State ex rel. Gibson v. American Bonding & Cas. Co.

Decision Date05 August 1938
Docket Number43959.
Citation281 N.W. 172,225 Iowa 638
PartiesSTATE ex rel. v. AMERICAN BONDING & CASUALTY CO. et al. GIBSON, Atty. Gen.,
CourtIowa Supreme Court

Appeal from District Court, Woodbury County; A. O. Wakefield, Judge.

Action in equity to dissolve corporation, appoint a receiver for and liquidate its assets. United States of America filed claim for income tax on income derived from securities and property of the corporation in the hands of the receiver. From a decree allowing the claim for such income taxes, the defendant corporation and receiver appeal.


F. E Gill and Gill & Gill, all of Sioux City, for appellants American Bonding & Casualty Co. and W. F. Grandy.

E. G Dunn, of Mason City, and Robert H. Jackson, Homer R. Miller and James W. Morris, all of Washington, D. C., for appellees the United States and Charles D. Huston, Collector of Internal Revenue.

DONEGAN, Justice.

The American Bonding & Casualty Company was incorporated on June 2, 1916, under Chapter 4, Title 9, of the Code of Iowa, 1897, and thereafter conducted a casualty insurance business pursuant to its articles of incorporation. In February, 1921, on petition of the State of Iowa ex rel. Ben J. Gibson, attorney general, the action, in connection with which the claim here involved originated, was instituted against the corporation in the district court of Woodbury County, Iowa, and on February 26, 1921, a decree was entered by said court, finding that the said company was insolvent, directing its dissolution, and appointing W. F. Grandy as permanent receiver thereof. Pursuant to this decree, Grandy qualified and entered upon the performance of his duties as such receiver, and continued to act in that capacity at all times thereafter. The principal assets of the corporation consisted of securities, which had been deposited with the commissioner of insurance of the State of Iowa, in the amount of approximately $700,000, and, on application of the receiver, these securities were turned over to him. In addition to these securities there were other securities owned by the corporation, consisting of mortgages not exceeding $100,000 and bonds not exceeding $50,000, which also came into the hands of the receiver. The corporation had been doing business in many other states, as well as in Iowa, and a large number of claims aggregating extensive sums of money were filed in the receivership. Because of the great number and magnitude of the claims, and the litigation connected with the proving and allowance thereof, it was impossible to make immediate distribution, and, instead of reducing the assets in his hands to cash, the receiver, under direction of the court, collected the interest on the securities in his hands, collected the rents of real estate which came into his hands under foreclosure of mortgages held by him, invested the moneys that thus came into his hands in additional securities, and collected the income therefrom. No federal income tax was paid upon the income thus derived by the receiver, and, in November, 1934, United States of America filed a claim against the corporation and the receiver in the district court of Woodbury County, Iowa, for income taxes for the years 1924 to 1932 inclusive, in the sum of $72,290.56, and asked that an order be entered directing payment thereof. The receiver filed objections to this claim on several different grounds. Trial was had upon the claim and the objections filed by the receiver thereto, and, on the 15th day of September, 1936, the trial judge filed his opinion and findings, in which he allowed the claim in the sum of $59,956.35, and entered a decree directing its payment. From such finding and decree of the trial court, the American Bonding & Casualty Company, and W. F. Grandy, receiver thereof, have appealed to this court.

There is practically no dispute in regard to the facts of this case, and this appeal involves purely questions of law. These questions have been presented to us by the appellants in the form of errors relied upon for reversal. Such errors have been alleged in six separate divisions of the appellants' brief and argument, but the questions thus raised may be reduced to three fundamental propositions: 1. Whether the federal statutes relied on by claimant were intended to impose or validly could impose income taxes on income derived from property of an insolvent and dissolved corporation during the time such property was in the hands of a receiver appointed by a state court, and in process of liquidation. 2. Whether the reports filed by the receiver with the income tax collector were sufficient to start the running of the statute of limitations as to assessments of income taxes for the years for which such reports were made. 3. Whether the trial court erred in holding that the burden was on the receiver to establish deductions which he claims should have been allowed in connection with the income taxes assessed in this case.


The first error which the appellants contend was committed by the trial court was in holding that a valid assessment for income tax could be made and charged against the dissolved corporation or the liquidating receiver. Appellants contend that, as the corporation was dissolved in February, 1921, it ceased to exist as a corporation at the time such order of dissolution was made, and that the corporation, as such, could not have any income thereafter and could not, therefore, be subject to an income tax. The statutes upon which the claimant is relying in this case are Section 239 (a) of the Revenue Act of 1924, 43 Stat. 287, Section 239 (a) of the Revenue Act of 1926, 44 Stat. 45, and Section 52 (a) of the Revenue Act of 1928, 45 Stat. 808, 26 U.S. C.A. § 52 and note. These several sections are substantially identical in language and, so far as the question now under consideration is concerned, it will be sufficient to consider the provisions of Section 239 (a) of the Revenue Act of 1924, which is as follows:

" Every corporation subject to taxation under this title shall make a return, stating specifically the items of its gross income and the deductions and credits allowed by this title. * * * In cases where receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, such receivers, trustees, or assignees shall make returns for such corporations in the same manner and form as corporations are required to make returns. Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporations of whose business or property they have custody and control." (Italics are ours.)

Appellants concede that this section is applicable to cases where the regular business of a corporation is carried on by a receiver, but contend that it does not apply in cases such as this, where the activities of the receiver are confined to such matters only as are connected with the dissolution and winding up of the affairs of a corporation. In other words, the appellants contend that the statute relied upon by the claimant is applicable only to operating receiverships, and that it is not applicable to a liquidating receivership, which, they say, exists in this case.

Appellants place great reliance on In re Owl Drug Co., 21 F.Supp. 907, decided by the United States District Court for the District of Nevada. In that case a corporation which owned and operated a chain of drug stores went into bankruptcy. The stores were sold by the trustee in bankruptcy, the money derived from the sale was deposited in banks, and interest on such money was paid to the trustee by the banks. The United States claimed an income tax on the money received by the trustee as interest on these bank deposits. After citing authorities to the effect that to " operate," within the meaning of the statute, implies the exercise of activity in connection with the thing operated, not sporadically, but continuously over a definite period of time (in which connection reference is made to the opinion of the trial judge in the instant case), the opinion proceeds to state (page 911):

" After the bankruptcy, the trustee continued to operate the stores for a while. Then he sold them. When he did, the business of the bankrupt was liquidated . The only property in the hands of the trustee was the money received from the sale. This he was holding, subject to bankruptcy administration. While he operated the drug stores, his income was clearly income from operation . After the sale, the interest received from the deposit of the money in various banks was earned, not by the bankrupt's business, but by the money into which the business had been transmuted through the sale. In holding the money, the trustee was ‘ not pursuing the ends for which the corporation was organized.’ See Edwards v. Chile Copper Co., 1926, 270 U.S. 452, 455, 46 S.Ct. 345, 346, 70 L.Ed. 678. It is true that if a trustee were to take over a bank, a trust company, an investment house, or some other concern which engages chiefly in loaning money, or if the trustee in an estate, the liquidation of which extended over a period of years, invested the funds of the bankrupt in promissory notes or securities, the interest or gain thus obtained might be considered income. This was the situation in State of Iowa ex rel. Gibson v. American Bonding & Casualty Co., supra, [D. C. Iowa, in and for Woodward County, Sept. 15, 1936, opinion by A. O. Wakefield, Judge, not reported],-involving a bonding and casualty company, the funds of which the trustee reinvested-upon which the Government relies. But the lending of money or putting it out at interest was not the business of the bankrupt here, or incidental to it. Its business was the

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT