Helvering v. Roth, 99.
| Decision Date | 04 November 1940 |
| Docket Number | No. 99.,99. |
| Citation | 115 F.2d 239 |
| Parties | HELVERING, Com'r of Internal Revenue, v. ROTH et al. |
| Court | U.S. Court of Appeals — Second Circuit |
Samuel O. Clark, Jr., Asst. Atty. Gen., and J. Louis Monarch and Newton K. Fox, Sp. Assts. to Atty. Gen., for petitioner.
Louis L. Hamby, of Washington, D. C., for respondents.
Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.
The Commissioner appeals from three orders of the Board of Tax Appeals expunging certain deficiencies which he assessed against the three respondents upon their income taxes for the year, 1935. It is not necessary to consider more than the deficiency assessed against the trustees of Henry Roth, as to which two questions arise: (1) Whether certain payments made to the trustees upon a construction contract shall be treated as income; (2) whether the payment to them of certain notes was income, because the notes had been appraised as worthless when Roth's estate was valued for estate tax purposes.
The facts relied upon to support the deficiency under the first point are as follows. Henry Roth, who died in 1918, owned 300 of 1,000 outstanding shares of the Newman & Carey Subway Construction Company; Henry Newman owned 350, William Newman 120, and James L. Carey 230 shares. This company had undertaken in 1915 to build a piece of subway in the City of New York, and Roth lent it $250,000 to finance the work. Later, performance having turned out to be more expensive than was expected, Roth agreed to procure such money as was necessary to complete the subway, and in the end he, or his trustees after his death, advanced in all $798,411.10. Some of the notes on which Roth or the trustees procured the necessary funds were endorsed by the Newmans and Carey, some were not; but Roth's trustees asserted that the three were liable for all advances in proportion to their holdings. The Newmans and Carey denied this and a long negotiation followed which ended in a contract by which they agreed to pay their proportionate part of the advances without interest; not unconditionally, however, but only as therein described. They were holders of shares in another company, called Necaro Co., Inc., which was apparently profitable; in any event they agreed to apply one-quarter of the dividends paid to them upon their shares in this company upon their obligations to the trustees. In addition, they agreed that if any of them should die before payment of his proportion was complete, one-quarter of his Necaro shares should be transferred to the trustees in satisfaction. All parties to the contract agreed that, if the construction company collected any money under the contract, it should be paid to the trustees who should credit it upon the debt owed them up to the amount of the whole principal; any surplus to be credited to interest. Such a payment of $20,000 was made in 1925. William Newman died in 1926 and the trustees took his Necaro shares at a valuation of $19,305.35; before 1935, Henry Newman and Carey had paid $80,000 out of Necaro dividends. In that year the trustees received $986,864.95 out of a judgment against the city, of which $679,105.60 was "treated" — by whom does not appear — as repayment of principal and $307,759.35 was interest. (The principal is the difference between the total of Roth's advances, less $20,000 and the amounts received from the Newmans and Carey.) The Commissioner held that the whole sum of $307,759.35 was interest and assessed the tax accordingly; the Board held that the payments made by the Newmans and Carey did not reduce the principal of the debt, qua Roth, and that therefore in computing the interest — and therefore the income — received by the trustees, they should be deducted. Henry Newman's executors later made a claim against the trustees for the sum of $50,000 paid by him out of Necaro dividends, on the theory that the trustees were entitled to no interest until they had repaid the contributions of the other shareholders. This claim was settled, but neither William Newman, nor Carey ever made any similar claim.
Both sides have argued the case strictly upon the basis of the actual language of the contract, disregarding the underlying relations of the parties. Of course it is true that the rights and liabilities created depend upon what was said; yet it is impossible to understand the words without considering the setting in which they occurred. All the parties, or their predecessors, had been shareholders in the construction company, and the trustees were insisting — in spite of the fact that the Newmans and Carey had not endorsed all the notes as Roth had — that all the...
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