Opinion
No. 42899.
March 7, 1938.
George H. Craven, of New York City (Charles Angulo, Russell L. Bradford, and Taylor, Blanc, Capron Marsh, all of New York City, on the brief), for plaintiffs.
Guy Patten, of Washington, D.C., and James W. Morris, Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Proceeding by the City Bank Farmers Trust Company and others as surviving executors of the last will and testament of William T. Carrington, deceased, against the United States to recover taxes paid.
Judgment for plaintiffs.
This case having been heard by the Court of Claims, the court, upon the evidence adduced, makes the following special findings of fact:
1. The plaintiffs, City Bank Farmers Trust Company, a corporation, Margaret H. Carrington, and Edwin A. Fish, are citizens of the United States and are the duly appointed, qualified, and acting surviving executors of the last will and testament of William T. Carrington, deceased, who died on May 4, 1931, a resident of Greenwich, Conn. William J. Woods, who was one of such executors and one of the plaintiffs, was a citizen of the United States and died on December 26, 1936.
2. The decedent, William T. Carrington, duly filed his federal income tax return for the calendar year 1929 on March 15, 1930, showing net taxable income of $110,281.26 and a tax due thereon of $16,304.36, which was duly paid in four installments of $4,076.09 each on March 15, June 16, September 13, and December 15, 1930. The return was filed with and the tax paid to the United States Collector of Internal Revenue for the Second District of New York. The return was executed by one William J. Woods, an agent for the decedent, and did not include as a deduction the sum of $89,000 claimed by the plaintiffs as a bad debt deduction for that year, as referred to below, nor the sum of $2,860.70 which subsequently was allowed as a deduction from dividends received because it was distributed from the depletion reserves of the corporation from which received.
3. On March 11, 1932, the plaintiffs duly filed their claim for refund of taxes paid by the decedent for the year 1929, in which they demanded a refund of $14,525.58 on the ground that a bad debt deduction of $89,000 was allowable on the decedent's return for loans made by him to the American Society for Opera in English, Inc., which loans were ascertained by the decedent to be worthless and were charged off by him in the year 1929, and on the further ground that a deduction of $2,860.70 should be allowed on the return because of nontaxable distributions made by Cerro de Pasco Copper Corporation from its depletion reserves which had been included in the taxable income shown on the return. The refund claimed by reason of the bad debt deduction was $13,953.14, for the recovery of which this suit is brought, and the amount claimed by reason of the nontaxable corporate distribution was $572.44, which has been refunded and which is not involved in this case.
4. Thereafter, the Commissioner of Internal Revenue considered the claim for refund, allowed it in the sum of $572.44, and refunded that sum to the plaintiffs, and on January 23, 1933, disallowed it to the extent of the balance of $13,953.14, the amount involved herein.
5. The decedent, William T. Carrington, advanced sums of money amounting to $89,000 to a corporation known as the American Society for Opera in English, Inc., by his personal checks and by checks of the brokerage firm of Charles D. Barney Co. which were charged against and paid by the decedent, which advances were made on the dates and in the amounts following:
September 6, 1927 .................. $ 4,000.00 October 7, 1927 .................... 3,000.00 December 7, 1927 ................... 5,000.00 December 10, 1927 .................. 10,000.00 December 14, 1927 .................. 6,000.00 December 20, 1927 .................. 15,000.00 January 4, 1928 .................... 10,000.00 January 12, 1928 ................... 15,000.00 January 27, 1928 ................... 10,000.00 February 17, 1928 .................. 5,000.00 September 7, 1928 .................. 1,000.00 November 23, 1928 .................. 5,000.00 __________ Total ....................... $89,000.00
No notes or other evidences of indebtedness were given by the corporation to the decedent for the above amounts, but these amounts were designated on the books of the corporation as loans from the decedent to it.
6. The American Society for Opera in English, Inc., was a business corporation incorporated under the laws of the state of New York on July 15, 1927, for the purpose of producing operas in the English language, and to sustain, encourage, and cultivate a taste for music, literature, and the arts. Its authorized capital stock was 7,500 shares, of which 6,000 shares of the par value of $25 each were preferred stock and 1,500 were common stock. No common stock was issued. The decedent, William T. Carrington, was president of the corporation.
7. The performances of operas in the English language which were produced by the American Society for Opera in English, Inc., were successful from a financial and artistic standpoint in many of the cities in the United States where performances were given. Those who were interested in the corporation, and particularly the decedent, were anxious that its operations be made successful financially, and with that end in view experienced musical managers were employed to take charge of its management in order to put it on a sound financial basis. Miss Harriet Steele Pickernell, who had been in the business of managing concerts and musical productions for a long period of years, was engaged as business manager of the corporation in 1928. Miss Pickernell considered the operations of the corporation as business undertakings; to her its operations of producing operas in English gave promise of success, and that is what induced her to undertake its management. Some of the engagements which were filled by the opera company under Miss Pickernell's management, in cities outside of New York, resulted in a profit. However, on the whole, this corporation never was sustained by its own income.
8. The American Society for Opera in English, Inc., ceased to operate in the summer of 1929, at which time it was insolvent and without assets of any value.
9. The advances made by the decedent, as set out in finding 5 herein, were treated as loans by both him and the American Society for Opera in English, Inc., and were in fact loans. These loans were in 1929 ascertained by the decedent to be worthless.
10. The decedent, William T. Carrington, kept no personal books of account. The preparation of the 1929 federal income tax return of the decedent was supervised by William J. Woods, who was connected with the firm of Charles D. Barney Co., through which the decedent transacted much of his business. In the latter part of November or the early part of December, 1929, when Mr. Carrington was going over his federal income tax matters for 1929 with Mr. Woods, he told Mr. Woods that the loans which he had made to the American Society for Opera in English, Inc., were a total loss to him, and that he wanted them charged off on his 1929 income tax return. Mr. Woods replied that it might be difficult to establish the loss because Mr. Carrington had not procured the notes which Mr. Woods had requested him to procure from the corporation. Mr. Carrington replied that he would get the notes for Mr. Woods. No notes were ever gotten by Mr. Carrington, and there is no evidence in the record of any attempt made by him to secure such notes.
11. Mr. Woods failed to claim the amount of the advances, $89,000, on the decedent's federal income tax return for the year 1929, contrary to the decedent's instructions, because Mr. Woods was of the opinion that they could not be claimed as a deduction in the absence of notes. Mr. Woods, however, made a memorandum of the matter and put it in the working envelope in which the papers pertaining to the 1929 return were kept so that the deduction would be called to the attention of the revenue agent who should audit the return. After the filing of the 1929 return, Mr. Woods spoke to a revenue agent who was auditing Mr. Carrington's 1927 and 1928 returns about the deduction which Mr. Carrington had claimed for 1929, and the agent told Mr. Woods that if he, the agent, was assigned to examine the 1929 return he would be glad to take that matter up with Mr. Woods at that time. Within a week or two after Mr. Carrington's death, Mr. Woods, who was also one of the executors, took up with the attorneys for the estate the matter of the deduction to which Mr. Carrington claimed that he was entitled.
The plaintiffs, as executors of the estate of William T. Carrington, deceased, have duly filed a claim for refund of taxes paid by the decedent for the year 1929 on the ground that in computing the taxes of the decedent for that year the Commissioner failed to allow $89,000 as a bad debt deduction by reason of which the decedent's taxes were overpaid in the sum of $13,953.14, for which sum judgment is asked.
The commissioner of this court found that in the years 1927 and 1928 the decedent made loans aggregating $89,000 to a corporation known as the American Society for Opera in English, Inc., and that in 1929 he ascertained the debts created thereby to be worthless. Counsel for defendant argue that the evidence does not sustain the commissioner's findings. It would serve no useful purpose to discuss the evidence as we agree with our commissioner and have affirmed his conclusions.
The defendant also contends that there is no evidence that the decedent charged off the loans on any books, and argues that as the decedent did not claim the deduction in his return it cannot be allowed. The decedent kept no books of account, and when his 1929 tax return was being made up he stated to his agent who was preparing the return that the loans were a total loss and that he wanted them charged off on the return. The failure to include the deduction in the return is thus fully explained. Under the circumstances, we think the plaintiffs were entitled to make a claim for refund. See Peters v. United States, 10 F. Supp. 145, 80 Ct.Cl. 830.
The plaintiffs are entitled to recover $13,953.14, together with interest thereon, as provided by law. Judgment will be rendered accordingly.