Scovill Manufacturing Company v. Fitzpatrick, 206

• Decision Date: 24 August 1954
• Docket Number: Docket 22981.,No. 206,206
• Parties: SCOVILL MANUFACTURING COMPANY, Plaintiff-Appellant, v. John J. FITZPATRICK, Collector of Internal Revenue for the District of Connecticut, Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

215 F.2d 567 (1954)

SCOVILL MANUFACTURING COMPANY, Plaintiff-Appellant, v. John J. FITZPATRICK, Collector of Internal Revenue for the District of Connecticut, Defendant-Appellee.

No. 206, Docket 22981.

United States Court of Appeals Second Circuit.

Argued April 12, 1954.

Decided August 24, 1954.

John S. Murtha, Hartford, Conn. (William M. Cullina, Shepherd, Murtha & Merritt, Hartford, Conn., on the brief), for appellant.

George F. Lynch, Sp. Asst. to the Atty. Gen. (H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack and Robert N. Anderson, Sp. Assts. to the Atty. Gen., Washington, D. C., and Simon S. Cohen, U. S. Atty., Hartford, Conn., on the brief), for appellee.

Before CLARK, HINCKS, and HARLAN, Circuit Judges.

CLARK, Circuit Judge.

This case involves a claim for refund of excess profits taxes and interest paid by plaintiff, Scovill Manufacturing Company, for the taxable year 1944 when its asserted deduction of certain worthless debts under I.R.C. § 23(k) (1), 26 U.S. C., was disallowed. Plaintiff-taxpayer appeals from a judgment on the merits for the defendant-collector.

In 1929 Scovill, in the course of its business, acquired the entire outstanding stock of A. Schrader's Son, Inc., a New York manufacturing corporation. Schrader continued to operate as a subsidiary until in 1934 it transferred all of its operating assets to Scovill. Thereafter Schrader continued to exist as a corporation, but its business was carried on by the A. Schrader's Son Division of Scovill.

Prior to the 1929 change of ownership Schrader had entered into a pension trust agreement for the benefit of certain of its employees. The agreement obligated Schrader to make good any deficiencies in the principal or earnings of the fund as the claims of the beneficiaries came due. In November, 1935, after Schrader had given up its manufacturing operation, it terminated the trust agreement and assigned its interest in the trust fund to Scovill; and Scovill entered into a similar arrangement with the trustees, binding the employee-beneficiaries to continue faithful service to Scovill until their retirement. All this was done with the consent of the beneficiaries. On the date of this arrangement the book value of the trust's assets slightly exceeded its obligations, but their then market value was substantially less. Schrader's retained assets largely exceeded the obligations of the trust.

From time to time thereafter, as the trustees needed funds, Schrader, acting with funds loaned by Scovill, advanced money to the trust and received such repayments as were made. The advances were made by checks drawn by Scovill, and charged on Scovill's books to Schrader's account, appearing amid the other exchanges of cash between parent and subsidiary. No explanation is offered for this practice except the trial judge's plausible surmise that it was to preserve the historical origin of the contingent liability involved, in Scovill's otherwise solid conservative financial statement. At any rate, the practice ceased in 1940 when by appropriate entries on all three sets of books Schrader was eliminated from the picture, leaving an obligation from the trustees to Scovill of $353,899.42.

Starting in 1934, Scovill had encouraged an orderly liquidation of the trust fund. By September, 1944, the trust obligation to its beneficiaries had been reduced to some $167,000. At that time Scovill proposed a large-scale financing program to prepare for postwar reconversion and expansion. In order to remove the contingent liability from its financial statement it requested the trustees to accelerate the liquidation and terminate the trust. This was successfully accomplished; and in December, 1944, the trustees paid over their surplus to Scovill, closing out the trust and leaving an unpaid balance on the Scovill advances of $211,820.27.

In Scovill's tax return for that year it took a deduction under I.R.C. § 23(k) (1) of $211,820.27, representing the unpaid balance of its account with the then defunct trust. The Commissioner disallowed the deduction, and Scovill paid the resulting deficiency. Thereupon Scovill filed a claim for refund in which it stated:

"Pursuant to said agreement with the Trustees, Scovill, at the request of said Trustees, loaned to the Trustees the following sums, to wit:

                  October 23, 1940 — $341,899.42
                  December,   1940     12,000.00
                  1941-1942                95.25
                  November,   1944    158,000.00
                                     ___________
                  Total loans,       $511,994.67"
                

and continued with offsetting payments by the trustees of $55,000 from August, 1942, to January, 1944, and $245,174.40 in December, 1944, to total $300,174.40. This statement, however, appeared as the 16th out of 24 paragraphs of detailed facts, concluding with a claim for deduction alternatively under I.R.C. § 23(k) or (f) or (a) (1) (A). Upon disallowance of its claim Scovill brought this action.

After trial, the district court held that Scovill in its action had materially altered the basis for its demand by shifting from the claim that it had made a direct loan in 1940 to the contention that it had made a series of advances on Schrader's account culminating in purchase of the resulting obligation in 1940. Accordingly it held that the action must fail for variance from the claim for refund. We think the judge took an overly narrow view of the filed claim.

It is true that a claim for refund setting forth the material facts on which the claim is based is an essential condition precedent to this sort of action. I.R.C. § 3772; U.S.Treas.Reg. 111, § 29.322-3, as amended T.D. 5325, 1944 Cum. Bull. 152. A claimant may not raise a wholly new factual basis for his claim at the later trial, Dascomb v. McCuen, 2 Cir., 73 F.2d 417, certiorari denied Chandler v. McCuen, 295 U.S. 737, 55 S.Ct. 649, 79 L.Ed. 1685; Samara v. United States, 2 Cir., 129 F.2d 594, certiorari denied 317 U.S. 686, 63 S.Ct. 258, 87 L.Ed. 549; cf. B.F. Goodrich Co. v. United States, 9 Cir., 135 F.2d 456, affirmed 321 U.S. 126, 64 S.Ct. 471, 88 L.Ed. 602; but also he may not shift the legal theory of his claim, United States v. Felt & Tarrant Mfg. Co., 283 U.S. 269, 51 S.Ct. 376, 75 L.Ed. 1025; Weagant v. Bowers, 2 Cir., 57 F.2d 679; Ronald Press Co. v. Shea, 2 Cir., 114 F.2d 453; Nemours Corp. v. United States, 3 Cir., 188 F.2d 745, certiorari denied 342 U.S. 834, 72 S.Ct. 50, 96 L.Ed. 631. Here, however, the basis of Scovill's claim has at all times been an obligation of the trustees owing to Scovill out of the latter's support of the Schrader pension fund and which arose in 1940 and became worthless in 1944. This is literally true, even though the claim for refund characterized as a "loan" a transaction which the parties later came to characterize as a "purchase of accounts receivable." Legally this latter may perhaps be a neater phrase; but from the Scovill end what happened in 1940 was a resettlement of existing cumulated loans to substitute the actual debtors, the trustees, for the nominal borrower, Schrader. One may hazard the guess that only lawyers would regard this as an investment in choses in action and that businessmen would more naturally think of it as an adjustment of loans to reflect realities.

We think that I.R.C. § 3772 and U.S.Treas.Reg. 111, § 29.322-3 go no further than to require the taxpayer to set forth facts...