Ewa Plantation Co. v. Wilder

• Decision Date: 28 May 1923
• Docket Number: 3876.
• Citation: 289 F. 664
• Parties: EWA PLANTATION CO. v. WILDER, Tax Assessor.
• Court: U.S. Court of Appeals — Ninth Circuit

289 F. 664

EWA PLANTATION CO. v. WILDER, Tax Assessor.

No. 3876.

United States Court of Appeals, Ninth Circuit.

May 28, 1923

Robertson & Castle, A. G. M. Robertson, Frear, Prosser, Anderson &amp Marx, W. F. Frear, Smith, Warren, Stanley & Vitousek, L. J Warren and Henry Holmes, all of Honolulu, Hawaii, for plaintiff in error.

John Albert Matthewman, Atty. Gen. (Marguerite K. Ashford, of Honolulu, Hawaii, of counsel), for defendant in error.

Before GILBERT and RUDKIN, Circuit Judges, and WOLVERTON, District judge.

GILBERT Circuit Judge.

This cause was tried in the Supreme Court of the Territory of Hawaii upon an agreed statement of facts, a procedure authorized by the laws of the territory. It concerns the annual income tax of the plaintiff in error, the Ewa Plantation Company, for the year 1920. One of the items of the income tax return was the 'strike claim settlement' of $2,324,931.75. To that item the assessor added $466,765.97. The item grew out of a strike of the Philippine and Japanese laborers employed on the sugar plantations of the island of Oahu in the year 1920. The Hawaiian Sugar Planters' Association, composed of practically all of the sugar producing concerns in the territory, entered into an agreement with the sugar plantations on the island of Oahu by which the former agreed to reimburse the latter for all loss sustained by them by reason of the strike, if they would resist the demands of the strikers. At the conclusion of the strike, it was ascertained that by reason thereof the losses of the plantations were $12,119,317.30. Of this sum, each plantation paid its pro rata. The plaintiff in error paid $721,818.95, and it received as its strike loss from the sugar planters' association $2,791,697.72, the same being apportioned as follows: For the crop of 1920, $2,324,921.75; for the crop of 1921, $133,706.29; and for the crop of 1922, $333,059.68. In its income tax return for the year 1920, the plaintiff in error deducted the sum which it had contributed as its pro rata to the sugar planters' association and also deducted the sums which were allowed for damage to the crops of 1921 and 1922 amounting to $466,765.97, contending that the amounts so received on account of taxable profits on the crops of 1921 and 1922 should be reserved for its returns of income for those years and should not be included in the income return for 1920. The Supreme Court of the territory held against this contention and sustained the ruling of the assessor that, since the losses allowed for the years 1921 and 1922 were received in the year 1920, they should be returned as income accruing during that year.

The contention of the plaintiff in error is based upon decisions of the Supreme Court of the territory construing the taxation laws of Hawaii. It appears that on a sugar plantation, while a crop of cane is harvested every year, there are each year three crops growing and maturing, one newly planted, one one-half grown, and one ready for harvest, and that the harvest requires from seven to ten months. It was for the loss and damages for these three crops to mature in 1920 1921, and 1922 that the payments were made by the sugar planters' association. It is admitted that it had been the practice of the sugar plantations to make their tax returns of income from the sale of sugar upon what was termed the crop basis rather than an annual basis, and that instead of deducting disbursements for operating and other expenses during the year, the sugar growers deducted the amounts expended or to be expended in the production and marketing of the crop harvested during the taxation period from the proceeds of sales, and the gross income was returned on the basis of the current crop and not on receipts from sales during the taxation period, and the deductible cost of producing the crop included all the cost of producing it, notwithstanding that the greater part of that cost was incurred in the preceding two years. This was in accordance with the accepted construction of section 1307 of the Revised Laws of Hawaii 1915, which provides:

'In estimating the gains, profits and income of any person or corporation, there shall be included * * * the amount of sales of all movable property, less the amount expended in the purchase or production of the same.'

In the case of Tax Assessor v. Laupahoehoe Sug. Co., 18 Haw. 206, tax returns had been made on the crop basis. The assessor claimed that the taxable income should be computed by deducting from the receipts during the year the total amounts expended during the year. The court held otherwise, ruling that the taxpayer's returns in question had been made in exact accordance with the statute of 1915. The court said:

'Even if, as claimed by the assessor, a portion of the cost of production was incurred prior to the six months' taxation period and has already been deducted from the income of the taxpayers during the preceding taxation periods, that does not take away the right of the taxpayers to make their returns and compute their incomes as the statute directs.'

In Re Income Tax Appeal Cases, 18 Haw. 596, the court affirmed the decision in the Laupahoehoe Case and held that a sum expended in 1906 for clearing land for a crop which was harvested in 1908 would not be deductible until 1908. The plaintiff in error relies upon these decisions as establishing a principle which it claims should be applied in the present case, the principle that the amounts expended in producing a crop of sugar cane are to be deducted only in the year when the crop is harvested, and that until a crop is harvested and marketed, the profit thereon, if any, cannot be known, and it argues, referring to the damages done to the crops of 1921 and 1922 during the strike, that until each crop had matured and been marketed, it could not be known whether or not there was profit or loss, that is to say, it could not be known in 1920 whether the sum so received for damages to the crops of 1921 and 1922 were merely return of capital or partly a return of capital and partly a return of profit, and that the money so received for those years should not be included in income tax returns until the crops to which they related should be harvested and sold.

We agree with the Supreme Court of the territory that the proper construction of the statute does not justify the contention of the plaintiff in error. The statute plainly provides that the return of the taxpayer shall include all 'gains, profits, and income, derived from any source whatsoever during said taxation period. ' Rev. Laws Hawaii 1915, Sec. 1307. The inference is not deducible from the decisions of the Supreme Court of Hawaii that income actually received in one year is not taxable as income of that year but is to be carried into the income of another year. What was the nature of the payment which in the year 1920 the plaintiff in error received from the sugar planters' association? Obviously it was not a payment for movable property which the plaintiff in error had sold or expected to sell. Nor was it reimbursement for money expended in the production of crops. It can only be regarded as compensation or liquidated damages for losses sustained by reason of the strike. It was in no proper sense a return to the plaintiff in error of amounts expended by it in the production of crops of sugar cane. Apparently the plaintiff in error itself recognized this view of the nature of the payment, for in deducting its expenses for the year 1920 it deducted the entire amount of its pro rata share of contribution to the sugar planters' association, instead of leaving it to be charged proportionately to each of the three annual crops. The case is in principle not unlike Maryland Casualty Co. v. United States, 251 U.S. 342, 40 Sup.Ct. 155, 64 L.Ed. 297, in which the court construed the Income Tax Act of 1913 (38 Stat. 114), and held that premiums collected in any year by the agents of an insurance company, but not paid over to the treasurer of the company, are to be reckoned as income received in that year. The court said, and it is applicable to the case at bar:

'Only imperative language in the statute would justify a construction which would place it in the power of the claimant, by private contract with its agents, to shift payment of taxes from one taxing year into another.'

A second cause of action so submitted to the territorial Supreme Court involved the question whether certain items of interest received by the plaintiff in error during the year 1920 on bonds and notes of corporations and deposits which it owned, and which were held in banks in the state of California, were legally deductible from its tax return of income of 1920. Castle & Cooke, a Hawaiian corporation had for many years been the general agent at Honolulu of the plaintiff in error. Welch & Co., a California corporation, had been the agent at San Francisco of Castle & Cooke. The sugar produced by the plaintiff in error had been sold in the States and had been received by Welch & Co., and by it deposited in California banks and credited on its books to Castle & Cooke for account of the...