*3514 Losses held to have been sustained in the years of sale.
*510 These are proceedings duly consolidated for hearing and decision involving income and profits taxes for the following years and amounts:
| Docket No. | Petitioner | Year | Amount |
| 1920 | $316,041.41 | ||
| 12488 | James H. Post | 1921 | 3,559.86 |
| 12489 | Fred H. Howell | 1920 | 280,494.93 |
| 12492 | Thomas A. Howell | 1920 | 240,853.92 |
The only issue is whether the respondent erred in disallowing certain amounts as deductions for losses sustained by the partnership of B. H. Howell, Son & Co., and the resulting inclusion in the taxable income of the partners of the amounts disallowed. The facts were stipulated.
FINDINGS OF FACT.
The taxpayers are individuals and were, during the calendar years 1920 and 1921, members of the copartnership consisting of James H. Post, Frederick H. Howell, and Thomas A. Howell, doing business in the city of New York under the firm name of B. H. Howell, Son & Co.The said firm has been engaged in the business of dealers in sugar, raw and refined, *3515 importers and exporters thereof, and generally active in all matters pertaining to the sugar industry, and one of the largest distributors of refined sugar.
By proclamation of the President of the United States dated November 21, 1919, there were transferred to the Attorney General of the United States all of the powers and authority vested in the United States Food Administration by an Act of Congress approved August 10, 1910, known as the "Lever Act," so far as such powers applied to food, feeds, and their derivative products, other than wheat and wheat products.
*511 In the spring of 1920, Howard Figg, Special Assistant to the Attorney General, was in charge of the High Cost of Living Bureau organized by the Department of Justice for the purpose of relieving the excessive cost of commodities then prevailing. At this time sugar was selling at retail in the United States at from 26 to 30 cents per pound. Some time in the latter part of April or the first of May, 1920, an official of the State Department, one Giddings, called the attention of Figg to a surplus of sugar existing in the Argentine Republic, and suggested the American Trading Co. as an agency, with offices*3516 in the Argentine Republic, which would import this sugar to the United States. On May 7, 1920, Franklin, vice president of the American Trading Co., at the request of Figg, went to Washington, and there Figg requested the American Trading Co. to import this sugar. Franklin pointed out two objections: (1) That there was an embargo against the export of sugar existing in the Argentine Republic, and (2) that his company had no means of distribution of the said sugar in the United States. Figg then informed Franklin that the Department of State had arranged for the lifting of the embargo to permit the export of any sugar purchased, and that he (Figg) would arrange for a large distributing house to distribute the sugar when imported.
Figg, in the early part of May, 1920, went to New York and there interviewed James H. Post and requested him to have his firm, B. H. Howell, Son & Co., undertake the distribution of sugar to be imported from the Argentine by the American Trading Co. It was arranged that the said sugar should be distributed to essential users under direction of the Department of Justice at a price equal to cost plus 1 cent per pound profit for B. H. Howell Son & Co., *3517 and 1 cent per pound profit for the American Trading Co.
Thereafter Figg wrote the following letter to the American Trading Co.:
DEPARTMENT OF JUSTICE,
Washington, D.C., May 11, 1920.
Mr. WALLACE D. FRANKLIN,
Vice President American Trading Co.,New York City.
DEAR SIR: I was notified by the State Department of the receipt of cable from the Argentine that upon proper presentation through official channels of the American Government that the Argentine would lift the embargo on present surpluses in that country, now amounting to some 150,000 tons; the American attache, however, estimates the surplus at approximately 70,000 tons.
After talking this over with your representative, Mr. Linn, and Mr. Giddings, it was deemed advisable that your agent already on the ground should be advised to contract for or buy as much of the entire surplus as possible before any further request was made that the embargo be lifted, as of course upon the general knowledge that this has been done will create a speculative market.
I have made arrangements with very large interests to handle all or any part of this sugar that we may indicate, our principal idea being first, to*3518 secure sugar for the United States; second, to secure the sugar at the lowest possible *512 price; and, third, to control or indicate the channels of distribution after arrival here.
It occurred to me that if your agent cooperated for all interests that expenses incurred by him could be prorated by the interests, as Mr. Giddings and Mr. Linn, your representative, indicate. I have figured that your firm would handle approximately 10,000 tons of this sugar, the balance to be handled by firm or firms that I may indicate hereafter. I will give Mr. Linn copy of last cable from the Argentine tomorrow, which I think will assure you that permit will be granted when asked for.
I hope that you will give this your immediate attention, as we must work very rapidly to beat the speculators in the market.
Yours very truly,
HOWARD FIGG,
Special Asst. to the Attorney General.
B. H. Howell, Son & Co., acting upon such request and representations of Figg, agreed with the American Trading Co. to purchase sugar in the Argentine Republic and to resell the same in the United States at a profit as agreed to with Figg, all for joint account, that is, one-half interest for the American*3519 Trading Co. and one-half interest for B. H. Howell, Son & Co.
Howell and the American Trading Co. had expected to sell said sugars for future delivery as soon as purchased in the Argentine, and as there was a large demand for sugar at high prices, no loss or risk of loss was contemplated. After approximately 13,902 tons of sugar had been purchased, Howell and the American Trading Co. learned that the Argentine Government had refused to lift the embargo so as to permit the unrestricted export of said sugar. No further purchases were made. Repeated requests were made by the State Department to the Argentine Government for permission to export said sugar, and after a delay of more than six weeks such permit was granted. In the meantime, the price of sugar had declined on the American market, and had risen in the Argentine market, so that the sugars so purchased could have been sold in the Argentine without loss. The Department of Justice and the Department of State of the United States objected to the resale of the sugars in the Argentine, the American Ambassador to the Argentine cabling that such resale would cause great embarrassment both to the Argentine Government and the*3520 American Government.
A copy of a letter written by Figg to the American Trading Co. objecting to the sale in the Argentine is as follows:
DEPARTMENT OF JUSTICE,
Washington, D.C., August 2, 1920.
Mr. W. S. FRANKLIN,
Vice-President American Trading Co., New York.
DEAR MR. FRANKLIN: I am in receipt of your communication of July 29 in regard to disposing of a certain portion of the 14,000 tons of Argentine sugar contracted for by the B. H. Howell Co., and in which the Department of Justice participated in distribution.
I am very sorry to inform you that under no circumstances could the Government concur in the thought even of allowing any portion of this sugar to *513 be sold in the Argentine. You will find attached hereto paraphrase of cablegram received from Wiley, in charge of the embassy at Buenos Aires, which very definitely states the position of the Government in this transaction. But in spite of this I took the matter up with the State Department and found that Ambassador Stimpson, from Argentina, was here. I arranged a conference with him, which took place Saturday, and I can not begin to make you understand how deeply he feels on this subject.
*3521 He also brought to my attention a matter of seeming interest to you, and that was that if any portion of this sugar was not sold in the Argentine it would he ruination to the American Trading Co., or any other American interests that might be involved, as well as a very serious thing for the United States Government.
I had a talk with Mr. Linn, your representative here in Washington, this morning, and tried to make him understand the seriousness of this thought.
I do not feel that there is an opportunity for you or the B. H. Howell Co. to lose any money on this transaction, but that you will find a ready sale for the sugar on its arrival here. I have been assured by a great many dealers over the country that they are ready to buy on delivery, but would not contract ahead of time. I not only think there will not be any loss but that your profits will be the same as you expected from the start.
I am leaving for a short vacation on Thursday and have left this matter entirely in the hands of Mr. Wilkins during my absence.
With kindest personal regards, I remain,
Yours truly,
HOWARD FIGG,
Special Assistant to the Attorney General.
The sugars so purchased in*3522 the Argentine were shipped to the United States and finally reached the United States at a time of complete collapse of sugar prices under practically panic conditions.
The greater part of the sugars were sold in the year 1920, at a loss of $2,511,752.50, one-half of which, or $1,255,876.25, was for the account of B. H. Howell, Son & Co.
In the year 1921 the remaining sugars were sold at a net loss to said B. H. Howell, Son & Co. of $84,250.21.
The purchase price of the sugars so imported was paid entirely wit4 the money of the american Trading Co. and B. H. Howell Son & Co.; nothing whatsoever was paid by the United States Government with the money of the American Trading Co. and B. H. Howell, Son & Co. and the American Trading Co. acted throughout in their own name, bought the said sugars, imported the same, paid the duty thereon and sold the same in their own name and as their own property. Their understanding with the said Special Assistant to the Attorney General, Figg, was that their profit would be limited to one cent each above cost, but there was no agreement or understanding of any kind by which they were to be compensated for loss, if any.
There was no contract, *3523 agreement, or understanding between B. H. Howell, Son & Co. or by any person on its behalf, with the Department of Justice or any Government officer or agency, or with anyone *514 on behalf of the Government, to guarantee or save B. H. Howell, Son & Co. harmless from loss on said transaction.
The said loss of the said copartnership, incurred as set forth above, in the sum of $1,255,876.25 for the year 1920 and in the sum of $84,250.21 for the year 1921, was reflected in the returns of the taxpayers to the extent of their interest in said copartnership, viz, 42 per cent thereof to James H. Post, 31 per cent to Frederick H. Howell, and 27 per cent to Thomas A. Howell; and the disallowance of the said percentage of said loss has resulted in the claims for the deficiency for the year 1920 in the sum of $316,041.41, $280,494.93, and $240,853.92 from James H. Post, Frederick H. Howell, and Thomas A. Howell, respectively, and for the year 1921 of a deficiency for $3,559.86 from James H. Post.
The firm of B. H. Howell, Son & Co., on October 7, 1920, wrote a letter to Figg, calling his attention to the losses incurred, and stated that "every requirement of justice calls for relief*3524 by the Government." In response to this letter, Figg wrote to the President on November 1, 1920, suggesting that the President direct the Sugar Equalization Board to assume the purchase and disposition of this sugar, and stating: "It would therefore appear that governmental action to relieve the situation is well justified in the premises."
After receipt of this letter, and during the latter part of the year 1920, the President referred the matter to the Attorney General with a request for an opinion as to whether he was authorized to require the Sugar Equalization Board to take over the transaction, and the Attorney General gave an opinion to the President to the effect that he could not require the Sugar Equalization Board to take over the transaction.
The firm of B. H. Howell, Son & Co., caused to be charged off prior to the close of December 31, 1920, the losses incurred as hereinabove set forth to that date, and charged off prior to the close of December 31, 1921, the additional losses incurred as above set forth for the year ended December 31, 1921.
Subsequent to the incurring of said losses and the entering of said losses for the year 1920 on their books in December, *3525 1920, there was introduced in the Senate on January 5, 1921, Joint Resolution No. 444, as follows:
[66th Congress S.J. Res. 238.]
JOINT RESOLUTION
Authorizing the President to require the United States Sugar Equalization Board to take over and dispose of thirteen thousand nine hundred and two tons of sugar imported from the Argentine Republic.
Resolved by the Senate and House of Representatives of the United States of America in Congress assembled, That the President is authorized to require the United States Sugar Equalization Board (Incorporated), a corporation *515 organized under the laws of the State of Delaware, to take over the importation of thirteen thousand nine hundred and two tons of sugar from the Argentine Republic procured by the Department of Justice and the Department of State from the agencies used by them for that purpose, and to distribute or dispose of any of the sugar so imported, and to liquidate and adjust the transaction in such manner as may be deemed by said Board to be equitable and proper in the premises.
And for this purpose the President is authorized to vote or use the stock of the corporation held by him, or otherwise exercise*3526 or use his control over the said corporation and its directors, and to continue the said United States Sugar Equalization Board for such time as may be necessary to carry out the intention of this resolution.
This Joint Resolution was favorably reported to the Senate on January 26, 1921, and to the House on February 1, 1921, and passed the Senate on February 24, 1921, but was laid upon the table and not finally acted upon in the House during said Sixty-sixth Congress.
A similar bill was reintroduced as Senate Joint Resolution No. 12 and House Joint Resolution No. 78 in the Sixty-seventh Congress and was finally passed by the Senate on December 15, 1921, and by the House on January 30, 1923, and was approved by the President on February 9, 1923.
This joint resolution authorized the President to require the United States Sugar Equalization Board to take over the aforesaid transaction, to dispose of any of said sugars so imported remaining undisposed of, to liquidate and adjust the entire transaction in such manner as might be deemed by the said Board to be equitable and proper in the premises, paying to the corporation and copartnership aforesaid such sums as might be found*3527 by said Board to represent the actual loss sustained by them or either of them in said transaction.
The United States Sugar Equalization Board was thereupon directed by the President to take over the said transaction and to liquidate and adjust it in such manner as might be deemed by said Board equitable and proper.
The Board, upon investigation, thereafter found that the actual loss sustained jointly by the American Trading Co. and B. H. Howell, Son & Co. amounted to $2,482,476.33 as of May 24, 1923, which amount was paid by said Board to said parties on May 24, 1923. One-half of the amount thus received represented a reimbursement for the loss sustained by B. H. Howell, Son & Co.
The report of the Sugar Equalization Board to the President, dated May 22, 1923, is as follows:
MAY 22, 1923.
The PRESIDENT,
White House,Washington, D.C.
MY DEAR MR. PRESIDENT: Pursuant to directions received from you under the authority of an Act of Congress, approved February 9, 1923, entitled *516 "Authorizing the President to require the United States Sugar Equalization Board (Inc.) to take over and dispose of 13,902 tons of sugar imported from the Argentine Republic", *3528 and reading as follows:
"RESOLVED by the Senate and House of Representatives of the United States of America in Congress assembled, That the President is authorized to require the United States Sugar Equalization Board (Inc.) to take over from the corporation, American Trading Co., and the copartnership, B. H. Howell, Son & Co., a certain transaction entered into and carried on by said corporation and copartnership at the request, under direction and as agents of the Department of Jus ice and Department of State, which transaction involved the purchase in the Argentine Republic, between the 13th day of May, 1920, and the 22nd day of May, 1920, of 13,902 tons of sugar, the importation thereof into the United States and the dis ribution of a portion of the same within the United States and to require the said United States Sugar Equalization Board (Inc.) to dispose of any of said sugar so imported remaining undisposed of, and to liquidate and adjust the entire transaction in such manner as may be deemed by said board to be equitable, and proper in the premises, paying to the corporation and copartnership aforesaid such sums as may be found by said board to represent the actual loss*3529 sustained by them, or either of them, in said transaction, and for this purpose the President is authorized to vote or use the stock of the corporation held by him, or otherwise exercise or use his control over the said United States Sugar Equalization Board and its directors, and to continue the said corporation for such time as may be necessary to carry out the intention of this joint resolution."
the United States Sugar Equalization Board (Inc.) has liquidated and adjusted the transaction referred to in such manner as is deemed by the Board to be equitable and proper in the premises, and has found that the actual loss sustained jointly by said American Trading Company and said B. H. Howell, Son & Co. in said transaction is, as of May 15, 1923, the sum of $2,479,290.15, and that from May 15th to the date of payment of the loss there should be added to the foregoing amount interest at the rate of 6 per cent per annum, which is equal to $354.02 per day.
After receiving your directions the Board invited the American Trading Co. and B. H. Howell, Son & Co. to submit their claim with substantiating documents. The detailed claim was submitted in the total sum, as of February 28, 1923, of*3530 $2,924,199.94. The details of the claim, and the reports of their auditors, thereon, together with substantiating evidence, were submitted with the claim. The Board thereupon employed Guthrie Hunter & Co., chartered accountants of 49 Wall Street, New York, to make an examination of the claim. Under date of March 7, 1923, Guthrie Hunter & Co. submitted to the Board a report setting forth the claim of American Trading Co. and B. H. Howell, Son & Co., and the result of their examination of the claim. This report is submitted herewith.
After a review and study of the report of March 7, 1923, Guthrie Hunter & Co. were given instructions to supplement the report of March 7th and furnished the Board with a further report under date of March 30, 1923, covering the instructions given. This report is submitted herewith.
After a review and study of the foregoing reports and documents, and after independent investigation and consideration of the various matters involved, the Board instructed Guthrie Hunter & Co. to make a further report, on the basis which the Board decided upon for the liquidation and adjustment of the claim, and their report under these instructions was rendered to*3531 the Board under date of May 12, 1923. This report is submitted herewith and contains *517 the findings of the Board as to the actual loss sustained by American Trading Co. and B. H. Howell, Son & Co. in the transaction.
The Board desires to call attention to the fact that in arriving at this loss it has deducted from the items claimed by American Trading Co. and B. H. Howell, Son & Co., and which are noted in the reports filed herewith, the following:
| Charges for overhead | $45,871.86 |
| Claims for loss in exchange on funds remitted to Buenos Aires | |
| in excess of amount required | 49,484.29 |
| Legal charges of Armstrong, Keith & Kern in connection with | |
| defaulted contracts on sugar sales | 5,000.00 |
| Special expenses in connection with the claim against the | |
| United States Government | 116,232.33 |
| Traveling and hotel expenses | 6,881.85 |
| One-half of W. S. Franklin's salary as Vice-President of | |
| American Trading Co. for two years | 15,000.00 |
| Accountant's charges in connection with claim | 4,889.09 |
| Printing and stenographic services | 748.40 |
In submitting their claim American Trading Co. and B. H. Howell, Son & Co., included an interest charge on outlays of money*3532 in the transaction at the rate of 8 per cent per annum. The Board has reduced this interest charge to 6 per cent per annum.
B. H. Howell, Son & Co. has uncollected, on defaulted contracts for the sale of sugar covered by the transactions, claims amounting to $44,318.56. It was the desire of B. H. Howell, Son & Co. that the Board take over these uncollected claims, but the Board was reluctant to enter into litigation for their collection, and after a careful investigation into the value of these claims the Board has agreed with B. H. Howell, Son & Co. that they shall retain these claims at a value of $154,800 less estimated legal expenses in connection therewith of $25,000, it being a part of this agreement that if B. H. Howell, Son & Co. collect on these claims in excess of $154,800 that such excess will be paid over to the Board, or the Treasury of the United States. The Board in its adjustment of the loss has therefore charged American Trading Co. and B. H. Howell, Son & Co. with $154,800, as the estimated value of these uncollected claims. Inasmuch as the Board has doubts that anything in excess of $154,800 will be realized on these claims the Board recommends that the Executive*3533 Order providing for the payment of the loss sustained be drawn on the basis of this estimated value, and to rely on the agreement between the Board and B. H. Howell, Son & Co. for the payment to the Board, or to the Treasury, of anything in excess of the estimated value that may be collected.
For your convenience I have taken the liberty of submitting a form of Executive Order approving the Findings of the Board and directing the payment of the losses.
Yours very truly,
(Signed) GEO. W. [*] ,
President U.S. Sugar Equalization Board, Inc.
OPINION.
SIEFKIN: The dispute in these proceedings results from the respondent's position that the losses claimed were not closed transactions in the years written off, presumably because of the partial reimbursement made by Congress in 1923. The only explanation *518 offered to the petitioners or to us (the respondent has filed no brief and made no argument) why the losses were disallowed is found in the report of the field examiner, which report was attached as an exhibit to the stipulation. There it is said:
The examining officers contend that this was not a loss in the year 1920 but should have been set up on the*3534 books as an Account Receivable, since the taxpayers were acting as agents of the Government, to purchase and sell sugar without loss to them, this fact being fully established by the reimbursement to the taxpayers of the amount of their claim less adjustments.
The taxpayers stated that at December 31, 1920, they were unable to locate anybody legally obligated to reimburse them for their loss. While this may be true, yet the taxpayers served notice to the Government that their claim was not a closed transaction, since a bill was introduced in the Senate January 5, 1921; or five days after they decided to claim this loss, requesting the legalization of the act of the Department of Justice which was subsequently passed. Since the U.S. Government is not a defunct corporation, and as this loss was paid the examining officers believe that it is proper income in 1920 and subject to prevailing rate of tax.
We consider that the position of the respondent, whether or not it rests upon the reasons advanced above, is without merit. It seems beyond question to us that the petitioners, when the sugar was sold, realized losses which were properly charged off during the years that the sales*3535 were made and that the hope, or even expectation, that Congress might afford relief by a special act was not sufficient to justify setting up the amounts as accounts receivable against anyone. We believe that the cases are more favorable to the petitioners than was the case in , decided May 16, 1927. There the taxpayer wrote off as a loss the value of assets at the time they were sequestrated by the German Government. Later it filed claim with the Mixed Claims Commission and was still later allowed a portion of the amount. The Commissioner of Internal Revenue disallowed the deduction in the year of sequestration on the ground that the loss was not a closed transaction. The Supreme Court said:
The sequestration of enemy property was within the rights of the German government as a belligerent power and when effected left the corporation without right to demand its release or compensation for its seizure, at least until the declaration of peace [citing authorities]. What would ultimately come back to it, as the event proved, might be secured not as a matter of right, but as a matter either of grace to the*3536 vanquished or exaction by the victor. In any case, the amount realized would be dependent upon the hazards of the war then in progress. * * * The quoted regulations, consistently with the statute, contemplate that a loss may become complete enough for 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 *519 the taxpayer to be an incorrigible optimist. * * * It is enough to justify the deduction here that the transaction causing the loss was completed when the seizure was made. It was none the less a deductible loss then, although later the German Government bound itself to repay and an award was made by the Mixed Claims Commission which may result in a recovery.
Under similar circumstances we held, prior to the decision in the Supreme Court, that a loss was completed at the time of the seizure by the German Custodian. See *3537 , where we said:
It would accordingly appear that, after the property was taken by the Custodian, the taxpayers were entirely devested of their property. All that they had was the hope that the treaty of peace would provide for the return of such property, or its value, or, if not, that the United States would compensate its nationals for seized property which Germany might be permitted to retain under such treaty. Any claim which existed, however, was a claim upon the United States, either to secure a return of the property by Germany or, if it allowed confiscation as part of the terms of the treaty, to compensate those whose property was lost.
Here we believe there was no legal right of recoupment which would permit the deductions to be taken as losses in other years than those in which the sales were made.
Judgment will be entered for the petitioners.