In re Heller, Hirsh & Co.

Decision Date14 May 1919
Docket Number186.
Citation258 F. 208
PartiesIn re HELLER, HIRSH & CO.
CourtU.S. Court of Appeals — Second Circuit

Francis G. Caffey, U.S. Atty., of New York City (Ben A. Matthews and Vincent H. Rothwell, Asst. U.S. Attys., both of New York City, of counsel), for collector of internal revenue.

Rushmore Bisbee & Stern, of New York City (Abraham Freedman, of New York City, of counsel), for trustee.

Before WARD, ROGERS, and MANTON, Circuit Judges.


The United States attorney filed a petition for an order directing the trustee of the bankrupt corporation to pay to the collector of internal revenue for the Second district of New York the sum of $2,400 under Act Sept. 8, 1916, c. 463, 39 Stat. 756, as taxes upon income for the year 1916, as a preferred claim. The trustee was not carrying on the business of the bankrupt, and the funds said to constitute net income were the result of a compromise made by him with a foreign corporation of a claim for nonpayment of salary and commissions by the foreign corporation to the bankrupt corporation as its agents between the years 1910 and 1914. The referee, John J. Townsend, Esq., recommended that the prayer of the petition be denied, and his report, which is set out below, was confirmed without opinion by Judge Hough. We are quite clear that under section 13(c) of the act of 1916 (Comp. St. Sec. 6336m) only net income earned by a trustee while operating the business of a bankrupt corporation is taxable.

The order is affirmed.

Note.-- Referee Townsend's opinion, referred to in the opinion here follows: 'Instead of making an order as referee on the present motion, I deem it more convenient to report to the judges the order I recommend should be made by them.

'On June 19, 1917, the United States attorney for the Southern district of New York filed with the referee the accompanying petition and notice of motion asking for an order directing Francis L. Kohlman, the trustee in bankruptcy of the bankrupt corporation, to pay to the collector of internal revenue for the Second district of New York the sum of $2,400 as a preferred claim against the estate of the said bankrupt corporation and against the said trustee in bankruptcy.

'The motion papers present the claim as an income tax for the year 1916, due and owing the United States of America by the trustee in bankruptcy; the tax being alleged to have accrued upon the income received by the trustee in bankruptcy during the year 1916, under the provisions of the act of Congress approved September 8, 1916. On June 19, 1917, the trustee in bankruptcy filed with the referee his affidavit denying any liability for the claim.

'On November 15, 1917, the parties filed with the referee the accompanying stipulation setting out the facts. This stipulation should be read at this point of my report. Among other facts set out in the stipulation the following appear:

'On April 23, 1915, the corporation (which had been engaged in business as a broker and dealer in fertilizing material) was adjudged a bankrupt after a petition in bankruptcy had been filed against the corporation (paragraph 2). At such date the bankrupt corporation was the owner of a claim or chose in action against an association organized under the laws of the empire of Germany, known as the Kalliwerke-Solstedt which claim, amounting to $396,973.44 (for commission and salary), had accrued in the year 1914 and in prior years (paragraphs 3 and 4). On July 27, 1916, this claim, with certain claims against the International Agricultural Corporation, were compromised by the payment to the trustee in bankruptcy of $119,275 (paragraph 6). Paragraphs 8, 9 and 10 set out certain deductions with which the trustee in bankruptcy deems himself entitled to be credited, if it be determined that he is a taxable party. Paragraph 12 sets out certain deductions with which the trustee in bankruptcy claims that the bankrupt corporation is entitled to be credited, if the fund collected be regarded as deferred income of the bankrupt corporation for the years 1910 to 1914, both inclusive. Paragraph 13 sets out that during the years 1912 to 1915, inclusive, the corporation sustained losses in its business in excess of the amount of its gross profits.
'The view I take of the case renders the facts set out in the stipulation, in my opinion, in large part immaterial. The basis of the claim of the government is tabulated in paragraph 9 of the stipulation; the government in its brief claiming the balance of $26,789.41 to be net taxable income upon which the government claims an income tax against the trustee in bankruptcy for the year 1916. The claim is advanced by the government under the act of September 8, 1916. This act superseded the prior act of October 3, 1913 (38 Stat. 114, c. 16). Sections II, A, B, C, D, E, F, G.
'Carefully prepared briefs have been filed with the Referee by the parties. I find in the briefs no decisions which I deem decisive of the present motion, viz. no decisions where the government asserts a claim for an income tax against a trustee in bankruptcy of a corporation or individual adjudicated a bankrupt and therefore presumably insolvent. I refer below to certain decisions which in my opinion aid in deciding the present motion.
'In my opinion the present motion depends for its determination upon a judicial interpretation of the act of September 8, 1916, a copy of which act accompanies this report. Such interpretation should be a fair one. It is not the duty of this court or of the government authorities to resort to Procrustean methods of interpretation against the taxpayer.
'I find nothing in the act of September 8, 1916, to indicate that Congress intended to impose an income tax upon a trustee in bankruptcy in respect to the assets of a bankrupt corporation which he has taken over to be marshaled and distributed among the creditors of the corporation. To my mind the text of the act of September 8, 1916, does not indicate any such purpose. This view of the act does not deprive the government of its just due. The dividends declared and distributed to the creditors are presumptively income in the hands of the latter subject to an income tax to be assessed against the latter.
'Part I of the act of September 8, 1916 (Comp. St. Sec. 6336a-6336iii), deals with the income tax on individuals: Section 1 (Comp. St. Sec. 6336a) provides for a tax on 'the entire net income' of the individual. Section 5 and section 6 (Comp. St. Secs. 6336e, 6336f) provide for certain deductions before the amount of the 'net income' is determined. Section 2(b) and 8(c) (Comp. St. Secs. 6336b, 6336h) contemplate cases where the corpus of the individual's property (both after his death or during his lifetime) is in the possession of and the income received by persons acting in a fiduciary capacity.
'There is not the slightest suggestion in part I of the statute either that Congress intended to impose an income tax upon an insolvent individual liquidating his own estate or upon the liquidator of an insolvent individual's estate, nor is there any suggestion that it entered into the mind of Congress that such insolvent individual or his liquidator

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    ...a trustee in bankruptcy had to pay tax on any income earned during his administration of the bankruptcy estate. In re Heller, Hirsh & Co., 258 F. 208 (2nd Cir. 1919); United States v. Chicago & E. I. Ry. Co., 298 F. 779 (N.D.Ill.1924); In re Owl Drug, supra; Doehler Co. v. Meadows Mfg. Co.,......
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    ...31 B.T.A. 935. Courts, which have had occasion to interpret enactments of this character, support this conclusion. In re Heller, Hirsh & Co. (C.C.A. 2, 1919) 258 F. 208, 209, the trustee of a bankrupt corporation received funds from a compromise made by him with a foreign corporation of a c......
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