The opinion of the court was delivered by: GOURLEY
In this action the taxpayer seeks to recover income tax alleged to have been assessed and collected improperly in the year 1941.
The denial of said deductions resulted in an assessed deficiency consisting of taxes of $ 1593.87 and interest of $ 235.83, a total of $ 1829.70, which the taxpayer paid and now asks for a refund of $ 1823.25. The difference in the amount paid and the amount which is asked for a refund is due to an error admitted by the taxpayer, as an item of income, which was subsequently adjusted and the taxpaid.
An agreed statement of facts, with exhibits thereto, has been filed by both parties. In addition, the Court has taken judicial knowledge of the records in the re-organization and bankruptcy proceeding of the company in which plaintiff was a stockholder and officer.
The plaintiff was a stockholder and President of the Monat Valve and Forge Company. Said corporation was organized to manufacture valves which had been designed by one of its officers and principal stockholders. The company had, in fact, never produced valves in any quantity, most of its efforts being devoted to the improvement of valves which had been designed or in attempts to design and produce new or improved types. It became necessary on July 9, 1939 to file a petition for re-organization in this Court. The hope of the debtor corporation to reorganize rested on the belief that its interest in the patents and patent applications involving valves would become valuable when the valves were perfected.
(a) It was questionable whether the debtor corporation had any title whatsoever in the patents or patent applications, and as a result thereof the values were conjectural and not determinable. (At a public sale in bankruptcy the plaintiff purchased all interest in the patents for the amount of $ 150.00.)
(b) It was very doubtful whether the valves manufactured under the patents would be such an improvement over other valves then on the market as to be sold in competition at a fair profit.
(c) Even if developed, the value of the patents would be limited to their worth to some competing company which might desire to acquire title to avoid infringement actions, or to make some minor changes in the valves of a competing company.
During the year 1939, while the debtor corporation was in re-organization, the taxpayer advanced moneys, or, as he contends, made loans to the corporation as an attempt to prevent bankruptcy. Said moneys advanced consisted principally or payments made to individuals in connection with patent applications, wage claims, rent, court filing fees, notices, advertising, telephone calls, attorneys' fees, advances to an officer and director of the corporation for unspecified purposes, and fees and expenses advanced to the Secretary-Treasurer of said company. The total amount of said advances aggregated $ 2295.00.
The efforts to reorganize said company were ineffective. On December 6, 1940, the Special Master, appointed by the Court, recommended that an Order be entered adjudging the debtor corporation a bankrupt since no plan of re-organization could be formulated, the debtor being hopelessly insolvent. The matter was not presented to a member of this Court until January 24, 1941, on which date the debtor corporation was adjudged a bankrupt. (File No. 20649 in Bankruptcy.)
The report of the Special Master shows that after the payment of the costs and expense of the administration expenses, attorneys' fees, master fees, wage claims, taxes and partial payment on the rent, no funds exist for distribution to the general creditors.
The factual findings of a referee in bankruptcy or a special master are to be sustained unless such findings are clearly erroneous. In the matter of American Coils Co., a corporation of the State of New Jersey, 3 Cir., 1951, 187 F.2d 384.
From an examination of the record, there is no clear error in the factual findings of the Special Master. Rather, there is sufficient credible evidence to support them.
In a bankruptcy proceeding, the object is to liquidate the assets of a bankrupt to pay off its creditors as quickly and inexpensively as possible, while the purpose of a re-organization proceeding is not liquidation and if re-organization is successful, the debtor corporation will continue to function, pay its creditors and carry on its business. ...