
    (348 F. 2d 492)
    IOWA SOUTHERN UTILITIES COMPANY v. THE UNITED STATES
    [No. 398-60.
    Decided July 16, 1965.
    Defendant’s motion for rehearing denied October 15, 1965]
    
      
      Ofiarles T. Akre, attorney of record, for plaintiff. Robert Valentine of Valentine, Greenleaf <& Gri'ffm; Marion Hirschburg of Hirschburg, Reynolds, Gilchrist & Nutty/ and James F. Gordy of Miller & Chevalier, of counsel.
    
      Robert Livingston, with, whom was Assistant Attorney General Louis F. Oberdorfer for defendant. G. Moxley Featherston, Lyle M. Turner and Philip R. Miller of counsel.
    Before CoweN, Chief Judge, Lakamore, Durfee, Davis ■and ColliNS, Judges.
    
   Durfee, Judge,

delivered the opinion of the court:

This action for refund of Federal income taxes is brought on the ground that plaintiff is entitled to a bad debt deduction for the calendar year 1953 (or in the alternative for 1954) for the uncollected portion of a judgment obtained by plaintiff.

Plaintiff, a Delaware corporation, was an electrical and gas public utility company doing business in the State of Iowa. In 1952, in a derivative action brought by certain stockholders in behalf of the company, the Supreme Court of Iowa found that from 1923 to 1939 the principal officers of the company, George M. Bechtel, Harold B. Bechtel and J. Boss Lee, named as defendants in the state court action, fraudulently and in breach of their fiduciary duty as officers and directors, sold ten utility properties to plaintiff for an aggregate purchase price of $12,846,088.96. The court found that this price was greatly in excess of the actual cost of these properties, and that these defendant officers and directors had wrongfully appropriated the profits derived thereby. Judgment for plaintiff was entered against defendants Harold B. Bechtel, George M. Bechtel and J. Boss Lee on remand to the District Court of Appanoose County, Iowa on October 24, 1952, in the principal sum of $2,211,-649.68, exclusive of interest. Judgment was also entered separately against defendant Edward L. Slmtts, who was also at various times an officer and director of plaintiff corporation.

1 The details and background of this litigation are set forth, in our findings, and in tbe comprehensive opinion of the Supreme Court of Iowa in Des Moines Bank & Trust Co. et al. v. George M. Bechtel & Co. et al., 243 Iowa 1007, 51 N.W. 2d 114 (1952), herein referred to as the Des Momes Bank case. The parties here have stipulated that, for the purposes of this proceeding, the facts found by the Supreme Court of Iowa in the Des Moines Bank case are true.

The ten properties acquired by plaintiff from defendants have been retained by it throughout the period involved in the present suit, with minor exceptions as to certain properties sold or abandoned by plaintiff as specified in the findings herein.

Plaintiff’s Federal income tax returns were timely filed and tax liabilities were paid for the calendar year 1952 in the total sum of $951,163.81, for 1953 in the total sum of $710,-761.86, and for 1954 in the total sum of $797,094.71.

Later, plaintiff paid deficiencies in income tax and interest determined by the Commissioner of Internal Revenue for the years 1952,1953 and 1954 as follows:

Date Paid, 1952 Amount
May 12, 1954_$1,282. 83
1953
March 7, 1957_ 63,302. 60
April 1, 1957- 8. 83
1954
March 7, 1957_67,219.63
April 1, 1957- 9. 87
November 17, 1958- 5, 800.83

Thereafter, plaintiff filed timely claims for refund of tax payments for these three years. The claims were in large part disallowed, and the petition herein was filed on October 14,1960.

Plaintiff asserts that it is entitled to a bad debt deduction for the year 1953 in the amount of the uncollected balance of the Des Moines Bank judgment under § 23 (k) of the Internal Eevenue Code of 1939,26 U.S.C. § 23 (k) (1952 ed.) Plaintiff did not deduct such uncollected balance of the judgment in computing its taxable income in its 1953 income tax return, and claims that it thereby overpaid its income tax for 1953 by $135,323.10. Plaintiff further claims that the allowance of the bad debt deduction in 1953 would result in a net operating loss, which, under the provisions of § 122 of the Internal Eevenue Code of 1939, 26 U.S.C. § 122 (1952 ed.) becomes a carryback deduction resulting in an overpayment of income tax for the year 1952 in the amount of $155,602.12.

Defendant takes the position that although the uncollected balance of the Iowa Court judgment may constitute a deductible “loss,” it is not a deductible “debt” under the Code. The parties agree that the statutory provisions relating to losses and bad debts are mutually exclusive, and an amount deductible under one section or subsection is not deductible under the other.

Accordingly, the first determination required is whether or not the uncollected balance of the Iowa Court’s judgment is a deductible “debt” under the Code, and if so, when it became deductible. If it is not a deductible “debt,” plaintiff cannot now recover, nor does it assert any right to recover on the basis that it is a deductible “loss,” under the relevant tax statutes.

Section 23 (k) of the 1939 Internal Eevenue Code relating to deduction of “Bad Debts” from income as embodied in the 1954 Code, 26 U.S.C. §166 (1958 ed.), provided as follows:

(a) General rule.
(1) Wholly worthless debts. — There shall be allowed as a deduction any debt which becomes worthless within the taxable year.

There is no special or restricted definition of a “debt” under this section, although a distinction is made thereunder in subsection (d) as to “Nonbusiness debts” relating to a taxpayer other than a corporation. A further distinction is made between “Wholly worthless debts” and “Partially worthless debts” in the same section by subsections a- (1) and (2). Eather than supplying any limited definition of the word “debt” itself, the statute expressly includes as deductible 11 cuny- debt” which becomes worthless within a taxable-year.

The Eegulations of the Internal Eevenue' Commissioner pertaining to this statute provide: “* * * A. bona fide debt is a debt which arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed, or determinable sum of money. * * *” Eeg. § 1.166-1 (c),. 26 CFE 1.166-1 (c). This is nothing more than a restatement of the basic essentials of a “debt” as defined by the-courts generally. These provisions of the statute do not apply to a debt evidenced by a “security” as defined in Sec. 165(g) (2) (C) of the 1954 Code, 26 U.S.C. § 165(g) (2) (C) (1958 ed.) No security was involved in the judgment of the Iowa Court, or in the obligations upon which the judgment was entered. Whatever these obligations were, they were personal obligations of defendants in that case, — obligations that arose from their fraudulent sale of the ten-utility companies to plaintiff.

The trial commissioner of this court has ably summarized, the conclusions of the Iowa Supreme Court as follows:

The reproduction of this extensive opinion requires-93 pages of Volume 243 of the Iowa Eeports. From a monumental trial record, reviewed on appeal de novo, Justice Bliss of the Supreme Court of Iowa has sifted out the sordid details of the nearly incredible financial machinations whereby plaintiff’s corporate assets were-systematically and fraudulently plundered by one-George M. Bechtel and his subservient associates.

We shall not follow the long and tangled skein of these-“nearly incredible financial machinations” any further than-required to resolve the- particular issues in this case.

The Iowa Court’s judgment against the Bechtels et al. determined a “valid and enforceable obligation” of defendants • therein “to pay a fixed or determinable sum of money” to-plaintiff within the meaning of Treasury Eegulations ■ 1.166-1 (c), supra. However, the judgment per se does not determine whether there is a “debt” within the meaning of" the Internal Eevenue laws and regulations. As the Court-; of Appeals for the Fifth Circuit said in Cotnam v. Commissioner, 263 F. 2d 119, 122 (5th Cir. 1959), citing United States v. Safety Car Heating Co., 297 U.S. 88 (1936), “The nature of the transaction underlying the judgment, not the judgment itself, controls the tax effects. * * *”

Defendant contends that there was no intent of the Bechtels et al. to repay the money, and therefore there could be no debt to plaintiff. However, a voluntary debt arising out of the intent of the parties is not the only kind of debt recognizable for tax deduction purposes. A debt can -arise by operation of law without proof of specific intent to create a debtor-creditor relationship. In Birdsboro Steel Foundry & Machine Co. v. United States, 78 Ct. Cl. 100, 108, 3 F. Supp. 640, 644 (1933) this court said:

* * * The relationship of debtor and creditor arises where one person, by contract or lato, is liable or bound to pay another an amount of money, certain or uncertain, * * [Emphasis supplied.]

In that case, plaintiff was unable to collect for equipment furnished as a subcontractor to a Government supplier. Although the contract made no provision for payment to plaintiff therein under the particular circumstances, the court stated (on the same page) “* * * the law would imply a stipulation for payment on demand or within a reasonable time.”

Defendant contends that the judgment is based upon an act of embezzlement and that “the embezzlement of funds does not create a debt owing by the embezzler to the defrauded party and the loss suffered in connection therewith is a loss and not a bad debt,” citing Burnet v. Huff, 288 U.S. 156 (1933). In Piedmont Grocery v. United States, 66 Ct. Cl. 468, 473 (1928), cert. denied 280 U.S. 554 (1929), this court pointed out the distinction between a deductible loss sustained by an embezzlement and a loss sustained through a bad debt.

It would seem that as a general rule, embezzlement losses may not be deducted as worthless debts, even when reduced to judgment.

Although the judgment of the Iowa Supreme Court was for damages for fraud and deceit by the Bechtels et dl., the court did not find that they had embezzled the amount of $2,211,649.68 for which the judgment was entered. Embezzlement is a statutory offense, not an offense at common law, and civil liability usually lies in action for conversion, the gist of which is the wrongful deprivation or taking of property from the possession of another by fraud or other unlawful means. While a civil cause of action for embezzlement includes several of the factors of fraud included in the cause of action in the Des Moines Bank case, that cause of action was not for embezzlement of plaintiff’s funds. The Iowa Supreme Court there characterized the fraudulent conduct of the Bechtels et dl. as follows:

As appears from the testimony of II. B,. Bechtel, supra, he and his father, and Lee Bulmahn, Payne and Nye-master were all officers or directors of ISU (Iowa Southern Utilities), and as such, and as “negotiators,” as he expresses it, they were engaged in acquiring properties for ISU. * * * That company was entitled to any net profit made by Bechtels in each instance because of the fiduciary relationship between these “negotiators” and ISU. * * * [Emphasis supplied.] (51 N.W. 2d, 174, 199.)

This particular fiduciary relationship under the facts in the Des Moines Bank case distinguishes this case from a case for embezzlement, larceny or theft. The amount of the judgment of $2,211,649.68, as determined by the court, was part of the total purchase price paid by plaintiff for the ten utilities. Although this part of the total purchase price was fraudulently retained by the Bechtels et dl., it was not embezzled or stolen by the Bechtels from the possession of plaintiff. It was the breach of. the particular fiduciary duty and obligation of defendants which gave rise to plaintiff’s recovery for the profits fraudulently retained by the. Bechtels, and this breach was not an act of embezzlement.

■The Iowa Court did not find that the Bechtels et dl., as defendants, were obligated to pay the- profits which they fraudulently retained because they had embezzled or stolen tbe money. The court said that the company “* * * was entitled to any net profit made by the Bechtels in each instance because of the ■fiduciary relationship between these ‘negotiators’ and * * * the Iowa Southern Utilities Co.” [Emphasis supplied.] (51 N.W.2d at 199.)

This statement by the Iowa Court is in accord with the generally recognized principle of law that officers and directors of a corporation occupy a special fiduciary relationship to the corporation, similar to a trustee, and they are obligated thereby to repay to the corporation any profits derived by them in violation of their fiduciary duty to the corporation. Caffee v. Berkley, 141 Iowa 344, 118 N.W. 267 (1908); Clapp v. Wallace, 221 Iowa 672, 266 N.W. 493 (1936); 13 Am. Jur. 997, et seq., 3 Fletcher Private Corporations, ¶¶ 884^890 et seq.

As determined by the Iowa Supreme Court, the obligation of defendants Bechtel et al. to repay the profits they derived from the sale of the ten utilities to plaintiff is not affected by the fact that the corporation retains the property. The corporation had the option either to void the transaction and return the property or to retain the property and hold defendant officers and directors to account for the profits. 3 Fletcher, supra, ¶¶ 884, 890, 899, 950; 2 Scott Trusts, § 170.12 (1939 ed.) An action against an officer or director to recover such profits sounds in contract and is analogous to an action in assumpsit for money had and received. 3 Fletcher, supra, ¶¶1270, 1276, 1283, 1292, 1295; Cunningham v. Commissioner of Banks, 249 Mass. 401, 144 N.E. 447 (1924).

Accordingly, when plaintiff’s officers and directors breached their fiduciary duty by their fraudulent sale of the ten utilities to the corporation, the law imposed upon them a clear and unqualified obligation to repay their fraudulent profits and at the same time plaintiff derived a clear and unqualified right to recover such profits. General Mortgage & Loan Corp. v. Guarantee Mort. & Secur. Corp., 264 Mass. 253, 162 N.E. 319 (1928); Dixmoor Golf Club v. Evans, 325 Ill. 612, 156 N.E. 785 (1927); Cream City Mirror Plate Co. v. Donahue, 142 Wis. 651, 126 N.W. 44 (1910); Marcus v. Otis, 168 F. 2d 649 (2d Cir. 1948).

. In-the opinion on .the case last cited, above, Jucige. Beamed ‘Hand stated at p..654, “Plainly, .the defendants violated their .duty- as .directors, when they, converted the. company’s, funds; tO'buy their, shares, and, like,any other fiduciaries, they made themselves liable for all profits. . That is, so, fundamental a doctrine as to fiduciaries of all sorts, that it is somewhat surprising, to find-it questioned.” * * * [Emphasis supplied.]

• This fiduciary obligation of the Bechtels et al., as corporate -officers and directors to. repay plaintiff, for their,fraudulent profits was, inchoate and undetermined until, .this profit in the principal-sum of $2,211,649.68 was, determined by .the Iowa Supreme Court in 1952.

•To support its point that the judgment does not entitle plaintiff to a deduction for the uncollectible part, thereof as a bad debt, defendant places much reliance upon the case of United States v. Safety Car Heating Co., 297 U.S. 88 (1838). Plaintiff in that case recovered judgment for the amount of profits received by an infringer of its patent, which was settled for a different and smaller amount, and plaintiff claimed a deduction for a loss resulting from this difference. Two points of distinction between the cited case and the present case illustrate the basic fallacy of defendant’s argument. One, the claim for deduction in Safety Gar Heating Go., supra, was for a loss and not for a bad debt. Two,-since the judgment was for loss of income and not loss of capital, the court said at p. 98, “* * * The case is not to-be confused-with one where the basis of the suit is an injury to capital,-with the result that the recovery is never income,, no matter when collected. * * *” The court pointed out that, the loss claimed as a result of the settlement did not involve-a loss of income, still less a loss of capital. The deduction claimed in the present case is for a bad debt which became-deductible as worthless when the final loss or damage from the bad debt was ascertained in 1953, as pointed out hereafter. Within - the meaning of Treasury Regulations; 1.166-1 (c), supra, this debt arose “* * * from a debtor-creditor relationship based upon a. valid and enforceable •obligation to pay a fixed or determinable sum of money.. * * .This debtor-creditor relationship arose, not by contract-, but operation of law arising from the fiduciary obligation of the Bechtels et dl., as officers and directors of the company, to pay to the company the fraudulent profits they had" retained. Birdsboro Steel Foundry v. United States, supra.

Defendant submits that the unsatisfied portion of the 1952 Iowa Court judgment, amounting to $1,723,894.65, exclusive of interest, cannot be considered as of tax significance until the ten utility properties, purchased by plaintiff from the Bechtels through the fraud which is the basis for the judgment, have been sold and until that time, no loss to plaintiff can be determined. The difficulty we encounter with defendant’s position is that it persists throughout in the assumption that the unsatisfied portion of the judgment is not deductible as a bad debt under § 166 of the Internal Bevenue Code, supra, and therefore it is a “loss” deductible only under § 165 of the Internal Bevenue Code for 1954, 26 U.S.C. § 165 (1958 ed.) which provides: “There shall be allowed as a deduction any loss sustained * * *” whereas § 166 provides “There shall be allowed as a deduction any debt which becomes worthless within the taxable year.” [Emphasis supplied]

If the unsatisfied balance of the Iowa Supreme Court judgment was deductible only as a property “loss” under § 165 supra, such “loss” might not be “sustained” until the ten utility properties were sold. However, we have determined that the uncollectible balance of that judgment was a “bad debt” and under § 166 it becomes deductible when ifc ■“becomes worthless.”

In order to ascertain when a debt “becomes worthless,” there must be some definitive event, such as a closed or completed transaction, which, establishes the point in time when the debt became worthless. Shiman v. Commissioner of Internal Revenue, 60 F. 2d 65 (2d Cir. 1932). The issue in. that case involved determination of whether a guarantor of a broker’s account, when the principal became insolvent and the guarantor was required to pay, could then deduct the payment on the guarantee as a bad debt. The court said at p. 67:

* * * Some courts have indeed gone so far as to say that a mere unexpressed determination to abandon the debt is enough. Jones v. Commissioner, 38 F. (2d) 550 (C.C.Á. 7); Stephenson v. Commissioner, 43 F. (2d) 348 (C.C.A. 3). Possibly that would not suffice (article 151, Regulations 65), but here it seems to us that Shi-man’s examination of Oppenheim with the view of learning whether he could collect, his failure to discover’ any assets and his abandonment in fact of any effort,, must be taken as determining the loss “by a closed and' completed transaction,” in the language of article 151.

In Helvering v. Smithy 132 F. 2d 965 (4th Cir. 1942), the-court discussed whether payments of assessments by plaintiff on bank stock were deductible as bad debts or losses, at p. 967:

While it may be said, strictly speaking, that a deduction for a bad debt is allowable under the statute when its worthlessness is “ascertained,” while a deduction for a loss is allowable only when it is actually “sustained,” a loss of either sort must be shown or proved by some “identifiable event,” or by attending circumstances which support an ascertainment of worthlessness. * * *

In the above cited case, the court said at p. 968:

* * * courts have held that neither the whole nor a part of a debt may be charged off as worthless until the taxpayer is able to demonstrate with a reasonable degree of certainty the amount that is uncollectible. Johnson, Drake & Piper, Inc., v. Helvering, 8 Cir., 69 F. 2d 151; Bingham v. Commissioner, 2 Cir., 105 F. 2d 971; Hadley Falls Trust Co. v. United States, 1 Cir. 110 F. 2d 887. Likewise, the courts have uniformly held that losses by individuals may not be deducted unless they grow out of closed and completed transactions in which all reasonable possibility of gain has been, exhausted. Mahler v. Commissioner, 2 Cir., 119 F. 2d 869; Deeds v. Commissioner, 6 Cir., 47 F. 2d 695; Burdan v. Commissioner, 3 Cir., 106 F. 2d 207; Jones v. Commissioner, 9 Cir., 103 F. 2d 681.

Obviously, the debt did not become, worthless prior to the entry of judgment in 1952. Up to that time'the Bechtel debtors contested the existence of any obligation to repay to plaintiff their fraudulent profits.

In 1953, plaintiff and its attorneys in the derivative litigation, decided not to proceed any further with two companion cases brought by it against W. L. .Langley & Co. This company had been involved in the fraudulent Bechtel- transactions. The first case in Illinois was dismissed for lack of jurisdiction; the second case in New York was dismissed for want of prosecution because of the large cost of litigation and risks involved to plaintiff.

-On November 21,1952, Harold R. Bechtel filed an application in the District Court of Appanoose County, Iowa, offering to settle the judgment against him' for $100,000. The application was resisted on the grounds that it was inadequate and that a release of Harold R. Bechtel would also release the estates of J. Ross Lee and George M. Bechtel. At a hearing held on December 15, 1952, the trial-court postponed its decision and suggested that the parties negotiate further taking into account the collectibility of the judgment.

Thereafter, at a meeting of plaintiff’s board of directors held on December 22,1952, the attorneys for plaintiffs in the derivative action, presented the evidence which their investigations had disclosed as to the assets of Harold R. Bechtel and the estate of George M. Bechtel, and expressed their opinion as to the extent to which they believed the judgment could be collected. They recommended the acceptance of a revised offer of $200,000 which had been received from Harold R. Bechtel and the estate of George M. Bechtel, provided that the acceptance did not result in the release of the estate of J. Ross Lee or any other joint tortfeasor. At that meeting, plaintiff’s board of directors approved the offer, and authorized the attorneys to enter into a stipulation accepting it, but without releasing the estate of J. Ross Lee. This was a bona fide determination by plaintiff that no further sums were collectible from Harold B. Bechtel or the estate of ■George M. Bechtel.

On December 27,1952, the court entered an order approving the offer received from Harold B. Bechtel and the estate of George M. Bechtel in the amount of $200,000, subject, however, to plaintiff’s seeking to recover all possible assets •from the estate of J. Boss Lee.

After the Bechtel stipulation was entered into, the attorneys for plaintiffs in the derivative action continued their investigation to determine the extent to which the judgment could be collected from the estate of J. Boss Lee. These efforts resulted on April 16, 1953, in a stipulation with the •estate relating to the settlement of the judgment against it, which stipulation was approved by the District Court on April 23,1953. Upon the recommendation of the company’s general counsel, plaintiff’s board of directors at its annual meeting held April 26,1953, unanimously approved and confirmed his prior action in entering into the stipulation on behalf of plaintiff. This was a bona fide determination by plaintiff that no further sums were collectible from the estate of J. Boss Lee.

Pursuant to the stipulations, as approved by the Iowa District Court, the following amounts were paid into the District Court for Appanoose County, Iowa on the judgment rendered against Harold B. Bechtel and the estates of George M. Bechtel and J. Boss Lee:

Date Amount Payor
December 29, 1952__ $127, 000. 00 Harold E. Becbtel and Estate of George M. Bechtel.
•January 22, 1953_ 65, 000. 00 Harold E. Bechtel and Estate of George M. Bechtel.
April 28, 1953_ 200, 000. 00 Estate of J. Eoss Lee
December 30, 1953 42,710. 93 Estate of J. Eoss Lee
Gctober 12, 1954_ 50,820.68 Estate of J. Eoss Lee
October 15, 1954_ 8, 000. 00 Harold E. Bechtel and Estate of George M. Bechtel.

The Clerk of the Court deducted $5,876.58 from the $200,-000 paid by Harold B. Bechtel and the estate of George M. Bechtel for the payment of court costs. The following amounts were received by plaintiff from tbe court on the dates shown:

Bate Amount Source
January 23, 1953_$186,123.42 Harold R. Bechtel and Estate of George M. Bechtel.
April 30, 1953_ 200,000.00 Estate of J. Boss Lee
January 8, 1954_ 42,710. 93 Estate of J. Ross Lee
October 18, 1954_ 50,820.63 Estate of J. Ross Lee
October 18, 1954_ 8, 000. 00 Harold R. Bechtel and Estate of
Total received- $487, 655.03 George M. Bechtel.

The balance of the judgment in the amount of $1,728,894.65, exclusive of interest, has never been collected. No part of the $2,211,649.68 judgment, or interest thereon, rendered in favor of plaintiff and against Harold R. Bechtel and the estates of George M. Bechtel and J. Ross Lee, was reported as income or otherwise included in the taxable income of plaintiff. The last stipulation for settlement of the judgment was between plaintiff and the J. Ross Lee Estate, and it was approved by the Iowa District Court on April 26,. 1953.

The trial commissioner has found that, “until this decision was made in 1953, and until the stipulation was entered into with the Lee Estate in April, 1953, no one could say with reasonable certainty how much of the Des Moines Bank judgment would remain uncollectible.” Although two payments totaling $58,820.08 were not actually received by plaintiff' until 1954, these later payments did not add to the amount of' the total payment of $493,531.61, required under the 1953 stipulations and settlement.

In Gorman Lumber Sales Co., 12 T.C. 1184 (1949) the petitioner filed a valid claim for debt of $32,920.07 against an estate. When it became evident in 1942 that the estate had insufficient assets to pay claims having priority over the petitioner’s claim, he accepted $1,000 in full settlement of the debt and deducted the balance of his claim as a bad debt for the taxable year 1942. The Tax Court held that the debt became worthless in 1942 and constituted an allowable deduction for that year.

We conclude that the debt became worthless in 1953 as to the unpaid balance of the Iowa Court’s judgment in the amount of $1,723,894.65 (exclusive of interest). No part of tbis balance of the judgment lias ever been collected. The worthlessness of the debt was ascertained in. 1953 by the identifiable events and circumstances attendant upon the final settlement of the Iowa Court’s judgment and the dismissal of the Langley litigation in the Illinois and New York courts, as already reviewed herein and stated in the findings of fact. Accordingly, it became deductible as a bad debt in 1953 under the express provisions of § 23 (k) of the 1939 Code.

At the time of the purchase of the ten utility companies by plaintiff from 1923 to 1926, plaintiff acquired two separate and distinct assets ; one, the utility properties, and second, the obligation in debt arising by operation of law from the fiduciary obligation of the officers and directors to repay the wrongful profits derived by them on the fraudulent transactions. The utilities and the debt were separate property rights and each had a separate tax basis. For the purpose of determining depreciation, gain or loss, or other tax consequences, an allocation of the cost of the property is necessary. United States v. Rogers, 120 F. 2d 244 (9th Cir. 1941).

There was an allocation in fact made on plaintiff’s records as to the tax basis of the ten utility properties by the Commissioner of Internal Eevenue in 1933. At that time he reduced the depreciable cost basis of these ten companies by transferring $2,585,616.13 to the non-depreciable intangibles account, pursuant to his determination of the fair value of these properties as depreciable assets. This was approximately ten years before the Des Moines Bank case was started in the Iowa State Court.

Plaintiff and defendant have stipulated, (1) that the amount of the original purchase price of the utility properties involved in the Des Moines Bcmk case which remained in plaintiff’s intangibles account in the years in issue in this suit was $2,812,079.86, and (2) that the amount of plaintiff’s intangibles account has never been less than that amount at any time after the transfers in 1933 pursuant to the Commissioner’s required reduction in its depreciable basis account. Thus, the obligation of plaintiff’s officers and directors subsequently determined to exist by the judgment of the Iowa Supreme Court in the Des Moines Bank case to repay the wrongful profits, $2,211,649.68, was substantially the same amount which had previously been the subject of transfer to plaintiff’s intangibles account.

The parties have also stipulated that no income tax benefits have ever been allowed to plaintiff with respect to these 1933 reductions in the depreciable basis of these ten utility companies.

We conclude that the debt of defendants in the Des Moines Bank case to plaintiff arose at the time of their fraudulent breach of their fiduciary obligation, and that this debt had a cost basis to plaintiff in the amoirnt of the judgment subsequently determined by the Iowa Supreme Court. This amount was subsequently reduced by settlement to an uncollected balance of $1,723,894.65, exclusive of interest, and this balance became worthless as a bad debt within the year 1953. Accordingly, we conclude that plaintiff was entitled to deduct such uncollected balance as a bad debt deduction in its 1953 income tax return. Plaintiff is entitled to recover and j udgment will be entered to that effect.

The parties have agreed that the computation of the tax and interest thereon attributable to the bad debt deduction and the amount of offsets, if any, shall be reserved for further proceedings, pursuant to Eule 47(c). Accordingly, the case is remanded to the trial commissioner for such further proceedings.

FINDINGS OF FACT

The court, having considered the evidence, the report of Trial Commissioner Lloyd Fletcher, and the briefs and argument of counsel, makes findings of fact as follows:

1. Plaintiff has brought this action for refund of Federal income taxes on the ground that, in computing its taxable income, it was entitled to a bad debt deduction for the calendar year 1953 (or in the alternative for the calendar year 1954) for the uncollected portion of a judgment obtained by plaintiff under the facts and circumstances related below. A second issue, described in the petition as the “Grinnell Abandonment Loss, 1954”, has been abandoned by plaintiff so that the only remaining issue in the case is with respect to plaintiff’s entitlement to the aforesaid bad debt deduction.

The background of this controversy may be foimd in the comprehensive opinion of the Supreme Court of Iowa in Des Moines Bank & Trust Co., et al. v. George M. Bechtel & Co., et al., 243 Iowa 1007, 51 N.W. 2d 174 (1952), hereinafter referred to as the Des Moines Bank case. The parties have filed a partial stipulation of facts, as a part of which it is agreed that, for purposes of this proceeding, the facts found by the Supreme Court of Iowa in the Des Moines Bank case are true.

2. The plaintiff is a public utility company duly authorized to transact business in the State of Iowa as a foreign corporation (Delaware), with its principal place of business at Centerville, Iowa. Its principal business consists of the generation, transmission, and sale of electrical energy for light,, heat, and power purposes, and of the sale of natural gas for heat and power purposes. Its principal service area is and has been located in the southern part of the State of Iowa. At times during its existence it has also owned and operated gas plants, heating plants, and railroads, including street railways. It kept its books and filed its income tax returns for the taxable years involved herein on the accrual basis.

3. In 1922 George M. Bechtel acquired all the outstanding common stock and a large block of the preferred stock of plaintiff’s predecessor which was a Maine corporation. Being dissatisfied with that corporation’s articles of incorporation, in early 1923 Bechtel effected a corporate reorganization. He caused plaintiff to be formed as a corporation under the laws of the State of Delaware, effected a transfer of the Maine corporation’s properties and assets (subject to liabilities) to plaintiff, and attended to the issuance to himself of plaintiff’s common stock together with a substantial block of its preferred stock.

Plaintiff’s articles of incorporation and by-laws, inter alia, effectively precluded its stockholders from inspecting the corporate books and records simply by giving the directors the discretion to determine under what circumstances such inspection would be permitted. They also dispensed with the usual meeting requirements by authorizing the directors to act by resolution signed by all directors. The articles further provided that, in the absence of fraud, no contract or transaction to which plaintiff was a party would be affected by the fact that any of its officers or directors were personally interested in the contract or transaction.

As hereinafter described, Bechtel thereupon embarked on a series of fraudulent schemes which were conceived, to use the words of the Supreme Court of Iowa, “in the organization of [plaintiff] and the inclusion in the Certificate of Incorporation of provisions to aid in the carrying out of the fraud, and by resolutions thereafter passed and a policy adopted of preventing stockholders from an examination of the books and records, so as to effectively conceal the fraud.”

4. Using the trade name of George M. Bechtel & Co., Bechtel entered the business of buying and selling bond issues -of various Iowa municipalities in 1891. Originally, he handled only municipal bonds, but later began dealing in ■corporate securities generally. In 1926, Bechtel formed a partnership with his son, Harold, and the partnership car-xied on the same business under the same name of George M. Bechtel & Co.

Not only was Bechtel the owner of all plaintiff’s outstanding common stock and a substantial portion of its preferred .•stock from the date of its incorporation. In addition, from 1923 until 1933 he was a member of plaintiff’s board of directors and its chief executive officer. From 1933 until he resigned in 1943, he was the chairman of its 'board. His son, Harold, was also a director and served as secretary; one of his employees in George M. Bechtel & Co., J. Boss Lee, was vice-president of plaintiff as well as a director. Also, an -original employee of plaintiff, Edward L. Shutts, was at various times assistant secretary, auditor, treasurer, president, and director of plaintiff. At all times during the years 1923 through 1943, Bechtel completely dominated and controlled plaintiff’s said directors and principal executive (officers. From the beginning, it was Bechtel’s intention and purpose to operate plaintiff primarily and chiefly for his and his associates’ benefit.

5. In its Des Moines Banlc decision entered on January 8, 1952, the Supreme Court of Iowa found that from 1923 until 1929 George M. Bechtel and his son, in conspiracy with the other individual defendants, had fraudulently and in breach of their fiduciary duty to the plaintiff sold ten utility properties (described hereafter) to the plaintiff for an aggregate purchase price of $12,846,088.96, which purchase price was greatly in excess of the cost of such properties to the Bechtels, and that they had wrongfully appropriated the wrongful profits derived thereby in the amount of $2,211,549.68. Specifically, the Supreme Court found that:

a. In March 1923, Bechtel sold the assets of the Crestón Mutual Electric Light, Heat and Power Company of Cres-tón, Iowa, to the plaintiff for $802,500. The Crestón property had been acquired by Bechtel about one year earlier for $300,000, and its fair market value at the time of sale to the plaintiff was $376,665. The wrongful profit found to have been fraudulently derived by Bechtel on this transaction was $425,835 (subsequently reduced to $412, 835).

b. In July 1925, Bechtel sold the assets of the Lamoni Electric Company to the plantiff for $250,000. As those assets had previously been acquired by Bechtel for $150,000, the wrongful profit found to have been fraudulently derived by Bechtel on this transaction was $100,000.

c. In July 1925, Bechtel sold certain utility properties, located in and about Ottumwa, Iowa, to the plaintiff for $3,250,000, which he had acquired in the preceding month, for $3,024,949. The wrongful profit found to have been fraudulently derived by Bechtel on the sale of the Ottumwa, properties was $225,051.

d. In September 1924, Bechtel sold the properties of the-Burlington Railway & Light Co. to the plaintiff for $2,197,-500 (plus assumption of bonded indebtedness). Those properties had been acquired by Bechtel about one month earlier-for $1,833,666.21, and the wrongful profit found to have been fraudulently derived by Bechtel on this transaction was-, $363,833.79.

e. In January 1929, Bechtel sold the Albia Light & Railway Company property to the plaintiff. Bechtel had owned this property for several years, knew it had little value and little prospect of increasing in value, and unloaded it on the plaintiff for his personal advantage. The plaintiff subsequently sold the Albia property and the minimum loss which it was found to have suffered through Bechtel’s fraudulent breach of his fiduciary duty was $395,000.

•f. In July 1926, Bechtel sold the assets of the Burlington Gas Light Co. to the plaintiff for $1,250,000. The wrongful profit found to have been fraudulently derived by Bechtel on this transaction was $118,868.14,

g. In August 1929, Bechtel sold the electrical distribution system of the town of Murray, Iowa, to the plaintiff for $22,000. The wrongful profit found to have been fraudulently derived by Bechtel on this transaction was $2,000.

h. In January 1928, Bechtel sold the properties of the Peoples Light and Fuel Co. of Grinnell, Iowa, to the plaintiff for $201,388.96. The wrongful profit found to have been fraudulently derived by Bechtel on this transaction was $121,268.85.

i. In January 1926, Bechtel sold the plant and distribution systems of the Iowa Light, Heat and Power Co. of Grinnell, Iowa, to the plaintiff for $750,000. The wrongful profit found to have been fraudulently derived by Bechtel on tin's transaction was $37,500.

j. In May 1925, Bechtel sold, the properties of the Iowa Gas and Electric Co. of Washington, Iowa, to the plaintiff for $1,071,800 (plus assumption of bonded indebtedness). From the valuations of disinterested appraisers, the court found that, through this transaction, Bechtel had forced upon plaintiff a property with a fair value far less than the amount plaintiff was required by him to pay for it. The loss suffered by plaintiff from this breach by Bechtel of his fiduciary relationship was $435,292.90.

6. George M. Bechtel carried out plaintiff’s financing needs by marketing its securities in various ways and .by using the proceeds to purchase properties-for plaintiff. Except for some small issues, substantially all of plaintiff’s preferred stock was originally issued to the Bechtel partnership or its nominees. The practice was for the partnership to take a preferred stock issue at par and then to resell it to customers, other stockbrokers, and large investors. In these brokerage activities, the Bechtel partnership became closely and profitably associated with a New York partnership, W. C. Langley & Co., which handled most of plaintiff’s securities outside Iowa. Through agreements with the Bech-tels for priorities, price preferences, kickbacks, and split commissions, Langley & Co. soon came to dominate the purchases of plaintiff’s stock from the Bechtel partnership. The proceeds received by the Bechtels from these sales were used by them in the purchase of properties which, as noted in the preceding finding, were then sold to plaintiff at inflated prices for which George M. Bechtel & Co. was credited on plaintiff’s books. The proceeds of any such sales not so used were credited to plaintiff in its account on the Bechtel company books and redeposited by Bechtel Co. to its credit in its depository banks. These activities of George M. Bechtel & Co. were characterized by the Supreme Court of Iowa in its Des Moines Bank decision as follows:

* * * It actively perpetrated the fraud by dominating and corrupting the other directors to violate their duty and fiduciary relationship- to" the corporation. By its domination and concert of action it caused the corporation to issue to Bechtel & Co. its securities greatly in excess of the acquisition cost of the properties delivered to [plaintiff]. It concealed these facts from the corporation to accomplish the fraudulent appropriation of its property. It was under a legal duty, as were its individuat members and associates as directors and officers of [plaintiff] to fully and fairly disclose all facts concerning the transactions. There was fraud by silence and concealment and by active misconduct. * * *

7. After some years of apparent success, George M. Bechtel & Co. began to meet with reverses. In January 1938, the Iowa Securities Department discovered that the Bechtels had neglected* to renew their license to sell securities. Further investigations disclosed irregularities in the Bechtels’ handling of the funds of various municipalities, and as a result the Bechtels were denied a license and receivership proceedings were instituted against them. In September 1933, involuntary bankruptcy proceedings were instituted against the Bechtels, which were carried to conclusion and discharge in 1934. This discharge, however, did-not relieve the Bech-tels from liability for their fraudulent activities involved in this case.

Also, beginning in 1932 and 1933, defaults occurred in the payment of dividends on plaintiff’s cumulative preferred stock. The preferred stock had no voting power, except that if default occurred in the payment of dividends for four consecutive quarters, the preferred stockholders were entitled to elect a majority of the directors until'all accumulated and current dividends were paid. At that time, this arrearage provision had no particular significance, however, because George M. Bechtel owned the major portion of the plaintiff’s preferred stock.

A recapitalization and reclassification of plaintiff’s stock was carried out in 1938. It was contested but upheld in two decisions by the Supreme Court of Iowa, except with respect to the new common stock which, under the plan, had been issued to the Bechtels. That stock was declared to be void because issued without consideration, the old common stock owned by the Bechtels having been found to be worthless.

Thus, the Bechtel frauds began to come slowly but surely to light.

8. In 1943, a derivative action was instituted in the District Court of Appanoose County, Iowa, by certain of plaintiff’s stockholders against George M. Bechtel, Harold B. Bechtel, J. Boss Lee, and other officers and directors of the plaintiff. In that action, it was alleged that the Bechtels in conspiracy with the other individual defendants had sold, fraudulently and in breach of their fiduciary duty to the plaintiff, ten utility properties to the plaintiff at prices greatly in excess of the cost of such properties to the Bechtels, and had wrongfully appropriated the illegal profits thereby derived. Additional claims for relief were asserted in'the derivative action, including the recovery of secret salary payments to Edward L. Slintts, tihe plaintiff’s president, for the appointment of a receiver, and for an accounting. Although W. C. Langley & Co., together with an individual partner therein who was also a director of plaintiff, were named as defendants, service of process in Iowa was not obtained on them, and no appearances in their behalf were noted.

9. After protracted litigation, which was sharply contested by the Bechtels but not by the plaintiff, the Iowa District Court rendered its judgment in the derivative action on May 25, 1948. The court found that the frauds had been committed, as alleged, but held that the claims against the several defendants arising out of their fraudulent actions were barred by laches and the statute of limitations.

10. Thereupon, the stockholders who had instituted the derivative action in plaintiff’s behalf appealed to the Supreme Court of Iowa. In their appellate arguments, the several defendants confined themselves substantially to upholding the trial court’s decision that the suit was barred by laches and limitations. They disregarded as of no practical importance the monetary variances between the parties as to the different claims for recovery because of their purported financial inability to pay the amounts claimed in any event.

The Supreme Court of Iowa reversed the District Court and held that the claims against the Bechtels and their associates were not barred. The court felt that the knowledge by the Bechtels and their associates of their own fraud against the corporation for which they acted as fiduciaries could not in any way be imputed to the corporation, and there was nothing to show that the plaintiff-stockholders had any knowledge or notice of the fraud. The court further held that a claim against Edward L. Shutts for recovery of secret and unauthorized salaries received by him during the years 1925 to 1944 was not barred. Recovery was denied on certain other claims not involved here, and the case was remanded to the District Court for entry of judgment in accordance with the Supreme Court’s opinion.

11. In conformity with the order of the Supreme Court of Iowa, on October 24, 1952, the District Court of Appa-noose County entered judgments in favor of plaintiff, as follows:

a. Against Defendants George M. Bechtel, Harold R. Bechtel and J. Ross Lee:
Total Principal Judgment- $2,211, 649. 68 Interest to Aug. 15,1952__ 3,163,142. 99
5% Interest from Aug. 15, 1952 to Oct. 16, 1952_ 18, 783. 52
Total Principal and Interest_ $5,393, 576.19
b. Against Defendant Edward L. Shutts:
Total Principal Judgment- $46, 728.29 Interest to Aug. 15,1952— 37, 643. 53
5% Interest from Aug. 15, 1952, to Oct. 16, 1952_ 396. 80
Total Principal and Interest_ $84,768. 62

George M. Bechtel and J. Ross Lee had both died during the pendency of the Iowa litigation, and that part of the judgment set forth in subparagraph (a) above was entered against Harold R. Bechtel individually and also against the executors of the two decedents’ estates. Claims for the amount of the judgment were filed against the estates of George M. Bechtel and J. Ross Lee in the probate proceedings in the District Court of Scott County, Iowa. The principal amount of the judgment under subparagraph (a) above is the arithmetical total of the amounts for which the Supreme Court found the Bechtels and Lee liable to plaintiff as detailed in finding 5, supra,. For convenience, they may be summarized as follows:

(1) Crestón Mutual Electric Light, Heat & Power Co. properties_ $412, 835.00
(2) Lamoni Electric Co. properties- 100, 000.00
(3) Ottumwa Traction Co. properties- 225, 051. 00
(4) Burlington Railway & Light Co. properties- 363, 833. 79
(5) Albia Light Ry. Co. securities- 395, 000. 00
(6) Burlington Gas Light Co. properties- 118,868.14
(7) Town of Murray electric distribution system— 2, 000. 00
(8) Peoples Light & Fuel Co. of Grinnell properties— 121,268.85
(9) Iowa Light, Heat, & Power Co. of Grinnell properties_ $37, 500. 00
(10) Iowa Gas & Electric Co. stock- 435, 292.90
Total_ 2,211,649.68

12. On November 21, 1952, Harold B. Bechtel filed an application in the District Court of Appanoose County, Iowa, offering to settle the judgment against him for $100,000. The application was resisted on the grounds that it was inadequate and that a release of Harold B. Bechtel would also release the estates of J. Boss Lee and George M. Bechtel. At a hearing held on December 15, 1952, the trial court postponed its decision and suggested that the parties negotiate further taking into account the collectibility of the judgment.

Thereafter, at a meeting of the plaintiff’s board of directors held on December 22, 1952, the attorneys for the plaintiffs in the derivative action presented the evidence which their investigations had disclosed as to the assets of Harold B. Bechtel and the estate of George M. Bechtel, and expressed their opinion as to the extent to which they believed the judgment could be collected. They recommended the acceptance of a revised offer of $200,000 which had been received from Harold E. Bechtel and the estate of George M. Bechtel, provided that the acceptance did not result in the release of the estate of J. Boss Lee or any other joint tort-feasor. At that meeting, the plaintiff’s board of directors approved the offer, and authorized the attorneys to enter into a stipulation accepting it, but without releasing the estate of J. Ross Lee. This was a bona fide determination by plaintiff that no further sums could be collected from Harold E. Bechtel and the Estate of George M. Bechtel.

On December 27, 1952, the court entered an order approving the offer received from Harold R. Bechtel and the estate of George M. Bechtel in the amount of $200,000, subject, however, to the plaintiff’s seeking to recover all possible assets from the estate of J. Ross Lee.

13. After the Bechtel stipulation was entered into, the attorneys for plaintiffs in the derivative action continued their investigation to determine the extent to which the judgment could be collected from the estate of J. Ross Lee. These efforts resulted on April 16, 1953, in a stipulation with the estate relating to the settlement of the judgment against it, which stipulation was approved by the District Court on April 23,1953. Upon the recommendation of the company’s general counsel, plaintiff’s board of directors at its annual meeting held April 26,1953, unanimously approved and confirmed his prior action in entering into the stipulation on behalf of plaintiff. This was a bona fide determination by plaintiff that no further sums could be collected from the Estate of J. Ross Lee.

14. Pursuant to the stipulations, the following amounts were paid into the District Court for Appanoose County, Iowa, on the judgment rendered against Harold R. Bechtel and the estates of George M. Bechtel and J. Ross Lee:

The Clerk of the Court deducted $5,876.58 from the $200,000 paid by Harold B. Bechtel and the estate of George M. Bechtel for the payment of court costs. The following amounts were received 'by the plaintiff from the court on the dates shown:

The balance of the judgment in the amount of $1,723,894.65, exclusive of interest, has never been collected. No part of the $2,211,649.68 judgment, or interest thereon, rendered in favor of the plaintiff and against Harold B. Bechtel, and the estates of George M. Bechtel and J. Boss Lee, was reported as income or otherwise included in the taxable income of plaintiff.

15. As to the judgment entered against Edward L. Shutts in the sum of $84,768.62 (principal and interest), plaintiff received thereon in 1953 and 1954 a total of $67,219.30, after deduction by the Clerk of the District Court of $500 for payment of court costs. Plaintiff has paid Federal income taxes on the amounts so received by it under the judgment rendered against Shutts, representing salary previously deducted by plaintiff and interest on the judgment against him.

16. Separate suits had been instituted on behalf of plaintiff against W. C. Langley & Co. in both Illinois and New York. Both suits were dismissed in the year 1952, or possibly prior thereto. The Illinois suit was dismissed for lack of jurisdiction, and the New York suit was dismissed for want of prosecution. Due to their belief that a judgment against the Langley Co. might result in full collection of the Des Mornes Bank judgment, the attorneys for the plaintiffs in tlie Iowa derivative action as late as 1953 were giving consideration to the advisability of trying to reinstate the dismissed New York action. The ultimate decision was to abandon the New York litigation because of the large expense incident to carrying it forward. Considering the risks involved, and the unavailability of the corporation’s funds to finance such litigation, the attorneys decided not to proceed. As one of them testified:

If you win, you are reimbursed. If you don’t, all you have is the privilege to weep.

Until this decision was made in 1953, and until the stipulation was entered into with the Lee estate in April 1953, no one could say with reasonable certainty how much of the Des Moines Bank judgment would remain uncollectible.

17. It has been stipulated that the following schedule reflects the ten properties involved in the Des Moines Bank case, the dates of acquisition, manner in which carried on the plaintiff’s tax records, and certain other information:

The adjustments shown in Column 7 of the above schedule, totaling $2,585,616.18, arose out of a determination by the Commissioner of Internal Revenue in 1932 and 1933 that said amounts were not depreciable and must be transferred from plaintiff’s depreciable basis account to its intangibles account. In 1933, plaintiff did transfer $2,585,616.13 of the original purchase price of the above described properties from its depreciable basis- account to its nondepreciable intangibles account. From that time through the years involved herein, no income tax benefits have been allowed to the plaintiff with respect to the reductions in the depreciable bases of the properties reflected in the above schedule.

18. Column 8 of the above schedule, totaling $2,872,079.86, reflects that portion of the original purchase price of the properties remaining in the plaintiff’s intangibles account during the years 1952 to 1954. From the time, in 1933 when the plaintiff made the entries of transfer referred to in the preceding finding, and through the years in suit, the plaintiff’s intangibles account has never been less than the total of the amounts shown in Column 8, i.e., $2,872,079.86. Therefore, the amount of $2,585,616.13 transferred to the intangibles account in 1933 was still in that account in 1953 and 1954. No adjustment was or has been made by the plaintiff to the basis of the ten properties involved as a result of the above-described judgment having been rendered in its favor.

19. In considering the validity of dividends which the Bechtels had caused plaintiff to pay them for the years 1923 through 1931, the Supreme Court of Iowa in its Bes Homes Bank decision discussed certain irregularities in plaintiff’s general bookkeeping system. With regard to this matter the court stated:

Another factor of great importance in the matter of declaring common stock dividends was the violation by its officers and directors of sound administration and accounting principles in their failure to make proper provision not only for the current depreciation of plant and equipment, but their failure to reflect on their books depreciation already accrued on properties acquired by the Company. * * * Before buying these properties the company had procured their appraisal by competent and independent appraisers and consultants. In their appraisals they computed the amount of the accrued depreciation and reduced the reproduction cost by those amounts. Some of these appraisals are before us and they set out substantial accrued depreciation. But the officers and directors of [plaintiff] ignored these appraisals and they not only did not show, nor reflect in any way, on their books of account any of this accrued depreciation in a single instance, but they also set up these properties on the books at the excessive and inflated prices at which they were purportedly sold to the company by Geo. M. Bechtel & Co., * * *.
$ H* ‡
Another pertinent matter is the abandonment of property. In 1924 the company bought the Burlington By. & Light Co., and in 1925, the Ottumwa property. Both of them included street railway systems and power plants necessary for their operation. It was recognized at the time these properties were purchased that heavy paving expense and other factors, including the decline in that type of traffic would make much of this property useless. A power plant at Burlington with a reproduction cost of about $670,000 was abandoned at once. Annually from 1926 to 1929, inclusive, parts of these street railway systems were abandoned, which had a total reproduction cost new of approximately $8,000,000. They should have been charged off or set apart from the assets. But because the company had set aside no adequate allowances for depreciation or retirement there was no reserve fund against which these abandonments could be charged. Consequently, these worthless properties, were retained on the assets side of the ledger, resulting in an inflated total. This made the balance sheet look better, which was an important factor in the sale of the Company’s stock and bonds.
Andersen & Co. in several audits called attention to the inadequate provisions for depreciation, the failure to reflect accrued depreciation on the books, and the necessity of the retirement of useless property. It apparently held up its reports because they were not complied with. * * *

Although the Bechtels had ignored the realistic property appraisals so far as the plaintiff’s general books were concerned, this was not true with respect to plaintiff’s tax accounting. The court found:

These appraisals which had been ignored when it was the purpose to build up assets in their books to provide a paper surplus on which to pay dividends on both preferred and common stock, and to make a better balance sheet to aid in the sale of securities, were now being used to provide larger deductions on the company’s back income tax returns to get adjustments in federal income taxes.
^ ij: %
That there was a substantial-difference in the set up of depreciation in the company’s books and as stated in its returns for Federal Income Tax, appears from the following statement:

20. On October 15, 1930, the plaintiff’s board of directors adopted a resolution that the accrued depreciation on the properties acquired from 1916 to 1926, inclusive, as determined by independent appraisers, in the amount of $2,043,328.30 be reflected on the plaintiff’s books as of December 31, 1929. In compliance with the resolution, this amount of accrued depreciation was entered on plaintiff’s general boobs. However, as stated'by the Iowa Supreme Court in the Des Moines Bank case, except for stating the amount, the entries accomplished nothing. They were not charged against surplus or earnings. Instead, the $2,043,-328.30 was charged to the plaintiff’s plant and equipment account, and the same figure was .''credited to the plaintiff’s retirement and reserve account thereby offsetting each other. By other entries the abandoned property was put in an asset account entitled the “Intangible Capital Account.”

21. The ten properties acquired by the plaintiff from the Bechtel partnership have been retained by it throughout the period involved in the present suit with the following exceptions : the street railway system portions only of the Ottumwa Traction Company and Burlington Railway & Light Company public utility properties were abandoned by the plaintiff during 1929 and 1930: the Lamoni Electric Company properties were disposed of in the year 1940; the securities of the Albia Light & Railway Company were sold in the years 1935 and 1941; the gas operating properties of the Peoples Light & Fuel Company of Grrinnell were abandoned in 1954 on account of a changeover from manufactured gas to natural gas in the Grrinnell area.

For the taxable years 1929 and 1930, plaintiff incurred no Federal income tax liability. This was partially attributable to ah allowance by the Commissioner of Internal Revenue of a deduction for the value of the tangible properties involved in plaintiff’s abandonment of the Burlington and Ottumwa street railway systems during those years. The deduction allowed in 1929 on account of the Burlington abandonment was in the amount of $1,056,438.91. For 1930, the deduction allowed on account of the Ottumwa abandonment was $509,109.24. To the extent plaintiff’s claimed deductions for such abandonments exceeded those amounts, the excess was treated as attributable to intangibles and disallowed.

22. On its tax return for the year 1954, the plaintiff cl aimed as a deduction from gross income a loss from the abandonment of its Grrinnell gas plant and equipment. The amount of the claimed loss included $58,298.62 as a write-off of intangibles on its tax records. Upon audit of the return, the claimed deduction was disallowed.

23. The plaintiff’s Federal income tax returns for the calendar years 1952,1953, and 1954 were timely filed on March 13, 1953, March 15, 1954, and September 9, 1955, respectively, disclosing tax liabilities in the amounts of $951,163.81, $710,-761.86, and $797,094.71, respectively. Timely payments of

the tax liabilities reflected on said returns were made as follows:

Year 1952
March 13, 1953 $380,465. 52
June 15, 1953— 380,465. 52
Sept. 14, 1953— 95,116. 38
Dee. 14, 1953— 95,116.39
951,163. 81
Year 195S
March 15, 1954_ $319, 842. 84
June 14, 1954-319, 842. 84
Sept. 13, 1954_ Dec. 13, 1954_ 35, 538.09 35, 538. 09
710, 761. 86
Year 1954
March 14, 1955-$392,449. 78
June 13, 1955-392,449. 77
Sept. 9, 1955_ 12,195.16
797, 094. 71

Upon audit of plaintiff’s Federal income tax returns for the calendar years 1952,1953, and 1954, tbe Commissioner of Internal Kevenue determined deficiencies in tax and interest thereon as follows:

Year: ■Tax Interest
1952_ $1,205.17 $77. 66
1953___ 53, 731. 73 9, 579. 70
1954___ 60,118.26 7, 111. 24
4,753.53 1,047.30

The plaintiff paid the deficiencies in tax and interest for 1952, 1953, and 1954 set forth in the preceding paragraph as follows:

Date Paid: 1952 Amount
May 12, 1954_!_L_'_$1, 282. 83
195S
March 7, 1957_ 63,302. 60
April 1, 1957_11_ 8.83
1954
March 7, 1957_67,219. 63
April 1, 1957_L__ 9. 87
November 17, 1958_ 5, 800. 83

The plaintiff filed timely claims for refund for the years 1952, 1953, and 1954 with the appropriate District Director as follows:

On September 27, 1960, there was refunded to plaintiff $29,170.49 in tax for 1953, $5,200.75 deficiency interest thereon, and $7,215.60 statutory interest pursuant to a claim for refund (other than set forth above) which claim for refund did not involve the claims set forth in plaintiff’s petition.

The petition herein was filed on October 14, 1960.

CONCLUSION OK LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to recover, and judgment is entered to that effect, with the amount of recovery to be determined pursuant to Rule 47(c) in accordance with this opinion and the stipulation of the parties.

In accordance with the opinion of the court and a memorandum report of the commissioner as to the amount due thereunder, it was ordered on March 4,1966, that judgment for the plaintiff be entered for $895,324.43, plus interest thereon as provided by law. 
      
       Apparently through an inadvertent transposition error, the amount of the judgment as directed by the Supreme Court was actually $100 less than this figure.
     
      
       See also Hamlen v. Welch, 116 F. 2d 413 (1st Cir. 1940); Shiman V. Commissioner, 60 F. 2d 65 (2d Cir. 1932) ; Douglas County Light & Water Co. v. Commissioner, 43 F. 2d 904 (9th Cir. 1930); Martin v. Commissioner, 38 T.C. 188 (1962); Stamos v. Commissioner, 22 T.C. 885 (1954); Aftergood V. Commissioner, 21 T.C. 60 (1953); Sherman v. Commissioner, 18 T.C. 746 (1952); Trimble v. Commissioner, 6 T.C. 1231 (1946).
     
      
       The ten properties acquired by the plaintiff from the Bechtel partnership have been retained by it throughout the period involved in the present suit with the following exceptions: the street railway system portions only of the Ot-tumwa Traction Company and Burlington Railway & Light Company public utility properties were abandoned by the plaintiff during 1929 and 1930 ; the Lamoni Electric Company properties were disposed of in the year 1940 ; the securities of the Albia Light & Railway Company were sold in the years 1935 and 1941; the gas operating properties of the Peoples Light & Euel Company of Grinnell were abandoned in 1954 on account of a changeover from manufactured gas to natural gas in the Grinnell area.
     
      
       The reproduction of this extensive opinion requires 93 pages of Volume 243 of the Iowa Reports. Erom a monumental trial record, reviewed on appeal de novo, Justice Bliss of the Supreme Court of Iowa has sifted out the sordid details of the nearly incredible financial machinations whereby plaintiff’s corporate assets were systematically and fraudulently plundered by one George M. Bechtel and his subservient associates.
     
      
       Although the derivative suit in Iowa was for the benefit of the plaintiff herein, it appears to have taken a neutral position in the litigation alleging, however, that the acts complained of were done more than five years before commencement of the suit. In its decision in the Des Moines Bank case, the Supreme Court of Iowa remarked that plaintiff “has filed a brief and argument in this case but no sentence is contained therein in behalf of the Company.” It is noteworthy that at this time Edward L. Shutts, one of Bechtel’s confederates, was still president and director of plaintiff.
     
      
       In their requested findings of fact, the parties have been unable to agree as to the proper designation for the plaintiff-stockholders in the derivative action. Plaintiff terms them “minority stockholders” to which description defendant objects. Defendant, on the other hand, designates them “preferred stockholders” to which description plaintiff objects. Actually, at the time of the filing of the derivative suit, they were former preferred stockholders who, as a result of the 1938 stock reclassification, had become common stockholders. In any event, they were stockholders whose interests were not the same as the Bechtel group and who were not in control of the plaintiff. Their standing to sue in behalf of plaintiff was not challenged in the Iowa courts.
     
      
       Apparently through an Inadvertent transposition error, the amount of the Judgment as directed by the Supreme Court was actually $100 less than this figure.
     
      
       All Interested parties appear to have recognized that the judgment was In excess of any amount which could be realized from any or all of the judgment-defendants or from any of their transferees.
     
      
       The parties have stipulated this fact with the added statement that no implication is intended as to whether any adjustment was proper or required.
     