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122 C. Cls. Opinion of the Court serted against him. These deductions much more than cancelled his net income, which would have been $52,716.37 but for the deductions. As to more than $90,000 of the deductions he did not, then, receive any tax benefit.
In 1934 the plaintiff in his return deducted $15,890.47, the amount he paid into the settlement fund that year. The discrepancy between this amount, plus the $1,018.05 which he had paid in 1933, on the one hand, and the $14,907.60 shown on his settlement fund certificate, is accounted for by certain equalization payments not here relevant. The plaintiff's 1934 income, except for the deduction of $15,890.47, was larger than that sum, hence he received full tax benefit from that deduction.
In his income tax return for 1942, the plaintiff reported as ordinary income the $1,490.76 which he was paid on his settlement fund certificate in that year. In his return for 1944 he similarly returned the $10,257.77 so received as principal, and the $4,988.34 received as interest during that year. He filed timely claims for refund of these amounts. His primary ground for recovery is that these payments to him in 1942 and 1944 were a partial return of capital lost by him in 1933 when his Guardian Group stock became worthless, involving a loss deductible from income of $145,945.72. He showed this loss on his return for 1933 but got no tax benefit from most of it because, as we have seen, it so far exceeded his income for that year.
The plaintiff relies upon the "tax benefit” doctrine as stated in Section 22 (b) (12) (D) of the Internal Revenue Code, inserted by the Revenue Act of 1942. That section says that recovery of bad debts, prior taxes, and delinquency amounts should be excluded from gross income to the extent to which the deductions allowed on such transactions had not resulted in a reduction of the taxpayer's income tax. The Supreme Court of the United States, in Dobson v. Commissioner, 320 U. S. 489, held that such a doctrine had been extant before the 1942 congressional enactment, and that the statute did not restrict its application to only the three kinds of losses named in the statute. Following the Dobson decision, on May 10, 1945, the Commissioner of Internal Revenue issued T. D. 5454 which expressly extended the applicability
Opinion of the Court of the tax benefit doctrine of the statute to "all other losses, expenditures * made the basis of deductions from gross income for prior taxable years” with certain exceptions not here relevant. The legal force of this Treasury Decision is not contested by the Government.
It seems to be settled that the payment of an assessment on bank stock is an additional capital cost of the stock. Porter Property Trustees, Ltd., 42 B. T. A. 681, 682; Mertens, Law of Federal Income Taxation, Section 28:42. The Bureau of Internal Revenue has taken this position. See First National Bank in Wichita v. Commissioner (C. C. A. 10), 46 F. (2d) 283, 284. If, then, the plaintiff had owned stock of the national banks themselves, and had been assessed thereon, his payment of his assessment would have been an additional cost of his stock and not a loss deductible from current income. Here the plaintiff did not directly own stock in the national banks, but the stock which he did own in the holding company was treated by the Government's Comptroller of the Currency, for the purpose of assessment, as if it had been stock in the national banks. This treatment was legally correct. Anderson, Receiver v. Abbott, Admo., 321 U. S. 349, 357. See also W. A. Lucking et al. v. United States, 102 C. Cls. 233, 240. Since the law treated the plaintiff as the owner of national bank stock for assessment purposes, we think that with equal recognition of the realities of the situation it should so treat him for the purpose of the tax benefit doctrine.
The plaintiff owned stock in Guardian Group, a holding company of national bank stock. Because he owned this stock, and solely because he owned it, he was assessed, when the national banks became insolvent. He compromised his liability by contributing to the settlement fund, for the payment of the creditors of the banks, and for ultimate return to himself, if the liquidation of the banks left something for that purpose. His parting with it, and his getting back of some of it, was an actual and legal consequence of his owning the stock in Guardian Group. We think it was all a part of one transaction. He should, therefore, be allowed to count up the original cost of his stock, add to that his assessment, deduct from the sum the amounts by which he
122 C. Cls. Opinion of the Court had tax benefits in 1933 and 1934, and still recover, without liability for income taxes, the difference. Since his recoveries of principal on his settlement fund certificate in 1942 and 1944 were much less than this difference, we think he should not have been taxed upon these amounts as income.
In the 1944 payments on the settlement fund certificates was a payment of $4,988.34, which was designated as interest on his contribution to the settlement fund. The liquidation agreement provided for the payment of 5 percent interest on the contributions, if funds were available for its payment. The payment was computed as interest, and we see no reason why it was not interest. It was, therefore, taxable as ordinary income.
The plaintiff is entitled to recover. Entry of judgment will be suspended to await the filing of a stipulation by the parties showing the amount due, in conformity with our findings and opinion, together with interest as provided by law.
HOWELL, Judge; WHITAKER, Judge; LITTLETON, Judge; and JONES, Chief Judge, concur.
In the above case (No. 49300) in accordance with the opinion of the court, on a stipulation by the parties showing the amount due thereunder, judgment for the plaintiff was entered April 8, 1952, as follows:
A refund of 1943 income and victory taxes in the amount of Four Thousand Nine Hundred Seventy-six Dollars and Eighty Cents ($4,976.80), plus interest according to law.
A refund of overpaid interest with respect to the calendar year 1943 in the amount of Nine Hundred Forty-four Dollars and Forty-three Cents ($944.43), plus interest according to law.
A refund of 1944 income tax in the amount of Thirteen Thousand Two Hundred Fifteen Dollars and Fifteen Cents ($13,215.15), plus interest according to law.
A refund of overpaid interest with respect to the calendar year 1944 in the amount of Four Hundred Seventy-six Dollars and Ninety-five Cents ($476.95), plus interest according to law.
A refund of overpaid interest with respect to the calendar year 1945 in the amount of Two Hundred Fifteen Dollars and Thirty-five Cents ($215.35), plus interest according to law.
ROBERT G. WHITE v. THE UNITED STATES
(No. 49621. Decided February 5, 1952]
On the Proofs
Pay and allowances; former enlisted man, discharged in 1935 for
permanent physical disability, entitled to retired pay under Acts of 1941 and 1945.-In a suit by a former enlisted man, discharged from the Army in 1935 because of permanent physical disability, for retirement pay to which he asserts a right under the Act of June 30, 1941 (55 Stat. 394), as amended by the Act of May 4, 1945 (59 Stat, 135); it is held that plaintiff
is entitled to recover. Army and Navy C 23 Same; disability compensation received by plaintiff from Veterans'
Administration.-Plaintiff, then holding the rank of a corporal in the fifth pay grade, with more than 20 years of active service in the Army, including service as a second lieutenant during the First World War, was in 1935 discharged from the regular Army because of permanent physical disability. In 1935, when plaintiff was discharged, there was no provision in the law whereby he might be retired. However he did receive 100 percent disability compensation from the Veterans' Administration from the time of his discharge on August 24, 1935, until
September 1, 1949. Army and Navy On 23 Same; plaintiff entitled to retired pay from effective date of 1945
Act.-By the Act of June 30, 1941 (55 Stat. 394), provision was made for retirement of enlisted men then in the Regular Army who had more than 20 years of active service and who were permanently incapacitated. The 1941 Act was amended by the Act of May 4, 1945 (59 Stat. 135), to include service men, such as plaintiff, who had been discharged prior to the 1941 Act. Upon proper application plaintiff on August 31, 1949, was placed on the Regular Army retired list, under the 1945 Act, and on the same date, under the Act of May 7, 1932 (47 Stat. 150), he was advanced on the retired list to the grade of second lieu
122 C. Cls, Syllabus tenant by reason of his commissioned service during the First World War. Plaintiff's claim for the difference between retired pay for the period May 4, 1945, to August 31, 1949, and the disability compensation which he had received for that period was disallowed by the Department of the Army. It is held
that plaintiff is entitled to recover. Army and Navy a 23 Same; remedial statutes liberally construed.-Notwithstanding the
usual practice under other retirement legislation it is the specific statutes of 1941 (55 Stat. 394) and 1945 (59 Stat. 135) which control in the instant suit. As remedial legislation they
are, under the decisions, to be liberally construed. Army and Navy On 28 Same; intent of Congress.—The intent of Congress, as disclosed in the
statutes themselves, and their legislative history, lends support
to plaintif's claim. Army and Navy em 23 Same; right to retired pay under 1945 Act accrues on effective date of
the Act.-In the 1945 Act Congress provided that no pay should accrue for any period prior to the effective date of the Act. The inference, therefore, is very strong that rights to retired pay for those covered by the Act, such as plaintiff, should accrue for the period beginning with the effective date of the Act,
which was May 4, 1945. Army and Navy na 23 Same; plaintiff's status as to permanent disability determined by
previous administrative procedure.-Where by proper administrative procedure it had previously been determined that plaintiff was a former enlisted man in the Regular Army who had served 20 years or more and who had been honorably discharged by reason of permanent disability incurred in line of duty, no further administrative investigation as to plaintiff's
disability was required under the 1945 Act. Army and Navy a 23 Same; waiver.--Plaintiff's failure to file a waiver of disability com
pensation does not constitute a waiver of retired pay under Sec
tion 4 of the 1941 Act. See Dugan v. United States, 100 C. Cls. 7. Army and Navy C 23
The Reporter's statement of the case:
Mr. Fred W. Shields for plaintiff. King & King were on the briefs.
Mr. Leroy Southmayd, Jr., with whom was Mr. Assistant Attorney General Holmes Baldridge, for defendant.