Appeal from the District Court of the United States for the Eastern District of Wisconsin; Ferdinand A. Geiger, Judge.
Before SPARKS and MAJOR, Circuit Judges, and LINDLEY, District Judge.
This appeal involves a claim for the refund of income taxes of Ida M. Sivyer, deceased, for the year 1929. The case was tried without a jury, and the court filed findings of fact and conclusions of law in favor of appellees, upon which judgment was rendered for them for $7,638.02 which included interest at the rate of six per cent. per annum from the date of payment. The Government has assigned fifty-two errors, and it claims generally to rely upon all of them. It has discussed but few of them, however, and for that reason those not discussed will be considered as having been waived.
The complaint, among other matters not now pertinent to the questions here raised, contained the following averments: On March 15, 1930, Ida M. Sivyer filed with the Collector of Internal Revenue, at Milwaukee, her return of income for the calendar year 1929, as required by the Revenue Act of 1928, disclosing a net taxable income of $28,990.65, and a tax liability of $1,116.77 which she paid to the Collector during the year 1930. She died testate March 30, 1931, a resident of Milwaukee, and appellees were qualified as her executors on May 5, 1931. On February 5, 1932, the Commissioner gave notice to appellees of his assessment of a deficiency income and surtaxes upon the income of decedent for 1929 in the sum of $5,300.74, and on April 28, 1932, demanded payment thereof with interest in the aggregate sum of $5,970.30, which they paid to him on May 2, 1932.
The deficiency resulted from the addition to decedent's income for 1929 the sum of $38,884.86, claimed by the Commissioner to be a normal dividend received by decedent on July 25, 1929, from Northwestern Malleable Iron Company, of Milwaukee. That company in 1928 had definitely determined to cease business and to liquidate its affairs, and during the remainder of that year and all the year of 1929 was in the process of liquidation. The item of $38,884.86 was a liquidating dividend and was not properly included in decedent's gross income for 1929 within the purview of the Revenue Act of 1928 (section 115 [26 U.S. C.A. § 115 and note]) then in effect, and was not subject to taxation. Upon these facts, and others not here pertinent, appellees alleged that the tax of $5,970.30 was illegally paid to and received by the Commissioner. Appellees duly filed their claim for a refund on January 18, 1934, which the Commissioner disallowed on August 1, 1934, and this action was instituted on September 27, 1935.
In its amended answer of February 20, 1936, the Government admitted that the deficiency resulted from the addition to decedent's taxable income for 1929, of the item of $38,884.86 received by her from the Northwestern Malleable Iron Company, but it averred that that item was lawfully and properly added to her ordinary income for that year, as a corporate distribution subject only to surtax, because it was a distribution out of earnings accumulated after February 28, 1913.
The trial of the cause occurred on December 8, 1936. As counsel for appellees was about to commence his opening statement appellant asked leave to file an amendment to its amended answer, stating that it did not introduce anything new into the case. After summary argument, and over the objection of appellees, the amendment was filed by permission of the court. The evidence was heard on the issues tendered by the complaint and the amendment of the amended answer. At the conclusion of all the evidence the court struck the amendment to the amended answer over the objection of appellant, to which exceptions were properly saved. Appellant moved for judgment in its favor, and also moved the court to enter findings of fact and conclusions of law which it therewith tendered. On December 28, 1936, the court overruled both of these motions and filed its own findings and conclusions, upon which the judgment appealed from was rendered. Since appellant questions the sufficiency of the court's opinion, findings and conclusions as contemplated by section 7 of the Tucker Act (28 U.S.C.A. § 764), they are set forth in the margin.*fn1
The amendment to the amended answer alleged specific facts, hereinafter referred to, to the effect that decedent had received income during 1929, other than that which she had reported, by reason of which she was indebted to the Government for income tax on it in an amount greater than her demand, and that in equity and good conscience she should not be permitted to prevail in her action. The averments of the amendment are substantially as follows: That if it be held that the amount of $45,063 so received by decedent from the company on July 25, 1929, was a liquidating dividend and not subject to surtax on the ground that she was not taxable upon such distributions until after they exceeded the cost basis of the stock which she held, she was still indebted to the Government for additional income taxes for 1929 in excess of her demand by reason of the following facts: The company in 1929 distributed to its stockholders the following items: July 25, cash $85,023; August 5, cash $28,341; and August 5, capital stock of Rockford Northwestern Malleable Iron Company of the par and fair value of $440,000.
The amendment further averred that in 1926, Ida M. Sivyer acquired three shares of the Northwestern Malleable Iron Company at a cost to her of $300. Upon the death of her son, Frederick L. Sivyer, on January 22, 1929, she came into possession and ownership of 7,507 1/2 shares of the same company from a trust under the will of her husband who died in 1910. Appellee, the Trust Company, was also executor of the son, and in 1929 included and reported as such executor in its returns certain shares of such stock for federal estate tax, and Wisconsin inheritance tax purposes, at a fair market value in January, 1929, of ten dollars per share, and the Commissioner accepted and relied upon such valuation, and closed the federal estate tax account, and said estate's liability therefor, and the Government is now barred by limitations from assessing or claiming any additional federal estate tax or any greater value than ten dollars per share. The cost basis to Ida M. Sivyer of all the stock so held by her in 1929 was $75,375, and of the distribution so make to her, on the dates referred to, she received the total sum of $60,084 in cash and approximately $233,297.24 in securities, which far exceeds her recoverable demand in this section. Neither she nor her executors reported any gain in excess of cost on the amount received by her in 1929, nor has any tax been paid thereon, which tax, due and unpaid at the time of trial, was alleged to amount to $44,192.16 in excess of what she had paid for that year.
By reason of these averments the Government alleged that neither the decedent nor her executors had overpaid any income taxes for the calendar year of 1929; that if it be held that appellees' contention is correct with respect to the distribution of July 25, 1929, then the Government was entitled to and claimed the right to recoup the additional tax alleged to be due and unpaid against any amount that might otherwise be due with respect to that distribution. It is further alleged that appellees are precluded by the representations in the return of the Frederick L. Sivyer estate from claiming any other cost basis or value in excess of ten dollars per share. The prayer was that appellees' claim be denied, and that the Government's costs be assessed against appellees.
All of the capital stock of the Northwestern Malleable Iron Company which is here involved, save the three shares which she purchased, came to Ida M. Sivyer by virtue of the will of her husband, Frederick W. Sivyer, Who died in 1910. By his will he nominated his wife, his only son, Frederick L. Sivyer, and another as his executors, and gave to them in trust all of his stock in that company for the purpose of paying to his wife, Ida M. Sivyer, not less than $3,600 annually out of the income therefrom. All remaining income therefrom was to be paid to Frederick L. Sivyer during the life of Ida M. Sivyer. The will further provided:
"3rd: I direct that my executors shall upon the death of my wife, transfer and assign all of my said stock in the Northwestern Malleable Iron Company, to my son Frederick L. Sivyer absolutely, and the trust hereby created shall thereupon cease; provided, however, that if my wife shall survive my son, then I direct that upon the death of my son my executors shall thereupon transfer and assign all of said stock to my wife and said trust shall thereupon terminate.
"4th: I direct that my son Frederick L. Sivyer, as one of the executors, shall have the sole control of such stock in the Northwestern Malleable Iron Company during th continuance of the foregoing trust, with the power to vote the same and control and ...