Opinion
Proceeding by James T. McMillan, trustee of the estate of James McMillan, deceased, against the United States.
Petition dismissed.
Frederick O. Graves, of Washington, D. C. (Miller & Chevalier, of Washington, D. C., on the briefs), for plaintiff.
Guy Patten, of Washington, D. C., and James W. Morris, Asst. Atty. Gen. (Robert H. Jackson, Asst. Atty. Gen., and Robert N. Anderson and Fred K. Dyar, both of Washington, D. C., on the briefs), for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges. The court, upon a stipulation of the facts and the evidence, makes the following special findings of fact:
1. Plaintiff, James T. McMillan, is a citizen of the United States and a resident of Detroit, Mich., and is, and at all times hereinafter mentioned was, a trustee of the estate of James McMillan, deceased.
2. On March 17, 1930, plaintiff filed his federal income tax return for the calendar year 1929, on behalf of the estate of James McMillan, with the collector of internal revenue at Detroit, Mich., disclosing therein a gross income of $303,817.14, deductions none, and net income of $303,817.14, taxable at capital gain rates and an income tax liability thereon of $37,977.14. The tax so disclosed was paid by plaintiff during the year 1930, as follows: On March 17th $9,494.29; on June 17th $9,494.29; on September 16th $9,494.28; and on December 16th $9,494.28.
3. Thereafter, upon audit of the income tax return, the Commissioner of Internal Revenue assessed an additional tax against plaintiff for the year 1929 in the amount of $1,945.47, based upon certain adjustments, including $15,563.75 net increase to income. Plaintiff paid the additional tax, together with interest thereon in the sum of $160.43, on October 17, 1931. The additional tax was assessed at capital gain rates.
4. On February 29, 1932, plaintiff filed with the collector of internal revenue a claim in which he asked for the refund of $1.00 or more upon the ground that:
'The taxpayer owned during 1929 and still owns bonds of Detroit, Jackson and Chicago Railway Company and Detroit and Port Huron Shore Line Railway Company on which relatively heavy losses have occurred due to the lines having been abandoned. It may be that the Treasury Department may eventually decide that these losses should have been claimed by the taxpayer in its tax return for the year 1929, and this claim is, therefore, dismissed. It is so ordered. The taxpayer's return for the year 1929 was signed by the trustee, James T. McMillan, who is still acting.'
The claim for refund was rejected by the Commissioner of Internal Revenue on a schedule dated November 1, 1932, and plaintiff was duly notified of the rejection on the date.
5. Throughout the year 1929 the estate of James McMillan owned first mortgage 5 per cent. gold bonds of Detroit & Port Huron Shore Line Railway Company of a par value of $25,000, due January 1, 1950, which had been acquired during the years 1916 and 1919 at a total cost of $23,150.
Detroit & Port Huron Shore Line Railway Company is a corporation which was organized in 1898 under the laws of the state of New York. On January 1, 1900, this railway company issued its 50-year first mortgage 5 per cent. gold bonds, dated January 1, 1900, and due January 1, 1950. The total amount of such bonds issued and outstanding throughout the years 1929 and 1930 was $2,499,000, and this was the total outstanding bond indebtedness of such company.
The Detroit & Port Huron Shore Line Railway Company was placed in receivership in 1925. Shortly thereafter a bondholders' protective committee was formed by the bondholders to protect their interests. The aforesaid bonds of the estate of James McMillan were deposited with the committee on October 21, 1925.
On or about June 1, 1929, the bondholders' protective committee adopted a plan for reorganizing the Detroit & Port Huron Shore Line Railway Company in connection with the Eastern Michigan Railway, a corporation which was organized in September, 1928, and which took over most of the net assets and properties which had been owned and operated by the detroit United Railway Company. On December 13, 1929, the plan was abandoned at a meeting of the bondholders' protective committee, at which time an appraisal of the assets of Detroit & Port Huron Shore Line Railway Company was submitted to the committee by A. L. Drum, president of Eastern Michigan Railway. In the appraisal so submitted, it was recommended that operation of the railroad be discontinued and that the assets be disposed of. The appraised value of the assets, as shown in the Drum report, was $1,060,000, and the estimated cost of completing foreclosure, and the estimate of receiver's accounts as of December 31, 1929, shown in the report, was $264,115, leaving an estimated net salvage value of $795,885, or $318 per $1,000 bond to participating bondholders.
On December 20, 1929, a decree of foreclosure of the mortgage securing the bonds of Detroit & Port Huron Shore Line Railway Company and an order of sale of all the railway company's assets was entered by the United States District Court for the Eastern District of Michigan, Southern Division. On January 24, 1930, the assets were sold pursuant to the decree of foreclosure and order of sale and were purchased by the bondholders' protective committee for $300,000. The sale was approved by the court on January 25, 1930. The sale price permitted nonparticipating bondholders to realize $67.04 for each $1,000 bond that they held, which amount by order of distribution dated May 15, 1930, was credited to each $1,000 bond. The money used to retire the nonparticipating bondholders' bonds was secured by the committee from a sale of the rolling stock and personalty of the railway company property purchased by it. The estimated amount which the participating bondholders expected to realize from a resale of the real estate purchased was $700,000, or $318 for each $1,000 bond they had deposited with the committee. This estimate was based upon the appraisal heretofore referred to.
On December 30, 1931, there was written off on the books of the estate of James McMillan as a loss on account of these bonds the sum of $18,150, which included the sum of $15,200 here claimed as a loss in 1929. No part of this amount was allowed by the Commissioner of Internal Revenue as a deduction from gross income in computing the tax liability of plaintiff for the year 1929, or for the year 1930, and was not claimed or allowed for 1931.
6. Throughout the year 1929 the estate of James McMillan owned consolidated mortgage 5 per cent. gold bonds of Detroit, Jackson & Chicago Railway Company of a par value of $10,000, due February 1, 1937, which had been acquired in 1916 at a cost of 9,150.
Detroit, Jackson & Chicago Railway Company is a corporation organized under the laws of the state of Michigan as the successor of Detroit, Ypsilanti, Ann Arbor & Jackson Railway Company, which in turn succeeded Detroit, Ypsilanti & Ann Arbor Railway Company. On February 1, 1907, Detroit, Jackson & Chicago Railway Company issued its 30-year consolidated mortgage 5 per cent. gold bonds, dated February 1, 1907, and due February 1, 1937. The total amount of such bonds issued and outstanding throughout the years 1929 and 1930 was $2,060,000. The mortgage which secured these bonds was a third lien on certain of the properties of the Railway Company, a second lien on certain other properties, and a first lien on still other properties. The bonded indebtedness of the Railway Company outstanding in 1929 and having priority over these particular bonds amounted to $1,940,000.
The Detroit, Jackson & Chicago Railway Company was placed in receivership in 1925. Shortly thereafter a bondholders' protective committee was formed by the bondholders to protect their interests. The aforesaid bonds of the estate of James McMillan were deposited with the committee on October 21, 1925.
In 1929 the assets of Detroit, Jackson & Chicago Railway Company which were covered by the senior liens were disposed of and nothing was received from the disposition of such assets which was available to the holders of the 5 per cent. 30-year bonds due in 1937. Thereafter, in 1929, operations of Detroit, Jackson & Chicago Railway Company were suspended by authority of the United States District Court.
The bondholders estimated that the balance of the assets owned by the Railway Company in 1929 available to the holders of the 5 per cent. 30-year bonds would not exceed $75,000, and because of the small value of assets there were no foreclosure proceedings.
On December 30, 1931, there was written off on the books of the estate of James McMillan as a loss on account of these bonds the sum of $7,150, which is the amount claimed herein as a loss in 1929. No part of this amount was allowed by the Commissioner of Internal Revenue as a deduction from gross income in computing the tax liability of plaintiff for the year 1929 or the year 1930, and was not claimed or allowed for 1931.
7. Plaintiff was at all times herein with this direction which caused status of Detroit & Port Huron Shore Line Railway Company and Detroit, Jackson & Chicago Railway Company, and with the bonds of these companies, and with the foreclosure sale of the properties of the Detroit and Port Huron Shore Line Railway Company herein mentioned.
WILLIAMS, Judge.
The plaintiff, trustee of the estate of James McMillan, deceased, seeks to recover the sum of $2,793.50, with interest thereon, internal revenue taxes alleged to have been overpaid for the calendar year 1929. The facts have been stipulated by the parties, and the only question involved is whether the Commissioner of Internal Revenue erred in disallowing a deduction of $15,200 claimed by plaintiff as a partial loss on first mortgage bonds of the Detroit & Port Huron Shore Line Railway Company, and $7,150 loss in respect to bonds of the Detroit, Jackson & Chicago Railway Company, which bonds plaintiff claims were ascertained to be partially worthless, to the extent of the deduction claimed, during the taxable year, and charged off.
The applicable statute is section 23(j) of the Revenue Act of 1928 (26 U.S.C.A. § 23 note), which reads:
'In computing net income there shall be allowed as deductions: * * * '(j) Bad Debts. Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.'
Plaintiff in his tax return for the year 1929 made no claim for deduction from income on account of the partial worthlessness of the bonds involved, and there was written off on the books of the estate of James McMillan no loss on account of the worthlessness or partial worthlessness of the bonds until December 31, 1931, on which date 18,500 was written off as a loss on account of the bonds of the Detroit & Port Huron Shore Line Company, which loss includes the sum of $15,200 here claimed as deduction for 1929. On the same date there was written off the books of the estate a loss of $7,150 in respect to the bonds of Detroit, Jackson & Chicago Railway Company, which loss is also here claimed for the year 1929. These charge-offs were for the entire loss sustained by plaintiff in respect to the bonds in question.
In addition to the fact that plaintiff did not claim the deductions now sought for the year 1929 in his tax return for that year, and did not charge off on the books of the estate such partial bad debt losses during that taxable year or within a reasonable time after the close of business for the year, there is nothing in the record to indicate that plaintiff at any time during the year 1929 had ascertained or even estimated the amount of his loss attributable to the fact that the bonds were recoverable only in part or that he had decided to take a partial loss in respect to them for that year. In the claim for refund filed shortly after plaintiff, on December 31, 1931, charged off his entire loss on account of the bonds, plaintiff stated:
'The taxpayer owned during 1929 and still owns bonds of Detroit, Jackson and Chicago Railway Company and Detroit and Port Huron Shore Line Railway Company on which relatively heavy losses have occurred due to the lines having been abandoned. It may be that the Treasury Department may eventually decide that these losses should have been claimed by the taxpayer in its tax return for the year 1929, and this claim is, therefore, filed to protect the interest of the taxpayer. The taxpayer's return for the year 1929 was signed by the trustee, James T. McMillan, who is still acting.'
Manifestly this claim is for the total loss on the bonds as shown by the chargeoffs on December 31, 1931, and not for the partial loss now asserted for the year 1929. The purpose of the claim was to protect the taxpayer in case the Department should decide that the losses charged off should have been claimed by the taxpayer in his tax return for the year 1929, and was in no way an assertion by plaintiff that the losses now claimed should be deducted from income for that year. In fact, there is nothing in the entire record of the case to show, or indicate, that plaintiff, at any time prior to the filing of the petition on October 30, 1934, asserted the right to have the partial losses in respect to its bonds in the amount claimed deducted from income for the taxable year 1929.
In view of the facts disclosed, it cannot be said that the Commissioner acted arbitrarily or abused the discretion vested in him in section 23(j) of the Revenue Act of 1928 (26 U.S.C.A. § 23 note) in disallowing plaintiff's claim for refund. In the absence of the abuse of discretion on the part of the Commissioner in rejecting the claim, the court would not be justified in reversing his decision. Boyle Valve Co. v. United States, 38 F. (2d) 135, 69 Ct.Cl. 129; United States v. Jefferson Electric Mfg. Co., 291 U.S. 386, 54 S.Ct. 443, 78 L.Ed. 859; Art Metal Construction Co. v. United States, 17 F.Supp. 854, 84 Ct.Cl. 312, decided January 11, 1937. Plaintiff is not entitled to recover, and the petition is dismissed.
It is so ordered.