinguish the case at bar from North American Oil Cons. v. Burnet, supra, by the claim that under the California law, the fund collected by the judgment creditor is a trust fund in the hands of the judgment creditor until the appeal is disposed of, and if the judgment is reversed it must be held as a trust fund until returned to the judgment debtor. This contention was upheld by the Board of Tax Appeals. In support of this proposition the respondent relies upon § 957 of the California Code of Civil Procedure regulating the rights of the parties in case a judgment is ordered reversed or modified and upon the decisions of the Supreme Court of California in Ward v. Sherman, 155 Cal. 287, 100 P. 864; Asato v. Emirzian, 177 Cal. 493, 171 P. 90; Dowdell v. Carpy, 137 Cal. 333, 70 P. 167; City of Oakland v. Buteau, 219 Cal. 745, 29 P.2d 177; Levy v. Drew, 4 Cal.2d 456, 459, 50 P. 2d 435, 101 A.L.R. 1144; Oldfield v. Bank of America Nat. Trust & Savings Ass'n, 6 Cal.2d 103, 110, 56 P.2d 1235.

The cases cited do not support the respondent's contention as to the law of California. On the contrary, they fully sustain the proposition that when the money is paid on a judgment where the collection has not been stayed by supersedeas the money belongs to the judgment creditor and remains his unless he disposes of it until the reversal of the judgment. It is on the reversal of the judgment that the trust relationship arises. The cases cited are in accord with the uniform rule to the effect repeatedly stated in the decisions of the California Supreme Court. The rights of the parties to such a judgment during the appeal and after reversal are clearly stated in a recent decision of the Supreme Court of the State of California. Oldfield v. Bank of America Nat. Trust & Savings Ass'n, 6 Cal.2d 103, 110, 56 P.2d 1235, 1239. In that case the court said, in quoting with approval from Garrett v. Jensen, 44 Cal.App. 99, 186 P. 156:

"At the time when, on order of the court, the money was paid by the county treasurer to the guardian, there was a legal right in the minor to demand and receive it, or to enforce payment of it by some suitable method for enforcing the judgment that had been given and made in his favor. ...