Full opinion text
BYRNE, District Judge. ' These are appeals from a judgment denying relief to plaintiffs below, who are seeking to recover approximately $17,000,000 from the reorganized The Western Pacific Railroad Company, defendant and appellee. Appellants are The Western Pacific Railroad Corporation (hereinafter sometimes referred to as “Corporation”), its receiver, and three of its preferred stockholders, who intervened to assert Corporation’s claims. Appellant Corporation, from 1916 until the events which gave rise to this litigation, owned all of the capital stock of The Western Pacific Railroad Company, an operating railroad company. The operating company became financially distressed during the “depression of the early thirties” and in 1935 it filed a petition under Section 77 of the Bankruptcy Act, 11 U.S.C.A. § 205. The court, in that year, placed its affairs in the hands of trustees. In 1939 the Interstate Commerce Commission approved (233 I. C, C. 409) a proposed plan of reorganization, which was thereafter submitted to and approved by the district court in 1940. In re Western Pac. R. Co., 34 F.Supp. 493. In the plan it was determined, inter alia, that the capital stock of the subsidiary, owned by Corporation, was without equity or value and therefore was not entitled to participate in the plan. Appeals followed and, after a contrary holding by this court, 124 F.2d 136, the Supreme Court considered and rejected the contention of Corporation that it should have the right to participate in the plan because of increased earnings of the debtor while in reorganization, and affirmed the district court on March 15, 1945. Thereafter the plan of reorganization was submitted to the creditors in accordance with the statutory requirement, 11 U.S.C.A. § 205, sub. e, and, following their approval, was confirmed on October 11, 1943 by the district court. On April 30, 1944, with the approval of the court, Corporation transferred all of its stock in the subsidiary to the reorganization committee and this stock was later cancelled. On December 31, 1944, the trustees turned the railroad properties over to the reorganized company, The Western, Pacific Railroad Company, appellee here. This litigation involves a dispute about taxes and tax savings for the years 1942, 1943 and the first four months of 1944, a period during which the railroad properties were controlled and operated by the trustees of the bankruptcy court. During the years in which Corporation was the owner of all the outstanding stock of the pre-reorganization, The Western Pacific Railroad Company, including the years the trustees of the bankruptcy court had possession and control of the railroad properties, Corporation followed the practice of filing, consolidated income tax returns in which it reported the earnings of the operating company as well as other affiliated companies. During the year 1942 the operating company, under the control of the court’s trustees, had substantial net earnings. On May 15, 1943, a consolidated return for the calendar year 1942, showing tax liability of $4,201,821.54, was filed by Corporation in behalf of all members of the affiliated group. Corporation, not having had any net earnings during 1942, did not pay any part of the tax. On July 1'5, 1944 a consolidated income and excess profits tax return for the calendar year 1943, showing no taxable income, was filed by Corporation in behalf of all members of the affiliated group. The operating company, under the management of the trustees, again made substantial net earnings in 1943, but the loss sustained by Corporation 'by reason of the declaration of worthlessness of its stock in the operating company (which 'had cost Corporation $75,-000,000) was utilized as an offset in the consolidated return and thus resulted in a net loss and no tax obligation for any of the affiliated group. In addition, part of the loss was “carried back” to 1942 and a claim for refund of the taxes paid under the consolidated return for 1942 was filed with the Commissioner by Corporation on March 9, 1945. A consolidated return in behalf of the affiliated group was filed on June 15, 1945, by Corporation for the first four months of 1944. No tax liability was shown by this return by reason of the “carry forward” of an unused portion of the loss arising from the declaration of the worthlessness of the stock of the subsidiary company owned by Corporation. The validity of the stock loss offsets was questioned by the Commissioner of Internal Revenue, and after negotiations a tax settlement was made with the Commissioner on August 13, 1947 whereby, in consideration of the withdrawal of the claim for refund of 1942 taxes, the Commissioner accepted and approved the returns for the calendar year 1943 and first four months of 1944. Except for the offset of the capital stock loss of Corporation, the net earnings of the subsidiaries for 1943 and the first four months of 1944 would have required the payment of some $17,000,000 in income and excess profits taxes. This suit in equity was instituted October 10, 1946 by Corporation, alleging “consolidated income tax returns were filed by the plaintiff for itself and its affiliates which reported a deductible loss by the plaintiff in an amount sufficient to eliminate all taxable income for the group as a whole” for the periods in question and praying that the rights and interests of the plaintiff and the defendants 'be fixed and determined. A complaint in intervention was filed by three stockholders of Corporation on April 7, 1947. The principal difference between the original complaint and the complaint in intervention is the allegations in the latter pertaining tp “duality” or interlocking management and “domination” of the parent by the subsidiary. It is alleged that various directors, officers and counsel of Corporation acted as directors, officers and counsel of the subsidiary with the result that the subsidiary dominated and controlled Corporation ; that said officers caused Corporation to file consolidated tax returns when Corporation had “no duty or obligation whatsoever so to do”. Corporation filed an answer to the complaint in intervention in which it denied “on its own behalf and on behalf of its officers and directors all allegations * * * of doinination and control of the plaintiff, its officers and directors” by the subsidiaries and affiliates, but six months later Corporation filed a supplemental bill of complaint alleging a “duality of control” and, though falling short of intervenors’ allegation of “domination”, it alleges “at the special instance and request of the defendants and the trustees in the reorganization proceedings acting for the defendants the plaintiff, however, consented to the filing on its behalf of consolidated * * * tax returns with defendants” for the tax periods in question. It is further alleged that plaintiff “does not aver that in so conducting themselves” the officers acting for both corporations “were aware of wrong-doing or consciously disregarded the interests of plaintiff”. There is no assertion of actual fraud or specific acts of deceit nor would the record support any such assertion. Corporation’s claim appears to rest on constructive fraud presumed from the intercorporate relationship which it asserts deprived it of its independence and caused it to suffer -a loss. The appellants emphasize that Corporation maintained its offices jointly with those of its subsidiaries and the trustees in New York; that Corporation’s officers, who handled the tax transactions, were also employees of the subsidiaries and trustees, and their salaries and the expenses of the office were jointly paid; that because of its impoverished financial condition, Corporation was incapable, as of June 1, 1943, of paying salaries or office expenses and thereafter the subsidiaries paid all of the salaries and office expenses. Appellants refer to this as “duality of management” which they contend created a fiduciary relationship and the subsidiaries’ duty to deal fairly with Corporation. Many of the cases cited by appellants deal with the duties of trustees, agents and partners and with the granting of restitution for violation of their duties. Clarity of reasoning has suffered because of the failure to distinguish between the several varieties of fiduciaries, and the duties imposed on each. Although all trustees are fiduciaries, all fiduciaries are not necessarily trustees. “A person in a fiduciary relation to another is under a duty to act for the benefit of the other as to matters within the scope of the relation. Fiduciary relations include among others the relation of trustee and beneficiary, guardian and ward, agent and principal, attorney and client * * *. The directors and officers of a corporation are also fiduciaries, as are receivers, and executors and administrators. The scope of the transactions affected by the relation and the extent of the duties imposed are not identical in all fiduciary relations * * Restatement of Restitution, Section 190, comment “a”, (emphasis added.) As stated by Professor Scott in 49 Harvard Law Review at page 521: “In some relations the fiduciary element is more intense than in others; it is peculiarly intense in the case of a trust * * (emphasis added.) Appellants place a great measure of reliance on the case of Commercial National Bank in Shreveport v. Parsons, 5 Cir., 144 F.2d 231, 236. That case is- distinguishable from the case before us in that the fiduciary relationship arose out of a contract which imposed the duties of a trustee upon the “new bank”. The court decided the case on the established rule that a trustee owes the duty of absolute fidelity to the trust estate and may not profit by dealing with it. We know of no better way to point up the distinction than to use the words of the court cited and emphasized by appellant’s brief: “The credit thus obtained by the new bank was a profit derived from the trust property as effectively as .if it had been paid that much in cash.” (emphasis added.) Cases which deal with trustees, agents and partners are not controlling here as there is no contention that the subsidiary was a trustee, agent or partner. It is appellants’ contention that the subsidiary dominated Corporation through the dual officers. If this be true, then a fiduciary relationship existed, but the duties imposed were not those of a trustee. While a trustee may not deal with the trust estate and thereby make a profit, affiliated corporations are usually associated for the very purpo.se of dealing with each other for profit, e. g., manufacturing and sales companies; railroads and their subsidiary short line companies. Even the corporation which dominates its subsidiary, with the resultant fiduciary relationship, properly deals with its affiliate for profit as long as there is no overreaching or unfairness. Whether or not a fiduciary relationship exists, and the extent of the duties imposed, depends upon the particular field of substantive law involved. We must look to the law of corporations to determine whether the subsidiary stood in a fiduciary relation to Corporation. The mere fact of officers^ and directors in common does not create such a fiduciary relationship. There is nothing insidious about duality of management and control as such. It is very common in the realm of business, particularly in the situation of parent and subsidiary, as here. At times business convenience requires such relationship. The officers and directors who occupy this dual position are fiduciaries to both companies and owe a duty of loyalty to each. Thus they cannot favor the interests of one corporation while sacrificing or betraying those of the other. If they do so, they must respond in damages for their tortious conduct or account for any benefits derived through their breach of duty. But rules relating to the individual officers do not reach the point involved in, this case. Here we must determine whether the subsidiary corporation stood in a fiduciary relation to the parent corporation. There are several orthodox ways in which one corporation may become a fiduciary in relation to another corporation, e. g., it may hold property in trust for the other, or it may become an agent for the other. Fiduciary duties also arise where one corporation dominates the other. Consolidated Rock Products Co. v. Du Bois, 312 U.S. 510, 61 S.Ct. 675, 85 L.Ed. 982. Although the presence of common officers and directors does not in itself create a domination or a fiduciary relationship between the corporations, it does subject dealings between them to judicial scrutiny as to their fairness and reasonableness to ascertain if domination exists,- and if so,, whether it has resulted in overreaching which will raise a .presumption of constructive fraud. ■There obviously existed an interlocking management between Corporation and the subsidiaries. But this -situation was not of the subsidiary’s making. On the, contrary, it was created -by Corporation, whose stockholders elected its Board of Directors, who appointed its officers. ■ Since plaintiff Corporation owned 100% of the stock of the subsidiary, it elected all of the directors of the subsidiary, which, in turn, appointed its officers. After the subsidiary was reorganized it was no longer controlled by Corporation but by the trustees appointed by the bankruptcy . court. Corporation continued in office the same directors who, in turn, continued to employ the same officers. This was not unnatural since Corporation continued to own all the capital stock of the subsidiary long after it had been divested of control of the subsidiary by reason of the reorganization. If it be assumed that the advent of the trustees into the affiliation and the increased prosperity of the subsidiary resulted in control of the affairs of Corporation so as to raise fiduciary obligations, the scope and extent of the subsidiary’s obligations would be to deal fairly with Corporation. A corporation can only act through its officers and agents. It follows that if there was domination and unfairness it was exercised through the dual officers who forsook their obligations to Corporation, by which they were appointed, and served the purposes of the subsidiary. Although the arguments of appellants are exceedingly general, it is apparent that they assign three particulars wherein the dual officers failed in their obligations to Corporation, resulting in unfairness: (1) They filed consolidated returns; (2) they failed to exact an agreement from the subsidiary requiring payment of money to Corporation as a condition to their consent to file consolidated returns; (3) they should have resigned and allowed the appointment of successors who would have exacted such an agreement from the subsidiary. We shall discuss these three particulars seriatim. The consolidated returns were filed by Corporation as the parent, for itself and its subsidiaries. Appellants contend that the subsidiaries causedCorporation to file consolidated returns when it had “no duty or obligation whatsoever so to do”. The filing of these returns was in exact conformity with the practice followed since 1916. Beginning in 1927 Michael J. Curry, first as treasurer and after February 1, 1942 as president of Corporation, supervised preparation of consolidated returns, signed and filed them. In each year the consolidated tax liability was distributed pro rata to those members of the group who had taxable incomes without allocating any tax to a company showing a loss or paying such company tribute for the tax “saved” by the use of its loss in the returns. Mr. Curry supervised preparation of a tentative tax return for 1942, and on March 15, 1943, signed and filed it and arranged for an extension of time until May 15, 1943, to file the final return. On March 23, 1943, F. C. Nicodemus, Jr., who was counsel for Corporation at the time and appears on the pleadings and briefs in this case as present counsel for appellants, suggested by letter to Mr. Schumacher, one of the trustees of the operating company, that he be authorized to employ Messrs. Whitman, Ransom, Coulson & Goetz, tax experts, to advise him on tax matters. This was done. Mr. Polk of this firm continued to advise with the officers of the group through the periods here in question. Mr. Polk reviewed the tax situation with Mr. Curry and Mr. Nicodemus and on May 20, 1943*, prepared a detailed written report addressed to Mr. Curry and circulated to Mr. Schumacher and Mr. Nicodemus. The report reviewed the tax advantages of consolidated returns and suggested the possibility that, under the recently enacted amendment to Section 23 (g) of the Internal Revenue Code, the loss of Corporation, upon a determination that its stock in the subsidiary was worthless, might constitute under a consolidated return, an offset to income of other group members. A consolidated return reporting the loss of Corporation as an offset to group income was prepared in the joint New York office, signed by Mr. Curry, and filed by him on July 15, 1944. The return reported no tax owing. Substantially the same procedure was followed for the “carry back” claim for refund March 9, 1945, as well as the consolidated tax return for the first four months of 1944, which was filed July 15, 1945. It hardly seems conceivable that Corporation could complain because consolidated returns were filed. Not only was it in accordance with past practice of the group and under the supervision of Corporation’s president, as in former years, but it was done under the guidance of the independent tax experts employed upon the suggestion of the General Counsel for Corporation, who represents appellants in the present proceeding. As' the trial court stated “ * * * when everybody was, as they were in this case, acting completely in the open in the matter, nobody was concealing anything from anyone else, the element of fraud or deception, of the kind that you refer to, is absent * * *. Everybody knew that consolidated returns were being filed * * *. Everybody knew that these attorneys were being employed to file this consolidated return. It was all done right out in the open.” At the time of trial plaintiff intervenors appeared to agree with these observations of the trial court, but on this appeal they infer that there was something sinister about the filing of the consolidated returns. It is interesting to note the reactions of appellants to observations in the opinion of the trial court to the effect that the Commissioner erred in allowing the tax deduction in question. They vehemently argue that the filing of the consolidated returns and the use of plaintiff’s loss to offset .defendant’s income was proper under the tax law and regulations. It is also interesting to note that the compromise of the tax claim between the Bureau of Internal Revenue and Corporation acting through its attorney-in-fact, James K. Polk, occurred after this action was commenced on October 10, 1946, and after the filing of the complaint in intervention on April 7, 1947; that no effort was made to invoke the power of the court to enjoin the officers of Corporation from continuing in their efforts to have the Bureau accept the consolidated returns as filed; that nothing was done to revoke Polk’s power-of-attorney to represent Corporation in the proceedings before the Bureau; that Polk, as attorney-in-fact for Corporation, made an offer of settlement of tax liability for 1942, 1943 and the first four months of 1944 by letter of May 19, 1947, to the Internal Revenue Bureau; that a stipulation (hereafter discussed) was entered into between counsel in this case approving the ■settlement of the returns with the Government; that Corporation’s Board of Directors adopted a resolution approving and ratifying the offer of settlement August 13, 1947. The conclusion is inescapable that Corporation’s officers, when they filed consolidated returns, did not violate any obligation but, on the contrary, were conforming with the -policy and directions of Corporation. Appellants suggest that Corporation was under no obligation to file consolidated returns; that it could have demanded that the subsidiaries enter into an agreement to pay it a sum of money as a prerequisite to its consent to filing such returns; that inasmuch as its officers did not exact such an agreement, they failed in their obligation to Corporation and are chargeable with an “unfair” omission to be imputed to the subsidiary by reason of the supposed domination. Section 141(a) of the Internal Revenue Code grants the ¡privilege of filing consolidated returns upon the condition that all members of the affiliated group consent to the regulations prescribed by the Commissioner under the authority of subsection (b) of the same section. Regulation 104, Section 23.12 provides that the consolidated return shall be made by the parent corporation. Under the Regulations, the parent corporation is the agent for the entire group, and (except in unusual circumstances) all dealings with the Commissioner are handled by the parent. Appellants argue that consolidated returns were designed solely for the benefit of the parent corporation. The argument is not sound. The Code and Regulations recognize that the benefit of consolidated returns is for all corporations in the group. Any subsidiary in the group, as well as the. parent, may prevent the filing of consolidated returns if the filing is detrimental or contrary to the interests of such corporation. Appellants assert that in the usual case the tax saving which a subsidiary effects will inure to the parent by way of increasing the value of its stock or by way of dividends. This is quite true in the usual case. But it does not mean that this result must follow, nor does it follow that, because the value of a parent’s equity in a subsidiary corporation is increased by reason of benefits flowing to the subsidiary’s preferred stockholders and creditors, it may receive the benefits direct, regardless of the rights of the subsidiary’s preferred stockholders, creditors and minority common stockholders. The appellants and jntervenors contend that the tax laws require “economic unity” for the filing of consolidated returns. This is incorrect. The Regulations suggest procedure in cases where a subsidiary has left the affiliated group. Regulation 104, Section 23.12(e). Thus, the regulations specifically envision situations where economic unity shall cease and yet permit the filing of consolidated returns. If, by the time the returns are filed the affiliation has ceased to exist, any benefits to the subsidiary obviously cannot inure to the ¡parent. That is precisely the situation in the case at bar. In the tax periods involved there was an affiliated group. When the returns and the claim for refund were filed, affiliation no longer existed. Therefore, the benefit of the consolidated return could not accrue to the parent corporation. If the assertion of appellants that consolidated returns “are not permitted for the benefit of the subsidiaries” were literally true, then there would be no lawsuit here because consolidated returns could not have been filed in the first instance. Appellants cite three decisions of the Securities and Exchange Commission in ¡support of their view that the rationale of the tax laws requires that any benefits resulting from the tax laws should go to the parent. These decisions do not support this contention of appellants. These companies were seeking the approval of the Commission to alteration of inter-company agreements respecting income taxes. All three decisions show a decided viewpoint that the tax savings from consolidated returns shall not be paid over to the parent if this would in any way endanger the position of the creditors of the subsidiary. They also make clear that a company. whose loss was utilized for the benefit of the group does not have a right to compensation from those who benefited. In the Cities Service case, supra, the Commission said; “ * * * we think it should be observed that in the ordinary case the fact that one subsidiary contributes a particular income deduction to a Consolidated return does not in itself entitle that subsidiary to the benefits of the reduced taxes resulting from the deduction. Where the reductions are possible from filing a consolidated return, they ordinarily are due to a number of factors contributed by the various members of the consolidated group, including, among others, earnings, and excess profits tax credits, as well as income deductions.” (emphasis added.) There is nothing in the Code or Regulations that compels the conclusion that a tax saving must or should inure to the benefit of the parent company or of the company which has sustained the loss that makes possible the tax saving. Assuming, as we have, that the subsidiary dominated Corporation through control of the dual officers, it did not abuse its supposed dominant position because the officers and directors common to both corporations did not sacrifice Corporation’s interests to those of the subsidiary. When the Supreme Court decided that Corporation could not participate in the increased earnings of the operating company while in reorganization, Corporation suffered a severe loss. Since it had no income, there was no possible way for it to achieve any tax advantage to offset the loss. But its affiliate did have use for the loss and the group was entitled, under the tax law, to make use of that means of tax savings. The dual officers owed fiduciary duties to both corporations to promote the interests of both and to obtain for each what it was entitled to under the tax laws. Under this state of facts these officers had a positive duty to make use of the loss as they did, that is, to offset the income of members of the affiliated group with deductible losses of other members. If the positions of the corporations were reversed and the subsidiary had a loss and the parent had income, the officers would have been obliged to file consolidated returns to enable Corporation to make use of the loss. Indeed, this very thing had occurred in previous years of the affiliation and Corporation had effected substantial tax savings (Def. Ex. 46) by reason of filing consolidated returns. The record is clear that on none of these occasions was tribute paid to a subsidiary which had suffered a loss. The officers would have been derelict in their duty to the subsidiary had they failed to file consolidated returns. Their duty to Corporation required only that they not sacrifice its interests and' did not require them to exact tribute for following the practice of the past twenty-five years. After the transaction Corporation was in exactly the same position that it was in before the subsidiary had effected the tax saving allowed by the tax laws. However, it is contended that the subsidiary should have notified the Corporation’s stockholders and directors of the filing of consolidated returns so that independent directors and officers could have been put in charge of Corporation’s interests to make a bargain with the subsidiaries and obtain compensation as a prerequisite to filing consolidated returns. There are several things wrong with this argument. The most obvious is that the entire transaction was open and above board. Many persons 'having an interest in Corporation, including stockholders and counsel, were fully aware of the situation. They chose not to act. They apparently preferred to permit the transaction to stand, intending thereafter to bargain for a share in the tax savings. They made no effort to inject themselves into the tax settlement with the government. But all this assumes that it would have been proper for Corporation to 'have made such a bargain. The Corporation was the sole owner of the subsidiary’s capital stock. As such it was under a duty to deal fairly with the subsidiary having full regard for' the interests of the creditors and holders of other securities. Consolidated Rock Products Co. v. DuBois, 312 U.S. 510, 522, 61 S.Ct. 675, 85 L.Ed. 982. It owed a duty not to require its subsidiary to forego a legitimate tax saving and could not bargain to perform its duty. A parent company is not acting in the best interests of its subsidiary when it seeks to appropriate to itself an advantage which the tax laws give the subsidiary. Plaintiff argues that it was a "complete stranger” to defendant when the consolidated return was filed July 15, 1944, because the affiliation terminated on April 30, 1944, when its stockholdings were transferred to the reorganization committee. A tax return is an historical document relating to the past. This return related to a period when the affiliation existed. All fiduciary duties with respect to matters arising during the relationship continue during the winding up period, and are “as sacred and inviolable after as before the expiration of its term”. It would be ridiculous to say that a fiduciary who performs an act winding up matters which relate to the affiliation period may exact payment merely because the relationship has technically terminated. If Corporation had required tribute as a condition of its cooperation, then it would have been acting with less than the required standard of fairness to the subsidiary’s creditors. Equity will not permit a recovery as a substitute for a bargain which would have been unfair. The record is barren of evidence to support the contention that Corporation was dominated by the subsidiary, or that there was a breach of any duty owed to Corporation. As the trial court stated, “The so-called ‘duality of control,’ much discussed and emphasized, is not important”. [85 F.Supp. 875.] Appellants contend that they have a special claim to the 1942 tax saving. They rely upon a pretrial stipulation and order. The proposed settlement of tax liability with the government provided that the returns for 1942, 1943 and first four months of 1944 were to be approved as filed, and that the claim for refund of 1942 taxes was to be rejected. Intervenors applied to the court below for an order restraining the consummation of the settlement on the theory that the rejection of the 1942 refund claim might be prejudicial to the position of Corporation in this litigation. The parties entered into a stipulation providing that for purposes of litigátion the 1942 refund claim, diminished in proportion to the diminution of the entir-. tax saving, should be deemed to have been allowed and “paid to the plaintiff as the agent for the affiliated group * * (emphasis added.) The pretrial order confirmed the stipulation. The trial court did not make formal findings of fact and conclusions of law, but relied upon section 52(a), F.R. C.P., 28 U.S.C., which provides in part: “* * & if an opinion or memorandum of decision is filed, it will be sufficient if the findings of fact and conclusions of law appear therein. * * * ” Findings of fact and conclusions of law are intended to aid appellate courts by affording them a clear understanding of the basis of the decision below. Findings are not a jurisdictional requirement of appeal which this court may not waive. Even in cases where there are no findings, if the record is so clear that the court does not need them, it may waive the defect on the ground that the error is not substantial in the particular case. In the instant case the trial court’s opinion discloses adequately the issues of fact which were before the court and the court’s findings thereon. The trial court, in a note appended to its opinion, stated that “Inasmuch as there is little factual dispute” the opinion would serve as findings of fact and conclusions of law, but “counsel, if they wish, may submit findings * * All parties elected not to submit additional or more detailed findings except that the appellants proposed findings .with respect to the above stipulation and pretrial order, and also a conclusion of law to the effect that the defendant should pay to the plaintiff the sum of $3,385,290. These proposed findings and conclusions, which were inconsistent with those embodied in the opinion, were rejected by the trial court. Appellants argue that the court below concluded that it should leave the parties where it found them and that Corporation is therefore entitled to the assumed avails of the reduced refund claim. The stipulation and pretrial order were entered into and made for the purpose of protecting the position of Corporation in relation to the refund claims only if it should be found entitled to the refund. The court found it zvas not entitled to it. Appellants’ position is no stronger with respect to the refund for 1942 taxes paid by the subsidiaries than it is with respect to the 1943 and 1944 savings of the subsidiaries. It is true that the government requires consolidated returns be filed in the name of the parent and that refunds are paid to the parent, but where such refunds are paid, the parent holds the refund as agent or trustee for the benefit of the affiliate which has overpaid. In their brief appellant-intervenors allude to the losses they sustained as stockholders and imply that they have an equitable right to compensation apart from that of Corporation. To believe this would be to misapprehend their position. A corporation is a legal entity separate and distinct from its stockholders and benefits to the latter flow from the rights of the corporation. If this were not true these intervenors could not hope to gain by this proceeding as they sustained no loss by reason of Corporation being barred from participation in the reorganization plan. Their pleadings, as well as a stipulation filed in this suit, show that they acquired their stock after Corporation’s stock in the subsidiary had been declared worthless. Defendants offered to prove at the trial that intervenors purchased their stock for less than one cent on the dollar. The offered evidence was properly excluded as irrelevant by the trial court. The fact, if it be a fact, that any or all of the present stockholders of Corporation acquired their stock as a speculation while the corporation was in the process of liquidation and its “stock was of trifling value” (page 11, intervenors’ opening brief), is irrelevant to the issues here. Corporation is an entity and the issue is whether or not it is entitled to recover $17,000,000 from the successor of its former subsidiary. If it prevails its stockholders are entitled to reap the benefit, regardless of when they became such, or how “trifling” a sum they paid for their stock. The intervenors recognized this when they filed their complaint in intervention to assert Corporation’s claims. We have examined the other authorities cited by appellants and find nothing contrary to our holding here. Appellants cite Southern Pacific Company v. Bogert, 250 U.S. 483, 492, 39 S.Ct. 533, 63 L.Ed. 1099. That case was not concerned with the question of fiduciary relationship between parent and subsidiary. Rather, it was concerned with the fiduciary duty owed 'bj1' the holders of the majority of the stock of a corporation to the minority stockholders. The case holds that a parent company has a fiduciary duty to any minority stockholders of the subsidiary. Also cited is North American Co. v. S. E. C., 327 U.S. 686, 693, 66 S.Ct. 785, 90 L.Ed. 945. That case is not in point either. The court was not concerned with any question of fiduciary relationships. Rather it was concerned with the validity of the so-called “utility 'holding company death sentence” provision of the Public Utility Holding Company Act, 15 U.S.C.A. § 79 et seq. The judgment is affirmed. . There are seven appellees who are an affiliated group. The only one from whom appellants seek a.money judgment is The Western Pacific Railroad Company, hereinafter sometimes referred to as the “subsidiary”. The term, “subsidiaries”, used in the plural number, refers to The Western Pacific Railroad Company and all other members of the affiliated group of which appellant “Corporation” was the parent. . Ecker v. Western Pacific Railroad Corp., 318 U.S. 448, 63 S.Ct. 662, 87 L.Ed. 892. . Section 123 of the Revenue Act of 1942, 26 U.S.O. § 23(g) (4). By this subsection, losses resulting from worthlessness of stock of an affiliate became operating losses instead of capital losses as theretofore. . Section 122(b) (1) of the Internal Revenue Code. 26 U.S.Code. . Section 122(b) (2) Qf tbe Internal Eeve_ nue Code_ 26 U.S.Code. . The name of one of the trustees was ■ submitted • to the court by Corporation and the other was selected by the court and approved by all interested parties in the bankruptcy proceeding. . Appellant Intervenors attribute the “causation” to “domination and control” of Corporation by the subsidiaries and trustees, whereas Corporation, which denies “domination and control” merely attributes it to its consent to the filing “at the special instance and request of the defendants and the trustees * * *” (pleadings). . Pl.Ex. 39B (read into record, page 544). . PLEx. 50. . Page 970, Transcript. . Page 971, Transcript: “The Court: Well, all I have to say to you there, Mr. Levy, is that I don’t think it is necessary to carry that argument forward now. Everybody knew, didn’t they, that the consolidated return was being filed? So. that the defendant railroad company wouldn’t have to pay any income tax? That was why it was filed, wasn’t it? “Mr. Levy: Yes, your honor.” . In the opinion filed by the trial court, D.C., 85 E.Supp. 868, 874, appears the expressed view that the Bureau of Internal Revenue should not have compromised the tax claim of the taxpayers and should have insisted that the claimed deductions be disallowed in their entirety. The court said, “If I had the power, I ■would not hesitate to set aside the tax' settlement. Indeed, if I could, I would order these taxes paid to the United States. That would effectively dispose of the cause.” While we agree with the • ' principal holding of the trial court, we do not share this view. A taxpayer may avail himself of every means of tax deduction proper under the applicable statutes. Here the Commissioner questioned the taxpayer’s right to the deduction and, after months of negotiation, compromised the disagreement with the taxpayer in lieu of litigating it in the Tax Court. The tax laws authorize the Commissioner to enter into compromises and they are binding on the court in the absence of fraud. This is particularly true in a collateral proceeding. The settlement of the tax claims is an undisputed fact in this case and whether or not it was advantageous to the government is not in issue. The trial court recognized the expression of this view as dictum when it stated: “Obviously the Court cannot pass judgment upon the validity of. the tax compromise and settlement. It is now closed. It is final and cannot be reopened except for fraud.” (emphasis added.) . In the Matter of Consolidated Electric & Gas Co., 15 S.E.C. 161; In the Matter of Consolidated Electric and Gas Co. and The Islands Gas and Electric Co., 13 S.E.C. 649; In the Matter of Cities Service Company and Cities Service Refining Corporation, Holding Co. Act of 1935, Release' #5535, File 70-988. . Trice v. Comstock, 8 Cir., 1903, 121 F. 620, 625, 61 L.R.A. 176; Uniform Partnership Act, 7 U.L.A. Sec. 30; Cal.Corp. Code Sec. 15030; 3 Scott on Trusts (1939) Sec. 344; 16 Fletcher, Corporation (Perm.Ed.) Sec. 8174. . Mayo v. Lakeland Highlands Canning Co., 309 U.S. 310, 60 S.Ct. 517, 84 L.Ed. 774; Hurwitz v. Hurwitz, 78 U.S.App.D.C. 66, 136 F.2d 796, 148 A.L.R. 226; Goodacre v. Panagopoulos, 72 App.D.C. 25, 110 F.2d 716. . Bankers Trust Co. v. Florida East Coast, etc., 5 Cir., 92 F.2d 450.
JAMES ALGER FEE, District Judge (dissenting). There are no findings of fact which support the judgment of the Trial Court or the affirmance thereof by a majority of this Court. The cause should be remanded for this reason alone. The Trial Court gives two reasons for decision against plaintiff: first, that the “tax escape” was a fraud on the government, and, second, that a recovery would violate the reorganization decree. Neither has any validity. The major portion of the opinion of the Trial Court is devoted to the proposition that the “tax escape” was a fraud upon the government, and therefore the proceeds were given to the defendant, an active wrongdoer. This position that there was a fraud is given no support by the tax agents of the government who made the settlement. It was expressly repudiated in open court by every party in this case. The majority of this Court, as the opinion shows, does not rely upon it. A second subsidiary theory was also advanced below with little emphasis. The Trial Court said it would be inequitable to allow recovery to plaintiff because the stock of the then subsidiary owned by plaintiff was denied participation in either the assets or earnings in the reorganization proceeding. This reason is as unstable as the first. The claim of plaintiff was not one against the original company, which was placed in reorganization. Everyone admits the genesis of the loss of plaintiff occurred later. Therefore,' the claim would not in any event be barred by the decree of reorganization. The liability to the government for taxes was not barred by that decree either. Liability for the use of plaintiff’s loss long after the closure of the reorganization proceeding to obtain a benefit for defendant by compromise of the still existing tax claim could not be discharged nor affected by the decree in reorganization. The right furnished consideration for contractual liability between plaintiff and defendant as independent corporations. Plaintiff had a property right as owner of these shares of stock. The reorganization court had power to deny plaintiff participation in the assets of its subsidiary, and, as a result, all but nominal values in the shares in the subsidiary were lost. But plaintiff was not in reorganization itself. The company in reorganization did not own the stock and could not legally exercise the appurtenant property right to file a consolidated return. The reorganization court had no jurisdiction of plaintiff or of these property rights. Decree of that court attempting to destroy rights of property in the stock owned by plaintiff would be void. The reorganization decree does not deal with the property rights in the stock and is therefore res judicata neither as to plaintiff nor as to its rights of property in the shares of stock or appurtenances. Thus the two grounds advanced to sustain the judgment fail. The cause should be reversed for failure to state adequate findings to support the judgment. Findings must be made in the Trial Court. Appellate courts have no such right or function. The majority opinion attempts to accomplish justification of the result below by drawing inferences, deductions and conclusions from evidence which they claim to find in the record. It would be possible for other judges to set up a diametrically opposite set of facts from which a judgment in favor of plaintiff might be based. The very reason that Rule 52 requires findings of fact is illustrated by the majority opinion. For the technical difficulties of finding a basis of fact for this judgment are many. Indeed, such difficulties are insurmountable. If recovery is to be denied, the findings of fact, upon which determination adverse to plaintiff is based, must deal with the admitted facts and the allegations of the complaints of intervenors and plaintiff. Thereby, these material claims must be negatived. In order to indicate what findings must be made to negative plaintiff’s claim, a review of various phases thereof will be made. First, plaintiff had a property right to ñle or refuse to file consolidated returns, which could neither be given away without consideration nor cut off judicially without due process. Second, a trust fund was apparently created to pay these taxes by the reorganization court, and no order thereof has been shown vesting this fund in defendant. Third, by stipulation with defendant, plaintiff, as trustee, deposited a trust fund in court, which has not been distributed. Fourth, as an independent corporation, plaintiff, at request of defendant, filed consolidated returns and made a settlement with the United States, from which defendant derived benefit. Therefore, plaintiff is entitled to recovery for at least as much as it was worth. Fifth, a recovery much in excess of bare compensation for doing the acts is foreshadowed. Plaintiff has not been found to be in a fiduciary capacity toward defendant, and therefore the actual cash benefit obtained by defendant by use of losses of plaintiff might well be compensated by award of an equitable portion of the tax remission which the United States allowed on account thereof. The findings made do not negative these contentions. First then, plaintiff was found by the Trial Court to have been the owner of all the stock in the operating company when the petition for reorganization was filed. The Interstate Commerce Commission held that the assets of the operating company, at the initiation of the proceeding, were so shrunken that this stock was valueless for the purpose of participation in either the assets or earnings of the reorganization. The Supreme Court affirmed the denial of the petition of plaintiff for this relief. Plaintiff thereby is found to have sustained a loss of $75,000,000.00 There is no finding that the property right in the shares of stock was taken away from plaintiff either by this order or by the decree of reorganization. Because of this ownership of these shares, plaintiff claims, under the recent enactment of Congress, a property right appurtenant thereto to use this loss in consolidated return and to offset it against earnings made by the properties in reorganization. Since, under the law, all corporations concerned must consent to the filing of consolidated returns, it is clear, contrary to the statement in the majority opinion, that plaintiff had no duty requiring it to file these returns. Plaintiff had a legal right to refuse to file. There is neither finding of fact that this property right did not accrue to plaintiff nor a finding that the right vested in the subsidiary, the trustees in reorganization or in defendant. It is found that plaintiff, by contract, transferred the stock in the former subsidiary to the reorganization trustees, after the right to file consolidated returns and have the benefit of offsetting losses against operating gains by the trustees, for income tax purposes, had accrued. These shares are thus recognized as property rights. There is no finding that the right to file or refrain from filing consolidated returns was sold and transferred with the shares of stock to the reorganization trustees. And here it might be well to deal with one specious argument. It seems to be assumed that the officers of plaintiff could give away the property right to file or refuse to file consolidated returns either voluntarily or acting under the control of defendant or the reorganization trustees. This is strange doctrine. At the time of the transfer of stock, rights of creditors of plaintiff as well as those of stockholders were involved. By the enactment of Elizabeth, an insolvent corporation cannot hinder, delay or defraud its creditors by a transfer of property in their despite. The equitable considerations are stressed by the Trial Court. The Chancellors have universally held that a transfer of all the assets of corporation, at the time not insolvent, cannot be made even by a majority of the stock. Neither officers nor directors, without a vote of the majority, have such power. In this case, it is of stellar importance that this right of plaintiff was its sole asset and that, upon appropriation thereof, it became insolvent. Specifically in any event, the transfer must be for adequate consideration and not in fraud of creditors or it will be invalid as against stockholders. There are thus equitable considerations which the findings did not exclude. In a suit where stockholders of plaintiff intervene, there must be findings that there was adequate consideration for the shares of stock and the appurtenant right of filing a return. Otherwise, the District Court would be obliged to set aside the reorganization decree in order to grant relief by recapturing the assets of plaintiff improvidently.given away. But a jury argument is made based upon a bare offer, which the Trial Court properly held incompetent, that the present stockholders of plaintiff did not pay adequate value for the stock. Suffice it to say that the James interests, which are present stockholders of defendant and which will share in this windfall, apparently acquired that stock to some extent by compromise of the interests of plaintiff in the stock which it formerly held. Second, plaintiff claims there was a trust fund created by the reorganization court in the amount of $7,100,000.00 for the payment of taxes, and that defendant added $3,000,000.00 to the fund for the same purpose. Plaintiff claims, 'since these funds were saved by its action in filing the consolidated returns and making a contract of settlement with the government, that it is entitled to receive some compensation for conserving the trust funds. This claim is not valid as to the fund initiated by defendant itself. A corporation has a right to set up reserves from its funds to meet contingencies. But the money impounded by the Bankruptcy Court to pay taxes was made up of funds in the hands of the reorganization trustees. There must be a finding that the Court decreed that this money should become the property of the defendant if not used to pay taxes.- Otherwise, it constitutes a trust fund of undistributed assets of the reorganization. Third, plaintiff claims defendant stipulated that the $3,385,290.00 should be treated as if it had -been paid to plaintiff “ai agent” and the latter had placed this trusl fund in court for distribution. By the stipulation, plaintiff “as agent” was trustee of an express trust and, as such, had a right to deposit the fund and ask for a determination of the rights of all parties thereto, as in the nature of interpleader. Plaintiff affirmatively demanded findings upon this feature, and the Trial Judge refused to make them. A stipulation of parties to litigation that a fund is deposited in court is sufficient. The Court must give affirmative directions that the fund be paid to the proper party. Before such a judgment be entered, findings of fact are required. It is assigned as error that the Trial Judge refused to make findings on this point. The Rule requires findings of fact. This is error requiring reversal. The judgment here against plaintiff did not end the case. According to the very record before us, there is still a fund in the Trial Court which has not been distributed. Fourth, we need not go so, far afield. If we disregard control of the officers of plaintiff by defendant, the ownership of the stock and the appurtenant right to file returns and the presence of a trust fund, still a cause of action was proven prima facie by facts which the Trial Court did find. We need only to be sophomorical enough to remind ourselves that, where one, at the special instance and request of another, does an act and benefit accrues to the one who made the request, the legal result is so standardized that for centuries it has been stated in one of the common counts. Here there were two independent corporations at the time of the settlement of tax liability. They were capable of contracting with each other. Neither was longer connected with the other. Plaintiff, at the request of defendant long after the reorganization had been closed, entered into a settlement with the United States, whereby its losses were used to obtain a benefit of $17,000,000.00 for defendant. Plaintiff was not bound to refuse consent to the filing of consolidated returns. It would seem, therefore, that sufficient facts are shown so that, in an action on the claim, plaintiff should recover (quantum meruit) as much as the service was worth. Findings as to any affirmative defense should be specific. If defendant had emerged sufficiently from reorganization to pay its own attorneys $300,000.00 for the same service, it is difficult to see how the reorganization decree prevents defendants from compensating plaintiff at least for what the services were worth, which were rendered at its request and which resulted in benefit to it. Fifth, it seems clear that definitive findings must be made on other phases in order to deny plaintiff a much broader recovery. An argument is made that plaintiff is a fiduciary as respects defendant. The tax statute ¡provides that plaintiff could use its loss of $75,000,000.00 to offset the earnings of the reorganization trustees and thereby obtain a remission of. taxes for the reorganized company. . Without the loss - to plaintiff, the statute would not have applied. Without consent of plaintiff, neither could consolidated returns have been filed nor settlement made. The tax statute does not go farther and lay ■down any rule for allocation of the benefits ■obtained from a remission of taxes. The principles of equity should control division. It is said, although there are no findings, that the history of prior consolidated returns is controlling. Of course, it cannot probably be shown how plaintiff heretofore dealt with a consolidated return after there had been a divorce from a subsidiary. If we look at it realistically, but little question arises. If plaintiff were «till the owner of the stock of defendant, then the allocation of the $17,000,000.00 tc defendant would be reflected in the increased value of its stock. The transfer of the stock left the right untouched. Since increase in value of stock in defendant no longer is of avail to plaintiff, there should be another method of applying the remission to the loss. Finally, it may be, as the Trial Court said, that there is an overwhelming public policy which dictates that the reorganized company should 'be left alone as owner of the “amazing and undeserved tax” [85 F. Supp. 875] remission. But, before we, as Judges, take this sole remaining asset without compensation from stockholders of the plaintiff, who bore the losses, and give it as a surplus to distribute to the stockholders of the reorganized company, we should set out in clear and specific findings of fact the exact steps by which we accomplish such a result. The cause should be reversed in order to permit adequate findings to be made. . The patent insufficiency of the findings of the lower court to support'the weight of the superstructure now imposed is ap-? parent. The order adopted "the opinion as findings:. “Findings of Fact. Plaintiff having proposed findings of fact in addition to the findings contained in the Court’s opinion filed herein on September 6, 1949, and the defendant having objected thereto, and the Court being now satisfied that all facts necessary for decision are found in the opinion of September 6, 1949, now adopts by reference all such findings as its formal findings of fact in this cause, for all purposes as if the same were fully set forth herein. Conclusions of law. The Court concludes that the plaintiff shall take nothing herein and that the defendants shall have judgment in their favor for their costs of suit.” Rule 52, Federal Rules of Civil Procedure; 28 U.S.C.A. § 2100; Interstate Circuit v. United States, 304 U.S. 55, 56, 58 S.Ct. 708, 82 L.Ed. 1146; Kelley v. Everglades District, 319 U.S. 415, 420, 421, 63 S.Ct. 1141, 87 L.Ed. 1485. . The opinion of September 6, 1949, thus referred to, appears in D.C., 85 F.Supp. S68. Insufficiency of findings appears in important particulars indicated below. There are no findings as to the mechanics of use of the right of plaintiff. It is not shown whether any resolutions were passed by the Board of Directors or stockholders of plaintiff authorizing the use for benefit of defendant. There is no finding whether a gift of the right was intended or whether there was an attempted payment of consideration. There is no finding that plaintiff was ever a party to the reorganization proceeding. There is no finding that plaintiff had any connection with the proceeding except to prosecute a claim for value of stock, which was disallowed. There is no finding that the compromise settlement with the government, in which plaintiff participated and from which benefit to defendant arose, was connected with or contemporaneous with the reorganization proceeding. The court should have found that defendant honestly believed that it was rightfully entitled to use the loss of plaintiff without consulting those beneficially interested in plaintiff or it used the loss fraudulently in deliberate disregard of the rights of those beneficially interested in plaintiff. The court should have found whether defendant was guilty either of mistake or of fraud. The belief of defendant’s officers as to its rights at the time of filing the consolidated returns is one of the key facts in the case and should have been the subject of findings. . The rationale of the opinion is set forth in colorful language. D.O., 85 F.Supp. 868, 875: “An array of able counsel on both sides have put forth prodigious and ingenious efforts, one side to retain the benefits of the tax ‘escape,’ and the other to obtain them. And all the time the taxes escaped in reality belong to the United States 1 “The Court cannot cause these taxes to be paid, where they should be paid, to the United States.” . Even if the transaction were illegal, the result reached by the Trial Court could not stand. Cf. Barney v. Saunders, 16 How. 535, 57 U.S. 535, 543, 14 L.Ed. 1047: “They cannot be allowed to aver that the profits made on the trust funds should be put in their own pockets, because they were unlawful gains, for fear that the conscience of the cestui que trust should be defiled by participation in them. To indulge trustees in such an obliquity of conscience, would be holding out immunity for misconduct and an inducement to speculate with the trust funds, and put them in peril.” . The fact that the agents of the government, who effected the settlement, did not agree that there was a fraud on the United States is shown by United States ex rel. Roberts v. Western Pacific Railroad, 9 Cir., 1951, 190 F.2d 243. . The error of the lower court was in assuming that plaintiff is seeking an interest in the defendant corporation instead . of compensaton for property taken by defendant which belonged to plaintiff. The Trial Court made no finding as to the nature of the right to file consolidated returns, which only plaintiff could exercise (Reg. 104, § 23.16(a) ), but which it could refuse to exercise (Reg. 104, § 23.11(a) ). Until such findings are made, there is no basis for a judgment denying participation in benefit. . The effect of the decree is provided by 11 U.S.C.A. § 205 sub. f, Tilt v. Kelsey, 207 U.S. 43, 52, 28 S.Ct. 1, 52 L.Ed. 95. Since the tax settlement between the government and the corporation occurred after the decree in reorganization, there could be no res judicata. Commissioner of Internal-Revenue v. Sunnen, 333 U.S. 591, 597 et seq., 68 S.Ct. 715, 92 L.Ed. 898; Diaz v. United States, 223 U.S. 442, 449, 32 S.Ct. 250, 56 L.Ed. 500. . An incontrovertible proof of the proposition that plaintiff had no duty to apply the loss for the benefit of defendant may be cited. If plaintiff bad sold a gold mine for a profit of over $75,000,000.00, its loss on the stock of the subsidiary could have been applied to offset any taxes against plaintiff. In that event, the trustees in reorganization would hav