United States v. Rushlight

• Decision Date: 17 June 1961
• Docket Number: No. 17076.,17076.
• Citation: 291 F.2d 508
• Parties: UNITED STATES of America, Appellant, v. W. A. RUSHLIGHT, Raymond G. Rushlight, and W. A. Rushlight, Executor of the Estate of Betty Rushlight, Deceased, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

291 F.2d 508 (1961)

UNITED STATES of America, Appellant, v.W. A. RUSHLIGHT, Raymond G. Rushlight, and W. A. Rushlight, Executor of the Estate of Betty Rushlight, Deceased, Appellees.

No. 17076.

United States Court of Appeals Ninth Circuit.

June 17, 1961.

Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, I. Henry Kutz, and Richard J. Medalie, Attys., Dept. of Justice, Washington, D. C., C. E. Luckey, U. S. Atty., and Edward J. Georgeff, Asst. U. S. Atty., Portland, Or., for appellant.

Denton G. Burdick, Jr., and Hutchinson, Schwab & Burdick, Portland, Or., for appellees.

Before HAMLIN, JERTBERG and KOELSCH, Circuit Judges.

JERTBERG, Circuit Judge.

This appeal involves refunds of federal income taxes for the taxable years 1946 through 1950.Jurisdiction was conferred on the district court by Title 28 U.S.C.A. § 1346(a).This Court has jurisdiction under Title 28 U.S.C.A. §§ 1291and1294.

In this opinion we will refer to the appellant as the "government" and to the appellees as the "taxpayers".

The taxpayers filed refund claims for the years 1946 through 1950, based on adjustments for (1) depreciation on certain farm assets, and (2) the elimination of gain on the sale of equipment, depreciation on the buildings, furniture, and fixtures, and the loss on salvaged equipment of a partnership steel works.The claims originated in certain tax adjustments made by the Tax Court and the Commissioner of Internal Revenue with respect to taxpayers for the years 1942 through 1945.

The refund claims were disallowed by the Commissioner.Following trial in the district court, judgment was entered for taxpayers, awarding all of the refunds claimed, in an aggregate sum of $5,845.00, together with interest at the rate of six per cent per annum from the appropriate dates.

The facts are not in dispute.The only question presented on this appeal is whether Section 3801 of the Internal Revenue Code of 1939,26 U.S.C.A. § 3801, mitigates the effect of the expiration of the applicable statute of limitations so that taxpayers may make certain adjustments for depreciation on certain farm assets and steel mill property, for the elimination of capital gain on the sale of steel mill equipment, and for the loss on salvaged equipment with respect to the steel mill, in order to receive refunds of income taxes for the taxable years 1946 through 1950.

The portions of Section 3801 of the Internal Revenue Code of 1939 relevant to this appeal are:

"§ 3801.Mitigation of effect of limitation and other provisions in income tax cases.

"(a)Definitions.— For the purpose of this section —

"(1) Determination.— The term `determination under the income tax laws\' means — * * *

"(B) A decision by the Tax Court of the United States or a judgment, decree, or other order by any court of competent jurisdiction, which has become final; or

"(C) A final disposition by the Commissioner of a claim for refund.* * *

* * * * * *

"(b) Circumstances of adjustment.— When a determination under the income tax laws —

"(1) Requires the inclusion in gross income of an item which was erroneously included in the gross income of the taxpayer for another taxable year or in the gross income of a related taxpayer; or

* * * * * *

"(5) Determines the basis of property for depletion, exhaustion, wear and tear, or obsolescence, or for gain or loss on a sale or exchange, and in respect of any transaction upon which such basis depends there was an erroneous inclusion in or omission from the gross income of, or an erroneous recognition or nonrecognition or gain or loss to, the taxpayer or any person who acquired title to such property in such transaction and from whom mediately or immediately the taxpayer derived title subsequent to such transaction; or

and, on the date the determination becomes final, correction of the effect of the error is prevented by the operation (whether before, on or after May 28, 1938) of any provision of the internal-revenue laws other than this section and other than section 3761(relating to compromises), then the effect of the error shall be corrected by an adjustment made under this section.Except in cases described in paragraphs (6) and (7), such adjustment shall be made only if there is adopted in the determination a position maintained by the Commissioner (in case the amount of the adjustment would be refunded or credited in the same manner as an overpayment under subsection (c)) or by the taxpayer with respect to whom the determination is made (in case the amount of the adjustment would be assessed and collected in the same manner as a deficiency under subsection (c)), which position is inconsistent with the erroneous inclusion, exclusion, omission, allowance, disallowance, recognition, or non-recognition, as the case may be.* * *."

The refund claims are best explained by reference to three unreported determinations by the Tax Court in 1953.

Adjustments for 1942 through 1945

A.The Farm Assets

During the years involved in this action, taxpayer W. A. Rushlight was a stockholder in A. G. Rushlight & Company, a corporation.On August 6, 1953 the corporation was required to pay additional taxes for the years 1943 and 1944 by order of the Tax Court A. G. Rushlight & Company, Docket No. 20053.In the proceedings before the Tax Court, the Commissioner had taken the position that certain amounts, equal to the sum of $26,135.32, which had been paid by the corporation for certain farm assets for the benefit of W. A. Rushlight, were not deductible as ordinary and necessary business expenses by the corporation, and were in fact dividends paid to the taxpayer, W. A. Rushlight.The corporation was ordered to pay additional taxes for the years 1943 and 1944.¹

The tax returns of W. A. Rushlight for the taxable years 1942, 1943 and 1945 W. A. Rushlight, Docket No. 20023, and1944 W. A. Rushlight and Betty Rushlight,²Docket No. 20022, were also the subject of proceedings before the Tax Court, in which the Commissioner took the same position with respect to the expenditures and farm assets that he had taken in the case of the corporation.

On August 6, 1953, the Tax Court decided that there had been no deficiency in income tax for 1942; that there had been a deficiency of $68,741.76 in income tax and a penalty of $3,941.71 for 1943; and that there had been an overpayment of income tax of $5,299.54 for 1944.

The district court found that: "In connection with the income tax liability of the plaintiffW. A. Rushlight for the years 1942, 1943, 1944 and 1945, as determined in the decisions of the Tax Court of the United States, as aforesaid, there was added to the income of W. A. Rushlight, as reported on his tax returns for said years, the sum of $26,135.32.Said sum was equal to the total cost of certain depreciable farm assets which had either been purchased for W. A. Rushlight by A. G. Rushlight & Co., an Oregon corporation in which W. A. Rushlight was a stockholder, or had been purchased by W. A. Rushlight and charged to expense.In said Tax Court proceedings the Commissioner took the position that such amounts paid for such farm assets were not deductible as ordinary and necessary business expense, and that the income of the said W. A. Rushlight for said years, as reported, should be increased by such amount.Such position was adopted by the said Tax Court in its decision as aforesaid."

This statement is substantially equivalent to the agreed statement of the parties in the pre-trial order as to the original tax treatment of the farm assets in the hands of W. A. Rushlight.From our examination of the record as a whole, we conclude that insofar as the tax treatment of the farm assets is concerned, the Tax Court in its determination adopted the position of the Commissioner that the farm assets should be treated as a capital asset with a cost basis of $26,135.32 in the hands of W. A. Rushlight.

Taking the $26,135.32 as the cost basis for the farm assets the district court set down a schedule which reflected the amount of depreciation which would have been allowable to taxpayer if timely claimed, 1946 through 1950.

B.The Partnership Steel Works

From 1942 through 1950, the W. A. Rushlight Company was a partnership, in which W. A. Rushlight was a 50 per cent partner and Raymond G. Rushlight was a 40 per cent partner.On its federal partnership tax return for the calendar year 1945, the W. A. Rushlight Company had deducted the sum of $105,305.51 as a claimed abandonment loss of a steel works, and further took the position that the equipment, buildings, furniture and fixtures of the steel works were worthless.

On the basis of his distributive partnership share of W. A. Rushlight Company's claimed loss for 1945, Raymond G. Rushlight claimed a net operating loss for 1945, and, by virtue of the loss carryback provisions of Section 122(b) of the Internal Revenue Code of 1939,26 U.S.C.A., § 122(b), filed a timely claim for refund for 1943.On November 18, 1953, the Commissioner disposed of the refund claim, and, with respect to this disposition, redetermined Raymond G. Rushlight's income tax liability for the years 1942 through 1945.

In the disposition of Raymond G. Rushlight's refund claim for 1943, as in the Tax Court determination with respect to W. A. Rushlight on August 6, 1953 W. A. Rushlight, Docket No. 20023, supra, the Commissioner took the position that the claimed abandonment loss should be substantially disallowed, and that the partnership had an income tax basis in the steel works as of December 31, 1945, of $61,875.60 for machinery and equipment and $30,596.80 for buildings, furniture, and fixtures, or a total basis of $92,472.40.This position with respect to W. A. Rushlight was adopted by the Tax Court.

Taking the $92,472.40 as the cost basis for the steel works, the district court in the present case set down a schedule which reflected the reductions in the income of the partnership, as originally reported, and in the...