Electric Reduction Co. v. Lewellyn

• Decision Date: 09 July 1925
• Docket Number: No. 3114.,3114.
• Citation: 8 F.2d 91
• Parties: ELECTRIC REDUCTION CO. v. LEWELLYN, Collector of Internal Revenue.
• Court: U.S. District Court — Western District of Pennsylvania

8 F.2d 91 (1925)

ELECTRIC REDUCTION CO. v. LEWELLYN, Collector of Internal Revenue.

No. 3114.

District Court, W. D. Pennsylvania.

July 9, 1925.

S. Leo Ruslander and George K. Warn, both of Pittsburgh, Pa., for plaintiff.

Walter Lyon, U. S. Atty., of Pittsburgh, Pa., for defendant.

SCHOONMAKER, District Judge.

This is an action at law to recover income and profit taxes paid by plaintiff for the year 1918. It involves an interpretation of the Revenue Act of 1918, § 234 (a) (4) and (5) being Comp. St. Ann. Supp. 1919, § 6336 1/8pp, which provides:

"Section 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:

* * * * * *

"(4) Losses sustained during the taxable year and not compensated by insurance or otherwise;

"(5) Debts ascertained to be worthless and charged off within the taxable year."

The plaintiff claims, under this section, a deduction from its 1918 income of $27,205.35, advanced by it to one Jouravleff as part payment of the purchase price of certain tungsten ore, which was never delivered, and which sum the plaintiff was unable to recover from Jouravleff.

The plaintiff contends that this sum was a deductible loss, and the government claims that it was a bad debt, which the plaintiff is not entitled to deduct, because it did not charge it off on the books of the company during the year 1918.

The case was tried before the court without a jury under agreement of the parties waiving a jury trial. From the admissions of parties and the proofs offered at the trial we find the following facts:

(1) The Electric Reduction Company, plaintiff, claims of C. G. Lewellyn, former Collector of Internal Revenue, the defendant, the sum of $7,051.55, with interest upon $667.22 thereof from March 15, 1919, and upon $2,092.41 thereof from June 15, 1919, and upon $2,045.91 thereof from September 15, 1919, and upon $2,045.91 thereof from December 15, 1919, as additional corporation income tax, which said amounts were paid to the defendant collector on the respective dates set forth.

(2) The Electric Reduction Company, the plaintiff, is a corporation duly organized under the laws of the state of Delaware, with its principal place of business in Pittsburgh, Pa.

(3) C. G. Lewellyn, the defendant, at the times of payment of said tax of $7,051.55, was the collector of internal revenue for the Twenty-Third district in the commonwealth of Pennsylvania.

(4) The Electric Reduction Company duly filed its income and profits tax return for the year 1918, which showed a tax liability of $8,183.63, which said tax was duly paid to C. G. Lewellyn, the then collector of internal revenue.

(5) On or about November 29, 1922, the Electric Reduction Company filed an amended income and profits tax return for the year 1918, showing a tax liability for said year of $1,132.78, and claiming a loss sustained for the year 1918 in the sum of $27,205.35, as is more particularly shown hereinafter. With said amended return it filed a claim for refund in the sum of $7,050.85, being the difference between the tax liability shown on the amended return for 1918 and the tax liability shown on the original return for 1918, which was paid. Said claim for refund was rejected by the Commissioner by letter dated April 17, 1923, upon the ground that the loss was not finally and definitely determined to be a loss until 1922, and was not charged off as such until 1922.

(6) The reason alleged by the Electric Reduction Company for the filing of the claim for refund and the amended return was that it claimed to have suffered a deductible loss of $27,205.35 in the year 1918, which was not deducted as a loss for said year 1918 in the original return filed.

(7) The transaction on which said claim of loss is based was as follows:

(8) The Electric Reduction Company entered into a contract with one Konstantine Jouravleff, dated July 2, 1918, and accepted July 3, 1918. Jouravleff therein agreed to deliver to the Electric Reduction Company 150 tons of tungsten ore sheelite at said company's factory, Washington, Pa., in shipments of one car of 30 to 35 tons each month, beginning August, 1918, through to the end of that year; payments, $24 per unit. It is agreed that Exhibit 6, attached to plaintiff's statement, is a true and correct copy of said contract. The Electric Reduction Company agreed to and did accept a trade acceptance for $30,000 in favor of said Jouravleff, payable in 60 days, to apply on and to be deducted from the amount which would be due Jouravleff when he made the first shipment of ore. It is agreed that Exhibit 7, attached to plaintiff's statement, is a true and correct copy of said trade acceptance.

(9) Prior to the making of said contract Jouravleff was unknown to the Electric Reduction Company. He was introduced by one Charles Hardy, a broker handling ores, who, to induce the plaintiff to enter into the said contract, verbally represented that said Jouravleff was a reputable business man of unquestioned integrity and financial responsibility, and that he was in a position to deliver tungsten ore in accordance with said contract.

(10) At the time of making the contract between Jouravleff and the Electric Reduction Company, and in order to induce said company to agree to the terms thereof and to give the acceptance provided for in said contract, the said Charles Hardy, at the request of the said company, verbally undertook to keep the said company fully informed concerning the deliveries of tungsten ore to be made by said Jouravleff under said contract, which deliveries were to be made at a point distant from said company's place of business and its plant, and also concerning the progress said Jouravleff was making in mining and concentrating the said tungsten ore to be used in the fulfilling and performance of said contract, as well as following up and seeing to the deliveries of said tungsten ore by said Jouravleff.

(11) After the making of the contract between Jouravleff and the Electric Reduction Company, said company performed the same on its part to be performed, and executed and delivered to said Jouravleff the acceptance provided for in the contract for $30,000.

(12) The said acceptance was given to Jouravleff with the agreement that it was to cover and be deducted from the price of the first car of tungsten ore to be shipped, which car was to be shipped before...