International Bldg. Co. v. United States, 6790.

• Decision Date: 22 January 1951
• Docket Number: No. 6790.,6790.
• Citation: 97 F. Supp. 595
• Parties: INTERNATIONAL BLDG. CO. v. UNITED STATES.
• Court: U.S. District Court — Eastern District of Missouri

97 F. Supp. 595

INTERNATIONAL BLDG. CO. v. UNITED STATES.

No. 6790.

United States District Court, E. D. Missouri, E. D.

January 22, 1951.

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

Drake Watson, U. S. Atty., New London, Mo., William V. O'Donnell, Asst. U. S. Atty., St. Louis, Mo., Theron Lamar Caudle, Asst. Atty. Gen., Andrew D. Sharpe and Clarence J. Nickman, Sp. Assts. to Atty. Gen., for defendants.

HULEN, District Judge.

This suit to recover $16,297.96 in taxes, presents as a principal issue the valuation, as of May 1, 1913, of a leasehold, including an office building in the City of St. Louis. Plaintiff's claim to depreciation of $12,500 for each of years 1943, 1944 and 1945; net operating loss carry-overs for same years, and excess profit credit of $170,000 for 1945, depends on determination of the main issue. There is a claim for credit of capital stock tax for years 1943 and 1945, depending on whether such items are legally allowable during year paid if taxpayer is on an accrual basis, and a claim for credit for professional fees of $6,360 paid in a bankruptcy reorganization proceeding, depending on whether it was deductible from gross revenue as "ordinary" business expenses.

I.

Decisions of the Tax Court finding valuation on the leasehold during years previous to those here in issue are claimed by plaintiff to be res adjudicata and to settle that issue in its favor. Defendant contends the decisions were by consent and not binding as to years other than set forth in the order of the Tax Court.

For the year 1933 a stipulation was signed by counsel for plaintiff and defendant (Ex. C) as follows:

"It is hereby stipulated that there is no deficiency in Federal income tax due from the petitioner for the taxable year 1933 and that the following statement shows the petitioner's Federal income tax liability for the taxable year 1933:

                Tax liability                          None
                Assessment (Jeopardy)
                 January 23, 1943 (not paid)        $2,188.12
                                                    _________
                Assessment to be abated             $2,188.12"
                

On this stipulation the following "Decision" was made by the Tax Court (Ex. C-1):

"Under written stipulation signed by counsel for the parties in the above-entitled proceeding and filed with the Court on October 11, 1944, it is

"Ordered and Decided: That there is no deficiency in income tax for the calendar year 1933."

The second "Decision" is of like origin and terms, but for another year.

The facts on which the stipulation is based covered valuation of the leasehold now in issue and the amount agreed on was the same as now claimed by plaintiff.

Plaintiff relies on Commissioner v. Sunnen, 333 U.S. 591, 68 S.Ct. 715, 721, 92 L.Ed. 898. That case holds: "* * * where a question of fact essential to the judgment is actually litigated and determined in the first tax proceeding, the parties are bound by that determination in a subsequent proceeding even though the cause of action is different. * * * And if the very same facts and no others are involved in the second case, a case relating to a different tax year, the prior judgment will be conclusive as to the same legal issues which appear, assuming no intervening doctrinal change."

The "Decisions" of the Tax Court relied on by plaintiff admittedly involved no hearings before the Tax Court, no facts were submitted to that Court, by stipulation or otherwise, consequently there were no issues presented for the Court to decide. Without a judgment on the merits there is no foundation for a judicial determination of anything. Res adjudicata obviously cannot attach to such a proceeding. While the Tax Court entitled its memorandum "Decision", it was nothing more than an order confirming an agreement of counsel. There was no decision on any fact or issue. "And a decision of that kind rendered by the Tax Court will not support a plea of estoppel in a case of this nature involving liability for income tax for a different year. Blaffer v. Commissioner, 5 Cir., 134 F.2d 389; Hartford-Empire Co. v. Commissioner, 2 Cir., 137 F.2d 540, certiorari denied, 320 U.S. 787, 64 S.Ct. 196, 88 L.Ed. 473; Riter v. Commissioner, 3 T.C. 301." Trapp v. United States, 10 Cir., 177 F.2d 1, 5.

II.

To fix the value of a fourteen-story office building, as of 37 years ago, as a determining factor in the value of a leasehold, is not a simple matter. This we feel even after hearing expert witnesses unhesitatingly express opinions on the subject. The fact that such opinions varied from a high of $900,000 to a low of $380,019 evidences that valuation by such methods is not an exact science.

The ground in question at Eighth and Chestnut Streets was leased for 99 years on December 27, 1905. The ground rental was $20,000, lessee to pay all taxes. Lessee was required to (and did) build a fourteen story office building on the ground within two years, to cost not less than $600,000. On April 14, 1913, plaintiff corporation was organized and by deed recorded May 1, 1913, acquired the leasehold. The consideration stated in the minutes of plaintiff was all of the authorized capital stock and bonds of plaintiff, consisting of 6,000 shares of common stock of par value of $50 per share, and $300,000 face value first-mortgage bonds. The plaintiff's only asset was the (building on) leasehold. May 1, 1913, is the base period for fixing valuation for the tax claims in issue.

The bonds were sold for face value and as to that $300,000 in value, there is no issue. Plaintiff argues there is "no measure of value of the stock except the value of the property", and this it attempted to show was "$750,000.00" to "$900,000.00", by opinion of two men who had been in the real estate business in St. Louis for many years.

Defendant determined the cost of plaintiff's interest in the leasehold, as of May 1, 1913, to be $430,000. This determination is presumed to be correct. The burden is upon the petitioner to prove this finding is wrong. Gloyd v. Commissioner of Internal Revenue, 8 Cir., 63 F.2d 649 3, 4.

Considerable time has been spent by plaintiff in attacking the defendant's methods in arriving at the valuation of $430,000. The issue now is correctness of the valuation figure regardless of how made.

In opposition to the opinions of real estate dealers evidence was offered by defendant of transactions represented by authentic book entries, and other documents, contemporaneous with the acquiring of the leasehold by plaintiff.

Plaintiff was organized by the Missouri Lincoln Trust Company.^* At that time the leasehold was held by a subsidiary of Missouri-Lincoln. On May 14, 1913, after plaintiff acquired the leasehold, Missouri-Lincoln authorized a credit to its bond account of $300,000, on account of plaintiff's bonds, and a credit to its stock account of $100,000, on account of the plaintiff's 6,000 shares of stock with a par value of $50; a total of $400,000. The credits reflect the seller's cost of the leasehold. A balance of $24,525 was written off in the profit and loss account. (See stipulation 11-C.) While not conclusive we think these activities reflect an appraisal on May 1, 1913, of some value. We doubt Missouri-Lincoln would have entered a loss of $24,525 and confined the value of cost of the leasehold to $400,000, had they been of the opinion the leasehold value was anywhere near twice that sum, as placed by plaintiff's witnesses. On January 21, 1906, Missouri-Lincoln had underwritten a bond issue of $450,000 secured by first mortgage on the property. In July, 1907, a subsidiary of Missouri-Lincoln had acquired the property. The deed gave the consideration as $775,000. On October 7, 1908, this subsidiary having defaulted, plaintiff's record grantor, another subsidiary of Missouri-Lincoln, purchased the property at foreclosure for a stated bid of $25,000.

The valuation of $100,000 for the 6,000 shares of stock represents approximately $16.67 a share. On May 20, 1913, Missouri-Lincoln offered to its stockholders the 6,000 shares of stock of plaintiff by subscription at $18 per share. Only 434 shares were sold by closing day of October 21, 1913. It is hard to believe that if informed appraisers had the same opinion in May, 1913, as plaintiff's appraisers now have, retrospectively, that this stock...