Opinion
No. H-299.
November 3, 1930.
Suit by the Acme Coal Company against the United States, wherein defendant filed a counterclaim.
Complaint and counterclaim both dismissed.
This is a suit to recover $13,646.91 income and profit taxes paid for the calendar year 1920, alleged to be illegally assessed by the Commissioner of Internal Revenue. A counterclaim for $6,864.86 was filed by the government.
The facts in this case were agreed to by counsel, and, from the stipulation, the court makes the following special findings of fact:
1. The Acme Coal Company is a corporation duly created and existing under the laws of the state of Wyoming, having its principal office and place of business at Sheridan, Wyo.
2. Prior to January 1, 1920, the plaintiff was engaged in mining and shipping coal from its mines at Acme, Wyo. On January 1, 1920, plaintiff sold substantially all its assets to Francis S. Peabody, of Chicago, Ill., under the following agreement:
"Memorandum of Agreement by and between F.S. Peabody, of Chicago, Illinois (hereinafter referred to as the `purchaser'), party of the first part, and the Acme Coal Company, a corporation of the State of Wyoming (hereinafter called `The Coal Company'), party of the second part, Witnesseth: That
"Whereas The Coal Company is the owner of certain coal land in Sheridan County, Wyoming, consisting of coal land leases in Sheridan County, Wyoming, whereby it leases approximately 1,620 acres with the right to mine the coal under the said lands, together with improvements, town sites, tipples, railroad tracks, waterworks, mining supplies and equipment, constituting its operating coal mines, and is desirous of selling the same; and whereas the purchaser is desirous of buying all of the said property of The Coal Company; and
"Whereas the purchaser is the assignee of a certain option entered into the 30th day of August, 1919, by and between The Coal Company and Robert H. Walsh, of the city and county of Sheridan, Wyoming, the said Robert H. Walsh having assigned to the purchaser all of his rights under said option agreement; and
"Whereas the purchaser as such assignee of Robert H. Walsh has exercised the option given in said option agreement of August 30, 1919, to purchase said property of the Acme Coal Company in accordance with all the terms and conditions contained in said option agreement, same being attached hereto and its terms and conditions being made a part hereof the same as if incorporated in this agreement; and
"Whereas under the terms and conditions of said option agreement it is provided that Robert H. Walsh, or his assigns, shall pay the sum of one million ($1,000,000) dollars to The Coal Company for all of its property and assets of every kind, including leases, improvements, machinery, equipment, mine horses, trade names, trade-marks, and good will, saving and excepting, however, all cash on hand and in bank, Government bonds, war-saving stamps, Treasury notes of the United States, oil stock, farm lands, livestock (except the mine horses above mentioned), accounts and bills receivable, and supplies other than such quantity of such supplies as shall be necessary for the operation of the company's mine for one month, owned by the Coal Company as of the 30th day of August 1919, or purchased subsequent to said date by The Coal Company; and
"Whereas it is further provided in said option agreement of August 31st, 1919, that Robert H. Walsh, or his assigns, in addition to the million-dollar purchase price above referred to, shall pay to The Coal Company an additional sum of money equal to the amount of any tax which shall be assessed against it by the United States under any income or excess profits tax law as the result of such sale at said price when any such tax shall have been duly assessed and becomes due and payable from the said Coal Company to the United States; and
"Whereas the said Walsh, or his assigns, by the terms of said option agreement of August 30, 1919, are required upon the day of exercise of the option contained in said agreement to deliver to The Coal Company sufficient security in the form of a bond or pledge or other security to amply guarantee to The Coal Company the payment of said tax, if any; and
"Whereas by the terms of said option agreement of August 30, 1919, the said Walsh, or his assigns, are further obligated by the terms of said agreement to pay to The Coal Company such sums as the latter shall actually expend between August 30, 1919, and December 31, 1919, upon improvements made to the Coal Company's property including additional machinery, development, house construction, etc., between the said dates as shown by the Acme Coal Company's books; and
"Whereas it is further provided in said option agreement of August 30, 1919, that in case of exercise by Walsh, or his assigns, of the option contained therein, possession of the residences now being constructed for the occupancy of Ora Darnall, of The Coal Company, and the houses now occupied by W.C. Craig, T.G. Kessinger, and W.H. Maddorn shall not be demanded until June 1, 1920, and they shall be allowed to remain in possession of their respective houses without further rental charge until that time; and
"Whereas by the terms of the option agreement of August 30, 1919, The Coal Company has agreed that the property optioned to be sold in said agreement shall be conveyed to said Walsh, or his assigns, free and clear of and from all liens and encumbrances whatsoever; and
"Whereas The Coal Company now has on hand on its property certain mine supplies in excess of the thirty (30) days' supply optioned to be sold by it and not included in the Million Dollar purchase price provided in said option agreement and is desirous of selling said surplus and the purchaser is desirous of buying the same; and
"Whereas The Coal Company is now a party to certain coal contracts for the sale of its coal, purchase of power, and for the construction of five (5) buildings for the Sheridan County Electric Company which it desires to assign to the purchaser and which the purchaser desires to accept the assignment of; and
"Whereas the consent of John B. Kendrick and William G. Irvine has been given to the exercise by Robert H. Walsh, or his assigns, of the option contained in the said agreement of August 30, 1919, as required therein:
"Now Therefore, This Agreement Witnesseth, that the parties hereto, in consideration of the mutual benefits hereby mutually accruing each to the other and for the purpose of carrying out the provision of said option agreement of August 30, 1919, between The Coal Company and Robert H. Walsh, agree as follows:
"1. The Coal Company acknowledges due and proper exercise by Francis S. Peabody as assigns of the option given to Robert H. Walsh in the agreement between the said Robert H. Walsh and The Coal Company, dated August 30, 1919.
"2. The purchaser will, on or before the 31st day of December, 1919, deposit to the credit of The Coal Company in the Union Trust Company of Chicago, Illinois, the sum of one million ($1,000,000.00) dollars payable to The Coal Company as soon as the latter has delivered to the purchaser the necessary instruments granting, bargaining, selling, and conveying to the purchaser, free and clear of and from any and all liens and encumbrances of any sort whatsoever the property herein described and provided in said option agreement to be sold for the sum of one million ($1,000,000.00) dollars.
"3. In addition to the payment above referred to of the sum of one million ($1,000,000.00) dollars, the purchaser, within a reasonable time after the inventory value of the improvement made in The Coal Company's property herein provided to be sold to the purchaser and also the inventory value of the excess supplies of The Coal Company now on hand has been ascertained and agreed upon between the purchaser and The Coal Company, will deposit in the Union Trust Company of Chicago, Illinois, to the credit of The Coal Company, a sum equal in amount to the said sum so ascertained and agreed upon.
"4. The purchaser agrees that it will within five (5) days from the date of this agreement deposit with the Union Trust Company of the city of Chicago, Illinois, for delivery to The Coal Company a bond executed by the National or American Surety Company in the penal sum of two hundred thousand ($200,000.00) dollars guaranteeing the payment by the purchaser of any income or excess-profits tax that may be assessed against The Coal Company by the United States as a result of the sale of the properties of The Coal Company herein provided to be sold, and will also deposit at the same time the bond of Mr. Francis S. Peabody for the same amount containing a similar guarantee. Said bonds to be delivered to The Coal Company upon receipt from it to the purchaser of instruments conveying to the purchaser the property of The Coal Company herein provided to be sold free and clear of and from all liens and encumbrances.
"5. The Coal Company agrees to grant, bargain, sell, and convey to the purchaser, free and clear of and from all liens and encumbrances of any kind whatsoever, all of its property herein above described provided to be sold by it to the purchaser by the option agreement of August 30, 1919, and herein described. And The Coal Company agrees to deliver possession thereof to the purchaser on January 1, 1920, and on December 31, 1919, to deliver to the purchaser all instruments necessary to effect such conveyance, sale, and transfer.
"6. The Coal Company agrees to assign to the purchaser, and the purchaser agrees to assume the obligations of, that certain contract between The Coal Company and the Sheridan County Electric Company for the furnishing of power to The Coal Company and the sale of coal by The Coal Company to said electric company; also all outstanding contracts to date covering the sale of coal to industrial plants, and also that certain contract between The Coal Company and the Sheridan County Electric Company for the construction by The Coal Company and lease by it to the Sheridan County Electric Company of five (5) buildings now under construction.
"7. The instruments of conveyance and transfer when actually executed shall be effected as of January 1, 1920.
"8. This agreement shall be binding upon the successors and assigns of the coal company and the heirs, executors, administrators, and assigns of the purchaser.
"In witness whereof F.S. Peabody has hereunto set his hand and seal and the Acme Coal Company has caused this instrument to be executed by its president and its corporate seal to be hereunto affixed, attested by its secretary, all on the 31st day of December, 1919.
"[Signed] F.S. Peabody [Seal.] "By Preston Davies, Attorney in Fact. "Acme Coal Company, "By [Signed] A.K. Craig, President. "Attest: "[Signed] W.G. Craig, [Seal.] "Secretary."
Pursuant to said agreement, said bonds were executed, and thereafter, in 1924, as will hereinafter more fully appear, the plaintiff received, in full settlement of the agreement and bonds for reimbursement for taxes hereinabove mentioned, the sum of $44,639.35. The plaintiff received in 1920, as profit on said sale independent of agreement for reimbursement for taxes, the sum of $231,889.41.
3. On May 20, 1921, having duly received an extension of time in which to do so, the plaintiff, pursuant to law, made a return of income earned by it in the year 1920, including profit realized on the sale of its said assets to Francis S. Peabody in the sum of $82,988.37, and filed such return with the collector of internal revenue at Cheyenne, Wyo.
4. Plaintiff's original income and profits tax return for the year 1920 having shown taxes due from it of $12,617.80, payment thereof was made to the collector of internal revenue at Cheyenne, Wyo., on May 20, 1921.
Thereafter the Bureau of Internal Revenue, by the letter of the deputy commissioner dated March 10, 1923, determined an additional tax liability on the part of plaintiff for the year 1920 of $70,032.54. Thereafter, on March 31, 1924, the Bureau of Internal Revenue again redetermined said tax liability, and, in addition to said additional tax of $70,032.54, determined a further additional tax liability of $18,299.91. In said letter of March 31, 1924, and in redetermining said tax liability, which was fixed at a total for the year 1920 of $100,950.25, said Bureau of Internal Revenue calculated as part of the net income of plaintiff the sum of $66,896.03, which it asserted to be the amount due plaintiff as a result of the agreement of the said Francis S. Peabody, hereinabove referred to, to pay income and excess profits taxes accruing to it on account of the sale aforesaid. On September 9, 1924, said additional sums of $70,032.54 and $18,299.91 were paid by the plaintiff to the collector of internal revenue at Cheyenne, Wyo.
5. Thereafter, and on the 29th day of October, 1924, plaintiff duly filed claim for refund of $20,511.77 of said tax, that being the amount of tax arising from the inclusion in plaintiff's net income for said year of said alleged income of $66,896.03. Said claim was duly and properly verified as required by law.
Thereafter, and on February 18, 1926, in response to said claim for refund, the Bureau of Internal Revenue redetermined the tax liability of plaintiff for the year 1920, and in such redetermination changed its computation of income alleged to have been received as a result of the said Peabody guaranty to pay taxes aforesaid, from the sum of $66,896.03, hereinbefore recited, to the sum of $44,639.35, which was and is the correct amount of money received by the plaintiff as a result of said agreement of the said Peabody to pay such taxes. Said letter of February 18, 1926, recomputed the tax liability of the plaintiff in the total sum of $94,085.39, instead of $100,950.25, and granted said claim for refund of $20,511.77 in the sum of $6,864.86, and denied the same in the sum of $13,646.91. Said claim for refund was denied and rejected and the payment thereof refused, and the payment thereof has never been made and is still refused, except of the said sum of $6,864.86.
6. The true tax liability of the plaintiff, if there is included in its net income for the year 1920 the sum of $66,896.03, as part of its profit on said sale resulting from the Peabody agreement to pay the tax on said profit, is the sum of $100,950.25; its true tax liability, if there is included in its net income for the year 1920 the sum of $44,639.35, as part of its profit on said sale resulting from the Peabody agreement to pay the tax on said profit, is $94,085.39; the true tax liability, if nothing is included in its net income for the year 1920, on account of the agreement to the said Francis S. Peabody to pay the tax on said profit, is $80,438.48.
7. The said Francis S. Peabody assigned his contract with the plaintiff hereinabove quoted to Sheridan Wyoming Coal Company, which became the purchaser of plaintiff's property under the terms of said contract, and plaintiff and said Sheridan Wyoming Coal Company disagreed as to the amount due plaintiff on account of said agreement hereinabove appearing. After discussion, they referred the matter for settlement to arbitrators, who fixed the figure at $44,639.35, and in the year 1924 there was paid to the plaintiff by the said Peabody's successors, on account of the said Peabody's agreement to pay said tax, the sum of $44,639.35. Said Peabody was at all times fully able to pay any amount for which he was legally liable under said contract.
Books of the plaintiff were kept on an accrual basis; no sum was accrued on such books on account of the contract for reimbursement for taxes recited in finding 2 hereof, but in the year 1924 the sum of $44,639.35, collected as a result of said contract, was entered in the plaintiff's cashbook and from there was credited to its surplus as a reduction of income tax previously charged to surplus.
8. No part of the sum of $13,646.91, here sought to be recovered, has been repaid to the plaintiff, and plaintiff has not repaid to the United States the sum of $6,864.85 sought to be recovered by counterclaim herein.
9. No action has been taken in respect of said matter before Congress or any of the departments of the government except as alleged in the petition, or before the United States Board of Tax Appeals, or in any court other than this proceeding before this court.
Smith Moore, of Washington, D.C., for plaintiff.
Ralph C. Williamson, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and WILLIAMS, GREEN, and WHALEY, Judges.
The plaintiff, a coal-mining company, on August 30, 1919, gave an option to Robert H. Walsh to purchase its entire property; Walsh assigned this option to F.S. Peabody, and thereafter, on December 31, 1919, pursuant to the exercise of said option by Peabody, it entered into an agreement to sell its entire property to him, or his assignees, for the sum of $1,000,000, and a certain additional sum based upon the inventory of supplies on hand of the company, and "* * * in addition to the million-dollar purchase price above referred to shall pay to the coal company an additional sum of money equal to the amount of any tax which shall be assessed against it by the United States under any income or excess profit tax law as the result of such sale at said price when any such tax shall have been duly assessed and become due and payable from the said coal company to the United States." Bonds were executed by a surety company and Peabody also, guaranteeing the payment of this additional amount. Peabody transferred his contract to the Sheridan Coal Company, and it became the purchaser.
An extension of time having been granted by the Bureau of Internal Revenue, the plaintiff duly made its income and profits tax return for the year 1920 on May 20, 1921. In this return it reported its operating net income at $46,297.65 and the net profit realized on the sale of its assets of $82,988.37, making a total net income of $129,286.02. The total tax shown by the return was $12,617.80, which amount was paid by plaintiff at the time of making the return. In arriving at this total tax, no sum was included to cover the income and profit taxes due the government and to be paid by the purchaser. The books of the plaintiff were kept on an accrual basis, but it did not enter on its books of account any sum representing the contract for reimbursement for taxes until the year 1924, when the sum of $44,639.35, collected as a result of said contract, was entered upon its cashbook and from there credited to its surplus as a reduction of income tax previously charged to surplus. On March 10, 1923, the Commissioner of Internal Revenue determined an additional tax liability on the part of plaintiff for the year 1920 of $70,032.54, and thereafter, on March 31, 1924, the Commissioner again redetermined said tax liability and levied a further assessment of $18,299.91. These amounts were paid by the plaintiff on September 9, 1924. In determining these amounts, the Commissioner computed as income for the year 1920 the amount of $66,896.03 to be the sum due, under the agreement, to discharge all taxes to the government. Having paid its additional taxes, plaintiff filed a claim for refund in the sum of $20,511.77, being the amount of tax arising from the inclusion in its net income for the year 1920 of the sum of $66,896.03. Thereafter the Bureau, having been advised that only $44,639.35 had been received from the purchaser, after arbitration of the matter, decided to tax that sum as income instead of the sum of $66,896.03, and accordingly it so computed the tax and granted the claim for refund to the extent of $6,864.86. It denied the claim for refund in the sum of $13,646.91.
To recover that sum, this suit is instituted. The government has filed a counterclaim to recover the sum of $6,864.86 refunded to plaintiff, which represents the tax on the difference between $66,896.03, the tax on net profit as calculated by the Bureau, and the $44,639.35, actual payment made to plaintiff in compliance with the agreement of the Sheridan Coal Company to pay plaintiff a sum equal to the tax paid to the government.
The first question to be decided is: Was any of the tax on the net profit due and payable in the year 1920? The books of plaintiff were kept on an accrual basis. All the events occurred which fixed the amount of the tax and determined the liability of the taxpayer to pay it in advance of the assessment of the tax. The liability of the plaintiff accrued in 1920. United States v. Anderson, 269 U.S. 422, 46 S. Ct. 131, 70 L. Ed. 347; Rouss v. Bowers (C.C.A.) 30 F.2d 628; American National Co., Rec., v. United States, 274 U.S. 99, 47 S. Ct. 520, 71 L. Ed. 946.
The next question to be decided is: Was the amount to be paid seller by the purchaser in liquidation of the taxes assessed against the seller part of the consideration of the purchase price and to be treated as income? Since this suit was commenced the Supreme Court has handed down the decision in the case of Old Colony Trust Company v. Commissioner of Internal Revenue, 279 U.S. 716, 49 S. Ct. 499, 73 L. Ed. 918. In this case, supra, the Supreme Court held that the payment by the employer of the income taxes assessable against the employee constituted additional taxable income to such employee. See, also, United States v. Boston Maine R.R. Co., 279 U.S. 732, 49 S. Ct. 505, 73 L. Ed. 929.
The agreement to pay, and the actual payment by the purchaser of the income taxes assessable against the seller, constitute additional taxable income to such seller. It is a profit derived from the sale, and taxable like any other gain or profit. The total amount paid is the actual purchase price, and the adding of the tax was only a method of arriving at the amount to secure the property and formed part of the consideration. Lash's Products Co. v. United States, 278 U.S. 175, 49 S. Ct. 100, 73 L. Ed. 251.
The plaintiff did not include in its income tax return for 1920 any amount to cover the federal taxes for that year which the purchaser had agreed to pay. The government in adjusting the taxes of plaintiff found the sum of $66,896.03, and included that amount in the taxable income assessed against the plaintiff, and levied an additional tax, which the plaintiff paid. Since the books of the plaintiff were kept on an accrual basis, it might be said this amount accrued to plaintiff. Subsequently, however, after arbitration, the plaintiff only received from the purchaser the sum of $44,639.35 as the amount of the obligation of the purchaser to discharge the income tax liability of the seller. Although it might be argued the amount accrued at the time of sale is the correct amount on which the tax should be levied, nevertheless the plaintiff, as a matter of fact, did not receive this amount, but, instead, only $44,639.35. Accruals of this nature for the purpose of determining income for tax purposes are subject to adjustment in order to reflect actual income. Producers Fuel Co., 1 B.T.A. 202; Josiah Wedgwood Sons, Ltd., 3 B.T.A. 355; Bonnie Bros., Inc., 15 B.T.A. 1231; Inland Products Co., 10 B.T.A. 235, affirmed (C.C.A.) 31 F.2d 867; Philip C. Brown et al., 10 B.T.A. 1122; Lehigh Valley Coal Sales Co., 15 B.T.A. 1401.
We now have before us the matter of the tax liability of plaintiff for the year in which the transaction occurred after all the facts are known and the amounts have been definitely determined.
The plaintiff's income with respect to this item should be determined upon the basis of what actually happened, and therefore upon the basis of what it actually received. The Commissioner of Internal Revenue was correct when he adjusted the tax to reflect the actual amount received by the plaintiff from the purchaser as the tax liability under the agreement of the purchaser to pay the tax.
The complaint and counterclaim should be dismissed, and it is so ordered.