Murray v. Commissioner of Internal Revenue

Decision Date15 May 1956
Docket NumberNo. 14579.,14579.
Citation232 F.2d 742
PartiesE. J. MURRAY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtU.S. Court of Appeals — Ninth Circuit

Frederick H. Torp, Paul L. Boley, Charles E. McCulloch, Cleveland C. Cory, Portland, Or., for petitioner.

H. Brian Holland, Asst. Atty. Gen., I. Henry Kutz, Ellis N. Slack, Meyer Rothwacks, Sp. Assts. to Atty. Gen., Washington, D. C., for respondent.

Before STEPHENS, HEALY and POPE, Circuit Judges.

POPE, Circuit Judge.

This is a petition to review a decision of the Tax Court which approved the Commissioner's determination of a deficiency in income tax for the year 1947.1 The opinion of the Tax Court is reported at 21 T.C. 1049 where the facts of the case are stated at greater length and in more detail than we find necessary here.

In 1928 the petitioner and his wife acquired certain real estate in Klamath Falls, Oregon. They borrowed $64,000 from a savings and loan association which they used to finance the construction of a building upon the property and secured the loan by a mortgage thereon. In 1932, when there was a balance due of $57,000 upon the mortgage debt, petitioner and his wife conveyed the building, subject to the mortgage, to a corporation whose sole stockholders were Wiley and D'Albini, petitioner's attorneys, and to the wives of Wiley and D'Albini. In 1934, the savings and loan association brought suit to foreclose its first mortgage and the property was sold pursuant to the foreclosure decree. On the last day of the statutory redemption period, the property was redeemed from the foreclosure sale by certain assignees of the Wiley-D'Albini corporation. In 1948 the petitioner and his wife brought suit in the Circuit Court of the State of Oregon against Wiley and D'Albini and their assignees and procured a sheriff's deed therefor, and after trial in that court and hearing upon appeal in the Supreme Court of Oregon, Murray v. Wiley, 169 Or. 381, 127 P.2d 112, 129 P.2d 66, the latter court on June 30, 1942, upholding the contentions of the petitioner and his wife, held that petitioner's conveyance of the building to Wiley and D'Albini was made merely to secure petitioner's indebtedness to his attorneys; that their corporation held the property as mortgagee in possession, and that the conveyance to the assignees who redeemed from the mortgage foreclosure was also subject to petitioner's continued right to redeem the property, and that petitioner was beneficial owner of the property subject to the liens of the various defendants, all of whom stood in the position of mortgagees in possession.

The Oregon Supreme Court remanded the case to the Circuit Court for an appropriate accounting in which defendants would be given credit for amounts paid to redeem the property, for the amounts paid to redeem from a federal tax lien, and for amounts owing for the legal services of Wiley and D'Albini, subject to certain named offsets. That court also ordered that upon payment of the amounts of these liens as ascertained by further accounting, the petitioner should be entitled to a reconveyance of the property, and in its decision (as revised on the petition for rehearing), the Oregon Supreme Court adjudged that the defendants should have credits in the ensuing accounting for their costs of management and repairs in the operation of the building while in possession thereof, and that the proceeding before the court was a suit by a mortgagor to redeem, not one to foreclose a mortgage. It was directed that unless petitioner did redeem the property from the liens the decree of the Circuit Court should determine and specify a reasonable time within which petitioner might redeem from the liens or be forever barred.

Upon the remand of the case to the Circuit Court, the accounting was taken as directed. A further appeal to the Supreme Court followed, but the action of the Circuit Court, with one minor exception, was affirmed on January 14, 1947. In the judgment thus affirmed it was ascertained that after charging petitioner with the amount of those liens and interest thereon, and crediting petitioner with the amount of the rents received by the so-called mortgagees in possession, and charging petitioner with the amount of expenses of maintenance, the amount required to be paid by petitioner to redeem was $10,630.41. He paid that sum on February 28, 1947, and on that date a final decree was entered adjudging that he had satisfied all liens on the property, and the defendants were directed to reconvey to him within ten days or have the reconveyance occur through operation of the decree. Possession of the building was thereupon surrendered to petitioner.

Petitioner who is a cash basis taxpayer, had filed no income tax returns for any of the years 1937 through 1945. He had no income during those years, but in July, 1947, he filed separate returns for all the years 1937 to 1946, reconstructing the income he would have had from his property in those years had he been in possession.

The Commissioner determined a deficiency in petitioner's income tax for the year 1947 based for the main part on the further determination that as a result of the transactions culminating in the final court decree above mentioned, petitioner had realized ordinary income of $57,512.64 in that year. This sum was arrived at as follows: In the Circuit Court accounting petitioner had been given credit and the defendants there had been charged with $102,589.45 received from rents on the building from 1936 to 1947. Interest had been added to this amount making the total credited to petitioner from this source $135,808.19. Against these credits there was charged maintenance expenses, interest on the mortgage, and other disbursements, totaling $78,295.55. The balance of $57,512.64 was the ordinary income thus charged to the petitioner by the Commissioner.

Petitioner contends that he did not realize any taxable income by reason of the state court litigation mentioned. He points out that he did not in the year 1947 or at any other time receive any cash or money as a result of the litigation and he asserts that the mere fact that the credits on account of the rentals received from the Murray Building were used to reduce the amount which he was required to pay to redeem the property from the liens against it, does not mean that this can be treated as income; that these liens were merely encumbrances on the property, and the amounts were not personal obligations of the petitioner.

Petitioner relies upon the case of Hilpert v. Commissioner, 5 Cir., 151 F.2d 929, 162 A.L.R. 899, as authority for his assertion that the reduction, satisfaction or cancellation of an indebtedness or obligation which is not a personal obligation of the owner of property does not result in taxable income to him. The Tax Court, deeming the Hilpert case not controlling here, held that the net proceeds realized by the petitioner in the accounting proceeding were income to him; that the fact that the rents were realized only after great delay, did not change the character of the rent from a tax viewpoint. It sustained the position of the Commissioner that petitioner realized this ordinary income in the taxable year 1947 as a result of the termination of the litigation.

That the petitioner did realize ordinary income we think is clear. The economic benefit which petitioner realized and which grew out of the rents from the building was within the rule recognized in Commissioner of Internal Revenue v. Smith, 324 U.S. 177, 181, 65 S.Ct. 591, 593, 89 L.Ed. 830; Helvering v. Bruun, 309 U.S. 461, 469, 60 S.Ct. 631, 84 L.Ed. 864, and Helvering v. Horst, 311 U.S. 112, 115, 61 S.Ct. 144, 85 L.Ed. 75. It was stated in Commissioner of Internal Revenue v. Smith, supra (which dealt with an employee's compensation), as follows: "Section 22(a) of the Revenue Act is broad enough to include in taxable income any economic or financial benefit conferred on the employee as compensation, whatever the form or mode by which it is effected."

We agree with the Tax Court that there is nothing in the Hilpert case which calls for a contrary conclusion.2

This brings us to the second or alternate contention of the petitioner which is that assuming taxable income was realized as a result of the proceedings in the Oregon courts, the Tax Court erred in holding that all such income was realized in 1947. Petitioner's argument is that the state court litigation established the proposition that the mortgagees in possession of petitioner's property were in effect constructive trustees for petitioners at all times when they were receiving rents which, as the Oregon courts held, they were obliged to credit or apply for petitioner's benefit. Petitioner argues that hence they owed duties to him similar to those of an agent in possession of rental property. Said petitioner: If the receipts were in fact taxable income, they were taxable to the petitioner in the years of collection by the...

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