Speyer v. Commissioner of Internal Revenue
| Decision Date | 27 April 1934 |
| Docket Number | Docket No. 56435. |
| Citation | 30 BTA 517 |
| Parties | JAMES SPEYER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Henry W. Taft, Esq., and C. W. McConaughy, Esq., for the petitioner.
Prew Savoy, Esq., for the respondent.
This proceeding was instituted to redetermine a deficiency of $48,643.92 in income tax for 1928. The primary facts are set forth in a voluminous stipulation of facts. Only so much of the agreed facts will be stated as is necessary for a clear understanding of the several issues raised by the pleadings, which are whether the respondent erred:
(1) In increasing gross income by $181,535.45 on account of payments received on awards of the Mixed Claims Commission;
(2) In refusing to allow as a deduction losses sustained on the accounts which formed the basis of the awards;
(3) In disallowing a deduction of $48,591.24 for attorney fees paid for services rendered in connection with the awards;
(4) In disallowing a credit of $59,805.31 for income tax paid to the German Government; and
(5) In allowing too large an amount as a deduction for contributions.
The petitioner is and was, at all times important here, a citizen of the United States, a resident of New York, and a member of the firm of Speyer & Co., a copartnership conducting a banking business in New York City. Prior to April 4, 1917, he was also a member of the firm of Lazard Speyer-Ellisson, a copartnership conducting a banking business at Frankfort-am-Main, Germany, hereinafter referred to as the German partnership.
On April 6, 1917, there were owing to the petitioner and Speyer & Co. amounts represented by deposits and balances in accounts with banks and bankers in Germany, including the German partnership. Excepting four items belonging to clients of Speyer & Co., since December 31, 1923, the petitioner has been the sole owner of said deposits and accounts and of the awards made by the Mixed Claims Commission, hereinafter referred to as the Commission, with respect thereto.
On or about December 31, 1922, the petitioner and Speyer & Co. filed 10 claims with the Commission respecting the deposits and accounts with German banks and bankers. Upon these claims the Commission entered awards in favor of the petitioner as follows:
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Number | Date | Principal
| | amount
-------|--------------------------------------------------------|------------
5958 | October 30, 1925 _____________________________________ | $415.64
6256 | " " " _____________________________________ | 6,843.47
6375 | Jan. 13, 1926 ________________________________________ | 63.84
6583 | Feb. 3, 1926 _________________________________________ | 160,066.85
7293 | Nov. 8, 1926 _________________________________________ | 181,309.63
7550 | Nov. 23, 1927 ________________________________________ | 648,039.04
| |____________
| Total ___________________________________________ | 996,738.47
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The principal amount of some of the awards included an allowance for interest to April 6, 1917, as claimed by the claimants. Each award was made with interest at the rate of 5 percent per year from designated dates, in most cases January 1, 1920.
Pursuant to the provisions of the Settlement of War Claims Act of 1928, 45 Stat. 254, the Secretary of the Treasury on September 26, 1928, made two payments to the petitioner on account of the sums due him under the six awards, one in the amount of $99,500 and the other in the amount of $386,412.43, a total of $485,912.43, after deducting $2,441.77 as reimbursement for expenses incurred by the United States as allowed by section (2) (e) of that act. The respondent first included one half of this sum in petitioner's taxable income on the theory that the payments were made for the equal benefit of the petitioner and a former member of Speyer & Co. In his answer to the petition he asserted a claim to tax on the whole amount. In his answer to the amended petition the respondent admitted error in asserting a tax on more than $181,535.45 of the payment.
The respondent pursued the following method in determining that $181,535.45 of the amount received in 1928 constituted taxable income of the petitioner. He first made an analysis of each item of each award and allocated the amount thereof to return of capital and income. For instance, of the amount of award No. 5958, he determined that $411.69, the principal of the bank deposits, was a return of capital, and the balance of $3.95, representing interest on the deposits from dates set forth in the stipulation to April 6, 1917, none of which was credited to the accounts by the respective banks, was income. The two items of bank deposits, without interest, constituting award No. 6256, have no basis within the meaning of section 113 of the Revenue Act of 1928, and, accordingly, the respondent treated the entire award of $6,843.47 as income. Under award No. 6583 he found that a loan of 41,121.27 marks, deducted as a loss in petitioner's return for 1913, together with interest thereon for 1916 in the amount of 7,764.76 marks, constituted income. In award No. 7293 he determined that dividends credited to one of petitioner's accounts with the German partnership prior to December 31, 1920, and certain depository fees, no part of either of which credits the petitioner ever reported as income for tax purposes, constituted taxable income. By this process he determined that of the aggregate principal amount of $996,738.47 awarded by the Commission, $852, 660.31 represented a return of capital and $144,077.78, income. Respondent's figures are short 38 cents. He then computed interest on the awards from the dates allowed by the Commission to January 1, 1928, in the amount of $391,936.78, which he calls income to the petitioner. He then reached the figure of $181,535.45 by the following computation:
Capital to be returned ($852,660.31 less $14,597.79 belonging to
clients) ______________________________________________________ $838,062.52
Income as of Jan. 1, 1928 ($144,077.78 plus $391,936.78) _______ 536,014.56
Percentage of payments—Return of capital _________________ 61%
Income __________________________________ 39%
Payments in 1928 ($485,912.43 less $20,436.91 received for the
account of clients) ___________________________________________ $465,475.52
Return of capital 61% __________________________________________ 283,940.07
Taxable income 39% __________________________________________ 181,535.45
This method of allocating payments is in accordance with G.C.M. 9210, C.B. X-1, p. 129, applicable to taxpayers, such as the petitioner, reporting income on the cash basis, and G.C.M. 9466, C.B. X-1, p. 133, relating to taxpayers on the accrual basis. The respondent adheres to this theory of prorating the payments, and the petitioner insists that he is entitled under the rule stated in Burnet v. Logan, 283 U.S. 404, to a return of his capital before being taxed on any payments made under the awards.
Under the respondent's method of allocating the payments the petitioner is taxed on but a part, instead of all, of the payment allocable to awards, such as No. 6256, where the parties are agreed there is no investment to recover. In other awards where the amount assigned to income is less than the average, he is called upon to pay a tax on an amount in excess of his real income. The interest on the awards prior to January 1, 1928, represents about 70 percent of the whole of the income items determined by the respondent, yet by September 30, 1932, only about 2 percent of the amount paid to claimants of petitioner's class, was applicable to such interest. It does not appear, and it is not claimed, that any part of the payments made in 1928 included interest on the awards prior to 1928. These few illustrations serve, we think, to show the inequity of the respondent's method. Under it there will not be a recovery of the petitioner's cost or other basis until the last installment is paid, irrespective of when that occurs.
The respondent cites no authority to support his method of taxing the payments and there appears to be none in point. Taxation is eminently practical, Tyler v. United States, 281 U.S. 497, and "Generally speaking, the income tax law is concerned only with realized losses, as with realized gains." Lucas v. American Code Co., 280 U.S. 445. In Doyle v. Mitchell Bros. Co., 247 U.S. 179, the Court said: "In order to determine whether there has been gain or loss, and the amount of the gain if any, we must withdraw from the gross proceeds an amount sufficient to restore the capital value that existed at the commencement of the period under consideration."
In Burnet v. Logan, supra, the respondent, with other stockholders of a corporation, sold their stock for a cash consideration and an agreement of the buyer to pay the additional amount of 60 cents per ton for ore removed from a certain mine. Thereafter she received sums pursuant to the agreement. The Commissioner treated the obligation of the buyer as having a cash value and regarded the sale as a closed transaction in the year made. The respondent maintained that the sale did not give rise to taxable gain until she had recovered her basis for the stock. In holding for the respondent, the Supreme Court said:
The 1916 transaction was a sale of stock — not an exchange of property. We are not dealing with royalties or deductions from gross income because of depletion of mining property. Nor does the situation demand that an effort be made to place according to the best...
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