Wiggin Terminals, Inc. v. United States

• Decision Date: 23 December 1929
• Docket Number: No. 2363.,2363.
• Parties: WIGGIN TERMINALS, Inc., v. UNITED STATES.
• Court: U.S. Court of Appeals — First Circuit

36 F.2d 893 (1929)

WIGGIN TERMINALS, Inc., v. UNITED STATES.

No. 2363.

Circuit Court of Appeals, First Circuit.

December 23, 1929.

Melville Fuller Weston (of Powers & Hall), of Boston, Mass., for appellant.

J. Duke Smith, Sp. Asst. U. S. Atty., of Boston, Mass. (Frederick H. Tarr, U. S. Atty., of Boston, Mass., on the brief; C. M. Charest, Gen. Counsel, and Ottamar Hamele, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for appellee.

Before BINGHAM, ANDERSON, and WILSON, Circuit Judges.

WILSON, Circuit Judge.

A petition by the Wiggin Terminal Company to recover taxes paid under protest on the ground of an overassessment. It involves the payment in 1918 by the petitioner, out of certain designated receipts, of the sum of $25,000, which it claims should be deducted as an interest charge, but which the government contends was a capital expense.

The government demurred to the appellant's petition as amended. Its demurrer was sustained, and judgment ordered for the government. Since the issues are raised by a demurrer, the facts as stated in the petition must be taken as true.

The following facts are set forth in the petition as modified by the amendments: Late in 1915, the petitioner, which was conducting a warehouse business in Charlestown in the commonwealth of Massachusetts, desiring to install a fumigating plant in its warehouse for the fumigation of imported cotton, applied to the banking houses of Estabrook & Co. and Parkinson & Burr, both located in Boston, and hereinafter referred to as bankers, for a loan of $50,000, which was the estimated cost of the fumigating plant.

The first proposition made by the bankers was that they would finance the proposition if the fumigating business were put into a separate corporation, and the bankers were given two-thirds of its capital stock and the petitioner one-third.

To this the petitioner replied that "it was not willing to have any outside ownership, and that it was interested only in securing a loan. The bankers replied that if that was so, their terms for a loan would be * * * six percent interest and $50,000 bonus."

Upon this oral agreement, which was accepted by the petitioner, and the further understanding that the formal details of the transaction whereby this result would be accomplished were to be formulated later, Estabrook & Co., acting for themselves and Parkinson & Burr, in December, 1915, entered into contracts for the construction of a fumigating plant in the warehouse of the petitioner according to plans and specifications already prepared by the petitioner's engineers.

The petition also sets forth that the installing of such a plant required extensive structural changes in the warehouse of the petitioner, including heavy reinforcing of flooring, a superstructure of steel 90 feet long, 30 feet wide, and 20 feet high, specially designed to carry a massive and intricate system of piping and machinery. All the machinery and equipment was secured to foundations built into a heavy enforced concrete floor, which floor and superstructure was supported by a series of beams and columns transmitting the weight to pile bents under the pier shed. It also included the installing of a sprinkler system for fire protection throughout the warehouse, and the construction of a driveway ramp to enable trucks and teams to drive into the fumigating plant and other units of the warehouse for loading and unloading merchandise.

The plant and structural changes to support it so became a part of the warehouse building that it could not be removed without great injury to the building, and such of the equipment as could be removed, when removed, would have little value.

The plans and specifications for the construction of the plant and the structural changes in the warehouse had already been prepared by the petitioner's engineers, and the contracts for construction were all executed and the work of construction done under their supervision. The bankers took no active part in supervising the work, and never inspected it while in progress.

The total cost of the plant, including the expense of restoring one unit which collapsed after completion, was approximately $78,000, instead of $50,000. The additional cost was paid by the petitioner in the first instance, though it was eventually paid out of the earnings of the plant, the same as the advances made by the bankers. The increased expense outside of restoring the unit which failed was not for independent and separate additions thereto, but for construction work and equipment that entered into the fumigating plant as a unified whole.

The petition also alleges that, in pursuance of a plan duly formulated for carrying out the informal understanding between the parties and for assuring to the bankers the repayment of the sum advanced with interest at 6 per cent., and the additional bonus of $50,000, a Massachusetts corporation was organized, which received its charter in February, 1916, with an authorized capital stock of $50,000, divided into 500 shares of the par value of $100 each.

In further pursuance of the plan already formulated, the bankers entered into a written agreement with the new corporation on February 15, 1916, which was known as the Terminal Fumigating Company, and which will hereinafter be referred to as the fumigating company, whereby the bankers agreed to complete the plant to the extent called for by the existing contracts already entered into by them in pursuance of their oral understanding, and as the contract stipulated, "(You to pay us the cost thereof as hereinafter set forth) or advance you the funds for that purpose upon your three months notes," with the further stipulation that the obligations of the bankers were to end when the total sums spent or advanced by them totaled $50,000. It was also further stipulated that the fumigating company was to reimburse the bankers for all expenses incurred in connection with the construction of the fumigating plant, including any sums spent on other parts of the warehouse not connected with the fumigating plant, such as installing a sprinkler system, made necessary by the increased fire hazard due to the installing of the fumigating plant. The bankers also agreed to convey the plant when completed to the fumigating company at cost, and obtain a lease from the petitioner, running to the fumigating company, of so much of the warehouse as was necessary for the construction and operation of the new plant.

On its part, the fumigating company agreed to reimburse the bankers for the cost of the plant to the extent of $50,000, pay it $300 for obtaining the lease, and issue to it 497 shares of its capital stock.

On the same day the fumigating company, as appears by the certificate required to be filed with the secretary of state when stock is issued after organization of a corporation (sections 11, 14, c. 437, St. Mass. 1903), issued to the bankers 497 shares of its capital stock, the consideration for which the certificate states cannot be itemized, but vaguely speaks of liabilities assumed, the payment of $300 to the bankers by the corporation for a lease, and the transfer of a fumigating plant at cost. Attached to the certificate was the contract above described between the fumigating company and the bankers, evidently in explanation of the consideration for the issuing of the stock.

The bankers then having at least all the capital stock of the fumigating company but 3 shares, and having agreed to obtain a lease from the petitioner of the necessary space in its warehouse, transferred, as the amended petition shows, not a completed plant, but such interest as it might then have in the incompleted plant on February 15, 1916, which was represented by an expenditure to that date of approximately $17,000.

In furtherance also of the plan formed by them and the petitioner, the bankers, on February 16, 1916, each entered into separate contracts with the petitioner, in which the petitioner agreed to give a lease to the fumigating company in the form already prepared, and the bankers each agreed to acquire 250 shares of the par value of $25,000 of the capital stock of the fumigating company, and further agreed to transfer this stock, "free of charge," to the petitioner, whenever the fumigating company had paid all advances made by the bankers to it, and the bankers shall each have received as dividends upon the said stock sums aggregating $25,000 or the total amount of the advances by the bankers to the fumigating company.

The fumigating company paid out of its earnings in 1916 the total of the advances of $50,000 and interest, and $10,000 in dividends to Estabrook & Co., and in 1917 $15,000 or the remainder of the amount to be received by them under the oral agreement, whereupon they transferred to the petitioner the 250 shares of the capital stock of the fumigating company held by it in accordance with their agreement dated February 16, 1916.

Parkinson & Burr, however, waived their dividends on the stock held by them in 1916 and 1917, as it was expressly provided in their contract with the petitioner they might do, and directed that they be paid to the petitioner, as they were interested in the financial condition of the petitioner, having sold its preferred stock to their customers and the public.

In April, 1918, however, Parkinson & Burr entered into a new agreement with the petitioner, canceling the agreement of February 16, 1916, and transferred the 250 shares of stock held by them to the petitioner, and accepted the petitioner's unsecured agreement to pay them out of dividends received on the 250 shares of stock, the $25,000 to which they were entitled, and which was paid in December of that year.

In making up its consolidated tax return for 1918, which included the operations of the fumigating company as one of its subsidiaries, the petitioner deducted the amount so paid as interest paid on the loan under the...