United States v. Archer

• Decision Date: 11 May 1949
• Docket Number: No. 4390.,4390.
• Parties: UNITED STATES et al. v. ARCHER.
• Court: U.S. Court of Appeals — First Circuit

174 F.2d 353 (1949)

UNITED STATES et al. v. ARCHER.

No. 4390.

United States Court of Appeals First Circuit.

May 11, 1949.

Sumner M. Redstone, Sp. Asst. to Atty. Gen. (Theron Lamar Caudle, Asst. Atty. Gen., Ellis N. Slack and Philip R. Miller, Sp. Assts. to Atty. Gen., and William T. McCarthy, U. S. Atty. and W. Arthur Garrity, Jr., Asst. U. S. Atty., both of Boston, Mass., on the brief), for appellants.

Albert L. Hyland, of Boston, Mass. (Stewart C. Woodworth and Lyne, Woodworth & Evarts, all of Boston, Mass., on the brief), for appellee.

Before MAGRUDER, Chief Judge, and MARIS (by special assignment) and WOODBURY, Circuit Judges.

MARIS, Circuit Judge.

These consolidated appeals present the question whether the district court was right in holding that the estate of Frank M. Archer, Sr., deceased, was not subject to income tax for the year 1938 on the sum of $50,000 received in that year in settlement of a claim of the decedent against one Francis E. Thompson.

Archer died on April 8, 1937. Prior to and at the time of his death he had been asserting a claim for $300,000 against Thompson on account of an oral agreement made many years before by which Thompson was alleged to have promised the decedent that if he remained in the employ of the Moxie Company Thompson would see to it that he would receive over the course of his service with that company as much as Thompson's brother actually received in salary and dividends plus an amount equal to the increase in the value of stock of the company held by Thompson's brother. The decedent had continued in the employ of the Moxie Company up to the time of his death, being at that time chairman of the board of directors and general manager.

Although Archer had been negotiating with Thompson with respect to his claim prior to his death nothing had come of the negotiations up to that time. After his death, however, the Moxie Company brought a suit against Thompson alleging mismanagement of its affairs and the present plaintiff, Archer's administrator, cooperated in that suit and in the course of it continued to assert the decedent's claim against Thompson. A settlement of both claims was reached in April, 1938. The Moxie Company received a substantial payment from Thompson and the plaintiff, as administrator of Archer's estate, received the sum of $50,000 the taxability of which is here in controversy, from Thompson on April 16, 1938 in settlement of the claim previously asserted by the decedent.

The plaintiff says that he was advised by counsel that the $50,000 thus received was not income of the estate but merely represented the collection of a debt due it. He did not include the $50,000 as an accrued item in the income tax return of the decedent for the period ending with his death and he filed no income tax return for the estate for the year 1938. He did file an estate tax return in July, 1938 which showed that the decedent did not have sufficient net assets to be subject to estate tax and in this return he reported the $50,000 claim against Thompson as an asset of the estate valuing it at $50,000 as of one year after the decedent's death in accordance with the option given by Section 302(j) of the Revenue Act of 1926, as amended, 26 U.S.C.A. § 811(j).

The Commissioner of Internal Revenue, being in doubt as to whether the item of $50,000 was subject to income tax in 1937 or in 1938, asserted deficiencies, based upon it, for both years. With respect to the deficiency asserted for 1937 he stated that the $50,000 represented compensation accrued to the decedent at the time of his death. The alternative deficiency proposed for 1938 was based upon the ground that the sum of $50,000 represented income which was actually received in that year For 1938 the Commissioner also determined under Section 291 of the Revenue Act of 1938, 26 U.S.C.A. § 291, an additional deficiency of 25% as a penalty for the failure to file an income tax return for the estate for that year. The plaintiff filed a petition for redetermination of the deficiency for the year 1937 with the Board of Tax Appeals but failed to file a timely petition with respect to the 1938 deficiency.

The basis for the Commissioner's contention that the $50,000 item here involved was taxable to the decedent's estate for 1937, the taxable period in which he died, was the provision of Section 42 of the Revenue Act of 1936, 26 U.S.C.A. § 42, that: "In the case of the death of a taxpayer there shall be included in computing net income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period."

Upon consideration of the decedent's 1937 tax liability the Board of Tax Appeals held that the $50,000 claim had not accrued in that or in any other actual amount at the date of the decedent's death within the meaning of Section 42 and was, therefore, not taxable for the year 1937. Estate of Frank M. Archer, 1942, 47 B.T.A. 228. In discussing the matter the Board said: "At the date of death, decedent had a stale claim for $300,000 upon which demand had been made and refused. Because it was based upon an oral promise which antedated the statutory period of limitations, counsel advised the administrator against suit. Whether, under these circumstances, the claim had any value can not as a matter of fact be determined upon the evidence in the present record, although superficially it would appear to have had none. Nevertheless, the claimee a year later so far acknowledged the validity of the claim as to pay $50,000 in discharge of it. This may be enough to justify the Commissioner in treating the claim as valid and as having had a value of $50,000 at the time of decedent's death; although we do not say it was. But at best, this validity and value at the date of death are constructive, being based upon nothing known at the time of death, but upon subsequent events. Such a rationalized validity and value do not support an accrual of the claim as income up to the time of death, especially of one on the cash basis. `Accruals here are to be construed in furtherance of the intent of Congress to cover into income the assets of decedents, earned during their life and unreported as income, which on a cash return would appear in the estate returns', Helvering v. Enright, supra 312 U.S. 636, 61 S.Ct. 777, 85 L.Ed. 1093. This $50,000 was not such as would appear on the estate's income tax return before its actual receipt in April 1938, nor if decedent had lived would it have been included in his income before he received it. He would not before its receipt have regarded it as accrued income, even if he had kept his accounts on an accrual method. Something more than a disputed assertion of a claim is needed to constitute accrued income; Jamaica Water Supply Co. v. Commissioner, 2 Cir., 125 F.2d 512; certiorari denied, 316 U.S. 698, 62...