Kerr v. Bowers

Full title: KERR v. BOWERS. CLEGG v. SAME

Court: Circuit Court of Appeals, Second Circuit

Date published: Jul 25, 1933

66 F.2d 419 (2d Cir. 1933)

Opinion

Nos. 227, 228.

July 25, 1933.

Appeals from the District Court of the United States for the Southern District of New York.

Actions by Henry F. Kerr and by Alfred E. Clegg against Frank Collis Bowers, as executor of the estate of Frank K. Bowers, deceased, formerly United States Collector of Internal Revenue for the Second District of New York. From judgments of the District Court of the United States for the Southern District of New York [ 48 F.2d 227], dismissing the complaint in each action, the plaintiffs respectively appeal.

Affirmed.

The above actions were tried before Judge Goddard without a jury, who made special findings upon which judgments were entered dismissing the complaints. The first action was brought to recover $1,677,005.79, and the second to recover $1,672,828.77. Each sum represented income taxes for the year 1920 assessed by the Commissioner of Internal Revenue and paid in 1927 by the respective plaintiffs after they had appealed to the Board of Tax Appeals and the Board had affirmed the order of the Commissioner.

The plaintiffs, in 1920, were British subjects, but residents of New York City, and had been engaged in the business of operating steamships. In September, 1919, there was a reorganization of the Kerr Navigation Corporation, in which both were stockholders, and under the reorganization Kerr received 11,547 shares of class A and 12,630 shares of class B stock in a new corporation, the American Ship Commerce Navigation Company, in exchange for 57,738 shares of stock which he owned in the old Kerr Navigation Corporation that had cost him $290,740, and Clegg received 11,547 shares of class A and 12,629 shares of class B stock in the new corporation in exchange for his holdings of 57,737 shares of stock in the old corporation that had cost him $290,735. Under agreements entered into at the time of the reorganization, Kerr and Clegg had upon the happening of a specified contingency the option of selling the stock which each had thus received in the new company to the American Ship Commerce Corporation, a holding company, which owned a majority of the stock of the new company. The price which Kerr and Clegg were each to receive for their stock was about $2,400,000. On June 24, 1920, the event occurred, which gave Kerr and Clegg the right to exercise the option of selling their stock at the specified price, and Kerr and Clegg notified Harriman, the president of the American Ship Commerce Corporation, and Ellis, its attorney, that they would exercise the option and that the tender of their stock would be made to the corporation on August 28, 1920. Prior to this time, auditors of the Bureau of Internal Revenue had been sent to New York to investigate the business affairs of Kerr and Clegg and the companies in which they were interested. In the course of this investigation it was learned that Kerr was going abroad on Saturday, August 28, and had booked passage on that day, and also that some one named Clegg, supposed to be the plaintiff Alfred E. Clegg, but who was actually the brother of the latter, was also going abroad. All of Kerr's property was in the United States, and included an estate at Summit, N.J., and a one-third interest in the Kerr Realty Corporation which owned a building at 44 Beaver street, an interest in the Northern Dock Company, where vessels were loaded, a one-half interest in the Kerr Steamship Company, and the stock in the new navigation corporation. Kerr sailed for Europe on September 2, 1920, and intended to reside abroad permanently, and Thomas Clegg sailed on September 4, 1920. Stephens, one of the government auditors, reached the conclusion from his investigation that between six and seven million dollars of additional income and profits taxes should be assessed against the old navigation corporation for the years 1917, 1918, and 1919, and early in September, 1920, the Commissioner of Internal Revenue made assessments amounting to $6,517,795.48 against the old navigation corporation for such taxes.

During the early part of the week which ended August 28, 1920, one of the auditors and McCawley, an assistant solicitor of internal revenue, went to see Harriman and Ellis and learned from them that the option for the sale of the stock had become effective, that Kerr and Clegg had asked to have the matter closed in London or Montreal rather than New York (a request that was declined), and that the transfer was likely to take place in the near future. These government officials were kept informed as to the progress of the conferences of Harriman and Ellis with Kerr and Clegg, and on August 27, 1920, notified the Commissioner and Solicitor, of Internal Revenue that Kerr and Clegg were likely to tender their stock under the option agreement upon the next day. The Commissioner and Solicitor of Internal Revenue thought that Kerr and Clegg might be planning to take the proceeds of their stock abroad with them, thus making it difficult for the government to collect the income taxes, and determined to prevent them from doing this by impounding the money as soon as it was paid to them, so that they could not dispose of it until the tax question should have been settled.

In order to carry out this plan, McCawley and the Solicitor of Internal Revenue arranged to have an assessment of income taxes made against Kerr and Clegg computed upon the anticipated profit from the sale of their stock. The Acting Commissioner of Internal Revenue, on August 27th, made a special assessment of income taxes alleged to be due from Kerr and Clegg upon a computation based upon information which had been obtained in the investigation of plaintiffs' affairs and communicated to the Commissioner of Internal Revenue by one of the auditors. Assessment certificates were accordingly issued by the Acting Commissioner of Internal Revenue on August 27, 1920, and the assessment list attached thereto purported to be an assessment of additional income taxes in August, 1920. The assessment list purported to be the August special, 1920, list of income taxes against the plaintiffs and showed a tax of $1,501,288.20 to be due from each of the plaintiffs. On the list appeared the words and figures "1920 Dummy S.A. 8/27/20," which meant that it was a special assessment of August 27, 1920, made where no return had been filed by the taxpayer. The Commissioner did not declare that the taxable period had terminated for either Kerr or Clegg during the year 1920. The assessment list and assessment certificate were received in the office of the collector of internal revenue for the second district of New York on the evening of August 27, 1920.

On August 28, 1920, there was issued by the collector of internal revenue, addressed to each of the plaintiffs, a notice and demand for taxes assessed on August 27, 1920, and subpœnas were issued out of the office of the collector to appear before him. There also were issued notices of a statutory lien for taxes. Certain of the notices recited the period of liability as the year 1920, and others as the year 1919.

On Friday evening, August 27, 1920, there was a conference in the office of the United States attorney's office between an assistant United States attorney, McCawley, and the auditors. Ellis was present part of the time, and was requested to notify the government officials when Kerr and Clegg were about to tender their stock so as to enable the government group to be present.

On the morning of August 28, Kerr and Clegg, accompanied by their attorneys, Noble and Scammell, went to the office of the American Ship Commerce Corporation to deliver their stock and obtain payment. Ellis, the attorney for the corporation, examined the stock certificates, and, after finding them in order, inquired in what form payment was desired, and in reply was told that certified checks would not do, and that legal tender was required, whereupon Harriman, the president of the corporation, telephoned to the Chase National Bank and arrangements were made to obtain the cash required to make the payment and to close the deal at the bank instead of in his office. In the meantime Ellis informed the government officials that Kerr and Clegg had demanded cash and that the closing was to take place at the Chase Bank. They accordingly went to the Chase Bank, taking with them the notices and other papers which had been prepared, and stationed themselves in various parts of the bank and corridor leading to the street in such a manner as to know what was taking place and yet not be observed. The representatives of the American Ship Commerce Corporation agreed to see to it that the money should be paid over to Kerr and Clegg in the main banking room on the ground floor of the Chase Bank in order that it might be made in view of the government group and also agreed that, when the transaction was completed, a signal would be given to the government officials. The representatives of the government planned to prevent Kerr and Clegg from taking the money away from the bank until payment of taxes should be made or assured. These taxes included not only those assessed against Kerr and Clegg, but the taxes which might be assessed against the corporations in which they were interested. After some delay, due to the necessity of sending to the Federal Reserve Bank to get the legal tender, two piles of money belonging to the American Ship Commerce Corporation were produced by a bank representative and placed on a small table in the main banking room. Kerr and Clegg asked the representatives of the corporation to close the transaction in a private room, instead of in the main banking room where there were many people about, but this request was refused, and they were told that there were no private rooms available. One of the piles of money which had been laid upon the table contained $2,456,959.80, the amount payable for Kerr's stock, and the other pile contained $2,456,859.80, being the amount payable for Clegg's stock. The certificates of stock of Kerr and Clegg, duly indorsed for transfer, had been placed on the table by Noble, their attorney. The piles of money had not been counted by Kerr and Clegg, but their representatives had previously agreed to accept the bank's count.

Kerr and Clegg then tendered their stock to Ellis, representing the purchasing corporation, who then handed to Kerr and Clegg, respectively, the two piles containing the money payable for their stock. Kerr took in his hand the pile of money handed to him and placed it on the table in front of his attorney, asking him to count it, and Clegg did the same with the pile of money handed to him, while Ellis picked up the certificates of stock which had been tendered by Kerr and Clegg, respectively, put them in his pocket and then, with Harriman, withdrew. Noble remained counting the money and placing it in a bag which Clegg's brother had brought for that purpose, while Kerr and Clegg started to leave the building. The representatives of the purchasing corporation then gave the prearranged signal to the government group indicating that the sale was completed, and the government officials stepped up and served Kerr and Clegg, while on their way out of the building, with the notices and demand for taxes and the subpœnas to appear before the collector of internal revenue, and the notices of statutory liens which had been previously prepared.

The attitude of the government officials was insistent; the deputy collector carried his shield of office, so that all would recognize his authority, thinking there might be shooting. Thomas Clegg, brother of the plaintiff, Alfred E. Clegg, reached for the bag in which the money had been placed. In a scuffle the deputy collector took hold of the bag and both of them carried it to a vault in the Equitable Safe Deposit Company; the government officials insisting to Kerr and Clegg that they were there to prevent them from endeavoring to take the money away from the place, except under the control of the government officials to the extent required to insure that it would be held intact until the tax questions had been settled. The government officials would not allow the plaintiffs to remove it to their personal safe deposit boxes, but arranged to have it placed in a vault of the Equitable Safe Deposit Company in the name of Clegg's brother and Noble, pasted a notice of lien on the box, and served a notice upon the safe deposit company that no one was to have access to the box except on the consent of the Commissioner of Internal Revenue. The government officials refused to permit the money to be removed except on the condition (a) that the alleged liens of the assessments and any other liens which might be lawfully imposed within 90 days after August 27, 1930, were canceled, or until the consent of the Commissioner should be given; (b) that the money be deposited in the Empire Trust Company; (c) that the principal be invested by the depositary, but no investments should be made in securities or enterprises in which Kerr and Clegg were personally interested.

On September 7, 1920, under the surveillance of the assistant solicitor and deputy collector of internal revenue, the money was transferred from the Equitable Safe Deposit Company to the Empire Trust Company, a depositary designated by the Solicitor of Internal Revenue. The proceeds of Kerr's stock were deposited to the credit of the account of "Collector of Internal Revenue and H.F. Kerr," and of Clegg's stock to the account of "Collector of Internal Revenue and A.E. Clegg." Clegg and Noble, the attorney of Kerr and Clegg, were present when the deposit was made. All of the moneys deposited at the Empire Trust Company remained there until June 2, 1927, except $300,000, withdrawn by each of the plaintiffs during the year 1921, with the consent of the Bureau of Internal Revenue. The interest and income from the moneys on deposit and the securities in which the moneys were invested were regularly paid to the plaintiffs.

The taxpayers filed their income tax returns for the year 1920 on September 15, 1921, and on that date also filed applications for abatement of the assessments made by the Commissioner on August 27, 1920. These assessments were abated by the Commissioner on February 14, 1924. They did not include in their returns profits from the sales of their stock in the navigation company, but set forth those transactions in separate exhibits stating that they had derived no taxable gain therefrom. On February 9, 1923, the Commissioner advised them that there was a deficiency in their taxes for 1920, based upon the sales of stock on August 28, 1920, and that under section 250(d) of the Revenue Act of 1921 (42 Stat. 264), they had a right to appeal from his determination. Each taxpayer took an appeal, but, before the appeals were heard, the Commissioner, on February 12, 1924, assessed an income tax deficiency of $1,564,400.30, for the year 1920, against Kerr, and of $1,529,190.19 against Clegg. These assessments were made without a prior hearing by inadvertence, and not because the Commissioner believed that collection would be jeopardized by delay. Owing to certain credits allowed Kerr by the Commissioner, the net amount of taxes due from him, by reason of the deficiency assessment, was $1,549,963.36. Owing to certain credits allowed Clegg by the Commissioner and of a balance of unpaid income taxes assessed against him under his return for 1920 as filed, the net amount of taxes due from him, by reason of the deficiency assessment, was $1,529,861.16.

The taxpayers filed claims for abatement of the deficiency assessments of February 12, 1924, on the ground that they had received no profit from the sales of their stock in 1920 and on the further ground that prior to the making of the deficiency assessments they had appealed from the findings of the Commissioner, and had not been granted a hearing on their appeals, as required by section 250(d) of the Revenue Act of 1921. Thereafter they were given a full hearing by the Bureau of Internal Revenue, and on December 16, 1924, their applications for abatement were rejected by the Commissioner. On February 11, 1925, they appealed to the Board of Tax Appeals which, in 1927, affirmed the determination of the Commissioner. Appeals of H.F. Kerr et al., 5 B.T.A. 1073. Thereafter the Commissioner directed the collector of internal revenue to demand payment of the taxes and to include interest upon the unpaid balances from February 26, 1926, when the Revenue Act of 1926 went into effect, to the date of the demand, at the rate of 6 per cent.

The collector accordingly made demand for payment on May 27, 1927, and on June 2, 1927, $1,666,465.40 of the amount on deposit in the account of "Collector of Internal Revenue and H.F. Kerr" was paid to Kerr and simultaneously paid over by him to the collector, while the balance of the account was paid over to Kerr. On the same day, $1,644,852.23 of the amount in the account of "Collector of Internal Revenue and A.E. Clegg" was paid to Clegg and simultaneously paid over by him to the collector, and the balance of the account was paid over to Clegg. The above payments were made after a discharge of all tax liens existing against the property, and they included interest from February 26, 1926, to May 27, 1927, at the rate of 6 per cent. per annum upon the balances of income taxes due for the year 1920, amounting in the case of Kerr to $116,502.04, and in the case of Clegg to $114,991.07. The payments to the collector were both made under protest.

On July 5, 1927, the taxpayers filed claims for refunds, which were rejected, and thereafter they brought the present actions against the collector to recover the sums paid under protest. Upon his death during the pendency of the actions, his executor was substituted as defendant.

Judge Goddard held that the taxpayers had realized a taxable gain in the year 1920 through the sale of their stock at a profit, and that the deficiencies which had been assessed were correctly determined. He dismissed the complaint in each action accordingly.

William Osgood Morgan, of New York City (John W. Davis, William Osgood Morgan, and Montgomery B. Angell, all of New York City, of counsel), for appellants.

George Z. Medalie, U.S. Atty., of New York City (Samuel C. Coleman and Frank Chambers, Asst. U.S. Attys., both of New York City, and William E. Davis, Sp. Atty., Bureau of Internal Revenue, of Washington, D.C., of counsel), for appellee.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge (after stating the facts as above).

Two questions arise on these appeals. The first is whether the taxpayers realized taxable gains in 1920 from the sale of their stock, and the second is whether there was any warrant for the inclusion of interest in the amounts demanded by the collector and paid to him under protest.

The first question must be answered in the affirmative. It may be conceded that the taxpayers realized no gain in 1920 unless in that year they obtained control over the moneys representing the purchase price of their stock. But they obtained such control. As between themselves and the purchaser, it was complete, and they were the only persons concerned in carrying out the sale and purchase. It is true that Harriman and Ellis had arranged with the government officials to signal to them when the sale had taken place and the purchase money had been handed over, but neither the giving of the signal nor the subsequent interference with the possession of Kerr and Clegg by the government officials prevented the taxpayers from obtaining unrestricted and absolute possession at the time the sale was consummated. Before the officials served the notices and demands and took action to prevent the money from being removed, Harriman and Ellis had gone away from the bank with the certificates of stock, Kerr and Clegg had received the purchase money, had left it with Noble and Clegg's brother to be counted and put in a bag for transportation, and had reached the corridor outside of the bank and were about to leave the building. The case would have been different had the money been seized before Kerr and Clegg had got hold of it, or had they been physically prevented from taking it at the time their stock was delivered. Here the money was placed on the table for them, and they intended to, and did, appropriate it. They thus obtained title, possession, and control of the purchase money and realized a taxable gain from the sale of their stock. We can find nothing in the authorities relied upon by appellants to negative our conclusion. They were adequately distinguished by the District Judge, and seem to us to have no real bearing upon the issues.

It is not possible to justify the so-called assessment of August 27, 1920, or the seizure of the taxpayers' property by virtue of it. No doubt the officials feared that Kerr and Clegg might take the proceeds of the sale to Europe and thus deprive the government of a large amount of taxes. But the danger of a governmental loss, if such danger existed, and the tax collecting zeal in a supposed righteous cause, could not validate the assessment of August 27, 1920. Indeed, it was no real assessment in law or in fact. According to the finding of the District Court, it was for income of the year 1920, and not 1919. Indeed, the assessment list bore the inscription "1920 Dummy S.A. 8/27/20" on its face, and, in spite of the form of some of the notices of lien and the statement of the Commissioner in his letter of October 1, 1920, we think the findings were justified. The large tax assessment of $1,501,288.20 against each taxpayer showed that future gains to be realized from the sales of stock on August 28 were the real basis of the assessments.

The only way of making an assessment or of collecting a tax in August, 1920, on income of that year was to employ the method provided for in section 250(g) of the Revenue Act of 1918 (40 Stat. 1082). Under that section, if the Commissioner had feared that Kerr or Clegg was to remove his property from the United States, he might have declared "the taxable period for such taxpayer terminated at the end of the calendar month then last past," have given notice to the taxpayer, and demanded immediate payment. But the Commissioner had no intention of declaring the taxable period for either taxpayer terminated until September and for the simple reason that at no earlier date could he have included profits realized on August 28 in his emergency assessment. The assessment attempted on August 27 was beyond any statutory authority. It was in effect an assessment of a single transaction which had not taken place, and not an assessment of income for any taxable period provided for by law. Indeed, the trial court specifically found that "the Government officials, McCawley and the Solicitor of Internal Revenue arranged to have an assessment of income tax made against Kerr and Clegg computed upon the anticipated profit from the sale of their stock." No wonder that such an assessment was abated by the Commissioner.

As the assessments on August 27, 1920, were without statutory authority, no demand for the collection of taxes could rightfully be based upon them and no seizure of property could properly follow any demand. Furthermore, under R.S. § 3187 (26 USCA § 116), property may only be distrained after failure to pay and an interval of "ten days after notice and demand." No such interval of time elapsed between the demand of payment on August 28 and the seizure on that date.

But these irregularities do not enable the plaintiffs to recover taxes which were undoubtedly due from them because of the gains resulting from the sales of their stock. The Commissioner made assessments on February 12, 1924, and the correctness of the calculations upon which they were based is not disputed. While these assessments were made without giving the taxpayers a prior hearing, hearings were subsequently had on the applications to abate, which were denied on December 16, 1924. Appeals were then taken to the Board of Tax appeals which acquired jurisdiction under section 283(f) of the Revenue Act of February 26, 1926 (26 USCA § 1064(f), to determine the taxes. Even though the assessments by the Commissioner were irregular for lack of a preliminary hearing, he made assessments before June 3, 1924. When the applications to abate were rejected on December 16, 1924, after full hearings, it may be said that the Commissioner then finally determined the amount of the deficiency. The appeals to the Board of Tax Appeals were filed on February 11, 1925. Therefore we have a case where the tax was assessed before June 3, 1924, the deficiencies were finally determined after June 2, 1924, but before February 26, 1926, and the persons liable for the taxes appealed to the Board before February 26, 1926. Section 283(f) covers such a case "ipsissimis verbis" and gives the Board of Tax Appeals authority to assess deficiencies arising under the Revenue Act here applicable. The Board upheld the deficiencies that had been determined by the Commissioner.

Section 283(h) of the Revenue Act of 1926 (26 USCA § 1064(h) provides that in computing the amount of taxes to be collected in cases within the scope of section 283(f) interest shall be included upon the amount of taxes found to be due by the decision of the Board at the rate of 6 per cent. from February 26, 1926, to the date of notice and demand by the collector.

Whether the failure of the Commissioner to grant a preliminary hearing invalidated his original assessments of February 12, 1924, is quite immaterial. The Board decided the amount of the deficiencies after the Commissioner had assessed final deficiencies on December 16, 1924, after full hearings. The statute clearly covered such a case, and required the addition of the items of interest to the deficiencies assessed against Kerr and Clegg.

The assessment required under section 283(b), Revenue Act 1926 (26 USCA § 1064(b), as a foundation for an appeal to the Board was not a valid assessment, but was any assessment actually made. By appealing from the rejection of their claims for abatement, the taxpayers opened all question of liability for 1920 taxes on the merits and became subject to pay the interest provided by section 283(h) in the event of an adverse decision.

The Board held that interest at the rate of 1 per cent. per month and penalties could not be imposed where the assessments of February 12, 1924, had been made without prior hearings (5 B.T.A. at page 1101), for no legal demand could be based on such assessments.

Section 250(e) of the Revenue Act of 1921 (42 Stat. 264) provides that: "If any tax remains unpaid after the date when it is due, and for ten days after notice and demand by the collector, then, * * * there shall be added as part of the tax the sum of 5 per centum on the amount due but unpaid, plus interest at the rate of 1 per centum per month upon such amount from the time it became due. * * *" Notice was given and demand was made on March 26, 1924, for payment of the taxes assessed on February 12, 1924. The Board properly held that such a notice and demand did not comply with the statute and did not justify the imposition of the penalty and interest provided by section 250(e). Their decision was right, but can have no bearing on the present situation where section 283(h) itself carries interest.

Judgments affirmed.