International Bldg. Co. v. United States

• Decision Date: 19 September 1952
• Docket Number: No. 14465.,14465.
• Citation: 199 F.2d 12
• Parties: INTERNATIONAL BLDG. CO. v. UNITED STATES.
• Court: U.S. Court of Appeals — Eighth Circuit

199 F.2d 12 (1952)

INTERNATIONAL BLDG. CO. v. UNITED STATES.

No. 14465.

United States Court of Appeals, Eighth Circuit.

September 19, 1952.

Malcolm I. Frank, St. Louis, Mo., for appellant.

Melva M. Graney, Sp. Asst. to Atty. Gen. (Ellis N. Slack, Acting Asst. Atty. Gen., Robert N. Anderson and Carolyn R. Just, Sp. Assts. to Atty. Gen., and George L. Robertson, U. S. Atty., St. Louis, Mo., on the brief), for appellee.

Before SANBORN, JOHNSEN and COLLET, Circuit Judges.

COLLET, Circuit Judge.

This action is for recovery of income taxes, declared value excess profits taxes, and excess profits taxes for the years 1943, 1944 and 1945. The controversy arises from the Commissioner's disallowance of depreciation on a 17-story building located at 8th and Chestnut Streets, St. Louis, Missouri, known as the International Building, for the years 1943, 1944 and 1945, and from the disallowance of attorneys' fees paid during the year 1944 in connection with a reorganization proceeding of the taxpayer corporation in the United States District Court under Chapter X of the Federal Bankruptcy Act, 11 U.S.C.A. § 501 et seq. The material facts follow:

In 1906 and 1907 the office building in question was erected. At that time it was completed only to the extent of six stories. Later, eleven stories were added. The building was erected upon leased premises, the lease extending for a period of 99 years from December 27, 1905. In 1913 the taxpayer corporation was formed as a subsidiary of the Missouri Lincoln Trust Company. On April 14, 1913, the taxpayer acquired the leasehold by deed recorded May 1, 1913. The consideration for the acquisition of the building stated in the taxpayer's minutes was all of its authorized common stock, consisting of 6,000 shares of common stock of a par value of $50 per share, and $300,000 face value first mortgage bonds. The only asset of the taxpayer was the building on the leasehold. May 1, 1913, is the base period for the fixing of the valuation for depreciation in this cause.

Beginning in 1920 the taxpayer claimed a basis for depreciation on the building of $860,000. This claim was based upon an alleged acquisition cost by taxpayer of $600,000, consisting of 6,000 shares of stock at $50 per share, equaling $300,000, and $300,000 face value 6 per cent mortgage bonds, totaling $600,000, plus $260,000 which it was alleged had been expended in the construction of the top eleven stories after taxpayer's acquisition of the building. This claimed valuation for depreciation was continued in the taxpayer's return from 1920 to 1939, inclusive. After 1939 the taxpayer claimed an additional value of $10,383 for additional capital invested in additions and betterments. Thereafter the claimed valuation for depreciation purposes was $870,383.

The Commissioner assessed a deficiency in income tax for the year 1933 against the taxpayer upon a determination then made by him that the value of the leasehold for depreciation purposes was $385,000 on May 1, 1913. Taxpayer filed a petition for review of this assessment with the Board of Tax Appeals and continued to make its returns as above noted, upon the basis of a valuation for depreciation of $860,000. Again for the years 1938 and 1939 the Commissioner assessed a deficiency in the taxpayer's income tax on the basis that the value of the leasehold for depreciation purposes was $385,000 on May 1, 1913. The taxpayer again filed a petition to review these later assessments with the Board of Tax Appeals. In these petitions for review the taxpayer contended that the value of the building for depreciation purposes was $860,000. That appears to have been the only issue involved in those proceedings. On October 11, 1944, both of the appeals to the Board of Tax Appeals were settled by stipulations. Those stipulations and the order which the taxpayer now claims to have been a final judgment finally determining the value of the building for depreciation purposes at $860,000 are set out in the margin.¹ In neither of these cases before the Board of Tax Appeals was any hearing held or argument made upon the issues. No stipulation of facts was entered, no evidence was received, no briefs were filed. The trial court held, D. C., 97 F.Supp. 595, that the order of the Board of Tax Appeals is not res judicata in this action; the taxpayer contends otherwise.

Another disputed question on this appeal arises out of the disallowance by the Commissioner for the year 1944 of the sum of $6,360 claimed by the taxpayer as a deduction for legal fees. In November, 1941, an action was instituted for the foreclosure of the $300,000 first mortgage bonds on the building in question. On November 12, 1941, the taxpayer filed a petition in the United States District Court at St. Louis under Chapter X, for reorganization in order to protect the property from foreclosure. A reorganization was effectuated. The District Court allowed the above amount as attorney fees to the attorneys for the bondholders, the attorney for the indenture trustee, and the indenture trustee.

In the trial of this case in the District Court that court was confronted with the problem of placing a value for depreciation purposes upon the building and the leasehold as of May 1, 1913. The testimony of a number of expert witnesses was taken on that question. Their opinions varied from a low of approximately $400,000 to a high figure of approximately $900,000, as of May 1, 1913. The Government, in addition to opinion evidence of experts, offered testimony relative to the reproduction cost new less depreciation as of May 1, 1913. It also offered in evidence the economic value as determined by the Hoskold's Formula.²

Since the property was acquired in 1913 by the payment of the 6,000 shares of common stock and the first mortgage bonds, the value of that stock as of that date was the subject of considerable testimony. The bonds having been sold for their face amount, their value was not and is not questioned. The evidence discloses that on May 14, 1913, after the taxpayer acquired the leasehold and the building, its parent company, the Missouri Lincoln Trust Company, which was also the parent company of the seller of the property to the taxpayer, credited its bond account with $300,000 on account of the bonds the taxpayer paid for the building, and for the 6,000 shares of stock also paid by the taxpayer for the building, the Missouri Lincoln Trust Company credited its stock account with $100,000. It appears that at that time Missouri Lincoln also charged off $24,525 which it had in this property, in addition to the $400,000 representing its valuation of the bonds and stock, as a loss. The trial court treated this transaction as some evidence that the value of the property was then considered to be $400,000. On May 20, 1913, Missouri Lincoln Trust Company offered to its stockholders the 6,000 shares of stock paid by the taxpayer in part payment for the building by subscription for a limited time at $18 per share. Only 434 shares were sold by the end of the time fixed, to wit, October 21, 1913. The evidence of this offering was received by the trial court over the objection of the taxpayer, who now contends that this evidence was improperly received because it was not a public offering and was therefore not evidence of fair market value. In 1917 the taxpayer had an argument with the Commissioner concerning the fair value of this stock in connection with its capital stock tax. The Commissioner then contended that the fair value of the stock was $348,607 and fixed it at that figure for purposes of capital stock tax. The taxpayer contended that it was only worth $18 per share, or $108,000. The secretary of Missouri Lincoln Trust Company wrote a letter to the Commissioner in 1917 stating that the unsold shares of the taxpayer's stock had been for sale to the public at all times at $18 a share. Only $60 was involved in this dispute. The taxpayer paid it because of the small amount involved, but in the letter accompanying the payment continued to protest the Commissioner's valuation of $348,607. The taxpayer now contends that the Government, having fixed the value of the stock in 1917 at that figure for capital stock tax purposes, is bound thereby and cannot now assert its value to be a different amount. In 1918 plaintiff's tax return showed the fair market value of the stock as of September, 1918, to be $108,000. The same is true of the 1919 tax return. In the year 1919, 17 more shares of the stock were sold for $18 a share. The 1920 tax return shows a value of $15.33 per share. All of the remainder of the 6,000 shares of stock were sold to the present owner on April 2, 1920, for $82,000, or $13.67 per share.

The record further shows that in July, 1907, a subsidiary of the Missouri Lincoln Trust Company acquired this property for a consideration stated in the deed of $775,000. This subsidiary, the West End Realty Company, defaulted in its payments on a deed of trust given to the Missouri Lincoln Trust Company at the time of the purchase of the property, and on October 7, 1908, the property was foreclosed under that deed of trust and bought in by the Nina Realty Company, another subsidiary of the Missouri Lincoln Trust Company, for the amount of $25,000.

The net income from the property throughout the years from 1913 to 1949 was stipulated. With considerable fluctuation, that income ranged from approximately $13,000 in 1913 to approximately $100,000 in 1949. Indicative of the wide range of the income, particularly as bearing upon the propriety of the use of the Hoskold Formula, at intervals the net income was as follows: 1913, $13,065.10; 1919, $17,899.57; 1925, $86,285.93; 1930, $49,006.75; 1935, $16,973.97; 1940, $24,610.18; 1945, $27,764.65. The building is located in a district described by the witnesses as favorable for an office building for real estate dealers and law offices. The trial court reached the conclusion upon all...