United States v. White Dental Mfg Co of Pennsylvania

• Decision Date: 16 May 1927
• Docket Number: No. 291,291
• Parties: UNITED STATES v. S. S. WHITE DENTAL MFG. CO. OF PENNSYLVANIA
• Court: U.S. Supreme Court

274 U.S. 398

47 S.Ct. 598

71 L.Ed. 1120

UNITED STATES

v S. S. WHITE DENTAL MFG. CO. OF PENNSYLVANIA.

No. 291.

Argued April 22, 1927.

Decided May 16, 1927.

The Attorney General and Mr. Herman J. Galloway, Asst. Atty. Gen., for the United States.

Messrs. John Hampton Barnes, of Philadelphia, Pa., and John F. McCarron, of Washington, D. C., for respondent.

Mr. Justice STONE delivered the opinion of the Court.

This case comes here on writ of certiorari to the Court of Claims, Act Feb. 13, 1925, 43 Stat. 939, § 3(b), being Comp. St. § 1172a, amending Judicial Code, to review a judgment of that court allowing recovery by respondent of income taxes paid for the year 1918. The sole question presented is the right of the respondent, upheld below, to deduct from its gross income for 1918, the amount of its investment in a subsidiary German corporation whose entire property was seized in that year by the German government as enemy property.

Respondent is a Pennsylvania corporation, engaged in the manufacture and sale of dental supplies. Before 1918 it had organized controlled, by ownership of all the capital stock, the S. S. White Dental Manufacturing Company, m. b. h. of Berlin, Germany, a German corporation. Its investment in the German corporation in 1918, as carried on its books, aggregated more than $130,000.

The agreed statement of facts adopted as findings by the court below are so vague as to leave it uncertain whether this investment was represented on the books of respondent by the capital stock alone, or in part by the capital stock and in part by an open account between it and the German corporation. The case was argued on the assumption, which we make, that the investment was represented by both the capital stock and an open account, due to respondent from the German company. The total is conceded to be no more than the fair value of the net assets of the German corporation.

In March, 1918, the sequestrator appointed by the German government took over the property of the German corporation and the management of its business. It is inferable from the findings, as the government concedes, that the sequestration was similar in purpose and legal effect to that authorized under the Trading with the Enemy Act of the United States Oct. 6, 1917, c. 106, 40 Stat. 411, Act March 28, 1918, c. 28, 40 Stat. 459, Act July 11, 1919, c. 6, 41 Stat. 35, Act June 5, 1920, c. 241, 41 Stat. 977, Act March 4, 1923, c. 285, 42 Stat. 1511, Act May 7, 1926, c. 252, 44 Stat. 406, and we shall deal with the case on that basis.

In March, 1920, the possession of the seized assets and business was relinquished to the German corporation by the sequestrator. As a result of the mismanagement of its affairs while in his custody, and investments of its funds by him in German war loans, the value of its assets was seriously impaired. In 1922 its tangible assets and its lease were sold for $6,000. This sum was included in respondent's income tax return for that year. Later respondent filed a claim with the Mixed Claims Commission which was allowed in 1924 to the extent of $70,000. What if anything may ultimately be realized from this award remains uncertain.

In 1918 the respondent charged off as a loss the entire amount of its investment in the German corporation as shown by its books, and in July of that year passed a resolution authorizing the establishment of a reserve against this loss at the rate of $15,000 quarterly, beginning March, 1918. In making its income tax return for 1918 respondent deducted from gross income the amount of its investment in the German corporation. The deduction was disallowed by the Commissioner of Internal Revenue, on the sole ground that the loss was not evidenced by a closed and completed transaction in the year for which it was deducted. The tax so assessed, was paid under protest and this suit followed.

Section 234 of the Revenue Act of 1918, c. 18, 40 Stat. 1057, 1077, 1078 (Comp. St. § 6336 1/8 pp), authorizes the deduction in the computation of income taxes of 'losses sustained during the taxable year and not compensated for by insurance or otherwise.' In explaining this section, article 141 of Treasury Regulations 45, provides that losses incurred in the taxpayer's trade or business or in any transaction entered into for profit may be deducted but such losses 'must usually be evidenced by closed and completed transactions.' Article 151 provides in part:

'Where all the surrounding and attendant circumstances indicate that a debt is worthless and uncollectible and that legal action to enforce payment would in all probability not result in the satisfaction of execution on a judgment, a showing of these facts will be sufficient evidence of the worthlessness of the debt for the purpose of deduction.'

And article 144 reads in part:

'If the stock of a corporation becomes worthless, its cost or its fair market value as of March 1, 1913, if acquired prior thereto, may be deducted by the owner in the taxable year in which the stock became worthless, provided a satisfactory showing of its worthlessness be made as in the case of bad...