Marshall v. Commissioner

*1140 Petitioner appeals from a deficiency in income and profits taxes in the amount of $3,632.20 for the calendar year 1921, determined against him as the transferee of assets of the Bellefonte Lime & Stone Co. The determination was made against the petitioner under the provisions of section 280 of the Revenue Act of 1926.

FINDINGS OF FACT.

Petitioner is a resident of Pennsylvania, residing at Maybrook, and having his office at Philadelphia.

In the early part of 1918 petitioner attended a number of meetings at which members of the War Industries Board urged increased production *1141 of manganese and chrome ores for use in the manufacture of steel and dyestuffs and other articles contributing to the prosecution of the war. J. N. M. Shimer, a business associate of petitioner, learned of a deposit of material carrying chrome flakes at Nottingham, Pa., and, in view of the earnest solicitation of government officials, *3961 petitioner, Shimer and O. J. McNitt decided to attempt to work the deposit. McNitt purchased a one-third interest in the Bellefonte Lime & Stone Co., a Pennsylvania corporation. Shimer had no funds to put into the enterprise, but the Atlantic Ore & Alloys Co., in which the petitioner and Shimer owned all the stock, had a surplus of cash and that cash was used to purchase the other two-thirds of the Bellefonte company stock.

In March, 1918, the Bellefonte company secured a lease on the chrome property and began the construction of a plant and the purchase and installation of dredging and washing machinery. From that time until November 11, 1918, the company was engaged in the construction of its plant and installation of machinery preparatory to reclaiming the chrome. Upon the signing of the Armistice the urgent need for chrome ceased and the Bellefonte company never engaged in the production of it, and since that time the plant has not been operated.

Between the dates of March 1 and November 11, 1918, the Bellefonte company expended the following sums:

Lease and investigation	$3,100.00
Equipment and machinery	8,163.29
Plant (sundries, labor, etc.)	13,283.30
Plant (construction wages)	7,245.22
Plant (salaries superintendent and engineer)	2,183.72
General expense (cars and miscellaneous)	4,760.99
Total	38,736.52

*3962 In 1921 or 1922 the Bellefonte company advertised its plant and held a public sale at which it sold the plant for $200. It also received from the salvage of machinery $5,000, and cars $300. Its lease has expired.

In 1919 the Bellefonte company, pursuant to the Act of Congress of March 2, 1919, 40 Stat. 1272, filed with the Secretary of the Interior a claim for losses in the amount of $42,995.38, alleged to have been sustained in its operation. This claim was numbered 814 and was taken under consideration by the War Minerals Relief Commission of the Department of the Interior. After a hearing, the Commission, under date of April 7, 1921, submitted a recommendation to the Secretary of the Interior which closed with the following recapitulation and conclusion:

*1142

RECAPITULATION
Expenditure		$33,508.26
Deductions:
Salvage (actual sale)	$5,050.00
(Est. value remaining equipment)	4,950.00
Purchase of lease	3,000.00
Salary deduction	459.49
Total deductions	$13,459.49
		13,459.49
Allowable net loss		$20,048.77

CONCLUSION

It seems that the claimant acting upon specific request of the government expended money upon a property of*3963 commercial importance and as the result of such operations made a net loss of $20,048.77.

The Commission, therefore, recommends an award be made in the matter of this claim in that amount.

On April 28, 1921, the Secretary of the Interior signed an award the body of which reads as follows:

The above is a claim under the War Minerals Relief Act, section 5 of the act of March 2, 1919 (40 Stat., 1274). The law authorizes compensation for losses incurred in the production of chrome during the war due to stimulation by the Government.

Here there was such stimulation commencing May 7, 1918. I have considered the record and the objections filed.

An award of $20,048.77 is made as recommended by the War Minerals Relief Commission.

Upon receipt of the award the Bellefonte Lime & Stone Co., after deduction of attorney fees and other necessary expenses, paid one-third to McNitt and the remaining two-thirds, in the amount of $11,600, to the Atlantic Ore & Alloys Co. The latter company then paid that amount to the petitioner in partial payment of money he had loaned it and for which he held its notes.

The Bellefonte Lime & Stone Co. filed returns for each of the years 1918*3964 to 1921, inclusive, showing in each year a loss. In the return for 1921 it showed expenses, interest, and taxes aggregating $4,433.79, which, added to its deficit at the close of 1920, made a gross deficit at the close of 1921 of $41,007.05. From this it deducted the amount of the award, $20,048.77, leaving a deficit of $20,958.28. The amount of the award was not reported as income. Upon an audit of the 1921 return the respondent computed a net income as follows:

Net loss reported	$4,433.79
War Minerals Relief award	20,048.77
Net income as adjusted	15,614.98

Upon the net income so found the respondent determined income and profits taxes in the amount of $3,632.20 and notified the petitioner by letter of August 9, 1926, that he is liable for the deficiency as a transferee of the assets of the Bellefonte Lime & Stone Co.

*1143 OPINION.

ARUNDELL: The petitioner does not raise any question as to his liability as a transferee and we assume without deciding that the respondent acted within his power in asserting against the petitioner as a transferee such liability as there may be for any deficiency in the taxes of the Bellefonte Lime & Stone Co. The*3965 only issue raised is whether the amount of $20,048.77 received by the Bellefonte company as an award under the War Minerals Relief Act constitutes income.

The facts, in brief, are these: Owing to stimulation by the Government, the Bellefonte company in 1918 acquired a lease on chrome property and proceeded to erect a plant and acquire necessary machinery, expending in the process $38,736.52. With the signing of the Armistice the urgent need for chrome ceased, and the company found itself with a useless plant on its hands. No income had been received from the venture and only $5,500 salvage was realized. The Government, pursuant to an Act of Congress, reimbursed the company in 1921 for its capital outlay to the extent of $20,048.77.

Adding to the award, $20,048.77, the salvage realized, $5,500, and deducting the total, $25,548.77, from the capital expenditure of $38,736.52, leaves $13,187.75 which the company is still out of pocket. It can never recover this amount for its lease has expired and its plant and equipment are gone. As it never had income it had no chance to recoup any of its capital outlay through deductions.

*3966 Under these facts, we do not see how the partial reimbursement for losses sustained can be construed to be income. "The mere diminution of loss is not gain, profit, or income." . As the company had no income in 1921, there can be no deficiency in tax, and it follows that there is no liability on the part of the petitioner by reason of his having been an ultimate recipient of a part of the award.

Judgment of no deficiency will be entered.