Opinion
Action by Margaret W. Galbreath Hendrickson, formerly Margaret W. Galbreath, against the United States, to recover payment of an unjust enrichment tax assessment against plaintiff.
Judgment for plaintiff to extent indicated in opinion.
MADDEN, Judge, dissenting.
This case having been heard by the Court of Claims, the court, upon the evidence and the report of a commissioner, makes the following special findings of fact:
1. Plaintiff, Margaret W. Galbreath Hendrickson, formerly Margaret W. Galbreath, is an individual and a resident of Greensville, Tennessee. Prior to and on June 11, 1936, she was the wife of Hugh J. Galbreath, and after his death intestate on that date she became administratrix of his estate.
2. Prior to June 11, 1936, Hugh J. Galbreath and W.C. Thomas, as partners, operated a bakery business in Morristown, Tennessee, under the name of "Galbreath's Bakery", with a branch in Greenville, Tennessee, Galbreath owning a three-fourths interest and Thomas a one-fourth interest therein. During 1935 that partnership purchased flour from various flour mills; the price paid therefor included the processing taxes which the millers had paid on the processing of the wheat from which the flour was made and had added to the sale price of the flour.
3. Upon the death of Hugh J. Galbreath intestate on June 11, 1936, the partnership terminated and, under the laws of Tennessee, his three-fourths interest therein passed one-half to his widow and one-half to his minor daughter. October 2, 1936, the Chancery Court for Greene County, Tennessee, entered an order approving the purchase by plaintiff of the three-eighths interest of the minor daughter in the partnership as of June 11, 1936. Plaintiff, now owning a three-fourths interest in the bakery, and Thomas, continuing to own a one-fourth interest, operated the bakery as partners from June 12, 1936 to November 30, 1936. During that period Thomas managed the business for the partnership. The amount paid by plaintiff for the daughter's interest was $14,667.20, and the order of the Chancery Court approving the purchase stated that this was the full book value of the interest of the minor in the partnership as of June 11, 1936. The court further found that the total assets of the partnership on June 11, 1936, were $84,259.33, and that its liabilities were $45,146.79, thus leaving a net worth of $39,112.54. The amount of $14,667.20 was duly paid by plaintiff to the guardian of the daughter. The balance sheet filed by the original partnership with its partnership return of income for the period January 1 to June 11, 1936, showed a net worth of the partnership at June 11, 1936, of $44,506.39. No mention was made in the appraisal by the court or in the balance sheet, referred to above, of the processing tax item described in finding 5.
4. November 30, 1936, plaintiff purchased the one-fourth interest of Thomas in the bakery business. The contract of sale recited that Thomas assigned all of his interest in and to the business known as "Galbreath's Bakery" to plaintiff in consideration of the payment to him of $4,000 in cash and the cancellation of $4,500 due on a note of Thomas, of which plaintiff was the owner. The balance sheet filed by the second partnership with its partnership return of income for the period June 12 to November 30, 1936, showed a net worth of the partnership at November 30, 1936, of $47,609.76. No mention was made in the bill of sale or in the balance sheet, referred to above, of the processing tax item described in finding 5. Since that time plaintiff has operated the bakery business as a sole proprietorship. During the entire period, both prior and subsequent to June 11, 1936, the business has been operated as "Galbreath's Bakery."
5. In 1937 the millers who in 1935 had sold flour to the partnership of Hugh J. Galbreath and Thomas, doing business as Galbreath's Bakery, refunded to Galbreath's Bakery the sum of $3,575.16, representing the processing taxes which were included in the prices paid by the partnership for the flour purchased by it from the mills. This amount was received by plaintiff, who was then the sole owner of Galbreath's Bakery, and has ever since been retained by her.
6. In the federal estate tax return filed for the estate of Hugh J. Galbreath, deceased, no amount was included as an asset for the item of $3,575.16, referred to in the preceding finding. No claim for such amount was ever set up on the books of the first partnership, which terminated June 11, 1936, on the books of the second partnership which terminated November 30, 1936, or on the books of plaintiff.
7. March 14, 1938, plaintiff filed her individual income tax return for the calendar year 1937 reporting a net income of $19,427.33 and a tax due of $1,483.46, which was paid on that date. Included in the gross income in that return under the designation "other income" was the item of $3,575.16, referred to in finding 5 and described in the return as "Refund--processing tax $3,575.16." An additional tax of $45.56 and interest thereon in the amount of $1.27 were paid by plaintiff on September 28, 1938.
8. February 26, 1940, plaintiff filed a claim for refund for 1937 of $461.20, or such greater amount as might be refundable. The following grounds were assigned therefor:
"There was included in the gross income in said return the sum of $3,575.16 as 'refund of processing taxes.' This was done in error because taxpayer was not in business during the time the Agricultural Adjustment Act was in effect and did not pay any processing taxes. Therefore, she could not possibly have had such a refund. "Taxpayer's husband (now deceased) and one W.C. Thomas were operating Galbreath's Bakery as a partnership while the Agricultural Adjustment Act was in effect, Mr. Galbreath having a three-fourths interest and Mr. Thomas a one-fourth interest. They did not pay any processing taxes as such, but had contracts with their vendors to the effect that, if the Agricultural Adjustment Act should be held invalid, the vendors would refund the processing taxes which they had included in the prices at which they sold flour to the partnership. Mr. Galbreath died June 11, 1936, leaving taxpayer and a daughter as his sole heirs. Taxpayer purchased the daughter's interest in said processing tax claims at face value and thus became the owner, at face value, of a three-fourths interest in said claims. On November 30, 1936, taxpayer purchased the one-fourth interest of Mr. Thomas in said claim paying therefor the face value of them. Thereafter, taxpayer received payment of the claims thus acquired--the amount received in 1937 being $3,575.16 which amount was included in income as stated above. Said payment did not constitute income to taxpayer."
The statement in plaintiff's claim for refund, just quoted, that her husband and Thomas had contracts with their vendors to the effect that, if the Agricultural Adjustment Act, 7 U.S.C.A. § 601 et seq., should be held invalid, the vendors would refund the processing taxes to them, was not true.
9. January 13, 1941, the Commissioner of Internal Revenue advised plaintiff of his determination of an adjusted net income of $21,232.74 for 1937, and of a deficiency against her of $293.66 for that year. The adjusted net income included the processing tax item of $3,575.16, heretofore referred to, and the letter set out the following action on the claim for refund filed February 26, 1940:
"The contention set out in your claim for refund that the refund of processing taxes which was included in income reported on the return is not income is disallowed in that the amount reported in 1937 had no cost basis to you."
Plaintiff paid that deficiency May 15, 1941, together with interest and penalty thereon in the amount of $55.15, making a total payment on that date of $348.81. The claim for refund was formally rejected by the Commissioner by letter dated June 17, 1941.
10. August 1, 1941, the Commissioner advised plaintiff of his determination of a deficiency in unjust enrichment taxes for the years 1936 and 1937 in the amount of $3,962.81. The part of that deficiency for the year 1937 resulted from the inclusion in income subject to that tax of the amount of $3,575.16 representing reimbursements of processing taxes made by vendors to plaintiff and described in finding 5. In computing the unjust enrichment tax, the net income of plaintiff for 1937 of $19,427.33, as reported in her return under Title I of the Revenue Act of 1936, 26 U.S.C.A.Int.Rev.Acts, page 819 et seq., was reduced by the amount of income included therein which was subject to the unjust enrichment tax imposed by Title III of the Revenue Act of 1936, 26 U.S.C.A.Int.Rev.Acts, page 838 et seq., that is, $3,575.16. That computation showed an income tax for 1937 of $1,021.58 instead of $1,483.46 as shown by plaintiff in her return; that is, a difference of $461.88. The unjust enrichment tax was then computed in the following manner:
Unjustenrichment tax
Net income adjusted ...............
$3,575.16
---------
Tax on $3,575.16 at 80 percent .....
2,860.13
Less credit for other taxes on income.............................
461.88
---------
Unjust enrichment tax assessable ...................
2,398.25
Unjust enrichment tax assessed:
Original return ......................
None
---------
Deficiency of unjust enrichment tax..............................
2,398.25
Penalty, 25 percent of $2,398.25 .....
599.56
Plaintiff appealed to the Tax Court of the United States from the Commissioner's determination as set out in his letter of August 1, 1941, and the Tax Court decided, on October 23, 1944, that plaintiff was not liable, in any capacity, for any unjust enrichment tax. See Henrickson v. Commissioner of Internal Revenue, 4 T.C. 231. This decision has now become final.
11. Plaintiff is the owner of the claim herein sued upon and no assignment of any part thereof has been made. [Copyrighted Material Omitted] Geo. E.H. Goodner, of Washington, D.C. (Scott P. Crampton, of Washington, D.C., on the brief), for appellant.
Elizabeth B. Davies, of Washington, D.C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for defendant.
Before WHALEY, Chief Justice and LITTLETON, WHITAKER, JONES, and MADDEN, Judges. WHITAKER, Judge.
Plaintiff sues to recover income taxes resulting from the inclusion within her gross income of $3,575.16, refunds of processing taxes which had been collected from Galbreath's Bakery by the flour mills from which it had purchased flour in 1935.
After the Agricultural Adjustment Act had been declared unconstitutional, under which Act these processing taxes had been levied, the flour mills refunded to "Galbreath's Bakery" the amount of the taxes which they had included in the price of the flour sold to that bakery. This sum was received by plaintiff in 1937 in the way to be set out and was included by her in her income for that year, on which taxes were paid, but later she filed a claim for refund of these taxes on the ground that these refunds were not income to her in that year or in any other year.
In the year 1935, when the mills sold the flour to Galbreath's Bakery, in the purchase price of which there was included the processing taxes, the bakery was operated by a partnership composed of Hugh J. Galbreath, the former husband of plaintiff, and W.C. Thomas. On June 11, 1936, Galbreath died leaving no will. Under the law of Tennessee, where he resided, one-half of his estate passed to his widow and one-half to his minor daughter. He owned a three-fourths interest in the bakery, so on his death plaintiff and his daughter each succeeded to a three-eighths interest therein. Subsequently, on October 2, 1936, plaintiff bought from her daughter her interest in the bakery for the sum of $14,667.20, which was the book value of the daughter's interest, and then on November 30, 1936, plaintiff purchased Thomas' one-fourth interest. Thereafter, plaintiff was the sole owner.
When the flour mills made the refunds of processing taxes collected by them from Galbreath's Bakery checks were issued by them in the name of Galbreath's Bakery. These checks were cashed by plaintiff and she has ever since retained the proceeds thereof.
When the mills made the refunds to the bakery they were making them to the persons from whom they had collected the processing taxes, to wit, the partnership of Galbreath and Thomas. When they were received by plaintiff she had a right to keep them only because she was an heir of her husband, one of the partners to whom the refunds were made, and because she was the purchaser of the interest in the business of her daughter and of Thomas. The mills owned nothing to anyone other than the partnership. They owed plaintiff nothing except as the successor in interest of the partners.
Three-eighths of the refunds received by her, then, she received by inheritance from her husband. Such receipts are expressly excluded by the Act from gross income. The inclusion in her gross income of so much of the refunds, at least, was wholly without justification.
The other five-eighths of the refunds plaintiff had a right to retain only by virtue of her purchase of her daughter's interest in the business and of Thomas' interest. She had no other right to it.
We think there can be no doubt that when plaintiff's daughter and Thomas sold to plaintiff their interests in the business they sold to her whatever right they had to receive a part of these refunds. The terms of their sales made no reservation of any asset of the business. Their entire interest was sold. This is evidenced by the fact that neither the daughter nor Thomas ever made any claim to any part of the refunds, or if they did, that they were unable to successfully maintain it.
Whether or not the partnership of Galbreath and Thomas had a legally enforceable right to a refund of the money from the flour mills, it nevertheless became, when paid, an asset of that partnership, and only those persons were entitled to keep the money who had succeeded to the interest of the partners. This person was the plaintiff, partly by inheritance from her husband and partly by purchase from her daughter and from Thomas.
We are of opinion that plaintiff is entitled to recover the amount of taxes paid as a result of the inclusion of these refunds within her gross income. Judgment is reserved until the filing of a stipulation by the parties, or, in the absence of a stipulation, until the incoming of a report of a commissioner, showing the amount due plaintiff computed in conformity with this opinion. It is so ordered.
WHALEY, Chief Justice, and LITTLETON, Judge, concur.
MADDEN, Judge (dissenting).
The original owners of the bakery, Hugh J. Galbreath and Thomas, paid to the millers, their vendors, processing taxes upon the flour which they bought in 1935; they, so far as appears, collected the amount so paid from their customers in increased prices; in 1936 the plaintiff became the owner of the bakery; in 1937 the millers sent payments to Galbreath's Bakery, which was the trade name of the enterprise throughout the entire period; the plaintiff appropriated the money. The question is whether or not it was taxable income to her. I think it was.
See Hendrickson v. Commissioner, 4 T.C. 231, at pages 236, 237.
The statutory definition of taxable income consists of a "general definition" of gross income, a list of specific exclusions from gross income, and a list of permissible deductions from gross income in computing the tax. The "general definition," shown in the footnote, is very broad, using the words "and income derived from any source whatever." This language easily includes the money here in question. When we look to the "Exclusions from Gross Income" in section 22(b), paragraph (3) excluding "the value of property acquired by gift, bequest, devise or inheritance" is the only provision with possible relevance. The plaintiff does not claim that any right to this money came to her by inheritance from her husband. She concedes that there was no contract for it or right to collect it in her husband and his partner. She does claim, however, that the money came to her by "gift" from the millers and is therefore excluded from taxable income by section 22(b)(3).
Revenue Act of 1936, Section 22, 26 U.S.C.A.Int.Rev.Acts, page 825. Gross Income.
Id. Section 22(b)(1-8).
Id. Section 23, 26 U.S.C.A.Int.Rev.Acts, page 827.
The plaintiff was a legal stranger to the millers, as far as the purchase of the flour on which the processing taxes were paid, were concerned. She just happened to own the same physical plant and business which her husband and Thomas had owned when they bought and used the flour. If they had had a legal right to a refund of the taxes, that right might have, probably would have, passed to the plaintiff by the inheritance and the assignments by which the business became hers. But the mere chance or prospect that, at the will of the millers, the taxes would be refunded, would not have passed to her by inheritance, nor by assignment in the absence of an intent to include such a chance or prospect. The evidence here negatives any such intent. So the plaintiff acquired by succession or assignment no interest in these refunds of taxes, and was, as I have said, a legal stranger to them. See Hendrickson v. Commissioner, supra. The plaintiff in her reply brief concedes this.
The millers, I suppose, intended to pay the taxes back to the persons from whom they had collected them. It would be remarkable if their only anxiety was to disgorge them, without regard to the question of who received them. If their intent was as I have supposed, they sent the money to "Galbreath's Bakery" upon the assumption that its owners, corporate or personal, were the ones who had paid them the money which they were now refunding. They could hardly have supposed that they could escape liability for the unjust enrichment tax themselves merely by donating to charity or to a stranger the amount of the processing taxes which they had collected from Hugh J. Galbreath and Thomas.
But when the payments arrived, addressed to "Galbreath's Bakery", the plaintiff was the one to whom they were delivered, since her business bore that name. She took the payments and appropriated them. So far as appears, she did not question the millers as to whether the payments were meant for her, or had merely come into her hands because of their erroneous assumption that "Galbreath Bakery" was still owned by the person or persons who had paid the taxes. If my supposition as to what happened is correct, the plaintiff was not the recipient of a "gift." If the transaction was intended by the millers as a gift to anyone, or if it would properly be classified as a gift if it had been received by the person intended, it still would not be a gift to the plaintiff, for whom it was not intended. If one sends a check for a Christmas present to his friend John Smith at a stated address, but the friend has died and another John Smith lives at the address and he receives and cashes the check, he cannot, we suppose, omit it from his income tax return as a gift. It was intended as a gift, but not to the one who got it. As to him, it is "income derived from any source whatever", and nothing elsewhere in the statutes excludes it from taxability. I think, therefore, that the plaintiff came into this money because her enterprise happened to bear the same name as it bore when the former owners who had paid the taxes to the millers operated it. If so, it was taxable income to her.
If the intention of the millers was not what I have inferred; if they wished only to pay out the money, without regard to who got it; or if they were intending to buy the good will of the present owner of the business at an 80% discount, rather than to restore the money to the persons from whom they had collected it, or their representatives, who would have included the heirs of Thomas and the minor daughter of Hugh J. Galbreath; the plaintiff should have come forward with evidence of such intentions. If the intention to purchase good will for the future had been shown, we would have had an interesting question as to whether the transaction was a gift, excluded from taxation. According to Sportwear Hosiery Mills v. Commissioner, 3 Cir., 129 F.2d 376, it would not have been a gift, and would have been taxable. But perhaps the decision in Helvering v. American Dental Company, 318 U.S. 322, 63 S.Ct. 577, 87 L.Ed. 785, points the other way. The court has not, as I understand it, considered this question, since we have no evidence as to what the millers' actual intent was. In this discussion, I have been obliged to infer their intent from the somewhat meager facts and circumstances proved.
The court's opinion awards the plaintiff a judgment upon a theory which the plaintiff herself expressly disclaims in her reply brief. I think the decision is wrong.
JONES, Judge, took no part in the decision of this case.
"(a) General Definition. 'Gross income' includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * * "