considerations apply to all the other years in question as to 1931. Consequently the fact finding must be made that the $393,357.94 in respect of which the additional tax for 1937 was paid did not accomplish a reduction in the plaintiff's tax liability for any of the years 1931 to 1936 inclusive.
Of course, if in any one of the years in question the taxpayer had returned a net income after all bad debts had been charged off, the burden of proof would have been met and the recovery would have been taxable to the extent to which the charge-off benefited the taxpayer.
I do not think that the basis of the decision of this case is inconsistent with Burnet v. Sanford & Brooks Co., 282 U.S. 359, 51 S. Ct. 150, 151, 75 L. Ed. 383. The recovery there was of a sum of money as a judgment in a suit upon a contract for breach of warranty. The taxpayer, a contractor for dredging, had found the material to be dredged more difficult than it had been warranted, and consequently had been compelled to incur much greater expense than anticipated. The Court pointed out that the recovery was income. Except for the year in which the money was received, the situation was about what it would have been if, instead of waiting to be sued, the contractee (in that case the Government) had voluntarily increased the contract price to cover the additional cost (which was what it should have done) and paid it to the contractor as the work progressed. The Court said, "That the recovery made by respondent in 1920 was gross income for that year within the meaning of these sections cannot, we think, be doubted. The money received was derived from a contract entered into in the course of respondent's business operations for profit. While it equalled, and in a loose sense was a return of, expenditures made in performing the contract, still, as the Board of Tax Appeals found, the expenditures were made in defraying the expenses incurred in the prosecution of the work under the contract, for the purpose of earning profits. They were not capital investments, the cost of which, if converted, must first be restored from the proceeds before there is a capital gain taxable as income." The point with which the decision dealt was the year in which the recovery was taxable. Here we are dealing not with income but with capital, and the only question is whether the taxpayer has impliedly agreed that it shall be taxed as though it were income.
For the same reason I find myself unable to agree with the District Court for the Western District of Kentucky in Stearns Coal & Lumber Co. v. Glenn, 42 F.Supp. 28. It is extremely doubtful whether the question which appears to me controlling was presented to the Court in that case and, as has been stated, I cannot accept Burnet v. Sanford & Brooks Co., supra, as dispositive of it as the Court in the Stearns case seemed to do. In a recent opinion (Second National Bank of Nashua v. Commissioner, Dec. 29, 1941) the Board of Tax Appeals declined to follow the decision in the Stearns case.
In Commissioner v. Liberty Bank & Trust Co., 6 Cir., 59 F.2d 320, the Court was considering a case in which the charge-off had resulted in a tax benefit to the taxpayers. The Court pointed out that the taxpayer was estopped to question the inclusion of the recoveries in his gross income for tax purposes in the year in which they were made. In my view, it was unnecessary to go further, as the Court did, and apply Burnet v. Sanford & Brooks Co. as a controlling authority, and, for the reasons stated, I am unable to follow that portion of the Court's opinion.
It might be pointed out also that in none of the case in which the courts have sustained taxation of recoveries of bad debts on theories other than the one here presented were the courts faced with the problem of recoveries of debts the deductions for which had not resulted in tax benefits.
The facts are found as stipulated.
The Court concludes as a matter of law that, upon the facts, the plaintiff is entitled to recover the amount of the tax in question with interest.
Judgment may be entered for the plaintiff in the amount claimed with interest.
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