Falk Corporation v. Commissioner of Internal Revenue

• Decision Date: 06 July 1932
• Docket Number: No. 4737.,4737.
• Citation: 60 F.2d 204
• Parties: FALK CORPORATION v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Seventh Circuit

60 F.2d 204 (1932)

FALK CORPORATION v. COMMISSIONER OF INTERNAL REVENUE.

No. 4737.

Circuit Court of Appeals, Seventh Circuit.

July 6, 1932.

Bernhard Knollenberg, of New York City (Quarles, Spence & Quarles, of Milwaukee, Wis., and Lord, Day & Lord, of New York City, of counsel), for appellant.

G. A. Youngquist, Asst. Atty. Gen., and Sewall Key and Erwin N. Griswold, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Edward L. Updike, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for respondent.

Before SPARKS, PAGE, and ANDERSON, Circuit Judges.

SPARKS, Circuit Judge (after stating the facts as above).

The first question presented by this appeal is whether petitioner is entitled to deduct in its income tax return for 1923 the amount which it paid to the state of Wisconsin in that year in payment of taxes assessed by the state in 1922 against another corporation, where it appears that the petitioner had earlier acquired part of the assets of the other corporation, and in part payment for those assets had agreed to pay any back taxes which might be assessed against the other corporation.

The ruling of the Board is based on the theory that taxes paid are deductible as such only by those upon whom they are imposed, and that the taxes assessed against Falk Company were paid by petitioner as part consideration for the assets of that company which petitioner by its contract had assumed and agreed to pay, and that therefore it is not such a payment of tax for which petitioner is entitled to a deduction as contemplated by the statute.

Petitioner, on the other hand, relies upon a strict literal interpretation of the statute and insists that all taxes paid are deductible, except those specifically exempted by the statute. It may be conceded that the tax in controversy does not come within any of the exemptions specifically enumerated in the statute now under discussion.

With petitioner's contention we cannot agree, and we think the Board's ruling is right. It is admitted that the money paid by petitioner to the state of Wisconsin was a part of the consideration for the assets received by it from Falk Company. It was made so by virtue of a contract entered into between Falk Company and petitioner. The amount paid, therefore, was a capital expenditure and of course cannot be deducted from petitioner's income in the determination of its income tax unless there is legislative sanction for doing so.

While the statute now in controversy, with certain exceptions not material to this discussion, authorizes deductions for taxes paid or accrued within the taxable year, yet we cannot believe it was the intention of Congress to permit one, in making his income tax return, to deduct from his income all taxes actually paid by him regardless of the fact that they may have been assessed in the first instance against another, and regardless of the further fact that payer may have received full consideration for making such payment, or may have made the payment voluntarily. Suppose A owns his home, upon which a tax sale is imminent. He also owns an automobile which is well worth the amount of taxes due on his home, and which he proposes to sell and transfer to B in consideration that B will pay the taxes on the home. The offer is accepted. The transfer is made and B pays the taxes. Under such circumstances we think it could not be seriously contended that in making his income tax return B would be entitled to deduct from his income the amount paid for A's taxes. It is quite true that B performed the physical act of paying the taxes, but he did so out of property which A had placed in his hands for that purpose. In effect B paid for the automobile and A paid the taxes. The object of the statute is to arrive fairly at taxpayer's net income by permitting him to deduct from his gross income what Congress regards as proper items of expense in producing his income. If, for instance, B is permitted to deduct from his gross income the amount he paid for A's taxes, the balance would not honestly reflect his net income, because he would be receiving credit for an item of expense which in fact cost him nothing.

Suppose corporation X says to corporation Y: "We understand that you have recently organized with a capital stock of 100,000 shares of the par value of One Hundred Dollars per share. We propose to sell and transfer to you all of our assets, free and clear from all liens and encumbrances, which assets we guarantee to be of the fair market value of $7,105,795.77, in consideration that you transfer and deliver to us 60,000 paid up shares of your capital stock and that you assume and agree to carry out all of our sales, purchase, and employees contracts, and provided, further, that you assume and agree to pay all of our debts and obligations of every kind and nature, including an income tax of $152,202.51 due from us to the State of Wisconsin." Corporation Y accepts the proposition of corporation X and the transfers are made. The result of the transaction is that 60,000 shares of the capital stock of Y corporation are paid up and delivered to X, and there remains in Y's hands $1,105,795.77, consisting of real estate and personal property, including cash of the approximate amount of $166,000, out of which Y has obligated itself to carry out the contracts and pay the debts and obligations of corporation X, including the income tax of $152,202.51. Corporation Y subsequently paid the Wisconsin income tax of corporation X as it had promised, but it paid it out of property and funds which X had delivered to Y for that purpose. In effect, Y performed the physical act of paying the taxes, but in doing so it was paying for the assets which it had purchased from X, and, as a matter of fact, X paid the taxes, because it placed the money in Y's hands for that specific purpose. Under such circumstances we think it quite obvious that X cannot be considered a taxpayer within the meaning of the statutes above referred to, nor can the amount of money paid by it to the state of Wisconsin, so far as Y is concerned, be considered as tax, but rather as payment of a contractual obligation which it owed to X. This position is supported in principle in Athol Mfg. Co. v. Commissioner (C. C. A.) 54 F.(2d) 230; King Amusement Co. v. Commissioner (C. C. A.) 44 F.(2d) 709; Rotan v. United States (D. C.) 43 F. (2d) 232; Hill v. Commissioner (C. C. A.) 38 F.(2d) 165; Newark Milk & Cream Co. v. Commissioner (C. C. A.) 34 F....