MacLaughlin v. Harr, 6660.
| Decision Date | 25 October 1938 |
| Docket Number | No. 6660.,6660. |
| Citation | 99 F.2d 638 |
| Parties | MacLAUGHLIN v. HARR. |
| Court | U.S. Court of Appeals — Third Circuit |
James W. Morris, Asst. Atty. Gen., and J. Louis Monarch and Lee A. Jackson, Sp. Assts. to Atty. Gen., J. Cullen Ganey, U. S. Atty., of Bethlehem, Pa., and Thomas J. Curtin, Asst. U. S. Atty., of Philadelphia, Pa., for appellant.
Harry C. Liebman, of Philadelphia, Pa., for appellees.
Before BUFFINGTON and BIGGS, Circuit Judges, and DICKINSON, District Judge.
This somewhat complicated case eventually narrows to an answer to the question of "whether an item of net accrued interest receivable of the taxpayer's predecessor corporation, all of whose assets the taxpayer acquired in a non-taxable consolidation, when collected by the taxpayer, constitutes income or the recovery of capital to the taxpayer". Here the interest had accrued at the date of consolidation and the predecessor corporation had reported same as income on its income tax return. The Commissioner of Internal Revenue had eliminated such interest in determining the tax liability of the predecessor corporation. In other words, was the interest thus collected income of the taxpayer or a recovery of capital? The taxing authorities held it was income and collected it from the taxpayer. It paid the same under protest and brought suit in the court below to recover the alleged overpayment, and recovered judgment.
The opinion of the trial court holding it was not income, but a capital asset, comprehensively and satisfactorily discusses at length the questions involved which, by reference thereto, is made part hereof.1 Agreeing therewith, the judgment of the court below is affirmed.
Four banking institutions of the City of Philadelphia, Oak Lane Trust Company, Queen Lane National Bank, Broad Street National Bank of Philadelphia and National Bank of North Philadelphia, upon July 27, 1928, entered into a plan of consolidation whereby the four companies were to be consolidated into a new banking institution designated by the title, Bank of Philadelphia and Trust Company, referred to in this opinion as the taxpayer. Upon August 18, 1928, an agreement of consolidation was entered into between the taxpayer and Oak Lane Trust Company. Without referring to immaterial details the agreement of consolidation provided that the capital stock of Oak Lane Trust Company should be exchanged share for share for the stock of the taxpayer. The agreement of consolidation also provided that all of the property, real and personal, including choses in action belonging to the constituent company, Oak Lane Trust Company, should be transferred to and vested in the taxpayer and that the liabilities of that constituent company should "attach" to the consolidated company, the taxpayer, and become enforceable against it to the same extent as if such liability had been contracted by it.
The consolidation was duly effected upon October 6, 1928, and as a result thereof two certain items set forth in the agreed statement of facts as "Interest receivable accrued $36,260.79", and "Interest payable accrued $10,960.52", were purported to be transferred to the consolidated company, the taxpayer.
For the years prior to 1928 Oak Lane Trust Company had kept its books of account upon a cash receipts and disbursements basis, with the exception of certain items with which we are not immediately concerned. Oak Lane Trust Company had paid its income taxes upon a cash receipts and disbursements basis. This basis of tax liability offered by Oak Lane Trust Company for the years prior to 1928 had always been accepted by the Commissioner of Internal Revenue. For the period, January 1 to October 6, 1928, the date of the consummation of the consolidation, Oak Lane Trust Company for the first time filed a return which included items of accrued interest receivable and accrued interest payable, and in the amounts set forth in the next preceding paragraph. The Collector of Internal Revenue refused to accept the changed basis, permission of the Commissioner of Internal Revenue for the change not having been obtained, and the Oak Lane Trust Company paid its income tax for the period January 1 to October 6, 1928 upon its usual cash receipts and disbursements basis.
Between October 6 and December 31, 1928, the taxpayer, the consolidated corporation, collected the item heretofore shown as accrued interest receivable and expended the sum shown as accrued interest payable, but when the taxpayer filed its income tax return for the year 1928 it treated the difference between these two items, the sum of $25,300.27, as the recovery of a capital item and did not report it as income. The taxpayer showed a net loss upon its income tax return for the year 1928 in the sum of $29,667.67, and when it filed its 1929 return it deducted this alleged loss from its income.
If the taxpayer had treated the sum of $25,300.27 as income, the net loss displayed by it upon its income tax return for the year 1928 would have been reduced to the sum of $4,316.65.2 In reviewing the return filed by the taxpayer for 1929, the Commissioner disallowed the deduction of loss claimed by it in the sum of $29,667.67, because he deemed the difference between the items of accrued interest receivable and accrued interest payable to be income to the taxpayer. When the petitioner filed a claim for refund of all taxes paid by it in the year 1929, the Commissioner again disallowed the deduction of $29,667.67 claimed as a loss in 1928 by the taxpayer. The amount of the net income reported by the taxpayer for the year 1929 was $183,754.18, upon which it paid a tax of $20,212.96. In passing upon the 1929 return of the taxpayer, the Commissioner allowed it to deduct from net income the sum of $12,696.62, which it had received in 1928, but which was in fact a non-taxable item. The sum of $6,620.15 was thereafter refunded by the Commissioner to the taxpayer.
Now if the figures be recapitulated it will be seen that if...
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