Ferguson v. Forstmann

• Decision Date: 15 March 1928
• Docket Number: 3616.,No. 3615,3615
• Parties: FERGUSON, Former Collector of Internal Revenue, v. FORSTMANN. GNICHTEL, Collector of Internal Revenue, v. SAME.
• Court: U.S. Court of Appeals — Third Circuit

25 F.2d 47 (1928)

FERGUSON, Former Collector of Internal Revenue, v. FORSTMANN.

GNICHTEL, Collector of Internal Revenue, v. SAME.

Nos. 3615, 3616.

Circuit Court of Appeals, Third Circuit.

March 15, 1928.

Walter G. Winne, U. S. Atty., of Hackensack, N. J., James S. Turp, Asst. U. S. Atty., of Trenton, N. J., and C. M. Charest and John R. Wheeler, both of Washington, D. C., for plaintiffs in error.

Wall, Haight, Carey & Hartpence, of Jersey City, N. J. (Thomas G. Haight and Robert H. Montgomery, both of Jersey City, N. J., of counsel), for defendant in error.

Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.

DAVIS, Circuit Judge.

These two cases are here on writ of error of the collectors of internal revenue. They are based upon the same facts and were tried together in the District Court. There are two suits, rather than one, because part of the tax in question was paid to one collector, and part to the other. They were tried to the court without a jury on stipulated facts.

There was a question as to the citizenship of Mrs. Adolfine Forstmann and her husband. In 1918 two suits were brought, one by A. Mitchell Palmer, Alien Property Custodian, and the other by Francis P. Garvan, his successor, against the plaintiff, who owned two blocks of stock, of 2,590 and 2,700 shares, in the Forstmann & Huffmann Company. The Alien Property Custodian, a stockholder of the company by virtue of the seizure of some stock of that company owned by Germans, brought a suit against the plaintiff to compel her to surrender to the corporation the 2,700 shares of stock, on the ground that they had been originally paid for by funds of the company. Later in that year Francis P. Garvan brought another suit against the same parties to compel the plaintiff to surrender and the company to transfer to him, as Alien Property Custodian, the 2,590 shares, on the ground that they were owned by alien enemies and as such had been seized by him. While these suits were pending the court entered orders restraining Mrs. Forstmann from transferring any of her stock in the Forstmann & Huffmann Company, and the company from paying dividends to her. These suits were dismissed on March 29, 1921, on motion of the Alien Property Custodian, before a final decision in them had been reached.

While the company was under injunction, dividends were declared on the stock of Mrs. Forstmann, $82,115 on March 31, 1919, and $113,150 on February 28, 1920, a total of $195,265. When the suits were dismissed and the restraining orders vacated, these dividends were paid to Mrs. Forstmann. However, they were not credited to her account on the books of the company until the suits were dismissed on March 19, 1921, when they were paid, with interest of $12,881.68. Mrs. Forstmann did not include these in her income tax return for the years 1919 and 1920, for she had not received them when those returns were made. On March 15, 1922, she filed amended returns and included in her gross returns the $82,115 for 1919 and $113,150 for 1920, and accordingly paid additional taxes for those years amounting to $99,301.52.

The Forstmann & Huffmann Company in some way came to the conclusion that it, as "fiduciary" for "unascertained persons," should have paid the taxes on these dividends for the years when they were received by it, and so on January 3, 1924, filed its returns for 1919 and 1920. These, with interest, amounted to $53,811.68. Mrs. Forstmann, who had already paid $99,301.52, filed a claim for a refund of $45,489.84, the difference between the $53,811.68 and $99,301.50, but the Commissioner rejected the claim.

Subsequently the Commissioner ruled that the dividends and interest were taxable income for the year 1921, when they were received by Mrs. Forstmann and assessed an additional tax for that year of $122,537.72 and determined at the same time that she had overpaid for the years 1919 and 1920. After adjustments were made, he required her to pay an additional tax for 1921 of $28,523.63, together with interest. She filed a claim for refund on June 18, 1921, on the ground that the dividends were not taxable against her in 1921, but were taxable in the years declared, when they would have been paid but for the restraining orders of the government. This claim for refund was denied.

Thereupon she brought these suits. The court held that the dividends were income received and held in trust by the Forstmann & Huffmann Company as a "fiduciary" for "unascertained persons," as provided in the Revenue Acts of 1918 and 1921. The government has brought the cases here on writ of error.

Two main issues are involved: First, whether or not the taxes could be legally assessed against, and properly paid by, the Forstmann & Huffmann Company as a "fiduciary," and, second, whether or not, if the taxes should have been assessed against Mrs. Forstmann, and not the "fiduciary," they were assessable against her for 1919 and 1920, when declared, or for 1921, when received. Admittedly tax was due the government on these dividends. It is, therefore, not the fact, but the amount, of the tax that is in dispute.

The amount depends upon whether the...