Opinion
This case having been heard by the Court of Claims, the court, upon the evidence adduces, makes the following special findings of fact:
1. Plaintiff is a New York banking corporation with its principal office and place of business in New York City.
2. During the year 1934 plaintiff was the owner of approximately $13,000,000, face amount, of claims against German nationals, which claims were covered by the "Standstill Agreement" entered into by representatives of the various banks holding such claims and the representatives of the German Debtors.
3. Claims covered by the "Standstill Agreement" consisted of dollar obligations of German banks and industrial corporations to American Banks. According to the terms of the "Standstill Agreement," as renewed from year to year, such claims were subject to call by the creditors at any time, but not in excess of stipulated percentages of the face amount of the respective claims at any one time. Payment was to be made in registered marks at the rate of exchange therefor. Payment at the rate of exchange during the period in question resulted in a loss to the creditor of approximately 40% upon the dollar amount of the claims paid.
4. Claims subject to the "Standstill Agreement" were held by many of the large New York banks, and during the year 1934 various methods were employed to liquidate those claims and to minimize the loss resulting from payment in registered marks. Plaintiff had, prior to the period involved herein, purchased German common shares with registered marks received in payment of such claims. It was plaintiff's policy to seek means of recouping the exchange loss suffered in the liquidation of such claims, and claims were called for payment when and as such opportunities appeared.
5. In September 1934, plaintiff concluded that the purchase of silver bullion afforded an opportunity to minimize or recoup the loss on German standstill claims, and thereupon determined to liquidate sufficient of those claims to produce proceeds in pounds sterling equivalent to approximately one million dollars and to convert them into an investment in silver bullion.
6. At a meeting of the Board of Directors of plaintiff held on September 4, 1934, a resolution was adopted authorizing the officers of plaintiff to accept registered marks in payment of a portion of the German obligations owned by plaintiff, to sell or otherwise dispose of such registered marks for sterling in an amount not in excess of the approximate equivalent of one million dollars at the then current rate of exchange, and to use such sterling proceeds in the purchase of silver bullion in the London market, and to hold and dispose of the silver so purchased on terms and at prices approved by the officers of plaintiff, all in compliance with the laws, executive orders and other legal requirements of the United States of America.
7. In pursuance of such authority German claims were called and the registered marks received in payment were converted into pounds sterling, and the sterling was used for the purchase in London on behalf of plaintiff of silver bullion as follows:
Date of purchase
Ounces
Cost
Sept. 6, 1934 ...............
401,384.40
$197,613.02
"
13,
" .................
100,258.50
49,067.39
"
14,
" .................
351,053.60
172,202.95
"
15,
" .................
99,810.10
49,004.86
"
19,
" .................
351,451.80
173,029.79
"
20,
" ................
150,481.20
74,288.98
Oct. 5, " .................
301,100.50
147,361.23
"
"
" .................
299,964.70
146,842.09
------------
------------
Total .................
2,055,504.80
1,009,410.31
8. Under the conditions existing during September and October, 1934, and the usual and customary trade and business practice, the purchases made as above stated constituted a reasonable and orderly method of acquiring and accumulating such a quantity of silver bullion in London without unduly disturbing the market.
9. The silver bullion was stored for the account of plaintiff in London and so held by plaintiff until its sale as hereinafter stated.
10. From the time of the enactment of the Silver Purchase Act of 1934, 31 U.S.C.A. §§ 311a, 316a, 316b, 405a, 448-448e, 734a, 734b, the United States Treasury became the most important buyer of silver in the world markets. The orders placed in the London market for the account of the Treasury exercised a great influence upon the price of silver. The price of silver rose from a level of approximately fifty cents a fine ounce prevailing at the date of enactment of the Silver Purchase Act in June 1934, to about eighty cents in the Spring of 1935, and thereafter declined to a level of about sixty-four and one-half cents in the early part of December, 1935.
11. On or about December 3, 1935, the Silver Committee of plaintiff decided to sell all of the silver bullion owned by plaintiff. Its conclusion was based upon uncertainty as to the buying policy of the United States Treasury as reflected in the declining price trend of silver, the apparent failure of the Government buying to establish and maintain a higher price level, and the unsettled conditions in the Far Ease indicating that large quantities of silver might be offered for sale from China with a further depressing effect upon the price level.
12. On or about December 3, 1935, the Silver Committee of plaintiff instructed its vice president in charge of the matter to sell all of the silver bullion owned by plaintiff and to carry out the selling during the two weeks' period following that date.
13. The London silver bullion market is operated and controlled by four bullion brokers and all purchases and sales of silver bullion must be made through one of those brokers. Orders to buy or sell may be given for execution at the "fixing price" or at a named figure. The "fixing price" is established by those brokers by mutual agreement each day before the opening of the market. Ordinarily all orders placed before the opening for purchase or sale at the "fixing price" will be executed. Orders given before the opening to buy or sell at a named figure will be executed only if the "fixing price" is at or above the figure in the case of sales, or at or below the figure in the case of purchases. Orders to buy or sell given after the opening of the market in London, if "at the market" will be executed only in the discretion of the broker and if his or another broker's "book" warrants, while such orders given at a named figure will be executed only if the broker finds a counter order on his or another broker's "book" at the price named. All orders given before the opening influence the judgment of the brokers in establishing the "fixing price" and the weight of buying or selling orders, as the case may be, determines the price trend.
14. In view of the nature of the London market plaintiff's vice president in charge of the matter concluded, in the exercise of his best judgment, that it would be imprudent to offer the entire 2,000,000 ounces of silver bullion for sale in one lot, either "at the market" or "at the fixing" or at a price. On December 2, 1935, he cabled plaintiff's London correspondent to sell 200,000 ounces of silver at the December 3rd fixing price, and to deliver 89 bars stored November 13, 1934, and 91 bars stored November 15, 1934, at Sharps & Wilkins'. On December 3rd he cabled to sell 150,000 ounces at the December 4th fixing price, and to deliver 136 bars stored November 20, 1934, at S. Montagu & Company's. On December 5th he cabled to sell 300,000 ounces at the December 6th fixing price, and to deliver 273 bars stored November 5, 1934, at Prixley & Abell's. On December 7th he cabled to sell 300,000 ounces at the December 9th fixing price, and to deliver 265 bars stored November 5, 1934, at S. Montagu & Company's. On December 9th he cabled to sell 250,000 ounces at the December 10th fixing price, and, if possible, all the remaining silver. The correspondent replied on December 10th that it was unable to execute the order, and that there had been no operations and no price fixed. Plaintiff on December 10th requested information to be furnished on December 11th as to the fixing price, and comments on the market, and was advised by its correspondent that the transaction were small, representing about one-tenth of the amount offered, and that failing official purchases, the market was obviously weak. Plaintiff made further requests of its correspondent to sell amounts ranging from 250,000 to 500,000 ounces, by cables on December 11, 12, 13, 14, 16 and 17. Against these orders four sales were made by the correspondent, ranging in amounts from 17,554 ounces to 63,412.80 ounces as shown in finding 16. The balance of the silver was sold on January 3 and 6, 1936. Offerings were made in this manner for the purpose of disposing of the silver as rapidly as possible at prevailing prices without creating an undue disturbance in the market through a large single offering, and the vice president of plaintiff in charge of the matter considered that this method of selling was the prudent manner of marketing that silver.
15. Between December 3, 1935, and December 9, 1935, plaintiff sold a total of 951,615 ounces of silver bullion in units as indicated below. On December 9, 1935, silver declined one cent from the fixing price of Saturday, December 7, 1935, and on December 10, 1935, the fixing was delayed for two hours beyond the usual time. Conditions in the London bullion market from that date to and including January 2, 1936, were extremely disturbed and the price of silver bullion declined rapidly. The offerings of silver bullion during that period so far exceeded the demand that there was no reasonable opportunity to dispose of any substantial quantity in an orderly manner until January 3, 1936, when trading in spot silver bullion again resumed activity. On January 3, 1936, and January 6, 1936 (the next trading day) plaintiff sold all of its remaining silver bullion. The sales made from December 3, 1935, to and including December 17, 1935, were made at prices above average cost, while the sales made on January 3 and 6, 1936, were made at prices below average cost.
16. The sales of silver bullion and the proceeds in dollars therefrom were as follows:
Date of sale
Ounces
Receipts from sales
Dec.
3,
1935 ...............
100,258.50
$64,847.05
"
"
" ..................
99,810.10
64,573.39
"
4,
" .................
150,481.20
97,221.58
"
6,
" .................
301,100.50
194,236.64
"
9,
" .................
299,964.70
191,274.59
"
13,
" ..................
44,902.30
26,664.2
"
14,
" ..................
63,412.80
37,062.13
"
16,
" ..................
17,554.00
10,087.23
"
17,
" ..................
25,302.90
13,914.46
Jan.
3,
1936 ...............
244,783.90
116,362.42
"
"
" .................
257,101.90
122,216.24
"
6,
" .................
144,282.30
65,413.18
"
"
" .................
306,549.70
138,980.15
------------
-------------
Total ...........
,504.80
1,142,853.27
17. A quantity of 2,000,000 ounces of silver bullion constitutes a very substantial amount even under ordinary conditions in the London bullion market, and an offering of such an amount in December, 1935, might have caused a violent decline of price. The sales made by plaintiff as above set forth constituted a reasonable and proper method of disposing of such a quantity of silver bullion in the London market in the light of conditions that existed in December, 1935, and the nature of trading in that market. A prudent seller of such a quantity of silver at that time in that market would not have offered the entire 2,000,000 ounces for sale at one time. It could not have been determined in advance to what extent an order to sell 2,000,000 ounces in one lot would have depressed the market, and while it might have been possible to sell a quantity on any one day, there was no way of determining in advance that such a quantity of silver would be taken.
18. The London bullion market was the only available outlet for that silver at that time.
19. Plaintiff regarded the silver in question as a single investment, and both in its purchase and sale considered that it was engaged in a single transaction and was acquiring and disposing of that silver as a single and entire investment. In selling the silver in installments plaintiff did not consider that it was separately transferring different interests in silver bullion.
20. The following expenses were actually incurred by plaintiff in connection with the holding, processing, or transporting of its interest in silver bullion:
Tax stamps ......................
$ 382.56
Cables .............................
185.35
Commissions ........................
336.83
Insurance ..........................
830.17
Storage ..........................
4,552.70
---------
Total ........................
6,287.61
21. In addition to the foregoing expenses plaintiff paid legal fees amounting to $2,095.10 to counsel who were retained specifically and only for the purpose of advising in connection with the proposed purchase of silver bullion and the legal problems involved therein. That advice related to questions of tax liability in the acquisition and sale of the silver, including the liability of plaintiff as transferee in the purchase thereof, and its liability as transferor in the sale thereof. The advice also covered questions arising in connection with the place of storage and the place of disposition of the silver, in the light of the provisions of the Silver Purchase Act of 1934. The services also included the preparation and filing of silver-tax returns and the obtaining of rulings and filing of protests in connection therewith. The fee was reasonable in amount.
22. The total receipts from the sale and disposal of silver bullion heretofore referred to were $1,142,853,27; the cost thereof to plaintiff, exclusive of the expenses enumerated above, was $1,009,410.31; the gross profit therefrom was $133,442.96; and the net profit therefrom, after deduction of the expenses enumerated above, inclusive of the legal fee, was $125,060.25.
23. Plaintiff requested a ruling by the Commissioner of Internal Revenue with respect to the taxable status of the aforementioned sales of silver bullion under the provisions of Subdivision 10, of Schedule A, of Title VIII, § 800 et seq., of the Revenue Act of 1926 as amended, as added by Section 8 of the Silver Purchase Act of 1934, 26 U.S.C.A.Int.Rev.Code, §§ 1805, 1821(b)(4), and Chapter VI of Treasury Regulations 85 relating thereto, and the Commissioner ruled that each of those sales which resulted in an excess of receipts therefrom over average cost thereof (including allowable expenses) was subject to tax.
24. Thereupon, under protest, plaintiff on January 19, 1936, duly filed with the collector of internal revenue, second district of New York (the district in which the principal place of business of the plaintiff was then located), returns or memoranda for each of the sales of silver bullion, in accordance with the ruling of the Commissioner above referred to, on official Form 1 (Silver).
25. Upon those returns taxes aggregating $74,969.66 were paid to the collector of internal revenue for the second district of New York by the plaintiff on January 30, 1936, by the due affixation of those returns of silver-tax stamps equal to the amount of those taxes, involuntarily and under protest.
26. That amount of $74,969.66 was thereafter turned over to and deposited by the collector of internal revenue, to whom that payment was made by plaintiff, in the Treasury of the United States in the course of his official business.
27. January 31, 1936, plaintiff duly filed with the collector of internal revenue for the second district of New York a claim of refund of $12,439.53, being the amount by which the above specified tax of $74,969.66 exceeded the amount which plaintiff claimed was legally due, and on February 6, 1936, that claim for refund was rejected by the Commissioner of Internal Revenue.
28. On or about March 21, 1936, the collector of internal revenue for the second district of New York reviewed the aforementioned returns of plaintiff and disallowed items of legal expenses referred to above aggregating $2,095.10 and suggested that plaintiff file amended returns.
29. On April 1, 1936, plaintiff duly filed nine amended returns or memoranda covering the transactions in silver bullion on which legal expenses had been so disallowed, eliminating in each of those returns the aforementioned legal expenses.
30. Upon those amended returns additional taxes aggregating $1,047.55 were paid by plaintiff to the collector of internal revenue for the second district of New York on April 1, 1936, by the due affixation to those returns of silver-tax stamps equal to the amount of the additional taxes, involuntarily and under protest.
31. The amount of $1,047.55 were thereafter turned over to and deposited by the collector of internal revenue, to whom the payment was made by plaintiff, in the Treasury of the United States, in the course of his official business.
32. May 26, 1936, plaintiff duly filed with the collector of internal revenue for the second district of New York a claim for refund of the additional taxes of $1,047.55, setting forth in detail the reasons why that amount should be refunded, and on June 11, 1936, plaintiff's claim for refund was rejected in full by the Commissioner of Internal Revenue. [Copyrighted Material Omitted] [Copyrighted Material Omitted] [Copyrighted Material Omitted] [Copyrighted Material Omitted] Donald Marks, of New York City (Baer & Marks, of New York City, on the brief), for plaintiff.
George H. Foster, 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 GREEN, LITTLETON, WILLIAMS, and WHITAKER, Judges.
GREEN, Judge.
This suit is begun to recover a refund of an alleged overpayment of the tax imposed by section 8 of the Silver Purchase Act of 1934, 48 Stat. 1179, 26 U.S.C.A.Int.Rev.Code, §§ 1805, 1821(b)(4). There is no disputed as to the facts in the case which so far as material to the decision to be rendered, are as follows:
In 1936, plaintiff purchased approximately 2,000,000 ounces of silver bullion in eight purchases. Between December 3, 1935, and January 6, 1936, plaintiff sold this silver in thirteen lots by separate sales. The first nine sales in December 1935, were made at a profit, while the last four sales in January 1936, were at prices below costs.
Plaintiff's cost for all of this silver was $1,009,410.31. It incurred expenses of $6,287.61 in connection with holding, processing, or transporting the silver. It paid out legal fees for advice in connection with the proposed purchase of the silver bullion and the legal profits involved therein, together with the liability of plaintiff as transferee in the purchase thereof and its liability as transferor in the sales made. This advice also covered questions arising in connection with the place of storage and disposition of the silver, the preparation and filing of silver tax returns and the obtaining of rulings and filing of protests in connection therewith. The total of these legal fees amounted to $2,095.10 which was reasonable in amount. Gross receipts from the sales were $1,142,853.27, making a gross profit of $133,442.96, and a new profit (if the legal fees are considered a deductible expense) of $125,060.25.
Following the sales plaintiff, under protest, filed returns or memoranda for each. On these returns the expenses, including the legal fees, were deducted from the gross receipts and the total of the tax thus computed amounting to $74,969.66 were paid.
Subsequently the returns were examined and the amount of legal fees was disallowed. Thereupon nine amended returns were filed eliminating the legal fees and additional taxes of $1,047.55 were paid.
Plaintiff filed proper and timely claims for refund claiming that the tax should be but 50 percent of the profit derived from all the sales taken together and that the legal fees should be allowed as deductible expenses. These claims were rejected and this suit was timely brought.
The main issue in the case is whether the tax was properly imposed on the profits of each sale, calculated upon the excess of receipts from such sale over the average cost of all the silver bullion, plus allowed expenses. This method eliminates the loss sustained on that portion of the silver which was sold on January 3 and 6, 1936.
The second issue in the case is whether the Commissioner correctly disallowed the item of $2,095.10 of legal expense as a deductible item.
The plaintiff contends that the sales of silver bullion from December 3, 1935, through January 6, 1936, constituted the transfer of a single interest in silver bullion and that the tax should have been calculated on the difference between the aggregate receipts and the cost thereof, plus allowable expenses.
With this contention we are unable to agree. The statute places a tax on any interest in silver bullion "transferred" if the price exceeds the total of the cost thereof and allowed expenses, and the term "transfer" is defined as follows: "The term 'transfer' means a sale, agreement of sale, agreement to sell, memorandum of sale or delivery of, or transfer, whether made by assignment in blank or by any delivery, or by any paper or agreement or memorandum or any other evidence of transfer or sale; or means to make a transfer as so defined."
Giving to this language its ordinary significance, each separate sale of the silver constituted a separate transfer. Each of these sales was a separate transaction governed and controlled by its terms without regard to other sales that might be made or the total amount of silver bullion held by the plaintiff at the time the sale was made. It is true the statute defines an "interest in silver bullion" as "any title or claim to, or interest in, any silver bullion or contract therefor," but this definition is in general terms referring merely to the nature or the title of the claim or interest in silver bullion transferred and does not define what constitutes a transfer. The fact that plaintiff regarded the 2,000,000 ounces of silver bullion as a single investment and that it considered its method of disposing of such a quantity of silver reasonable and proper in view of the conditions which then existed is entirely immaterial. We conclude that the Commissioner imposed the tax in accordance with the statute.
The plaintiff contends that the application of the silver tax in the manner used in this case involves an unconstitutional interpretation of the statute. Part of its argument in support of this contention is based upon the premise that plaintiff's sales of silver constituted one transaction. In what has been said above we have shown, as we think, that the sales were in fact separate and distinct transactions. But, as we understand plaintiff's argument, it is further contended that even so the tax would be unconstitutional by reason of its being assessed on transactions in silver bullion that showed a profit without making any allowance or deduction for similar transactions that resulted in a loss, and that a tax so assessed cannot be a true income tax. The validity of the tax involved was attacked in the case of United States v. Hudson, 299 U.S. 498, 57 S.Ct. 309, 81 L.Ed. 370, The decision in the Hudson case, supra, settles the question of whether the tax in controversy is an income tax and we think the opinion in that case holds in effect that Congress may segregate the income or profit from a particular transaction and tax it separately, without making any provision with reference to losses sustained in other transactions, although they might be similar in their nature. See Cohn. v. United States, 23 F.Supp. 534, 87 Ct.Cl. 422. The matter of deductions, credits, and allowances on an income tax is in the discretion of Congress, and if Congress sees fit to deny them in unrelated though similar transactions it is acting within its power. This principle has been applied in the limitation placed upon deductions for capital losses in the statutory provisions with reference to the taxes on capital gains which has always been enforced and considered constitutional.
Much of plaintiff's argument is devoted to the question of whether the tax involved is direct or indirect. In Brushaber v. Union Pacific R. R. Co., 240 U.S. 1, 26 S.Ct. 236, 60 L.Ed. 493, L.R.A.1917D, 414, Ann.Cas.1917B, 713, it was held in effect that the constitutional amendment which authorized the levy of an income tax made it immaterial whether it was a direct tax or an indirect tax. The plaintiff contends that the silver tax is not an excise or an indirect tax and is not sustainable as a direct tax, yet it must be one or the other; and being, as the Supreme Court has held, an income tax, can be sustained on either basis. The Brushaber case, supra, is also authority for the principle that a tax levied upon property because of its ownership is direct, while one levied upon property because of its use is an excise duty or impost. The silver tax is manifestly not a tax levied on property because of its ownership but one levied upon the use made of the property. We think, therefore, it is an excise tax, and find no constitutional objection against the manner in which it is applied in the case before us.
It should also be noted, in this connection, that the gains which plaintiff realized were in one calendar year, and the losses in another. The statute makes no reference to calendar or fiscal years, and it would be entirely impracticable to create a taxable year for its enforcement.
The plaintiff paid legal fees amounting to $2,095.10 to counsel who were retained specifically and only for the purpose of advising in connection with the proposed purchase of silver bullion and the legal problems involved therein, including the tax liability when the bullion was sold and the making of tax returns. This item of expense was disallowed by the Commissioner. The statute specifies definitely certain items of expense which may be allowed. Legal fees are not specified as allowable, and "charges in the nature of overhead" are specifically excluded. The failure to include legal fees in the list of allowable items would, by itself, exclude them, unless there was something further in the statute which would show a different intention. The only further statement in the statute is to the effect that the specified items would include "storage, insurance, and transportation charges," but would not include "interest, taxes, or charges in the nature of overhead." We do not think it is necessary to determine whether the legal fees involved were "in the nature of overhead" as there is nothing in the statute which authorizes their allowance.
It follows that plaintiff's petition must be dismissed, and it is so ordered.
WHALEY, Chief Justice, and WHITAKER and LITTLETON, Judges, concur.
WILLIAMS, Judge, took no part in the decision of this case.