Hendrickson v. United States , 59 F. Supp. 145 ( 1945 )

Whitaker Judge,

delivered the opinion of the court:

Plaintiff sues to recover income taxes resulting from the inclusion within her gross income of $3,575.16, refunds of processing taxes which had been collected from Galbreath’s Bakery by the flour mills from which it had purchased flour in 1935.

After the Agricultural Adjustment Act had been declared unconstitutional, under which Act these processing taxes had been levied, the flour mills refunded to “Galbreath’s Bakery” the amount of the taxes which they had included in the price of the flour sold to that bakery. This sum was received by plaintiff in 1937 in the way to be set out and was included by her in her income for that year, on which taxes were paid, but later she filed a claim for refund of these taxes on the ground that these refunds were not income to her in that year or in any other year.

In tbe year 1935, when the mills sold the flour to Gal-breath’s Bakery, in the purchase price of which there was included the processing taxes, the bakery was operated by a partnership composed of Hugh J. Galbreath, the former husband of plaintiff, and W. C. Thomas. On June 11, 1936, Galbreath died leaving no will. Under the law of Tennessee, where he resided, one-half of his estate passed to his widow and one-half to his minor daughter. He owned a three-fourths interest in the bakery, so, on his death plaintiff and his daughter each succeeded to a three-eighths interest therein. Subsequently, on October 2, 1936, plaintiff bought from her daughter her interest in the bakery for the sum of $14,667.20, which was the book value of the daughter’s interest, and then on November 30, 1936, plaintiff purchased Thomas’ one-fourth interest. Thereafter, plaintiff was the sole owner.

When the flour mills made the refunds of processing taxes collected by them from Galbreath’s Bakery checks were issued by them in the name of Galbreath’s Bakery. These checks were cashed by plaintiff and she has ever since retained the proceeds thereof.

When the mills made the refunds to the bakery they were making them to the persons from whom they had collected the processing taxes, to wit, the partnership of Galbreath and Thomas. When they were received by plaintiff she had a right to keep them only because she was an heir of her husband, one of the partners to whom the refunds were made, and because she was the purchaser of the interest in the business of her daughter and of Thomas. The mills owed nothing to anyone other than the partnership. They owed plaintiff nothing except as the successor in interest of the* partners.

Three-eighths of the refunds received by her, then, she received by inheritance from her husband. Such receipts are expressly excluded by the Act from gross income. The inclusion in her gross income of so much of the refunds, at least, was wholly without justification.

The other five-eighths of the refunds plaintiff had a right to retain only by virtue of her purchase of her daughter’s. interest in the business and of Thomas’ interest. She had no other right to it.

We think there can be no doubt that when plaintiff’s daughter and Thomas sold to plaintiff their interests in the business they sold to her whatever right they had to receive a part of these refunds. The terms of their sales made no-reservation of any asset of the business. Their entire interest was sold. This is evidenced by the fact that neither-the daughter nor Thomas ever made any claim to any part of the refunds, or if they did, that they were unable to successfully maintain it.

Whether or not the partnership of Galbreath and Thomas had a legally enforceable right to a refund of the money from the flour mills, it nevertheless became, when paid, an, asset of that partnership, and only those persons were-entitled to keep the money who had succeeded to the interest, of the partners. This person was the plaintiff, partly by inheritance from her husband and partly by purchase from her daughter and from Thomas.

We are of opinion that plaintiff is entitled to recover the-amount of taxes paid as the result of the inclusion of these-refunds within her gross income. Judgjment is reserved until the filing of a stipulation by the parties, or, in the absence of a stipulation, until the incoming of a report of a., commissioner, showing the amount due plaintiff computed¹ in conformity with this opinion. It is so ordered.

LittletoN, Judge; and Whaley, Chief Justice, concur.

1 See Hendrickson v. Commissioner, 4 T. C. 231 at 236-7.