Commissioner of Internal Rev. v. Pennroad Corporation, 11569.
| Decision Date | 12 December 1955 |
| Docket Number | No. 11569.,11569. |
| Citation | 228 F.2d 329 |
| Parties | COMMISSIONER OF INTERNAL REVENUE v. The PENNROAD CORPORATION and Affiliated Companies. |
| Court | U.S. Court of Appeals — Third Circuit |
Frank E. A. Sander, Washington, D. C. (H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, Lee A. Jackson, Sp. Assts. to the Atty. Gen., on the brief), for petitioner.
William R. Spofford, Philadelphia, Pa. (Charles S. Jacobs, Robert R. Batt, Ballard, Spahr, Andrews & Ingersoll, Philadelphia, Pa., on the brief), for respondent.
Before BIGGS, Chief Judge, and GOODRICH and McLAUGHLIN, Circuit Judges.
The case at bar concerns the 1947 income tax of Pennroad Corporation and its affiliates. In 1929 The Pennsylvania, Railroad Company caused the taxpayer, Pennroad, to be created so that it might do for Pennsylvania the things which Pennsylvania could not legally do for itself: the protection and extension of Pennsylvania's empire in the fiercely competitive field of railroad transportation. Pennsylvania caused Pennroad to invest its capital in stocks of railroad companies and, later, to embark on disastrous freight-forwarding ventures referred to generically hereinafter as "Freight Forwarding transactions." The details of these investments and transactions are set out in full in the findings and opinions listed in the footnote1 and need not be repeated here.
It is sufficient to state here that a stockholders' derivative suit (Perrine) was commenced against Pennsylvania on behalf of Pennroad in the Court of Chancery of Delaware, and two other similar suits (Overfield and Weigle, later consolidated for trial) were filed against Pennsylvania in the United States District Court for the Eastern District of Pennsylvania. A judgment of $22,104,515.92, based on three of Pennroad's eight railroad investments and the Freight Forwarding transactions, was obtained by Pennroad against Pennsylvania in the Weigle and Overfield suits. Recovery was had on proof that Pennroad, dominated by Pennsylvania, was compelled by it to invest in the stocks of railroad companies at exorbitant prices, and to conduct Freight Forwarding transactions to the great benefit of Pennsylvania and to the great loss of Pennroad. Recovery was based on the items and in the amounts set out in the footnote.2
The judgment was appealed to this court and was reversed, the majority ruling that a Pennsylvania statute of limitations barred Pennroad's recovery. The present writer dissented. Thereafter negotiations were commenced and all three suits were finally settled by Pennsylvania paying to Pennroad the sum of $15,000,000 on February 9, 1947. The net amount remaining to Pennroad after the payment of counsel fees and other expenses was $12,202,804.31, and this was credited on Pennroad's books to capital surplus.
In its 1947 tax return, Pennroad did not report any part of the settlement as income. Its unrecovered bases for the three railroad investments and the Freight Forwarding transactions, for which the District Court had allowed recovery, at the time of settlement were no less than the amounts listed below:
Boston & Maine Railroad Co. ....................... $23,637,708.38
Pittsburgh & West Virginia Railway
Co. ............................................. 37,898,100.00
Seaboard Air Line Railway Co. ..................... 3,312,179.40
Freight Forwarding transactions ................... 1,532,460.30
______________
Total .................... $66,380,448.08
The Commissioner assessed a deficiency. As stated in his brief, he "first deducted from the $15,000,000 settlement proceeds $2,939,190.27 of various expenses and fees which had been incurred as a result of the litigation, and then allocated the balance to the various items for which the United States District Court had awarded recovery, and in the same proportions as it had, as follows:
Pittsburgh & West Virginia Railway
Company .............................. $ 4,987,097.17
Seaboard Air Line Railway Company ...... 2,428,120.90
Boston and Maine Railroad .............. 694,028.12
*National Freight Company .............. 2,101,753.29
*Profits derived by Pennsylvania from
National Freight Company business .... 1,849,810.25
_______________
*Freight Forwarding transactions
Total ........... $12,060,809.73"
The Boston & Maine and Pittsburgh & West Virginia settlement proceeds as allocated by the Commissioner were held non-taxable by him since the amounts recovered were less than the bases of these investments. In respect to the Freight Forwarding investment the Commissioner concluded that Pennroad had derived income of $569,292.99. The Commissioner determined that Pennroad's original basis in this investment was $3,852,000, the net amount which Pennsylvania caused Pennroad to invest in Freight Forwarding transactions. He also concluded that this basis must be adjusted by $2,319,539.70 of Freight Forwarding transactions losses during the years 1930 to 1933, which, allegedly, as a result of the filing of consolidated returns, had reduced or eliminated altogether the taxable income of Pennroad in those years. With respect to the $1,849,810.25 attributable to profits which Pennsylvania had made on the Freight Forwarding transactions, the Commissioner concluded that this amount was taxable to Pennroad in its entirety. The Commissioner also assessed a deficiency on the Seaboard Air Line investment but abandoned this asserted deficiency in the proceedings before the Tax Court.
The Tax Court held, 21 T.C. 1087, all sixteen judges concurring, that since the total amount of the settlement was substantially less than the total loss sustained by Pennroad as a result of Pennsylvania's domination and control which had caused Pennroad's disastrous investment policy, the total proceeds of the settlement should be tax exempt. The court concluded that although the losses arose from different investments and transactions, nonetheless they should be viewed as a unit because "the basic...
To continue reading
Request your trial
-
Ruoff v. Comm'r of Internal Revenue
...of income. The settlement expressly left all the income with the Attorney General.4 See Pennroad Corporation, 21 T.C. 1087, affd. (C.A. 3) 228 F.2d 329. All petitioner did at the most was to maintain successfully her position that she was entitled for an indefinite period into the future to......
-
California and Hawaiian Sugar Refin. Corp. v. United States
...880, 81 S.Ct. 171, 5 L.Ed.2d 103 and Pennroad Corp. & Affiliated Companies v. Commissioner, 21 T.C. 1087 (1954), aff'd on another issue, 228 F.2d 329 (C. A.3, 1955), involved comparable situations in which expenditures to realize a capital gain, or to minimize a capital loss, on investments......
-
Iowa Southern Utilities Company v. CIR
...case in the Commissioner's favor. The Commissioner's second primary case is Pennroad Corp., 21 T.C. 1087 (1954), affirmed, C. I. R. v. Pennroad, 228 F.2d 329 (3 Cir.). There shareholders' derivative suits were settled after extensive litigation for $15,000,000 in cash. Substantial legal fee......
-
Ridge Realization Corp. v. Comm'r of Internal Revenue, Docket No. 2907-62.
...grounds for recovery almost identical to those of the stockholders' suits involved in Pennroad Corporation, 21 T.C. 1087 (1954), affd. 228 F.2d 329 (C.A. 3, 1955), by the time of the settlement negotiations in the fall of 1958, all but the Conde Nast transaction and the Central States stock......