Court Opinion

ID: 4495269
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:14:14.609779+00
Date Added: 2024-06-11T14:54:09.877854
License: Public Domain

Tbammell,
dissenting: I am unable to concur in the conclusions reached by a majority of the Board in this case for two principal reasons. In the first place, the prevailing opinion treats the incidents occurring in 1917 as not constituting a completed transaction for tax purposes, and takes into consideration the proceeds of insurance collected in that year in determining the amount of the gain to be included in gross income for 1928.
In the second place, the majority view is based upon the theory that only one conversion of the petitioner’s property in the S.S. Wil-more occurred. Neither of these propositions, in my opinion, can be sustained.
In 1917, when the petitioner’s steamer was destroyed by the German submarine and petitioner collected proceeds of insurance in the amount of $1,750,000, it was not then known nor could it have been known with reasonable certainty how the World War would terminate, or whether the petitioner would ever be able to collect damages from Germany on account of that incident. In these circumstances the transaction then became closed and completed, in so far as concerned the recognition of gain or loss for tax purposes, under the doctrine proclaimed by the Supreme Court in United States v. White Dental Mfg. Co., 274 U.S. 398. In that case the sole question presented was the right of the taxpayer to deduct from its gross income for 1918 the amount of its investment in a subsidiary German corporation whose entire property was seized in that year by the German Government as enemy property. The Commissioner contended that the transaction was not closed and completed in 1918, since an award was made by the Mixed Claims Commission in 1924 in part compensation for such loss. In holding that the transaction was closed and *872completed for tax purposes in 1918 and the entire loss deductible in 1918, the Supreme Court said:
* * * a loss may become complete enough ior deduction without the taxpayer’s establishing that there is no possibility of an eventual recoupment. It would require a high degree of optimism to discern in the seizure of enemy property by the German government in 1918 more than a remote hope of ultimate salvage from the wreck of the war. The taxing act does not require the taxpayer to be an incorrigible optimist.
The transaction of 1917, involved herein, consisting of the destruction of petitioner’s steamer and the recovery of proceeds of insurance in excess of the cost of the steamer, constituted a closed and completed transaction, and in reporting in its return for 1917 the taxable profit derived, the petitioner was not only within its legal rights, but was required by the existing law to do that very thing. Neither in 1917 nor in 1918 prior to the date on which returns were required to be filed for 1917 was there any provision in the tax laws or regulations then in effect by which gain or loss from the involuntary conversion of jnoperty could escape recognition for tax purposes-Such regulations were first approved by the Commissioner on April 25, 1918, in TJX 2706, and the respondent now argues that the petitioner could have availed itself of those provisions by filing an amended return. I think this is immaterial. Even under the present law a taxpayer is not required to replace property involuntarily converted into cash, but may at his option include in taxable income any gain derived or deduct from gross income any loss sustained.
In my opinion also the facts of this case established two separate and distinct conversions into cash of the petitioner’s property in the S.S. Wilmore, although resulting from a single act of destruction. In 1917 a part of its property rights in the steamer was converted into cash, measured by the proceeds recovered under the insurance contract. The cash acquired by this conversion the petitioner did not elect to use for the purpose of replacing the destroyed steamer, but treated the transaction as closed and completed, and reported the profit derived in its return for 1917. There is no controversy respecting the amount of the profit so reported, nor the correctness of the petitioner’s act in so doing.
In 1928 the remainder of the petitioner’s property rights in the S.S. Wibnore was converted into cash to the extent of the payments received in that year on account of the award of the Mixed Claims Commission. The cash received from this conversion the petitioner forthwith in good faith expended in the acquisition of other property admittedly similar or related in service and use to the property so converted.
If the petitioner had owned two steamships, one of which was involuntarily converted into cash in 1917 and not replaced, and the *873other involuntarily converted into cash in 1928 and forthwith replaced, it would hardly be contended that any profit realized on the latter transaction would be recognized for tax purposes under the statute.
Obviously such would be the rule if a taxpayer owned a building equipped with machinery, having a policy of insurance on the building and a separate policy on the machinery. Upon destruction by fire, the taxpayer might elect to take his loss or report his profit on the involuntary conversion of the building, and forthwith replace the machinery with the proceeds of the other policy of insurance. On the latter transaction no profit or loss would be recognizable.
In the supposed case, two separate conversions of the taxpayer’s property occurred, both resulting from the same casualty, and with only one replacement. So here there were two wholly separate and distinct involutary conversions into cash of the taxpayer’s property in the steamship, and in my opinion the petitioner has the right of election under the statute to treat them separately.
In International Boiler Works Co., 3 B.T.A. 283, a situation was presented similar in principle to the instant case, and the respondent there urged substantially the same argument as here. That case involved section 234 (a) (14) of the Revenue Act of 1921, which, with the exception of minor differences unimportant here, is comparable to section 112 (f) of the 1928 Act. In our opinion, at p. 291, we said:
The Commissioner urges that, if section 234 (a) (14) is to be applied, the taxpayer must treat all the amounts received as insurance for the destruction of its property as a single sum, and that it may not segregate the amounts received under different policies for different properties and select those which it desires to subject to the general gain or loss provisions and those to which it desires to apply the provisions as to involuntary conversion.
We see nothing in the statute to require treatment of the proceeds as a unit. If a taxpayer, for example, has two separate plants, on each of which it received a specified amount upon destruction or condemnation, there is no reason why it may not apply the one specific amount to the reconstruction of the one plant, claiming under section 234 (a) (14), and determine its gain or loss upon the other without reconstruction. The provisions of section 234 (a) (14) are relief provisions by which a taxpayer may postpone the taxation of so much of the gain derived from an involuntary conversion as it uses in replacement. It may not be permitted to postpone the taxation of gain derived from the conversion of one piece of property merely because it elects to use the proceeds in replacing another piece of property. On the other hand, the Commissioner may not deny it the deduction of a loss in the one case if the taxpayer elects to keep the two funds separate.
In the instant case the majority opinion in effect treats as a unit the proceeds of insurance, received in 1917, and the proceeds of the award of the Mixed Claims Commission, received in 1928, notwithstanding the taxpayer elected to keep the two funds separate.
*874Since the deficiency determined by the respondent in this case results wholly from the inclusion in petitioner’s gross income for 1928 of gain derived from an involuntary conversion of property, not recognizable for tax purposes under section 112 (f), supra, in my opinion the respondent’s action should be reversed and we should hold there is no deficiency.