
    MALLEABLE IRON RANGE CO v. THE UNITED STATES
    [No. D-510.
    Decided April 16, 1928]
    
      On the Proofs
    
    
      Income tax; return on accrual basts; deduction for judgment debt affirmed after return. — In the year 1918 plaintiff, keeping its accounts on an accrual basis, set up as an accrued liability a judgment rendered against it during the year and from which it had appealed, with interest thereon to the end of the taxable year. In prosecuting the appeal plaintiff filed a super-sedeas bond with United States bonds as security, staying execution of the judgment, which was increased and affirmed in 1920 by the appellate court. Held, that the amount so set up was properly accrued on the plaintiff’s books in the year 1918, and was not subject to the income tax for that year. Interest on the judgment debt, likewise accrued on the books in 1919, was not exempt from taxation.
    
      The Reporter’s statement of the case:
    
      Mr. J. G. Hardgrore for the plaintiff. Miller, Mack <& Fairchild were on the briefs.
    
      Mr. Fred. K. Dyar, with whom was Mr. Assistant Attorney General Herman J. Galloway, for the defendant.
    The original judgment in this case was rendered June 14, 1926, 62 C. Cls. 425, and on certiorari the case was remanded by the Supreme Court April 11, 1927, 278 U. S. 674, for additional findings. On the remand the court below made special findings of fact, as follows:
    I. At all of the times herein mentioned, the plaintiff, Malleable Iron Range Company, was and now is a corporation organized and existing under and by virtue of the laws of the State of Wisconsin and a citizen of said State, having its principal office and place of business at the city of Beaver Dam, in the eastern district of Wisconsin.
    II. On and at all times since April 26, 1923, one A. H. Wilkinson, hereinafter referred to as the collector, was and now is the duly appointed, qualified, and acting collector of internal revenue for the eastern district of Wisconsin.
    
      III. On April 26, 1923, the said collector notified the plaintiff that a tax of $33,023.86 had been assessed against the plaintiff in respect to its income for the 7/ear 1918, and that a further additional tax of $925.89 had been assessed against the plaintiff in respect to its income for the year 1919, and demanded payment of said taxes, and threatened that if said taxes were not paid, penalties would be imposed upon the plaintiff and that as such collector he would collect said taxes and penalties by distraint of the plaintiff’s property.
    IY. Thereafter, and on May 7, 1923, the plaintiff, under protest and compulsion and not voluntarily and only for the purpose of avoiding the imposition of penalties, seizure, or prosecution, paid to the said collector the amount of said taxes, respectively, to wit, the sum of $33,023.86 for the year 1918 and the sum of $925.89 for the year 1919, notifying said collector at the time of such payments that it objected to said taxes and to each thereof, that the objection to the said taxes upon which said protest was based was “ that there has been eliminated from the accrued liabilities of the undersigned a certain judgment entered January 15, 1918, against the undersigned by the District Court of the United States for the Eastern District of Wisconsin, because of the claim of your department that said judgment was a liability in the year 1920 and not in the year 1918; that if the amount of said judgment were allowed as a deductible liability in the year 1918, as heretofore treated by the undersigned in returns and claims heretofore filed, as under the revenue acts it should properly and legally be treated, no additional tax liability would be assessable against the undersigned, and that the payment of said additional tax is exacted under compulsion and illegally and under threat of the imposition of illegal, unjust, and oppressive penalties,” and further notified said collector that the recovery of the amount of said taxes, and of each thereof, would be sought by all means available for that purpose.
    V. The assessment of said taxes was made by the Deputy Commissioner of Internal Eevenue on June 30,1921. Thereafter the plaintiff objected thereto and requested a conference and duly presented its objections and the evidence in support thereof before the income-tax unit of the Internal Revenue Department for the purpose of showing cause why said tax should not have been assessed and should not be paid. On October 27, 1921, the plaintiff’s objections were overruled by the deputy commissioner. On November 19, 1921, the plaintiff appealed to the Committee on Appeals and Review from said ruling and said appeal was thereafter duly heard. On February 21, 1923, the Committee on Appeals and Review recommended the disallowance of the plaintiff’s claims, which recommendation was approved by the Commissioner of Internal Revenue. Demand for payment of -said taxes having been made by said collector on April 26,1923, requiring the making of such payment within 10 days thereafter, the plaintiff paid the taxes under protest, on May 7, 1923. Thereafter on August 23, 1923, the plaintiff filed with the collector of internal revenue of the said district in which said assessment had been made a claim for refund of the taxes so collected from it, which claim was rejected by the Deputy Commissioner of Internal Revenue on November 8, 1923.
    VI. The said additional taxes of $33,023.86 for the year 1918 and $925.89 for the year 1919 were assessed as hereinafter more particularly shown.
    On January 15, 1918, a decree was duly entered in the District Court of the United States for the Eastern District of Wisconsin in a cause there pending in which one Fred E. Lee, as administrator of the estate of one Arthur K. Beck-with, deceased, was plaintiff, and in which the plaintiff herein was defendant, finding and adjudging the plaintiff entitled to recover from the plaintiff herein the sum of $78,816.67 damages for certain patent infringements extending from April, 1905, to Apr.il, 1911, together with interest thereon at 6% from June 10, 1915, to January 15, 1918, and as punitive damages 20% of said $78,816.67, or $15,763.33, making a total of $106,862.26, together with costs taxed at $2,803.28, amounting in all to $109,665.54. On February 25, 1918, the plaintiff gave notice of appeal from said decree and an order was made in open court giving the defendant 10 days in which to file a petition for appeal and assignment of errors.
    During the year 1918 and the succeeding years the plaintiff kept its books on the accrual basis and not on the cash basis. It set up on its books in the year 1918 as an accrued liability the said sum of $109,665.54, with interest at the rate of 6% per annum from the date of the entry of said decree to December 31, 1918, to wit, $6,305.77, or a total of $115,971.31.
    On March 6, 1918, the plaintiff duly filed its petition for appeal from said decree to the United States Circuit Court of Appeals for the Seventh Circuit.
    On March 6, 1918, the United States District Court for the Eastern District of Wisconsin entered an order in the case mentioned allowing an appeal and ordering a stay of execution, conditioned upon the furnishing of a supersedeas bond in the sum of $120,000. Before sa,id order was entered, the parties stipulated for the acceptance of a bond executed by one Andrew G. Hill, one Fred W. Rogers, and one Silas McClure, as sureties, provided the plaintiff herein should cause to be deposited and kept undisposed of $135,000 par value of bonds of the United States pursuant to the agreement, a copy of which is attached to the petition. The agreement was executed by the plaintiff herein and by a trust company corporation organized under the laws of Wisconsin, under date of February 28, 1918, and the attorney for the plaintiff in said suit noted at the foot thereof his consent to the approval, without notice, of the bond executed by the plaintiff herein as principal and said Hill, Rogers, and McClure as sureties, upon the filing with the court of the receipt of said trust company showing the deposit of bonds pursuant to the agreement. In the agreement it was recited that the plaintiff herein had deposited with the trust company, in trust, $135,000 par value of second Liberty loan bonds, and it was agreed that the trust company should keep and hold said bonds and collect the interest therefrom as the same matured and add such interest to the principal sum of said bonds to be subject to the uses for which the said bonds were applicable, that if the United States Circuit Court of Appeals should wholly reverse said judgment and by its mandate award or direct a decree in favor of the plaintiff herein and against the plaintiff in said suit, then the'trust company should deliver all of said bonds, with accrued interest, to the plaintiff herein and be discharged from any further, liability, but that if said judgment or decree should be affirmed, either in whole or in part, so that the same should be immediately payable and the liability of the plaintiff herein and said sureties upon said bond should become due and payable ,in all respects, then the trust company, upon the filing of the mandate of the court of appeals in the district court, and upon notice of such fact, should immediately self or cause to be sold all or so many of said bonds as might be necessary and apply the proceeds thereof, or so much as might be necessary' toward the entire satisfaction of the liability of the plaintiff upon such supersedeas bond, paying the surplus after deduction of its reasonable costs, expenses, and compensation to the plaintiff herein.
    At the same time, the attorney for the plaintiff in said suit noted at the foot of the supersedeas bond his approval • thereof. The agreement of February 25, 1918, and the supersedeas bond were filed on March 12, 1918.
    Of the $135,000 of bonds so deposited, $60,000 in amount were loaned to the plaintiff herein by said Hill, Rogers, and McClure and the plaintiff herein executed an agreement to stand responsible and indebted to them therefor.
    Thereafter, by proceedings duly had, said appeal was perfected and the cause heard in the circuit court of appeals, and, on March 15, 1920, said decree was by the circuit court of appeals modified by adding to the amount fixed therein interest on $78,816.67, at 6%, from April 18, 1911, to June 10, 1915, and as so modified affirmed. Thereafter pursuant to the mandate of the circuit court of appeals the district court modified its decree by providing that the amount of the recovery thereunder be increased by adding thereto the sum of $19,599.09, being the interest on the item of $78,816.67, at 6% from April 18, 1911, to June 10, 1915, making a total of $126,461.17, and by providing for the recovery by the plaintiff therein of the interest on the costs theretofore taxed and on the amount of the modified decree from January 15, 1918, making a total to March 15, 1920, the date as of which said modified decree was entered, of $146,049.73.
    The judgment was paid on March 22, 1920, the sum paid being $146,220.71, and the bonds deposited with the trust company under the agreement of February 28, 1918, were returned.
    In making its return of income for the year 1918 the plaintiff deducted the amount of said alleged judgment debt represented by said decree of January 15, 1918, and the interest which had accrued thereon during the year 1918, and in making its return for the year 1919 deducted, among other things, the interest on said alleged judgment debt. In the assessment of the taxes hereinbefore mentioned the deductions so claimed by the plaintiff were disallowed and rejected. The disallowance and rejection of the deductions so claimed resulted in an increase in the plaintiff’s net taxable income as determined by the Internal Revenue Department for the years 1918 and 1919. The additional taxes so 'assessed against the plaintiff for the years 1918 and 1919 are the amounts of the additional taxes assessed against said plaintiff for 1918 and 1919 by reason of the disallowance and rejection of the deduction© aforesaid.
    At the close of the year 1919, acting on advice of the attorneys who represented it in the cause in which the decree was entered, the plaintiff herein increased the liability on its books under the judgment or decree in question to $145,000, debiting reserve profit and crediting judgment re Fred E. Lee, etc., $29,028.67; but the only portion of the deduction here claimed is the interest accrued on the decree during the year 1919.
    The court decided that plaintiff was entitled to recover, in part.
   Graham, Judge,

delivered the opinion of the court:

This case has been heard heretofore by this court and a judgment entered dismissing the petition. Thereafter a cer-tiorari was granted by the Supreme Court, and, before a hearing, the following order was entered by that court:

“ The motion is granted, and the cause is remanded for additional findings by the Court of Claims from the evidence already introduced before the Court of Claims in respect to the outlay in bonds or money required to be deposited by the petitioner herein in securing a stay of the execution of the judgment against the petitioner in the suit against it by the United States in the United States District Court for the Eastern District of Wisconsin and in the Circuit Court of Appeals for the Seventh Circuit.”

The findings have been amended in compliance with that order.

It is to be assumed that the language “ the suit against it by the United States in the United States District Court for the Eastern District of Wisconsin ” refers to a suit against the plaintiff in that court by Fred E. Lee, administrator of the estate of Arthur K. Beckwith, as there is nothing in the record in regard to a suit in that court by the United States against plaintiff. There is a suit by Lee against plaintiff.

On January 15, 1918, the District Court for the Eastern District of Wisconsin entered a decree finding and adjudging the plaintiff Therein entitled to a judgment of $109,665.54. 'On February 25,1918, plaintiff here gave notice of an appeal, and on March 6, 1918, an order was entered allowing the appeal and ordering a stay of execution conditioned upon the furnishing of a supersedeas bond in the sum of $120,000. Before the entry of the decree plaintiff stipulated with third parties for the acceptance of a bond executed by it and said parties, provided plaintiff should cause to be deposited and kept undisposed of $135,000, par value, United States Liberty bonds. The agreement, copy of which is attached to the petition, was executed by plaintiff and a trust company, and the attorney for plaintiff in that suit noted on said agreement his consent to the approval of the bond, upon the filing with the court of the receipt of the trust company showing the deposit of the bonds.

The agreement with the trust company recited that plaintiff had deposited $135,000 in bonds and agreed that the trust company should keep and hold said bonds, collect the interest thereon as it matured, and add such interest to the principal of said bonds to be subject to the uses for which said bonds were applicable, and that if the United States Circuit Court of Appeals wholly reversed said judgment and awarded a decree in favor of the plaintiff herein, then the trust company should deliver all of said bonds, with accrued interest, to the plaintiff, but that if said judgment should be affirmed, either in whole or in part, so that the same should be immediately payable and the liability of the plaintiff herein and the sureties on the bonds became due and payable in all respects, then the trust company, upon the filing of the mandate of the court of appeals in the district court, and upon notice of the fact, should immediately sell or cause to be sold all or so many of said bonds as might be necessary and apply the proceeds thereof, or so much as might be necessary, toward the entire satisfaction of the liability of the plaintiff upon said supersedeas bond, paying the surplus after deducting its reasonable costs, expenses, and compensation to the plaintiff.

On March 15,1920, the decree of the lower court was modified by the circuit court of appeals by increasing the judgment to $126,461.17 and providing for the recovery by the plaintiff in that suit of this amount with interest on the costs theretofore taxed and on the amount of the modified decree from January 15, 1918, a total as of March 15, 1920, of $146,049.73, for which sum decree was entered. Plaintiff herein paid this judgment on March 22, 1920, in the sum of $146,220.11, and the bonds deposited with the trust company were returned to it.

The plaintiff accrued for the year 1918 on its books as a loss or expense the amount of this judgment with interest at the rate of 6% from the date of entry to December 31, 1918, a total of $115,971.31, and at the close of the year 1919, acting on the advice of the attorney who represented it in said suit, the plaintiff, in order to provide for any increase in the judgment, accrued on its books an additional sum of $29,028.67, making a total of $144,999.98.

The plaintiff made its return for 1918 on the accrued basis, and on April 26,1923, the Commissioner, of Internal Revenue refused to allow the sum thus accrued as a loss or expense, and assessed against plaintiff a tax of $33,023.86 in respect to its income for 1918. The commissioner also disallowed said accrual of $29,028.67 for the year 1919 and assessed an additional tax of $925.89 for that year. These two sums were paid by plaintiff under protest, and it is to recover them .that this suit is brought.

The additional findings, responsive to the order of the Supreme Court, show that there was an “ outlay ” of bonds amounting in 1918 to $135,000, which was more than the amount of the accrual for tha;t year by the plaintiff. The question arises whether under the circumstances of this case this outlay was a proper accrual under the statute. The plaintiff kept its books on an accrual and not a cash basis. It could have paid this judgment and taken an appeal, or it could have put a sum of money in escrow sufficient to pay it, or it could have done what it did — pledge in trust United States bonds in a sum sufficient to guarantee the payment of the judgment should the judgment of the higher court be adverse. In any event it would seem that the result would be the same. Had it paid this judgment and taken an appeal, it would undoubtedly have been entitled to accrue the amount paid. Had it put the money in escrow, the same would be true. See Becker Brothers v. United States, 7 Fed. (2d) 3, 8, a case similar to this, where it was held that the amount of the judgment was accruable. While these bonds were not cash, they were the equivalent of, and readily convertible into, cash. As far as plaintiff is concerned its financial position was as much affected by the deposit of the bonds as it would have been by the deposit of the money. It could have sold the bonds and realized the cash,, and in putting them in trust it destroyed their availability as an asset in its business as completely as if their value in cash had been withdrawn from its treasury.

We are of opinion that the accrual in the year 1918 for the deposit of the bonds was proper, and that plaintiff is entitled to recover the sum assessed against it for that year of $33,023.86.

As to the accrual of $29,028.67 for 1919 on the advice of its attorneys to meet a possible increase in the judgment on appeal, no facts had occurred in regard to this, within the knowledge of the plaintiff, to justify an accrual. It was merely a precautionary measure based upon no known fact, but upon a possibility, a speculation. We do not think that this sum was accruable, and as to this plaintiff is not entitled to recover.

Judgment will be entered for plaintiff in the sum of $38,023.86, with interest from May 7, 1923, to date of judgment. It is so ordered.

Moss, Judge; Booth, Judge; and Campbell, Chief Justice, concur.

GREEN, Judge, took no part in the decision of this case.  