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Commissioner of Internal Revenue v. Trounstine

decided: April 29, 1954.


Author: Staley

Before GOODRICH, STALEY and HASTIE, Circuit Judges.

STALEY, Circuit Judge.

In 1944 the estate of Norman S. Goldberger received $108,453.59 as a result of a judgment recovered in the United States District Court for the Southern District of New York. That receipt gave rise to these cases, the Commissioner having assessed income tax deficiencies for the year 1944 against both the estate and the beneficiary of a trust set up by Goldberger's will. The Tax Court*fn1 held that there was no deficiency as to the estate but that the recovery, minus certain deductions, was income to the beneficiary.

The facts were stipulated and were found accordingly by the Tax Court.

In 1933 Goldberger entered into a joint venture with Bauer, Pogue & Co., Inc., a brokerage company, and George E. Tribble. The purpose of the venture was to trade in the stock of Fidelio Brewery, Inc. Each of the venturers contributed a substantial number of Fidelio shares, and Bauer, Pogue & Co., Inc., were the managers of the trading account. By the terms of the agreement, Goldberger was to receive 50/115ths of the net profits of the venture, which was active from June 8 to August 2, 1933. In September of that year, an accounting was rendered to Goldberger which showed that his share of the net profits of the venture was $71,847.58. This sum was paid to him. He died in 1936, believing that the accounting rendered in 1933 was correct. In 1939 his executrix, petitioner Trounstine, discovered that Bauer, Pogue & Co., Inc., had not dealt honestly with Goldberger in 1933. Trounstine brought suit in New York against Bauer, Pogue & Co., Inc., and Bauer, individually, for an accounting of the joint venture profits. Following removal of the suit, the district court found that, during the operation of the joint venture and in violation of its terms, Bauer, Pogue & Co., Inc., and Bauer and Pogue, individually, secretly traded in Fidelio shares and failed to account to Goldberger for the profits of those sales. After an accounting before a special master, the court found that in addition to the sum paid to Goldberger in 1933, he should have received $60,163.73. Final judgment was then entered in favor of the estate.*fn2 In 1944 the estate received, in satisfaction of the judgment, $108,453.59, which included the $60,163.73 which Goldberger should have received in 1933, plus interest from August 11, 1933, and costs and disbursements. Expenses of the litigation amounted to $64,855.02, leaving a net recovery of $43,598.57.

Petitioner Trounstine is Goldberger's widow and the executrix of his estate. His will left his entire residuary estate in trust for his widow. The trustees were to pay to her all income from the res (with an irrelevant exception), and, if any year's income was less than $12,000, a sufficient amount from corpus to make a total annual payment of $12,000. Prior to receipt of the proceeds of the judgment, Goldberger's entire residuary estate, aggregating $79,272.61, had been paid over to her as trust beneficiary. The net recovery was deposited in an account maintained by her as ancillary executrix between December, 1944, and February, 1945. Between February and May of 1945, that amount was transferred to her domiciliary executrix account, and was transferred to her, individually, between March and May of 1945.

The estate did not file a return for 1944, and Trounstine's 1944 return did not report any of the amount received on the recovery. The Commissioner assessed deficiencies against both the estate and Trounstine and a 25 per cent penalty against the estate for failure to file a return. On petitions for redetermination the Tax Court held that the recovery was gross income to the estate in 1944 but that it was entitled to deduct the litigation expenses and the net amount of the recovery, the latter because it was held to be currently distributable to Trounstine as trust beneficiary.This left no net income to the estate and taxed the net recovery to Trounstine. The result was a determination of no deficiency against the estate, rendering moot the penalty for failure to file, but a deficiency as to Trounstine larger than that assessed. The latter is the petitioner in No. 11,110, and the Commissioner has filed a protective petition for review in No. 11,077.

The Commissioner supports his deficiency assessments by pointing to the general rule that the taxability of the principal amount of recovery in a law suit depends upon the nature of the claim and the basis of recovery. If the claim is for lost profits, the recovery is a taxable gain because it is in lieu of what would have been taxable had it been received without a law suit. If the claim is for loss of, or damage to, capital, the recovery is nontaxable because it is a return of capital. Here, the principal sum recovered was the amount of joint-venture profits wrongfully withheld from Goldberger and, therefore, we are told, there was taxable income. The taxpayers argue, correctly we believe, that the principal sum was taxable income to Goldberger in 1933 and is now beyond reach of the fisc because of the statute of limitations.

The Revenue Act of 1932 governs this phase of the case. Its Section 1111 (a) (3)*fn3 includes a joint venture within the meaning of the term "partnership." Thus, for simplicity's sake, we will use partnership language here. That Act treated the firm and the individual partners substantially as does the present Code. That is, for income tax purposes, the common law, aggregate theory prevailed. The firm was not a taxable entity; its return was informational only. Sections 181 and 189. Its net income was computed, except as to the deduction for charitable contributions, in the same manner as that of an individual. Section 183. The tax was imposed upon the individual partner, who must include, in computing his net income, his distributive share of the firm's net income, whether or not distributed to him.*fn4 That is the determinative point here. The joint venture made certain profits in 1933, but Goldberger did not receive his entire share. By the express words of Section 182(a), however, that nonreceipt makes no difference, taxwise. Once the joint venture realized net income, Goldberger became taxable upon his distributive share, in spite of the fact that he did not actually receive it in that year. This court so decided in First Mechanics Bank v. Commissioner of Internal Revenue, 3 Cir., 1937, 91 F.2d 275, on facts which are on all fours with those of this case. There, the petitioner's decedent was a member of a joint venture which realized income in 1916. A dispute arose between the venturers, and the decedent did not receive any of his share until 1928, and that in a compromise amount, pending appeal from a judgment in his favor. This court held that the decedent had realized taxable income in 1916 in the full amount of his distributive share. That holding governs here. Moreover, in Stoumen v. Commissioner of Internal Revenue, 3 Cir., 1953, 208 F.2d 903, we held that a partner was taxable, in the year of realization by the firm, upon his full distributive share of the firm's net income even though he received very little of his share and was wholly unaware of its existence. On the record in that case, there was every reason to believe that he never would receive his full distributive share. The footnote contains some of the many cases applying the rule of Section 182(a) in a variety of factual settings.*fn5

But, says the Commissioner, all that Goldberger had in 1933 was an inchoate, contingent claim, which is not income. The leading case of United States v. Safety Car Heating & Lighting Co., 1936, 297 U.S. 88, 56 S. Ct. 353, 80 L. Ed. 500, is relied upon. We think that case and its progeny inapplicable here for the same reason this court held it inapplicable in First Mechanics Bank, supra, 91 F.2d at page 279-280. The Safety Car Heating case did not involve a partnership or joint venture. Here, the profits were realized by the joint venture in 1933. There was nothing conditional or contingent about their receipt. They were earned and paid in 1933. Goldberger, therefore, was legally entitled to his share of those profits and was taxable on that share although he did not actually receive it in that year. The statute made his nonreceipt irrelevant. The fact that he was deceived and was ignorant of the full extent of the gain did not change the fact that profits had been received in 1933 by the joint venture, and his share was income taxable to him in that year.

Swastika Oil & Gas Co. v. Commissioner of Internal Revenue, 6 Cir., 1941, 123 F.2d 382, certiorari denied 1942, 317 U.S. 639, 63 S. Ct. 30, 87 L. Ed. 515, and Parr v. Scofield, 5 Cir., 1950, 185 F.2d 535, certiorari denied 1951, 340 U.S. 951, 71 S. Ct. 571, 95 L. Ed. 686, relied upon by the Commissioner, do not bear on this case. In those cases there was no partnership or joint venture.

Finally, we think the Commissioner distorts the nature of the 1944 judgment. He argues that what the estate recovered in 1944 never became joint-venture profits in 1933 but were the profits of the individual wrongdoers, made in breach of their fiduciary duty. The opinion and findings of fact in the 1944 action, which are part of the stipulated facts here, and the Tax Court's opinion show, however, that joint-venture profits, made in 1933 but wrongfully withheld from Goldberger in that year, are exactly what the estate recovered in 1944. The fact of their nonappearance on the books of the venture, if it is a fact, is not determinative here, for book entries are "no more than evidential, being neither indispensable nor conclusive." Doyle v. Mitchell Brothers Co., 1918, 247 U.S. 179, 187, 38 S. Ct. 467, 62 L. Ed. 1054; Northwestern States Portland Cement Co. v. Huston, 8 Cir., 1942, 126 F.2d 196, 199; Commissioner of Internal Revenue v. North Jersey Title Ins. Co., 3 Cir., 1935, 79 F.2d 492.

Having been so recently convinced in the Stoumen case, supra, that Section 182 required that the taxpayer lose there, we remain convinced that that section requires that the taxpayers win here. The Commissioner's brief in that case presents a compelling argument in the taxpayers' favor here. Thus, although there may be no requirement that the Commissioner argue consistently from case to case, we must decide consistently, so far as we are able. We hold that $60,163.73, the principal amount of the 1944 judgment, was not taxable income to the estate or Trounstine in 1944 but was income to Goldberger in 1933.

The amount received included $43,165.61 which represented interest on the principal amount from September 11, 1933. There is no question but that this interest item is income, Section 22(a), 26 U.S.C. § 22(a) (1952); Kieselbach v. Commissioner of Internal Revenue, 1943, 317 U.S. 399, 63 S. Ct. 303, 87 L. Ed. 358, and we agree with the Commissioner that it was taxable in the year of receipt. Rose, 1947, 8 T.C. 854. The interest did not come through the firm and was not, therefore, subject to the operation of Section 182(a). The taxpayers contend, however, that under Section 42*fn6 of the Revenue Act of 1934, Goldberger's death resulted in making the interest for the period from September 11, 1933, to March 3, 1936, the date of his death, a part of his income for the taxable period in which fell the date of his death. Section 42 of the 1936 Act is the applicable statute, but it makes no difference for the two sections are identical. This language first appeared in the Revenue Act of 1934 and was inserted to reach income earned by a cash-basis taxpayer but not received prior to his death. Such income had eluded the Commissioner since it was held not to be income to the decedent prior to his death because not then received nor income to his estate because a part of corpus. 2 Mertens, Law of Federal Income Taxation § 12.100 (1942). Not even the broad meaning of "accrued" given that word in Helvering v. Estate of Enright, 1941, 312 U.S. 636, 61 S. Ct. 777, 85 L. Ed. 1093, however, would encompass an item so contingent as was this interest in 1936. At Goldberger's death he had a cause of action of an equitable nature, a suit for an accounting against his coadventurers. In equity the allowance of interest is wholly discretionary. Bates v. Dresser, 1920, 251 U.S. 524, 531, 40 S. Ct. 247, 64 L. Ed. 388; In re ...

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