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U.S. v. White Dental Co.

U.S.
May 16, 1927
274 U.S. 398 (1927)

Summary

In United States v. S.S. White Dental Mfg. Co., 274 U.S. 398 (1927), the taxpayer, a Pennsylvania corporation engaged in the manufacture and sale of dental supplies, had organized a German subsidiary.

Summary of this case from Jeppsen v. Commissioner of Internal Revenue

Opinion

CERTIORARI TO THE COURT OF CLAIMS.

No. 291.

Argued April 22, 1927. Decided May 16, 1927.

1. Under § 234 of the Revenue Act of 1918 which authorizes the deduction from gross income in the computation of income taxes of "Losses sustained during the taxable year not compensated by insurance or otherwise," and Treasury regulations providing that losses deducted "must usually be evidenced by closed or completed transactions," but specifically authorizing deduction of worthless debts and corporate stock, the American creditor, and owner of the stock, of a corporation in Germany, was entitled to deduct the entire amount of such investment from gross income when the assets and business of the corporation were sequestered by the German Government during the war. P. 400. 2. Such sequestration of enemy property was within the rights of the German Government as a belligerent power and when effected left the corporation without right to demand its release or compensation for its seizure, at least until the declaration of peace. P. 402. 3. The transaction — the sequestration — causing the loss was "closed and completed" when the seizure was made, and the loss was then deductible although later the German Government bound itself to repay and an award was made by the Mixed Claims Commission which may result in recovery. P. 403. 61 Ct. Cls. 143, affirmed.

CERTIORARI ( 271 U.S. 651) to a judgment of the Court of Claims allowing a recovery of income taxes paid for the year 1918.

Assistant Attorney General Galloway, with whom Solicitor General Mitchell, and Messrs. A.W. Gregg, General Counsel, Bureau of Internal Revenue, and Frederick W. Dewart, Special Attorney, Bureau of Internal Revenue, were on the brief, for the United States.

Messrs. John Hampton Barnes and John F. McCarron for respondent.


This case comes here on writ of certiorari to the Court of Claims, § 240, § 3(b) Jud. Code, as amended, to review a judgment of that court allowing recovery by respondent of income taxes paid for the year 1918. The sole question presented is the right of the respondent, upheld below, to deduct from its gross income for 1918, the amount of its investment in a subsidiary German corporation whose entire property was seized in that year by the German government as enemy property.

Respondent is a Pennsylvania corporation, engaged in the manufacture and sale of dental supplies. Before 1918 it had organized and controlled, by ownership of all the capital stock, the S.S. White Dental Manufacturing Company, m.b.h. of Berlin, Germany, a German corporation. Its investment in the German corporation in 1918, as carried on its books, aggregated more than $130,000.

The agreed statement of facts adopted as findings by the court below are so vague as to leave it uncertain whether this investment was represented on the books of respondent by the capital stock alone, or in part by the capital stock and in part by an open account between it and the German corporation. The case was argued on the assumption, which we make, that the investment was represented by both the capital stock and an open account, due to respondent from the German company. The total is conceded to be no more than the fair value of the net assets of the German corporation.

In March, 1918, the sequestrator appointed by the German government took over the property of the German corporation and the management of its business. It is inferable from the findings, as the government concedes, that the sequestration was similar in purpose and legal effect to that authorized under the Trading with the Enemy Act of the United States, Oct. 6, 1917, c. 106, 40 Stat. 411; March 28, 1918, c. 28, 40 Stat. 459; July 11, 1919, c. 6, 41 Stat. 35; June 5, 1920, c. 241, 41 Stat. 977; March 4, 1923, c. 285, 42 Stat. 1511; May 7, 1926, c. 252, 44 Stat. 406, and we shall deal with the case on that basis.

In March, 1920, the possession of the seized assets and business was relinquished to the German corporation by the sequestrator. As a result of the mismanagement of its affairs while in his custody, and investments of its funds by him in German war loans, the value of its assets was seriously impaired. In 1922 its tangible assets and its lease were sold for $6,000. This sum was included in respondent's income tax return for that year. Later respondent filed a claim with the Mixed Claims Commission which was allowed in 1924 to the extent of $70,000. What if anything may ultimately be realized from this award remains uncertain.

In 1918 the respondent charged off as a loss the entire amount of its investment in the German corporation as shown by its books, and in July of that year passed a resolution authorizing the establishment of a reserve against this loss at the rate of $15,000 quarterly, beginning March, 1918. In making its income tax return for 1918 respondent deducted from gross income the amount of its investment in the German corporation. The deduction was disallowed by the Commissioner of Internal Revenue, on the sole ground that the loss was not evidenced by a closed and completed transaction in the year for which it was deducted. The tax so assessed was paid under protest and this suit followed.

Section 234 of the Revenue Act of 1918, c. 18, 40 Stat. 1057, 1077, 1078, authorizes the deduction in the computation of income taxes of "Losses sustained during the taxable year and not compensated for by insurance or otherwise;". In explaining this section, Article 141 of Treasury Regulations, 45, provides that losses incurred in the taxpayer's trade or business or in any transaction entered into for profit may be deducted but such losses "must usually be evidenced by closed and completed transactions." Article 151 provides in part: "Where all the surrounding and attendant circumstances indicate that a debt is worthless and uncollectible and that legal action to enforce payment would in all probability not result in the satisfaction of execution on a judgment, a showing of these facts will be sufficient evidence of the worthlessness of the debt for the purpose of deduction." And Art. 144 reads in part: "if stock of a corporation becomes worthless, its cost or its fair market value as of March 1, 1913, if acquired prior thereto, may be deducted by the owner in the taxable year in which the stock became worthless, provided a satisfactory showing of its worthlessness be made as in the case of bad debts." See Art. 561, making these provisions applicable to corporations.

The case turns upon the question whether the loss, concededly sustained by the respondent through the seizure of the assets of the German company in 1918, was so evidenced by a closed transaction within the meaning of the quoted statute and treasury regulations as to authorize its deduction from gross income of that year. The statute obviously does not contemplate and the regulations (Art. 144) forbid the deduction of losses resulting from the mere fluctuation in value of property owned by the taxpayer. New York Ins. Co. v. Edwards, 271 U.S. 109, 116; cf. Miles v. Safe Deposit Co., 259 U.S. 247. But with equal certainty they do contemplate the deduction from gross income of losses, which are fixed by identifiable events, such as the sale of property (Art. 141, 144), or caused by its destruction or physical injury (Art. 141, 142, 143) or, in the case of debts, by the occurrence of such events as prevent their collection (Art. 151).

The transaction evidencing the loss here was the seizure of the property of the German company. The loss resulted to the respondent because it was a creditor and stockholder of that company which, as a result of the sequestration, was left without property or assets of any kind. The sequestration of enemy property was within the rights of the German government as a belligerent power and when effected left the corporation without right to demand its release or compensation for its seizure, at least until the declaration of peace. See Littlejohn Co. v. United States, 270 U.S. 215; White v. Mechanics Securities Corp., 269 U.S. 283, 300, 301; Swiss Insurance Co. v. Miller, 267 U.S. 42; Stoehr v. Wallace, 255 U.S. 239, 242-244; Central Trust Co. v. Garvan, 254 U.S. 554; Brown v. United States, 8 Cranch. 110, 122. What would ultimately come back to it, as the event proved, might be secured not as a matter of right, but as a matter either of grace to the vanquished or exaction by the victor. In any case the amount realized would be dependent upon the hazards of the war then in progress.

That legal action by respondent upon its open accounts against a corporation thus despoiled would have been fruitless within the meaning of Art. 151 seems not open to question. No distinction is urged by the government between respondent's investment in the stock of the German company and in its open accounts. It is equally apparent that the stock after the seizure was as worthless as the obligations of the German company and was deductible under Art. 144 on the same basis as bad debts.

If the seized assets are viewed as the property of respondent, ignoring the entity of the German company, the result is the same. The quoted regulations, consistently with the statute, contemplate that a loss may become complete enough for deduction without the taxpayer's establishing that there is no possibility of an eventual recoupment. It would require a high degree of optimism to discern in the seizure of enemy property by the German government in 1918 more than a remote hope of ultimate salvage from the wreck of the war. The Taxing Act does not require the taxpayer to be an incorrigible optimist.

We need not attempt to say what constitutes a closed transaction evidencing loss in other situations. It is enough to justify the deduction here that the transaction causing the loss was completed when the seizure was made. It was none the less a deductible loss then, although later the German government bound itself to repay and an award was made by the Mixed Claims Commission which may result in a recovery.

Judgment affirmed.


Summaries of

U.S. v. White Dental Co.

U.S.
May 16, 1927
274 U.S. 398 (1927)

In United States v. S.S. White Dental Mfg. Co., 274 U.S. 398 (1927), the taxpayer, a Pennsylvania corporation engaged in the manufacture and sale of dental supplies, had organized a German subsidiary.

Summary of this case from Jeppsen v. Commissioner of Internal Revenue

In White Dental, the sole question presented was "the right of the [taxpayer corporation] to deduct from its gross income for 1918, the amount of its investment [represented by both the capital stock and an open account] in a subsidiary German corporation whose entire property was seized in that year by the German government as enemy property."

Summary of this case from Exxon Corp. v. United States

In United States v. S.S. White Dental Manufacturing Co., 274 U.S. 398, 47 S.Ct. 598, 71 L.Ed. 1120 (1927) and Post v. Commissioner, 12 B.T.A. 510 (1928), the unanticipated and gratuitous relief payment was made years after the loss was incurred.

Summary of this case from Forward Communications Corp. v. United States

In United States v. S.S. White Dental Manufacturing Co., 274 U.S. 398, 47 S.Ct. 598, 71 L.Ed. 1120 (1927), the leading case in this field, the Supreme Court held that a taxpayer creditor and stockholder of a corporation seized by the German government in 1918 could take a deduction for the loss of the taxpayer's investment in that year.

Summary of this case from Fuchs v. Commissioner of Internal Revenue

In United States v. White Dental Co., 1927, 274 U.S. 398, 47 S.Ct. 598, 71 L.Ed. 1120, the taxpayer's German subsidiary, all of whose capital stock was owned by the taxpayer, was seized by the German government as enemy property in 1918; in 1920 the seized assets were released; in 1932 these assets were sold for $6000. The Supreme Court held that the stock became worthless in 1918 and permitted the loss to be deducted in that year.

Summary of this case from Clark v. Welch

In United States v. S.S. White Dental Mfg. Co., 274 U.S. 398, 401, 47 S.Ct. 598, 600, 71 L.Ed. 1120, it is said that losses "which are fixed by identifiable events" are accrued.

Summary of this case from H. Liebes Co. v. Commr. of Internal Revenue

In United States v. S.S. White Dental Co., 274 U.S. 398, 47 S.Ct. 598, 71 L.Ed. 1120, the taxpayer was allowed its loss, though it had a possible recoupment — eventually realized — against the German government after the war.

Summary of this case from General Outdoor Advertising Co. v. Helvering

In United States v. S.S. White Dental Co., 274 U.S. 398, 47 S. Ct. 598, 71 L. Ed. 1120, the taxpayer carried on its books an investment in the capital stock of, and a debt owing by, its German subsidiary.

Summary of this case from Sherman Bryan v. Blair

In United States v. S.S. White Dental Co., supra, 274 U.S. at pages 402-403, 47 S. Ct. at page 600, the court said: "The quoted regulations, consistently with the statute, contemplate that a loss may become complete enough for deduction without the taxpayer's establishing that there is no possibility of an eventual recoupment. * * * The taxing act does not require the taxpayer to be an incorrigible optimist.

Summary of this case from Callan v. Westover
Case details for

U.S. v. White Dental Co.

Case Details

Full title:UNITED STATES v . S.S. WHITE DENTAL MANUFACTURING COMPANY

Court:U.S.

Date published: May 16, 1927

Citations

274 U.S. 398 (1927)
47 S. Ct. 598

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