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26 F.(2d) 408

Samuel H. Cady, of Chicago, Ill., and Nelson Trottman, of Milwaukee, Wis., amici curiæ.

Before BINGHAM and JOHNSON, Circuit Judges, and HALE, District Judge.

BINGHAM, Circuit Judge. This is a petition to review a final order of the Board of Tax Appeals, setting aside an order of the Commissioner of Internal Revenue assessing a deficiency income tax against the Old Colony Railroad Company for the calendar year

1920.

March 1, 1893, the Old Colony leased its lines and property to the New York, New Haven & Hartford Railroad Company for a series of years, and the lease was in force during the year 1920. In it the lessee agreed to pay the federal income and profits taxes of the lessor upon its taxable income for each taxable year. In 1921 the Old Colony filed an income tax return for 1920 under the Reve nue Act of 1918 (40 Stat. 1057). In 1924 and again in 1925 the Commissioner by letters advised the Old Colony of an additional income tax liability of $765.67, determined by treating as additional income for that year the sum of $6,960.64 (being the apportionment to the taxable year of premiums on bonds sold as hereinafter stated) and $696.06, which was the federal income tax computed on such additional income of $6,960.64. Between 1895 and 1904 the Old Colony issued bonds, which were sold at premiums aggregating $199,528 in excess of the face amounts thereof. When the premiums were received they were entered in an account entitled "Premium on Bonds." In 1914 the Interstate Commerce Commission required the Old Colony, for the purpose of its reports to the Interstate Commerce Commission, to amortize such premiums over the periods of the respective lives of the bonds. For the purpose of meting the requirements of the Interstate Commerce Commission, and under its protest to the Commission, the Old Colony made such adjustments up to June, 1914, and thereafter each year transferred $6,960.64 from the "Premium on Bonds" account to the profit and loss account (a surplus account), representing the annual apportionment of premiums on the bonds required by the Interstate Commerce Commission to be so transferred. The Old Colony did not include in its 1920 return the sum of $6,960.64 transferred that year as above stated, not regarding it as income. But the Commissioner, regarding it as income, found an additional tax due thereon of $696.06 and considering this additional 26 F. (2d)-261⁄2

tax as payable by the lessee, the New York, New Haven & Hartford Railroad, and as constituting additional income to the lessor, the Old Colony, levied on these two items a tax of $765.67.

The Board of Tax Appeals entered a no deficiency order, holding that the Commission erred in treating the amount ($6,960.64) of the amortized premium as income, for the reason that "the amortization of the premiums cannot give rise to on the bonds income where no transaction has occurred during the taxable year with reference to the sale, purchase or payment of the bonds." It is contended by the Commissioner that the decision is wrong.

Article 16 of the Constitution, in force February 25, 1913, provides:

"The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration."

Revenue Act of 1918 (40 Stat. 1057-1152) provides:

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"Sec. 232. That in the case of a corporation subject to the tax imposed by section 230 the term 'net income' means the gross income

as defined in section 233 less the deductions allowed by section 234, and the net income shall be computed on the same basis as is provided in subdivision (b) of section 212 or in section 226." Comp. St. § 633600.

"Sec. 233. That in the case of a corporation subject to the tax imposed by section 230 the term 'gross income' means the gross income as defined in section 213. Comp. St. § 6336sp.

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or the trans

"(a) Includes gains, profits, and income derived from businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, action of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be

properly accounted for as of a different pe- they be said to be taxable income "for the riod." Comp. St. § 6336%ff (a).

"Sec. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:

"(1) All the ordinary and necessary expenses paid or incurred during the taxable

year.

"(2) All interest paid or accrued within the taxable year on its indebtedness. " Comp. St. § 6336spp (a).

"Sec. 212. (b) The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income." Comp. St. § 6336f (b).

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taxable year in which received by the taxpayer" (section 213(a), "which should be prorated or amortized over the life of the bonds" (article 544, Reg. 45, 2 (a). It seems to us that the answer to this question disposes of the case, and that the answer must be in the negative. The premiums, when received, were treated and used as capital. They were not received in 1920, the tax year in question, but some 16 or more years prior thereto. At that time there was no federal statute imposing a tax upon incomes and no provision of the Constitution giving Congress power to lay or collect taxes on incomes without apportionment, which the Revenue Act of 1918 unquestionably does. It is not to be presumed that Congress by the act of 1918 intended to tax the whole or any part of the premiums on bonds received prior to February 25, 1913, whether the life of the bonds extended into a taxable year subsequent to February 25, 1913, or not, as it was beyond its power to do so at the time they were received.

Article 544 of Regulation 45, based upon See Lynch v. Turrish, 247 U. S. 221, 38 S. the Revenue Act of 1918, provides:

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It is to be borne in mind that the premiums here in question were received by the Old Colony not later than 1904, and during a period of time when there was no federal statute authorizing the laying and collection of taxes on incomes, and several years prior to the adoption of the Sixteenth Amendment (February 25, 1913), authorizing Congress to lay and collect taxes on incomes without apportionment among the several states, and that these premiums when received were regarded and treated as capital and expended in the improvement of its road.

The question then is whether the premiums that were received by the taxpayer not later than 1904, are income of the taxpayer that may be amortized over the life of the bonds and the sum or part of the premiums apportioned to the year 1920 be taxed in 1920 to the taxpayer as a part of its income in that year under section 213(a) and 212(b) of the Revenue Act of 1918.

If it be assumed that the premiums received in 1904 and prior thereto were income, can

Ct. 537, 62 L. Ed. 1087; Southern Pacific Co. v. Lowe, 247 U. S. 330, 38 S. Ct. 540, 62 L. Ed. 1142; Doyle v. Mitchell Bros. Co., 247 U. S. 179, 38 S. Ct. 467, 62 L. Ed. 1054; Hays v. Gauley Mountain Coal Co., 247 U. S. 189, 38 S. Ct. 470, 62 L. Ed. 1061; Merchants' Loan & Trust Co. v. Smietanka, 255 U. S. 509, 41 S. Ct. 386, 65 L. Ed. 751, 15 A. L. R. 1305; Goodrich v. Edwards, 255 U. S. 527, 41 S. Ct. 390, 65 L. Ed. 758.

This question, as we understand it, has not heretofore been passed upon by any court. A somewhat analogous question was decided by the Court of Claims, in the case of Chicago & Alton Railroad Co. v. United States, 53 Ct. Cl. 41. There the corporation in 1906 issued and sold its bonds at a discount and the amount of the discount was entered in a "Profit and Loss" account of that year. In 1909 the Corporation Excise Tax Act (36 Stat. 112), was enacted. In filing its returns for 1911 and 1912 under that act, the corporation did not claim deductions for the discount, but later filed claims for refunds for those years of a proportionate amount of the discount. The Commissioner rejected the claims for refunds and the Court of Claims approved his decision. The significant thing about the case is that the court declined to allow the taxpayer, who had sustained a loss in 1906 in the amount of discount then made in the sale of bonds extending over a period of years, to have such loss amortized and allowed as a deduction in de

26 F.(2d) 411

termining the amount of the taxpayer's tax 5. Banks and banking 80 (7)-To establish for the years 1911 and 1912.

The decision of the Board of Tax Appeals is affirmed.

DICKSON v. FIRST NAT. BANK OF BUFFALO, OKL., et al.

Circuit Court of Appeals, Eighth Circuit. May 25, 1928.

No. 8013.

1. Courts 372(1)-Whether proceeds of checks collected by insolvent bank constitute trust fund, entitling depositor to preference, must be determined by general commercial law, as defined by federal courts.

Whether insolvent bank's collection of checks created fiduciary relation of principal and agent between it and one depositing them in forwarding bank, so as to constitute proceeds a trust fund, entitling depositor to preference, must be determined by principles of general commercial law, as defined by federal courts, independent of state law.

2. Banks and banking 126-Deposit of check with bank and entry of credit therefor creates relationship of debtor and creditor, not principal and agent.

Where the owner of a check deposits it with a bank and receives credit therefor, the relationship of debtor and creditor, not of principal and agent, is created, though check may be charged against depositor's account, when dishonored by bank on which drawn.

3. Banks and banking 166(1)-Depositor of checks in forwarding bank could not treat collecting bank as his agent, so as to entitle him to preference on its insolvency.

One depositing checks in bank, which forwarded them to another bank for collection,

could not treat latter bank as his agent in handling them, so as to be entitled to preference of claim to proceeds on its insolvency; such bank being agent of forwarding bank.

4. Banks and banking 166(1)—Depositor of

checks, entire proceeds of which were applied on collecting bank's indebtedness to drawee bank and Federal Reserve Bank, held not entitled to preference on collecting bank's insolvency.

Where accounts of collecting and drawee banks were adjusted, and draft for balance given former when checks were presented for collection, such draft was forwarded to, and deposited to collecting bank's credit by, Federal Reserve Bank, which applied collecting bank's entire balance on its indebtedness to Reserve Bank, owner depositing checks in bank which forwarded them to collecting bank was not entitled to preference of claim to proceeds on latter's insolvency, as transaction did not increase its assets available for distribution to creditors, but merely decreased its indebtedness to Re serve Bank.

preference, trust funds must be traced into insolvent bank's assets.

To establish a preference, trust funds must be traced into the assets of the insolvent bank.

Appeal from the District Court of the United States for the Western District of Oklahoma; John H. Cotteral, Judge.

Action by C. B. Dickson against the First National Bank of Buffalo, Okl., and the receiver thereof. Judgment for defendants, and plaintiff appeals. Affirmed.

John J. Hildreth, of Guthrie, Okl., and H. W. Hart, Glenn Porter, and Enos E. Hook, all of Wichita, Kan., for appellant.

H. J. Sturgis and J. Wilford Hill, both of Enid, Okl., for appellees.

Before LEWIS, Circuit Judge, and SCOTT and DAVIS, District Judges.

DAVIS, District Judge. This is an action in equity, brought by C. B. Dickson, a citizen of Kansas, against the First National Bank of Buffalo, Okl., and Carl O. Nelson, the receiver of said bank, in the District Court of the Western District of Oklahoma. Judgment was entered in favor of the defendants, and the case has been brought to this court on appeal. The parties will be designated as in the court below.

The case was submitted to the court on an

agreed statement of facts, a summary of which is as follows:

That on December 4, 1924, one C. F. Myles executed two checks, drawn on the Central State Bank of Buffalo, Okl., aggregating $2,007.50, payable to the Railroad Building, Loan & Savings Association. The plaintiff became the owner of these checks and deposited them on December 6, 1924, in his checking account in the Fourth National Bank of Wichita, Kan. Thereafter the Fourth National Bank, in the usual course, forwarded the checks for collection to the defendant bank. These checks, with other items, reached the defendant bank from the Federal Reserve Branch Bank at Oklahoma City on December 11, 1924. On the same day the defendant bank took both of the checks, together with other items for collection, totaling $5,196.77, to the Central State Bank of Buffalo, Okl., and received therefor items on the defendant bank in the sum of $1,008.02, and a draft for the balance, $4,188.75.

This draft was forwarded by the defendant bank to the Federal Reserve Bank at Kansas City, and collected and credited to

the account of the defendant bank. The defendant bank was indebted to the Federal Reserve Bank at Kansas City in the sum of $188,977.19, by reason of rediscounts, taken under a contract whereby the Federal Reserve Bank was authorized to charge any of such paper to the account of the defendant bank, whenever the same became due or any paper which they deemed undesirable. The Federal Reserve Bank at Kansas City, on December 13, 1924, charged undesirable paper to the account of the defendant bank in the sum of $22,092.13, leaving no balance in the said Federal Reserve Bank to the credit of the defendant bank.

It was admitted that C. F. Myles, who drew the checks, had on deposit in the Central State Bank funds sufficient to cover both checks, and that when presented they were paid in the manner above stated. It is also conceded that the defendant bank was insolvent on December 11, 1924, and that such insolvency was known to the officers of the said bank. The defendant bank was closed by order of the board of directors on December 13, 1924, and defendant receiver took charge on December 27, 1924.

The plaintiff contends that, when the First National Bank of Buffalo collected the proceeds of the two checks, the transaction resulted in the creation of a relation of principal and agent between the plaintiff and the defendant bank; that this relation amounts in law to a fiduciary relation, and that the defendant bank became a trustee, and that the proceeds of the checks constituted a trust fund; that this trust fund was, by the defendant, mingled with its own fund, and the entire amount at insolvency went into the hands of a receiver; that this claim of the plaintiff against the insolvent estate should be treated as a preference and paid before general claims.

[1] The issue in this case is to be determined by resort to the principles of the general commercial law, as defined by the federal courts, independent of the state law on the subject. Oates v. National Bank, 100 U. S. 239, 25 L. Ed. 580.

[2] It seems to be the well-established rule that, where the owner of a check deposits it with a bank and receives credit therefor, the relationship of debtor and creditor, and not that of principal and agent is created. This relationship is not affected by the fact that upon dishonor of the check by the bank upon which it is drawn it may be charged against the account of the depositor. In the recent case of City of Douglas v. Federal Reserve Bank of Dallas, 271 U. S. 489, 46 S. Ct. 554,

70 L. Ed. 1051, the facts were very similar to those in the case before this court, and it was there held:

"When commercial paper is indorsed without restriction by a bank depositor, and is at once passed to his credit by the bank to which he delivers it, he becomes the creditor of the bank; the bank becomes the owner of the paper, and in making the collection is not the agent for the depositor. One who indorses a check in blank and deposits it in his bank account cannot maintain an action against another bank to which the paper is sent for collection, since, having surrendered his rights in the paper, no relationship exists between him and the collecting bank which can be made the basis of a recovery for its negligent acts."

In Burton v. U. S., 196 U. S. 283, 25 S. Ct. 243, 49 L. Ed. 482, it was said:

"When a check is taken to a bank, and the bank receives it and places the amount to the credit of a customer, the relation of creditor and debtor between them subsists, and it is not that of principal and agent."

See, also, Thompson v. Riggs, 5 Wall. 663, 18 L. Ed. 704; Davis v. Elmira Savings Bank, 161 U. S. 275, 16 S. Ct. 502, 40 L. Ed. 700.

[3] These cases seem to conclusively indicate that the plaintiff is not entitled to treat the defendant bank as having been its agent in the handling of the two checks with which we are concerned in this case. The defendant bank was the agent of the institution which forwarded the checks to it for collection, and stood in no fiduciary relation to plaintiff.

[4] But, even if the plaintiff's position were sustained in this respect by the authorities, he would not be entitled to a preference for another reason. When the two checks in question were presented by the defendant bank to the Central State Bank of Buffalo, the accounts of these two institutions were adjusted and the balance was given to the defendant in the form of a draft. This draft was forwarded to the Federal Reserve Bank at Kansas City and deposited to the credit of the defendant. The entire balance of the defendant bank in the Federal Reserve Bank was applied on its indebtedness to the Federal Reserve Bank. So that the proceeds of these two checks were consumed in satisfying defendant bank's obligations to the Central State Bank of Buffalo and to the Federal Reserve Bank at Kansas City. The ultimate result was that the indebtedness of the defendant bank was decreased to the amount of these two checks. The transaction did not

26 F.(2d) 413

in any sense result in increasing the assets of the bank which were available for distribution to creditors. To grant plaintiff a preference would not be to authorize him to take from the assets something which rightfully belonged to him by reason of his property being wrongfully added to the assets, but it would be to permit him to take from the assets funds which belong to other creditors. Since plaintiff contributed nothing to the assets of the defendant bank, when the failure came, no portion of his funds went into the receiver's hands. The same situation has frequently been presented to this court. In Empire State Surety Co. v. Carroll County, 194 F. 593, it was said:

"It is indispensable to the maintenance by a cestui que trust of a claim to preferential payment by a receiver out of the proceeds of the estate of an insolvent that clear

proof be made that the trust property or its proceeds went into a specific fund or into a specific identified piece of property which came to the hands of the receiver, and then the claim can be sustained to that fund or property only and only to the extent that the trust property or its proceeds went into it. It is not sufficient to prove that the trust property or its proceeds went into the general assets of the insolvent estate and increased the amount and the value thereof which came to the hands of the receiver."

In the case of Farmers' National Bank v. Pribble, 15 F. (2d) 175, this court held that: "The fact that the claimant's property paid or reduced the indebtedness or liability of the insolvent corporation, so that it will pay a larger percentage of its debts, justifies no lien on its assets by or preference in pay ment to the cestui que trust (1) because such a reduction of indebtedness does not increase the property or the value of the property of the insolvent; and (2) because the property of the claimant so used to pay a part of the insolvent's general indebtedness or liability never goes into, and therefore cannot be traced into, the property or assets of the insolvent which subsequently come into the possession of the receiver."

[5] The same doctrine has been announced in other cases in this circuit. State Bank of Winfield v. Alva Security Bank, 232 F. 847; Mechanics & Metals Nat. Bank v. Buchanan, 12 F. (2d) 891. These cases conclusively hold that, to establish a preference,

trust funds must be traced into the assets of an insolvent estate. This situation is not here presented.

The court below entered the proper judgment, and it will be affirmed.

ATCHISON, T. & S. F. RY. CO. et al. v.
BROTHERHOOD OF LOCOMOTIVE
FIREMEN AND ENGINEMEN.

Circuit Court of Appeals, Seventh Circuit.
May 24, 1928.

No. 4009.

3-Arbitrations

1. Arbitration and award
may deal either with private disputes or mat-
ters of public concern.

Arbitrations dealing with matters of public rules than those that govern arbitrations of concern are governed by somewhat different private disputes.

2. Arbitration and award 35-Parties to arbitration as to public matter may provide for valid award by majority of arbitrators.

In case of an arbitration as to matter of public concern, the parties may provide for valid award by majority of the arbitrators.

3. Arbitration and award 35-One arbitra

tor, or minority of arbitrators, cannot defeat award by resigning, withdrawing, or otherwise refusing to participate in hearings.

One arbitrator, or a minority of arbitrators, cannot, after dispute has been fully submitted, defeat an award by resigning, withdrawing, or otherwise refusing to participate in hearings. 4. Master and servant 16-Award by majority of arbitration board in controversy between carriers and employees held valid, notwithstanding refusal of minority to participate after filing report by board showing inability to agree (Railway Labor Act [45 USCA §§ 151-163]).

Under the Railway Labor Act (45 USCA 88 151-163), governing arbitrations relative to award filed by a majority of the members of an disputes between carriers and employees, an arbitration board appointed pursuant to provisions of the act, before expiration of time provalid, notwithstanding refusal of certain memvided in agreement for entering of award, held bers to participate therein, on ground board had previously filed a report showing an inability to reach agreement.

Geiger, District Judge, dissenting.

Appeal from the District Court of the United States for, the Eastern Division of the Northern District of Illinois.

Petition by the Atchison, Topeka & Santa Fé Railway Company and others to impeach an award filed by an arbitration board, disposing of controversies between petitioners and the Brotherhood of Locomotive Firemen and Enginemen. From an order denying the petition, petitioners appeal. Af

firmed.

Kenneth F. Burgess, of Chicago, Ill., for appellants. Donald R. Richberg, of Chicago, Ill., for appellee.

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