Consorzio Veneziano di Armamento, etc. v. Commissioner

CONSORZIO VENEZIANO DI ARMAMENTO E NAVIGAZIONE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Consorzio Veneziano di Armamento, etc. v. Commissioner

Docket No. 39759.

United States Board of Tax Appeals

21 B.T.A. 984; 1930 BTA LEXIS 1759;

December 30, 1930, Promulgated

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Held that the inclusion by the Court of Claims in a suit against the United States of interest on a claim as a means of determining just compensation for the taking of property for public use is not interest on a "bond, note, or other interest bearing obligation of a resident, corporate or otherwise," in determining the taxable income of a foreign corporation from sources within the United States, and since the total amount received was less than cost of the property, no taxable income resulted.

John J. Fitzgerald, Esq., for the petitioner.

J. A. Lyons, Esq., for the respondent.

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TRAMMELL

This proceeding is for the redetermination of a deficiency in income tax for 1928 of $82,018.72 which has been assessed. The matters in controversy are (1) whether $551,270.59 of the amount of a judgment of $1,165,182.34 rendered on February 14, 1927, and amended December 5, 1927, by the United States Court of Claims (64 Ct.Cls. 11) against the United States in favor of the petitioner and paid in 1928 constitutes taxable income for 1928; (2) whether an amount of $56,275.47 paid in 1928 pursuant to the judgment of the Court of Claims and computed as interest at 6 per cent on $839,569.35 from February 14, 1927, to March 31, 1928, the date of the issuance of the Treasury warrant in satisfaction of the judgment of the Court of Claims constitutes taxable income for 1928; and (3) whether the petitioner is entitled to a deduction of $62,291.78 paid by it in 1928 for legal services and expenses in connection with the suit in the Court of Claims which resulted in the above mentioned judgment. From the testimony of counsel for the petitioner and from the special findings of fact, conclusion of law, and opinion of the Court of Claims, which were put in evidence, we make the following findings of fact.

FINDINGS OF FACT.

The petitioner is a foreign corporation, organized and existing under the laws of the Kingdom of Italy, with its principal office and place of business at Venice. It has no office or place of business within the United States of America.

On April 23, 1917, one Carlo de Luca entered into two separate contracts with Standard Shipbuilding Corporation, a New York corporation with a shipyard at Shooter's Island in that State, for the construction of two cargo steamships according to plans, specifications and conditions described, known as hull No. 10 and Hull No. 11, of approximately 7,300 tons dead-weight capacity each, at an agreed price of $150 for each ton of dead-weight capacity, or $2,190,000 for both ships. The contracts were identical except the vessels therein were respectively designated as Hull No. 10 and Hull No. 11, and hull No. 10 was to be completed on March 31, 1918, and hull No. 11 on April 30, 1918.

On July 25, 1917, the two contracts were assigned by de Luca to the petitioner.

On July 11, 1917, the President, by virtue of the authority vested in him by Act of Congress of June 15, 1917, by an Executive order delegated the powers conferred upon him by the said act to the United States Shipping Board Emergency Fleet Corporation. On August 3, 1917, and while the work provided to be done under the contracts of April 23, 1917, between de Luca and the Standard Shipbuilding Corporation was in progress, the Shipping Board, under the authority so conferred upon it, served an order on the Standard Shipbuilding Corporation requisitioning all power-driven cargocarrying and passenger vessels above 2,500 tons dead-weight capacity under construction in its yards and certain materials, machinery, equipment, and outfit necessary for their completion. Prior to August 3, 1917, the Standard Shipbuilding Corporation had placed orders for certain materials to be used in the construction of bulls No. 10 and No. 11 at prices lower than those prevailing after August 3, 1917. The materials so ordered were delivered to the Standard Shipbuilding Corporation and were used in the completion of hulls No. 10 and No. 11. The two vessels, with certain changes and modifications, were completed and delivered to the United States on January 15, 1919, and February 18, 1919, respectively.

Prior to July 25, 1917, there had been paid by de Luca, the petitioner's assignor, to the Standard Shipbuilding Corporation, as provided in the contracts of April 23, 1917, on account of the construction of the two vessels the first three installments, amounting to $635,100. On July 31, 1917, the petitioner paid to the Standard Shipbuilding Corporation the fourth installment of $153,300 on the two vessels. The total amount, therefore, paid on account of the contracts by the petitioner and its assignor prior to August 3, 1917, was $788,400. In addition to the $153,300, the fourth installment paid by the petitioner to the Standard Shipbuilding Corporation, the petitioner paid to de Luca $635,100 representing the amount paid by him on the contracts. The petitioner also paid to de Luca for the assignment of the two contracts the amount of $1,000,000. It further expended $491,731 in fees, commissions, taxes and other charges growing out of the purchase of the contracts, making the total amount expended by the petitioner on account of the two contracts $2,280,131.

In accordance with the provisions of the above mentioned Act of Congress of June 15, 1917, the petitioner filed its claim for the payment of just compensation with the United States Shipping Board Emergency Fleet Corporation for the property which was taken under the requisition order of August 3, 1917, and on July 23, 1920, was awarded as just compensation the amount of $816,651. The amount of the award was unsatisfactory to the petitioner and on August 27, 1920, pursuant to the provisions of the Act of Congress of June 15, 1917, it received from the Government of the United States 75 per cent of such amount, or $612,488.25.

The petitioner thereafter brought suit in the United States Court of Claims for $3,402.511.75, representing the difference between the amount paid to it under the award and the amount claimed by it as the value of the property requisitioned.

On February 14, 1927, the Court of Claims rendered a decision in favor of the petitioner and against the United States. The court made the following finding:

XXII. Just compensation to the plaintiff for its rights and contracts which were expropriated by the Government, being the sum that will put it in as good a position pecuniarily as it would have been if its property had not been taken, and fixed as of the date of the taking August 3, 1917, is the sum of $1,266,400 with interest, and is shown as follows:

Just compensation as of August 3, 1917	$1,226,400.00
Interest thereon at 6 per cent per annum
from Aug. 3, 1917, to Aug. 27, 1920	225,657.60
Total	1,452,057.60
Less 75 per cent of award paid Aug. 27, 1920	612,488.25
Balance	839,569.35
Interest on balance at 6 per cent per
annum from Aug. 27, 1920, to Feb. 14, 1927	325,612.99
	1,165,182.34

Judgment was accordingly rendered for the petitioner in the amount of $1,165,182.34.

Subsequently and on December 5, 1927, the Court of Claims amended its decision as follows:

Upon the foregoing special findings of fact, which are made part of the judgment herein, the court decides as a conclusion of law that the plaintiff is entitled to recover the sum of $1,165,182.34 with interest.

It is therefore adjudged and ordered that the plaintiff have and recover of and from the United States the sum of One million one hundred sixty-five thousand one hundred eighty-two dollars and thirty-four cents ($1,165,182.34), with interest at six per cent per annum on eight hundred thirty-nine thousand, five hundred sixty-nine dollars and thirty-five cents ($839,569.35), the principal sum, from the said February 14, 1927.

The additional amount resulting from the allowance by the Court of Claims of interest at 6 per cent on $839,569.35 from February 14, 1927, until March 31, 1928, the date of the issuance of the Treasury warrant in payment of the judgment, was $56,275.47.

Under date of May 15, 1928, the respondent notified the petitioner of the determination and assessment against it for 1928 of a tax of $82,018.72, which was computed as follows:

Judgment awarded on February 14, 1927		$1,165,182.34
Less:
Value of contracts or just compensation as
of August 3, 1917	$1,226,400.00
Less: 75 per cent of award paid August 27,
1920	612,488.25
Net unrecovered value		613,911.75
Taxable gain under section 203(b)(5)		551,270.59
Add:
Interest from February 14, 1927, to
March 31, 1928		56,275.47
Taxable net income		607,546.06
Tax liability at 13 1/2%		82,018.72

On June 7, 1928, the petitioner paid to the firm of Fitzgerald, Stapleton & Mahon the amount of $62,291.78 for legal services and disbursements in connection with the suit in the Court of Claims and covering a period from some time in 1920 Until June 7, 1928. In determining the tax liability here involved no amount was allowed by the respondent for such services and disbursements.

OPINION.

TRAMMELL: The petitioner contends that the entire amount paid under the judgment of the Court of Claims as amended on December 5, 1927, constituted the just compensation to which it was entitled and which was awarded to it for the taking of its property for public use and that no part of it constituted income. The respondent, on the other hand, contends that only the amount of $1,226,400 constituted just compensation as of August 3, 1917, the date of taking the property, and the difference between that amount and the amount of $1,833,946.06 constituted interest. The Court of Claims, in its judgment, included interest at 6 per cent as a part of the just compensation to which the petitioner was entitled.

As we view the question, it is not necessary for us to determine whether the amount was awarded as interest or as compensation. Conceding for the sake of argument that it was interest as contended by the respondent, not all interest is "income from sources within the United States" taxable as income of a foreign corporation. The Revenue Act of 1928, section 119(a)(1), provides what shall be included in gross income of a foreign corporation with respect to interest as follows:

Interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise * * *

and in paragraph (c) of the same section provides:

The following items of gross income shall be treated as income from sources without the United States: (1) Interest other than that derived from sources within the United States as provided in subsection (a)(1) of this section.

In our opinion, even if the amount constituted interest, it was not interest on bonds, notes or other interest-bearing obligations of residents, corporate or otherwise. It would be a strained construction to say in the first place that the United States was a resident, corporate or otherwise, of the United States. Wherever in the statute obligations of the United States are referred to they are referred to specifically as "obligations of the United States." The expression "resident" in its ordinary acceptation does not refer to the Government itself and the language in the statute "resident, corporate or otherwise," we think should be given its ordinary and generally accepted meaning. This view finds support in article 1509 of Regulations 69, with respect to this section of the statute, which states that a "domestic corporation is a resident corporation * * *." The regulations of the Commissioner construe the language in its ordinary and generally accepted meaning and make no reference to the Government as being "resident, corporate or otherwise."

In construing a statute words are to be taken in their ordinary and generally accepted sense, unless another meaning is clearly shown by the context. Bailey v. Drexel Furniture Co.,259 U.S. 20">259 U.S. 20; Caminetti v. United States,242 U.S. 470">242 U.S. 470; De Ganay v. Lederer,250 U.S. 376">250 U.S. 376; Danciger v. Cooley,248 U.S. 319">248 U.S. 319.

In any event, whether the expression "residents, corporate or otherwise" might be held to include the United States Government, the amount received here was not interest on bonds, notes or other interest-bearing obligations. Section 177 of the Judicial Code provides as follows:

No interest shall be allowed on any claim up to the time of the rendition of judgment thereon by the Court of Claims unless upon a contract expressly stipulated for the payment of interest.

This section of the Judicial Code has been construed by the United States Supreme Court in Brooks-Scanlon Corporation v. United States,265 U.S. 106">265 U.S. 106; Seaboard Air Line Railroad v. United States,61 U.S. 299">61 U.S. 299; and Phelps v. United States,274 U.S. 341">274 U.S. 341, in all of which cases the court held that the addition of interest allowed by the courts in judgments rendered against the United States on account of the just compensation for the taking of property for public use was not interest, but a part of the just compensation. We do not think, therefore, that it could be held that a claim paid by the United States as just compensation under the circumstances here presented constituted interest from an interest-bearing obligation of a "resident, corporate or otherwise," even conceding that the United States is a resident, corporate or otherwise.

On the other hand, if the amount received here was not interest, it clearly was not income, because the entire amount received, to wit, $1,833,946.06, did not equal the cost expended by the petitioner on account of the contracts taken over by the Government, to wit, $2,280,131. Clearly, it could not be said that a taxpayer received income under such circumstances.

The remaining question relates to the deductibility by the petitioner of $62,291.78 paid by it in 1928 for legal services and expenses in connection with its suit in the Court of Claims. The allowance of this amount as a deduction was urged by the petitioner in the event the Board should hold that the petitioner had received taxable income on account of the amount calculated as interest in order to allow what was designated as just compensation.

In view of our conclusion that no part of the amount received constituted taxable income, it is not necessary for us to decide whether or not the above amount is an allowable deduction. See also section 233 of the Revenue Act of 1928.

Reviewed by the Board.

Judgment will be entered for the petitioner.