Smith v. Russell

• Decision Date: 11 March 1935
• Docket Number: No. 10089.,10089.
• Citation: 76 F.2d 91
• Parties: SMITH et al. v. RUSSELL.
• Court: U.S. Court of Appeals — Eighth Circuit

76 F.2d 91 (1935)

SMITH et al. v. RUSSELL.^*

No. 10089.

Circuit Court of Appeals, Eighth Circuit.

March 11, 1935.

M. A. Matlock, of Little Rock, Ark., for appellants.

L. W. Post, Sp. Asst. to Atty. Gen. (Frank J. Wideman, Asst. Atty. Gen., Sewall Key, Sp. Asst. to Atty. Gen., and Fred A. Isgrig, U. S. Atty., of Little Rock, Ark., on the brief), for appellee.

Before WOODROUGH and FARIS, Circuit Judges, and DONOHOE, District Judge.

FARIS, Circuit Judge.

Plaintiffs, constituting all of the surviving former stockholders and distributees, in liquidation of the Smith Arkansas Traveler Company, a corporation, together with the legal representatives of a deceased stockholder and distributee, brought this action, against the former Collector of Internal Revenue, to collect the sum of $7,920, paid to such collector on income tax of the Smith Arkansas Traveler Company for the year 1929. For brevity, the above company will be referred to hereinafter as the company, appellants herein will be called plaintiffs, and appellee, defendant.

A jury being waived, the case was tried to the court without a jury, and at the close of the evidence for plaintiffs defendant offered, what is called in the record, a motion for judgment in favor of the defendant. This motion the court sustained, and plaintiffs appealed in common form.

The case arises out of the following facts: The Smith Arkansas Traveler Company was incorporated in 1926 under the laws of Arkansas. Through the efforts of its officers and stockholders it procured the passage of local laws by the Legislature of Arkansas, which in effect gave it a virtual monopoly of operation over the principal state highways into and out of Little Rock, thus rendering its property, largely franchises, valuable. The company sold its properties on January 2, 1929, for a comparatively large profit, relinquished its corporate charter and dissolved. On this net profit, after paying its debts, it became liable to pay income taxes. The dispute here has to do with two contested items of deductions from such profits, claimed by plaintiffs. These arose thus:

In 1927, the taxpayer issued $100,000 par value 7 per cent. 10-year gold bonds, securing same by a deed of trust on its properties. These bonds were all distributed among its officers and stockholders in payment for alleged services rendered largely, if not wholly, in procuring the passage of the local law already mentioned. The reason for the issuance of these bonds was, as the record shows without contradiction, because the plaintiffs desired to protect the company's property in case of damage suits.

In 1927 the officers and stockholders to whom these bonds had been distributed paid income taxes thereon, on the basis of 41 cents on the dollar, or on a total value of $41,000, which was then estimated as the fair value of the entire issue of these bonds. On January 2, 1929, the sale of the company's properties was finally consummated and closed, and in that same year the bonds were called and paid, in the full sum of $100,000. The plaintiffs were allowed as a credit on income for 1929, arising from the payment of the bonds, the sum of $41,000 only. This was the value of the whole $100,000 issue of bonds as fixed and accounted for as income in 1927 by the plaintiffs to whom the bonds had been apportioned and distributed.

The plaintiffs contend that the total deduction should, under the facts and the law, have been $100,000 instead of $41,000. So the dispute largely rages about this point. This action is therefore to recover taxes paid on $59,000, plus the sum of $10,000 paid for a fee to an attorney for brokerage services in consummating the sale. The facts as to this fee, and as to the time of payment thereof, are made clear by an admission made on the trial, which runs thus:

"It is stipulated and agreed that the attorney's fee of $10,000, in controversy, was paid for services rendered in connection with the sale of the property by the corporation, that it was actually paid by the corporation in 1928, was actually charged as a deduction on income tax return in 1928 by the Commissioner, in his audit of it. The sale, however, of the property, for which the fee was paid for services rendered in connection with it, was not made and consummated until January 2, 1929."

"And also that in reporting the taxable income gain in 1929, the return of the corporation did not reflect, did not include as an expense, the $10,000 item just mentioned; that the first time the Commissioner of Internal Revenue's attention was called to the failure to deduct this ten-thousand dollars item in refund of the total sale price of the assets, was contained in claim for refund filed which is attached as an exhibit to the complaint. * * * And that the services were actually rendered in 1928."

In limine, complaint is voiced that the trial court erred in refusing to pass on some nineteen declarations of law which, subsequent to the court's sustaining the motion for judgment on the evidence, were offered by the plaintiff.

The action taken by the court in...