Joseph Eichelberger & Co. v. Commissioner of Internal Revenue , 88 F.2d 874 ( 1937 )

SIBLEY, Circuit Judge.

The petitioning taxpayer, Joseph Eichelberger & Co., a corporation, asserts that the Board of Tax Appeals erred in holding that a loss of $29,000 in the sale of certain land was realized in 1930 and not in the tax year 1932. The- undisputed facts are that the land cost $35,000 and was in" 1930 conveyed to Umatilla Groves, Inc., for $6,000 to be later paid. Both corporations belonged wholly and in the same proportions to two individuals who were the officers of each. Taxpayer in its income tax return for the year 1930 claimed as a deduction a loss of $29,000 as realized by the transaction with Umatilla Groves, Inc. The Commissioner, as it is stipulated, disallowed the deduction, and the Board finds that it was “for the reason as given by the Revenue Agent in charge that since the stock of petitioner and of Umatilla Groves, Inc., was all owned by the same individuals the transfer was a non-taxable transaction.” This ruling was not contested. Umatilla Groves, Inc., had paid nothing, and the sale of the land was agreed to be canceled, and appropriated entries were made on the books of both corporations but no reconveyance of the title was executed. In 1932 Umatilla Groves, Inc., conveyed the land to a stranger for $6,000 which took the form of stock in a third corporation, which stock was at once turned over to the taxpayer and was by it sold for $6,000 cash. These transactions in 1932 were set up in the present tax return as realizing a loss in that year of $29,000, but the deduction was again disallowed.

The land which cost taxpayer $35,-000 is gone, and the taxpayer has $6,000 to show for it. Beyond question the loss of $29,000 has been suffered, and the only question is whether it occurred in 1930 or in 1932. Under all the circumstances we think the deduction ought to be allowed in 1932. There is no room for doubt that the sale in 1930 by one of the identically owned and managed corporations to the other on which nothing was ever paid was fictitious and intended only to realize a loss. Transactions between corporations owning each other or identically owned are by the tax statutes very generally ignored as realizing a gain or loss. While no provision exactly fitting this case is pointed to, the disallowance by the Commissioner of the loss in 1930 for the reason given by the agent seemed reasonable and was accepted as a right decision. The fictitious sale having failed of its object, was set aside on the books of both corporations. Thereafter the taxpayer could never have collected the wholly executory consideration. Although the legal title was left in Umatilla Groves, Inc., the beneficial ownership was in the taxpayer. Umatilla Groves, Inc., held the title as a naked trustee for the benefit of the taxpayer. When it sold the land in 1932 to an outsider, since the corporate officers were the same the taxpayer of course was consenting. In turning the consideration over to the taxpayer Umatilla Groves, Inc., was not paying its debt for the land, because that obligation did not exist, but was recognizing its trust. The consideration must have been turned over if it had been twice $6,000. This was the first real sale of the land.

This conclusion is fortified by the rejection of the claim of loss in 1930 on the ground that the then sale was not a real one and could not realize a loss. Whether that decision was right or wrong, the accredited officer of the United States made it. He cannot justly decide in 1930 that the sale did not realize the loss and thereby collect increased taxes, and in 1932 decide that it did realize the loss and collect taxes accordingly again. We said in Perkins et al. v. Thomas, Collector, 86 F.(2d) 954, 956: “It is manifestly unjust to allow the government, having thus informed the taxpayer he could not have the deduction for his invested capital in 1928, now to say he could have it only then.” This is not a case of a taxpayer who neglected to assert his rights and so lost them by limitation. It is not a case of taking bad advice given by a mere revenue agent as in Darling v. Commissioner (C.C.A.) 49 F.(2d) 111. The right was claimed in the 1930 return and disallowed by the Commissioner. The United States got the benefit of his decision then and ought to abide by it now. The judgment is reversed, with direction to correct the tax by allowing the deduction in contention.

Reversed.