Keeler v. Commissioner of Internal Revenue

• Decision Date: 08 March 1950
• Docket Number: No. 4009.,4009.
• Citation: 180 F.2d 707
• Parties: KEELER v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Tenth Circuit

180 F.2d 707 (1950)

KEELER v. COMMISSIONER OF INTERNAL REVENUE.

No. 4009.

United States Court of Appeals Tenth Circuit.

March 8, 1950.

Stanley L. Drexler, Denver, Colo. (Richard M. Davis, Denver, Colo., and Laurence Graves, New York City, on the brief), for petitioner.

Ellis N. Slack, Washington, D. C. (Theron Lamar Caudle, Assistant Attorney General, Lee A. Jackson and Hilbert P. Zarky, Special Assistants to the Attorney General, on the brief), for respondent.

Before BRATTON, MURRAH and PICKETT, Circuit Judges.

PICKETT, Circuit Judge.

This is a petition to review a decision of the Tax Court of the United States entered June 22, 1949, refusing to permit petitioner to withdraw a war loss claimed for the year 1942 under the provisions of the Internal Revenue Code, 26 U.S.C.A. § 127. The petitioner sought to accomplish the withdrawal by filing an amended income tax return for the year 1942 which return did not include the claim.

Prior to 1942, Frank W. Keeler, hereinafter referred to as the taxpayer, purchased at a cost of $30,676.25 bonds of the Philippine Railway Company having a par value of $141,000.00. The railway company was incorporated under the laws of Connecticut. It owned and operated railway properties only on the islands of Cebu and Panay in the Philippine Islands. These islands were seized by the Imperial Japanese Government on April 8 and 9, 1942. The taxpayer filed his income tax return for the year 1942 in April of 1943, pursuant to an extension of time authorized for that purpose. In this return he claimed a war loss deduction for the bonds in the sum of $14,701.25. On April 19, 1943, an amended return was filed in which the total cost of the bonds was claimed as a war loss under the provisions of the aforesaid statute. In April, 1945, a second amended return for the year 1942 was filed but this reflected no change in the war loss claim.

The forgiveness features of the Current Tax Payment Act of 1943, 26 U.S.C.A. § 1621 et seq., 57 Stat. 126, required that the 1942 and 1943 returns be considered together in arriving at the correct 1943 tax. The Commissioner's report of the taxpayer's returns for these two years showed a deficiency for the year 1943 amounting to $3910.34. This report was received by the taxpayer in July of 1946. On August 15, 1946, he filed a third amended return in which no war losses were claimed, the taxes were recomputed and the deficiency forwarded to the Commissioner. The Commissioner, on October 20, 1947, served upon the taxpayer a notice of deficiency in his 1943 income tax as computed in the report. In arriving at the deficiency, the Commissioner gave no consideration to the third amended return. Within the statutory time, a petition to redetermine the deficiency stated in the notice was filed in the Tax Court alleging that the deficiency should have been determined in accordance with the third amended return. The Commissioner joined issue on the allegations in the petition. The essential facts were stipulated and the Tax Court determined the deficiency for the year 1943 without giving consideration to the war loss claim. It is conceded that if the taxpayer is permitted to withdraw the claim his income tax liability for the years 1942 and 1943 would be increased.

At the outset, we are confronted with the contention of the Commissioner that the decision of the Tax Court in refusing to permit the withdrawal of the war claim was in fact favorable to the taxpayer and that such taxpayer is not an "aggrieved person" within the meaning of the law and cannot maintain this appeal. Admittedly, the purpose of the withdrawal of the claim was to re-establish the cost basis for the bonds, as Title 26 U.S.C.A. § 127(c) (1) requires the claimant to include the value of the property as gross income at the time there is a recovery as contemplated by that section. In the petition for redetermination before the Tax Court, it was alleged that the bonds were not a war loss and should not have been claimed as such by the taxpayer and that the Commissioner should not have allowed them in the first instance. The stipulated facts showed the bonds to have had a substantial value and that there was a ready market for them during the time the islands of Cebu and Panay were under control of the Japanese. The taxpayer contends that this was sufficient to show conclusively that the bonds were not worthless within the meaning of the statute. This was the issue put squarely to the Tax Court which decided the same against the taxpayer. The Tax Court determined the deficiency for the year 1943 without the elimination of the war loss claim. This stands as an adjudication of that issue. Electrical Fittings Corp. v. Thomas and Betts Co., 307 U.S. 241, 59 S.Ct. 860, 83 L.Ed. 1263.

Upon receiving notice from the Commissioner that there is a deficiency with respect to income tax, the taxpayer may file a petition with the Tax Court "for a redetermination of the deficiency." 26 U.S.C.A. § 272(a) (1). The Tax Court then has jurisdiction to determine the correct deficiency even though the amount so determined is greater than that found by the Commissioner. This right is limited, however, to a claim which "is asserted by the Commissioner at or before the hearing or a rehearing." 26 U.S.C.A. § 272(e). The limitation is obviously for the protection of the taxpayer and would not prevent him from insisting upon a correct determination of the deficiency regardless of the immediate result. Olds & Whipple v. United States, 1938, 22 F.Supp. 809, 818, 86 Ct.Cl. 705. When the jurisdiction of the Tax Court is properly invoked it has power to review legal errors of the Commissioner whether they be for or against the taxpayer. Champlin v. Commissioner, 10 Cir., 78 F.2d 905, 907. We think the taxpayer is entitled to a correct determination of his tax deficiency without regard to its immediate consequence, and that the failure of the Tax Court to determine a correct deficiency may be reviewed by this court on a petition for review. 26 U.S. C.A. §§ 1141, 1142. The rule that only a party aggrieved by a decision may appeal is recognized, but to be aggrieved it is not necessary that there be an actual pecuniary loss. The proper test is whether the decision invades the legal rights of a person or operates adversely on his property rights and interests.¹

This brings us to the basic question presented, that is, were the bonds a war loss within the meaning of the statute? We think they were. The purpose of Section 127 as stated by the Senate Finance Committee was to provide, for tax purposes, practical rules for the treatment of property which had been destroyed or seized in the course of military and naval operations during the last war.² One of the objects of the statute was to permit a taxpayer to declare a loss equal to the cost of securities owned by him, the underlying assets of which were located in countries which were at war with the United States or in territories seized by such countries. It was not necessary for the taxpayer to show an actual destruction of the property in order to avail himself of the benefit of the statute. All of the assets of the Philippine Railway Company were located in territories seized by the Imperial Japanese Government. The statute therefore presumes that all of the property of that company was destroyed or seized when the islands came under Japanese control. Ford v. Commissioner, 6 T.C. 499, Heckett v. Commissioner, 8 T.C. 841. The...