Commissioner of Internal Revenue v. Saltonstall, 3671.

• Decision Date: 10 December 1941
• Docket Number: No. 3671.,3671.
• Citation: 124 F.2d 110
• Parties: COMMISSIONER OF INTERNAL REVENUE v. SALTONSTALL.
• Court: U.S. Court of Appeals — First Circuit

124 F.2d 110 (1941)

COMMISSIONER OF INTERNAL REVENUE v. SALTONSTALL.

No. 3671.

Circuit Court of Appeals, First Circuit.

December 10, 1941.

Michael H. Cardozo, IV, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Louise Foster, Sp. Assts. to Atty. Gen., on the brief), for Commissioner.

Edward C. Thayer, of Boston, Mass. (Loring P. Jordan, Jr., of Boston, Mass., on the brief), for Taxpayer.

Before MAGRUDER, MAHONEY, and WOODBURY, Circuit Judges.

MAGRUDER, Circuit Judge.

Eleanor Saltonstall, the taxpayer herein, and her brother, are sole income beneficiaries, in equal shares, under a trust established by the will of Peter C. Brooks, probated in 1920. In her individual income tax return for 1935, Mrs. Saltonstall reported her share of the distributable income of the trust, as disclosed in the fiduciary return, Form 1041, filed by the trustees for that year. The Commissioner ruled that her trust income should be increased in the sum of $10,911.92, half of the amount which the trustees had reserved out of rent from the Brooks Building in Chicago to cover the year's depreciation of the building. Upon petition for redetermination of the deficiency resulting from this adjustment, the Board of Tax Appeals upheld the taxpayer. The case is before us on petition by the Commissioner for review of the Board's decision.

In 1926, the building in question, and the land upon which it stood, were disposed of by the trustees to the Brooks Building Corporation (in which the trustees had no interest), under the terms of an indenture which purported to be a sale of the building and lease of the land for a period of 198 years for a reserved rental. $900,000 was the consideration actually received for the building. The transferee corporation was given an option to tear down the existing building and replace it with another meeting certain specifications. It agreed to pay taxes, to insure, repair and restore the building.

The trustees in good faith computed the profit on the presumed sale of the building in 1926 as follows:

                  Unadjusted basis              $740,000.00
                  Improvements                     7,506.34
                                                ___________
                                                 747,506.34
                  Depreciation allowed            90,365.46
                                                ___________
                                                 657,140.88
                  Cash received    $900,000.00
                  Less expenses      70,740.55
                                   ___________
                  Net receipt                    829,259.45
                                                 __________
                  Capital gain                  $172,118.57
                

Thus, in computing the gain of $172,118.57, the trustees wrote off the books of the trust the recorded depreciated value of the Brooks Building, namely, $657,140.88. This gain so computed was included in gross income for the year 1926 in the income tax return (Form 1040) filed by the trustees; it was, however, more than offset by other losses. The report of the revenue agent upon his audit of the return filed by the trustees made reference to the Brooks Building transaction, but no adjustment was made of the amount of gain reported by the trustees with respect thereto.

The returns of the trustees for 1926 (Form 1040, aforesaid, and a fiduciary return, Form 1041) did not show any of the said $172,118.57 gain from the presumed sale of the Brooks Building as distributable to the beneficiaries, and none of such amount was ever distributed to the taxpayer. The income reported by the taxpayer on her individual return for 1926 did not include any portion of this supposed capital gain.

A default by the Brooks Building Corporation having occurred in 1931, the trustees took possession of the land and building pursuant to a judgment entered in the Municipal Court of Chicago in a forcible entry and detainer suit. Title to the property was confirmed in the trustees in 1932 by decree of the Circuit Court of Cook County, Illinois, in a suit to quiet title.

The trustees in 1932 restored the Brooks Building to the books of the trust in the amount of $747,461.40, which represented the balance shown by the old ledger less a slight adjustment for error. Likewise the old depreciation reserve account which had been written off in the amount of $90,365.46 was restored to the books in 1932 in the amount of $90,313.04,¹ the difference of $52.42 representing correction of an error. This was done by the trustees upon advice of counsel to the effect that treating the disposition of the property in 1926 as a sale had been established to be erroneous by the decision in the case of Minneapolis Syndicate v. Commissioner, 1928, 13 B.T.A. 1303, acquiesced in by the Commissioner (C.B. VIII-1, p. 31). In this altered view of the transaction the sum of $900,000 received in 1926 did not constitute proceeds of sale of the Brooks Building but was in fact rent therefor which should have been taxed as income in 1926.

In their fiduciary returns (Form 1041) for the years 1933, 1934 and 1935, the trustees claimed a deduction in each year for depreciation on the Brooks Building in the amount of $21,823.84, or 3% of the adjusted book value of the building, namely, $727,461.40 ($20,000 having been subtracted from the book value as the estimated value, at date of reacquisition, of certain elevators discarded in 1932). It is stated in the Board's findings of fact that the amount of these annual deductions for depreciation had been "charged to distributable income and credited to principal by the trustees in every year and the whole of such amount was excluded from distribution to the beneficiary and none of it was distributed to the petitioner Mrs. Saltonstall and the probate account of the trustees was allowed upon such basis." Only the year 1935 is now in issue.

The taxpayer contends that the understatement of income in 1926 resulted from a mutual mistake of law; that the trustees had been guilty of no concealment or misrepresentation of facts; that the statute of limitations now prohibits rectification of the 1926 error; and that this rectification cannot be indirectly accomplished by distorting the 1935 income computed on the basis of the true situation. Salvage v. Commissioner, 2 Cir., 1935, 76 F.2d 112, affirmed sub nom., Helvering v. Salvage, 1936, 297 U.S. 106, 56 S.Ct. 375, 80 L.Ed. 511; Commissioner v. Union Pac. R. Co., 2 Cir., 1936, 86 F.2d 637; Helvering v. Williams, 8 Cir., 1938, 97 F.2d 810; Hawke v. Commissioner, 9 Cir., 1940, 109 F.2d 946, certiorari denied, 1940, 311 U.S. 657, 61 S.Ct. 11, 85 L.Ed. 421; Helvering v. Schine Chain Theatres, Inc., 2 Cir., 1941, 121 F.2d 948. The Commissioner has been quite insistent upon this point of view in the reverse case where in an earlier year a taxpayer by mistake had overstated his income. See Bigelow v. Bowers, 2 Cir., 1934, 68 F.2d 839, certiorari denied, 292 U.S. 656, 54 S.Ct. 864, 78 L.Ed. 1504; Corinne S. Koshland v. Commissioner, 1935, 33 B.T.A. 634.

There are cases where a taxpayer who has made an underpayment in a prior year has been prevented, by the doctrine of equitable estoppel, from showing the true facts to defeat a deficiency assessment for a subsequent year. Crane v. Commissioner, 1 Cir., 1934, 68 F.2d 640; Portland Oil Co. v. Commissioner, 1 Cir., 1940, 109 F.2d 479, 485, 486, certiorari denied, 1940, 310 U.S. 650, 60 S.Ct. 1100, 84 L.Ed. 1416. See Raleigh v. United States, Ct.Cl.1934, 5 F.Supp. 622. But the foundation of these estoppel cases is a misrepresentation of fact, express or implied; and after the Government has changed its position in reliance thereon, the taxpayer is not permitted to show the fact to be other than as previously represented. In the present case there was no such misrepresentation. The Commissioner was apprised of all the facts and approved the returns for 1926 under a mistake of law. Estoppel was not pleaded here and the Commissioner disclaims reliance upon such defense. In this he was well advised. See United States v. Dickinson, 1 Cir., 1938, 95 F.2d 65; Helvering v. Williams, 8 Cir., 1938, 97 F.2d 810; Helvering v. Schine Chain Theatres, Inc., 2 Cir., 1941, 121 F.2d 948; Sugar Creek Coal & Mining Co. v. Commissioner, 1934, 31 B.T.A. 344.

But the Commissioner urges that in effect the trustees recovered the entire cost of the building in 1926 by virtue of having deducted in that year the depreciated cost in calculating the capital gain from the supposed sale of the building. To allow a further deduction for depreciation in the return of income for 1935 would contravene the policy of the law against double or duplicating deductions — so the argument goes.

Ilfeld Co. v. Hernandez, 1934, 292 U.S. 62, 54 S.Ct. 596, 78 L.Ed. 1127, is the Supreme Court case chiefly relied on. There a parent corporation had properly deducted the losses of certain subsidiaries in its consolidated returns for several years; and it was held that the Act and Regulations should not be construed to permit the same deduction to be made again in stating the eventual loss to the parent corporation from its investment in the subsidiaries. The deductions had been correctly taken in the earlier years, and no question of the statute of limitations was involved. The holding is irrelevant to the case at bar. To the same effect are Commissioner v. Apartment Corp., 4 Cir., 1933, 67 F.2d 3, certiorari denied, 1934, 292 U. S. 631, 54 S.Ct. 639, 78 L.Ed. 1485; Greif Cooperage Corp. v. Commissioner, 3 Cir., 1936, 85 F.2d 365. Cincinnati Milling Machine Co. v. United States, Ct.Cl.1936, 14 F.Supp. 505, was somewhat different. Here a parent corporation making a consolidated return deducted certain losses of a subsidiary. The deductions were allowed by the Commissioner, although a later Supreme Court decision indicated that this should not have been done. After the statute of limitations had run, the parent corporation in a subsequent year sought to deduct its losses on liquidation of the subsidiary. It was held that the amount...