
    H. W. NELSON COMPANY, INC. v. THE UNITED STATES
    [Cong. No. 13-58.
    Decided October 3, 1962]
    
      
      Thomas G. Garney for plaintiff.
    
      Theodore D. Peyser, with, whom was Assistant Attorney General Louis F. OToerdorfer, for defendant. Edward S. Smith, Lyle M. Twmer and Philip B. Miller were on the brief.
   Whitaker, Judge,

delivered the opinion of the court:

This case is before us pursuant to the provisions of House Eesolution 636 of the House of Representatives of the 85th Congress of the United States, Second Session, referring a bill (H.R. 6234, entitled “A Bill for the Relief of the H. W. Nelson Company, Incorporated,”) to this court for proceedings in accordance with the provisions of sections 1492 and 2509 of Title 28 of the United States Code. The court is requested to inform the Congress of the “nature and character of the demand as a claim, legal or equitable, against the United States and the amount, if any, legally or equitably due from the United States to the claimant.”

Plaintiff’s claim involves amounts of income taxes, interest thereon and penalties assessed and collected by the defendant with respect to the Federal income-tax liability of the plaintiff for the fiscal year ending August 31, 1941. Plaintiff’s return was filed by plaintiff June 15, 1943, reporting a tax liability of $31,461.38. The only item of income reported on the return was the sum of $378,143.18 which was identified as being a portion of the sum of $550,000 received by plaintiff on June 7, 1941, in settlement of a judgment against Grand Trunk Western Railroad, successor by consolidation of Detroit, Grand Haven and Milwaukee Railway Company. The statement attached to the return stated that the balance of the settlement award, $171,586.82, was included by the Commissioner of Internal Revenue in the taxable net income of the plaintiff for the fiscal year ending August 31, 1929. No part of the amount of tax liability, as indicated on the return, was paid at the time of the filing. The Commissioner determined that a delinquency penalty of 25 percent of the tax liability of $31,467.38 reported ($7,866.85) should be asserted against the plaintiff, and accordingly such penalty, in addition to the tax with interest, was assessed against plaintiff.

The settlement sum of $550,000 was received by plaintiff under the following circumstances:

Plaintiff, a Kentucky corporation, was engaged in the business of constructing railroads. Its income from construction contracts was recorded on its books and reported on its tax returns on the completed contract method and on the basis of cash receipts and disbursements. As of December 31, 1928, plaintiff had seven uncompleted contracts, including a contract with Detroit, Grand Haven and Milwaukee Railway Company (hereafter referred to as the Birmingham contract).

Under the Birmingham contract, plaintiff was to construct approximately 11 miles of two-track railroad on a right-of-way, to be provided by the Railroad. The right-of-way was to be free of liens, claims and adverse interests. The contract further provided that plaintiff could assign said contract only with the written consent of the Chief Engineer of the Railroad, which consent would in no way release or relieve the plaintiff from any of its obligations and liabilities under the contract.

About June 1, 1928, having been notified by the Railroad that substantially all of the right-of-way had been procured, plaintiff began its work. However, the right-of-way that had been procured was burdened with restrictive covenants. Threatened with injunction proceedings from the landowners, the Railroad instructed plaintiff to move its equipment to a different location. Plaintiff did so, but several injunction proceedings followed, with the result that plaintiff’s work had to be stopped on August 3, 1928, and could not be resumed until July 12, 1929.

During 1928 plaintiff had serious financial difficulties. Seeking additional capital to alleviate these difficulties, Henry W. Nelson, plaintiff’s president and majority shareholder, approached Chase & Gilbert, Inc. of Boston, Massachusetts. Since Chase & Gilbert was unwilling to enter into a financial arrangement directly with plaintiff, it was finally decided that a new corporation would be formed to acquire all of plaintiff’s assets, except certain real estate and two automobiles. The new corporation was to assume all of plaintiff’s liabilities, Chase & Gilbert was to arrange a bank loan of $60,000 for the new corporation, and was to purchase $300,000 of its notes at 93. Nelson was to be elected president. Pursuant to the resolution of its Board of Directors, all of plaintiff’s assets, except for the real estate and automobiles, were transferred to the new corporation, known as Nelson and Chase & Gilbert Company (hereafter referred to as the “Boston Company”), in consideration of the assumption by the Boston Company of all plaintiff’s liabilities.

This transaction was completed on January 21, 1929. The record discloses that several days prior to the formal corporate actions, Nelson telegraphed Dey, a vice-president of Chase & Gilbert, expressing his unwillingness to seek the Bailroad’s consent to the assignment of the Birmingham contract. In response thereto, Dey suggested that they simply keep the present companies alive and have them give their securities and property to the new company. Notwithstanding this recognition of the terms of the contract limiting its transferability, the formal corporate authorizations were phrased in unqualified terms, making no reference to any restrictions on assignability of the Birmingham contract, expressing no intent to withhold any rights in this contract from among the rights and properties to be transferred. After December 31, 1928, the Boston Company physically performed the Birmingham contract, disbursed all amounts expended in connection with such performance, kept all records as to expenses incurred and payments received, except the $550,000 settlement from the Kailroad in 1941.

As of December 31, 1928, plaintiff’s books show, for the Birmingham contract, an asset account of $200,042.87, representing the amount then due plaintiff from the Railroad, and a deferred earnings account of $70,687.92 as plaintiff’s computed profit. These accounts, as well as all other asset and liability accounts being transferred, were closed out to “Nelson Liquidating Account.” Nelson then transferred all assets to the Boston Company, which opened asset and liability accounts in its books with the same balances as plaintiff’s closing entries.

Work on the Birmingham contract was resumed on July 12,1929, and completed in 1931. The machinery and equipment used in this work were carried as assets on the books of the Boston Company, expenses were paid by checks drawn on bank accounts in the name of the Boston Company or by cash withdrawn from these accounts. The books carried “Accounts Receivable” and “Accrued Expenses — Birmingham Job” for the Birmingham contract. The Boston Company also completed the six other contracts, recorded on its books in like maimer, and reported the profit or loss on them in its tax returns on the completed contract method. Expenses and receipts appear on plaintiff’s books prior to December 31, 1928, and on the Boston Company’s books after that date, although the entries cannot be verified. Neither the books of plaintiff nor those of the Boston Company contain evidence of any indebtedness existing at any time between plaintiff and the Boston Company.

Based upon the foregoing transactions and events, the tax returns of the Nelson Company and the Boston Company were as follows:

TAX RETURNS-1929 TO 1935
Date 'Nelson Company Boston Company
1929 Reported $394.93 income as “Interest and discount earned”, and no tax due. (Filed November 12, 1929) Reported $510.77 income, no tax due. Statement listed nine uncompleted contracts, including the Birmingham contract.
Date Nelson Company Boston Compcmy
1930 Reported no income, no tax due, and contained a notation of “Inactive year.” (Filed November 14,1930) Reported nine jobs, four of which were completed at a loss. The Birmingham contract was listed as uncompleted.
1931 Filed a blank return except for a notation that the company was inactive for 1931. (November 10, 1931, a deficiency was assessed for 1929.) (Filed Reported income from equipment rental. Statement listed six jobs all uncompleted, including the Birmingham contract. January 15, 1932)
1932 No return was filed from Reported three con-1932 through 1940. tracts completed at a small profit, and tax due or $52.79 which was paid with the return. Three contracts, including Birmingham, were listed as uncompleted.
1933-1935 Returns were filed, but none showed the Birmingham contract as completed. (The Company lost its charter in 1935 and filed no returns thereafter.)

We think that the foregoing facts show a transfer from plaintiff to the Boston Company of all of its rights under the Birmingham contract, which was effectual as between plaintiff and the Boston Company, but ineffectual as to the Eailroad. As between plaintiff and the Boston Company, there was a complete transfer by plaintiff to the Boston Company of all of its rights and of all of its responsibilities and liabilities under the contract.

The Court of Appeals for the Sixth Circuit, in the case of Grand Trunk Western Railroad v. H. W. Nelson Company, 116 F. 2d 823, stated that the contract “was nonassignable without appellant’s [the Railroad’s] consent which is neither alleged nor proved.” However, this was a suit by plaintiff against the Railroad, and what the Sixth Circuit Court of Appeals had reference to was the assignability of the contract, so far as the Railroad was concerned. There was no reason for it to consider the effect of the transfers as between plaintiff and the Boston Company. We have no doubt that as between the two, the transfers were effectual to divest plaintiff of all of its rights under the contract, to vest in the Boston Company these rights, and to charge the Boston Company with all responsibility, insofar as plaintiff was concerned, with carrying out the contract.

Although the assignment was effectual as between plaintiff and the Boston Company, only plaintiff could maintain an action against the Railroad, because the Railroad did not recognize the transfer of the contract by plaintiff to the Boston Company. So far as it was concerned, there had been no transfer which was effectual as to it.

But it would seem that any recovery by plaintiff would be for the account of the Boston Company. How plaintiff became entitled to retain the money which it recovered from the Railroad, as hereinafter set out, is unexplained in the record. But the Boston Company, having been dissolved some six years before the recovery from the Railroad, never claimed the money which plaintiff had recovered, nor did the shareholders of the Boston Company, although Nelson owned one-half the stock of that company and Chase and Gilbert owned the other half. In some unexplained way plaintiff was entitled to keep the money it recovered, and it did keep it, and the amount received, therefore, was income to it in the year it was received.

But plaintiff says that none of the $550,000 received from the Railroad in 1941 was taxable income, because it was “a return of capital.” Plaintiff argues that whether the proceeds of litigation received by a successful litigant constitute taxable income depends upon the nature of the claim on which the recovery was realized. It says that where such recovery represents a reimbursement of money previously expended by the claimant, the money recovered constitutes a return of capital and is not taxable income, qualified only when and to the extent that the party recovering such costs has previously employed such costs as deductions to offset other income for Federal tax purposes. But, even if we admit, arguendo, the correctness of the proposition stated by plaintiff, it must still show that it had incurred these expenses and had not deducted them in prior income tax returns. It, itself, must have incurred these expenses. There are no provisions in the tax laws whereby one taxpayer can deduct from his gross income expenses incurred and defrayed by another.

Since plaintiff had assigned all of its rights in the Birmingham contract to the Boston Company, and the Boston Company had assumed plaintiff’s liabilities thereunder, and had used on the job the equipment carried on its books as its assets, and had received from the Railroad money due for work done, and had disbursed from its own account money to pay the expenses of doing the work, and since plaintiff’s income tax returns for the years subsequent to 1929 show that it was in “inactive status”, and since no return at all was filed by plaintiff from and including 1932 to and including 1940 — taking all these things into consideration, we must conclude that all expenditures subsequent to 1929 were not plaintiff’s expenditures, but were the expenditures of the Boston Company, which was an entirely different entity from plaintiff. The money recovered from the .Railroad, therefore, could not be considered a recoupment by plaintiff of its expenses incurred on account of the delay, except such expenses as it may have incurred on account thereof prior to the date of the assignment of the Birmingham contract, which was on January 21, 1929, to take effect as of December 31, 1928.

But we do not think it necessary for us to determine how much of the $550,000 was to reimburse plaintiff for expenses it had incurred on account of delay in obtaining the right-of-way prior to December 31, 1928. In a breach of contract action, a determination that a litigant be awarded a money judgment as reimbursement for materials, labor, supplies, and the like, called “capital expenditures” by the Sixth Circuit, would not support a contention by the recipient in a tax proceeding that such money received was a “capital expenditure” in the tax sense. In the tax law, “capital expenditures” and “business expenses” are terms of art, representing different categories with specific provision for the treatment of each.

In the case of Dobson v. Commissioner, 320 U.S. 489, the Supreme Court dealt with a recovery by a taxpayer for misrepresentation in connection with the purchase of shares of stock, which he had purchased as an investment. It said that the Tax Court was justified in having treated this recovery as a return of capital, to offset losses sustained in a prior year when the stock was sold. However, in that case the Supreme Court recognized the distinction between a return of capital and the recoupment of expenses incurred in the performance of a contract. It approved the statement in Burnet v. Sanford & Brooks Company, 282 U.S. 359, 363 to 364, reading, “While it [the money] equalled, and in a loose sense, was a return of, expenditures made in performing the contract, still, as the Board of Tax Appeals found, the expenditures were made in defraying the expenses * * *. They were not capital investments, the cost of which, if converted, must first be restored from the proceeds before there is a capital gain taxable as income.” In the case of Burnet v. Sanford & Brooks Company, supra, the Supreme Court had said that since returns were made on an annual basis, a recovery by a taxpayer in a subsequent year for misrepresentations with reference to the work to be done under the contract was income in the year in which received, notwithstanding the fact that the recovery was by way of reimbursement of the taxpayer for expenses incurred in previous years by reason of the misrepresentation.

The only difference between this case and Sanford c& Brooks is that here the taxpayer made its return on a completed contract basis, whereas in Sanford <& Brooks returns were made on an annual basis. But this difference is immaterial. The contract in the case at bar was completed in 1981. In that year all receipts under the contract should have been taken into account and all expenses incurred up to that date should have been deducted therefrom, both amounts received and expended by plaintiff and the Boston Company, and a return for 1931 should have been filed on that basis. No account could have been taken in that return for a problematical recovery some time in the future of damages on account of delay in obtaining the right-of-way.

So it is, that, when plaintiff received the $550,000 in the year 1941 on account of damages for delay in securing the right-of-way, this amount of money was income to plaintiff in the year it was received, to wit, 1941. And, under the authority of Burnet v. Sanford & Brooks, supra, in determining plaintiff’s tax liability for 1941, the amount received in that year cannot be reduced by any expenses incurred in prior years on account of the damages for delay. The entire amount of $550,000 was income to plaintiff in the year 1941, and taxes should have been assessed accordingly.

The case at bar cannot be distinguished from the case of Burnet v. Sanford & Brooks Company, supra. During the years 1913 to 1915 the respondent was engaged in carrying out a contract for dredging the Delaware River. In making its income tax returns for the years 1913 to 1916, respondent deducted from gross income from each year its expenses paid in that year in performing the contract. The expenses exceeded the payments received under the contract. The tax returns for 1913, 1915 and 1916 showed net losses, but that for 1914 showed net income. In 1915 work under the contract was abandoned, and in the following year suit was brought in this court to recover for a breach of warranty of the character of the material to be dredged. This court rendered a judgment for the plaintiff, which was affirmed by the Supreme Court in 1920, and plaintiff received in that year the sum of $192,577.59, which included the $176,271.88, by which its expenses under the contract had exceeded receipts from it; in addition, the gross sum also included accrued interest, amounting to $16,305.71. Notwithstanding the fact that the major portion of the recovery was to reimburse plaintiff for the amounts by which its expenses had exceeded its receipts, nevertheless, the Supreme Court held that the entire amount received in the year 1920 was taxable as income in that year, without any deduction.

So, in the case at bar, the amounts recovered in the year 1941 for damages for delay in securing the right-of-way was income to the plaintiff in the year received, notwithstanding the fact that the recovery was intended to reimburse plaintiff for its expenses in excess of the amounts received under the contract.

There is no justification for the assessment against plaintiff of a deficiency for 1929. As stated heretofore, plaintiff made its returns on a completed contract basis. The contract was not completed when it was assigned to the Boston Company and, therefore, no income from the contract was due to be reported. No income or loss should have been reported with reference to this contract until its completion and that was in the year 1931. The deficiency assessed against plaintiff for 1929 was erroneous. However, this deficiency was refunded to plaintiff, partly in cash and partly by credits against its 1941 tax liability.

Hence, we are concerned only with the correctness of the Commissioner’s action in reference to plaintiff’s tax liability for 1941. Plaintiff made a return for that year showing net income of $378,143.18. This figure was arrived at by deducting from the $550,000 received from the Railroad in that year, the sum of $171,856.82 on account of expenses incurred prior to the transfer of the contract to the Boston Company. As we have stated, this deduction was erroneous. Plaintiff should have returned the full $550,000.

The Commissioner of Internal Revenue, however, did not assess plaintiff a tax upon the basis of the full $550,000, but he did add to the $378,143.18, reported by plaintiff, the sum of $70,687.92, making a total of $448,831.10. This $70,687.92 was the amount of estimated profit derived on the Birmingham contract, as shown on plaintiff’s books at the time of the transfer of the contract to the Boston Company. There was no justification for this; but, even so, the total of $448,831.10 upon which the Commissioner did assess a tax against plaintiff was something over $100,000 less than the amount of income on which the tax should have been assessed. Plaintiff, therefore, cannot complain of this unwarranted addition to the amount of its income as reported on its return for the year 1941.

But irrespective of the correctness of what we have heretofore said, nevertheless, we think plaintiff is estopped, legally and equitably, from now asserting any claim against defendant on account of any taxes, penalty or interest it may have paid to defendant by virtue of income alleged to have been received on account of the Birmingham contract. It is estopped by virtue of two offers in compromise which were accepted by defendant.

The first offer was dated October 27, 1946. At this time there was outstanding plaintiff’s claim for refund of the assessment against plaintiff for 1929 of $33,357.89, $29,803.15, tax, plus interest, and $22,998.21, interest accrued after the assessment, which plaintiff had paid. There was also outstanding an assessment against plaintiff for 1941 of the $31,467.38 shown on plaintiff’s return for 1941, plus $7,866.85 penalty, and interest of $2,989.40, a total of $42,323.63, and also a deficiency assessment for 1941 of $29,172.25, including interest and penalty. Thus plaintiff, on the one hand, was claiming a refund of 1929 taxes of $56,357.10, and the Commissioner of Internal Revenue was claiming assessments for 1941 of $71,495.88. Plaintiff offered to settle these respective claims as follows: It agreed to consent to (a) the assessment and collection of a deficiency for 1941 of $21,206.37, and (b) accept as correct an overas-sessment for 1929 of $29,803.15 plus interest. Plaintiff agreed that if the offer was accepted, the case would not be reopened in the absence of fraud, malfeasance, concealment or misrepresentation of material fact, or of an important mistake in mathematical calculations, that plaintiff would not file an offer in compromise respecting such liabilities, and would not file or prosecute any claims for refund of income tax or penalty for the taxable year ending August 31, 1941. We think it well to quote the exact language of the offer with respect to reopening the case. It reads:

If this proposal is accepted by or on behalf of the Commissioner, the case shall not be reopened in the absence of fraud, malfeasance, concealment or misrepresentation of material fact, or of an important mistake in mathematical calculations, and the taxpayer agrees: (1) to make payment of the above deficiencies for the taxable year ended August 31, 1941, together with interest, as provided by law, promptly upon receipt of notice and demand from the Collector of Internal Revenue, and not to file an offer in compromise respecting such liabilities; (2) not to file or prosecute any claims for refund of income tax or penalty for the taxable year ended August 31, 1941 and upon request of the Commissioner to execute at any time a final closing agreement as to the tax liabilities on the foregoing basis for the said years under the provisions of Section 3160 of the Internal Revenue Code. * * *

This offer was accepted by the Internal Revenue Service on June 4, 1948, and in accordance therewith, a timely assessment was made against plaintiff for 1941 in the amount of $27,943.84, of which $16,965.10 was tax, $6,737.47 interest, and $4,241.27 penalty. This assessment of $27,943.84 plus the original assessment of $42,323.63 brought the total assessment for 1941 to $70,267.47.

The overassessment agreed to for 1929 was eliminated by a cash payment to plaintiff of $19,739.56 (of which $14,325.51 was interest), and credits against the 1941 assessment of $51,524.56. This reduced the balance due on the assessment to $18,742.91 plus delinquency interest. This balance was further reduced by payment by plaintiff of amounts totalling $1,974.96, the last payment being made June 16, 1953.

Despite its agreement in the 1948 offer of compromise, plaintiff, on September 22,1953, filed a claim for refund and a substitute offer in compromise. The justification for attempting to reopen the case was, inter alia, “because of a mutual mistake of law and fact, a completely erroneous basis had been used in determining its 1941 tax liability.” The claim demanded a refund of $56,000.12, more or less, for 1941. The' accompanying offer sought to compromise plaintiff’s liability for 1941 for $10 which was paid with the offer. In a statement attached to the claim for refund and offer in compromise, plaintiff alleged that the Birmingham contract was never assigned to the Boston Company, that it had made payments to the Boston Company for loans from it enabling plaintiff to perform said contract, and that the end result of the contract was a loss to plaintiff. It also contested the inclusion in income for 1941 of the amount of $70,687.92 — the basis for the deficiency plaintiff had proposed to accept in its previous offer in compromise — because it had already been included in plaintiff’s taxable income for 1929.

Plaintiff was notified in July, 1954, that the claim would be disallowed, stating the reasons to be: (1) the claim was timely only as to payments made during the immediately preceeding two years; (2) the Birmingham contract was completed and accepted prior to the 1941 taxable year; (3) only part of the costs claimed by plaintiff in performance of the Birmingham contract was borne by plaintiff, which costs were recovered tax free in another year; and (4) plaintiff had waived its right to file a claim for refund for 1941.

On February 1, 1955, plaintiff filed an “Amended Offer in Compromise” seeking to compromise for $2,339.68 its liability for 1941 which by then amounted to $16,757.25 plus delinquency interest. This was accepted on December 7, 1955, because of doubt as to the collectibility of the balance due. The offer provided in part that as partial consideration, the plaintiff expressly agreed that all prior payments and credits made for the period under consideration were to be retained by the United States, and plaintiff expressly waived all claims to money to which it might be entitled under internal revenue laws, due to overpayments made prior to the acceptance of the offer, of any tax or other liability, including interest and/or ad valorem penalty and interest on overpayments or otherwise, as are not in excess of the difference between the liability sought to be compromised and the amount offered, and agreed that the United States might retain such amounts, if any. In accordance with this agreement, plaintiff paid to the Government the sum of $2,339.68, the last payment having been made on December 15, 1955. The balance of the 1941 assessment ($14,427.67) was abated.

This last offer stated, in haec verba:

In making this offer, and as a part consideration thereof, the proponent hereby expressly agrees that all payments and other credits heretofore made to the account (s) for the period (s) under consideration shall be retained by the United States, and, in addition, the proponent hereby expressly waives:
■ 1. Any and all claims to amounts of money to which the proponent may be entitled under the internal revenue laws, due through overpayments made prior to the date of the acceptance of this offer of any tax or other liability, including interest and/or ad valorem penalty, and interest on overpayments or otherwise, as are not in excess of the difference between the liability sought to be compromised hereby and the amount herein offered, and agrees that the United States may retain such amounts of money, if any.

In complete disregard of the agreements made in its two offers in compromise, plaintiff now seeks to recover by private bill introduced in the House of Representatives in March 1957, the sums which, for a valuable consideration, it solemnly agreed the Government might retain.

This is done in face of the fact that after the payment by plaintiff to defendant of the sum of $2,339.68, the balance of the 1941 assessment against plaintiff of $14,427.67 was abated. It is also in face of the fact that the statute has now run against the assertion by the Government of any additional deficiency for the year 1941, and it had run when plaintiff secured the introduction in the House of Representatives of the private relief bill.

In Guggenheim v. United States, 111 Ct. Cl. 165, certiorari denied, 335 U.S. 908, rehearing denied, 336 U.S. 911, we held that a taxpayer who executed an agreement such as that involved in the instant case was equitably estopped from prosecuting a claim for refund filed after the agreement was executed. The only difference between this case and the Guggenheim case is that in the latter there had been added to the form “Offer of Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment,” a provision reserving to the Commissioner of Internal Revenue the right to later assert any deficiency he might determine the plaintiff owed, but this addition had been stricken before the offer was submitted. This is not true in the case at bar, but it is true that in consideration of the offer, the remaining balance of the previous assessment against plaintiff was abated. The agreements in the respective cases are, otherwise, identical in every material respect. Both contain provisions that the case will not be reopened absent certain specified conditions, not found to have been present in the Guggenheim case, nor are they present in this case. If anything, this case presents even stronger ground for invoking the doctrine of equitable estoppel. At the time of the agreement, the period for collection of the balance of the assessments for fiscal 1941 had not expired, while at the time the private bill was introduced in 1957 collection of additional taxes was barred, the balance of the assessments having been abated and the time for making a new assessment having expired. The agreements having been executed in good faith, to allow plaintiff to renounce them now and to recover a refund would be both illegal and inequitable.

We, therefore, conclude that plaintiff has neither an equitable nor a legal claim against defendant with respect to taxes paid on account of the Birmingham contract.

There follows the findings of fact of the Trial Commissioner, which have been adopted by the court with only minor modifications. This opinion and findings of fact will be transmitted to the House of Representatives pursuant to Resolution 636 of the 85th Congress of the United States, Second Session.

It is so ordered.

Davis, Judge; Dtjebee, Judge; Laeamoee, Judge; and Jones, Chief Judge, concur.

BINDINGS OB BACT

The court, having considered the evidence, the report of Trial Commissioner Robert K. McConnaughey, and the briefs and argument of counsel, makes findings of fact as follows:

1. The plaintiff is a Kentucky corporation organized in 1924. In 1928, it was engaged in the business of construct-ixig railroads, and as of December 31, 1928, it bad seven uncompleted construction contracts, including a contract hereafter identified as the Birmingham contract.

The plaintiff’s income from construction contracts was recorded on its books and reported on its tax returns on the completed contract method and on the basis of cash receipts and disbursements.

2. In December 1928, Henry W. Nelson acquired 200 shares of plaintiff’s stock. This was all but a few shares of the total outstanding. For a number of years, between 1944 and 1966, this stock was recorded on the plaintiff’s books in the name of H. W. Nelson’s son, apparently subject, after October 1, 1941, to a blank stock power signed by the son on that date. On February 16, 1956, a certificate for these shares was again issued to H. W. Nelson, following his son’s surrender of his certificate.

3. Nelson has been the president of the plaintiff at all times and has made all decisions affecting its business.

The Birmingham Contract

4. Oil May 29, 1928, plaintiff entered into a contract (referred to in these findings as the “Birmingham contract”) with the Detroit, Grand Haven and Milwaukee Kailroad Company (hereafter, along with its successor, the Grand Trunk Western Kailroad, referred to as the “Kailroad”). Under the Birmingham contract, plaintiff agreed to construct approximately 11 miles of two track railroad near Birmingham, Michigan.

5. The plaintiff’s right to assign the Birmingham contract was limited by the following provision of the contract itself:

Consent to transfer.

16. The Contractor [the plaintiff] shall not let or transfer this contract or any part thereof (except for the delivery of material) without consent of the Chief Engineer, given in writing. Such consent shall not release or relieve the Contractor from any of his obligations and liabilities under this contract.

6. Under the Birmingham contract, the Kailroad agreed to provide the right-of-way free of any liens, claims or adverse interests. About June 1, 1928, the Railroad notified plaintiff that it had procured substantially all of the right-of-way and ordered plaintiff to place its equipment, organize its construction crew, and commence work at Maple Avenue, Birmingham, Michigan, where an underpass was to be constructed. Plaintiff placed its equipment and assembled its crew at this point and began work.

On June 12, 1928, it was notified by the Railroad that it would have to discontinue construction there because the land was burdened with certain restrictions requiring it to be used exclusively for residential purposes and some of the owners were threatening injunction proceedings. The Railroad directed plaintiff to move its equipment to another point. Plaintiff did so. On July 3, 1928, owners of property at that point commenced injunction proceedings which held up the work until July 27, 1928, when the injunction was dissolved. On August 3, 1928, other owners procured a like injunction which stopped construction until July 12, 1929. Thereafter, work was resumed and all work under the Birmingham contract was completed by August 1931.

This case is concerned in part with the extent to which costs of doing the work are properly attributable to the plaintiff or to a transferee of plaintiff’s assets, herein called the Boston Company, which is described hereafter.

The Plaintiffs Arrangements with the Boston Oomfa/tvy

7. During 1928, the plaintiff had serious financial difficulties resulting in part from the Railroad’s failure to make prompt payments on billings submitted under the Birmingham contract. Seeking additional capital to meet these difficulties, Nelson approached a company called Chase & Gilbert, Inc., of Boston, Massachusetts. Chase & Gilbert was unwilling to enter into any arrangement with the plaintiff because of its poor financial condition. It was finally decided, however, that a new corporation would be formed to take over the assets and liabilities of the plaintiff and that Chase & Gilbert would extend credit to the new corporation.

On January 10,1929, Nelson agreed with Chase & Gilbert that a new corporation to be known as Nelson and Chase & Gilbert Company (referred to in these findings as the “Boston Company”) would be formed to acquire all of plaintiff’s assets, except certain real estate and two automobiles. Subject to a satisfactory audit, the Boston Company was to assume all of plaintiff’s liabilities, and Chase & Gilbert was to arrange a bank loan of $60,000 for the Boston Company, and was to purchase, on May 1, 1929, $300,000 of the Boston Company’s notes at 93. Nelson was to be hired by the Boston Company as president for 4 years at a salary of $25,000 per year.

8. The Boston Company was incorporated in Delaware on January 14,1929.

9. On January 21, 1929, the plaintiff’s board of directors passed a resolution approving the transfer of its assets and liabilities to the Boston Company. The resolution reads as follows:

FURTHER kesolved, That this Corporation shall sell, convey, assign and transfer unto Nelson and Chase & Gilbert Company, a Delaware Corporation, all of its property, rights, privileges, easements, rights of way and all other property or property rights it may use or possess with the exception of the following: a farm at Princeton, New Jersey, six vacant lots at Staten Island, New York, and two vacent [sic] lots at St. Albans, Long-Island, New York, and two Lincoln cars, in consideration of the payment to this Corporation by H. W. Nelson of the sum of $100 and the assumption by said Nelson and Chase & Gilbert Company of all the liabilities of this Corporation; and
further resolved, That the President and Secretary of this Corporation be and they hereby are authorized, empowered and directed to execute such instruments of assignment and transfer as they may deem necessary or appropriate in order to carry out the foregoing resolution.

10. On January 21, 1929, all plaintiff’s stockholders consented to the sale of its rights and property to the Boston Company in the following terms:

The undersigned, being the holders of not less than three-fourths of the capital stock of H. W. Nelson Company, Inc., a Kentucky corporation, to-wit, all of such capital stock, do hereby consent to the sale and conveyance by the said Corporation of all of its property, rights, privileges, easements, rights of way and all other property and property rights it may use or possess except the following: a farm at Princeton, New Jersey, six vacant lots at Staten Island, New York, and two vacant lots at St. Albans, Long Island, New York, and two Lincoln cars, to Nelson and Chase & Gilbert Company, a Delaware corporation, in consideration of the payment by H. W. Nelson to this Corporation of the sum of $100 and the assumption by said Nelson and Chase & Gilbert Company of all the liabilities of this Corporation.

11. (a) At the first meeting of the Boston Company’s board of directors on January 21, 1929, the board elected Nelson as president and accepted Nelson’s offer to carise “to be sold, transferred, assigned and conveyed” to the Boston Company all of plaintiff’s assets, except for certain real estate and two automobiles, provided that the Boston Company assume all of plaintiff’s liabilities.

(b) Nelson continued to serve as president of the Boston Company through 1937, and during the period January 31, 1929, through January 31, 1937, the Boston Company made salary payments to him totaling $137,112.87, of which $23,416.74 was paid in 1929, $25,000.08 in 1930, and the balance of $88,696.05 in the 6-year period January 1, 1931, through January 31,1937.

12. (a) The transaction was carried out with full recognition of the terms of the Birmingham contract imposing limits upon its transferability.

About the middle of January 1929, before the corporate actions of the plaintiff and the Boston Company described in findings 9,10, and 11, the question of procuring the Bail-road’s consent to the transfer of the Birmingham contract to the Boston Company was the subject of correspondence between Chase & Gilbert, Inc. and Nelson.

On January 17, 1929, in a telegram to Dey, a vice president of Chase & Gilbert, Nelson expressed unwillingness to seek the Bailroad’s consent.

On January 18,1929, Dey wired Nelson:

* * * if consulting railroads re assignment of contracts would be embarrassing do not see why we cannot keep present companies alive and have them give their security and property to the new company * * *

Despite the recognition, evident from this exchange, of the terms of the contract limiting its transferability, the formal corporate authorizations of January 21, 1929, 3 days later, were phrased in unqualified terms. They made no reference to any legal impediment to transfer of the Birmingham contract and expressed no intention or authorization on the part of either corporation to withhold any rights in the Birmingham contract from among the rights and properties to be transferred.

(b) Nelson, writing in December 1932 to one Cook of Detroit, stated:

* * * this assignment was voted by the company but never put into effect because I noticed that the contract was non-assignable without the consent of the Railroad Company and they were never asked to give their consent and the assignment was detached and withdrawn as far as relations with the Railroad Company were concerned.

There is no direct evidence, however, that the terms of any closing papers varied from the terms of the corporate authorizations and directions described in findings 9, 10, and 11, or that Nelson had any authority to deviate from the terms of those authorizations.

(c) There is no evidence that the Railroad’s consent was ever procured. We find that it was not.

(d) According to the terms of the Birmingham contract, the plaintiff could not transfer any part of the contract without the consent of the Railroad’s chief engineer and, even if it obtained such consent, could not thereby relieve itself of its primary obligation to the Railroad to perform the contract. Accordingly, the contract’s terms afford no basis for finding as a fact that, by such transfer as was made without such consent, the plaintiff relieved itself of its obligation to the Railroad or transferred to the Boston Company a primary obligation to the Railroad to perform the contract.

(e) The Boston Company physically performed all functions required as performance of the Birmingham contract that were performed after December 31,1928, disbursed all amounts that were expended after December 31, 1928, in connection with such performance, and kept all records that were kept after December 31, 1928, in respect of expenses incurred and payments received in connection with such performance except the payment of $550,000 made by the Railroad in 1941, which is described in finding 36, and which was made after the Boston Company had ceased to exist.

(f) On the basis of all the evidence, including the absolute terms of the corporate actions authorizing the transfer, the plaintiff’s dormancy after December 31, 1928, and the evidence that the Boston Company alone was active after December 31, 1928, in connection with the performance of the Birmingham contract, it appears that the intention of the corporate parties was to secure the Boston Company to the utmost extent legally feasible without the Railroad’s consent in return for the Boston Company’s financial assistance, by transferring to it, among other rights and property,

1) all rights under the Birmingham contract that the plaintiff legally could transfer without the Railroad’s consent, and
2) (in order to enable it to protect its security and any rights plaintiff retained under the contract after the transfer) all authority plaintiff legally could, without the Railroad’s consent, transfer to the Boston Company to perform functions the plaintiff was legally obligated to the Railroad to perform but was financially incapable of performing.

(g) Issues of law that are insusceptible of ultimate resolution by findings of fact are involved in the decision whether, in the circumstances described in these findings, the plaintiff was disabled after December 31, 1928, from claiming, for tax purposes, expenses or losses incurred in the performance of the Birmingham contract

1) that had occurred before January 1, 1929, or
2) that occurred on or after January 1,1929.

(h) Issues of law that are insusceptible of ultimate resolution by findings of fact are involved also in the decision whether the arrangements between the plaintiff and the Boston Company, described in these findings, were ineffective to transfer from the plaintiff to the Boston Company the right to receive from the Railroad, and to treat, for tax purposes, as income or reimbursement of costs or losses, proceeds that became available under the contract after December 31, 1928, and particularly proceeds of future litigation against the Railroad for damages resulting from delays

1) that had occurred before January 1, 1929, and
2) that occurred on or after January 1,1929.

(i) The evidence in this record concerning the manner in which the plaintiff and the Boston Company conducted and accounted for their operations after December 31,1928, is summarized in the following findings.

Plaintiff’s Accounts Relating to its Construction Contracts

13. (a) As of December 31, 1928, plaintiff’s books included, for the Birmingham contract, an asset account showing the amount due from the Railroad, various liability accounts for expenses payable, and a liability account for deferred earnings.

(b) As of December 31, 1928, plaintiff’s asset account showed a balance due plaintiff from the Railroad of $200,042.87 and its deferred earnings account showed a computed profit as of that date on the Birmingham contract of $70,687.92.

14. As of December 31, 1928, plaintiff’s books showed $262,573.99 as the total net amount of deferred earnings on all of its seven uncompleted contracts, including the $70,687.92 on the Birmingham contract.

15. (a) Entries dated December 31,1928, were made in the plaintiff’s books closing out to an account called “H. W. Nelson Liquidating Account” all assets and liabilities with the exception of the real estate and two automobiles mentioned as not transferred to the Boston Company in the resolution of January 21, 1929, quoted in finding 10. The accounts mentioned in findings 13 and 14 were closed out in this manner.

(b) Except for a few entries dated April 30 and September 1,1929, no entries have been made in plaintiff’s books since the close-out entries of December 31,1928, described in finding 15(a), and plaintiff’s books contain no entries after December 31, 1928, pertaining to any of the seven then uncompleted construction contracts.

(c) Nelson transferred all assets to the Boston Company pursuant to the action of the directors of the Boston Company, described in finding 11.

The Boston Company’’s Activities in Connection with the Construction Contracts

16. The books of the Boston Company were opened with entries of January 1,1929, showing the assets and liabilities acquired from the plaintiff. Accounts for the Birmingham contract similar to those mentioned in finding 13 were opened on the Boston Company’s books as of January 1,1929. The initial balances of these accounts were the same as the closing balances on plaintiff’s books mentioned in finding 13.

17. All of the common stock (100,000 shares) of the Boston Company was issued to Nelson, and Nelson transferred 50,000 shares to Chase & Gilbert, Inc. Subsequently, all of the stock was reissued to four voting trustees pursuant to a voting trust agreement. The trustees were Nelson, G. A. Stuart, Boyce W. Gilbert, and K. V. R. Bey.

18. Work was resumed on the Birmingham contract on July 12, 1929, and was completed in 1931. The machinery and equipment used in this work were carried as assets on the books of the Boston Company. The expenses were paid by checks drawn on bank accounts in the name of the Boston Company or by cash withdrawn from such accounts. The Boston Company’s books contain entries showing amounts payable by the Railroad with respect to the Birmingham contract as “Accounts Receivable” and include items designated as “Accrued Expenses — Birmingham Job” in the “Liabilities” account.

19. The Boston Company also completed the six other contracts that were uncompleted by the plaintiff as of December 31, 1928. Its income from construction contracts was recorded on its books and reported on its tax returns on the completed contract method.

20. The following table summarizes the amounts of the billings which plaintiff had rendered under the six other contracts as of December 31, 1928, the total billings as of completion and the costs of such jobs to completion and the amounts reported as profit or (loss) from such contracts in the income tax returns of the Boston Company (a) for the calendar year 1930 with respect to the Bridgeport, Milwaukee, and Bayland jobs, and (b) for the calendar year 1932 with respect to the Grundy and Wyomissing contracts:

Contract Billings as of Dec. 31,1928 Billings as of completion per return Cost to completion' per return Profit or (loss) per income tax returns Year reported
Waverly_ $1,991,841.23
Bayland_ 31,892.19 $34,940.89 $43,771.68 ($8,830.79) 1930
Wyomissing.. 96,026.24 123,042.76 149,824.85 (26,782.09) 1932
Bridgeport. 74,727.46 102,384.32 125,305.72 (22,721.40) 1930
Grundy_ 66,045.33 1,307,963.02 1,335,806.92 (27,843.90) 1932
Milwaukee_ 13,887.81 260,712.20 222,720.99 37,991.21 1930

The income tax returns of the Boston Company for the years 1929-1932 state that the Waverly job was uncompleted. None of the Boston Company’s returns discloses any report of any profit or loss from the completion of the Waverly job and the Boston Company’s books reflect no changes from the initial entries relative to billings rendered, costs or estimates received on the Waverly job. A profit of $240,-884.38 on the Waverly contract that appéared on plaintiff’s books as of December 31,1928, was included in the total, referred to in finding 14, of $262,573.99, shown as deferred earnings on the seven uncompleted contracts.

The income tax returns of the Boston Company fail to show that it ever reported any income, deductions, profit (or loss) identifiable with the Birmingham contract. Indeed, despite the admitted completion of the Birmingham job in 1931, the Boston Company, in its returns for the years 1929-1933, stated that the Birmingham contract was still uncompleted.

There is no record of any returns filed by the Boston Company for any year since 1935 when it lost its Delaware charter for nonpayment of taxes.

21. (a) The expenses and receipts recorded on the books of the Boston Company and on the books of the plaintiff relating to the Birmingham contract were divided between the plaintiff’s records and those of the Boston Company, as follows:

Boston Co. books Plaintiffs books Total
Total costs recorded_ $951,814.89 $308,909.87 $1,260,724.26
Total payments recorded.. 558,475.72 179,405.22 737,880.94
Difference. 393,338.67 129,504.65 522,843.32

It has been impossible to verify these entries because none of the underlying documents such as checks, vouchers, and invoices is available.

22: All the expenses listed in finding 21 that are shown on the plaintiff’s books were recorded as incurred before January 1, 1929. Those shown on the Boston Company’s books were recorded as incurred after December 31, 1928.

All the payments listed in finding 21 that are shown on plaintiff’s books are recorded as received from the Eailroad before January 1, 1929. Those shown on the Boston Company’s books are recorded as received from the Eailroad after December 31,1928.

23. The books of the plaintiff and the Boston Company contain no evidence of any indebtedness existing at any time between the plaintiff and the Boston Company.

The Plaintiff’s Income Tax Returns — 1929-1940

24. Plaintiff’s Federal income tax return for the fiscal year ended August 31, 1929 (hereafter referred to as “1929”) was filed on November 12, 1929. It is signed by Nelson as president of the plaintiff. The return shows as its only item of income “Interest and discount earned” $394.93. It shows no tax due. On the balance sheet for the end of the taxable year, the only asset shown is $100 which is explained as follows:

“H. W. Nelson (for sale of Assets & Liabilities under reorganization.) ”

The following statement is also found on the balance sheet page:

On Dec. 31, 1928, this corporation sold its entire Assets and business to H. W. Nelson, who in turn sold them to Nelson and Chase & Gilbert Company of Boston, which latter company assumed all Liabilities of this corporation under the organization agreement. Certain personalty and real estate was excluded from this liquidation, including Liabilities of $2,442.00 in connection therewith.

25. In a report dated October 13, 1931, a revenue agent recommended the assessment of a deficiency of $29,803.15 against the plaintiff for 1929. The recommendation was based on the inclusion in income for 1929 of the $262,573.99 credit balance, referred to in finding 14, which appeared on plaintiff’s books as of December 31, 1928, in an account called “Unfinished Jobs,” and which included the $70,687.92 of deferred earnings on the Birmingham contract recorded on plaintiff’s books as of December 31, 1928, under an account designated “Deferred Earnings of Incompleted Contract.”

On November 10, 1931, a deficiency of $33,357.89 ($29,803.15 plus interest of $3,554.74) was assessed against the plaintiff by a jeopardy assessment pursuant to Section 273 (a) of the Bevenue Act of 1928.

By letter of November 30,1931, the plaintiff was informed of this assessment and of its right to petition the Board of Tax Appeals. The plaintiff filed such a petition but it was dismissed on April 8, 1933, for lack of prosecution, before any trial or hearing on the merits. The order of dismissal is as follows:

This proceeding having been called from the Day Calendar of April 5,1933, for hearing on the merits, and there being no appearance on behalf of the petitioner and counsel for the respondent having moved to dismiss for lack of prosecution, the premises being considered, it hereby is
ORdered that the motion be and hereby is granted and the proceeding is dismissed. There is a deficiency in income tax for the fiscal year ended August 31, 1929 in the amount of $29,803.15.

26. On November 14,1930, plaintiff filed a Federal income tax return for the fiscal year ended August 31, 1930. The return, which was signed by Nelson as president, reports no income and shows no tax to be due. The only asset shown on the balance sheet is the same $100 item referred to in finding 24. At the bottom of the balance sheet is the notation “Inactive entire year”.

27.On January 15, 1932, plaintiff filed a Federal income tax return for the fiscal year ended August 31, 1931, signed by Nelson. The return is blank except for the following notation:

This company was entirely inactive during the year 1931.
H. W. Nelson
President

28.Plaintiff filed no Federal income tax returns for the fiscal years 1932 through 1940.

The Boston Company's Income Tax Returns — 1929-1935

29.On February 15, 1930, the Boston Company filed a Federal income tax return for the calendar year 1929. The return reported $510.77 in income and showed no tax due but contained the following statement:

NOTE
This corporation is engaged entirely in Job Contracting. Under our system of accounting, therefore, all expenses of doing business are charged to Contract Accounts.
During the year covered by this Return, we had nine (9) such Jobs, as follows, none of which were completed this year:
Birmingham Job
Bridgeport Job
Grundy Job
Milwaukee Job
Pontiac Job
Rayland Job
Waverly Job
Wyomissing Job
Yorktown Job

On the balance sheet attached to the return, the total of assets as of the end of the year was stated to be $1,122,211.43.

30.On March 10, 1931, the Boston Company filed a Federal income tax return for the calendar year 1930. The return reported a loss on four completed contracts: Bridgeport, Milwaukee, Rayland, and Yorktown. The return contains the following statement:

Note: This Corporation is engaged entirely in Job Contracting. Under our system of accounting, therefore, all expenses of doing business are charged to Contract Accounts.
During the year covered by this Return, we had nine (9) such Jobs, as follows, of which the four above were completed this year:
Birmingham Job
Bridgeport Job
Grundy Job
Milwaukee Job
Pontiac Job
Rayland Job
Waverly Job
Wyomissing Job
Yorktown Job

31. On May 16,1932, the Boston Company filed a Federal income tax return for 1931. The return reported income from equipment rental and contained the following statement :

Note: This Corporation is engaged entirely in Job Contracting. Under our system of accounting, therefore, all expenses of doing business are charged to Contract Accounts.
During the year covered by this Return, we had six (6) such Jobs, as follows, none of which were completed this year:
Birmingham Job
Grundy Job
Justice Job
Pontiac Job
Waverly Job
Wyomissing Job

32. On May 6,1933, the Boston Company filed a Federal income tax return for 1932 reporting a small profit on the completion of three contracts and showing a tax due of $52.79 which was paid with the return. The return contains the following statement:

note: This Corporation is engaged entirely in Job Contracting. Under our system of accounting, therefore, all expenses of doing business are charged to Contract Accounts.
During the year covered by this Eeturn, we had six (6) such Jobs, as follows, of which three were completed this year:
Birmingham Job
* Grundy Job
*Justice Job
Pontiac Job
Waverly Job
*Wyomissing Job
Those indicated by * completed this year.

33. The Boston Company also filed Federal income tax returns for 1933, 1934, and 1935, none of which shows completion of the Birmingham contract. On the balance sheet attached to each of these returns there was an asset item of $445,189 for “Billings not yet accepted” and an offsetting reserve account of $165,595.23.

Disposition of General Claims Against the Railroad

34. (a) On November 28, 1932, the Boston Company board of directors passed the following resolution:

Resolved That H. W. Nelson, President of Nelson and Chase & Gilbert Company, be and he hereby is authorized to act for said Nelson and Chase & Gilbert Company in settling and releasing claims against the grand trunk RAILWAY SYSTEM.

(b) On the same day, plaintiff’s board of directors took the action reflected in the following excerpt from the minutes of a meeting held that day:

The Chairman stated that negotiations were under way with the Detroit, Grand Haven & Milwaukee Railroad Company in connection with the construction contract undertaken in May, 1928. He further stated that a settlement was about to be reached and that it would be necessary for the Company to authorize an officer to sign various settlement agreements and releases covering the transaction.
Whereupon, upon motion duly made and seconded, it was unanimously
resolved : That H. W. Nelson be and he is hereby authorized and directed to act on behalf of this Company in the settlement of claims against the Detroit, Grand Haven & Milwaukee Bailroad Company, with full power to sign any release of such claims or any other document in connection therewith.

(c) On November 30,1932, the plaintiff and the Bailroad entered into an agreement, signed on behalf of the plaintiff by H. W. Nelson as president, whereby the plaintiff acknowledged receipt of $25,433.35 as full payment of all claims under the Birmingham contract except for those arising out of the delay in obtaining the right-of-way.

(d) An amount equal to the payment of $25,433.35 made by the Bailroad was eventually deposited in a bank account in the name of the Boston Company and recorded on the Boston Company’s books as an item of income.

35. The minutes of a meeting of plaintiff’s board of directors on May 21,1934, read in part as follows:

In accordance with the resolution adopted by the Board of Directors at a meeting held on the 21st day of January, 1929, all assets (with exceptions as noted in said resolution) and liabilities of H. W. Nelson Company, Incorporated, were taken over by Nelson and Chase & Gilbert Company.
The Chairman stated that in order that Nelson and Chase & Gilbert Company may collect and receive credit for the accounts of H. W. Nelson Company, Incorporated which are still due, a resolution authorizing the acceptance for deposit to the credit of Nelson and Chase & Gilbert Company by its bank is necessary.
Whereupon, upon motion duly made and seconded, it was unanimously
Resolved: That H. W. Nelson, President of H. W. Nelson Company, Incorporated, be and he hereby is appointed and empowered to sign and/or endorse, on behalf of the Company, all checks, drafts or instruments of like nature; and it was
further resolved: That the Irving Trust Company of New York be and it hereby is authorized to accept for deposit, collection and credit to the account of Nelson and Chase & Gilbert Company any and all checks presented which are drawn to H. W. Nelson Company, Incorporated, or order, when endorsed by said H. W. Nelson, President; and it was
further resolved: That Nelson and Chase & Gilbert Company be and it hereby is authorized to receive in its account, for collection and credit, any and all cheeks so drawn.
There being no further business to come before the meeting, it was thereupon adjourned.
[s] A. E. Rinchey,
Secretary.
APPROVED :
[s] H. W. Nelson
Chairman.

It does not appear what use, if any, was made of the powers conferred by these resolutions between the date of their enactment and the completion of the Boston Company’s liquidation following the loss of its charter in 1935.

Disposition of Claim Against the Railroad for Delay in Obtaining Right-of-Way

36. On April 18, 1933, plaintiff filed suit against the Railroad in the United States District Court for the Eastern District of Michigan, seeking a judgment of $750,000 as recompense for costs, damages, and losses allegedly suffered in performance of the Birmingham contract.

After a number of years spent disposing of motions filed by the Railroad, the case went to trial before a jury which returned a verdict for the plaintiff, on June 5, 1939, for $871,000.

The Railroad appealed. The Sixth Circuit reversed (116 F. 2d 823) holding that the trial judge erred in directing the jury to award interest but rejecting an assignment of error directed against the lower court’s denial of a motion to dismiss based on the ground that the plaintiff had assigned all its assets to the Boston Company and, accordingly, was not the real party in interest under the Michigan law.

Eventually, the plaintiff offered a computation in support of a remittitur of $308,762.24 and, on April 7, 1941, the Sixth Circuit remanded the case, with a direction to enter judgment for $562,237.76.

The District Court entered judgment for that amount. Thereupon, the plaintiff, pursuant to an authorization by its board of directors dated May 29, 1941, agreed to accept $550,000 in complete satisfaction of the judgment.

The $550,000 was paid 'by the Railroad in accordance with instructions contained in a letter from the plaintiff dated June 7, 1941, which directed that payment be made as follows:

Ogden Corporation-$99, 827.67
White, Bower & Prevo_ 6, 500.00
H. W. Nelson Company, Inc., to be delivered to the Reconstruction Finance Corporation_ 76, 890.40
Baker, Hostetler & Patterson_ 11, 819.46
Collector of Internal Revenue, Detroit, Michigan_ 56, 357.10
Clark, Klein, Brucker & Waples_ 135,848. 64
H. W. Nelson Company, Inc_ 162,756.73
Total 550,000.00

37. The plaintiff’s books contain no entries to show the receipt or disposition of the $162,756.73 paid to it by the Railroad.

38. There is no evidence that the Boston Company, which had ceased to exist some years before the payment was made, ever made a claim against plaintiff for any portion of the $550,000 received from the Railroad.

39. At the trial of the case described in finding 36, the court admitted into evidence a “preliminary report,” prepared, at plaintiff’s request, by a firm of certified public accountants, which purported to show the costs incurred in completing the Birmingham contract. This report, based upon “a partial examination of certain of the books of account and records of” the plaintiff and the Boston Company, was not certified by the accountants who .prepared it as correct or as in conformity with generally accepted accounting principles. It does not indicate how the expenses were divided between the two companies. It does state that the total cost of the job was $1,282,077.08, and that the total amount received from the Railroad was $731,666.92, leaving an excess of costs over payments of $550,410.16.

The figures contained in the “preliminary report” appear to be at variance in some respects with the book records of the plaintiff and the Boston Company, summarized in finding 21(a), which show a recorded total cost of $1,260,724.26, recorded total payments from the Railroad of $737,880.94 and a difference of $522,843.32. As indicated in finding 21(a), those totals likewise have not been susceptible to definite verification in this proceeding.

40. During the trial of the suit against the Eailroad, described in finding 36, the Railroad’s attorney sought to cross-examine a former officer of the plaintiff concerning the relationship between the plaintiff and the Boston Company. Plaintiff’s counsel objected on the ground of lack of materiality. The Railroad’s counsel stated his purpose was to show that the plaintiff was not the real party in interest. The District Court sustained the objection of plaintiff’s counsel holding that a new plaintiff could easily be substituted and that the identity of the person who paid the expenses in no way affected any obligation or duty of the Railroad.

Administrative Proceedings Relating to Plaintiffs 19%9 a/nd 191f.l Income Tax

41. While the lawsuit described in finding 36 was in progress, various other events pertinent to plaintiff’s tax situation occurred. These are summarized chronologically in the following findings.

42. On May 22, 1934, deficiencies of $29,803.15 were determined for the fiscal year ended August 31, 1929, against Nelson and the Boston Company as transferees of the plaintiff. These derive from the basic assessment of $29,803.15 against the plaintiff for 1929, which is described in finding 25.

43. On May 23,1934, Nelson filed two protests with respect to the determination described in finding 42; one on his behalf and the other on behalf of the Boston Company. In both protests, Nelson stated that the Boston Company took over the assets and liabilities of the plaintiff. In his personal protest, he made no specific reference to the Birmingham contract. In the protest on behalf of the Boston Company, Nelson stated that the Boston Company had assumed “the obligation to finish certain uncompleted contracts,” specifically mentioned the Birmingham contract as one of six “contracts under way on January 1st, 1929,” and included an alleged profit of $174,648.41 on its completion in a computation designed to show that on balance, the Boston Company’s losses accrued after January 1,1929, in completing the six contracts listed exceeded its profits.

44. On January 26, 1938, Nelson sent a letter to the Government stating reasons why he believed no additional tax was due from the plaintiff for 1929, from which he contended that there was no transferee liability. In the letter, he stated that the plaintiff “engaged in the business for which it was organized [railroad construction] until January, 1929, at which time a reorganization was effected whereby its assets, liabilities and business were transferred to a new corporation” [the Boston Company]. He claimed that if the plaintiff’s deferred earnings were to be included in plaintiff’s income for fiscal 1929, the figure of $70,687.92 should not have been used as the deferred earnings on the Birmingham contract but that a loss of $216,972.93 should have been shown instead — that the figure of $379,597.79 shown as “billed” included an overpayment of $67,679.74 later repaid to the Railroad, and that $171,856.82 of billings which, on December 31, 1928, had not been approved by the Railroad were finally disapproved and rejected by the Railroad on December 31,1932, and were never paid to the H. W. Nelson Company, Incorporated.

Plaintiff’s then pending suit against the Railroad for damages arising out of delays affecting the Birmingham contract had not yet come to trial and Nelson made no mention of it in his letter. He did state that plaintiff had transferred to the Boston Company “all its assets, liabilities and business, including all contracts (exclusive of certain minor assets, hereinafter described).” The “minor assets” were thereafter described as certain real estate and two automobiles. The closing paragraph of the letter is as follows:

In closing, let me add that our business, railroad construction, has suffered the most and has recovered the least of any major industry as a result of the depression beginning in 1929. We have not had a single new contract or order since 1931 and have done no work whatever since 1932. Personally, I have managed to get along since that time by realizing on what assets I had, by borrowing, and by acting as salesman on a commission basis and by doing such engineering work as I was able to get. During this time, the Nelson and Chase & Gilbert Company has had to liquidate practically all of its assets at a small fractional part of their cost. At the present time, neither the company nor I has any substantial assets. No part of the $300,000.00 'borrowed by Nelson and Chase & Gilbert Company from Chase & Gilbert, Ino. has ever been repaid, nor has any interest been paid thereon. In fact, the amount of the loan was increased to $340,000.00 and afterwards was exchanged for Preferred Stock, prior to the time Chase & Gilbert, Inc. made an assignment to a Creditor’s Committee in, about 1934. No dividends have ever been paid on such Preferred Stock or on the company’s Common Stock; nor has H. W. Nelson Company, Incorporated ever paid any dividends on its stock.

45. Nelson and the Boston Company offered to settle the tax claims asserted against them as transferees by a stipulation that they had a joint and several transferee liability of $15,000. The offer was accepted and the cases were settled on that basis. In 1938, deficiencies of $15,000 plus interest of $7,466.92 were assessed against Nelson and the Boston Company as transferees. The basic liability against the plaintiff transferor was collected on June 7,1941, as appears in finding 49. No part of the transferee assessments against Nelson or the Boston Company was ever paid.

46. On June 1, 1935, the Boston Company lost its charter for nonpayment of taxes to the state of its incorporation.

47. There is no record of any Federal income tax returns filed by the Boston Company for any year after 1935.

48. The Boston Company apparently went out of business but the record contains no evidence of the manner of its liquidation or of the disposition of its creditors’ claims except that it never paid the tax claim asserted against it as transferee.

On demand by the Government in this proceeding, Nelson produced a journal, ledger, minute book, and stock record book, all belonging to the Boston Company.

49. Out of the $550,000 settlement paid by the Railroad, $56,357.10 was paid to the Collector of Internal Revenue at Detroit, on June 7, 1941, as indicated in finding 36, and was used to satisfy the tax assessed against the plaintiff for 1929, as described in finding 25. Of the $56,357.10, $33,357.89 was the amount originally assessed on November 10, 1931, $22,998.21 was interest thereon and the remaining $1 was for service of notice of levy.

As described in findings 54 and 59, the $56,357.10 was subsequently refunded or credited to the plaintiff with interest.

50. On June 23, 1943, the plaintiff filed a delinquent Federal income and excess profits tax return for the fiscal year ended August 31, 1941 (hereafter referred to as “1941”). This return was prepared by a prominent accounting firm and was signed by Nelson. It showed a tax due of $31,467.38. No part of this sum was paid with the return.

51. Attached to the return is the following statement:

Settlement of judgment against Grand Trunk Western Railroad Company, successor by consolidation of Detroit, Grand Haven and Milwaukee Railway Company on June 7, 1941_$550, 000. 00
Minus — The billings of $200,042.57, not accepted by tbe railroad, which were included by the Commissioner of Internal Revenue in the taxable net income for the year ended August SI, 1929, less the sum of $28,185.75 heretofore collected_ 171,856.82
378,143.18

52. On the return, $378,143.18 was reported as income. Deductions totaling $247,029.10 were claimed as follows:

Salary paid to Nelson- $3, 750. 00
Other salaries and wages_ 22,249.00
Rent_ 8,738. 85
Interest_ 38, 740. 87
Taxes_ 3.00
Net operating loss deduction_ 7,068.01
Legal fees and expenses_151, 218.10
Accounting fees_ 6, 500. 00
Witness fees_ 3,400. 00
Telephone and telegraph_ 109.45
Office supplies- 32.51
Miscellaneous expenses_ 834.06
Expenses in connection with litigation_ 4,385.25
247,029.10

53.In August 1943, an assessment of $42,323.63 was made against plaintiff for 1941. Of this amount $31,467.38 was tax, $7,866.85 was 25 percent penalty for failure to file the return on time, and $2,989.40 was interest.

54. (a) On June 5, 1943, the plaintiff filed a claim for refund of tbe $56,357.10 paid on June 7, 1941, for 1929, as described in finding 49.

(b) On October 4, 1945, plaintiff was informed that a revenue agent bad recommended allowance of its claim for refund for 1929 on tbe ground tbat tbe payment of $56,357.10 was made on June 7, 1941, more than 6 years after tbe November 10,1931, assessment date.

55. Meanwhile, tbe plaintiff bad also been informed by a letter dated April 7, 1945, accompanied by a report dated March 26,1945, that a deficiency of $23,337.80 and a penalty of $5,834.45 had been recommended against it for 1941.

In computing tbe alleged deficiency, the agent increased gross income for 1941 by $70,687.92 (from $378,143.18 to $448,831.10) and eliminated $26,552.92 of the interest deduction of $38,740.87 described in finding 52.

Tbe increase in gross income was computed as follows:

Amount received from the Railroad_ $550, 000.00
Estimates not paid by the Railroad in fiscal 1929_ $171, 856. 82
Less profit included in income for fiscal 1929_ 70,687.92
101,168.90
Difference_ 448, 881.10

The disallowance of $26,552.92 of tbe interest deduction was made on tbe ground that this interest bad been collected for 1929 (as described in finding 49), and tbat plaintiff was seeking its refund (as described in finding 54(a)).

Tbe $70,687.92 added to gross income in this computation of plaintiff’s tax for 1941 was tbe same $70,687.92 shown on tbe plaintiff’s boobs as of December 31, 1928, as a computed profit on tbe Birmingham contract, under an account designated as “Deferred Earnings of Incompleted Contract.” This $70,687.92 had already been included in plaintiff’s income for 1929 in determining tbe deficiency for that year, described in finding 25 above.

56. On October 27, 1946, plaintiff submitted to the Commissioner of Internal Revenue an “Offer of Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment.” This offer proposed

(a) to consent to the assessment and collection of a deficiency for 1941 of $21,206.37, consisting of $16,965.10 of tax, plus penalty of $4,241.27, and
(b) to accept as correct an overassessment for 1929 of $29,803.15.

As a part of its offer, plaintiff stated:

If this proposal is accepted by or on behalf of the Commissioner, the case shall not be reopened in the absence of fraud, malfeasance, concealment or misrepresentation of material fact, or of an important mistake in mathematical calculations, and the taxpayer agrees: (1) to make payment of the above deficiencies for the taxable year ended August 31, 1941, together with interest, as provided by law, promptly upon receipt of notice and demand from the Collector of Internal Revenue, and not to file an offer in compromise respecting such liabilities; (2) not to file or prosecute any claims for refund of income tax or penalty for the taxable year ended August 31,1941 and upon request of the Commissioner to execute at any time a final closing agreement as to the tax liabilities on the foregoing basis for the said years under the provisions of Section 3760 of the Internal Revenue Code. * * *

57. On June 4, 1948, the Bureau of Internal Revenue accepted plaintiff’s offer of October 27,1946, described in finding 56, wherein plaintiff had consented to the assessment and collection for 1941 of a deficiency of $16,965.10 and a penalty of $4,241.27, a total of $21,206.37. According to the Bureau’s letter, the deficiency of $16,965.10 was arrived at by allowing plaintiff the interest deduction of $26,552.95 previously disallowed in April 1945 (as stated in finding 55), thereby reducing net income, as stated in the Bureau’s preliminary letter, from $228,354.95 to $201,802. This adjustment did not eliminate from the computation of plaintiff’s 1941 tax the $70,682.92 of computed profit on the Birmingham contract as of December 31, 1928, which had already been included in its 1929 income in determining the deficiency assessed for that year.

The Government also agreed to an overassessment of $29,803.15 for 1929.

58. In accordance with the agreement described in finding 57, a timely assessment for 1941 was made on June 28,1948, in the amount of $27,943.84, of which $16,965.10 was tax, $6,737.47 interest, and $4,241.27 penalty.

At this point, the two assessments against plaintiff for 1941 totaled $70,267.47: $42,323.63 originally assessed as described in finding 53 and the $27,943.84 deficiency assessment described in this finding.

59. The overassessment for 1929 agreed to, as described in finding 57, was eliminated by a cash payment to the plaintiff of $19,739.56 (of which $14,325.51 was interest) in March 1949 and credits against the 1941 assessments of $27,943.84 on September 28, 1948, and $23,580.72 (of which $582.51 was interest) on December 12,1951.

60. As a result of the credits described in finding 59, the unpaid portion of the 1941 assessments against the plaintiff was reduced to $18,742.91 plus delinquency interest. This balance due on the assessments for 1941 was further reduced by payments of $1,819.34 on May 1, 1953, and $155.62 on June 16,1953.

61. (a) Despite plaintiff’s undertaking quoted in finding-56 to make prompt payment of its agreed liability for 1941 and not to file a claim for refund or an offer in compromise with respect to such liability, plaintiff did file a claim for refund and an offer in compromise, on September 22, 1953. As justification for reopening the case, the plaintiff stated various reasons, including the claim that because of a mutual mistake of law and fact, a completely erroneous basis had been used in determining its 1941 tax liability.

The claim demanded a refund of $56,000.12, more or less, for 1941 and was accompanied by an amended return for that year.

The payments made and credits accorded within 2 years immediately prior to the filing of the claim on September 22, 1953, were as follows:

Dee. 12, 1951_$23, 580.72
May 1, 1953_ 1,819.34
June 16, 1953_ 155.62
25, 555.68

The offer sought to compromise plaintiff’s liability for 1941 for $10 which was paid with the offer.

(b) In the statements attached to the claim for refund and the offer of September 22, 1953, the plaintiff reviewed its arrangements with the Boston Company in 1929, asserted that the Birmingham contract was not assigned to the Boston Company because the Railroad would not consent to the assignment, and said that, whereas the Boston Company had completed the several contracts assigned to it by the plaintiff in 1929, the plaintiff had completed the Birmingham contract with funds loaned by the Boston Company, that the plaintiff had billed the Railroad periodically for the work done, and that the Railroad had paid the plaintiff by checks to its order, with which plaintiff had repaid the Boston Company for the funds advanced by the Boston Company.

The plaintiff further claimed that it had lost on the Birmingham contract, on a completed contract basis, the difference of $410.16 between an alleged total cost to plaintiff in performing the contract of $1,282,077.08 and an alleged total amount of $1,281,666.92 received from the Railroad, including the $550,000.

(c) The statement also contended that the item of $70,-687.92 added to plaintiff’s 1941 income in computing the 1941 deficiency — which was the basis for the $16,985.10 (sic — $16,965.10) deficiency plaintiff had previously proposed to accept — had already been included in plaintiff’s taxable income for a prior year (1929).

(d) On July 10, 1954, the plaintiff was notified that its claim would be disallowed. The reasons stated were that:

(1) the claim was timely only as to the amount of tax paid during the immediately preceding 2 years,
(2) the Birmingham contract was completed and accepted before the 1941 taxable year,
(3) only a part of the total construction cost claimed was borne by the plaintiff and such costs were previously recovered tax free in an earlier year, and
(4) the plaintiff had formally waived its right to file a claim for refund for the taxable year.

62. On February 1, 1955, plaintiff filed, on Form 656-c, an “Amended Offer in Compromise” seeking to compromise for $2,339.68 its liability for 1941 which by then amounted to $16,757.25 plus delinquency interest. On December 7, 1955, plaintiff’s offer of February 1, 1955, was accepted because of doubt as to tbe collectibility of the balance due. The offer provides in part as follows:

In making this offer, and as a part consideration thereof, the proponent hereby expressly agrees that all payments and other credits heretofore made to the account(s) for the period(s) under consideration shall be retained by the United States, and, in addition, the proponent hereby expressly waives:
1. Any and all claims to amounts of money to which the proponent may be entitled under the internal revenue laws, due through overpayments made prior to the date of the acceptance of this offer of any tax or other liability, including interest and/or ad valorem penalty, and interest on overpayments or otherwise, as are not in excess of the difference between the liability sought to be compromised hereby and the amount herein offered, and agrees that the United States may retain such amounts of money, if any.

63. In accordance with the compromise agreement described in finding 62, plaintiff paid $2,339.68 to the Government by a payment of $99.68 on February 1, 1955, and a payment of $2,230 on December 15, 1955. The $14,427.67 balance of the assessments for 1941 was abated.

64. Despite the arrangements described above for compromise of its tax liability for 1941 and waiver of all claims for refund of amounts paid with respect to that liability, plaintiff sought recovery of those amounts by a private relief bill which was introduced in the House of March 20, 1957, as H.R. 6234 (103 Cong. Kec., 85th Cong., 1st Sess., p. 4075). The bill was not passed but, by House Resolution 636, 85th Cong., 2nd Sess., was referred to this court for a report on “the nature and character of the demand as a claim, legal or equitable, against the United States and the amount, if any, legally or equitably due from the United States to the claimant.”

65. The total amount paid by or credited to the plaintiff against the assessments for 1941 is $55,257.69.

66. Of the total amount paid by or credited to the plaintiff against the assessments for 1941, $25,555.68 was paid or credited within 2 years prior to the filing of the claim for refund on September 22,1953.

67. Of tbe total amount assessed against plaintiff as income tax for 1941, $16,965.10 is attributable to tbe inclusion as income for 1941 of tbe item of $70,687.92, wbicb appeared on the books of the plaintiff as of December 81, 1928, in its deferred earnings account as a computed profit on the Birmingham contract and which had already been included as taxable income of the plaintiff for 1929. 
      
       Since the findings of the Trial Commissioner, based upon the stipulations of the parties, were reported and the case was tentatively decided prior to the decision of the Supreme Court in Glidden v. Olga Zdanok, rendered on June 25, 1962, 370 TP.S. 530, we think it proper to file this report without reference to the effect of the Supreme Court’s opinions in that case.
     
      
       On December -31, 1928, the books of the Nelson Company bad an account “Unfinished Jobs” showing a balance of $262,573.99, which amount included $70,687.92 from the deferred earnings account on the Birmingham contract. In 19,31 a deficiency of $33,357.89 ($29,803.15 plus $3,554.74 interest) was assessed against the Company by a jeopardy assessment, based upon inclusion in income for 1929 of the $262,573.99 credit balance. The Company exercised its right to petition the Board of Tax Appeals, but the petition was dismissed for lack of prosecution. In the order dismissing said petition, the court stated that there was a deficiency for 1929 in the amount of $29,803.15.
     
      
       On November 30, 1932, acting upon authority conferred upon him by the Board of Directors of both the Nelson Company and the Boston Company, Nelson accepted payment from the Railroad of $25,433.35, in full payment for any claim arising out of the Birmingham contract except as to those related to delay in obtaining the right-of-way. This amount was deposited in the bank accounts of the Boston Company and entered on its books as income.
     