*2990 1. Where a taxpayer received an initial payment on a contract for the construction of ships and where thereafter suit was filed against him to cancel the contract, and where the final judgment left undisturbed in his hands a part of such payment, held that so much as he retained under the judgment was not income in the year in which the suit was finally settled.
2. Deduction for an amount alleged to have been paid for services rendered denied for lack of evidence.
3. Where stock was pledged by a taxpayer to secure his obligation under a contract and the stock was sold by the pledgee at less than cost, held that the loss was sustained in the year in which the stock was sold and not in the year in which a loss was sustained under the contract.
4. The Board has no jurisdiction to redetermine the tax for years for which no deficiency was determined, nor may it consider facts occurring in such years, where such facts have no bearing on the tax for the years over which it has jurisdiction.
5. On the facts obtaining during the years surrounding the business of petitioner and filing of the tax returns, held, the Commissioner was in error in imposing the negligence*2991 penalty.
*1090 These proceedings were, by order duly entered, consolidated for hearing and decision. Respondent has determined that petitioner Hans Pedersen suffered net losses for the years 1918 and 1919 in the respective amounts of $315.43 and $30,266.50, and has further determined deficiencies in tax against said petitioner for the years 1920 and 1921 in the amounts of $9,416 and $13,781.09, respectively, and negligence penalties of 5 per cent for the two latter years in the respective amounts of $470.80 and $689.06. With respect to petitioner Marie Pederson, respondent has determined deficiencies for the years 1920 and 1921 in the respective amounts of $9,416 and $13,781.09. The taxes for all years were determined on a community property basis.
The errors asserted in the original petitions are (a) that respondent erred in including in gross income for the year 1921 the amount of $96,630.50 income from what is known as the French contract, whereas said amount was income for the year 1918; (b) that respondent*2992 erred in not allowing a deduction for a loss of $93,000 sustained through the foreclosure of petitioner's mortgage on the property of the National Realty Co.; that said loss was sustained either in 1918 or in 1921. At the hearing and in his brief filed in this proceeding, counsel for petitioners abandoned the claim that said loss was suffered in the year 1921 and asserts that said loss was suffered in the year 1918; (c) that respondent erred in determining the negligence penalty of 5 per cent; and (d) that the charge of 1 per cent interest a month is unwarranted.
In an amended petition filed at the hearing, all the allegations of which are denied by respondent, petitioner alleged the following additional errors: (e) that respondent erred in disallowing a deduction from gross income for the year 1921 of a loss of $20,000 arising from the sale in that year of stock in Coast Steel Machinery Co.; (f) that respondent erred in not allowing as a deduction from gross income for the year 1918 a loss of $20,000 incurred by reason of the fact that petitioner's stock in the National Realty Co. became worthless in that year; (g) that respondent erred in disallowing as a *1091 deduction*2993 from gross income for the year 1921 the amount of $8,000 paid by petitioner to secure the payment to him of $15,000 on the Nisqually Bridge contract; and (h) in disallowing as a deduction from gross income for the year 1918 the amount of $71,912.45 owing petitioner by the Hans Pederson Construction Co., which amount said company was unable to pay.
FINDINGS OF FACT.
The petitioner, Hans Pederson, who will hereafter be referred to as petitioner, and the petitioner Marie Pederson, were during all the times hereinafter mentioned, and are now husband and wife, citizens of the United States, and residents of the City of Seattle, State of Washington. Petitioner has been engaged in general contracting business in the City of Seattle for about 42 years and has entered into and performed construction contracts involving large amounts, one involving as much as $3,500,000. The books of petitioner are kept as follows: Contract accounts for contract work are on an accrual basis, both as to income and cost. All other income, consisting principally of interest, taxes, repairs and rentals, and all other expenses, consisting of taxes, repairs, rentals and office expenses, are on a cash receipts*2994 and disbursements basis. The accounts of petitioner, of the Hans Pederson Construction Co., and of two other corporations in which petitioner was interested, were until about the year 1923 kept in one and the same set of books. All the income-tax returns hereinafter referred to were made on the calendar year basis.
1.
In the latter part of the summer or the early part of the autumn of 1917, the petitioner began negotiations with one Robert Pichot looking to the construction by petitioner for Pichot of certain ships. On February 13, 1918, Robert Pichot, doing business as Robert Pichot & Co., through his attorney in fact, entered into a contract with one Pierre Guiffard, the material parts of which read:
(1) Messrs. Robert Pichot & Co. confirm having sold obligatorily, by the present contract to Mr. Pierre Guiffard, through the mediation of Mr. Gustave Viterbo:
(2) (8) eight sailing ships with motors, called schooners, (4 master Goelette), built of wood, (Oregon pine) Douglas Fir, conformable, in every respect, to the clauses and stipulations of the here annexed terms and conditions. Those eight schooners shall have a carrying capacity of 2,300 tons (Dead Weight), and their*2995 construction shall be, in every way, equal to the best usual work on the PACIFIC COAST. They shall be built in the YARDS of MR. HANS PEDERSON, at SEATTLE, and shall be identified by their slip numbers on the stocks in said yards, which shall be: 1, 2, 3, 4, 5, 6, 7, 8. They shall have the best character in the BUREAU VERITAS, under whose supervision each of them shall be built.
*1092 (3) The agent of the Bureau Veritas shall inform Mr. Pierre Guiffard, at his request, on the progress of the constructions in order that the subsequent payments answer the advancement of the work. Moreover, Mr. Pierre Guiffard reserves for himself the right to appoint such person of his choice, at his convenience, to superintend the construction work of the eight schooners in all its details, and the strict observance of the terms and conditions.
* * *
(5) Messrs. Robert Pichot & Co. guaranty that those eight schooners are not liable to the requisitioned, and that they will be delivered under French flag.
* * *
(7) The delivery shall take place: For the (4) first four schooners in the (7) seven months from the date of the opening of credit at the account of Messrs. Robert Pichot*2996 & Co., in the Bank of California, at Seattle. The delivery, for the other four (4), shall take place in the (9) nine months from the same date. That delivery shall be made in Seattle.
* * *
(9) The eight schooners shall be insured against all damages made by fire, launching, or other accidents before the final delivery. The price of each schooner is fixed at $337,000) THREE HUNDRED AND THIRTY-SEVEN THOUSAND DOLLARS, viz., for the (8) eight schooners, ($2,696,000) TWO MILLION SIX HUNDRED AND NINETY-SIX THOUSAND DOLLARS.
(10) The payments shall be made thus by Mr. Pierre Guiffard:
I - (20%) Twenty per cent on the signing of the contract, viz., for the (8) schooners, the sum of ($539,200) FIVE HUNDRED AND THIRTY-NINE THOUSAND TWO HUNDRED DOLLARS.
II - The balance, in advance, by monthly instalments in proportion to the term of the delivery of each schooner.
$314,533.30 - THERE HUNDRED AND FOURTEEN THOUSAND FIVE HUNDRED AND THIRTY-THREE DOLLARS, 30 CENTS. 15th of March, 1918.
$314,533.30 - THREE HUNDRED AND FOURTEEN THOUSAND FIVE HUNDRED AND THIRTY-THREE DOLLARS, 30 CENTS. 15th of April, 1918.
$314,533.35 - THREE HUNDRED AND FOURTEEN THOUSAND FIVE HUNDRED AND*2997 THIRTY-THREE DOLLARS, 35 CENTS. 15th of May, 1918.
$314,533.35 - THREE HUNDRED AND FOURTEEN THOUSAND FIVE HUNDRED AND THIRTY-THREE DOLLARS, 35 CENTS. 15th of June, 1918.
$314,533.35 - THREE HUNDRED AND FOURTEEN THOUSAND FIVE HUNDRED AND THIRTY-THREE DOLLARS, 35 CENTS. 15th of July, 1918.
$314,533.35 - THREE HUNDRED AND FOURTEEN THOUSAND FIVE HUNDRED AND THIRTY-THREE DOLLARS, 35 CENTS. 15th of August, 1918.
$314,533.35 - THREE HUNDRED AND FOURTEEN THOUSAND FIVE HUNDRED AND THIRTY-THREE DOLLARS, 35 CENTS. 15th of September, 1918.
$314,533.35 - THREE HUNDRED AND FOURTEEN THOUSAND FIVE HUNDRED AND THIRTY-THREE DOLLARS, 35 CENTS. 15th of October, 1918.
2,696,000.00 - TWO MILLION SIX HUNDRED AND NINETY-SIX THOUSAND DOLLARS.
* * *
(12) Messrs. Robert Pichot & Co. bind themselves to have the builder register the said (8) eight schooners in the name of Mr. Pierre Guiffard, so that the latter be assured of the immediate and absolute ownership of the (8) eight schooners, from their laying on the ways. In guarantee of the good and thorough execution of the contract, Mr. Hans Pederson gives, as he engaged himself rowards messrs. Robert Pichot & Co. following verbal*2998 agreement entered into at Seattle: -
1o - A *1093 fidelity bond of $250,000, issued by the National Surety Company of New York, 42 Broadway (Seattle branch), which will guaranty Mr. Pierre Guiffard against any embezzlement or misuse of the outlaid funds.
20 - A personal security of $250,000 signed and endorsed by friends of his, notoriously solvent. The Bankers of the interested parties shall ascertain themselves of the concomitancy of the above stipulated guarantees, and the payment of the (20%) twenty per cent, provided in No. 1 of the present contract.
(13) In case the final delivery of the (8) eight schooners would not take place for any cause whatsoever, imputable to the builder, that guarantee shall, immediately and of full right, be acquired to Mr. Pierre Guiffard.
Owing to the agreements for taking freight, entered into by Mr. Pierre Guiffard, for the (8) eight schooners, the dates of delivery are absolutely compulsory, and any delay would give occasion to recover damages.
It is agreed between the parties that Mr. Pierre Guiffard is authorized to sell, wholly or partially, with all its advantages and charges, the present contract.
On the same day*2999 a contract of assignment was entered into between Guiffard and the Republic of France, contracting under the name of the French Government, the material part of which reads:
The present contract, with its rights, advantages and charges, is resold, by Mr. Pierre Guiffard to the FRENCH GOVERNMENT who substitutes itself entirely to said Mr. PIERRE GUIFFARD for the entire contents of the contract.
The following letter was mailed to and received by petitioner in due course:
SEATTLE, WASH., U.S.A.,
February 11th 1918.
Mr. HANS PEDERSON,
Alaska Building,City.
DEAR SIR: I am in receipt this morning of a cablegram from Paris, saying:
"Have received your letter of the 5th; consider all is now in order the funds will be paid by Guarantee Trust Co of Paris who have instructions to telegraph to Bank of California, Seattle telegraphic transfer will be made to your credit upon receipt of reply that both guarantees (National Surety Co and personal bond are given in exchange. - Give full instructions to Bank of California; telegraph instructions to Guarantee Trust Co of Paris to transfer the funds and carry out our instructions."
I hereby beg to ask you to have your*3000 personal bond of $250,000 executed immediately and have Mr. Allen instruct the Bank of California that a Fidelity Bond of same amount will be forthcoming upon demand. Your personal bond also must be presented to the Bank of California here.
Upon notification from the Bank of California that those bonds are ready, the funds will be immediately cabled from Guarantee Trust Co of Paris.
Please act immediately.
Yours very truly,
(Signed) ROBERT PICHOT
*1094 Petitioner and Robert Pichot entered into a contract, the material parts of which read:
THIS AGREEMENT, made this 27th day of February, 1918 by and between HANS PEDERSON (hereinafter called the Builder) and Robert Pichot (hereinafter called the Purchaser) both parties of Seattle, Washington, U.S.A.
WITNESSETH:
FIRST: That the builder for and in consideration of the sum to be paid to him by the purchaser as hereinafter set forth, agrees to build and deliver complete in all respects and ready for sale to the purchaser at the yard of the builder at Seattle, Washington, on or before the time hereinafter mentioned, unless prevented by strikes or non-delivery of materials beyond the control of the builder, or otherwise*3001 unavoidable causes beyond his control, free from all and of all claims, liens, and encumbrances, the auxiliary schooners, Numbers I, II, III, IV, V, VI, VII, VIII, known as four masted auxiliary power wooden schooners, built as per approved plans and specifications, of the following dimensions: (Here follows specifications for ships.)
The said vessels shall be constructed according to the requirements of Bureau Veritas, and under their supervision to for ocean going vessels, and will be equipped in accordance with the requirements of the United States Steamboat Inspection Laws in force; all fees for Veritas inspection and classification to be paid by the builders, and Veritas certificate of class to be furnished to the purchaser on delivery of vessels.
* * *
FOURTH: The purchase price of each vessel is Three Hundred and Five Thousand Dollars ($305,000) less five (5) per cent in United States currency, payable as follows:
1. Twenty (20) per cent on the signing of the contract;
2. Thirteen (13) per cent when the vessel is one-half in frame;
3. Thirteen (13) per cent when the vessel is all in frame and keelson in;
4. Thirteen (13) per cent*3002 when the vessel is ceiled;
5. Thirteen (13) per cent when the deck is laid;
6. Thirteen (13) per cent when vessel is planked;
7. Fifteen (15) per cent when vessel is launched and certified to by Veritas and accepted by Purchaser.
FIFTH: The first four vessels shall be completed in seven months from date of final contract and the last four vessels shall be completed in nine months from date of final contract.
* * *
SIXTH: The Builder agrees to furnish the following guarantee to the purchaser;
1. A corporate surety bond in the sum of Two Hundred and Fifty Thousand Dollars ($250,000) to guarantee the completion and delivery of the eight vessels.
2. A personal fidelity bond in the sum of Two Hundred and Fifty Thousand Dollars ($250,000) to guarantee the proper use of the funds for the construction of the above mentioned eight vessels.
Upon the delivery of the above mentioned securities to the purchaser, the purchaser will conclude payments agreed herein.
SEVENTH: It is further agreed and understood that an assignment of this contract by the purchaser will be permitted at any time.
EIGHTH: It is further understood that all installments, after the first payment*3003 is made, shall be made to the builder on the receipt and acceptance of *1095 a report from Bureau Veritas, under whose direction the vessels are to be built at the various specified periods set forth in this agreement.
NINTH: The builder agrees to furnish four copies of specifications and blue prints for each vessel and the yard number under which each vessel is identified by while under construction.
IT IS HEREBY FURTHER AGREED that these vessels shall at all times be the property of the purchaser in all stages of construction and that all materials purchased and delivered in the yard for them or appropriated to the construction of them shall become his property by such delivery or appropriation, subject to a lien by the builder for any unpaid instalments of the purchase price and for work done and labor and materials furnished.
On February 27, 1918, petitioner, with the National Surety Co. as security, executed his bond to Robert Pichot, the material part of which is as follows:
THE CONDITION OF THIS OBLIGATION IS SUCH, that whereas, the said Hans Pederson has entered into a contract with the said Robert Pichot, to build and deliver certain wooden auxiliary schooners, *3004 designated in said contract as Numbers 1, 2, 3, 4, 5, 6, 7, and 8, a copy of which contract is hereto attached and made a part hereof, as if fully set forth herein;
NOW THEREFORE, if the above bounden Hans Pederson shall well and truly perform said contract, and duly complete and deliver said vessels and said auxiliary schooners according to said contract, then this obligation to be void; otherwise to remain in full force and effect.
On February 27, 1918, petitioner, with Sam Hunter, G. H. Hammon, and George L. Haley as sureties, executed his bond to Robert Pichot, the material part of which reads:
The condition of the above obligation is such that if the above bounden Hans Pederson shall properly use the money for the construction of eight vessels in the manner as provided in the contract for the construction thereof, and shall not commit any act of larceny or embezzlement in the use of said money, but shall faithfully discharge his duties with reference to the expenditure and proper use of said moneys as set forth in said contract, a true and correct copy of which contract is attached to and made part of this bond, then the above obligation to be void, otherwise to remain*3005 in full force, virtue and effect.
Upon the execution of these contracts, petitioner began negotiations with persons and corporations looking to the construction of the said ships. He acquired an option on a shipyard and incurred certain liabilities, the nature and amounts of which are not shown.
Under date of April 2, 1918, petitioner and Robert Pichot executed an application to the United States Shipping Board and the United States Shipping Board Emergency Fleet Corporation for permission to construct said ships. By letter dated April 19, 1918, this application was denied.
Some time in March, 1918, the Republic of France made the initial payment demanded by its contract with Pichot, and of this amount the sum of $209,420.30 was deposited on April 2, 1918, with the *1096 Scandinavian American Bank of Seattle, to the credit of petitioner, but in the name of the Hans Pederson Construction Co., all the stock of which was owned by petitioner, who controlled said account to the same extent as though made in his own name. About this time petitioner drew checks on this account amounting to $4,000, for the purpose of making payments for materials and services in connection*3006 with his contract with Pichot. These checks were paid by the bank but on exactly what date does not appear.
About April 17, 1918, the Government of France notified all the parties and sureties on said contract that it canceled the contract with Pichot, of which it was the assignee. On April 20, 1918, the Republic of France filed its complaint in the Superior Court of the State of Washington, in and for the County of King, against Robert Pichot, the petitioner, the Scandinavian American Bank, and the National Surety Co. In its complaint, the Republic of France set forth the contracts and surety bonds above referred to and alleged that on or about March 7, 1918, it turned over to Scandinavian American Bank the amount of the initial payment required in the contract between Guiffard and Pichot, to wit, the amount of $539,200; that out of this amount Pichot, at the request of petitioner, paid the sum of $4,180 to the National Surety Co. as a premium on its bond; that Pichot delivered to the National Surety Co. the sum of $250,000 to be held by it as indemnity against any loss by reason of its said surety bond; that Pichot turned over to petitioner the amount of $209,420 and retained*3007 the balance, to wit, $75,600. The complainant further alleged that Pichot had made certain misrepresentations to Guiffard, among them that petitioner owned and controlled a shipyard and that the vessels contracted for could be built in the United States and would not be requisitioned by the United States, all of which misrepresentations complainant alleged were false. It alleged that petitioner, the Scandinavian American Bank, and the National Surety Company, each and all had notice of the contract between Guiffard and Pichot, of which it was the assignee, and of its rights thereunder. The complainant concluded its complaint with the following prayer:
The premises considered, plaintiff prays that the said contract between the plaintiff's assignor and the defendant Robert Pichot, Exhibit "A" hereto be adjudged to be cancelled and rescinded, and that plaintiff have judgment against said defendant Robert Pichot for the said sum of $539,200 advanced to him under said contract. That the said defendants Pederson and Pichot be restrained and enjoined from paying out, using or expending any part of the money or credits received by such defendants, or either of them, from the said advance*3008 of $539,200, so turned over by plaintiff to said defendant Bank. That the said defendant Bank be restrained and enjoined from paying over to said defendant, Robert Pichot, or to the said defendant Hans Pederson, or to the said National Surety Company, or to or upon the order of them, or either of them, *1097 any part of the said $539,200 remaining on deposit in said Bank, whether such deposit be in the name of said Robert Pichot or Robert Pichot & Company, or Hans Pederson, or National Surety Company, or in any other name. That all of said moneys may be adjudged to belong to this plaintiff, and that said defendant, and each of them, be required and decreed to pay over to this plaintiff all of said moneys in their possession or subject to their control; and for such other, further and general relief as may be equitable and meet in the premises.
All the defendants filed answers. The answer of petitioner denied the allegations of the complaint and affirmatively alleged that there was no privity between complainant and petitioner; that the he did not know of the contract between Pichot and the Republic of France until sometime after he had signed the contract with Pichot; *3009 that he was able and willing to perform his contract with Pichot; that he had incurred large expenditures and liabilities in preparing to perform his contract with Pichot, and concluded with the following prayer:
WHEREFORE the defendant Hans Pederson, prays for judgment that the complaint of plaintiff be denied and that plaintiff take nothing in this cause, and that the Court hold that it is without jurisdiction to grant any relief to the plaintiff as against this defendant Hans Pederson, but if the Court should hold for any reason that the plaintiff is entitled to any relief as against the defendant Robert Pichot that the Court then hold that the plaintiff is entitled to no relief as against this defendant Hans Pederson, and that the defendant Hans Pederson has suffered and sustained a loss and been damaged in sums greater than the total amount of the claim of plaintiff, and the defendant further prays that he may be granted such other, further or different relief as may to the Court seem meet, proper and equitable in the premises.
On April 18, 1921, the following judgment was entered by said Court:
The above cause having come duly and regularly on for trial before the undersigned, *3010 one of the judges of said court, without a jury, on Monday, the 18th day of April, 1921, the said plaintiff appearing by Messrs. Bogle, Merritt & Bogle, its attorneys herein, and said defendant Robert Pichot, appearing by S. D. Wingate, Esquire, and Kerr, McCord & Ivey, his attorneys herein, and said parties having in open court consented that a judgment and decree herein might be entered herein in favor of said plaintiff and against said defendant, Robert Pichot, as prayed for in the amended complaint herein, except that no money judgment should be entered against said defendant, Robert Pichot;
NOW THEREFORE, by reason of the law and the premises, it is ORDERED, ADJUDGED AND DECREED that the plaintiff herein have and recover judgment herein against said defendant, Robert Pichot, as follows:
That the said contract executed between the defendant Robert Pichot, through his attorney in fact, Gustave Viterbo, and one Pierre Guiffard, on or about February 13, 1918, in the City of Paris, France, which contract was thereafter by said Pierre Guiffard duly assigned to the plaintiff herein, with the consent of said defendant, a copy of said contract being attached to the amended complaint*3011 herein, marked Exhibit "A" and made a part thereof, be *1098 and the same is hereby adjudged to be canceled and rescinded. That said defendant, Robert Pichot, be and he is hereby restrained and enjoined from receiving, paying out, using, expending or claiming any part of the sum of $463,600.00 mentioned and referred to in the amended complaint herein, which sum said defendant, Robert Pichot, heretofore paid and turned over, or caused to be paid and turned over, out of the moneys received by him from the plaintiff herein, as alleged in the complaint, to the defendant Hans Pederson; and that as between the plaintiff herein and the said defendant, Robert Pichot, all of said sum of $463,600.00 and any bonds or other property purchased thereby or credits therefrom be and the same are hereby adjudged the property of said plaintiff.
That plaintiff take nothing against said defendant, Robert Pichot, for or on account of said sum of $75,600.00 of the said sum of $539,200.00 so received by said defendant, Robert Pichot, from the plaintiff, and retained by said defendant, as alleged in the amended complaint.
That neither party hereto recover any costs in this action.
On April 19, 1921, a*3012 judgment was entered in said cause, of which the following is the material part:
The above cause having come on duly and regularly for trial before the undersigned, one of the judges of said court, without a jury on Monday, the 18th day of April, 1921, said plaintiff appearing by Messrs. Bogle, Merritt & Bogle, its attorneys herein, and said defendant Hans Pederson appearing by Messrs. Tucker & Hyland and Messrs. Roberts & Skeel, his attorneys herein, and said defendant The Scandinavian American Bank, a corporation, appearing by Messrs. Ballinger, Battle, Hulbert & Shorts, its attorneys herein, and said defendant The National Surety Company, a corporation, appearing by C. B. White, Esquire, its attorney herein, and said parties in open court having consented that a judgment and decree herein might be entered in favor of said plaintiff and against the said defendants as herein provided;
Now, THEREFORE, by reason of the law and the premises, it is hereby ORDERED, ADJUDGED AND DECREED that the plaintiff herein have and recover judgment herein against said defendants, Hans Pederson, The Scandinavian American Bank, a corporation, and The National Surety Company, a corporation, as follows:
*3013 That the said contract executed between the defendant Robert Pichot, through his attorney in fact, Gustave Viterbo, and one Pierre Guiffard, on or about February 13, 1918, in the City of Paris, France, which contract was thereafter by said Pierre Guiffard duly assigned to the plaintiff herein, with the consent of said defendant Robert Pichot, a copy of which contract is attached to the amended complaint herein, marked Exhibit "A" and made a part thereof, be and the same is hereby adjudged to be cancelled and rescinded.
That the contract executed between the defendant Robert Pichot and the defendant Hans Pederson, dated February 27, 1918, a copy of which is attached to said amended complaint marked Exhibit "C" and made a part thereof, which contract has been duly assigned by said defendant Robert Pichot to said plaintiff, be and the same is hereby cancelled and rescinded. Said original contract being attached to the original deposition of H. J. Johannet on file herein, the Clerk of this Court is hereby ordered to detach said contract from said deposition and deliver the same to said defendant Hans Pederson, or his attorney herein.
*1099 That said plaintiff is the owner*3014 and entitled to recover from the defendant The Scandinavian American Bank, a corporation, the sum of One Hundred and Five Thousand Four Hundred Twenty and 30/100 Dollars ($105,420.30) received by said The Scandinavian American Bank from the defendant Hans Pederson, out of the moneys paid by the plaintiff to the defendant Robert Pichot and turned over by said Robert Pichot to said Pederson and deposited by him in said Bank and that no one of the defendants herein is entitled to any part of said sum of $105,420.30.
That said plaintiff is the owner of and entitled to recover from the defendant The National Surety Company, a corporation, the sum of Two Hundred Fifty-one Thousand Two Hundred Eighty-two and 50/100 Dollars ($251,282.50) received by said defendant The National Surety Company, a corporation, from said defendant Hans Pederson, out of the moneys paid by the plaintiff to the defendant Robert Pichot, and turned over by him to said defendant Hans Pederson and by him to said The National Surety Company, a corporation, and to all interest collected or received by said The National Surety Company from or on account of said such of money, or any securities purchased therewith, and*3015 that no one of the defendants herein is entitled to said sum of money or interest collected or received thereon. The judgment herein in favor of plaintiff and against the defendant The National Surety Company, a corporation. shall be satisfied by said The National Surety Company turning over and delivering to one E. G. Fifield, attorney, at No. 65 Broadway, New York City, for the plaintiff herein, Liberty Bonds of the United States of America, aggregating the sum of $250,000.00 par value, heretofore purchased out of said sum of $251,282.50, with such interest coupons as are attached thereto, together with any and all other bonds or other evidences of indebtedness purchased out of said moneys or the interest collected or received on account of said moneys, together with any part of said sum of $251,282.50 and or interest thereon or on bonds or securities purchased therewith, which has not been invested in securities by said The National Surety Company.
The judgment then canceled the various surety bonds above set forth and adjudged that none of the parties recover any cost.
On April 24, 1918, the Hans Pederson Construction Co. by petitioner, its president, drew its check for*3016 $200,000 in favor of petitioner, who endorsed the check and delivered it to the Scandinavian American Bank for the purpose of paying certain indebtedness of petitioner to said bank. The check is stamped on its face "N May 27, 1919 11" and is canceled by perforations. The bank book of the Hans Pederson Construction Co. shows a further credit of May 27, 1919, of $205,420.30. This last credit represents the first credit of April 2, 1918, less the amount of $4,000 checked out by petitioner as heretofore set forth. On May 27, 1919, said check for $200,000 was paid by said bank. Scandinavian American Bank paid to the Republic of France through attorneys Bogle, Merritt and Bogle the sum of $105,420.30, the amount recited in the judgment of April 19, 1921, and thereupon the matter was settled by petitioner and *1100 said bank as shown by the following letter of April 19, 1921, from the bank to petitioner:
SEATTLE, WASHINGTON, April 19, 1921.
Mr. HANS PEDERSON,
Alaska Building, City.
DEAR SIR: The following is a statement of the manner in which we have adjusted the various items in connection with the settlement of the suit of the Republic of France against yourself, *3017 Robert Pinchot and this bank:
| DISBURSEMENTS. | ||
| Paid - Bogle, Merritt & Bogle, in full settlement of their claim | $105,420.30 | |
| Paid - Tucker & Hyland, Attorneys Fees | 3,500.00 | |
| Paid - John W. Roberts, Attorneys Fees | 2,500.00 | |
| Paid - National Surety Co | 6,965.81 | |
| TOTAL DISBURSEMENTS IN CONNECTION WITH THIS MATTER | 118,386.11 | |
| Against this amount we have allowed you the following credits: | ||
| Proceeds of 2 notes of the Erickson Const. Co. which we held as collateral to your obligations and which we now have purchased without recourse upon you, including interest figured to the 19th instant | $14,324.30 | |
| Interest on the deposit of $200,000 for 14 mos. at 6%, during which time we held the funds in trust, and did not apply the same on your obligation | 14,000.00 | |
| TOTAL CREDIT | 28,324.30 | |
| Leaving a balance advanced by us for your account of | 90,061.81 |
We already hold your note for $91,000 dated April 16, 1921, with your letter of instructions of even date covering the agreement between us regarding the adjustment of this matter, and it will now be in order for you to call and execute a note, we would suggest, in the even amount of $90,000 giving us a check*3018 for the difference of $61.81, plus revenue stamps $18.00, making the check for $79.81.
We trust the above statement is clear to you, and in accordance with our agreement in the matter.
By reason of all these matters, petitioner received income in the amount of $96,630.50. In the deficiency letter upon which this proceeding is based respondent his included this amount in petitioner's gross income for 1921 as "Income from French contract". Petitioner's books show said amount to have been received in 1918.
2.
Petitioner was engaged in the year 1921 in the construction of what was known as the Nisqually Bridge. He desired to obtain from the State of Washington compensation for extra work and materials and through one George W. Allen, who was engaged in the insurance business, submitted a claim therefor in the amount of $27,000 or *1101 $30,000 to the Highway Department of said State. The claim was allowed to the extent of $15,000 and this amount was deposited to the credit of petitioner in Scandinavian American Bank and was represented by a certificate of deposit of that bank dated March 28, 1921, drawn in favor of petitioner.
3.
On or about April 30, 1916, petitioner*3019 transferred to the Coast Steel Machinery Co. of Portland, Oreg., for 200 shares of the capital stock of that company, certain machinery and equipment theretofore purchased and owned by him personally and certain machinery and equipment theretofore purchased by the Hans Pederson Construction Co., a corporation, and turned over by that company to petitioner in settlement of an account with him. The value of the machinery turned into the transferred to the Coast Steel Machinery Co. of Portland by petitioner in April, 1915, was $14,000, and the cost of the Coast Steel Machinery Co. stock to petitioner was $14,000. The Coast Steel Machinery Co. stock issued for said machinery and equipment was issued in the name of petitioner, individually, and was his properry. About the year 1917 the Coast Steel Machinery Co. stock was put up by petitioner with one J. C. Boyer, Portland, Oreg. Petitioner had contructed part of the City Auditorium for the City of Portland. Petitioner was one of several contractors engaged in the construction of said auditorium. The completion of said building was turned over to a creditors' committee, of which J. C. Boyer was trustee, the contractors not being relieved*3020 of their obligation on their contracts.
Petitioner turned over to J. C. Boyer, trustee for the creditors' committee 180 shares of Coast Steel Machinery Co. stock acquired in 1915, as heretofore set forth. This stock was sold by J. C. Boyer in 1921 for $12,000 and applied by Boyer, trustee, to the balance due for material and loabor on petitioner's contract. Interreleases of petitioner by his bondsmen and by petitioner of the City of Portland were executed by the parties in February, 1921. One of these releases was executed by J. F. Kelly. Said release recited that he, Kelly, with certain others, had executed a bond in favor of the City of Portland, guaranteeing the faithful performance by petitioner of his construction contract with the City of Portland; that the ultimate cost of the building had exceeded the contract price; that the City of Portland had expressed a desire to pay the sum of $36,702.84, representing a portion of the increased cost of said building, in consideration that petitioner release the City from all obligations to him, *1102 to J. C. Boyer, trustee, for the benefit of unpaid creditors, and then contained the following:
NOW THEREFORE, I, J. F. *3021 Kelly, of Portland, Oregon, at the express solicitation and request of the estate of N. A. Schanen, deceased, and of the heirs at law of the said N. A. Schanen, deceased, and in consideration of said Hans Pederson executing said release of the City of Portland in terms and figures as required by the City of Portland, do hereby release and discharge subject to the conditions hereinafter set out, the said Hans Pederson from any and all rights, claims, dued or credits that I now have or at any time hereafter may have against the said Hans Pederson by reason of or in any way growing out of the execution of said bond guaranteeing the faithful performance upon the part of said Hans Pederson of the contract for the construction of said building.
This release is contingent upon and shall be effective only after the said City of Portland has paid to J. C. Boyer, trustee and the said J. C. Boyer, trustee, has received from the City of Portland the sum of $36,702.84, for the use and benefit of the said unpaid creditors of Hans Pederson.
It is understood that in the execution of this release in favor of Hans Pederson that the undersigned does so at the express solicitation and request of*3022 the estate of N. A. Schanen, deceased, and the heirs at law of the said N. A. Schanen, deceased, and this release and discharge shall in no manner be considered as releasing or discharging the estate of N. A. Schanen, deceased, from any claim, right, dues or credit that the undersigned now has or at any time hereafter may have by reason of or in any manner growing out of the execution of said indemnity agreement by the said N. A. Schanen and H. P. Scheel in favor of the undersigned.
By an instrument dated February 11, 1918, the executors and certain heirs at law of one N. A. Schanen executed an instrument in writing by which they agreed that the indemnification of N. A. Schanen should not be affected by reason of the execution of the agreement of Kelly of February 2, 1921. On the 11th day of February 1921, the executors of N. A. Schanen, deceased, executed an instrument similar to that executed by Kelly.
On the 16th day of February 1921, the N. A. Schanen Marble Works executed a paper reciting, among other things, that they had furnished certain labor and material for the construction of said building and contained the following:
NOW THEREFORE, the undersigned, THE N. A. SCHANEN*3023 MARBLE WORKS, an Oregon corporation, pursuant to a resolution of the Board of Directors duly and regularly passed, and in consideration of the said Hans Pederson executing said release of the City of Portland of any and all claims that it might have against the City of Portland by reason of the construction of the Public Auditorium in said City, does hereby forever release and discharge the said Hans Pederson from any and all claims that the undersigned now has or at any time hereafter may have by reason of the furnishing of labor and material in the construction of said Auditorium.
The Coast Steel Machinery Co. stock acquired by petitioner and disposed of as aforesaid was not carried on petitioner's books and its cost, therefore, not included as a part of the net loss computed by petitioner on his books and on his income-tax return for the calendar *1103 year 1922, on the completion of said Civic Auditorium in the City of Portland by the creditors' committee or on settlement by petitioner of the last of these obligations under his contract. But the cost of said Coast Steel Machinery Co. stock is a loss or deduction in addition to whatever other loss may have been sustained*3024 by petitioner on his said contract with the City of Portland.
4.
During the year 1910 or 1911 the petitioner, Hans Pederson, completed a building on lots 9 and 10, block 1103, New Tacoma Addition to the City of Tacoma, Wash., for the National Realty Co., a Washington corporation. On or about December 23, 1911, petitioner accepted in payment of the balance due him on the construction of said building a note of the National Realty Co. for $100,000, secured by a second mortgage on the property built and the lots on which it stood. There was at that time a first mortgage of $375,000 on the property, said mortgage being owned by the Metropolitan Life Insurance Co. of New York.
The National Realty Co. became financially embarrassed and in order to provide it with funds to meet taxes and charges on the building, petitioner permitted a new mortgage ot William Virges, as trustee, to come in ahead of his mortgage, and to become a second mortgage, petitioner's mortgage thereby becoming a third mortgage. The note to William Virges as trustee was dated June 1, 1914, and secured a note of the same date for the sum of $20,000, that amount having been lent to the National Realty Co. by*3025 William Virges as trustee. The mortgage to William Virges, as trustee, covered lots 9 and 10, block 1103, New Tacoma. In order to further secure William Virges, trustee, the National Realty Co., at the time of the execution of said note and mortgage, turned over to Virges possession and the rents of the building on lots 9 and 10, and also a contract for the purchase of lots 11 and 12 of said block, then held by the National Realty Co., and possession and the rents of said lots 11 and 12 also.
Some time in the year 1916, the exact date of which is unknown to the parties hereto, the National Realty Co. went into a general receivership, one G. F. O'Brien being receiver.
On January 19, 1915, petitioner assigned his note and mortgage for $100,000 to the E. I. Dupont De Nemours Powder Co. as collateral security for a note in the approximate amount of $13,000 owed by him to the Powder Company. Prior to the time of assignment petitioner had been paid $7,000 on account of the principal of said note of the National Realty Co., and the amount then due thereon was $93,000. The National Realty Co. failed to pay the interest on petitioner's note due March 22, 1915, and interest subsequently*3026 *1104 due. It also failed to pay the interest on the first mortgage held by the Metropolitan Life Insurance Co., due April 1, 1915. At the time of default in the payment of interest on the mortgages aforesaid some judgments had been secured against the National Realty Co. by other creditors than the three mortgage holders heretofore mentioned, and executions taken out on those judgments, and rents of tenants of the National Realty Co. garnisheed.
To prevent dissipation of the rents on the property subject to the third mortgage, suit and application were filed in the name of the Dupont De Nemours Powder Co. in the Superior Court of Pierce County, State of Washington, in the case of E. I. Dupont De Nemours Powder Co. v. National Realty Co., William Virges as Trustee, at alia, Docket No. 37803, asking for judgment upon the Pederson note and mortgage, for appointment of a receiver until sale of the property under the terms of said third mortgage, and for a decree for sale. William Virges, as trustee, filed answer and cross-petition, alleging that his mortgage was a second mortgage and superior to the Pederson mortgage, and asking for foreclosure of his mortgage and*3027 sale of the property.
In April, 1915, one Lyons was appointed special receiver and took possession of lots 9, 10, 11, and 12, block 1103, New Tacoma, pending foreclosure of the mortgages. At the time said Lyons took possession the interest of the National Realty Co. in lot 8, block 1103, New Tacoma, immediately adjoining lot 9 on the north, had been lost by foreclosure proceedings brought by the Bankers Trust Co. of Tacoma.
On February 15, 1916, the Superior Court of Pierce County, Washington, rendered judgment on the application for foreclosure of the second and third mortgages on lots 9 and 10. The court order held the Virges mortgage superior to that held by the Dupont Powder Co., gave judgment to Virges in the sum of $23,140.38, together with such additional amounts as might be necessary to satisfy and redeem outstanding receiver's certificates theretofore issued by the receiver Lyons for money borrowed for use in the receivership and for expense of the receivership, gave judgment in favor of the Dupont Powder Co. on the Pederson mortgage in the sum of $118,340, and ordered a sale of the property.
On July 1, 1916, the sheriff duly sold the property covered by petitioner's*3028 mortgage to William Virges, as trustee, for a sum sufficient to satisfy the second mortgage, costs, and fees, but insufficient to satisfy any part of the Dupont Powder Co. judgment. On August 28, 1916, the Superior Court of Pierce County, Washington, issued an order confirming the sheriff's sale of July 1, 1916, to William Virges, as trustee, and ordering the sheriff to issue to the purchaser a sheriff's certificate to said property.
*1105 On May 10, 1916, notice of appeal to the Supreme Court of the State of Washington was filed in the name of the Dupont Powder Co., appealing from the Superior Court decision of February 15, 1916, whereby the court had directed a foreclosure of the second and third mortgages, in the manner set forth in the decree, and "particularly from the refusal to decree a separate sale of said property under and by virtue of the plaintiff's mortgage" (the Dupont-Pederson mortgage) "in the said cause." On December 26, 1916, the Supreme Court of Washington denied the appeal in a decision reported as *3029 ; . On January 26, 1917, the Supreme Court of Washington signed the remittitur affirming the judgment of the Superior Court of Pierce County, as shown in the above cited decision of December 26, 1916, and remitting the cause to the Superior Court for further proceedings in accordance with the said decision.
On or about January 23, 1917, the Dupont Powder Co. brought suit against petitioner on the note for approximately $13,000 owed by him to the Powder Company, as heretofore mentioned. That suit was filed in the Superior Court of Kings County, Seattle, Washington, where it was docketed as case No. 120334. Petitioner filed his answer to said suit and by way of cross-complaint and counterclaim alleged conversion of the National Realty Co. note and mortgage assigned by him to the Dupont Powder Co. on or about January 19, 1915. On November 26, 1917, the Superior Court of Kings County, Washington, gave judgment for the Dupont Powder Co. on the said note for approximately $13,000 given it by petitioner, and against petitioner on his cross-complaint and counterclaim. Petitioner then appealed to the Supreme Court*3030 of the State of Washington, and that court on December 16, 1918, affirmed the decision of the trial court, in a decision reported as ; . The decisions of the Supreme Court of Washington, reported in , and , are made a part of these findings of fact to the same extent as though fully incorporated herein.
The National Realty Co. was the owner of lots 8, 9, 10, 11, and 12 in block 1103, New Tacoma addition to the City of Tacoma, Wash. During the years 1917 and 1918 the approximate market value, without improvements, of lots 8, 9, and 10, was $40,000, each, and of lots 11 and 12, $110,000. The contract price for the building entered into by petitioner on lots 9 and 10 was something over $500,000 and the approximate value of said building was between $400,000 and $500,000. The petitioner collected on his mortgage debt approximately $7,000. Petitioner built what is known as the Puget Sound State Bank Building on lot 8, and said building was worth at its *1106 completion about $55,000, but when said building was erected or completed does*3031 not appear.
In November, 1916, James F. O'Brien, receiver of National Surety Co., filed his complaint in the Superior Court of the State of Washington in and for the County of Pierce against Walter N. Harvey, George V. Burke and L. W. Pratt, alleging that as officers of National Realty Co. they had misappropriated $6,100 of the money of said corporation, and also that they had in violation of the right of the creditors of the corporation paid out dividends in the amount of $2,514.05, and sought judgment against said defendants and each of them in said amounts. What judgment was finally entered in said proceeding, if any, does not appear. Under date of June 29, 1920, the Metropolitan Life Insurance Co., in consideration of $100,000 and accrued interest paid to it, executed a release of its mortgage of December 13, 1911, and an extension thereof in so far as lots 11 and 12 of block 1103 were concerned. Said release stated that it did not apply to security in so far as lots 9 and 10 of said block were concerned. Said release was recorded August 16, 1920. Under date of September 1, 1920, the Sound Bond & Mortgage Co., a corporation, executed a mortgage to the Protective Realty*3032 Co., a corporation, to secure certain notes of a total face value of $180,000. The said mortgage contains the following:
It is covenanted that party of the first part shall have the privilege of increasing the amount of the mortgage of the Metropolitan Life Insurance Company beyond the sum of $245,000 now outstanding as the balance of the principal of said mortgage, in that or some other company, or to some other person and if it does so the excess amount shall stand as a first and prior lien upon the mortgaged property in addition to the $245,000 provided that the amount of the increase of the principal of the mortgage indebtedness is applied on the indebtedness secured by this mortgage.
The following is a complete list of all judgments against the National Realty Co., as listed in the execution record in the office of the County Clerk of Pierce County, State of Washington, for the years 1910 to 1918, inclusive:
No. 113803.
Judgment *1107 Sheet.
Judgment Debtor: J. W. Greene individually, and J. W. Greene and Rosa E. Greene, his wife, a community, and National Realty Company and Louis W. Pratt, individually and Louis W. Pratt and Geraldine S. Pratt, his wife as*3033 a community.
Judgment Creditor: The Bankers Trust Company
Dept. No. 3 Case No. 36249 Ex. Doc. 28 Page 358
Judgment Entered: July 1, 1914.
| Judgment with interest at | 8% per annum 0n | $587.50 payable quarterly |
| 6% per annum on | 87.11 | |
| 655.61 |
and Costs, $16.80. Grosscup & Morrow, Attorneys for Judgment Creditor.
| Supplemental Proceedings. | |
| July 1, 1914 | 2 Abstracts of Judgment issued $1.40 |
| July 1 | General Execution issued Adams County |
| Aug. 3 | General Exceution issued Spokane Co. |
| Oct. 30, | General Execution Returned |
Judgment Debtor: J. W. Greene individually and J. W. Greene and Rosa E. Greene, his wife, as a community and National Realty Company severally.
Judgment Creditor: The Bankers Trust Company.
Dept. No. 3. Case No. 36250. Ex. Doc. 28. Page 359
Judgment Entered: July 1, 1914.
| Judgment with interest | at 8% per annum on | $2,000.00 payable quarterly |
| 6% per annum on | 228.30 | |
| 2,228.30 |
and Costs, $16.80. Grosscup & Morrow, Attorneys for Judgment Creditor.
| Supplemental Proceedings. | |
| July 1, 1914 | 2 Abstracts of Judgment issued $1.40 |
| Aug. 3, | General execution issued Spokane Co. |
| July 1, | General execution issued Adams Co. |
| Oct. 30 | General execution Returned |
*3034 Judgment Sheet.
Judgment Debtor: National Realty Company
Judgment Creditor: C. C. Doud
Dept No. 3 Case No. 35968 Ex. Doc. 28 Page 373
Judgment Entered: July 8, 1914
Judgment with interest at 6% per annum from Dec. 17, 1913 $1,000 and Costs,
$ . F. D. Oakley, Attorney for Judgment Creditor.
Supplemental Proceedings.
Judgment Debtor: National Realty Company.
Judgment Creditor: Nickerson-McFarlane Machinery Co.
Dept. No. 1 Case No. 35969 Ex. Doc. 28 Page 374
Judgment Entered: July 8, 1914
Judgment with interest at 6% per annum, $508.37 and Costs, $ . F. D. Oakley Attorney for Judgment Creditor
Judgment Sheet.
Judgment Debtor: National Realty Company, a corp.
Judgment Creditor: The Blaisdell Machinery Company, a corp.
Dept. No. 1 Case No. 36042 Ex. Doc. 28 Page 426
Judgment Entered: Sept. 9, 1914. $600.00
Judgment with interest at 6% per annum from 1st day of May, 1913, $48.00 $648
and Costs, $24. Chapman and Bailey Attorney for Judgment Creditor.
*1108 Supplemental Proceedings.
Judgment Debtor: E. W. Bereiter and Bessie Bereiter, his wife, and National Realty Company, a corp., and each of them jointly and severally
Judgment*3035 Creditor: The Bankers Trust Company, a corp.
Dept. No. 2 Case No. 36474 Ex. Doc. 28 Page 458
Judgment Entered: Oct. 6, 1914.
Judgment with interest at 6% per annum on $189.66 until paid $1,189.66 8% on $1,000 from date until paid.
and Costs, $14.60. D. S. Grosscup and Morrow, Attorneys for Judgment Creditor.
*1109 Judgment Sheet.
Judgment Debtor: National Realty Company, a corp.
Judgment Creditor: Bankers Trust Company, a corp.
Dept. No. 2 Case No. 36459 Ex. Doc. 29 Page 31.
Judgment Entered: Nov. 25, 1914
Judgment with interest at 7% per annum, $60,000 and costs, $3,616.24
Supplemental Proceedings.
11-25-14 Special Execution issued
1-25-15 Special Execution returned. Sold plff. $50,000
1-27-15 Sheriff's Return shows a deficiency of $16,922.07
Sheriff's Return of sale of personal property
(See Ex. Doc. 29-144.)
Judgment Debtor: James Keho and National Realty Company Domestic corp and each of them.
Judgment Creditor: Bankers Trust Company, a domestic corp.
Dept. No. 4. Case No. 36658. Ex. Doc. 29 Page 62.
Judgment Entered: Dec. 14, 1914.
Judgment with interest at 6% per annum, $199.64 and Costs, $85
Judgment Sheet.
*3036 Judgment Debtor: C. E. Jay and National Realty Company, a corp.
Judgment Creditor: Bankers Trust Company, a corp.
Dept. No. 3 Case No. 37219 Ex. Doc. 29 Page 118.
Judgment Entered: Jan. 20, 1915
Judgment with interest at 6% per annum, $764, and Costs, $28.40.
Kelley & MacMahon.
Judgment Debtor: National Realty Company, a corp.
Judgment Creditor: Bankers Trust Company, a corp.
Dept. No. 2, Case No. 36459 Ex. Doc. 29 Page 144.
Judgment Entered: Feb. 6, 1914.
Judgment: Deficiency with interest at 7% per annum from Jan. 23, 1915, $17,097.09. Grosscup & Morrow.
(See Ex. Doc. 29, page 31.)
Judgment Sheet.
Judgment Debtor: National Realty Company, a corp.
Judgment Creditor: International Mercantile & Bond Company a corp.
Dept. No. 3 Case No. 37648 Ex. Doc. 29 Page 218.
Judgment entered: March 31, 1915.
Judgment with interest at 6% per annum, $339.08. W. W. Keyes.
Judgment Debtor: National Realty Company, a corp.
Judgment Creditor: William Virges, as Trustee.
Dept. No. 4 Case No. 37803 Ex. Doc. 30 Page 83.
Judgment Entered: Dec. 2, 1915.
Judgment with interest at 7% per annum - Nov. 10, 1915 $21,672.00 and Costs, $1,011.80. *3037 Burkey, O'Brien & Burkey.
Supplemental Proceedings.
12-2-15 Special Execution issued.
12-15-15 Vacated and set aside by Order of Court.
Judgment Sheet.
Judgment Debtor: National Realty Company, a corp.
Judgment Creditor: E. I. DuPont de Nemours Powder Co., a corp.
Dept; No. 4 Case No. 37803 Ex. Doc. 30 Page 83.
Judgment Entered: Dec. 2, 1915.
Judgment with interest at 12% per annum Nov. 10-15 $110,506.10 and costs, $5,000. Atty. Trefethen Grunstead & Laube, Seattle.
Supplemental Proceedings.
12-2-15 Special Execution issued.
12-15-15 Vacated and set aside by Order of Court.
Judgment Debtor: National Realty Company, a corp.
Judgment Creditor; E. I. DuPont de Nemours Powder Company.
Dept. No. 4. Case No. 37803. Ex Doc. 30 Page 199
Judgment Entered: Feb. 15, 1916
Judgment with interest at 12% per annum, $113,419.40 and costs, $5,010.60.
Trefethen Grunstead & Laube
Supplemental Proceedings.
2-15-16 Special Execution issued
4-29-16 Special Execution returned, request W. Virges.
5- 3-16 Alias Special Execution issued
5-10-16 Bond for Costs 5-10-16 Notice of Appeal Pltff.
1-10-24 Abstract of Judgment, 70??
Judgment*3038 Sheet.
Judgment Debtor: National Realty Company, a corp.
Judgment Creditor: The National Bank of Tacoma, a corp.
Dept. No. 2 Case No. 39094 Ex. Doc. 30 Page 200.
Judgment Entered: Feb. 15, 1916
Judgment with interest at 10% per annum, $9,890.30 and costs, $783.30. Hayden Langhorne & Metzger
*1110 Supplemental Proceedings.
2-15-16 Special Execution issued
3-25-16 Special Execution returned Sold plff. No deficiency.
4- 6-16 Order of confirmation.
At a time not shown National Realty Co. owned various pieces of property throughout the State of Washington. During the year 1918, the National Realty Co. owned two lots, known as the "Market", in Tacoma, which had a market value of $10,000 each. Whether these properties were covered by liens or mortgages does not appear. In the year 1918 petitioner engaged certain attorneys to investigate the question of tax liability of the stockholders of National Realty Co. These attorneys were engaged at this work several months, with what result is not shown.
5.
The Hans Pederson Construction Co. is a corporation which was organized under the laws of the State of Washington in April, 1911. It had an authorized*3039 capital stock of $50,000, divided into 500 shares of the par value of $100 each. On May 5, 1911, the whole of said capital stock was subscribed as follows: petitioner, 250 shares; C. J. Erickson, 150 shares; and W. G. Jones, 100 shares. The only payments made on said subscriptions were represented by certain wagons, scrapers, and a Bucyrus Dragline Shovel, all of which were carried on the books of said company as of the year 1918 in the amount of $20,000, less depreciation in the amount of $800. At a time not shown, petitioner acquired all of the stock of Hans Pederson Construction Co. In 1913 and 1914 petitioner entered into certain contracts with the Puget Sound & Willapa Harbor Railway Co., a corporation, for the construction of a part of its railroad. These contracts are known as the Raymond Branch contracts. At the annual meeting of the stockholders of the Hans Pederson Construction Co., held September 11, 1914, the following resolution was adopted:
It was further moved, seconded and unanimously carried that any and all contracts performed, or transactions had, by Hans Pederson, as president of the company, by in all things by the corporation confirmed and approved, particularly*3040 the carrying out of the City of Tacoma contract and the entering into a sub-contract by Hans Pederson, as contractor, with the Puget Sound & Willapa Harbor Railway Company for what is known as the Raymond Branch; also any and all drainage district contracts that Hans Pederson made for the company in Yakima County.
In carrying out said contracts petitioner during the years 1914 to 1918, inclusive, advanced the following amounts, which were credited to him on the books of the Hans Pederson Construction Co., to wit: 1914, $128,138.71; 1915, $2,341.77; 1916, $7,801.66; 1917, *1111 $164.57; and 1918, $118.32. In 1915 petitioner received from the Hans Pederson Construction Co. the sum of $6,340.58. The net total advanced by petitioner during said years amounted to $132,223.91. Of these advancements petitioner took as deductions in his incometax returns the following amounts in the following years: 1914, $24,963.95; 1915, $4,498.26; and 1916, $7,904.39. Whether these deductions were allowed by the Commissioner does not appear. The total so charged off for all these said years amounts to $37,366.60. The amount not charged off was $94,857.31. Of this latter amount petitioner*3041 sought in his return for the calendar year 1921 to deduct the amount of $71,912.45. This deduction was denied by respondent and petitioner seeks in this proceeding to have said amount allowed as a deduction for the calendar year 1918.
On July 19, 1917, petitioner filed in the Superior Court for the State of Washington in and for King County, his amended complaint against the Puget Sound & Willapa Harbor Railway Company. In this amended complaint he set forth the various contracts entered into between him and the Railway Company and alleged, among other things, that he had done extra work and furnished extra materials and that there were due him for these and other reasons, the amount of $82,373.64. Said amended complaint concludes with the following prayer:
WHEREFORE, Plaintiff Hans Pederson prays for judgment against the defendant Puget Sound & Willapa Harbor Railway Company, for the sum of eighty-two thousand three hundred seventy-three and 64/100 dollars ($82,373.64), with interest thereon at the rate of six per cent per annum from the 7th day of December 1914, until paid, and for all proper costs and disbursements in this action; and plaintiff prays for all equitable relief*3042 and for such other, further or different relief as may to the Court seem meet, just and equitable.
On the 17th day of September, 1917, a final judgment was entered in said cause, the material part of which reads as follows:
IT IS ORDERED, ADJUDGED AND DECREED:
I.That the sum of $521.43 heretofore paid into court by the said defendant for the said plaintiff as a balance owing unto the said plaintiff for and on account of services performed and material furnished by the said plaintiff under the contract between the said parties dated December 29, 1913, and under the terms and provisions of said contract of December 7, 1914, be paid over by the clerk of this court unto the said plaintiff.
II.That the sum of $388.28 heretofore deposited with the clerk of this court as a balance owing by the said defendant to the said plaintiff for work and labor performed and material furnished under the said contract of February 21, 1914, be refunded by the said clerk unto the said defendant.
*1112 III.
That said action be, and the same is hereby, dismissed with prejudice; and that the said defendant do have and recover of and from the said plaintiff its costs and disbursements*3043 herein to be duly taxed.
No appeal was taken from this judgment. In the year 1918 the only assets of the Hans Pederson Construction Co. which could have been subjected to its debts were the wagons, scrapers and the Bucyrus Dragline Shovel above mentioned, which were carried on its books at a value of $20,000, subject to depreciation of $800 and unpaid stock subscriptions of approximately $30,000.
Subsequent to the year 1918, petitioner made the following advances to the Hans Pederson Construction Co.: 1919, $312.80; 1920, $350; 1922, $500; 1923, $5,610; and 1924, $250. During the following years petitioner made the following withdrawals from the Hans Pederson Construction Co.: 1920, $2,928.90; 1921, $2,920.40; 1922, $4,474.89; 1923, $5,046.99; 1924, $5,025.66; 1925, $3,693.24; 1926, $1,926.75; and 1927, $3,350.86. During said years the Hans Pederson Construction Co. made no formal declaration of dividends.
6.
Petitioner in his income-tax return for the year 1920 reported net income from business or profession, $93,880.39; net income from salaries, etc., $6,294.63; income from partnerships, etc., $5,222.56; net income from rents, royalties, etc., $9,776.92; other income, *3044 $28,166.14, making a total of $143,058.14, against which he took deductions in the amount of $195,513.68. Among the deductions which he took were loss on National Realty Co. mortgage $169,137.65 and loss on National Realty Co. stock of $20,000. Respondent has determined that the net taxable income of petitioner for the year 1920 amounted to $131,313.46, from which respondent deducted a net loss for 1919 of $30,266.50, with the result that the taxable income amounted to $101,046.96. This amount respondent determined should be taxed in equal parts to petitioner and his wife, the petitioner Marie Pederson. In his income-tax return for 1921, the petitioner reported gross income in the amount of $119,116.15 and took as deductions items amounting to $119,403.51. Among the items taken as deductions was a $20,000 loss on Coast Steel Machinery Co. stock sold by a creditors' committee, and the sum of $71,912.45 as a worthless loan to the Hans Pederson Construction Co., which said company lost on the Raymond contract. Among other things, respondent has determined that neither of the above amounts was deductible from gross income for 1921. Respondent has determined that the net taxable*3045 income for 1921 amounted to $126,050.81, and this amount respondent has determined should be taxed in equal amounts to petitioner and his wife, *1113 the petitioner Marie Pederson. Among other items added by respondent to petitioner's gross income for said year is the amount of $96,630.50, "Income from French contract."
OPINION.
MILLIKEN: We will discuss the issues raised in the order in which they are set forth in our findings of fact.
I. It was conceded by both parties at the hearing, and it is conceded in the briefs filed in behalf of them respectively, that petitioner made income in the amount of $96,630.50; that this income was derived from the so-called French contract; and that the only question with reference to such income which is submitted to the Board for decision is whether it should be included in petitioner's gross income for the calendar year 1921, where respondent has placed it, or in his gross income for the calendar year 1918, when petitioner asserts it was received. Since, as will later appear in this opinion, the Board has no jurisdiction to redetermine the tax for the latter year, and since the amount of income received by petitioner in that*3046 year can, as will appear, in no way affect the tax liability for the years over which the Board has jurisdiction, to wit, 1920 and 1921, we will confine ourselves to the question of whether this income is taxable in the year 1921.
The facts as found show that of the initial payment made by the French Republic under its contract with Pichot, the sum of $209,420.30, was deposited on April 2, 1918, to petitioner's credit in the Scandinavian American Bank. Against this deposit petitioner drew checks amounting to $4,000, and these checks were honored but at a time not shown. On April 20, 1918, the Republic of France instituted its suit in which it sought the cancellation of its contract and the recovery of its initial payment from Pichot, the bank, the National Surety Co. and the petitioner. On April 24, 1918, or four days after the institution of the suit, petitioner drew and delivered to the bank his check for $200,000, in payment of indebtedness owing by him to the bank. About this time it appears that in some way not shown this money disappeared from petitioner's account and the payment of the check was withheld. The money again appears in petitioner's bank pass book as of May 27, 1919, and*3047 this time in the amount of $205,420.30, this being the amount of the original deposit, less the checks totaling $4,000 above referred to. On the same day on which the sum of $205,420.30 appeared in petitioner's pass book the check for $200,000 was cashed by the bank. It further appears that in the final settlement between petitioner and the bank, made after the entry of the judgment in the French suit, the bank credited petitioner with interest on the $200,000 represented by the check of *1114 April 24, 1918, for the period during which payment of the check had been withheld. The final judgment in so far as it affected petitioner was to the effect that the Republic of France recover of the Scandinavian American Bank the sum of $105,420.30 "received by the Scandinavian American Bank from the defendant, Hans Pederson, out of the moneys paid by the plaintiff to defendant Robert Pichot, and turned over by said Robert Pichot to said Pederson and deposited by him in said bank; and that not one of the defendants herein is entitled to any part of said sum of $105,420.30". The mater was then finally settled between petitioner and the bank by the bank giving him credit for interest*3048 on the $200,000 check during the period which its payment had been withheld, and credit for other items, whereupon petitioner executed to the bank his note for the balance. It is thus clear that the sum of $205,420.30 was in the bank to the credit of petitioner from May 27, 1919; that the remainder of the initial deposit had on that date been paid on checks of petitioner; and, lastly, and this is significant, that petitioner was credited with interest on the sum of $200,000 represented by the check of April 24, 1918, for the period during which its payment was denied. It is inconceivable that interest was paid by the bank to petitioner on money deposited which should not have been properly credited to him.
Respondent contends that the matter should be treated as though petitioner had been compelled to sue for the breach of his contract and had received no part of the gain sought to be taxed until the end of his suit. In support of this contention respondent cites authorities (13 C.J. 644; 6 R.C.L. 982; ; *3049 ) to the effect that it is a general rule of law that one who has contracted to do a particular thing and has received payment in advance therefor, can not retain such payment where by reason of unavoidable accident he is excused from performance; and, further, that where performance of a contract, lawful in its inception, becomes unlawful by reason of subsequent events, the contract is terminated in so far as it remains executory, and both parties are excused from further performance, citing . From these authorities counsel for respondent reaches the conclusion that petitioner "became liable to the Republic of France for the return of all moneys advanced to him under the contract." From this counsel for respondent argues that the case is the same as though petitioner had received nothing until the termination of the action brought by the Republic of France. Before discussing these contentions, it is pertinent to point out that it is further held in the Dietrich case that such subsequent events do not extinguish any rights acquired by either party before *1115 the contract became unlawful*3050 or by its breach. A similar rule is laid down in the Butterfield case.
We should determine the tax liability of petitioner on the basis of what actually has occurred rather than on the basis of what ought to have occurred. ; . We have found, and both parties agree on this point, that petitioner was in receipt of income from the French contract in the amount of $96,630.50. This disposes of the question of petitioner's rights under the contract. Under this state of facts we can perceive no reason which required petitioner to return to the Republic of France what he originally received, at least to the extent of the amount he was allowed by the final judgment to retain. Petitioner was in absolute possession of this latter amount from May 27, 1919, and it is a very pertinent fact that he was credited with interest on the amount represented by the check of April 24, 1918, for the period that it remained unpaid. Petitioner did not bring the suit. The suit was brought against him. He asserted his right to the whole amount. It was the Republic of France that partially prevailed in the*3051 action but with the result that petitioner was left in undisturbed possession of a sufficient amount of the original deposit to include taxable income to the extent of $96,630.50. Looking to what actually occurred, we find that petitioner was in possession and claiming the ownership of this sum long prior to the taxable year 1921, and that the final judgment confirmed his right thereto. Under these circumstances we are compelled to hold that respondent erred in including this income in petitioner's gross income for the year 1921. Cf.
II. Petitioner asserts that from the sum of $15,000 received by him from the Highway Department of the State of Washington he paid or caused to be paid amounts which total $8,000 to George W. Allen, in consideration of the latter's services in securing the payment of the above sum. In support of his claim, petitioner introduced in evidence three checks signed by him, all dated January 12, 1921, and all drawn on the Scandinavian American Bank. Two of these checks, one for $500 and one for $1,000, were drawn in favor of "Geo. W. Allen & Co." and one for $500 was drawn in favor of "Geo. W. Allen". On direct examination*3052 petitioner testified that on April 1, 1921, he endorsed the certificate of deposit of March 28, 1921, to the bank and that from the total of said deposit the bank deducted the sum of $6,000 for the account of Allen and only the remainder of $8,000 was placed to his credit. Petitioner introduced in evidence the note teller's blotter of the bank for April 1, 1921, and this discloses that on that date petitioner deposited the sum of $15,000 and that of this amount the sum of $6,000 was used to pay *1116 a loan to "Geo. W. Allen," identified by the number 74037. It is claimed by petitioner than the total amount of $8,000 which he first and last paid Allen was represented by the three checks above referred to and the credit given by the bank to Allen.
Petitioner placed George W. Allen on the stand, and instead of supporting petitioner's claim he denied that he had received anything in consideration for his services. He stated that the three checks represented amounts paid for premiums on insurance of which his company had issued at different times large amounts as surety for petitioner, but he was unable to specify the policies on which such premiums had been charged. He was*3053 emphatic in his denial that he had ever owed a note of $6,000 or of any amount to the Scandinavian American Bank and denied that he, individually, had ever done business with that bank. Petitioner then placed on the stand the former note teller and former cashier of the Scandinavian American Bank, which is now defunct. The former note teller identified the note teller's blotter above referred to and certain notations on the back of the certificate of deposit, which he stated were made by him at the oral instruction of the cashier. He stated that the entry in the note teller's blotter and the notations on the back of the certificate of deposit indicated that of the total deposit of $15,000 the sum of $6,000 was used to pay a note of George W. Allen, but that he had no distinct recollection of the matter and that he did not know whether the George W. Allen, on whose note the credit was made, was the same George W. Allen who petitioner charges received the amount. The former teller was even more uncertain as to what took place. He testified as follows with reference to the entries on the note teller's blotter:
Q. And so far as you now know you have no recollection that is not*3054 a correct entry of the disposition of these funds?
A. I have no recollection of the transaction.By the Member:
Q. Do you know if the bank had a note of Mr. Allen of $6,000? A. I do not recall. Q. Do you know whether you had any note of Mr. Allen?A. He was not a customer at the bank, and he did a lot of business for his company with the bank.
Q. You do not know if that $6,000 entry there was true or not? A. No.Q. You would not know if the distribution on the back of that certificate of deposit was true or not true, would you?
A. No.With reference to the $6,000 credit, petitioner testified:
By the Member:
Q. What do you know about this $6,000 item? A. I know I never got it.*1117 Q. You know you never got it?
A. Yes. Q. Do you know who got it? A. No. Q. Do you know if Mr. Allen got any of it? A. No. Q. Do you know anything about the note he had at the bank? A. No, sir.Q. Did any man at the bank ever tell you about it, anything you know about Mr. Allen receiving a penny?
A. Not of that $6,000.Thus the evidence discloses that the very man to whom petitioner testified he paid or caused*3055 to be paid the sum of $8,000 for his services, denies that he was paid that or any other amount therefor. Neither officer of the bank is able to recall anything about Allen's alleged note. What connection, if any, petitioner had with such note is unexplained; in fact, petitioner admits he does not know whether Allen received any part of the credit of $6,000. It is not explained why it was necessary, in order to pay the sum of $2,000, to draw three separate checks on the same day on the same bank to two payees. When we add to this the claim of petitioner that he paid Allen over one-half the amount recovered solely for the use by Allen of his friendly relations with the officers of the Highway Department, we can not say the respondent erred in denying this particular deduction.
III. The only question submitted to the Board with respect to the loss by reason of the sale of stock in the Coast Steel Machinery Co. is whether such loss was sustained in the year 1921, when the stock was sold by Boyer, trustee, or in the year 1922, when petitioner sustained his loss under his building contract with the City of Portland. The facts relating to this issue consist of a stipulation of the*3056 parties and certain exhibits filed therewith. The stipulation does not disclose exactly what was the nature of the contractual relation between petitioner and Boyer, trustee, with reference to this stock. At one place it is stated that the stock was "put up" by petitioner with the trustee and in another place that petitioner "turned over" the stock to the trustee. However, we are aided by the brief filed for respondent, who was a party to the stipulation. It is there stated, "In the year 1917 the petitioner, Hans Pederson, transferred 180 shares of said stock to one J. C. Boyer, trustee, for the Creditor's Committee for the Civic Auditorium of Portland, Oregon, as collateral under a contract which petitioner Hans Pederson had for the construction of a part of said building". Thus it is disclosed that the stock was "put up" or "turned over" as "collateral." *1118 The title to the stock therefore remained in petitioner, and when the sale was made it was petitioner's stock that was sold. If the stock had never been pledged but petitioner had sold it and applied the proceeds to this building contract, we do not think it would be contended that his loss did not occur in the*3057 year the sale was made. The fact that the sale was made by the pledgee does not alter the case. The loss by reason of the sale of the stock and the loss arising out of the construction contract were losses incurred in distinct and different transactions. Petitioner is entitled to the deduction of this loss from his gross income for the year 1921. Petitioner's loss in 1921 with respect to the sale of this stock is the difference between the cost of the 180 shares pledged and the sale price.
IV and V. Petitioner in his return for 1920 sought to deduct from his gross income for that year the amount of $169,137.65 as a loss on his National Realty Co. mortgage and the further sum of $20,000 as a loss on his stock in the same corporation. Respondent determined that these losses were not sustained during the year 1920 but were sustained in the year 1916 and, further, that the loss on the mortgage amounted to $93,000 instead of $169,137.65. Petitioner now assents to the determination as to the amount of his loss on the mortgage but asserts in this proceeding that both the losses on the mortgage and on the stock were sustained in the year 1918 and seeks to have the Board determine*3058 that such losses were sustained in the latter year.
Petitioner in his return for the year 1921 sought to deduct the amount of $71,912.45, representing moneys advanced by him to the Hans Pederson Construction Co., and lost by that company on the Raymond contract. Respondent determined that the loss, if any, was not sustained in the year 1921, and disallowed the deduction. Petitioner asserts in this proceeding that the loss was incurred in the year 1918 and requests the Board to so determine.
It will be perceived from the above that petitioner does not contend that respondent erred in determining that any of the above deductions should not be taken in the respective years in which petitioner in his returns sought to deduct them. All that he asks is that the Board Determine that they are deductible from his gross income for the year 1918.
The record discloses that respondent has not only determined no deficiency for the year 1918, but has here determined that petitioner sustained in that year a loss of $315.43 and was liable for no tax whatsoever. No question of overassessment is presented. The sole pertinent fact is that no tax whatever has been determined and *1119 *3059 therefore no deficiency, as that term is used in the Revenue Acts, has been determined. The question presented is whether the Board possesses jurisdiction to make the determination requested by petitioner.
The jurisdiction conferred upon the Board by section 274 of the Revenue Act of 1926 to redetermine a deficiency is limited by subdivision (g) of the same section. This subdivision reads:
The Board in redetermining a deficiency in respect of any taxable year shall consider such facts with relation to the taxes for other taxable years as may be necessary correctly to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the tax for any other taxable year has been overpaid or underpaid.
It is clear that under the above provision the Board is without jurisdiction to determine petitioner's tax liability for the year 1918 for the reason that no deficiency has been determined by respondent for that year. Such is not only the clear meaning of the subdivision, but has been the constant holding of the Board since its decisions in *3060 , and . Cf. , affirmed per curiam by the Circuit Court of Appeals in the Second Circuit on October 15, 1928, .
The only remaining question is, Would the redetermination of the issues pressed by petitioner with reference to the calendar year 1918 have any effect on his tax liability for the years over which the Board has jurisdiction, to wit, the calendar years 1920 and 1921. There has been no overpayment of taxes for the year 1918, since no taxes whatever have been paid, and, therefore, there is no overpayment to be credited on taxes for 1920 and 1921. Even if such overpayment had been made, we would not, as above pointed out, possess jurisdiction to make such redetermination. See Neither could we determine that petitioner suffered a "net loss," as that term is defined in section 204 of the Revenue Act of 1918, for the calendar year 1918, for the reason that the only period for which such net loss may be determined is "for any taxable year beginning*3061 after October 31, 1918, and ending prior to January 1, 1920, * * *." See ; . These are the only factors with reference to the calendar year 1918 which would have any bearing on petitioner's tax liability for the years 1920 and 1921.
Petitioner makes no complaint as to respondent's determinations for the calendar year 1919, in which respondent determined that petitioner suffered a net loss. For the above reasons these appeals, in so far as they relate to the calendar years 1918 and 1919, are dismissed. *1120 Since we reach the above conclusion we do not deem it necessary or proper to determine the amount or the nature of these deductions.
VI. With respect to the determination of respondent of a negligence penalty, while it is no doubt true that petitioner made mistakes in his interpretations of the law as concerns his taxable income for the years in question, yet when we consider the extensive business interests of petitioner and the complexities with which they were surrounded, we can not say that the returns were negligently filed. The books of petitioner, together*3062 with their supporting data, record no intentional omissions. Neither petitioner nor his bookkeeper were versed in the income-tax laws and the errors were made in good faith The respondent was in error in his imposition of the negligence penalty.
Reviewed by the Board.
Judgment will be entered under Rule 50.