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January 23, 1930


Appeal from the District Court of the United States for the Western District of Pennsylvania; Frederic P. Schoonmaker, Judge.

Author: Thomson

Before BUFFINGTON, Circuit Judge, and THOMSON and AVIS, District Judges.

THOMSON, District Judge. The Liberty Baking Company brings this suit against D. B. Heiner, collector, to recover back $16,418.24 income and profits taxes for the year 1918. The collector having held the company liable, an appeal was taken to the Board of Tax Appeals, which was heard in 1926, the Board sustaining the ruling of the collector. The appeal to the Board being filed before the Act of 1926, the plaintiff, instead of appealing directly to this court, elected to pay the taxes and sue in the United States District Court, under section 283(b) of the Revenue Act of 1926 (26 USCA ยง 1064(b). The case was tried without a jury, and the court, after making special findings, entered judgment thereon for the defendant. The case is before us on appeal from that decision.

The first question involves the statute of limitations. If that statute does not apply, the next question is:

Was the plaintiff entitled, in computing its taxable income for the year 1918, to deduct --

(a) Loss of $11,000 alleged to have resulted from the demolition of certain buildings which were razed in order to make way for plant extensions?

(b) Loss of $10,000 alleged to have resulted from the worthlessness of a flourmilling process.

(c) An alleged loss of $5,895.45, being a part of the cost of certain bread wrappers which were too small for the bread loaves manufactured by the plaintiff after the war.

The statute of limitations would have been a bar in this case, except for two waivers, executed by the plaintiff -- one dated February 4, 1924, extending the time for the assessment and collection of the 1918 taxes for one year after the expiration of the statutory period of limitations, and a second waiver dated November 29, 1924, which covered not only the year 1918, but also the year 1919.

While these waivers have been attacked by the defendant as invalid, we agree with the court that there does not appear any substantial objection to their validity. The extension of time seems to have been of marked advantage to the plaintiff, and was followed by very substantial reductions in the amounts claimed against it.

The first waiver was signed by the president and secretary of the plaintiff company with the corporate seal annexed. In it, the plaintiff consented to the "determination, assessment and collection" of any taxes for the year 1918, for "one year after the expiration of the statutory period of limitations."

By the second waiver, the plaintiff consented to the extension of the period for "determination, assessment and collection" of taxes for the years 1918 and 1919, for one year "after the expiration of the statutory period of limitations within which assessments of taxes may be made for the year or years mentioned."

The court below held as untenable the objection that the waivers were not properly executed by the plaintiff or by the Commissioner of Internal Revenue; that the signing of such a waiver, by one or more executive officers, with the corporate seal affixed, given as it was to secure further consideration of corporate tax liability, comes within the ordinary powers of corporate officers; that, as to the acceptance by the Commissioner, waivers being filed in his office bearing what purports to be his signature and acted upon by that officer, giving repeated consideration to the plaintiff's claims for further reductions, which resulted in withholding collections while the plaintiff's books were being examined, these facts preclude the plaintiff from now controverting the validity of the waivers. The objection that the waivers were without consideration cannot be sustained. The statute requires nothing but "consent," and it would be unconscionable to allow the taxpayer to afterwards repudiate a consent upon which the Commissioner has acted and relied. It appears that, in the circumstances, the execution of the waivers was a necessary incident to the securing of further consideration of the plaintiff's tax liability.

We conclude that there was no error in sustaining the validity of the waivers.

As to the three items upon which plaintiff claims a loss:

In November, 1916, plaintiff bought additional ground adjoining its place of business for the future extension of its plant. There were three buildings on this land valued at $11,000, which plaintiff tore down in 1918 and 1919, in order to make room for the contemplated extensions to its plant. Plaintiff claimed this item as a deductible loss in 1918.

The court in its findings and conclusions held that this item was not a deductible loss. The court found that the property, as it stood, was bought for the purpose of enlarging the plant. That there was no loss sustained because the demolition which was in contemplation at the time the property was bought. The court concluded that this situation was directly covered by article 142 of Regulation 45, to the effect that, when a taxpayer buys real estate upon which is located a building which he proceeds to raze in view of erecting another, it will be considered that the taxpayer has sustained no deductible loss by reason of the demolition of the old building, and no deductible expenses on account of the cost of removal; that the value of the real estate, exclusive of old improvements, is presumably equal to the purchase price of the land and building, plus the cost of removal of the old. While the razing of the buildings in this case was somewhat deferred, we think the conclusion of the court was correct.

On October 24, 1917, plaintiff made an agreement with a milling company for an exclusive license to use the Herendeen process for treating flour. The consideration agreed upon was $10,000, of which $2,500 was paid in 1917. The agreement contained a provision that the plaintiff might process flour at its own plant or send it to the mills of the Herendeen Company at Danville, Ill. In 1918, the plaintiff had its flour processed at Danville, but found the process unsatisfactory, and in December, 1918, charged as a loss the entire $10,000. Later, in 1919, this charge was re-entered on the books of the company, and equipment was installed at its plant at Pittsburgh for the process, which was used there during the year 1919. This process was not satisfactory; the machinery being dismantled in 1920. The Commissioner allowed this item as a loss in 1919, but not in 1918.

The court, in finding with the Commissioner, said: "There had been no trial of the process by the plaintiff until 1919, when for the first time it installed the necessary machinery to make a test of the process. The accountants of the plaintiff charged this item back on the books of the plaintiff after it had been claimed as a 1918 loss. There was no error in so doing."

The court was perhaps in error in saying that there had been no trial of the process until 1919. It seems that the process was tried and found unsatisfactory in Danville in 1918, and in December of that year plaintiff charged the entire amount of $10,000 as a loss. Had the matter ended there, the plaintiff would have been entitled to the loss as claimed. But it did not end there. Evidently not satisfied with the result of their 1918 experiments, the charge was re-entered on the books, and new equipment installed at its plant in Pittsburgh, which was used there during the year 1919. They were experimenting to determine whether, in fact, the process was good or bad, and in 1919, after full experimentation, they concluded the process was worthless and abandoned it.It would seem that this was the time when the matter was definitely determined and as the loss definitely established.We see no error in allowing credit for the loss in 1919.

In the year 1918, the plaintiff purchased a quantity of paper bread loaf wrappers for use on loaves of the size prescribed by the United States Food Administrator during the war. After the Armistice in November, 1918, the food regulations were canceled. The plaintiff then enlarged the size of its loaf, with the result that the wrappers bought in 1918 were too small. As a result, the plaintiff used two wrappers on each loaf for the balance of the year 1918 and extending into the year 1919, when it procured other wrappers and abandoned those bought in 1918. The plaintiff charged off 50 per cent. of the cost of the wrappers on hand December 31, 1918, as a loss, which the Commissioner disallowed for the tax year 1918. Such loss from the abandonment of unused wrappers was allowed as a deduction in 1919. The court was of opinion that there was no deductible loss under the statute allowable for either the year 1918 or 1919, and held there was no shrinkage in inventory. The court held, however, that, if there was a deductible loss, it was in the year 1919, as the Commissioner had allowed. With this conclusion we cannot agree. The wrappers were purchased of the size prescribed by the government. Later the food regulations were canceled, which was a matter far beyond the control of the plaintiff. It was natural that the normal size of the loaf thereafter should govern, and a clear loss resulted to the plaintiff by reason of the change of conditions. It would seem to us correct for the plaintiff to charge off 50 per cent. of the cost of the wrappers on hand December 31, 1918, as a loss which it had sustained in that year.

To the additional loss involved in this item, the plaintiff should be entitled to credit, and to that extent the conclusion of the court should be modified. If the government will file a remittitur as to the amount of this item of loss, the judgment will in all respects be affirmed.


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