Hart v. Commissioner of Internal Revenue, 2600.

• Citation: 54 F.2d 848
• Decision Date: 05 January 1932
• Docket Number: No. 2600.,2600.
• Parties: HART v. COMMISSIONER OF INTERNAL REVENUE.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

54 F.2d 848 (1932)

HART v. COMMISSIONER OF INTERNAL REVENUE.

No. 2600.

Circuit Court of Appeals, First Circuit.

January 5, 1932.

Alfred P. Lowell, of Boston, Mass. (Samuel H. Pillsbury, of Boston, Mass., on the brief), for petitioner.

Helen R. Carloss, Sp. Asst. to Atty. Gen. (G. A. Youngquist, Asst. Atty. Gen., Sewall Key, Sp. Asst. to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and J. E. Marshall, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., on the brief), for Commissioner of Internal Revenue.

Before BINGHAM and WILSON, Circuit Judges, and MORRIS, District Judge.

MORRIS, District Judge.

This is a petition for review of a decision of the Board of Tax Appeals sustaining the Commissioner of Internal Revenue in his determination of a deficiency in the petitioner's income tax for the year 1926, amounting to $5,668.44.

The facts appearing in the record are as follows: In 1925, the New England Oil Corporation was in the hands of a receiver appointed by the United States District Court for the District of Massachusetts. Irving McD. Garfield was the receiver. A proceeding ancillary to the receivership was brought against Francis R. Hart and five others, who were members of a committee for the protection of the holders of certain notes of the oil corporation. After hearing, a decree was entered against the noteholders' committee, May 15, 1926, adjudging that Hart and the five others were jointly and severally liable to the receiver of the oil corporation in the sum of $3,327,740.48, and that execution issue against them for that sum. The decree further directed that Garfield, as receiver, should forthwith distribute all amounts collected to certain creditors of the oil company. The defendants under the decree desired to appeal, but the combined resources of such as were within reach of the process of the court were insufficient to secure a supersedeas bond sufficient in amount to cover the judgment. In order to prevent a levy and sale upon execution of all his property, Hart filed in the District Court a petition for the segregation of assets pending appeal. The petition was granted June 4, 1926, the order being worded as follows:

"On the petition of Francis R. Hart for segregation of assets pending appeal, it appearing to the Court that the petitioner is about to file an appeal from the decree of May 15, 1926, and, constrained by said decree and by the danger of levy thereunder and not voluntarily is preparing to turn over certain property to the Receiver appointed by the Court in this cause, and the Receiver and counsel for Wiltsee and other creditors interested having been notified and having assented thereto; it is, Ordered and decreed, that the Receiver receipt for all securities, money and other property turned over to him by the respondent Francis R. Hart, and earmark, segregate and keep the same together with the income received thereon separate from other property, investing said income in United States Government securities, pending final determination of the appeal of said Hart from the decree of May 15, 1926, and upon such final determination, if said decree shall not be affirmed in whole or in part as to the said Hart said Receiver shall return said property, less income taxes and other charges thereon including reasonable compensation of the Receiver for keeping the said property to said Hart; if said decree shall be affirmed and/or modified as to said Hart said funds shall be held subject to further order of the Court. Leave is reserved to the receiver and any party in interest to apply for any other decree or order found necessary or expedient."

Following the entry of the above order, Hart, on the same day, turned over to Garfield, receiver, United States Liberty bonds of a value equal to his entire assets, which bonds were held by Garfield pursuant to the above order until after the appeal to the Circuit Court of Appeals for the First Circuit was determined (see Hart v. Wiltsee, 19 F. (2d) 903) resulting in a reversal of the decree of the District Court entered May 15, 1926.

The receiver collected the coupons maturing on the bonds during the period they were held by him and invested the sums so collected in like securities. Some time in 1927 the bonds and accumulated income therefrom were restored to Hart. The receiver filed a separate income tax return for the year 1926, in which he reported the amount collected for interest on the bonds as income taxable to a trust, but it does not appear that any tax was assessed against the receiver or paid by him on account of such interest.

It further appears that Hart, the petitioner, in order to secure funds with which to purchase the Liberty bonds, became indebted to the American Trust Company in the amount of $475,000, represented by his promissory notes, bearing interest at the rate of 4½ per cent. payable semiannually. On December 4, 1925, the American Trust Company rendered petitioner a bill for interest to that date in the amount of $10,865.62. On the same date the petitioner gave the trust company his promissory note for the amount of the interest due, said note being payable six months from date and bearing interest at the rate of 4½ per cent. The bill for interest was stamped "paid" as of December 6, 1926. The American Trust Company on the same date entered the amount of the note as a credit to interest in its books of account.

The petitioner made his income tax return for 1926 upon the cash receipts and disbursements basis.

The assignments of error are seven in number, but really present only two questions, which are fairly covered by assignments numbered 5 and 7 as follows:

5. "That the Board of Tax Appeals erred in holding that the interest on the bonds held by the receiver constituted income of the petitioner for the year 1926."

7. "That the Board of Tax Appeals erred in holding that the amount of the note given by the petitioner in 1926 in payment of interest then due was not deductible under the provisions of section 214 (a) (2) of the statute."

A determination of the case seems to turn on the status of the Liberty bonds under the order of June 4, 1926, for the segregation of the assets. The petitioner claims that title to the bonds passed to the receiver, who was required to report the income tax and pay the amount assessed thereon.

The respondent claims that title to the bonds never passed out of the petitioner, and that the income therefrom constituted taxable income of the petitioner for the year 1926. The commissioner, in making a deficiency determination, adopted the latter view. The Board of Tax Appeals sustained the Commissioner.

The case must be determined under the Revenue Act of 1926, which took effect upon its enactment.

Section 219 (a) of the act provides that "the tax imposed by Parts I and II of this title shall apply to the income of estates of any kind of property held in trust, including —

"(1) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust. * * *

"(b) Except as otherwise provided in subdivisions (g) and (h), the tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212," etc. 44 Stat. 32. Then follow certain exceptions which are unimportant in the determination of this case. Subdivisions (g) (h), above mentioned, are also inapplicable.

Revenue Act 1926, § 200 (b), 26 USCA § 931 (b), provides,

...