The opinion of the court was delivered by: DAWSON
This is a motion by defendant seeking an order under Rule 56 of the Federal Rules of Civil Procedure, 28 U.S.C.A. granting summary judgment on the ground that there is no genuine issue as to any material fact and that the defendant is entitled to a judgment dismissing the complaint as a matter of law.
The following facts appear to exist without substantial controversy:
Morris White Fashions, inc. (hereinafter referred to as plaintiff) is a corporation formed in 1939 by Morris and Abe White, brothers, who have for many years been active in the handbag manufacturing business, and who have organized various corporations to conduct their business since 1926. On December 15, 1944 plaintiff filed a completed Income and Declared Value Excess Profits Tax Return and a completed Excess Profits Tax Return for the fiscal years ended June 30, 1943 and June 30, 1944, and on January 15, 1946 plaintiff filed identical returns for the fiscal year ended June 30, 1945. Based upon an audit of plaintiff's returns for the above-stated fiscal periods, the Internal Revenue Service recommended a deficiency assessment of $ 96,343.05, partially resulting from a disallowance of certain unsubstantiated cash purchases of leather raw materials made by plaintiff in the amount of $ 45,549.58 for the fiscal year ended June 30, 1944, and in the amount of $ 16,167.97 for the fiscal year ended June 30, 1945.
After discussion of the proposed deficiency with plaintiff and his representative, on or about January 2, 1947, plaintiff executed a 'Waiver of Restrictions on Assessment and Acceptance of Overassessment' (Treasury Form 874) consenting to the assessment of the deficiency and an overassessment for the fiscal year ended June 30, 1944 in the amount of $ 3,897.25.
Subsequently, on June 21, 1948, plaintiff was notified by the Internal Revenue Service of a proposed additional deficiency assessment in the amount to $ 209,242.78, based on a supplemental audit of the plaintiff's tax returns for the same fiscal periods upon which the original assessment was based. On October 7, 1948, plaintiff filed a Notice of Protest disputing the basis for the proposed additional deficiency assessment. Simultaneously, deficiencies and overassessments were also proposed in the cases of the following related individual taxpayers for the years 1942-1945, inclusive: (a) Morris White and his wife Lillie White, (b) Abe White and Elsie White and (c) Bernard White, son of Morris White.
In 1951 all the tax cases were referred to the New York District Appellate Staff of the Internal Revenue Service where the taxpayers were represented by counsel, and the following issues were presented:
(1) Whether Morris White and Abe White sustained long-term capital losses in the year 1942 by reason of purported sales of stock they owned in Morris White, Inc., a predecessor corporation to plaintiff formed in 1926. The authorized capital stock of this corporation was $ 2,000,000, representing 20,000 shares with a par value of $ 100, of which Morris White invested $ 1,500,000 for 15,000 shares and Abe White invested $ 500,000 for the remaining 5,000 shares. On December 15, 1937 Morris White, Inc. was involuntarily dissolved by the State of New York for non-payment of franchise taxes. In August 1942 a business competitor purchased the entire capital stock of the corporation for $ 16,000, $ 12,450 being paid to Morris White for his 15,000 shares and $ 4,150 being paid to Abe White for his 5,000 shares. In their joint return for the year 1942, Morris White and his wife Lillie reported a long-term capital loss of $ 743,775 for the sale in that year of the 15,000 shares of Morris White, Inc. for $ 12,450, and in his individual return filed for the same year, Abe White reported a long-term capital loss of $ 247,925 with respect to the sale in that year of his 5,000 shares of Morris White, Inc. for $ 4,150. The Internal Revenue Service took the position that the claimed losses should be disallowed on the ground that the capital stock of Morris White, Inc. became worthless in 1937 when the corporation was dissolved after distribution of all of its tangible assets to its creditors. Accordingly the net income of Morris and Abe White for the year 1942 was increased by $ 6,225 and $ 2,075 respectively, representing longterm capital gain on the sale of the capital stock of Morris White, Inc., which was deemed to have a zero basis.
(2) Whether the Internal Revenue Agent in Charge properly increased the net income of Morris White Fashions, Inc. for the years ended June 30, 1944 and June 30, 1945 by disallowance of cash purchases of raw materials in the respective amounts of $ 45,549.58 and $ 16,167.97 for lack of substantiating evidence. (In spite of the fact that plaintiff had executed Form 874 consenting to a deficiency assessment on this particular issue in 1947, this matter was treated as a new issue by the Appellate Staff).
(3) Whether Morris White Sales Co., a partnership consisting of Morris White, his son Bernard B. White, his wife Lillie White, and Abe White, organized in 1934 for the purpose of engaging in business as sales agents, and which by contract with plaintiff became sole selling agent for Morris White Fashions, Inc., should be recognized as a valid partnership for federal income tax purposes, or whether, as determined by the Internal Revenue Agent in Charge, its net income for the fiscal years 1944 and 1945 should be considered as integral parts of the net income of plaintiff for the aforementioned periods.
The following proposals were submitted on behalf of plaintiff and the individual taxpayers in settlement of these issues:
(1) That the taxpayers, Morris and Abe White, concede that they did not sustain long-term capital losses in the year 1942 by reason of the sale of stock of Morris White, Inc.
(2) That it be conceded that the net income of plaintiff for the years 1944 and 1945 should be increased by $ 45,549.58 and $ 16,167.97, respectively, representing unsubstantiated cash purchases.
(3) That the Government concede that Morris White Sales Company is to be recognized as a valid partnership for federal income tax purposes.
These proposals for settlement were accepted by the Appellate Staff as being in the best interests of the Government, and accordingly, on April 4, 1952, the plaintiff executed a modified Form 874 and the related taxpayers executed Form 870-AS. In plaintiff's modified Form 874 the usual statement to the effect that the assertion of further deficiencies by the Commissioner of Internal Revenue was not precluded was crossed out. Also, the plaintiff expressly agreed not to file or prosecute claims for refund, except as to an issue not now raised by the plaintiff. The modified Form 874 was accepted by the Commissioner's delegate on May 28, 1952, and the plaintiff agreed to an assessment and collection of a deficiency in the amount of $ 95,678.68 ...