Opinion
No. M-178.
December 7, 1936.
George E.H. Goodner, of Washington, D.C. for plaintiff.
John A. Rees, of Washington, D.C. and Robert H. Jackson, Asst. Atty. Gen., for the United States.
Before, BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Proceedings by Bernard Greenbaum against the United States.
Judgment for plaintiff.
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. During the years 1922 to 1925, inclusive, the plaintiff was a resident of New York City, N. Y., and a stockholder and the treasurer of Grayona Needlecraft Corporation. This was a New York corporation engaged in the business of manufacturing and selling needlecraft material and prior to 1923 was known as Lorimer Greenbaum Company, Incorporated. The plaintiff spent the most of his time on the road selling the products of the said corporation to the retail trade. His trips averaged about six weeks each.
2. Plaintiff timely filed his personal federal income tax return for the calendar year 1924, reporting thereon a total income from salaries and commissions of $67,500, less entertainment expenses of $5,500; other income from dividends of $144; a total gross income of $62,144; deductions therefrom of $10,654.52 for interest paid, $332.44 as taxes paid to the State of New York, and $2,800 as contributions to charitable organizations, all amounting to $13,786.96, leaving a net taxable income of $48,357.04 and a total tax due thereon of $5,668.48. The Commissioner of Internal Revenue made no changes in the return, and this sum was paid by plaintiff in four equal installments of $1,417.12 on the 15th day of March, June, September, and December, 1925.
3. Plaintiff also timely filed his income tax return for the calendar year 1925, reporting thereon a total income from salaries and commissions received from the Grayona Needlecraft Corporation of $60,000, less entertainment expenses of $5,500; other income from dividends of $144; a total gross income of $54,644; deductions therefrom of $13,654.96 for interest paid, $613.34 as taxes paid to the State of New York, and $2,500 as charitable contributions, all amounting to $16,768.30, leaving a net taxable income of $37,875.70 and a total tax due thereon of $2,842.93. The Commissioner of Internal Revenue subsequently audited this return, disallowed the claimed item of entertainment expenses of $5,500, and thereby increased plaintiff's net taxable income to $43,375.70, resulting in a total tax due thereon of $3,701.67. This sum was paid by plaintiff as follows:
March 19, 1926 ............... $ 710.73 June 16, 1926 ................ 710.78 Sept. 16, 1926 ............... 710.70 May 7, 1931 .................. 710.70 May 29, 1931 ................. 858.76 -------- Total ..................... 3,701.67
4. Plaintiff kept no books during the years 1924 and 1925, but his federal tax returns were prepared upon the basis of cash receipts and disbursements.
5. The plaintiff did not receive a regular or fixed salary from the Grayona Needlecraft Corporation during 1924 and 1925, but did receive commissions on sales, together with a bonus at the end of each year, and that was based upon the volume of sales during the year. The corporation carried upon its books a drawing or salary account for the plaintiff, to which it charged all withdrawals that he made and all payments made by the corporation on his behalf and to which it credited commissions and bonuses earned by him, amounts which he personally repaid to the corporation, and amounts paid to the corporation for him by others. The total amount entered in plaintiff's salary account as payments made by the corporation to or for him during 1924 was $129,223.84, not including amounts advanced to him as travel expenses aggregating $6,951.83. This sum of $129,223.84 included $39,800 paid to the plaintiff, $54,354.05 paid for him by the corporation upon notes of the Lyk-Glas Corporation, and $35,069.79 representing other miscellaneous payments made for plaintiff by the corporation for items including insurance, taxes, and interest.
During 1924 the Lyk-Glas Corporation repaid to the Grayona Needlecraft Corporation $4,000 of the $54,354.05 received as aforesaid. The plaintiff himself repaid to the corporation sums aggregating $35,$530.40, and the corporation received from others (in addition to the $4,000 paid by the Lyk-Glas Corporation) sums aggregating $20,752. Separate items making up these totals of $4,000, $35,530.40, and $20,752, in the sum of $60,282.40, were credited by the corporation to plaintiff's salary account.
6. Late in 1922 plaintiff's brother, Victor Greenbaum, and one Walter G. Ross organized a corporation known as "Lyk-Glas Corporation" with a total issued stock of $28,500, of which the plaintiff purchased $5,000. Plaintiff was a director of the corporation for the first three or four months of its existence, but was neither director nor officer thereafter. This corporation engaged in the business of repainting automobiles by means of a patented quick-drying process. Its business expanded rapidly, and early in 1923 it was in need of additional operating capital. Its stockholders, including plaintiff, thought the prospects were good for handsome profits and decided to borrow the necessary capital rather than to raise it by selling more stock. However, it could not borrow on its own notes without acceptable indorsers, and the plaintiff agreed to use his credit and to indorse notes for whatever capital might be needed, believing that he would never be called upon to pay the notes.
7. Plaintiff's first indorsement of notes of the Lyk-Glas Corporation was in February, 1923, when he indorsed a series of notes in the aggregate amount of $20,000 in order to assist the corporation in establishing a line of credit at the Columbia Bank. The entire amount was borrowed within the next month. These were all short-term notes and were paid by plaintiff when due. In June and July, 1923, further expansion of the business necessitated the indorsement of additional notes in order to obtain further working capital. These loans were obtained from "loan sharks" at a high rate of interest and discount. Each time that a note fell due and the corporation could not pay, plaintiff paid it or indorsed a new note to take it up.
8. The business of the Lyk-Glas Corporation appeared to prosper until about July, 1923, when the plaintiff decided that it was actually a losing venture, partly because of the high operating expenses and the fact that guaranteed paint jobs were proving unsatisfactory and cars were being returned for repainting under the terms of the corporation's warranty, and more particularly by reason of the competition arising from the introduction and use by competitors of the "Duco" painting process.
9. Before the end of 1923 all hope of success of the Lyk-Glas Corporation was gone, but plaintiff insisted that the business be continued even at a loss. This was because of his indorsements on the corporation's notes which he now knew he would have to pay. If compelled to pay them all at once, the burden would have crushed him, but by spreading the payments over a period of time, he thought he could take care of them out of his earnings. Furthermore, plaintiff knew that if the Lyk-Glas Corporation notes were permitted to go to protest with his indorsement on them, it would ruin his credit. Upon plaintiff's insistence, therefore, the Lyk-Glas Corporation continued in business at a loss until about the end of 1925. During this time plaintiff was able to liquidate its indebtedness represented by the notes on which he was indorser.
10. During 1924 the Lyk-Glas Corporation, while operating its business at a loss, experimented with other paint processes in an attempt to meet its competition. It continued a losing venture until early in 1926, when the process rights and shop equipment were sold to a former employee in consideration of his agreement to assume outstanding obligations of the corporation approximating $1,200, together with his personal note for $2,000, which was never paid.
11. All of the notes indorsed by the plaintiff as stated above, which matured in 1924, in the aggregate sum of $54,354.05, were paid for him by Grayona Needlecraft Corporation and charged to his drawing or salary account. During 1925 one such payment was similarly made by the Grayona Needlecraft Corporation in the sum of $1,500 and charged to plaintiff's salary account. Plaintiff made payment by his personal checks during 1925 upon such notes so indorsed as follows:
March 12 to Nat Ottensoser ....... $ 500.00 November 16 to Eugene Loeb ....... 900.00 { S. Friedman ...... 1,200.00 November 18 to { { Eugene Loeb ...... 3,000.00 -------- Total ......................... 5,600.00
12. Plaintiff has never been reimbursed for any of the aforesaid payments made by him on indorsements of Lyk-Glas Corporation notes, except as herein stated. The said payments were set up on the books of the' Lyk-Glas Corporation as accounts payable to plaintiff. Said notes were also indorsed by Victor Greenbaum and Walter C. Ross, but these two indorsers were insolvent and unable to pay and plaintiff has never recovered anything from them. Before indorsing the corporation's notes, plaintiff had an agreement that, before any dividends were paid, he should be repaid in full for any payments he might make.
13. At the time the Commissioner of Internal Revenue assessed the additional tax of $858.76 for 1925, which was paid on May 29, 1931, as set out in finding 3, above, he also assessed interest thereon in the amount of $74.69, which amount was paid by plaintiff on May 29, 1931. No part of the taxes and interest paid by plaintiff for 1924 and 1925, as aforesaid, has been refunded.
14. In determining the income upon which the aforesaid taxes for 1924 and 1925 were assessed, the Commissioner of Internal Revenue allowed no deductions in respect of the payments made by plaintiff on notes of the Lyk-Glas Corporation.
15. On April 17, 1929, the plaintiff filed separate claims for refund of all taxes paid for the years 1924 and 1925, both stating as grounds that he "failed to deduct losses sustained by him during the year on account of payments made by him of notes which he endorsed for others in the course of his business dealings." These claims were disallowed by the Commissioner of Internal Revenue on a schedule dated June 11, 1929.
16. Plaintiff is the same party as the petitioner in the case of Ben Greenbaum v. Commissioner, 20 B.T.A. 469, and that decision became final without any appeal therefrom by the Commissioner.
This is a suit to recover overpayments of income taxes by plaintiff upon his personal returns for the calendar years 1924 and 1925.
The sole issue for decision is whether certain payments made by plaintiff during these years are statutory losses properly deductible in determining his taxable net income for those years. The Commissioner of Internal Revenue declined to allow the deduction.
The plaintiff indorsed certain notes of the Lyk-Glas Corporation in 1922 and 1923. The corporation became financially involved in those years and plaintiff was called upon in 1922, 1923, 1924, and 1925 to pay the notes or renewals thereof. The corporation was hopelessly insolvent, and there can be no question that plaintiff sustained a loss of the entire amount which he was required to pay. The plaintiff filed a petition before the Board of Tax Appeals on the identical facts and involving the same statute and claiming losses for the years 1922 and 1923 on notes paid during these years. By a decision of the Board in August, 1930, Ben Greenbaum v. Commissioner, 20 B.T.A. 469, the plaintiff was held entitled to deduct losses sustained by reason of the notes which he had paid in those years. The present suit is for the years 1924 and 1925, claiming the right to deduct the losses occasioned by the further payment on the same notes during those years on which he was indorser.
The decision of the Board of Tax Appeals is res judicata. It was a decision on the merits between the same parties and upon the same demand for previous years. The taxpayer is entitled to "relief from redundant litigation of the identical question of the statute's application to the taxpayer's status." Tait v. Western Maryland Ry. Co., 289 U.S. 620, 53 S.Ct. 706, 707, 77 L.Ed. 1405. The first installment of the 1924 tax is barred, no refund claim having been filed within the statutory period.
Judgment will accordingly be entered in favor of plaintiff by giving effect to those deductions, with entry of judgment suspended pending the submission of a computation by the parties on that basis. It is so ordered.