Opinion
No. 43543.
May 5, 1941.
William Flannery, of Elmira, N.Y. (Charles L. Brayton, of Elmira, N.Y., on the briefs; William H. Hayes and Roger S. Brassel, both of New York City, and William Flannery, of Elmira, N Y, of counsel), for plaintiff.
Francis T. Donahoe and J.A. Rees, both of Washington, D.C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for defendant.
Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES, and MADDEN, Judges.
Action by the Insuranshares General Management Company against the United States of America to recover alleged overpayment of income taxes.
Petition dismissed.
This case having been heard by the Court of Claims, the court, upon the evidence and the report of a commissioner, makes the following special findings of fact:
1. Insuranshares and General Management Company, plaintiff, is, and at all the times mentioned herein was, a corporation duly organized and existing under the laws of the State of Delaware. Its proper corporate name until May 8, 1930, was "Insuranshares Management Company"; and since May 8, 1930, it has been "Insuranshares and General Management Company." The chief office of plaintiff until January 1, 1928, was at 49 Wall Street, New York, New York, and since January 1, 1928, it has been at 1 Exchange Place, Jersey City, New Jersey. It is no longer engaged in active business, and is now in process of dissolution.
Insuranshares Corporation is, and at all times mentioned herein was, a corporation, duly organized and existing under the laws of the State of New York. The date of its incorporation was March 21, 1927. It is referred to herein as the "Distributor."
Farmers Loan and Trust Company is, and at all times mentioned herein was, a trust company, duly organized and existing under the laws of the State of New York. Its present corporate name is "City Bank-Farmers Trust Company." It is referred to herein as the "Trustee."
2. During the years 1927 and 1928, plaintiff, the distributor, and the trustee entered into certain agreements, whereby there were created and established five separate investment funds designated A-27, C-27, F-27, H-27, and B-28. Funds H-27 and B-28 only are involved herein.
The several agreements were similar in that each provided for an arrangement whereby plaintiff would furnish investment advice and act as the designated "Manager"; the distributor would furnish funds to acquire by purchase, on the open market, selected common stocks of banks, trust and insurance companies, designated by plaintiff from a list specified in the agreements, for delivery to the trustee, and receive from said trustee, in return, certain participating shares designated "Insuranshares Trust Certificates," which it might retain or sell to others, including the general public; and the trustee was the custodian of the common stocks acquired and deposited by the distributor as above stated to constitute the underlying securities behind the participating certificates.
Agreement H-27 specifically provided that the distributor, upon recommendation of plaintiff, had purchased out of its own funds listed common stocks of at least 20 of 37 named banks, trust and insurance companies, and had transferred and delivered the same to the trustee at a total cost (including carrying charges to date and cash to adjust any difference) of $400,000. Agreement B-28 also provided that, upon recommendation of plaintiff, the distributor had purchased out of its own funds and transferred and delivered to the trustee common stocks of at least 25 of 41 named banks, trust and insurance companies, at a total cost (including carrying charges to date and cash to adjust any difference) of $1,000,000. Both agreements further provided that the distributor would transfer and deliver to the trustee all subscription rights or warrants upon stocks already deposited, all stock dividends accrued or received, and all cash dividends received between the date of purchase and the date of delivery of the original securities to the trustee.
3. Each of the agreements relating to Funds H-27 and B-28 provided, among other things, for the issuance by the trustee of two separate kinds of participating shares. One of these, designated "Insuranshares Trust Certificates," was an inseparable combination, consisting of one or more shares known as "Class A" and the same number of shares known as "Class B." Each A share had a designated par value of $20, and each B share had no par value. Such a combination certificate entitled the owner thereof to an undivided distributive share and pro rata interest in and to the stocks and funds constituting the underlying trust fund on deposit with the trustee, as set out above. Each A share was entitled to a noncumulative semiannual distribution, out of the net income of the trust fund, at the rate of three percent per annum. Each B share, after distribution had been made on the A shares, was entitled to a pro rata distribution of at least 20 percent of the balance of the net income of the trust fund plus such further distributions therefrom as might be determined by plaintiff and approved by the distributor.
The owner of any inseparable combination A and B share had the power on two specified dates each year upon serving written demand on seventy days' notice in accordance with the agreements to cause such share to be redeemed at $20.00 and accrued dividend for the A part plus the pro rata value of the B part in the overplus of the fair market values of the cash and securities in the Fund after the allowance for the A part and subject to the payment of a redemption fee of $2 and one-third of one percent of his distributive share. Upon liquidation of each Fund each A share was entitled to $20 plus accrued income and each B share both separate and inseparable to its pro rata interest in the fair market values of the assets in the Fund after deductnig said $20 for each A share less certain fees.
Each agreement contained provisions for adjusting the price of shares to be sold when additional securities would be placed in the fund and additional certificates issued, so as to prevent dilution of the investments of earlier investors and to avoid giving to later investors a share in any increment already accrued to the fund.
Each of the agreements relating to Funds H-27 and B-28 also provided for the issuance of 18 separate B shares for each 100 of the combination A and B shares known as Insuranshares Trust Certificates. In Fund H-27, 20,000 combination A and B shares were originally authorized for issuance by the trustee to the distributor, and 3,600 separate B shares were similarly authorized for issuance by the trustee to plaintiff. In Fund B-28 the trustee was similarly authorized to issue 50,000 combination A and B shares to the distributor, and 9,000 separate B shares to plaintiff.
4. Plaintiff acted as the manager of the several funds during the years 1927 and 1928, and received as its compensation for such management, certificates for shares of separate B stock in amounts and on dates hereinafter set forth. Plaintiff's duties in managing Funds H-27 and B-28 were in particular, to recommend to the distributor what selected stocks should be purchased for delivery to the trustee in the first instance, and what additional block of securities should be added to the original deposit; to determine and direct the trustee, in its absolute discretion, without limit or liability on its own part, to sell and deliver specific stocks or securities on deposit in the funds in exchange for cash or other specified securities; to manage the trust funds in accordance with the terms of the written agreements, and to direct the investment and reinvestment of the funds in accordance with its best judgment; to exercise, directly or indirectly, any rights incident to ownership of the securities on deposit in the funds including the right (1) to waive any right or release any property held as collateral thereto, (2) to vote upon any deposited stocks without restriction, (3) to direct the sale or disposition of any rights or warrants of purchase that accrued or issued from time to time with respect to any securities in the funds, (4) to cause any securities in the funds to be withdrawn and deposited under any agreement, whether or not accompanied by a plan of reorganization or other plan, and (5), in general, to take any action which, in its discretion, it deemed necessary or advisable to maintain or preserve the value of any security on deposit in such funds; to borrow money for the sole purpose of exercising subscription rights or warrants on stocks already held in the funds, and to mortgage or pledge, as security therefor, stocks and securities already on deposit in the funds, and to execute such notes, assignments, and other instruments necessary or proper to effect any such loan, mortgage, or pledge; to cause the books of account for the funds to be audited periodically, at such time as it might in its discretion determine, but at least once in each calendar year; to prepare and mail, on or before March 1st in each year, to registered holders of participating certificates a statement and annual report showing securities on deposit in the funds and the amounts thereof, the actual value of A and B shares, gross and net income (or loss) during the preceding calendar year, gross expenses, amounts charged to reserves against contingent liabilities, and amounts actually distributed on A and B shares; to determine the actual value of each A and B share outstanding, and of each security on deposit in the funds, and to direct the trustee, in specific written instructions, to redeem any or all outstanding certificates of combination A and B shares. Plaintiff's sole compensation for these managerial services, and others not herein enumerated, consisted of separate B shares, delivered to it by the trustee at the same time the inseparable combination A and B shares were delivered by the trustee to the distributor. Plaintiff was entitled to receive 18 B shares for each 100 B shares that were delivered to the distributor. These separate B shares were issued only to plaintiff and none of them were ever sold.
5. Plaintiff was entitled to receive from the trustee, as payment for its services performed as manager of Funds H-27 and B-28, separate B shares in amounts and on dates as follows:
Separate B Shares Receivable Date Receivable
Fund H-27 ........ 3,600 September 3, 1927 2,700 " 19, " 3,600 " 23, " 3,600 October 10, " 3,600 " 28, " 5,400 November 17, " 3,600 December 5, " 6,300 " 19, " 3,600 " 29, " _____ 36,000 3,600 January 6, 1928 3,600 " 10, " 3,600 " 19, " _____ 10,800 ______ 46,800
Fund B-28 ........ 9,000 February 1, 1928 9,000 " 9, " 9,000 March 9, " 4,500 April 25, " 4,500 May 15, " 1,800 July 8, " _____ 37,800
The opening bid on the combination A and B share on September 3, 1927, when plaintiff became entitled to its first B shares, was 23¼. The price asked was 23¾.
The prices bid and asked on the dates in 1928 when plaintiff became entitled to its B shares are as follows:
Date Bid Asked
Fund H-27 .................... 1/6 26 1/8 26 3/8 1/10 26¼ 26¾ 1/19 26½ 27 Fund B-28 .................... 2/1 21 5/8 22½ 2/9 21 5/8 22 1/8 3/9 21 5/8 22 1/8 4/25 23 23½ 5/15 23 23½ 7/8 21 3/8 22 3/8
Each separate B share in Fund H-27 was worth at least the following amount in dollars on the date it was receivable:
1928 1/6 8 1/8 1/10 8¼ 1/19 8½
Each separate B share in Fund B-28 was worth at least the following amount in dollars on the date it was receivable:
1928 2/1 3 5/8 2/9 3 5/8 3/9 3 5/8 4/25 5 5/15 5 7/8 3 3/8
On February 14, 1928, permanent certificates for 46,800 B shares in Fund H-27 were issued and delivered to plaintiff. On November 3, 1928, similar certificates for 37,800 B shares in Fund B-28 were issued and delivered to plaintiff.
6. The trustee, with respect to Funds A-27, C-27, F-27, H-27, and B-28, timely filed federal fiduciary income tax returns for the calendar year 1928 for each of the five trust funds as simple trusts, and reported no tax due thereon. The Commissioner of Internal Revenue subsequently determined that the trust funds were associations taxable as corporations and found a deficiency in the returns. By appropriate sixty-day letters, he notified the trustee of proposed deficiencies upon each of the returns filed, and appeals therefrom were subsequently filed with the United States Board of Tax Appeals. The parties thereto, by their respective counsel before the Board, thereafter filed with the Board stipulations and agreements that certain specified deficiencies might be assessed and collected. The Board decided and ordered that the trustee was liable for the agreed deficiencies in each of the several proceedings.
Pursuant to the Revenue Act of 1928, 26 U.S.C.A. Int.Rev. Acts, page 345, and the Treasury Regulations promulgated under said Act, the trust funds were associations taxable as corporations for the purposes of determining the federal income tax liability thereof for the calendar year 1928 and determining whether or not plaintiff should have included in its net income on its 1928 federal income tax return any part of the income earned by said funds.
7. On March 15, 1928, plaintiff filed its federal corporation income tax return for the calendar year 1927, reporting a total gross income of $10,939.65, deductions of $754.36, a net income of $10,185.29, and a total tax liability of $1,105. The return was prepared upon the accrual basis. Included among the items making up the said gross income were two items, representing compensation as manager of Insuranshares funds, set forth as follows:
10. (a) Compensation as Manager of Insuranshares Funds ................................. ......... (b) Payment received in "B" shares of Insuranshares Funds ................... $ 1.00 (c) Distributive share in Insuranshares Trust Funds on "B" shares ............. 8,795.25
Item 10(b) above was the balance of an amount set up on plaintiff's books as the value of the "B" shares of Insuranshares trust funds, which amount was set up at one cent a share and against which a reserve was set up in an amount one dollar less than the amount set up as at one cent a share, leaving one dollar shown by the books as income which was brought into the tax return. Item 10(c) above consisted of five separate items as follows:
Domestic dividends attributable to the "B" shares of Fund C-27 owned by plaintiff ... $ 17.55 All other net income attributable to the "B" shares of Fund C-27 ...................... 2,632.50 All other net income attributable to the "B" shares of Fund A-27 ...................... 2,959.20 Similar income attributable to the "B" shares of Fund F-27 ...................... 2,754.00 Similar income on the "B" shares of Fund H-27 ..................................... 432.00
8. On March 15, 1929, plaintiff filed its federal corporation income tax return for the calendar year 1928, reporting thereon a total gross income of $238,879.63, deductions amounting to $39,548.97, a net income of $199,330.66, and a total tax liability of $23,919.68. The return was filed upon the accrual basis. The tax so reported was paid in four installments of $5,979.92 each on the 15th of March, June, September, and December 1929. Included among the items making up the total gross income reported upon the return were two items as follows:
10. (a) Compensation as manager of Insuranshares Funds — B Shares ...................... $143,283.23 (b) Undistributed income of Insuranshares Funds — B Shares ...................... 82,038.75
Item 10(b) represented plaintiff's pro rata interest by reason of its ownership of B shares in the income earned by the trust funds during the year 1928, and item 10(a) represented the value of B shares received as compensation by plaintiff as manager of the trust funds. Item 10(a) consisted of two items of income of plaintiff as manager for the five trust funds, one, the B shares earned in the year 1927 based on a total value of $86,395.50, of which $1.00 had been included in plaintiff's 1927 return as above stated, and the other, compensation earned in the year 1928 in the form of B shares to which plaintiff assigned a total value of $56,888.73. The amount of $86,395.50, representing values assigned to B shares earned in 1927, was allocated as follows: 5,400 shares in Fund A-27 at one cent each, $54; 5,850 shares in Fund C-27, $58.50; 16,200 shares in Fund F-27, $25,308; 36,000 shares in Fund H-27, $60,975, making a grand total of 63,450 shares with a total value of $86,395.50, of which $1.00 had been included in the 1927 return, leaving $86,394.50 as the amount included in the 1928 return. The item of $56,888.73 represented the value placed on the 10,800 B shares in Fund H-27 of $41,688, and a value of $15,200.73 on 37,800 B shares in Fund B-28.
9. The method plaintiff used to fix the value of the B shares was to determine the total fair market value of the underlying securities in the fund on the date of deposit, after deposit, and then to divide the total number of B shares, both separate and inseparable, issuable at that date, into that sum, after first deducting $20 for the par value of each A share.
10. On March 12, 1931, plaintiff filed with the collector of internal revenue a claim for refund of $9,844.65 for the calendar year 1928, stating as grounds therefor the following:
"Taxpayer claims this refund if and only if Insuranshares Trust Funds, A, C, F, H, and B — which filed fiduciary returns as non-taxable trusts are held to be associations subject to Corporation Income Tax as proposed in New York Division (2nd Dist.) Letters of 6/17/30, which tax if imposed would subject this corporation to double taxation as under advice of counsel it as a holder of certificates of the above noted Funds, reported and paid tax upon its proportionate share of the net income of the Funds as a beneficiary.
"This claim is filed to protect this Taxpayer against limitations."
The Commissioner of Internal Revenue did not consider the merits of plaintiff's formal claim for refund until the summer and autumn of 1933 and after the entry on May 23, 1933, of final decisions and orders in those Board of Tax Appeals proceedings mentioned in finding 6, supra. In the summer of 1933 the Commissioner considered the effect upon plaintiff's income tax liability for the year 1928 of an elimination from gross income, as shown upon its 1928 income tax return, by allocating to the year 1927, $86,394.50 or more of the value of $143,283.23 of the B shares included in that return, as income received by plaintiff during 1928.
11. Conferences were held between representatives of the Commissioner and of plaintiff on December 26, 1933, July 11, 1934, and July 20, 1934. On July 24, 1934, prior to the rejection by the Commissioner of the formal claim for refund filed March 12, 1931, plaintiff filed with the Commissioner an unsworn document consisting of a three-page letter, together with attached exhibits, stating, in effect, that plaintiff's claim for refund filed March 12, 1931, should be increased in amount to $20,211.99, with interest, and, further, that such increase resulted from deductions from plaintiff's gross income for the year 1928 of the sum of $86,394.50, representing the market value of the B shares claimed to have been earned by plaintiff in the year 1927 as its compensation for the management of the several trust funds.
12. Plaintiff was notified by Bureau letter of March 21, 1935, that its claim for refund of $9,844.65 for the year 1928 "will be disallowed" for the stated reason that its taxable income for the year 1928 had been understated rather than overstated, and that the federal income tax in question had not been overpaid. The Commissioner rejected plaintiff's claim for refund on April 19, 1935, and plaintiff was so advised by registered letter of the same date. No part of that claim has ever been allowed.
By letter dated September 17, 1935, plaintiff applied for the reopening of its claim for refund and on December 30, 1935, the Commissioner denied that application. On January 20, 1936, plaintiff protested the denial of its application for a reopening of the action, and on June 26, 1936, the Commissioner affirmed his prior refusal to reopen it.
Plaintiff in 1927 and 1928, then known as the Insuranshares Management Company, entered into agreements with Insuranshares Corporation, herein called the distributor, and Farmers Loan and Trust Company, herein called the trustee. By these agreements five investment funds were set up in the hands of the trustee. The funds consisted of stocks of banks, trust companies and insurance companies designated by plaintiff, acquired by the distributor and deposited with the trustee. The two funds involved here were H-27, set up in 1927, and B-28, set up in 1928. Under the agreements, plaintiff's function was to act as manager, selecting the securities to be acquired and placed in the fund, and directing their subsequent disposition and performing numerous other functions as manager of such a trust, as set out in finding 4. The distributor's function was to acquire the securities designated by plaintiff, deposit them with the trustee, and receive in return certain shares in the fund, which shares it might retain or market. The trustee's function was to hold, as trustee, the securities deposited with it by the distributor and to issue the shares hereinafter described.
Under each agreement, the trustee was to issue two different kinds of participating shares. One kind, to be issued to the distributor, for sale to the public, if it so desired, was an inseparable combination of so-called A and B shares. Each A share had a par value of $20. B shares had no par value. Each A share was entitled to a noncumulative semiannual distribution out of the net income of the fund, at the rate of 3% per annum. Each B share was entitled, after the rights of the A shares had been satisfied, to a pro rata distribution of at least 20% of the remaining net income, and of so much more of it as should be determined by plaintiff and approved by the distributor. Each A share was entitled, in liquidation, to a distribution of $20, its par value, and the holder of a combination A share and B share was entitled on two specified dates per year, on seventy days' notice, to turn in his share certificate and receive, either in cash or securities, whichever should be elected by plaintiff, the value of his shares, less a charge of two dollars for each A share, and less a further charge for redemption of one-third on one percent. In short, the A share part of the inseparable combination had the qualities of a preferred stock, and the B share part of it had the qualities of a common stock, comprising all rights to income above the noncumulative 3% per annum, and all rights to increases in the capital of the fund.
The other kind of share which each agreement called for was a separate B share, which had the same rights as the B share in the combination just described. These shares were to be issued only to plaintiff, and were to be its sole compensation for the management of the trust. It was to receive 18 B shares for every one hundred B shares issued to the distributor in the combination shares.
At the time each fund was set up, the then market value of the securities deposited with the trustee was divided by twenty, the dollar par value of the A shares, and a number of combined shares equal to the quotient was issued. An immediate liquidation would, then, have permitted no distribution on the B shares either to plaintiff, or to the holder of the combined share. When additional securities were placed in the funds, and additional certificates were issued, the price of the shares sold was adjusted to prevent dilution of the investments of earlier investors and to avoid giving later investors a share in any increment already accrued to the fund.
Plaintiff became entitled in 1927 under the H-27 agreement to 36,000 B shares. The shares were not actually issued to it until 1928. In its corporation income tax return for 1927, filed March 15, 1928, on the accrual basis, it returned as income on account of these B shares one dollar, having valued them at one cent each and having set up a reserve against even that valuation of all of it except one dollar.
In 1928, plaintiff became entitled to 10,800 B shares under the H-27 agreement and 37,800 shares under the B-28 agreement. In its return for that year it stated a value of $41,688 for the former shares, $3.85 per share, and a value of $15,200.73 for the latter shares, 40.2 cents per share. It also included, in its 1928 return, B shares to which it had become entitled in 1927, viz, 63,450 B shares in H-27 and three other funds, of a total value of $86,395.50, deducting one dollar from that sum because of the return of one dollar made in 1927.
The total of $143,283.23, then represented plaintiff's valuation of the B shares to which it became entitled during the two years 1927 and 1928, and $86,394.50 of that income, accounting for $10,361.91 of its tax, was attributable to 1927. It claims therefore that that part of its tax should be refunded, since it was not obliged to pay it as a 1928 tax, and the defendant's right to collect it as 1927 tax is barred by the statute of limitations.
Plaintiff also claims that a sum of $82,038.75 which it included in its 1928 return as "undistributed income of Insuranshares Funds-B shares" which was plaintiff's pro rata interest, by reason of its ownership of separate B shares, in the income earned by the five trust funds during 1928, as distinguished from the B shares themselves which it received as compensation during 1928, was improperly included, or should have been deducted, as corporate dividends, since the funds themselves were taxed as corporations upon their income. Since this sum of $82,038.75 accounted for $9,844.65 of the tax plaintiff paid in 1928, it asks also for a return of that amount, making a total amount of $20,206.56 claimed for return.
The defendant's contentions are:
1. There was no sufficient claim for refund as to the asserted overassessment of $82,038.75 and overpayment of $9,844.65.
2. There was no timely claim for refund as to the asserted overassessment of $86,394.50 and overpayment of $10,361.91.
3. If either or both of the foregoing contentions are found to be without merit, still plaintiff is not entitled to recover, because the B shares to which it became entitled in 1928 had a fair market value of more than the total income returned by plaintiff for 1928, and therefore plaintiff underpaid, rather than overpaid, its 1928 tax.
The defendant does not seriously contest plaintiff's contention that the $82,038.75 item in the 1928 return was deductible as a dividend of a domestic corporation. Revenue Act of 1928, § 23, page 356. The funds were taxed on their incomes as domestic corporations within the meaning of the statute, and it follows that their distributions should be treated as those of domestic corporations, not taxable to the shareholders receiving such distributions.
As to the defendant's first contention that the refund claim timely filed, and quoted in finding 10, was insufficient, we think that the claim was sufficient. The claim was conditional, but the contemplated condition was that the funds should be taxed as domestic corporations, and that happened. That such taxation should be, strictly, double taxation of plaintiff was not really a part of the condition. It follows that unless plaintiff underpaid its taxes for 1928 in some other respect, it would be entitled to a refund of the $9,844.65 tax paid on the $82,038.75 item of income.
The defendant's second contention, relating to the timeliness and sufficiency of plaintiff's claim for refund of taxes paid in 1928 on 1927 income, presents a more serious question. It will be remembered that plaintiff filed its first claim for refund of 1928 taxes on March 12, 1931, which was within the permissible two-year period after payment of the tax. Revenue Act of 1928, § 322(b)(1), 26 U.S.C.A. Int.Rev. Acts, page 436. Its claim relating to its return of 1927 income in 1928 was not filed until July 20, 1934, more than two years after the taxes had been paid. Plaintiff contends that this claim was a permissible amendment of its previous timely claim. We do not think so. The timely claim was specific, both as to the item of income to which it related and as to the asserted ground for refund. The 1934 claim related both to a different item of income and a different ground for refund. It was not an amendment, but a new claim, filed late. United States v. Andrews, 302 U.S. 517, 58 S.Ct. 315, 82 L.Ed. 398; Hanna Furnace Corp. v. United States, 31 F. Supp. 136, 90 Ct.Cl. 439; Guantanamo Sugar Co. v. United States, 38 F. Supp. 252, 93 Ct.Cl. ___.
The fact that the previous timely claim had not yet been acted upon by the Commissioner of Internal Revenue at the time the later claim was filed is immaterial. The Commissioner has no power to waive the statute of limitations after it has run. United States v. Garbutt Oil Co., 302 U.S. 528, 58 S.Ct. 320, 82 L.Ed. 405.
The language of the court in Pink v. United States, 2 Cir., 105 F.2d 183, 187, relied upon by plaintiff, gives it no aid in this case. The court there said that where the orginal claim filed is such that the facts upon which the amendment is based would necessarily have been ascertained by the Commissioner in investigating the merits of the orginal claim, the amendment may be made after the statute has run. Here the investigation of the timely claim as to the nontaxability of dividends of domestic corporations would not lead the Commissioner to suspect that plaintiff had done the unusual thing of including 1927 income in its 1928 return. We conclude, therefore, that plaintiff's claim for refund of $10,361.91 taxes paid on its return of $86,394.50 of income in 1928, which was 1927 income, is barred because no timely claim for refund was made to the Commissioner of Internal Revenue. However, as we shall see hereinafter, even though plaintiff's claim for refund as to the 1927 income on which it paid 1928 taxes had been timely filed, the result would not be changed because even in that event plaintiff did not overpay its 1928 taxes.
The defendant's third contention is, as we have said, that regardless of the merits of either or both of plaintiff's asserted grounds for recovery, plaintiff underpaid rather than overpaid taxes on its 1928 income. It will be remembered that plaintiff in 1928 became entitled to 10,800 B shares in Fund H-27 and 37,800 B shares in Fund B-28. In the return it valued the former at $41,688 and the latter at $15,200.73, a total of $56,888.73. It arrived at these valuations by taking the market value of the underlying securities on the dates in question, subtracting from that sum the product of twenty times the number of A shares and dividing the remainder by the number of B shares. This, plaintiff claims, was its total taxable income in 1928, so far as relates to this controversy. We have held that as to $86,394.50 more of its return, which was 1927 income, plaintiff may not have a refund because it did not file a timely claim. It returned and paid taxes on $225,321.98. The defendant claims that the 48,600 shares had a fair market value, not of $56,888.73 as returned by plaintiff, but of at least $225,321.98, and that therefore plaintiff did not overpay its tax.
Our question then is whether these B shares had an average fair market value of at least $4.64 per share, which would justify all the income that plaintiff returned in 1928, or at least, $2.86, which would absorb all the income as to which plaintiff is not barred by limitation from seeking a refund.
No one could get the separate B shares from the trustee except plaintiff, and it never sold them nor offered them for sale. No offer to plaintiff for them is shown. The B shares were bought and sold only in the inseparable combination with A shares.
Since the combined shares were not listed on any exchange, but were sold only "over the counter", no record is available of actual sale prices, but only of bid and asked quotations, as that is the practice of the financial journals which publish such reports. The following tabulation shows the number of B shares and the dates in 1928 on which plaintiff became entitled to them, the bid and asked quotations on the combined shares on those dates, as shown by the joint exhibit of the parties prepared from financial reports current in 1928, and the values of the B shares, assuming that the A shares accounted for $20 of the value of the combination, or in the alternative, of $18 of the combination.
Fund B-28 Fund H-27
-------------------------------------------------------------------------------------- | No. of | | | Value of B shares Date shares receivable | shares | Bid | Asked |------------------------ | receivable | | | A at $20 | A at $18 ---------------------------|------------|---------|----------|-----------|------------ | | | | | February 1 ............... | 9,000 | 1 5/8 | 22½ | $14,625 | $32,625 February 9 ............... | 9,000 | 1 5/8 | 22 1/8 | 14,625 | 32,625 March 9 .................. | 9,000 | 1 5/8 | 22 1/8 | 14,625 | 32,625 April 25 ................. | 4,500 | 23 | 23½ | 13,500 | 22,500 May 15 ................... | 4,500 | 23 | 23½ | 13,500 | 22,500 August 8 ................. | 1,800 | 21 3/8 | 22 3/8 | 2,475 | 6,075 |____________| | |___________|____________ | 37,800 | | | 73,350 | 148,950 | | | | | | | | | | January 6 ................ | 3,600 | 26 1/3 | 26 3/8 | 22,050 | 29,250 January 10 ............... | 3,600 | 26¼ | 26¾ | 22,500 | 29,700 January 19 ............... | 3,600 | 26½ | 27 | 23,400 | 30,600 |____________| | |___________|____________ | 10,800 | | | 67,950 | 89,550 -------------------------------------------------------------------------------------- Assuming the A shares to have had a par value of $20, which plaintiff seriously urges that they had, the bid price for the B share portion of the combination at the time that plaintiff became entitled to its B shares was $141,300, as against the $56,888.73, at which plaintiff valued them in its return. But the market value of the A share portion of the combination was not $20. It could not have been more than $18, since the voluntary cashing in of a combination share by a shareholder was subject to a discount of $2 from the $20 par value. Counting the value of the A shares at $18, the tabulation shows that the B shares had a value of $238,500, which is more than the $225,321.98 which plaintiff returned and on which it paid taxes.In fact the A shares in these funds had a market value of less than $18 per share. There would have been no reason why an investor would pay $18 for a preferred stock with a noncumulative return of 3% on a $20 par value, and a liquidating value of $18 if he desired to withdraw his cash from the enterprise. A better return could have been obtained on government bonds, municipal bonds, public utility bonds or savings bank deposits, forms of investment just as convenient. The investor in these combination shares was looking to the increment in value of the underlying securities and to their dividends. The increases in value of the bank, trust company and insurance stocks comprised in these trusts, had, over the preceding years, been regular and substantial. Their cash and stock dividends had been large. The opportunity for the ordinary investor to obtain an interest in a selected list of such stocks, and to have the list managed by plaintiff must have been a principal attraction. The fact that the securities initially deposited in the H-27 trust on September 1, 1927, had cost the distributor an amount equal to $20 for each combined share, yet the shares had a bid and asked price of 23¼ and 23¾, respectively, on September 3, proves that the management trust set up by plaintiff added substantially in the mind of the investor to the bare value of the separate stocks in the trust fund. Plaintiff's method of valuation assumes that the investor's principal interest at the time of putting his money in is in what he would realize on it in a forced liquidation. If that had been first in the minds of the investors in the case of these shares, they would not have invested at all.
The rate on long-term government bonds was 3.33%. Annual Report of the Secretary of the Treasury, June 30, 1939, p. 486.
4.02%, based on a selected list. United States Statistical Abstract, 1935, p. 284; The Bond Buyer.
The figure given in the Standard Bond Investment Book (Standard Statistics Co.), based on 4,000 better grade issues, is 5.395%. The United States Statistical Abstract, 1935, p. 284, lists 4.68%, based on 15 better grade issues.
In New York the average return was 4.39%. Savings Banks Association of New York, Annual Report, 1929.
As to the earning power of the stocks in the trust, plaintiff's income of $82,038.75 from its class B shares for 1928 is significant. It had 48,600 such shares for the whole year, and 37,800 other such shares, most of them for the principal part of the year. Its average dividend from them was almost one dollar a share. The investor in the combined share was, similarly, receiving one dollar a share on the B part and 60 cents on the A part. It would have been difficult to convince him that, as plaintiff contends, the A part of the combined share was worth $20 and the B part $1.18, on the average, which was the value attributed to the B shares by plaintiff in its tax return.
An expert offered by the defendant placed the value of the A shares at $7.50 and attributed all the rest of the market price of the combinations to the B shares, thus giving them a market value of from $13.50 to $21, at different relevant times. This expert was, at the time he testified, the manager of Insuranshares Certificates, Inc., the company formed when Insuranshares trust certificates were liquidated in the fall of 1929 for the purpose of forming a corporation whose stock would be listed on the New York Stock Exchange.
It is not necessary for us to determine the value so definitely. We are, as we have indicated, convinced that the aggregate value of the B shares in these two funds; received by plaintiff in 1928, was more than $225,321.98. Plaintiff having paid taxes on that sum, did not overpay its tax and is not entitled to recover. Its petition will, therefore, be dismissed. It is so ordered.