Opinion
No. 5998.
March 24, 1930.
Appeal from the District Court of the United States for the Southern Division of the Northern District of California; Harold Louderback, Judge.
Action by Haas Bros., a corporation, against John P. McLaughlin, United States Commissioner of Internal Revenue for the First District of California. From an adverse judgment, plaintiff appeals.
Affirmed.
The appellant seeks to recover $13,104.18, with interest, for payment under protest of income tax by reason of disallowance of losses claimed for the years 1919 and 1920. From an adverse judgment, this appeal is prosecuted. Involved are four contracts for the purchase of coffee; five contracts for the purchase of fruit; and nine contracts for the purchase of prunes. All of the coffee, except 400 bags, was delivered under the first contract during 1919. None was delivered under the other contracts until 1920. The undelivered coffee was in transit on the high seas at the close of 1919. The market price of the undelivered coffee on December 31, 1919, was $9,476.25 less than the contract price. The contracts provided that the seller was privileged to deliver "spot" coffee and to "select and/or grade and make any arrivals of coffee uniform by mixing if deemed necessary for proper delivery," and the buyer was bound to accept the coffee if "average grading within one half (½c) cent per pound of sample or description sold by at the graded allowance." At the time of the fruit contracts, the fruit was in process of growth. On maturity, a portion of the fruit was delivered before the close of 1920. The balance remained in the seller's warehouse in separate stacks as to grades, quantities, and values, and appellant paid storage and insurance for December, 1920. None of the fruit was identified as to lot or warehouse or ranch on which it was grown, or segregated in any fashion as appellant's fruit. The seller reserved the routing of freight from different "factories." The market price of the undelivered fruit on December 31, 1920, was $7,589.53 less than the contract price. Twenty-five pound boxes of different grades of prunes under the prune contracts were to be delivered at various times from September to November, 1920. The appellant was privileged to substitute larger sizes for smaller sizes (30/40 to 70/80); payment to be cash, less 2 per cent. if draft attached paid in 10 days; otherwise net cash 30 days from date of draft; documents to be attached. The price per pound was the seller's opening prices. The market price for prunes December 31, 1920, was $23,825.85 less than the contract price. The undelivered coffee was not included in appellant's inventory for 1919, nor were the undelivered canned goods, prunes, etc., included in the 1920 inventory. No debit was made for delivered merchandise, nor credit for bills payable, etc. Entries were made as losses, the difference between the contract price and market price of undelivered coffee, prunes, etc., on December 31, 1919, and December 31, 1920, and losses claimed upon income tax returns for such year.
The trial court held that there was no identification of the undelivered coffee or fruit, etc., at the time the contracts were made, nor at any time prior to the close of the respective years, and that the title to the coffee did not pass during 1919, nor did title to the fruit, etc., pass during 1920, and confirmed the order of the Commissioner of Internal Revenue disallowing the deductions, and dismissed the action.
I.I. Brown and Thomas, Beedy, Presley Paramore, and George Stoker, all of San Francisco, Cal., for appellant.
George J. Hatfield, U.S. Atty., and Chellis M. Carpenter and Esther B. Phillips, Asst. U.S. Attys., all of San Francisco, Cal., for appellee.
Before DIETRICH and WILBUR, Circuit Judges, and NETERER, District Judge.
It is conceded that, the contracts being made in and to be performed in California, the laws of that state control. Section 1140 of the California Civil Code provides: "The title to personal property, sold or exchanged, passes to the buyer whenever the parties agree upon a present transfer, and the thing itself is identified, whether it is separated from other things or not."
It is obvious that neither the coffee nor fruit, etc., was identified at the execution of the contract. Neither does it appear that any of the merchandise was set apart or used by appellant as his own — appropriated — at any time during the years in question. In Blackwood v. Cutting Packing Co., 76 Cal. 212, 18 P. 248, 251, 9 Am. St. Rep. 199, the court holds a like agreement was not a sale in præsenti. Referring to section 1140, the court said: "This section does not dispense with identification. On the contrary, it requires it. It only dispenses with segregation when the property is otherwise identified."
In Todd v. Lyon, 55 Cal.App. 67, 202 P. 899, 901, there was no question of identity. The court said: "They are sufficiently described as being the entire stock of merchandise located in the store of plaintiff at La Mesa."
See, also, Walti v. Gaba, 160 Cal. 324, 116 P. 963; American Factors, Ltd., v. Goss, 72 Cal.App. 742, 238 P. 121; Wanee v. Thomas, 75 Cal.App. 231, 242 P. 509; In re Schujahn (C.C.A.) 120 F. 938; Gage Lumber Co. v. McEldowney (C.C.A.) 207 F. 255; Robinson Bros. Co. v. Patterson (C.C.A.) 210 F. 839; Stamford Extract Mfg. Co. v. Oakes Mfg. Co. (C.C.A.) 9 F.2d 301.
Williston on Sales, p. 520, says: "Sec. 17. No property passes until goods are ascertained. * * *"
Again, page 522: "The earliest conceivable moment for transfer of the property in such a case is when the goods become identified; and generally, if not universally, the property will not pass until not only the goods are identified, but some agreed act of appropriation has taken place."
No coffee was specified; no carrying steamer was named; privilege of delivering "spot" coffee and of selecting or grading "any arrivals" of coffee so as to make it uniform was retained — negatives identification or appropriation. The fact that the seller had fruit at the close of 1920 to meet the contract, in its warehouses, as to time and grade, since none was segregated or set apart, is not material. The fungible mass doctrine has no application. The appellants were not to take a part of a larger mass of like kind.
The conduct of the appellant is significant. At the time the contracts were a live issue, Regulation 45, article 1581 (Revenue Act of 1918, promulgated Jan. 28, 1921; amended March 3, 1922, Treasury Decision 3296, vol. 24, 1922) applicable at the time, which has the force of law, provided: "A purchaser should include in inventory merchandise purchased, title to which has passed to him, although such merchandise is in transit or for other reasons has not been reduced to physical possession, but should not include goods ordered for future delivery, transfer of title to which has not yet been effected."
Claiming losses on property in income tax returns, when not supported by inventory as required by law, is not persuasive. The appellant may not "blow hot and cold" at the same time. Its conduct is in harmony with the last provision of Regulation 45, supra, and corroborates the record, that the merchandise was not identified, nor were the goods set apart to, or used by, appellant at any time during 1919 and 1920, respectively. The fact that appellant paid storage and insurance for December, 1920, in view of the record, is of no importance.
None of the cases cited by appellant derogate from the foregoing. To apply, analyze, or distinguish the cases cited would serve no useful purpose and unduly lengthen this opinion.
The District Court was right. Affirmed.