Commissioner of Internal Revenue v. Speyer, 430.

• Decision Date: 10 June 1935
• Docket Number: No. 430.,430.
• Citation: 77 F.2d 824
• Parties: COMMISSIONER OF INTERNAL REVENUE v. SPEYER. SPEYER v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

77 F.2d 824 (1935)

COMMISSIONER OF INTERNAL REVENUE v. SPEYER.

SPEYER v. COMMISSIONER OF INTERNAL REVENUE.

No. 430.

Circuit Court of Appeals, Second Circuit.

June 10, 1935.

Henry W. Taft, of New York City (Henry W. Taft and C. W. McConaughy, both of New York City, of counsel), for petitioner.

Frank J. Wideman, Asst. Atty. Gen., and Sewall Key and Maurice J. Mahoney, Sp. Assts. to Atty. Gen., for Commissioner of Internal Revenue.

Before MANTON, SWAN, and CHASE, Circuit Judges.

MANTON, Circuit Judge.

In 1928, the taxpayer, pursuant to the Settlement of War Claims Act of 1928 (45 Stat. 254), received $485,912.43, part payment on account of awards of the Mixed Claims Commission (United States and Germany). The awards were made in respect of Reichsmark accounts to his credit in German banks during the World War period. The awards were $996,738.47 principal, and $397,775.52 interest from January 1, 1920, to January 1, 1928. The principal of the awards contained interest, dividends, and profits credited to the taxpayer's account in the German banks prior to July 1, 1921. The taxpayer contended and the Board of Tax Appeals held that the amount paid was in part restoration of the principal and not taxable income.

The taxpayer was in the banking business in New York City, with a partner, in April, 1917. He was also a member of a banking house at Frankfort-am-Main, Germany. At this time the New York firm had mark accounts with various banks in Germany. April 4, 1917, the taxpayer withdrew from the German firm. He had five accounts in marks with his German firm. The interest of his partner in the New York City partnership was assigned to him December 31, 1923. The taxpayer's books were kept on a cash basis.

German war legislation resulted, August 9, 1917, in the extension of a moratorium to debts payable to persons in the United States. A decree of November 10, 1917, resulted in the restriction on sales, assignments, and charges of enemy owned property and it became applicable to persons of the United States. January 30, 1918, a decree provided that property of United States residents would be taken over for administration by the German government. Under the German law a bank account deposit creates a debtor-creditor relationship between a depositor and his bank. The accounts of this taxpayer were never taken over under the decree authorizing the Treuhander to do so. The accounts were continued in the name of the taxpayer, and that of his New York firm, throughout the war period.

Before the Mixed Claims Commission, appointed pursuant to statute, after controversy, a compromise was reached between the agents of Germany and our government, whereby Germany assumed a joint liability with the German banks in respect to the mark balances. By the terms of that agreement, these awards were made to the taxpayer. By the Settlement War Claims Act of 1928 (45 Stat. 254) means of payment of awards were provided. Section 4 (c), 45 Stat. 260 lists priorities of payment. The amounts received and the disbursements made, as the record discloses, indicate a very long delay — estimated at 24 years — before this taxpayer would be paid in full the amount of his award. Moreover, upon convincing evidence, the Board of Tax Appeals' conclusion that there is not only a lack of certainty of future payments, but that it is highly probable that the taxpayer will never receive any substantial part of that which is due him, is justified.

The taxpayer's capital investment in the bank accounts on which the award was based was $1,228,748.28. Of the payment received, $485,912.43, the Commissioner determined $181,535.45 was taxable income. This conclusion was reached by analyzing the taxpayer's capital, interest on the awards from January 1, 1920, to January 1, 1928, and interest, dividends, and profits paid into the bank accounts in Germany prior to December 31, 1920. The Commissioner treated the interest on the awards, and the interest, dividends, and profits paid into the bank accounts, as income, and on this basis found that the awards stated as of January 1, 1928, were made up of 61 per cent. capital and 39 per cent. income. He then determined that as each payment is made out of the German Special Deposit Fund on the awards it would contain 39 per cent. taxable income. In this manner he arrived at the amount of income and taxed it accordingly. The Board of Tax Appeals disagreed.

The taxpayer's capital in the bank accounts was far in excess of the payment received in 1928. In order to arrive at gain or loss, there must be withdrawn from the gross proceeds an amount sufficient to restore capital that existed at the commencement of the period under consideration. Eisner v. Macomber, 252 U. S. 189, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570; Doyle v. Mitchell Bros. Co., 247 U. S. 179, 38 S. Ct. 467, 62 L. Ed. 1054. In Drier v. Helvering, 63 App. D. C. 283, 72 F.(2d) 76, the court considered income tax on an award of the Mixed Claims Commission. The award made on August 1, 1928, amounted to $68,782.70, of which $48,000 was principal and $21,128, interest. At the time of the seizure of Drier's property, it was worth $68,782.70. The value of the taxpayer's property at the time it was acquired by her was equal to the sum received by her under the award of the Claims Commission; the total sum received was sufficient only to restore the capital value that existed at the commencement of the period under consideration;...