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SONNENBERG v. UNITED STATES

May 23, 1958

Henry H. SONNENBERG, Plaintiff,
v.
UNITED STATES of America, Defendant



The opinion of the court was delivered by: LEIBELL

Preliminary Statement

This is an action for a refund of plaintiff's 1941 income tax of.$ 44,369.01 with interest thereon. The claim is based upon Sections 127 and 23 of the Internal Revenue Code of 1939 as amended, 26 U.S.C.A. §§ 127, 23. Section 127 relates to war losses and their deduction in calculating taxable net income. *fn1" This Court has jurisdiction of the action by virtue of Sections 1340 and 1346 of Title 28 U.S.C., 62 Stat. 932 and 933. The collector of internal revenue to whom the tax was paid was not in office as collector when the action was commenced. The United States of America has properly been named as the defendant. Buhl v. Menninger, 6 Cir., 251 F.2d 659, 660; T. 28 U.S.C.A. § 1346(a)(1).

 At the trial two experts on German law testified concerning the German decree of January 15, 1940, issued by the Ministerial Council for Reich Defense, and the circular decrees or regulations promulgated thereunder, in relation to the handling of enemy property in Germany. Dr. Steefel testified for the plaintiff and Dr. Oppenheimer for the defendant. The deposition of the plaintiff, taken January 17, 1958, was received as plaintiff's Exhibit III. The plaintiff was in Europe at the time of the trial March 10-11, 1958. The deposition on written interrogatories of Dr. Wirtz, plaintiff's agent and lawyer in Germany, was also offered and received as a plaintiff's exhibit. Certain exhibits attached to the Wirtz deposition were put in evidence, some of them by the defendant.

 The Barton Machinery, Ltd., a British corporation, owned directly and indirectly the stock of certain German corporations, two of which were operating corporations, manufacturing machinery and machine tools. Plaintiff through an agent (Lindars) owned all the outstanding shares of stock of Barton Machinery, Ltd.

 It is plaintiff's contention that his interest, in the shares of Barton Machinery, Ltd., had a substantial value, at least $ 99,700.83, the cash cost of his shares, immediately prior to December 11, 1941, but that such interest became worthless on December 11, 1941, when the United States declared war on Germany, and that his claim thus comes within the purview of Section 127(a)(3) of the Internal Revenue Code as a war loss. If recognized as a proper deduction, the amount of the war loss would exceed the 1941 taxable income, on which plaintiff paid a tax; and he would be entitled to the refund claimed.

 The Government contends that plaintiff's interest in the shares of Barton Machinery, Ltd., a British corporation, had become worthless when England declared war on Germany in September 1939, or sometime thereafter but prior to December 11, 1941, and therefore plaintiff had nothing to lose when the United States declared war on Germany on December 11, 1941. Without his claimed war loss as a deduction, plaintiff would be entitled to no tax refund.

 After a careful examination of the evidence, the depositions, documents and the trial record, I have concluded that the Government's contention is correct. The following constitute my findings of fact and conclusions of law, to which I have annexed a discussion of the evidence, the statute, Section 127(a)(2) and (3) of the 1939 Internal Revenue Code, and the controlling decisions of our courts.

 Findings of Fact

 1. The Court takes judicial notice of the following historical facts as a background, against which many of the findings of fact concerning the German corporations, their assets, plaintiff's indirect interest therein and the German decrees and action in relation thereto, should be considered.

 (a) Britain and France guaranteed the integrity of Poland on March 31, 1939. Germany invaded Poland September 1, 1939. Britain declared war on Germany September 3, 1939. France followed suit.

 (b) Germany invaded Belgium and Holland May 10, 1940, and attacked the French line.

 (c) The British Expeditionary Force was evacuated from Dunkirk, May 27, 1940 to June 4, 1940. Italy declared war on Britain and France on June 10, 1940. Paris was taken by the Germans June 14, 1940. The Petain government in France asked Germany for an armistice on June 16, 1940. Churchill made his speech of defiance of Germany calling on all Britains to fight on (the 'This was their finest hour' speech), on June 18, 1940.

 (d) The air battle for Britain was started by Germany early in August 1940 and continued into the month of October. Its turning point in favor of Britain was about mid-September, 1940. (e) Germany invaded Russia in June 1941.

 (f) The Japanese attacked the United States at Pearl Harbor on December 7, 1941. On December 11, 1941, the United States declared war on Germany.

 (g) Germany surrendered unconditionally May 8, 1945.

 2. The plaintiff became a citizen of the United States In November 1946. He is a resident of Bronx County, New York City.

 3. The plaintiff filed his federal income tax return for the calendar year 1941 on or about March 14, 1942. Said return showed taxable net income in the amount of $ 89,692.55 and a total income tax due thereon of $ 44,373.01 of which.$ 44,369.01 was paid by the plaintiff to the collector of internal revenue. In arriving at said taxable net income of $ 89,692.55 the plaintiff did not deduct from gross income any amount on account of or with respect to any war loss under Section 127 of the Internal Revenue Code of 1939, which said section was not enacted until October 21, 1942. Plaintiff subsequently filed a claim for refund of the tax paid.

 4. Barton Machinery, Limited, hereinafter referred to as Barton, was incorporated under the laws of England on July 25, 1933 with an authorized capital stock of divided into 15,000 shares of each; and in January 1936, the capital stock of Barton was increased to by the creation of 15,000 additional shares of each, ranking in all respects pari passu with the existing shares.

 5. From June 29, 1938 until after July 12, 1951 the outstanding capital stock of Barton consisted of 18,502 shares which had been issued and paid for in cash at the rate of per share. 6. Herman Lindars, hereinafter referred to as Lindars, was at all times relevant hereto a British citizen and resident. On July 23, 1937, and until July 12, 1951, he was the registered holder of 14,001 shares of the 16,502 shares of the capital stock of Barton issued and outstanding in July 1937. Said 14,001 shares had been paid for by the plaintiff in cash at the rate of per share as follows: August 14, 1933 œ 2,500 August 16, 1933 1 January 11, 1936 3,829. 7.3 February 1, 1936 7,670.12.9 Total œ 14,001. 0.0

 Lindars at all times held said shares for and on behalf of the plaintiff and was paid for whatever work he did.

 7. On June 28, 1938 Lindars acquired 2,500 additional shares of Barton from 'Laagland', a Dutch corporation owned by plaintiff, for which Lindars paid in cash; and on the same date he acquired 2,000 additional shares from Barton for 2,000 in cash. In making these further acquisitions of Barton stock, Lindars was acting for and on behalf of the plaintiff and utilizing funds which were made available to him by or on behalf of the plaintiff. The said additional 4,500 shares of Barton stock were held, from June 28, 1938 to July 12, 1951, in the name of Lindars, who acted as agent for and on behalf of the plaintiff and was paid for whatever work he did.

 8. The net profit of Barton for the period January 1, 1939 to August 31, 1939 was 3.1.8. For the period September 1, 1939 to December 31, 1941 Barton had a small net loss, consisting of bank charges and sundry expenses of 9. On December 11, 1941 Barton, according to its books, had the following assets and liabilities: In English pounds Cash œ 10. 3.6 Receivables 34. 5.1 Formation expense 136.17.1 Total 181. 5.8 Less payables 86.15.6 Excess of assets over payables 94.10.2 All other assets -- direct ownership of 65 per cent. of the capital stock of a German corporation referred to as I.V.* 50 per cent. of the capital stock of a German corporation referred to as Eisenwerke Reisholz, later known as Maschinen 79 shares of the capital stock of a German corporation referred to as W.Z.W.

 The formation expense, although shown as an asset, was actually a capitalized expense representing no assets; and the payables represented petty cash items due to creditors in England.

 Because of cross holdings of stock by I.V., Maschinen and their subsidiaries, the actual participation, direct and indirect, of Barton in I.V. and Maschinen amounted to over 90 per cent. and 100 per cent., respectively. These two corporations, in turn, owned all of the outstanding shares of a German corporation known as Wewag and 90 per cent. of the shares of a German corporation known as W.Z.W.

 10. Barton had acquired the aforesaid shares of I.V., which it owned directly, by purchase for on July 28, 1933 from 'Laagland', a Dutch corporation completely owned by Sonnenberg. The certificates representing said shares of I.V. stock are in bearer form and from about July 1933 until March 7, 1952 were held continuously in physical custody for Barton by a bank in London.

 11. Wewag and W.Z.W. were German corporations organized prior to July 28, 1933 and, at all times relevant hereto, were engaged in the business of manufacturing and selling machine tools in Germany. Until 1938 Wewag's corporate name was Heinrich Sonnenberg Aktiengesellschaft. I.V. was a German corporation organized prior to July 28, 1933 and, until 1931 or 1932, when it became a holding company the assets of which consisted of Wewag and W.Z.W. shares, it had been engaged in the manufacture and sale of machine tools in Germany. Maschinen was a German corporation organized in 1905 and had been engaged in the machine and machine tool business. From prior to and on December 11, 1941 it was not engaged in active business operations. There is no proof in the record as to where the shares of stock of Wewag and W.Z.W. were physically located in 1939 or at any time subsequent thereto. 12. The tables below show the sales and net profit of Wewag for each of the years 1938 to 1943, inclusive, and its condensed balance sheet as at the end of each of said years, according to its books. Sales and net profit of Wewag (In German Reichsmarks) Net Year Sales profit 1938 RM7,098,535.61 RM589,511 1939 7,794,411.54 185,551 1940 8,420,773.49 41,783 1941 7,846,418.32 113,297 1942 7,673,584.39 137,492 1943 5,841,730.37 138,910 Condensed balance sheets of Wewag (In German Reichsmarks) Plant and December equipment Current 31 assets Liabilities 1938 RM633,383 RM3,201,053 1939 622,537 4,129,911 RM1,310,154 1940 631,953 4,479,958 1,193,428 1941 519,136 4,760,889 1,168,859 1942 385,918 5,069,863 1,013,380 1943 396,675 5,063,124 761,720 Condensed balance sheets of Wewag (In German Reichsmarks) December Capital 31 stock Surplus 1938 1939 RM1,000,000 RM2,442,294 1940 1,000,000 2,918,483 1941 3,000,000 1,111,166 1942 3,000,000 1,442,401 1943 3,000,000 1,698,079 13. The table below shows the net profit of Maschinen, I.V. and W.Z.W., respectively, according to their respective books, for the years 1940 to 1943. Net profit of Maschinen, I.V. and W.Z.W. (In German Reichsmarks) Year* Maschinen I.V. W.Z.W.** 1940 (4,966.02) 34,693.50 1941 (29,974.60) 59,242.79 1942 (3,360.25) 189,343.16 31,787.37 1943 (4,009.65) 308,432.06 141,986.90 14. The tables below show the condensed balance sheets of Maschinen, I.V. and W.Z.W., respectively, according to their respective books, as of the end of their fiscal years. Condensed balance sheets of Maschinen, I.V. and W.Z.W. (In German Reichsmarks) Total Capital Date assets Liabilities stock Surplus Maschinen (As of December 31) 1940 492,672.25 422,456.43 2,000,000 (1,929,784.18) 1941 466,219.49 425,978.27 2,000,000 (1,959,758.78) 1942 462,271.42 425,390.45 2,000,000 (1,963,119.03) 1943 459,418.14 426,546.82 2,000,000 (1,967,128.68) I.V. (As of June 30) 1941 3,238,931.39 65,048.48 735,000 2,438,882.91 1942 3,381,072.87 17,846.80 735,000 2,628,226.07 1943 4,015,155.69 343,003.56 735,000 2,937,152.13 W.Z.W. (As of June 30) 1943 8,849,664.68 1,354,591.82 2,500,000 4,995,072.86 1944 8,040,983.43 1,535,189.89 2,500,000 4,005,793.54

 15. The shares of Barton had no market value in 1941. They were not listed on any stock exchange nor were there any outstanding offers to buy them. Plaintiff's own evaluation of the Barton stock is based solely on its ownership, directly or indirectly, of the shares in the four German companies. While there is proof that the assets of the German companies had value in Germany, Barton ...


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