Joyce v. Gentsch

• Decision Date: 07 April 1944
• Docket Number: No. 9643.,9643.
• Citation: 141 F.2d 891
• Parties: JOYCE v. GENTSCH, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Sixth Circuit

141 F.2d 891 (1944)

JOYCE v. GENTSCH, Collector of Internal Revenue.

No. 9643.

Circuit Court of Appeals, Sixth Circuit.

April 7, 1944.

H. J. Crawford, of Cleveland, Ohio, and Roger Hinds, of New York City (Squire, Sanders & Dempsey, H. J. Crawford, and John A. Duncan, all of Cleveland, Ohio, and Roger Hinds, of New York City, on the brief), for appellant.

Warren F. Wattles, of Washington, D. C. (Samuel O. Clark, Jr., Sewall Key, and Ray A. Brown, all of Washington, D.C., and Don C. Miller and F. B. Kavanagh, both of Cleveland, Ohio, on the brief), for appellee.

Before SIMONS, HAMILTON, and MARTIN, Circuit Judges.

MARTIN, Circuit Judge.

The appellant, Adrian D. Joyce, was defeated in his action, brought in the United States District Court for Northern Ohio, against Frank F. Gentsch, Collector of Internal Revenue, to recover an alleged overpayment of income taxes for 1934. On March 15, 1935, appellant and his wife filed a joint income tax return for the year in controversy in which a net loss of $30,299.13 was disclosed. The Deputy Commissioner of Internal Revenue notified appellant, by letter of May 8, 1937, of a proposed deficiency of $224,187.91 in the taxable year. Exception was taken to this proposal; and various conferences between representatives of the taxpayer and of the Commissioner ensued, to the result that, on October 11, 1937, Mr. and Mrs. Joyce signed a so-called Waiver of Restrictions on Assessment and Collection of Deficiency in Tax on printed Form 870 of the Treasury Department, in which the first printed sentence provided: "Pursuant to the provisions of Section 272(d) of the Revenue Act of 1934 26 U.S.C.A. Int.Rev.Acts, page 744, and/or the corresponding provisions of prior Revenue Acts, the restrictions provided in Section 272(a) of the Revenue Act of 1934, and/or the corresponding provisions of prior Revenue Acts, as amended, are hereby waived and consent is given to the assessment and collection of the following deficiency or deficiencies in income tax and/or excess-profits tax: taxable year ended December 31, 1934 income tax in the sum of $50,822.30."

The following two typewritten paragraphs were added to and included in the printed waiver form, signed by appellant:

"This Waiver of Restrictions is subject to acceptance by the Deputy Commissioner on the basis of the adjusted liability as hereinabove proposed and if not thus accepted, will have no force or effect.

"If this proposal is accepted the taxpayer agrees (1) to make payment of the above deficiency, together with interest as provided by law, promptly upon receipt of notice and demand from the collector of internal revenue; (2) not to file or prosecute any claim for refund of income taxes for the year 1934 except claims in connection with stock of the Glidden Company received as a bonus and reported as compensation, and (3) upon request of the Commissioner will execute at any time a final closing agreement as to the tax liability, on the foregoing basis, for the said year 1934 under the provisions of section 606 of the Revenue Act of 1928."

In a printed footnote to the Waiver form, the following paragraph is found: "The execution and filing of this waiver at the address shown in the accompanying letter will expedite the adjustment of your income tax liability as indicated above. It is not, however, a final closing agreement under Section 606 of the Revenue Act of 1928 and does not, therefore, preclude the assertion of a further deficiency in the manner provided by law should it subsequently be determined that additional tax is due, nor does it extend the statutory period of limitation for refund, assessment, or collection of the tax."

On October 27, 1937, the Deputy Commissioner advised appellant of the acceptance of the proposed settlement on the basis of a deficiency in the income tax of $50,822.30; and, pursuant to notice and demand, appellant subsequently paid to the collector that amount, with interest. On October 20, 1939, appellant filed with the collector a claim for refund in the amount of $39,000, based on a total loss of the cost price ($50,543.50) of 825 shares of Union Trust Company stock alleged to have become worthless during the calendar year 1934; and, on January 9, 1940, a refund claim was filed by the taxpayer alleging the loss by him of $30,420 on 400 shares of Standard Textile Products Company stock during the taxable year 1934. Both claims for refund on 1934 taxes were rejected by the Commissioner on August 15, 1940.

It appears that appellant, in his income tax return for 1935, which was filed March 16, 1936, had claimed the same two stock loss deductions later embraced in his refund claim for the taxable year 1934. Conferences concerning appellant's 1935 return were held, and a waiver agreement similar to that entered into for the year 1934 was signed by appellant on December 20, 1939. In entering into the latter waiver agreement, the Commissioner disallowed any deduction in the 1935 taxes on account of worthlessness of the stock of Union Trust Company and Standard Textile Products Company. Neither in the income tax return of appellant for 1934, nor in any of the conferences or letters with respect to that year, nor in the "recomputation," was any reference made to loss by appellant in connection with either Union Trust Company or Standard Textile Products Company stock. The taxpayer conceded three comparatively minor items in controversy, leaving three important items to be considered and adjusted in conferences. The main dispute concerned the largest item, relating to options to stockholders to purchase stock of the Glidden Company. This item was adjusted by the Commissioner's representative favorably to the taxpayer. On the trial of this case, Agent Cunningham, of the Bureau of Internal Revenue, testified that he had no doubt that the Board of Tax Appeals would have decided the question in favor of Joyce and other taxpayers similarly situated.

The second item of dispute, settled by conference, pertained to the disallowance of loss on "wash sales" and was resolved against Joyce. The third item involved the determination of the particular year in which the taxpayer sustained loss "on the A. B. Leach Stock." He claimed that his loss in that stock occurred in 1934. But in the case of another taxpayer, the loss had been allowed by the Department as accruing in a prior year. In the settlement with Joyce, a fifty percent compromise was reached on the Leach stock item.

At the time of the recomputation of his 1934 income tax, appellant's claim in his tax return for the year 1935 for deduction of his losses in the Union Trust and Standard Textile stocks as occurring in the latter year was still undetermined and pending before the Treasury Department. The Government had contended in the cases of numerous stockholders of the Union Trust Company that the stock had become worthless in 1933; and not until late in 1939 2 Cum.Bul. p. 39 for that year did the Treasury Department publicly announce its acquiescence in the decision of the Board of Tax Appeals, in Watson v. Commissioner, 38 B. T. A. 1026, that the stock became worthless in 1934.

On October 19, 1939, appellant filed his claim for refund, based on appropriate deduction for the year 1934 of his loss in the Union Trust Company stock; and promptly thereafter, in a conference concerning his tax liability for 1935, withdrew his previous claim that his loss in that stock had occurred in 1935.

Appellant testified that he originally claimed his loss in the Standard Textile Products Company stock for 1935, instead of for 1934, for the reason that when representatives of his concern called to sell materials to that company, its credit rating was found to be such that the contemplated sales were not justifiable. He then decided that the Standard was bankrupt. Moreover, after his claim for loss in the stock in 1935 had been rejected, facts concerning the Standard developed by his further investigation and the reports of his auditors convinced him that the company, having been forced to pay a tax of $890,000 for violation of provisions of the National Recovery Act, was "hopelessly insolvent in 1934."

In its findings of fact, the district court stated that, though unable to fix the exact "identifiable event" of the worthlessness of the Standard Textile Products Company stock, "it would appear that it probably was settled upon the filing of the petition in bankruptcy in 1934." It was found more positively that the "identifiable event" of the worthlessness of the Union Trust Company stock was the assessment of 100% stock liability against appellant on or about July 30, 1934. The losses to the taxpayer on both the Union Trust and the Standard Textile stock were therefore found to have accrued during the year 1934.

In a memorandum opinion, the district court stated that it would seem to be a fair finding that before executing either the 1934 or the 1935 form of Waiver Agreement, appellant had reason to believe that the Standard Textile stock was worthless either in 1934 or in 1935. Prior to the conferences concerning appellant's 1935 tax liability in the latter part of 1939, the Government had determined that the stock became worthless in 1937.

The opinion of the district court recognized the practical difficulty of determining for income tax purposes the time when stocks have become worthless; that often the doubt can be resolved only by judicial decision; and that, under ordinary circumstances, a taxpayer may seek refund within the statutory period when he receives reliable information as to the year in which a deductible stock loss occurred, even though he has claimed the loss in a previous year and his claim has been rejected. But the court concluded that with the knowledge and means of knowledge which the evidence indicated he had concerning the worthlessness of the stock contested, appellant would be held bound by the Waiver Agreement of October 11,...