Opinion
No. 45335.
February 1, 1943.
J.C. Murphy, of Atlanta, Ga., for plaintiff.
Daniel F. Hickey, 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 Mrs. Lois Thom Nichol against the United States to recover an alleged overpayment of income taxes for the year 1936.
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. Plaintiff is now and at all times material hereto has been a citizen of the United States and a resident of Atlanta, Georgia.
2. Plaintiff filed her income tax return for the calendar year 1936 in the office of the Collector of Internal Revenue for the District of Georgia on April 16, 1937, having secured an extension of the time for such filing until April 15, 1937. Net income in the amount of $20,352.71 was reported therein and tax of $1,549.51 computed thereon. Such tax was duly paid in quarterly installments during 1937, together with interest amounting to $1.94.
3. Included in the gross income reported by plaintiff in her return for 1936 was the sum of $4,250.60 representing 30% of $14,168.72, which latter sum, treated in the return as gain on a capital asset, was the remainder of a judgment for $22,600 principal, after deduction of the pro rata portion of expenses of recovery allocable thereto. Also included in such gross income was the sum of $8,612.16, being the remainder of the interest in the full amount of $13,779.72 allowed by the court on such judgment after deduction of the allocable pro rata portion of the expenses of recovery.
4. Following investigation of the plaintiff's tax liability for 1936 in the field, and the recommendation of deficiency tax in the amount of $1,982.49 by the examining officer, a conference was held at Atlanta between plaintiff's representatives and a representative of the Bureau of Internal Revenue. Such conference resulted in the final determination of deficiency tax in the amount of $234.86, instead of the amount found by the revenue agent. This deficiency was due to the addition to income of two items totalling $76.12, not in dispute and to determining that 40% of the $14,168.72 gain on a capital asset heretofore mentioned, or $5,667.49, was returnable as income, instead of 30%, or $4,250.61, as reported in the return. Such asset was found to have been held for more than five but less than ten years. In the return the asset was reported as having been held for more than ten years.
Plaintiff paid the deficiency tax of $234.86 on May 23, 1939, and she paid interest thereon amounting to $30.83 on June 13, 1939, the total of such tax and interest being $265.69.
5. On April 12, 1940, plaintiff filed a claim for refund of $1,615.09, income tax for 1936, recomputing net income for the year as $7,566.06 and contending (1) that none of the proceeds of the judgment received in that year and reported was taxable regardless of the element of interest included therein, and (2) that in any event, and if such proceeds were taxable at all, they should be taxed in their entirety as capital gain because, although a portion of the total amount recovered was designated as interest, the whole was in reality a judgment for damages. This claim was formally rejected in full by the Bureau of Internal Revenue on August 8, 1940. The petition herein was filed on January 27, 1941.
6. Plaintiff, then a resident of the City of Appleton, Wisconsin, upon the death of her father, Peter Robertson Thom, on March 18, 1920, inherited 468 shares of the common stock and 234 shares of the preferred stock of the Kimberly Clark Company, a Wisconsin corporation, whose home office was in the City of Neenah, Wisconsin, and whose principal business was the manufacture and sale of pulp and paper products, directly and through subsidiary industrial corporations. Shortly after her father's death plaintiff moved from Appleton, Wisconsin to Detroit, Michigan, prior to her removal to Atlanta, Georgia.
7. Plaintiff's father and one F.J. Sensenbrenner, during the former's lifetime, had been personal friends and closely associated for many years as officials in the business of the Kimberly Clark Company, and plaintiff and other members of her family had profound confidence in the friendship, integrity, and judgment of Sensenbrenner who was first vice-president and general executive officer and manager of the company. Sensenbrenner, however, in October, 1926, withholding from the plaintiff the fact of his interest in and connection with the matter, arranged through another person and a Detroit brokerage firm to procure an offer from plaintiff to sell stock of the Kimberly Clark Company. On November 6, 1926, she offered to sell 100 of her shares at $250 a share and Sensenbrenner directed immediate acceptance. The 100 shares of plaintiff's stock were transferred on the books of the company to the brokerage firm on November 8, 1926. On November 16, 1926, the stock was transferred again on the books of the company, to another person, and finally transferred to Sensenbrenner on December 2, 1926. Nichol v. Sensenbrenner, 220 Wis. 165, 173, 174, 263 N.W. 650.
8. On December 28, 1931, the plaintiff filed suit against Sensenbrenner in the Circuit Court for Winnebago County, Wisconsin, for the profits reaped and retained by him, being the difference between the actual value of plaintiff's stock at the time of its acquisition by him and the price paid therefor to plaintiff by his agents. She set forth circumstances claimed by her to constitute fraud and deception on her and a breach of his duty to deal with her honestly and in good faith in the transaction involved by making an adequate disclosure of facts affecting the value of the stock.
9. The jury's verdict was for the plaintiff, and among other things it found that the fair cash value of plaintiff's common stock of the Kimberly Clark Company on November 6, 1926, was $476 per share. The lower court therefore ordered the entry of judgment for plaintiff in the amount of $22,600 ($47,600 less $25,000 paid) with interest thereon at the rate of 6% per annum, from June 29, 1934, the date of the verdict, to December 29, 1934, the date of entry of judgment, amounting to $678. The lower court denied plaintiff's motion for interest upon the sum of $22,600 from November 6, 1926, to June 29, 1934.
10. Sensenbrenner appealed from the judgment of the lower court, and plaintiff gave notice of review on the appeal, alleging, among other things, that the trial court erred in denying interest from the date of the sale of her stock, namely, November 6, 1926. The Supreme Court of Wisconsin concluded that the plaintiff was entitled to interest on the judgment of $22,600 at 6% per annum from November 6, 1926, to the date of the verdict, and on February 4, 1936, it affirmed the judgment as so modified. Nichol v. Sensenbrenner, 220 Wis. 165, 182, 184, 263 N.W. 650. Interest computed on that basis amounted to $13,779.72 as reported, subject to pro rata deduction by plaintiff in her income tax return for 1936. The total of the judgment and the interest thereon was $36,379.72.
This is a suit to recover a portion of the income tax paid by plaintiff in 1936.
Upon the death of her father in 1920 the plaintiff inherited certain shares of stock in the Kimberly Clark Company.
F.J. Sensenbrenner, the vice president and manager of the company, had long been associated with her father in business. Plaintiff and her family had complete confidence in his friendship and integrity.
On November 6, 1926, upon the recommendation of Sensenbrenner, plaintiff sold to a brokerage firm 100 shares of the stock of the Kimberly Clark Company for $250 per share. On November 16, 1926, the stock was transferred to a third party and on December 2, 1926, it was transferred to Sensenbrenner. It developed that the stock was worth considerably more than the $250 per share.
On December 28, 1931, the plaintiff filed suit against Sensenbrenner in the Circuit Court for Winnebago County, Wisconsin, for the profits reaped and retained by him; that is, the difference between the actual value of plaintiff's stock at the time of its acquisition by Sensenbrenner and the price which had been paid the plaintiff by his agents, alleging that fraud and deception had been practiced on her.
The jury returned a verdict for plaintiff in the sum of $22,600. The trial court entered judgment for that sum, together with interest at the rate of 6% per annum from June 29, 1934, the date of the verdict. On appeal the Supreme Court of Wisconsin reformed the judgment allowing plaintiff interest at the rate of six per cent per annum from November 6, 1926. Interest computed on that basis amounted to $13,779.72, which, less the deduction of expense of collection, was reported in her income tax return for 1936. The tax was paid on that basis.
Plaintiff filed a timely claim for refund in the sum of $1,615.09 on the basis of two contentions; first, none of the proceeds of the judgment received in the year 1936 and reported was taxable income, regardless of the element of interest included therein; and, second, that if such proceeds were taxable at all, they should be taxed in their entirety as capital gain, because while a portion of the total amount recovered was designated as interest, the entire amount was in reality a judgment for damages.
We think the taxes were properly levied and collected by the Commissioner of Internal Revenue.
Clearly the gain realized in 1926 was taxable. In essence her suit was brought to recover additional unrealized gains to which she claimed she was entitled as of November, 1926. These additional gains, when she finally recovered them in 1936, had the same status as income as that portion of the 1926 payment which represented gain. Whether they be called damages or gains they represented gains.
We also think that the interest collected should be treated as income. A recent decision by the United States Supreme Court, Kieselbach v. Commissioner of Internal Revenue, 63 S.Ct. 303, 305, 87 L.Ed. ___, decided January 4, 1943, is controlling in this case. The facts are similar and the principle is the same.
In that case the Board of Estimate of the City of New York, pursuant to a charter provision, passed a resolution directing that upon January 3, 1933, the title in fee to a tract of realty should vest in the city. Condemnation proceedings, of which the resolution was a part, were instituted. The city took possession on the date named in the resolution and received all rents thereafter accruing. The Supreme Court of New York entered its final decree on March 31, 1937, allowing payment in the sum of $73,246.57 as compensation to the owners. The amount of said payment was computed by adding to the principal amount of $58,000, interest thereon at the rate of six per cent per annum from January 3, 1933 to May 12, 1937, in the sum of $15,246.57. The primary question was whether the interest should be treated for tax purposes as a portion of the capital gain, or as ordinary income.
In passing on this question the court, after quoting Section 22 of the Revenue Act of 1936, c. 690, 49 Stat. 1648, 1657, 26 U.S.C.A. Int.Rev. Acts, page 825, makes the following comment:
"The sum paid these taxpayers above the award of $58,000 was paid because of the failure to put the award in the taxpayers' hands on the day, January 3, 1933, when the property was taken. This additional payment was necessary to give the owner the full equivalent of the value of the property at the time it was taken. Whether one calls it interest on the value or payments to meet the constitutional requirement of just compensation * * * is immaterial. It is income under Sec. 22, paid to the taxpayers in lieu of what they might have earned on the sum found to be the value of the property on the day the property was taken. It is not a capital gain upon an asset sold under Sec. 117 [26 U.S.C.A. Int.Rev. Acts, page 873]. The sale price was the $58,000.
"The property was turned over in January, 1933, by the resolution. This was the sale. Title then passed. The subsequent earnings of the property went to the city. The transaction was as though a purchase money lien at legal interest was retained upon the property. Such interest when paid would, of course, be ordinary income."
The plaintiff is not entitled to recover, and the petition is dismissed. It is so ordered.