Opinion
No. F-342.
April 6, 1931.
Suit by Mt. Vernon Car Manufacturing Company against the United States.
Judgment for plaintiff.
This case having been heard by the Court of Claims, the court, upon the report of a Commissioner and the evidence, makes the following amended special findings of fact:
1. Plaintiff is a corporation organized under the laws of the state of Illinois, with its principal office and place of business in Mount Vernon, Ill.
2. Since its organization in 1890 the business of the Mt. Vernon Car Manufacturing Company has been that of building freight cars of every description, car wheels, castings, forgings, etc., and in the construction of such cars lumber is an essential product, and it is advisable to have at all times an available source of supply for such lumber.
3. On or about June 16, 1906, the plaintiff entered into a certain contract with the Lumber-Mineral Company, a Maine corporation, with principal place of business in Arbo, Miss., the substance of which was as follows:
"Witnesseth: That whereas the party of the first part is engaged in the lumber business at Arbo, Covington County, in the State of Mississippi, and manufactures lumber for use principally in the manufacture of cars and for railroad work, and, whereas, the Mount Vernon Car Manufacturing Company is engaged in the construction and manufacture of freight cars, in the city of Mount Vernon, Jefferson County, in the State of Illinois, and needs and uses large quantities of lumber of the kind and character produced by the party of the first part, and whereas the party of the first part is desirous of securing and raising additional capital to use in enlarging and improving its plant, and is also desirous of making arrangements whereby funds and capital may be secured in order to pay certain obligations of the party of the first party, outstanding, for borrowed money now maturing, and also to provide the necessary money to meet the payments coming due on its timber tract in the State of Mississippi; and whereas in consideration of the terms and conditions hereinafter set forth, the party, of the second part is willing to advance and furnish said funds. Therefore it is mutually understood and agreed:
"First. That the party of the first part shall secure from its stockholders five hundred thirteen (513) shares of the capital stock of the said Lumber-Mineral Company, now outstanding and shall cancel and retire same and shall thereby reduce the capital stock of the said Lumber-Mineral Company issued and outstanding to four hundred thirty-three (433) shares, par value of each share one hundred dollars ($100.00).
"Second. The party of the second part shall subscribe for seven hundred twenty-three (723) shares of the capital stock of the party of the first part of the value of one hundred ($100.00) dollars each, and shall pay to the party of the first part cash for said stock; and said party of the first part agrees to issue same, and in addition two hundred forty (240) shares of said stock to be sold in accordance with contract of even date between W.H. Moseley and H.H. Cust; and also fifty (50) shares to be sold to W.B. Ridgely, making in all fourteen hundred forty-six (1446) shares.
"Third. The said party of the first part shall not issue or sell any more of its capital stock without the consent, in writing, of the party of the second part.
"Fourth. The said party of the second part will loan or advance to the said party of the first part, from time to time, such sums of money as may be required to meet and pay maturing notes and obligations of the party of the first part that can not or may not advisedly be renewed; and also to provide needed betterments and improvements in the plant of the party of the first part, for which advancements the said party of the first part shall give its promissory note bearing interest at six per cent (6%) per annum. Advancements and loans to meet the notes mentioned in the fifth clause hereof shall bear interest at the rate of seven and one-half per cent (7½%) from the date thereof.
"Fifth. It is further and especially agreed that the said party of the second part shall advance such sums of money as the said party of the first part, given for timber and now held by W.S.F. Tatum, agent, at Hattiesburg, Mississippi, in which case said party of the second part agrees that such notes and obligations may be transferred to the party of the second part by said W.S.F. Tatum, agent, endorsed by him without recourse, provided such action is agreeable to said W.S.F. Tatum, agent, and mutually desirable by the parties hereto. And to further secure such advancements in purchasing the said obligations of the party of the first part, it is the intent of the party of the first part in this agreement to place the party of the second part in possession of the same securities that the said W.S.F. Tatum, agent, now holds; to wit, a deed of trust securing said notes covering the property of the said party of the first part. The party of the first part further agrees to cause to be executed in favor of the said party of the second part a mortgage or a deed of trust, similar in its provisions to the aforesaid deed of trust, whenever requested by the party of the second part, and to provide security to the said party of the second part for its advances in paying off or taking over said W.S.F. Tatum, agent, notes and deed of trust given for land and timber payments; and especially is it agreed that the new deed of trust and notes shall be given to the party of the second part to take up what may not be paid of said notes by the party of the first part at the date of maturity of the last note given to the said W.S.F. Tatum, agent, and secured by said deed of trust. All advancements made under this clause and the new deed of trust and note referred to shall bear interest at the rate of seven and one-half per cent (7½%) per annum.
"Sixth. It is further agreed that the said party of the first part shall give the orders for lumber and materials and the business of the said party of the second part preferred attention and execution, and shall use its best endeavors to provide suitable lumber for car-building purposes for the said party of the second part, from time to time, as same shall be needed by the said party of the second part, and shall use every possible effort to make delivery thereof to the said party of the second part at the time, or times, requested and desired by the said party of the second part, for the interest and furtherance of the business of the said party of the second part. Party of the second part agrees to give the party of the first part its orders so far as the party of the first part may be able to fill the same as required, and to pay for the same the prevailing market price.
"Seventh. It is further agreed that the party of the first part shall issue its bonds, secured with the property of the party of the first part, at any time hereafter in sufficient amount to cover and secure all sums due the party of the second part; or at any time, upon request, will secure its indebtedness to the party of the second part by mortgage or second mortgage or deed of trust on all of the property of the party of the first part; and it is further agreed that this contract shall be binding upon the parties hereto until December fifteenth (15th), 1908, and thereafter until the timber referred to is cut and disposed of, together with its by-products, and until the business contemplated is finished and settled."
This was the only contract made covering advancements by plaintiff to the Lumber-Mineral Company and the payment of interest thereon.
4. During the year 1905 plaintiff had advanced to the said Lumber-Mineral Company the sum of $10,000. During the years 1906 to 1911, inclusive, plaintiff loaned or advanced to the Lumber-Mineral Company, pursuant to the terms of the contract set out above and in fulfillment of its provisions, the following (including the advancement made in 1905) respective amounts, which were thereupon entered upon the books of the plaintiff company:
1905 ..................... $ 10,000.00 1906 ..................... 152,000.00 1907 ..................... 180,000.00 1908 ..................... 90,000.00 1909 ..................... 82,000.00 1910 ..................... Nothing. 1911 ..................... 5,000.00 ____________ Total .................... 519,000.00
When an amount of cash was loaned to the Lumber-Mineral Company and a note was received therefor they were charged to cash on plaintiff's books, and the Lumber-Mineral Company was given credit for the note.
5. All of said principal advances were repaid by the said Lumber-Mineral Company to plaintiff as follows:
1907. $ 72,300.00 by issuance of 723 shares of capital stock of $100 each. 1913. $ 21,400.00 by cash. 1917. $203,300.00 by cash. 1918. $125,000.00 by cash. 1919. $ 97,000.00 by cash. ___________ Total $519,000.00
6. From and after June 16, 1906, all loans or advancements made bore interest at the rate of 6 per cent. per annum. Demand notes payable at the Third National Bank of Mt. Vernon, Ill., were given by the Lumber-Mineral Company to plaintiff on the following respective dates and in the following respective amounts, in payment of the interest then due on the advancements made by plaintiff pursuant to said contract:
April 30, 1907 .............. $ 5,200.48 April 30, 1908 .............. 17,110.69 April 30, 1909 .............. 24,361.00 April 30, 1910 .............. 31,602.22 April 30, 1911 .............. 34,745.85 April 30, 1912 .............. 37,126.43 April 30, 1913 .............. 39,358.19 April 30, 1914 .............. 40,621.94 __________ Total ................... 230,126.80
These notes represented the entire amount of accumulated interest for the current year. They were entered on the books of the plaintiff as accounts receivable from the Lumber-Mineral Company. Plaintiff's interest account was given credit for the note and a charge was made to bills receivable.
Each of the several interest notes in question had a value equivalent to its face value on the respective dates appearing thereon and at the times said notes were acquired by the plaintiff.
7. To date of April 30, 1914, plaintiff had received from said Lumber-Mineral Company interest notes aggregating $230,126.80, as above set out, and it was decided by plaintiff at that time to waive its right to further interest until such time as the said Lumber-Mineral Company was in better financial condition.
8. Beginning December 31, 1908, and thereafter at the end of each year in which these notes were received, the vice president and general manager of plaintiff, who, together with his wife, owned a majority of the stock of the plaintiff and who was the only one in position to give authoritative directions to plaintiff's auditor as to the method of handling accounts, directed him to charge these interest notes off plaintiff's books.
9. On the following dates plaintiff debited the surplus account on its books and credited the notes receivable account with the following sums, representing the notes set out in Finding 6 above, to wit:
December 31, 1908 .............. $ 22,311.17 December 31, 1909 .............. 24,361.00 December 31, 1910 .............. 31,602.22 December 31, 1911 .............. 34,745.85 December 31, 1912 .............. 37,126.43 December 31, 1913 .............. 39,358.19 December 4, 1914 .............. 40,621.94 __________ Total ...................... 230,126.80
10. At the times these respective interest notes were directed to be charged off and were charged off they were not ascertained to be worthless, but plaintiff considered their payment would be slow, and they were charged off solely in consonance with its policy of conservation in keeping its accounts; that is, in arbitrarily charging matters off its books in order to reflect at all times a conservative balance sheet and an extremely liquid condition. Until 1914 or 1916 capital expenditures had been frequently treated as expense items; inventories had been arbitrarily written off as high as 25 per cent.; and properties belonging to the company had not been carried on its books.
11. Prior to and during the entire years 1918, 1919, and 1920 the Lumber-Mineral Company owned in fee 14,642 acres of land situated in Smith and Covington counties, Miss. Generally speaking, this property was pretty well blocked. The property is located in the immediate vicinity of Arbo, Miss., and readily accessible to railroads for shiping facilities, being located on both sides of the Illinois Central Railroad right of way running from Hattiesburg to Jackson, Mississippi, and on both sides of the Illinois Central Railroad branch road known as the Gulf Ship Island Railroad, running from about Saratoga to Laurel, Miss. In 1911 the company still owned two-thirds of the timber that was originally on this property, and in addition it owned rights in a considerable amount of other property on which it had timber leases. It was operating a sawmill in 1911 and removing timber from its tract. It built a new mill in 1914 and 1915, which doubled the capacity of its plant, and was actively engaged in business until May 11, 1916, when a disastrous fire greatly reduced its physical assets. The mill was not rebuilt because of the increased cost of new machinery and the uncertainty of delivery during the war period. Approximately 40,000,000 feet of merchantable standing timber remained at the time of the fire. This was principally pine. In addition, the company had quite a lot of oak, some cypress, black gum, sweet gum, and yellow poplar that was not estimated or computed or applied as being merchantable timber in 1913 to 1916, as that class of timber was not then selling for enough to make it profitable to manufacture.
12. On January 1, 1918, the value of the assets of the Lumber-Mineral Company, as carried on its books of account, together with the fair market value of assets not carried on its books, amounted to $452,963.67. Its liabilities, exclusive of capital stock liability, amounted to $460,298.25, which sum included the said interest notes due plaintiff of $230,126.80.
13. On January 1, 1919, the value of the assets of the Lumber-Mineral Company as carried on its books of account, together with the fair market value of assets not carried on its books, amounted to $316,960.25. Its liabilities, exclusive of capital stock liability, amounted to $327,423.37. This consisted of the notes for interest due to the plaintiff of $230,126.80 and the unpaid part of the principal notes due plaintiff of $97,000.
14. On January 1, 1920, the value of the assets of the Lumber-Mineral Company, as carried on its books of account, together with the fair market value of assets not carried on its books, amounted to $267,780.29. Its liabilities, exclusive of capital stock liability, amounted to $230,126.80, being the amount of the interest notes due to plaintiff.
15. On January 1, 1927, the value of the assets of the Lumber-Mineral Company as carried on its books of account, together with the fair market value of assets not carried on its books, amounted to $234,386.35. Its total liabilities, exclusive of capital stock liability, amounted to $230,126.80, being the amount of the interest notes due to plaintiff.
16. On March 14, 1919, plaintiff filed a tentative return for income and excess profits taxes for the calendar year 1918, showing estimated taxes due in the sum of $8,000; on June 16, 1919, it filed its original return of such taxes for said years showing a total amount of taxes due of $13,644.02; and on or about July 8, 1920, it filed an amended return of such taxes for the calendar year 1918 showing a total amount of such taxes for said calendar year of $163,076.25, all of which was paid by the plaintiff.
17. On March 13, 1920, the plaintiff filed its return for income and excess profits taxes for the year 1919, disclosing taxes due in the amount of $433,659.49, which was paid by the plaintiff.
18. On March 14, 1921, plaintiff filed its original return for income and excess profits taxes for the calendar year 1920, and on April 1, 1921, filed its amended return thereof, in both of which returns plaintiff reported a loss and no tax due. On March 15, 1922, plaintiff filed its second amended return for said calendar year 1920, disclosing income and excess profits taxes due in the sum of $85,048.60, which amount was paid by the plaintiff.
19. Thereafter, the Commissioner of Internal Revenue caused the books of the plaintiff to be audited, and on or about July 5, 1923, the said Commissioner of Internal Revenue proposed the assessment of additional taxes in the sum of $196,361.42 against the plaintiff for the year 1918, and in the sum of $884,375.93 for the year 1919, and advised the plaintiff that it had paid taxes in the sum of $85,048.60 in excess of its liabilities in respect of the year 1920. Protest to the assessment of these additional taxes was filed by plaintiff, and, after certain adjustments were made, assessments of additional taxes for the various years were levied as follows:
1918 ........................ $161,701.17 1919 ........................ 96,474.05 1920 ........................ 66,498.59
All of which were paid on April 26, 1924.
20. In arriving at the amounts assessed and collected as last above set out, the Commissioner of Internal Revenue disallowed, as plaintiff's invested capital for the years 1918, 1919, and 1920, the sum of $230,126.80, represented by demand notes given to the plaintiff by the Lumber-Mineral Company in payment of interest on certain advances made by the plaintiff to the Lumber-Mineral Company during the years 1905 to 1911, inclusive. The said interest notes were dated and were in amounts as follows:
April 30, 1907 ................ $ 5,200.48 April 30, 1908 ................ 17,110.69 April 30, 1909 ................ 24,361.00 April 30, 1910 ................ 31,602.22 April 30, 1911 ................ 34,745.85 April 30, 1912 ................ 37,126.43 April 30, 1913 ................ 39,358.19 April 30, 1914 ................ 40,621.94 __________ Total ..................... 230,126.80
No amount has been paid on any of these interest notes by the Lumber-Mineral Company or any one on its behalf to the plaintiff.
Said notes or any portion thereof are not included either as capital assets or as income in any tax return of plaintiff for any year.
21. Plaintiff did not include the above $230,126.80 as part of its invested capital in any of its original or amended returns for said years.
22. Plaintiff kept its books and made its income and excess profits tax returns for the years here involved upon the accrual basis.
23. On September 30, 1924, plaintiff filed claims for refund of income and excess profits taxes collected for the years 1918, 1919, and 1920 in the amounts of $16,094.46, $11,880.17, and $3,615.71, respectively, based specifically on the contention that the said notes of the Lumber-Mineral Company should be included in its invested capital. This contention was first made in the plaintiff's protest to the deficiency letter of July 5, 1923, referred to in finding 19 above. On or about February 5, 1925, the Commissioner of Internal Revenue rejected said claim for refund for the year 1918 in its entirety, and on or about December 12, 1924, the said Commissioner rejected said claims for refund for the years 1919 and 1920 in their entirety.
24. The Lumber-Mineral Company has never disclaimed any liability on the said interest notes, and it is its present intention to pay all of said notes so far as it may be able. They have never been canceled and are still in the custody of the plaintiff. They have always appeared, and continue to appear, as an obligation on the books of the Lumber-Mineral Company. The Lumber-Mineral Company has waived the benefit of a plea of the statute of limitations.
25. The Mississippi locality where the Lumber-Mineral Company is situated is developing very rapidly, and it seems to be an assured thing that the notes will be paid.
26. Plaintiff has at all times borne true allegiance to the government of the United States, and has not in any way voluntarily aided, abetted, or encouraged rebellion against the government.
Russell A. McNair, of Detroit, Mich. (Goodenough, Voorhies, Long Ryan, of Detroit, Mich., on the brief), for plaintiff.
Ralph C. Williamson, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen., for the United States.
The plaintiff presented the identical question involved in this case to the Board of Tax Appeals in contesting an alleged deficiency tax for the calendar year 1921. The Board of Tax Appeals in a written opinion announced October 5, 1928 ( 13 B.T.A. 810), granted the plaintiff's contentions and entered judgment accordingly. Thereafter the Commissioner of Internal Revenue acquiesced in the holdings of the Board of Tax Appeals. No reason has been advanced in this case why we should disturb the opinion of the Board of Tax Appeals, and judgment for the plaintiff is entered accordingly.