December 2, 1929.
Action by Amy H. Du Puy against the United States. Petition dismissed.
H.B. McCawley, of Washington, D.C., for claimant.
Before BOOTH, Chief Justice, and GREEN, SINNOTT, MOSS, and GRAHAM, Judges.
The court, upon the evidence adduced, makes the following special findings of fact:
I. In 1908 Herbert Du Puy, plaintiff in the companion case, No. E-209 of the docket of this court, 67 Ct. Cl. 348, and Amy Hostetter Du Puy, his wife, plaintiff herein, concluded to provide their four children with independent financial resources and incomes before the death of their parents. Mr. and Mrs. Du Puy had for many years been residents of Pittsburgh, Pennsylvania, and both were very wealthy. They contemplated the transfer of certain of their real and personal property directly to their children by way of gift, and the transfer of other properties and securities to corporations to be organized, and gifts to their children of stockholdings in those corporations.
II. Between 1908 and 1918 the four Du Puy children, two of whom were sons and two of whom were daughters, were married, and several children were born as issue of their marriages. During that period, including the years 1908 to 1918, Mr. and Mrs. Du Puy transferred directly to their children and grandchildren by way of gift, moneys, securities, and properties of the value of $2,732,205.56. The two sons were named H. Wilfred Du Puy and Charles M. Du Puy. Of the married daughters, one was Mrs. E.D. Merrick, and the other became Mrs. McHenry, who died and left a daughter named Amy Du Puy McHenry.
III. In 1908 Herbert Du Puy caused to be organized the corporations known as the Morewood Realty Holding Company and the Lansing Realty Holding Company, and in that year he acquired a substantial stock interest in the Goodwin Sand Gravel Company. These three corporations are hereinafter referred to in some of the findings as the New York corporations. During the years 1908 to 1915, inclusive, Mr. and Mrs. Du Puy transferred to the New York Corporations certain valuable real property situated in New York City, and also transferred certain securities to the said corporations. The properties transferred had a value at the time of the transfers of approximately $5,000,000, and were made as a gift without any consideration being received therefor.
During the years of 1917, 1918, and 1919 additional transfers by way of gifts of properties and securities aggregating $11,983,053.72 in market value were made by Mr. and Mrs. Du Puy to the Lansing Realty Holding Company, the Morewood Realty Holding Company, and the Goodwin Sand Gravel Company.
On June 23, 1921, Mr. and Mrs. Du Puy, acting upon a suggestion from the Bureau of Internal Revenue, executed formal instruments in writing whereby they ratified and confirmed as gifts the transfers of securities and properties made by them during the years 1917, 1918, and 1919 to the New York corporations.
IV. On May 14, 1917, at a meeting of the board of directors of the Morewood Realty Holding Company, Herbert Du Puy and James C. Ewing at that time being president and vice president, respectively, a blanket resolution was adopted authorizing the president or vice president, with the concurrence of the secretary and treasurer, to sell, assign, transfer, and deliver moneys, stocks, bonds, mortgages, or other securities, and to execute any contract, agreement, or conveyance deemed necessary and proper, without any further action on part of the board of directors. On July 13, 1917, a resolution was adopted to the effect that it was not necessary for a director to be a stockholder of the company. Herbert Du Puy and James C. Ewing were, by a resolution adopted May 28, 1917, authorized to have access to safes in the name of the corporation in the vaults of the Mercantile Safe Deposit Company. Herbert Du Puy was president up to December 15, 1917, and thereafter A.P. Anderson was president until January 4, 1918. Ewing was vice president and Reed was secretary during the year 1917. On May 14, 1917, at a meeting of the board of directors of the Goodwin Sand Gravel Company, the president or vice president, with the concurrence of the secretary and treasurer of the company, were authorized to make any transfers or sales of personal property. The officers of the Goodwin Sand Gravel Company, during 1917, were Herbert Du Puy, president; James C. Ewing, vice president; William E. Reed, secretary and treasurer.
V. The Morewood Realty Holding Company and the Lansing Realty Holding Company were each organized with an authorized capital stock of $1,000, divided into ten shares. Originally Herbert Du Puy owned eight shares, H. Wilfred Du Puy one share, and James C. Ewing one share. On October 15, 1908, Herbert Du Puy held one share, plaintiff seven shares, H.W. Du Puy one share, and Charles M. Du Puy one share. On May 23, 1912, Herbert Du Puy held three shares, plaintiff five shares, H.W. Du Puy one share, and Charles M. Du Puy one share. On May 23, 1916, Herbert Du Puy held five shares, plaintiff three shares, H.W. Du Puy one share, and Charles M. Du Puy one share. On October 23, 1916, Herbert Du Puy held six shares, plaintiff two shares, H.W. Du Puy one share, and Charles M. Du Puy one share. On May 19, 1917, H.W. Du Puy held three shares, Charles M. Du Puy three shares, Mrs. E.D. Merrick two shares, and Herbert Du Puy, trustee, for Amy Du Puy McHenry, two shares. On December 14, James C. Ewing held nine shares and W.E. Reed one share. No authority appears on the books for the transfers to the children or to Ewing and Reed.
On December 15, 1917, Herbert Du Puy wrote a letter directed to the board of directors of the Morewood Realty Holding Company offering to purchase 6,440 shares of the capital stock of the company at the price of $1,000 a share, provided the owners of the ten shares in the company then outstanding would contribute to the capital of the company an additional $9,000 in cash. The company was reorganized and a total number of 6,450 shares of stock was issued. Along from December 15 to 20, 1917, Herbert Du Puy issued his checks upon the joint account of himself and plaintiff in the Farmers' Loan Trust Company for $6,450,000, being the price of 6,450 shares, at $1,000 each. These checks went to the credit of the Morewood Realty Holding Company with the Farmers' Loan Trust Company, and, as a simultaneous transaction, the Morewood Realty Holding Company issued its check or checks back, which went to the joint account of Herbert Du Puy and plaintiff. The evidence does not show that any stock of the new denomination under the reorganization was issued on account of giving these checks to either Herbert Du Puy or Amy Du Puy, but 1,611 shares were issued to each of the following named parties, to wit: H.W. Du Puy, Charles M. Du Puy, Mrs. E.D. Merrick, and James C. Ewing, in trust for Amy Du Puy McHenry, and the accounts of these parties were charged with the price of this stock on the books of the Morewood Realty Holding Company. Also, Herbert Du Puy and plaintiff each received two shares, James C. Ewing one share, and William E. Reed one share. These stockholdings continued until July 21, 1918, when the stock held by James C. Ewing, in trust for Amy Du Puy McHenry, was transferred to Herbert Du Puy, as trustee for the same party.
VI. From October, 1908, to November 20, 1911, the stockholdings in the Goodwin Sand Gravel Company were divided between the Du Puy interests and the Goodwin interests. At the latter date the Goodwin interests were taken over by the Du Puys. From November 20, 1911, to December 24, 1919, 21,680 of the 25,000 shares of the Goodwin Sand Gravel Company were held by Herbert Du Puy, 3,286 were held by Herbert Du Puy as trustee, 16 shares each were held by H.W. Du Puy and Charles M. Du Puy, and one share each by William E. Reed and James C. Ewing. On December 24, 1919, Herbert Du Puy transferred his 21,680 shares to the Morewood Realty Holding Company, and with that exception the stock ownership as of November 20, 1911, remained unchanged until January 19, 1921.
H. Wilfred Du Puy died July 4, 1920. Charles M. Du Puy died in 1925. After their deaths certificates representing their share holdings in the corporations named were found in their safe-deposit boxes by their respective executors. Since 1924 regular dividends have been paid to and received by the stockholders of record of the Morewood Realty Holding Company, and prior to that time only nominal dividends were paid.
VII. The evidence fails to show that after the year 1913 the Morewood Realty Holding Company and the Lansing Realty Holding Company were engaged in any active business apart from receiving the income from properties that they held or in a few cases the income from real estate or securities sold at a profit. Until January 30, 1913, the Goodwin Sand Gravel Company was an operating company. On that date it ceased operations and also became a holding company; that is, it engaged in no active business outside of the receipts from its securities and investments, and, like the other companies mentioned, was a company primarily for investment purposes. In July, 1917, large amounts of securities were transferred by Herbert Du Puy to these companies.
During the year 1908 Herbert Du Puy transferred to the Morewood Realty Holding Company various properties amounting to several million dollars in value. These transfers were entered upon his books, which were kept by himself, as gifts to the corporation without consideration. The corporation credited them to the account of the Morewood Realty Holding Company, which was equivalent to crediting them to the capital account. On November 30, 1909, the items of the capital account representing the value of property transferred to the corporation by Du Puy were transferred from that account on the books of the corporation to Du Puy's credit by a Mr. Kelly, who appears to have been in charge of the corporation's books at that time. There was no authorization for this from the stockholders or the board of directors, and Kelly claims to have made the change because the original entry on the books was meaningless. On the same date interest at six per cent. on the value of the property transferred was credited to Du Puy's account amounting to $110,367.80, which was greater than the income on the property transferred to the corporation by Du Puy, making the corporation's books show a net loss for that year. Du Puy's own books, however, continued to treat as gifts these transfers to the corporation.
From March 22, 1910, to May 19, 1917, the stock of the Lansing Realty Holding Company, consisting in all of ten shares, was held, eight shares by Herbert Du Puy, one share by H. Wilfred Du Puy, and one share by James C. Ewing. From May 19, 1917, to December 19, 1917, H. Wilfred Du Puy held three shares, Charles M. Du Puy three shares, Mrs. E.D. Merrick two shares, and Herbert Du Puy, in trust for Amy Du Puy McHenry, two shares; and at about that time the Lansing Realty Holding Company was merged into the Morewood Realty Holding Company.
Prior to October 31, 1912, Herbert Du Puy had transferred a certain mortgage to the Lansing Realty Holding Company. On the date mentioned he withdrew this mortgage from that company and gave it to the Morewood Company, which used it in purchasing two apartment houses. This mortgage Du Puy had treated on his books as a gift to the Lansing Realty Holding Company, and that company had entered it upon its books to the credit of Du Puy's account.
Beginning with 1913 interest was no longer credited to Herbert Du Puy on balances to his credit, as it had been theretofore, but his account was credited with the value of the property transferred, or plaintiff's account, according to who held the title to the property transferred.
VIII. Herbert Du Puy loaned to the Morewood Realty Holding Company $1,353,000 on May 8, 1917, which was credited to bills payable. On June 30, 1917, this credit was transferred to the stockholders along with all other credits in the bills payable account, amounting to a total of $1,584,000, which apparently included credits for other loans made by him.
The income on the securities transferred to the Lansing Realty Holding Company for 1917 amounted to $90,149.35. This company loaned to Du Puy in that year $91,300. The Morewood Realty Holding Company had earnings of $172,550.17 in its special investment account for that year on securities transferred by him and subsequently turned over to his children, and it loaned Herbert Du Puy $200,000 the same year. The personal account of Herbert Du Puy was credited with $200,000 by reason of this loan, but he drew only $110,000 that year and the balance in 1918. The total income of the Morewood Realty Holding Company for 1917 and 1918 was $478,491.12. All of these loans were made after the stockholders' account had been credited with the amount in the bills payable account, as above recited. The testimony does not show when these notes were finally paid, but they were renewed in 1918 and 1919, and the Morewood Company loaned Herbert Du Puy $150,000 in 1919 for one year. The income for 1917 and 1918 of the Goodwin Sand Gravel Company was $476,263.92 from securities transferred by Du Puy. This company loaned Du Puy in 1917, $182,000 on note or notes renewed in 1918 and 1919, and paid according to the books in October, 1920.
On all loans made to him by the New York corporations, Herbert Du Puy gave notes and paid interest, but neither Herbert Du Puy's books nor the books of the New York corporations show that all of this interest was paid when due and prior to the investigation hereinafter described.
IX. On July 1, 1917, Herbert Du Puy was the owner of various warehouses which were under lease to various Moline plow companies, and on that date, by a written instrument executed by him and plaintiff, the rentals for the entire term of such leases were assigned to the Morewood Realty Holding Company, and under such assignment there was paid to the Morewood Realty Holding Company, in the year 1918, the sum of $74,156.48, which said company retained and credited to the special income account. At the date specified the account of investment securities was charged with $856,805.02, with an explanatory entry of "rents — Moline Plow Co.," but no deeds were ever made, and nothing but the right to collect the rents had been transferred. On December 31, 1917, an entry was made crediting the same account with $856,804.02, with the explanatory entry of "rents — Moline Plow Co.," this last entry evidently being a correction of the preceding one.
X. In the years 1917 and 1918 securities were transferred by Herbert Du Puy to the Goodwin Sand Gravel Company valued as follows:
May 31, 1917 ...................... $660,200 February 13, 1918 ................. 5,400 July 15, 1913 ..................... 35,850 ________ Total ............................. $701,450
and he was credited in his individual account with that company with the amount thereof. The total of these securities was carried or transferred to the paid-in surplus account December 31, 1920, which extinguished the credit balance to his account at that time.
On January 1, 1918, the books of the Goodwin Sand Gravel Company show $556,275 credited to bills payable with an explanatory note "balance brought forward from old ledger." Apparently he had had this amount to his credit upon the books of the company, and an examination of the books of the Morewood Company shows an entry on January 1, 1919, charging bills receivable with the same amount, which would indicate that a note had been given either to Du Puy or the Morewood Company. In any event that amount in bills payable became the property of the Morewood Company. This entry of January 1, 1919, is on the books of the Morewood Company and is also accompanied by an explanatory entry to the effect that it is "carried forward as a balance from previous account."
The income from the securities which were transferred to the Goodwin Company was credited to what was called the "special income account." At the end of the year this income was transferred to the profit and loss account.
XI. Between September 17 and October 2, 1919, inclusive, Miss E.W. Reed, assistant secretary of the Crucible Steel Company, at Herbert Du Puy's directions, sold 6,385 shares of Crucible Steel common stock. Of this stock, 3,500 shares had been registered in the name of George D. Barrow and 2,885 in the name of James C. Ewing. James C. Ewing delivered the stock to the brokers.
On the Morewood Company's journal for December 31, 1919, an entry appears showing the sale of 3,500 shares of Crucible common stock, "transferred as of sundry dates and sold." In a journal entry of the same date the account of investment securities is debited with $547,072.50, and $266,012.50 was also debited to investment securities and credited to paid-in surplus. These entries are accompanied with the explanatory memorandum of "to place on the books 3,500 shares of Crucible Steel Company common stock, at the value shown by the average of the bid and asked price on the dates of registration in the name of George D. Barrow." The stock was registered in the name of George D. Barrow in the month of May, 1919.
The journal of Herbert Du Puy, of date December 31, 1919, shows a debit to "capital account" of $472,944, and a credit to "Crucible Steel Co. common stock" of the same amount, with the memorandum, "Recording 6,385 shares of C.S. Co. com. stock given to M.R.H. Co. and G.S. G. Co. in December, 1918, and during 1919."
This account showed that on January 1, 1919, he had 3,300 shares. The entries in this account show that he was buying and selling this stock. From June 23, 1919, to August 23, 1919, this account showed that he had 6,385 shares. On July 31, 1919, a dividend of $1.50 per share was paid on Crucible Steel stock to the Goodwin Sand Gravel Company upon 6,385 shares according to its books. On December 31, 1919, an entry was made transferring the dividends on 3,500 of these shares to the Morewood Realty Holding Company with an explanatory memorandum, "by transfer of dividends received August 5, 1919, on 3,500 shares of Crucible Steel Co. belonging to M.R.H. Co." The photostatic copies of the entries referred to above on the books of the Morewood Realty Holding Company show that they were made in a different handwriting from other entries on the books.
At the same date, on the books of the Goodwin Sand Gravel Company, similar entries were made in the same handwriting, the identical language being employed. The number of shares sold was 2,885; the value was stated at $211,502.19, the profit at $334,799.16, making a total sale price of $546,301.35. The entry also shows the stock was registered in the name of James C. Ewing at sundry dates in December, 1918, and June, 1919.
James C. Ewing was actual manager and in active charge of the New York corporations taking care of the corporate interests of Herbert Du Puy. Emily W. Reed became Herbert Du Puy's private secretary about November, 1919. Prior to this date she was an employee of the Crucible Steel Company working for Herbert Du Puy, its chairman. Daniel F. Kelly was in the employ of the Morewood and the Goodwin companies, auditing and supervising the accounting work and in closing the books at the end of the fiscal year. He got all his information from Ewing. The New York Corporations were controlled by Herbert Du Puy.
XII. During the year 1919 the Morewood Realty Holding Company sold 722 shares of stock of the Farmers Deposit National Bank of Pittsburgh, Pa., at a net profit of $16,216.12. These securities had been purchased on August 29, 1919, with funds of the Morewood Realty Holding Company and were sold for the account of the Morewood Realty Holding Company some time in October, 1919, and the money retained by the Morewood Realty Holding Company. The aforesaid 722 shares of stock did not constitute assets previously transferred by Herbert Du Puy to the Morewood Realty Holding Company.
XIII. For a period of ten years prior to 1919 Herbert Du Puy had been chairman of the board of directors of the Crucible Steel Company of America, and during part of that time he had also been its president. In 1919 there was a contest for the control of the corporation, and the shares of common stock of the corporation rose greatly in value. Mr. Du Puy sold much of his stock, and in the fall of the year was replaced as chairman of the board of directors of the company by a person representing the parties who had come into control of the company. In the latter part of the same year the Bureau of Internal Revenue caused an investigation to be made of the income of the company, which was subject to the corporation income tax, and, as a result of that investigation, the company was charged with having made false income tax returns, and an additional tax was assessed of several millions of dollars and penalties of a large amount. Mr. Du Puy was charged with being responsible for making the returns which were alleged to be false.
A settlement was effected between the Crucible Steel Company and the Bureau of Internal Revenue whereby the additional taxes assessed against the company were paid, and penalties were fixed at an amount approximating the value of the use of the money involved in the additional tax for the period of delinquency. Some time later, an indictment was found against Mr. Du Puy, based upon the income tax return of the Crucible Steel Company which was found by the government to be incorrect, and which was signed by Mr. Du Puy as president. He was subsequently tried before a jury and acquitted. After the settlement of the income tax of the Crucible Steel Company an investigation was made by government officials of the personal income tax returns of Mr. and Mrs. Du Puy. As a result of this investigation, a letter was sent to Mr. Du Puy, dated February 11, 1920, advising him that an audit of his income tax returns for the years ending December 31, 1916, 1917, and 1918, indicated that he was subject to additional taxes and penalties for those three years aggregating $3,018,160.99, and that, by reason of the fact that his income tax returns for those years were regarded by the department as false, he had incurred liability for penalties as outlined under the provisions of section 3176, U.S. Revised Statutes (26 USCA § 98), and section 250 of the Revenue Act of 1918 ( 40 Stat. 1083).
Another letter of the same date was sent to the plaintiff advising her that she was subject to additional taxes and penalties for said years in the amount of $155,133.02.
XIV. Pursuant to the recommendations and reports of the investigators and the said letter of February 11, 1920, the Commissioner of Internal Revenue, under date of February 11, 1920, assessed additional taxes and penalties as follows:
============================================================== | Tax | Penalty | Total ---------------|---------------|---------------|-------------- Herbert Du Puy | $1,532,613.51 | $1,485,547.48 | $3,018,160.99 Amy H. Du Puy | 61,700.94 | 93,432.08 | 155,133.02 --------------------------------------------------------------
Subsequent to such assessments Herbert Du Puy and Amy H. Du Puy sought a reduction in the assessments made against them by filing a claim for abatement and through conferences between their attorneys and representatives of the Bureau of Internal Revenue. These conferences began in August, 1920, and ended just prior to the submission of the compromise offer of November 9, 1920, hereinafter referred to. Two of these conferences were presided over by the Commissioner of Internal Revenue, William M. Williams. The last conference was held in the office of the Commissioner of Internal Revenue. The Solicitor of Internal Revenue, Carl Mapes, Assistant Solicitor S.E. Whitaker, and others attended on behalf of the government. The interests of the Du Puys were represented by Mr. Lamar Hardy, Mr. Carter Hall, and others.
At these conferences the various items going to make up the income of Herbert Du Puy and the plaintiff were discussed, the representatives of the Du Puys claiming in substance that various items were erroneous. As the conferences progressed, the assessments against Herbert Du Puy were reduced on certain items by the government officials. At the last conference $1,722,016.81 was understood to be the lowest amount which the government would accept for the taxes, together with $250,000 assessed as a penalty in settlement of the taxes and penalties originally claimed against Herbert Du Puy and Amy H. Du Puy. The $1,722,016.81 fixed as the amount of the taxes was the sum which the counsel and officials acting for the government considered was actually due. The $250,000 fixed for the amount of the penalties was agreed upon in compromise of the statutory penalties, which were very much larger.
All of this assessment, both of taxes and penalties, was disputed to the end by the representatives of Herbert Du Puy and Amy H. Du Puy. At one of the conferences, a proposition was made by the representatives of the Du Puys to Mr. Whitaker, special counsel for the government, and in charge of the government's case at the time subject to the solicitor and the Commissioner, that the amount fixed by the government should be paid with the right reserved to bring suit to recover the same back. At another conference, the same proposition, in substance, was made to the Commissioner. In both instances Mr. Whitaker and the Commissioner told the representatives of the Du Puys, in substance, that this amount would be accepted by the government only in full settlement. At the last conference, it was understood that an offer of this amount would be made by Herbert Du Puy in compromise and settlement of the taxes and penalties claimed by the government from him and plaintiff, which would be accepted on behalf of the government.
XV. Pursuant to the understanding reached at the last conference, Herbert Du Puy, on November 9, 1920, wrote the following letter:
"November 9, 1920.
"C.G. Llewellyn, Esq., Collector of Internal Revenue, Pittsburgh, Pa. Dear Sir: Referring to letters, dated February 11th, 1920, addressed to Herbert Du Puy and Amy H. Du Puy, respectively, and signed by G.V. Newton, Acting Assistant to Commissioner of Internal Revenue, and to the claims for abatement of the additional taxes and penalties assessed against Herbert Du Puy and Amy H. Du Puy for the years 1916, 1917, and 1918, filed February 25th, 1920, which are still pending before the Bureau of Internal Revenue, and to the claims which are now being made by the United States for additional taxes and penalties for the year 1919, which have not yet been assessed, but for which demand is about to be made, and inasmuch as there have arisen differences of opinion and disputes with respect to the legality of the additional taxes and penalties assessed for the years 1916, 1917, and 1918, and the additional taxes and penalties claimed to be due for the year 1919 but not yet assessed, and with respect to the charges of fraud in the above-mentioned letters and similar charges for the year 1919, in order to compromise and settle all controversies, claims, and liabilities in the manner hereinafter set forth, I, on behalf of myself and my wife, Mrs. Amy H. Du Puy, hereby make the following offer of compromise, and tender herewith two bank cashiers' checks, one for $1,000,000 on the Farmers' Loan Trust Company, New York, and the other for $972,016.81 on the Farmers' Deposit National Bank, Pittsburgh, or a total of $1,972,016.81, to cover the payment of
"(1) The additional taxes claimed to be due for the years 1916, 1917, 1918, and 1919, amounting in all to the sum of $1,722,016.81; and
"(2) The sum of $250,000, in full settlement and compromise of all further civil liability for penalties claimed in connection therewith and all right to, in any way or under any circumstances, cause to be instituted or prosecuted criminal proceedings, charges or allegations of any nature whatsoever in connection therewith and in full settlement and release thereof and of any and all liability arising in connection therewith.
"(3) Upon the acceptance of these payments, as aforesaid, the said Herbert Du Puy and Amy H. Du Puy shall be relieved from any and all claims for taxes, penalties, and liabilities of any nature whatsoever under existing law arising out of or in connection with, the returns for, or payments of taxes or penalties due, or claimed to be due, from me or from my wife, Amy H. Du Puy, for the years 1916, 1917, 1918, and 1919.
"Neither this offer of compromise, nor any payment made, or action taken, thereunder, shall be used as an admission by, or offer in evidence against, Herbert Du Puy, Amy H. Du Puy, Morewood Realty Holding Company, Lansing Realty Holding Company, or Goodwin Sand Gravel Company, or their successor or successors or representatives, or any of them, in any future action or proceeding of any nature whatsoever.
"As a result of and by reason of the basis in which this settlement is proposed to be made it is understood that the commissioner will issue to the Morewood Realty Holding Company, Lansing Realty Holding Company, and the Goodwin Sand Gravel Company, respectively, certificates of overpayment of taxes in such amounts as he may find them to be entitled to by reason of the taxes paid by said companies, respectively, on the income taxed to Herbert Du Puy and Amy H. Du Puy under this settlement.
"Encls. [Signed] Herbert Du Puy."
To this letter the Commissioner of Internal Revenue replied as of date November 12, 1920, advising Herbert Du Puy that his offer was accepted on the conditions set out in his letter. The letter of the Commissioner bore the following indorsement:
"[Signed] Wm. M. Williams, "Commissioner.
"November 15, 1920.
"Approved by direction of the secretary (Jouett Shouse).
"[Signed] Jouett Shouse, "Assistant Secretary."
The said letter of the Commissioner is attached to the petition as Exhibit D and is made a part hereof by reference thereto.
Carl D. Mapes, Acting Solicitor, rendered an opinion recommending that the total tax assessed against Herbert and Amy H. Du Puy be reduced to $1,722,016.81, and that the penalty be reduced to $250,000 in compromise of both civil and criminal penalties and liabilities, the total tax and penalty under this recommendation being $1,972,016.81. This opinion was dated September 30, 1920.
XVI. At a conference held on October 1, 1920, the Commissioner stated in substance that since additional taxes for 1917, 1918, and 1919, in an amount determined against the plaintiff as before stated, represented in part income which had already been returned by the New York corporations, who had paid taxes upon income on which some of these additional assessments were levied against the plaintiff, certificates of overassessment would be promptly issued to the said corporations for the amount of assessment upon income which, under the settlement, had been assessed against plaintiff. No certificates of overassessment to the said corporations were issued prior to the filing of plaintiff's claim for refund herein on May 7, 1923. After the filing of the plaintiff's claim for refund herein such certificates of overassessment were issued to the said corporations and refunds were made to them of the taxes which they had paid upon the same income that had been charged to the plaintiff as the basis for the said additional taxes. The said corporations, at the time of receiving such credits or refunds, wrote to the commissioner to the effect that they did not regard themselves as entitled to these refunds, and that in event the plaintiff succeeded in this action the said corporations would make repayment to the defendant of the amount of the said refunds made to the corporations; but said corporations accepted said refund checks and cashed them. The sums refunded were pursuant to claims for refunds previously filed by the corporations on March 2, 1921, and not withdrawn.
The letter of Herbert Du Puy, dated November 9, 1920, addressed to C.G. Llewellyn, collector, and hereinabove set forth, was accompanied by two bank cashiers' checks for a total of $1,972,016.81; and, at the same time of the delivery of the letter, he stated to the collector that he intended to ask for a refund and to "push the matter to the end."
XVII. Plaintiff, under the Revenue Act of September 8, 1916 ( 39 Stat. 756), the Revenue Act of September 8, 1916, as amended by the Revenue Act of October 3, 1917 ( 40 Stat. 300), and the Revenue Act of February 24, 1919 ( 40 Stat. 1057), filed her income tax returns for the calendar years 1916, 1917, 1918, and 1919, which returns showed net taxable income and a total tax due as follows, and paid in the amounts and on the dates indicated opposite the amount of the tax returned.
================================================================== | Net Taxable | Total Tax | | Amount Year | Income | Due | Date | Paid ----------|-------------|------------|----------------|----------- 1916 .... | $ 47,647.89 | $ 389.77 | June 5, 1917 | $ 389.77 1917 .... | 265,935.71 | 34,151.66 | June 14, 1918 | 34,151.66 1918 .... | 22,983.23 | 2,227.49 | Mar. 31, 1919 | 750.00 | | | June 19, 1919 | 363.75 | | | Sept. 15, 1919 | 556.87 | | | Dec. 13, 1919 | 556.87 1919 .... | 32,001.01 | 2,707.49 | Mar. 24, 1920 | 500.00 | | | Apr. 17, 1920 | 176.88 | | | June 15, 1920 | 676.87 | | | Sept. 14, 1920 | 676.87 | | | Dec. 16, 1920 | 676.87 ------------------------------------------------------------------
XVIII. As a result of an investigation made by the Bureau of Internal Revenue beginning November 24, 1919, such investigation and subsequent proceedings being more fully hereinbefore described, there was assessed against the plaintiff on the 11th day of February, 1920, pursuant to the A-2 letter of February 11, 1920, hereinbefore referred to, additional taxes for the years 1916, 1917, and 1918. A portion of the additional assessments was paid, and abatement claims filed covering the balance of these assessments of which abatement claims the one for the year 1916 was allowed in part and that portion of the abatement claims disallowed was paid as additional taxes, being payment made with the letter of November 9, 1920, hereinbefore more particularly referred to.
In the original investigation by the Bureau of Internal Revenue beginning November 24, 1919, the plaintiff's taxes for 1919 were not involved and did not become involved in the controversy until during the year 1920. As a further result of the investigation aforesaid there was assessed against plaintiff on the 13th day of December, 1920, additional taxes for the year 1919, this tax being assessed approximately one month after it had been paid on November 12, 1920. There is set out below the additional tax assessed for each year named, additional tax paid February 25, 1920, the portion of the additional tax abated and date of abatement, and additional tax paid November 12, 1920.
================================================================== | Additional | | Additional | Additional Year | Tax Assessed | Additional | Tax Abated | Tax Paid | Feb | Tax Paid in | Jan. 7, | Nov. 12, | 11, 1920 | February, 1920 | 1921 | 1920 -----|--------------|-------------------|------------|------------ 1916 | $ 8,957.77 | $70.62 pd. 2/29 | $815.86 | $ 8,071.29 1917 | 49,932.88 | 3,824.37 " 2/27 | .......... | 204,003.33 1918 | 2,810.29 | 98.72 " 2/27 | .......... | 108,437.07 1919 | ............ | ................. | .......... | 30,944.99 | Dec. 13, | | | | 1920 | | | 1917 | $157,894.92 | ................. | .......... | ........... 1918 | 105,725.50 | ................. | .......... | ........... 1919 | 30,944.99 | ................. | .......... | ........... ------------------------------------------------------------------
XIX. The following stipulation has been agreed upon and signed by the attorneys of the respective parties:
(i) Pursuant to filing her income tax return for the calendar year 1916 plaintiff paid to the collector of internal revenue at Pittsburgh, Pa., as income taxes for the calendar year 1916, under the provisions of the revenue act of 1916, the following sums on the dates indicated:
June 5, 1917 ..................... $ 389 77 February 29, 1920 ................ 70 62 November 12, 1920 ................ 8,071 29 _________ Total ........................ $8,531 88
(ii) For the calendar year 1916, exclusive of the items in dispute listed below, the following is a correct statement of the net income and tax of plaintiff:
Net income ............................. $49,647 89 Less: Dividends ........................ 26,906 60 __________ Income subject to normal tax ......... $22,741 29 ========== Normal tax: At 2% ................................. $ 454 83 Less: 1% collected at source .......... 378 02 _________ Balance normal tax ................... $ 76 81 Surtax: On $49,647 89 ......................... $ 392 96 _________ Total tax on above income ............ $ 469 77
Statement of Item of Income at Issue Herein, Year 1916.
Plaintiff asserts that at various times prior to May 19, 1916, Amy H. Du Puy advanced to her husband, Herbert Du Puy, various sums of money totaling $270,735.70; on May 19, 1916, Herbert Du Puy paid to his wife, Amy H. Du Puy, $125,000; on May 22, 1916, Amy H. Du Puy transferred to her husband, Herbert Du Puy, three shares of stock in the Morewood Realty Holding Company; of the $125,000 paid by Herbert Du Puy to Amy H. Du Puy, the defendant assessed a tax on $124,700 as a profit to Amy H. Du Puy on the aforesaid three shares of stock in the Morewood Realty Holding Company. The par value of these three shares of stock was alleged by the plaintiff to be $100 each.
On the foregoing item of income in dispute, taxes were assessed against the plaintiff for 1916 and paid by the plaintiff.
(iii) Pursuant to filing her income tax return for the calendar year 1917, plaintiff paid as her income taxes for the calendar year 1917 under the provisions of the revenue act of 1916, as amended by the revenue act of 1917, the following sums on the dates indicated:
June 14, 1918 ................. $ 34,151 66 February 27, 1920 ............. 3,824 37 November 12, 1920 ............. 204,003 33 __________ Total ...................... $241,979 36
(iv) For the calendar year 1917, exclusive of the items in dispute listed below, the following is a correct statement of plaintiff's net income subject to normal tax, tax paid at the source on tax-free bonds, and income subject to surtax:
Net income subject to normal tax ....... $32,846 40 Tax paid at source ..................... 364 30 Income subject to surtax ............... 32,846 40
Statement of Items of Income at Issue Herein, Year 1917.
1. Plaintiff asserts that during 1917 she received a total of $274,187.00 in dividends. The Commissioner treated these dividends as follows:
Taxable at 1916 rates ................... $106,887 50 Taxable at 1917 rates ................... 167,299 50 ___________ Total ............................... $274,187 00
Plaintiff contends that of these dividends, in the amount of $106,887.50, received and treated as taxable at 1916 rates, $56,409.64 thereof represented distribution by the Connellsville Central Coke Company out of earnings accumulated prior to March 1, 1913, and therefore not taxable; and that of these dividends in the sum of $167,299.50 received and treated as taxable at 1917 rates, $54,923.24 thereof represented distribution by the Connellsville Central Coke Company out of earnings accumulated prior to March 1, 1913, and therefore not taxable.
2. Plaintiff asserts that during 1917 there were received by the following corporations dividends in the amounts listed, from corporate stocks which had been previously transferred to such corporations by plaintiff:
Morewood Realty Holding Company ......... $ 4,275 00 Lansing Realty Holding Company .......... 26,969 00 Goodwin Sand Gravel Company ........... 388,500 00 ___________ Total ................................ $419,744 00
These dividends were treated by the Commissioner as income of plaintiff for the year 1917.
3. Plaintiff asserts that during 1917 there was received by the Morewood Realty Holding Company interest in the sum of $300 from securities which had been previously transferred to such corporation by plaintiff. This interest was treated by the commissioner as income of plaintiff for the year 1917.
On all of the foregoing items of income in dispute, taxes were assessed against the plaintiff for 1917 and paid by plaintiff.
(v) Pursuant to filing her income tax return for the calendar year 1918, plaintiff paid the collector of internal revenue at Pittsburgh, Pa., as her income taxes for the calendar year 1918, under the provisions of the Revenue Act of 1918, the following sums on the dates indicated:
March 31, 1919 .................. $ 750 00 June 19, 1919 ................... 363 75 September 15, 1919 .............. 556 87 December 13, 1919 ............... 556 87 February 27, 1920 ............... 98 72 November 12, 1920 ............... 108,437 07 ___________ Total ........................ $110,763 28
(vi) For the calendar year 1918, exclusive of the items in dispute listed below, the following is a correct statement of plaintiff's net income subject to normal tax, tax paid at the source, and income subject to surtax:
Net income subject to normal tax ....... $26,059 29 Tax paid at the source ................. 393 30 Income subject to surtax ............... 35,837 29
Statement of Items of Income at Issue Herein, Year 1918.
1. Plaintiff asserts that during the year 1918, she received interest on Hostetter Connellsville Coke Company bonds as follows:
February 12th ....................... $1,100 August 7th .......................... 1,100
Plaintiff asserts that her cashbook shows entries on March 23, February 12, and August 7, 1918, of $1,100 each, as interest received on Hostetter Connellsville Coke Company bonds, and on March 23 a contra entry of $1,100 on account of that amount of Hostetter Connellsville Coke Company bonds interest previously recorded in error as received. The commissioner included in plaintiff's income, in addition to the $2,200 interest received February 12 and August 7, an additional $1,100 as received March 23, and did not correct the interest account with the contra entry of March 23.
2. Plaintiff asserts that during 1918 there was received by the Morewood Realty Holding Company interest in the sum of $300 from securities which had been previously transferred to such corporation by plaintiff.
3. Plaintiff asserts that during the year 1918 there were received by the following corporations dividends in the amounts listed from corporate stocks which had been previously transferred to such corporations by plaintiff:
Morewood Realty Holding Company .......... $ 35,647 50 Goodwin Sand Gravel Company ............ 178,101 00
These dividends were treated by the Commissioner as income of plaintiff for the year 1918.
On all of the foregoing items of income in dispute, taxes were assessed against the plaintiff for 1918 and paid by plaintiff.
(vii) Pursuant to the filing of her return for the calendar year 1919, plaintiff paid to the collector of internal revenue at Pittsburgh, Pa., as her income taxes for the calendar year 1919, under the provisions of the revenue act of 1918, the following sums on the dates indicated:
March 24, 1920 .................... $ 500 00 April 17, 1920 .................... 176 88 June 15, 1920 ..................... 676 87 September 14, 1920 ................ 676 87 December 16, 1920 ................. 676 87 November 12, 1920 ................. 30,944 99 __________ Total .......................... $33,652 48
(viii) For the calendar year 1919, exclusive of the items in dispute listed below, the following is a correct statement of plaintiff's net income subject to normal tax, tax paid at the source, and income subject to surtax:
Net income subject to normal tax ......... $22,848 07 Tax paid at source ....................... 236 50 Income subject to surtax ................. 42,176 01
Statement of Items of Income at Issue Herein, Year 1919.
1. Plaintiff asserts that during 1919 there were received by the following corporations dividends in the amounts listed from corporate stocks which had been previously transferred to such corporations by plaintiff:
Morewood Realty Holding Company .......... $49,630 Goodwin Sand Gravel Company ............ 24,600
2. Plaintiff asserts that during 1919 there was received by the Morewood Realty Holding Company, interest in the sum of $300 from securities which had been previously transferred to such corporation by plaintiff.
On the foregoing items of income in dispute, taxes were assessed against the plaintiff for 1919 and paid by plaintiff.
XX. The total tax paid by plaintiff for each year 1916, 1917, 1918, and 1919 is the tax on the income conceded by the plaintiff in the stipulation as correct, plus the excepted items above referred to.
Refund claims for each of the years 1916, 1917, 1918, and 1919 were duly filed with the collector of internal revenue at Pittsburgh, Pa., on the 7th day of May, 1923, setting forth the alleged wrongful inclusion of the aforesaid excepted items of income and the claimed wrongful disallowance of the aforesaid excepted deductions, which claims were by the Commissioner of Internal Revenue rejected under date of May 15, 1924. This suit was instituted March 24, 1925.
XXI. The returns of income tax of plaintiff referred to in the foregoing findings were made by Herbert Du Puy as her attorney in fact. Herbert Du Puy attended entirely to the books of account of the plaintiff. She trusted the handling of her property to him and he determined what should be done with reference to it. He also acted with her knowledge and consent in sending the letter signed by him, and set out in finding XV.
XXII. The plaintiff is and at all times herein mentioned has been a citizen of the United States and a legal resident of Pittsburgh, Pa. No action upon plaintiff's claim for refund has been had before Congress, or either House thereof, or any of the departments of the government, other than the Treasury Department, or in any other court.
Plaintiff is the sole owner of the claim herein involved, and the only party interested therein, and no assignment or transfer of the said claim, or any part thereof or any interest therein, has been made, and plaintiff has at all times borne true faith and allegiance to the government of the United States, and has not in any way aided, abetted, or given encouragement or comfort to any person, or persons, or government in rebellion against the government of the United States, or at any time aided or abetted or in any way given comfort to any sovereign or government that is or ever has been at war with the United States.
This case is controlled by the decision of the court in the companion case of Herbert Du Puy v. United States, No. E-209, 67 Ct. Cl. 348, decided by this court April 1, 1929. In accordance with the opinion rendered in that case, the plaintiff's petition must be dismissed, and it is so ordered.
The opinion of Judge Green reads as follows:
This action is a suit to recover income taxes alleged to have been wrongfully assessed against the plaintiff for the years 1916, 1917, 1918, and 1919, as a deficiency. The plaintiff paid the amount of the deficiency assessment, filed a claim for refund and asks judgment for the amount paid. The defendant pleads full settlement and compromise of the taxes involved, and also that the taxes were due and rightfully collected from the plaintiff.
The assessments involved grew out of transactions which the plaintiff had with certain corporations and for the most part pertained to income from property which the plaintiff had transferred to them without consideration. As far back as 1908, plaintiff and his wife, both of whom possessed great wealth, contemplated providing their four children with independent means and incomes by means of transfers of property to them directly, or to corporations for their use and benefit. In pursuance of this purpose, large amounts of property were transferred without consideration directly to their children, or to corporations created or controlled by the plaintiff. In the years 1917, 1918, and 1919 property which had a market value of nearly $12,000,000 was transferred to three corporations controlled by the plaintiff, the stock of which, however, eventually was held by the children. The total amount transferred to these corporations from 1908 to 1920, approximated $25,000,000 in value.
The particular assessments that are in controversy are set out in finding XIX, and they apply to the taxes of 1916, 1917, 1918, and 1919. An examination of the statements with reference to the taxes in controversy contained in this finding will show that they were made chiefly upon income derived from property which the plaintiff had transferred to these corporations consisting of dividends, interest, and rentals; also profits on the sale of stocks and securities held by these corporations and obtained from the plaintiff or claimed to be his property, the theory of the government officials being that the transfers made by plaintiff were not in good faith and were invalid for that reason, or, at least, that the property had been transferred to corporations which were controlled by him and used after the enactment of the federal income tax for the purpose of evading its provisions. There was also a claim on behalf of the government that interest which was paid to these corporations by the plaintiff on money alleged to have been borrowed from them, was not in fact paid, and therefore the deduction which plaintiff had taken in his income tax by reason thereof was disallowed; and the Commissioner also disallowed a deduction made by plaintiff in his return for 1919 on account of a loss alleged to have been sustained on a sale by him of bonds for a small sum at public auction to one of these corporations controlled, as before stated, by himself. In short, the government contended that all of these transactions set out in finding XIX as being in dispute were part of a fraudulent scheme of the plaintiff to defeat the government in the collection of income taxes justly due from him for the years named. In support of their respective contentions as to the facts, the plaintiff and defendant introduced at great length both oral and documentary evidence, the latter largely in the form of account-book entries. It would require too much space to even summarize this evidence. The plaintiff paid all of the taxes, specified in finding XIX as being in dispute, together with a penalty thereon at the time of entering into a contract with the defendant, which the defendant alleges was in full settlement of all of the additional taxes and penalties assessed against plaintiff and his wife. Subsequently, and within the time prescribed by the statute of limitations, he filed a claim for refund of the whole amount of additional taxes and penalty paid for his own account. He now vigorously insists that he acted in good faith in all of the transactions involved, and that none of these additional taxes or penalties were due and owing from him at the time they were paid. Having within the period of limitations filed a claim for refund, he now asks judgment for the whole amount paid for taxes and penalties assessed against him at the time of the alleged settlement, which he insists is not binding upon him. The respective contentions of the plaintiff and the defendant with respect to the separate items of assessments present numerous questions of law and fact which in many instances are inextricably mingled.
The plaintiff had a right to give his property to his children or to a corporation for their benefit, either as stockholders or otherwise, and thereafter the income from the property transferred could not be rightfully assessed against him. It was only necessary that the transfers should be in good faith and that the corporations should not be used as a device for enabling the plaintiff to escape income taxes, while he in fact kept control and had the use of the property. It would have been perfectly easy for the plaintiff to have so conducted these transactions and to have had the accounts so kept on his own books and the books of the corporations as to demonstrate that the transfers were made in good faith and without any purpose to play fast and loose with the government if such was the fact. Either through misfortune or design in many instances this was not done, and his oral testimony is so general in its nature that it affords little assistance in explanation of the transactions which are attacked by the government. On the other hand, it must be said that there are some of them which need no explanation as they afford no basis for any claim of fraud or illegality.
We do not, however, find it necessary to review the voluminous testimony offered and analyze the indefinite and involved entries that appear on the account books with reference to these transactions in order to determine whether, as counsel for defendant contend, the plaintiff was not acting in good faith with reference to certain of these transfers and other transactions in connection with the corporations, and whether they, or some of them, were in fact made or entered into for the purpose of defrauding the government, and had in law that effect. In any event, as stated in the letters hereinafter mentioned, a controversy arose between plaintiff and the defendant as to the validity of the assessments and taxes involved herein and a contract was entered into between the parties, the terms of which control the decision in the case, as will be shown hereinafter.
The plaintiff and defendant entered into an agreement for full settlement and compromise of the taxes involved in the case by and through an offer contained in a letter dated November 9, 1920, addressed to the collector of internal revenue at Pittsburgh, Pa., by the plaintiff, a copy of which is set out in finding XV, and an acceptance thereof contained in a reply to this letter dated November 12, 1920, signed by the Commissioner of Internal Revenue. The plaintiff, however, contends that by reason of a provision included in his letter and offer, no evidence thereof can be received or considered by the court. It must be conceded that if the next to the last paragraph of the letter of plaintiff is applied literally the plaintiff's objection to any evidence of a settlement or a payment thereunder, or anything done in relation thereto, must be sustained, and the situation is as if the contract and agreement had never been executed. The terms of this paragraph are broad and sweeping, and are as follows:
"Neither this offer of compromise, nor any payment made or action taken thereunder, shall be used as an admission by, or offer in evidence against, Herbert Du Puy, Amy H. Du Puy, Morewood Realty Holding Company, Lansing Realty Holding Company, or Goodwin Sand Gravel Company, or their successor or successors, or representatives, or any of them in any future action or proceeding of any nature whatsoever."
We think it needs no argument to prove that a so-called settlement of which no evidence can be given, either in writing or orally on behalf of one of the parties thereto, is in fact no settlement at all, and if this paragraph must control the decision of the court, defendant's plea of settlement at once comes to an end. But as this provision completely nullifies the former provisions in plaintiff's letter containing the offer to pay $1,972,016.81, which was made "in order to compromise and settle all controversies, claims, and liabilities," and "in full settlement and compromise" of all civil and criminal liability in connection with taxes for the years 1916, 1917, 1918, and 1919, it becomes necessary to consider whether such a provision in a contract of settlement is enforceable.
In this connection it should be kept in mind that the parties had been for some months endeavoring to effect a settlement of the taxes in question, and frequent conferences between them had been held; and that finally a basis of agreement had been found and the parties came to a mutual understanding that the taxes and penalties assessed against plaintiff and his wife, Amy H. Du Puy, could be settled for the amount stated above. In fact, if oral evidence is admissible with relation to the payment and the terms thereof, the oral evidence of the settlement is abundant; but as the provision under consideration excludes any evidence of payment, the oral evidence, if this provision be followed, is incompetent, and on account of the requirements of the statute with reference to settlements, it may be that it could not be used in any event.
The question involved has often been considered by the courts with, so far as we have been able to ascertain, perfect unanimity of opinion with reference to the construction of contracts in which a clause or proviso is found wholly nullifying the main provisions thereof and rendering them of no force and effect.
Davis v. Frazier, 150 N.C. 447, 64 S.E. 200, is a leading case. The opinion therein quotes with approval from Bishop on Contracts, § 386, as follows: "After interpretation has exhausted itself in harmonizing the several clauses and words, if there is a residue which can not be reconciled, the repugnancy must be got rid of by rejecting what will free the contract from it."
Also from the same author (section 387): "If the main body of the writing is followed by a proviso wholly repugnant thereto, it must necessarily be rejected, because otherwise the entire contract will be rendered null; but where it can be construed to qualify the main provisions so that all may stand together, it will be permitted to be retained."
Also quoting from Jones v. Casualty Co., 140 N.C. 262, 52 S.E. 578, 5 L.R.A. (N.S.) 932, 111 Am. St. Rep. 843: "It is an undoubted principle that a subsequent clause irreconcilable with a former clause and repugnant to the general purpose and intent of the contract will be set aside."
The oral evidence leaves no doubt that the general purpose and intent of the contract was to make a settlement. On two different occasions, once by Mr. Whitaker, special counsel for the government, and at another time by the Commissioner, the representatives of the plaintiff were informed that only a final settlement would be agreed to on behalf of the government. It may be claimed that the oral evidence is incompetent. If so, we need only consider the contract itself, which provides for "full settlement and compromise," using the strongest and most explicit terms. If the contention of the plaintiff is to be sustained, nothing was settled. The two provisions of the contract are so utterly repugnant that both can not stand. The first expresses the general purpose of the contract, as is shown by both the oral evidence and the contract itself.
Moreover, if there was not to be a settlement there was no possible object in the contract. It accomplished nothing, was unenforceable, and without consideration. It bound neither plaintiff nor defendant, and became merely a scrap of paper.
Bean v. Ætna Life Insurance Co., 111 Tenn. 186, 78 S.W. 104, is another leading case on the construction of conflicting clauses in a contract. In the decision in this case it is said: "When two clauses of a contract are in conflict, the first governs rather than the last."
And quoting from Blackstone: "If there be two clauses so totally repugnant that they can not stand together, the first will be received and the last rejected."
Also from Wisconsin Marine, etc., Bank v. Wilkin, 95 Wis. 111, 69 N.W. 354, 60 Am. St. Rep. 86: "The law is so settled on the subject that it can not be contended but that if the last clause of the contract is so repugnant to the first that both can not stand, the first must be taken as expressing the contract between the parties."
To the same effect is 2 Parsons on Contracts, 513, and Straus v. Wanamaker, 175 Pa. 213, 34 A. 648.
Where a construction can be given the latter clause which will be consistent with the other terms of the contract and its main purposes the courts hold that such a construction should be given it, but this rule does not apply where the latter clause is utterly repugnant to the main purposes of the contract and would nullify it. The rule as above stated in such cases is simply that the latter clause will be rejected and the contract will stand.
It is suggested that a construction might be given the paragraph under consideration which would not be in conflict with the agreement for a settlement and compromise. This suggestion is made on the ground that such was the intention of the parties. On this point it is sufficient to say that if such a construction could properly be given this paragraph of the agreement, it would be as fatal to the plaintiff's cause of action herein as if this paragraph of plaintiff's letter were disregarded entirely.
The plaintiff also contends that the agreement for a compromise and settlement is void, for the reason that no consideration was received for it. We do not think this contention merits extended discussion. Plaintiff is correct in saying that the evidence shows that when the final figure for compromise and settlement was reached, the representatives of the government had come to the conclusion that no larger amount of taxes than the amount fixed for this item and included in the total to be paid could be legally collected, and it is therefore said that the government yielded or gave up nothing as a consideration for the agreement. It is not necessary for us to decide whether a consideration would be found in the fact that the government officials, as the conferences progressed, had been yielding one point after another. Any consideration, however small, will support a contract for compromise and settlement. Plaintiff's agreement to compromise and settle was not simply based on the amount of taxes which the government officials agreed to accept. There were two other very important and moving considerations. The government agreed to accept in compromise of the penalties a sum which not only was more than a million dollars less than the amount of penalties originally assessed, but was many thousands less than the statutory amount of penalties on the taxes as finally computed. Besides this it was agreed, on behalf of the government, that all right to institute any criminal proceedings or charges would be relinquished, and that all liabilities of any nature whatever in connection with the taxes or penalties due or claimed to be due, either from the plaintiff or his wife, were to be extinguished. It is immaterial whether the plaintiff could in fact be legally subjected to these penalties, or whether he was subject to criminal prosecution. It is sufficient if the representatives for the Government believed that such was the case, as they undoubtedly did, and we hold that there was not only sufficient but ample consideration for the agreement.
There was also a still further consideration for the settlement. Part at least of the income which was in controversy, upon which, under the settlement, the plaintiff was to pay taxes, had theretofore been assessed against corporations to which the property had been transferred and taxes paid thereon by them. The contract of settlement provided that these taxes should be refunded to the corporations. (See last paragraph of plaintiff's letter of November 9, 1920.) This, of course, was proper to prevent the income being taxed both against the corporations and the plaintiff, but the government had the money and it was nevertheless a consideration. The fact that there was some delay about this payment is immaterial. The corporations had some time before filed a claim for refund, and by the settlement the government contracted to pay them the refund.
It is also urged on behalf of the plaintiff that in executing the contract of settlement he acted under duress. It is true that the government officials refused to accept the sum finally agreed upon unless it was paid without protest and in compromise and full settlement of the amount claimed. But we can not believe that the attorneys on either side were so ignorant as not to know that the plaintiff, had he so desired, could have paid or at least tendered this sum without making any agreement of settlement; and that whether this amount was received by the government or not, the result would be the same. With the exception of the criminal proceedings mentioned in the agreement and the balance of the penalty, the government could have proceeded no further and the plaintiff could have sued for a refund if the payment was accepted on behalf of the government. We repeat that there could have been no object in making the contract unless it was for the purpose of a final settlement of both civil and criminal liability, and the assurance that the government would not attempt to exact more in either case.
It seems to be contended also that the proceedings of the government with reference to collecting the tax and in the negotiations show duress. We need not determine whether any courtesies were required in making an examination of plaintiff's books or whether at the time this was done the plaintiff was given a full opportunity to investigate the case on behalf of the government. Certain it is that as the subsequent conferences between the two parties progressed the additional assessments against the plaintiff were discussed item by item and were fully understood by him. At these conferences what was said with reference to criminal prosecution appears to have been brought in by the plaintiff, who wanted to have the settlement cover this matter. It is well settled that the fact that one party to a settlement entered into it reluctantly will not void it, and it has even been held that the fact that plaintiff is under arrest at the time the compromise is entered into will not be sufficient to defeat it; and, as a matter of course, the fact that one of the parties signed the settlement to avoid the trouble and expense of a law suit does not amount to intimidation or duress, for that is ordinarily the purpose of a settlement.
The seizure of property by legal process on a claim made in good faith will not invalidate a compromise settlement. In United States v. Child, 12 Wall. 232, 244, 20 L. Ed. 360, it is said: "But no case can be found, we apprehend, where a party who, without force or intimidation and with a full knowledge of all the facts of the case, accepts on account of an unliquidated and controverted demand, a sum less than what he claims and believes to be due him, and agrees to accept that sum in full satisfaction, has been permitted to avoid his act on the ground that this is duress."
The principle upon which this statement is based applies equally to the converse of the case where a party, with full knowledge, pays a sum greater than what he claims he should and believes that he ought to pay, and pays it in full settlement. The facts in the Child's Case much nearer approach duress than in the case at bar. Like the instant case, a very large sum was involved, but unlike the instant case, it was stated in the opinion of the Court of Claims, from which an appeal had been taken, that the action of the government had "reduced them (Child Co.) to the verge of bankruptcy," and it appeared that the plaintiff did not sign the receipt voluntarily, but under protest."
In the case at bar the plaintiff, during the negotiations for settlement, was represented by able attorneys, and both they and the plaintiff knew before the settlement was signed everything that they know now. In order to successfully defend on the ground of force or duress it must be shown that the party benefited thereby constrained or forced the action of the injured party, and even threatened financial disaster is not sufficient. McCormick v. St. Louis, 166 Mo. 315, 334, 65 S.W. 1038. That plaintiff, who was at the time under indictment in connection with the tax return of the Crucible Steel Company, made the settlement to avoid some threatened or possible embarrassment or inconvenience is quite plain, but in the case last cited this is said to be usually the moving influence in bringing about a settlement. There is nothing in the evidence to show any threats or intimidation on the part of the government officials. If the counsel for the government had acted in bad faith, the conclusion would be different, but there is nothing in the evidence to show bad faith on their part.
The defendant also urges that the payment of $1,972,016.81 accompanying the letter of offer was made without protest, and at the time when it was paid a protest was necessary to recover any of it back. It is true that Du Puy stated to the collector in substance that he proposed to "push the matter to the end," but this statement was not contained in his letter which went on to Washington for determination of whether his offer should be accepted. Moreover, it was expressly stated at the conferences at which the settlement was made that this amount would not be received as paid under protest. In fact, that was one of the conditions which the government officials insisted upon if a settlement was to be made. The plaintiff could have simply paid what the government officials demanded and made a protest if he had desired, without the settlement. He did not see fit to do this, and, consequently, must be held to have paid without protest. It was not until about three years after the payment that a suit could be maintained to recover a tax without protest. This was provided by the Revenue Act of 1924, § 1014(a), 43 Stat. 343 (26 USCA § 156). The payment was a voluntary one, as we have before found, and we think that plaintiff's suit is also precluded by reason of a lack of protest. United States v. N.Y. Cuba Mail S.S. Co., 200 U.S. 488, 26 S. Ct. 327, 50 L. Ed. 569; Fox v. Edwards (D.C.) 280 F. 413.
The conclusions which we have reached with reference to the contract for settlement and the lack of protest make it unnecessary to determine whether the taxes paid by the plaintiff were legally due and owing to the government. It follows that his petition must be dismissed, and it is so ordered.
Green, Judge, also delivered the following supplemental opinion on motion for new trial, decided December 2, 1929:
The brief of the plaintiff on motion for a new trial correctly states that the opinion herein was rendered upon a question which was not discussed by counsel on either side. The plaintiff has therefore properly presented a brief and argument upon this question, and we think that under the circumstances an opinion should be rendered upon consideration of this argument.
The original opinion held that a paragraph near the close of the contract of settlement was repugnant to the body of the contract, and if enforced would nullify the whole of the instrument. This paragraph is set out in the original opinion, but as it is the basis of this opinion also, we quote it again as follows:
"Neither this offer of compromise, nor any payment made or action taken thereunder, shall be used as an admission by, or offer in evidence against, Herbert Du Puy, Amy H. Du Puy, Morewood Realty Holding Company, Lansing Realty Holding Company, or Goodwin Sand Gravel Company, or their successor or successors, or representatives, or any of them in any future action or proceeding of any nature whatsoever."
Counsel for plaintiff seem to concede in argument the correctness of the rule quoted from Bishop on Contracts, and stated in the original opinion as follows: "If the main body of the writing is followed by a proviso wholly repugnant thereto, it must necessarily be rejected, because otherwise the entire contract will be rendered null. * * *"
It is now contended by counsel for plaintiff that the entire contract was not rendered null by this clause, and it is said in the brief of counsel that "the court is not ousted of jurisdiction to define the relative obligations between the parties."
This may be conceded. Both before and after the contract was signed, and whether it be held to be a nullity or not, this court has jurisdiction to define the relative obligations between the parties, and it has done so.
It is also said that, "on the contrary, the parties have agreed to invest the court with jurisdiction to determine the legality of the taxes which, but for the presence of this clause, the court might be deemed foreclosed from determining."
But this sort of reasoning would prevent the rule of law upon which the case was decided from ever applying in any case. The main body of the contract did indeed foreclose the court from passing on the legality of the taxes. The nullifying clause, if put in force and effect, prevented the contract from being used, offered in evidence, or considered by the court. In other words, the whole matter stood just as if the contract had never been executed. The paragraph in question did not invest the court with jurisdiction; it had that already. In fact it made no attempt to do so. If held valid, the result was to make the whole contract of no effect by preventing the court from considering it. As said in the original opinion, it would make the contract a mere scrap of paper as to which the court could only decide that it had no effect on the case or the legal relations of the parties.
It is also argued that the terms of the compromise did not include the taxes in question but only the penalties assessed against the plaintiff. This is directly contrary to the language used in the letter which set out the terms of the settlement. In this connection see also the case of Ely Walker Dry Goods Co. v. United States, 34 F.2d 429 (a case in which a settlement was involved), holding that under the act of 1918 the penalty became part of the tax and together therewith constituted a single liability.
We think it quite clear that the paragraph in question nullified the main body of the contract and entirely destroyed its only purpose, which was to settle entirely the controversy over taxes between plaintiff and defendant. The motion for a new trial must therefore be overruled.
WILLIAMS and LITTLETON, Judges, did not hear and took no part in the decision of this case.