Court Opinion

ID: 4626007
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:58:19.46536+00
Date Added: 2024-06-11T07:56:48.194792
License: Public Domain

W. F. TAYLOR COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.W. F. Taylor Co. v. CommissionerDocket No. 89597.United States Board of Tax Appeals38 B.T.A. 551; 1938 BTA LEXIS 853; September 20, 1938, Promulgated *853  Petitioner's stockholders were the owners of a majority of the stock of a corporation which owned and operated 11 retail grocery stores in Shreveport, Louisiana.  The corporation was indebted to petitioner in a large sum, as well as to a bank in Shreveport and to other outside creditors.  Petitioner and its individual stockholders were the unconditional guarantors of this latter indebtedness.  The corporation was insolvent and in the taxable year the shares of stock of the corporation were sold to outside interests.  The price at which the shares of stock were sold was fixed at the value of the underlying assets and a condition of the sale was that the amount paid for the shares of stock sold should be first applied to the payment of the indebtedness on which petitioner was one of the guarantors and the balance was to be paid to petitioner and petitioner was to cancel and discharge any remaining indebtedness which it held against the corporation.  The transaction was consummated as agreed upon and petitioner charged off in the taxable year the remainder of the debt due it by the corporation; it retained no interest of any kind in the corporation and has never been reimbursed for any*854  of the amount thus charged off, except by the small amount of cash received in the transaction for which it is held to account.  Held, petitioner is entitled to the deduction, as a bad debt ascertained to be worthless and charged off in the taxable year, of that part of the indebtedness to it which remained after the application of the cash payment which it received in the transaction.  Sidney M. Cook, Esq., for the petitioner.  John E. Marshall, Esq., for the respondent.  BLACK*552  The Commissioner determined a deficiency in income tax against the petitioner for the year 1933 of $7,421.43 and in excess profits tax of $2,386.  The entire deficiency is due to the disallowance by the Commissioner of a claimed bad debt deduction of $79,303.26.  Petitioner in its income tax return for 1933 deducted the amount of this bad debt charge-off from its gross income for that year and showed a loss of $25,329.26 on its return.  By disallowing this claimed deduction and restoring it to petitioner's gross income, the Commissioner determined petitioner's net income as adjusted for 1933 to be $53,974.  Petitioner, by an appropriate assignment of error, *855  contests this action of the Commissioner and the issue thus raised constitutes the only issue to be decided.  The evidence consists of a stipulation of facts filed at the hearing and also the testimony of several witnesses and several exhibits received in evidence at the hearing, from all of which we make the following findings of fact: FINDINGS OF FACT.  The petitioner, W. F. Taylor Co., sometimes hereinafter referred to as the Taylor Co., was incorporated under the laws of the State of Louisiana in 1915, with an authorized capitalization of $500,000, consisting of 5,000 shares of common stock of the par value of $100 per share.  W. F. Taylor became the sole stockholder except for qualifying shares.  Petitioner was engaged in the wholesale grocery business in Shreveport, Louisiana, and also owned and operated plantations in the vicinity of Shreveport, Louisiana, on which the principal crop raised was cotton.  The stock of petitioner was owned exclusively by W. F. Taylor until his death in 1922, and by the members of his family thereafter.  The McPhil Mercantile Co. was incorporated under the laws of the State of Louisiana in 1919, with an authorized capitalization of*856  $11,000, consisting of 110 shares of common stock of the par value of $100 per share.  The McPhil Mercantile Co. owned and operated *553  a chain of retail grocery stores stores in Shreveport, Louisiana, and was a customer of petitioner.  In November 1920, W. F. Taylor, individually, purchased 51 percent of the stock of the McPhil Mercantile Co. and his associate, G. R. Ogden, purchased the other 49 percent, shortly after which the name of the McPhil Mercantile Co. was changed to "G. R. Ogden Company, Inc.", and its authorized capitalization was increased from $11,000 to $50,000, consisting of 500 shares of stock of the par value of $100 each.  The corporation which became known as the G. R. Ogden Co., sometimes hereinafter referred to as the Ogden Co. was under the management of G. R. Ogden.  The Ogden Co. operated a chain of grocery stores in Shreveport, Louisiana, under Piggly Wiggly granchise.  On May 27, 1933, the value of the assets of the Ogden Co., exclusive of any value for store fixtures, furniture, trucks and automobiles, Piggly Wiggly franchise, and good will, was in the aggregate, $34,982.66.  The fair market value of its store fixtures, furniture, trucks and*857  automobiles, Piggly Wiggly franchise, and good will was $25,000 on May 27, 1933.  On May 27, 1933, the liabilities of the Ogden Co., exclusive of the account owed to the Taylor Co., petitioner herein, in the net amount of $79,303.26, and exclusive of the notes owed by it to Continental American Bank & Trust Co. in the aggregate amount of $25,000, and also exclusive of the notes owed by it to the W. F. Taylor estate in the amount of $25,000, were in the aggregate, $29,898.69.  F. H. Ford became president of the Taylor Co. in February of 1922, upon the death of W. F. Taylor, following which F. H. Ford became administrator of the estate of W. F. Taylor, and since the administration of the estate was completed he has continued to represent the estate under power of attorney.  From the beginning of the association of W. F. Taylor with the Ogden Co., the Taylor Co., W. F. Taylor during his lifetime, and the estate of W. F. Taylor thereafter, have from time to time given financial support to the Ogden Co.  In November of 1929, the Taylor Co. sold the wholesale grocery portion of its business and F. H. Ford, president of the Taylor Co., took active charge of the affairs of the Ogden*858  Co. and became the head of that business in 1929, in which year G. R. Ogden retired as head of the Ogden Co.  After the Taylor Co. sold its wholesale grocery business it still had and continued to operate large farming interests and considerable real estate holdings.  *554  Beginning in 1929, and continuing until the sale of the business and assets of the Ogden Co. to the Frank Grocery Co., Ltd., in 1933, F. H. Ford, who was president of the Taylor Co. was also in charge of the Ogden Co., handling all affairs of the corporation of any importance and passing upon the buying and selling by that company other than minor matters which were passed upon by local store managers.  In 1933 the Ogden Co. was indebted to W. F. Taylor Co. in the sum of approximately $79,000, which indebtedness, as of the date of the sale of the business of the Ogden Co. to the Frank Grocery Co., Ltd., hereinafter referred to, was in the amount of $79,303.26.  In 1931 F. H. Ford, as president of the Taylor Co. as head of the Ogden Co., and as head of the Taylor estate, caused the execution by the Taylor Co. of a real estate mortgage in the principal sum of $460,000, which was delivered to the Commercial*859  National Bank of Shreveport, Louisiana, acting as trustee for itself and for the Continental Bank & Trust Co. of the same city, the mortgage being given to secure an indebtedness of the Taylor Co. to the Commercial National Bank in the sum of $160,000; to secure an indebtedness of the Taylor Co. to the Continental Bank & Trust Co. of $25,000; to secure an indebtedness of the Taylor estate of $25,000; to secure an indebtedness of the Ogden Co. to the Continental Bank & Trust Co. of $25,000, and to secure future advances made by either of the said banks to any or all of the said debtors.  Beginning in 1929 and continuing until the sale to the Frank Grocery Co., Ltd., the Ogden Co. did not have sufficient credit to operate its business and the Taylor Co. and W. F. Taylor estate extended their credit to the support of the Ogden Co. and became generally known and considered in the business and financial community of Shreveport, Louisiana, as responsible for the obligations of the Ogden Co.  The Taylor Co. impliedly or expressly guaranteed and became responsible and liable for the obligations of the Ogden Co. to other creditors.  During the period of time referred to, creditors of*860  the Ogden Co. who could not get money from the Ogden Co. called upon F. H. Ford in his capacity as president of the Taylor Co. and received payment or satisfactory arrangements of their accounts through the Taylor Co.Immediately prior to the sale of the Ogden Co. to the Frank Grocery Co., Lted., the Taylor Co. was having difficulty with the banks with reference to its own indebtedness and the Commercial National Bank and Continental Bank & Trust Co. were pressing the Taylor Co. for liquidation.  *555  The most liquid asset of the Taylor Co. and of the Taylor estate was approximately 6,000 bales of cotton being carried in the hope of a rise in the price of cotton, and F. H. Ford, president of the Taylor Co., was called to the Commercial National Bank one afternoon in 1933 and told that the bank required immediate liquidation or partial liquidation of the indebtedness of the Taylor Co. and would require the sale of the 6,000 bales of cotton the following morning.  F. H. Ford was of the opinion that cotton would recover quicker than the retail stores of the Ogden Co. and that it was good business, considering the predicament in which the Taylor Co. and the Taylor estate*861  found themselves, to dispose of the Ogden Co. shares of stock rather than to sacrifice the cotton, which they wished to hold in the expectation of a rising market.  When ordered by the Commercial National Bank to sell the cotton, as above recited, F. H. Ford, president of petitioner, who had been negotiating with the Frank Grocery Co. for some time, told the bank that he could find a market for the stores operated by the Ogden Co. and thus liquidate $25,000 of the obligation held by the Commercial Bank as trustee (being the indebtedness of the Ogden Co. to the Continental Bank & Trust Co.) which was guaranteed by the Taylor Co. and the Taylor estate and also further strengthen the security held by the bank and the financial position of the Taylor Co. by removing the Taylor Co. as guarantor of approximately $28,000 more of liability, being the guarantees by the Taylor Co. to the open creditors of the Ogden Co., and that he would sell the stores of the Ogden Co. and obtain this liquidation on the condition that the bank would withdraw its order to sell the 6,000 bales of cotton on the following morning and would allow the cotton to be held in the hope of a rising market.  At the*862  time just above referred to, the Frank Grocery Co., Ltd., was in the wholesale grocery business and desired a retail outlet for its merchandise but insisted that its ownership of this retail outlet be kept secret in order that its retail customers might not know that it was competing with them, and for this reason the Frank Grocery Co., Ltd., insisted that its purchase of the business of the Ogden Co. be handled in the form of a stock sale transaction rather than a sale of assets.  The stock of the Ogden Co. had been originally issued in blank, the 51 percent originally owned by W. F. Taylor having come into the possession of F. H. Ford in his capacities above recited, and the 49 percent issued to G. R. Ogden having been endorsed in blank by G. R. Ogden and pledged to the Continental Bank & Trust Co. for a personal debt of G. R. Ogden, which debt the bank had charged off as being uncollectible.  *556  When it was found that the only way the deal with Frank Grocery Co., Ltd., could be handled was in the form of a stock sale transaction, the Continental Bank & Trust Co. being interested in the liquidation which it was getting of the Ogden Co. indebtedness, agreed to release*863  G. R. Ogden from his personal obligation to the bank upon the surrender by him of his stock, which agreement was accepted by G. R. Ogden.  The stock was delivered to F. H. Ford, who, in his capacities above referred to, had all of the stock of the Ogden Co. placed in his name and transferred it to the purchaser, Frank Grocery Co., Ltd., in accordance with its request as to the details of the handling of the sale of the Ogden Co. and in accordance with the written agreement covering the transaction.  The Frank Grocery Co., Ltd., required as a condition of the sale that the Ogden Co. be turned over to it as a solvent concern and, in effecting this result, agreed to pay for the fixtures, equipment, Piggly Wiggly franchises, and good will of the concern the sum of $25,000 and for the merchandise and other assets $34,982.66, which it paid by paying off the $25,000 note owing the Continental Bank & Trust Co. by the Ogden Co. and by paying off the liabilities to open creditors of the Ogden Co., and also other liabilities, all amounting to the sum of $29,898.69, which accounts, as well as the indebtedness to the bank, were guaranteed by the Taylor Co.The amount paid the bank and the*864  various creditors of the Ogden Co. aggregated $54,898.69.  This amount was $5,083.97 less than the agreed value of the entire assets of the Ogden Co. and this $5,083.97 was paid in cash by the Frank Grocery Co. to petitioner.  Later this $5,083.97 was paid over to the W. F. Taylor estate by petitioner.  By reason of the sale of the shares of stock of the Ogden Co. and the reduction in liabilities of the Taylor Co. and the Taylor estate which the sale brought about, the banks permitted the Taylor Co. and the Taylor estate to continue to hold the 6,000 bales of cotton.  Cotton prices advanced and several months later the cotton was sold for approximately $100,000 more that it would have sold for if it had been sold at the time the banks first demanded that it be sold.  At the time of the sale of the shares of stock of the Ogden Co. to the Frank Grocery Co., Ltd., the Ogden Co. was insolvent, its total assets having a value of $59,928.66 and its liabilities, including the debt to petitioner which was canceled as a part of the transaction, amounting to $159,201.95.  In the taxable year 1933, petitioner ascertained $74,219.29 of the indebtedness of the Ogden Co. to it to be worthless*865  and on December 30, 1933, charged off the entire amount of its claims against the Ogden Co., the amount so charged off being $79,303.26.  Of the amount so charged off, $74,219.29 was worthless.  *557  OPINION.  BLACK: There is very little dispute, if any, between the parties in this proceeding as to the facts.  The dispute arises as to the legal consequences of the facts.  Petitioner contends that the facts prove the ascertainment of worthlessness and the charge-off in the year 1933 of a debt amounting to $79,303.26 which it held against the Ogden Co., and that as a consequence it is entitled to a deduction of this amount from its gross income under the provisions of section 23(j) of the Revenue Act of 1932.  The Commissioner concedes that petitioner, prior to the sale of the Ogden Co. stock, held a bona fide debt against the Ogden Co. of $79,303.26 and that petitioner charged this debt off its books in the year 1933.  The Commissioner contends, however, that petitioner did not ascertain the said debt to be worthless in 1933, and that on the contrary the debt was not worthless but was voluntarily canceled by petitioner as an act of debt forgiveness and petitioner is not*866  entitled to the deduction which it claims or to any part thereof.  For reasons which we shall later state in more detail, we think the Commissioner must be sustained in his contentions as to $5,083.97 of the debt charged off.  As to the balance of the debt, to wit, $74,219.29, we think the Commissioner should not be sustained and that petitioner must prevail.  If, as respondent contends, the facts show a case where a creditor voluntarily canceled the debt of a solvent debtor, it would require no citation of authority to support respondent's contention that no deduction is allowable.  A creditor can not voluntarily forgive a debt against a solvent debtor and then be heard to claim a deduction for a bad debt ascertained to be worthless and charged off in the taxable year.  Such action would be a perversion of the statute.  But we have no such situation in the instant case.  The uncontradicted evidence shows that petitioner had guaranteed the payment of all the outside debts of the Ogden Co.  In fact it is clear from the evidence in the case that the Ogden Co. operated on the credit of petitioner and the Taylor estate.  At the time in question, the Ogden Co. owed to the bank and*867  outside creditors the total sum of $54,898.69.  This was exclusive of the $79,303.26 which it owed to petitioner and the $25,000 which it owed to the Taylor estate, all amounting to the total sum of $159,201.95 of indebtedness.  The value of the total assets of the Ogden Co. was $59,982.66.  The Frank Grocery Co., Ltd., agreed to purchase the shares of stock of the Ogden Co. and pay for them $59,982.66, the value of the underlying assets.  This payment was to be made in the following manner: The Frank Grocery Co., Ltd., assumed and agreed to pay the *558  bank $25,000 and to pay all the other indebtedness of the Ogden Co. to outside creditors, amounting to $29,898.69.  The total thus to be paid amounted to a gross of $54,898.69.  When these amounts were paid, the Frank Grocery Co., Ltd., still owed $5,083.97 of the agreed purchase price of the Ogden Co. stock, which was paid in cash to petitioner.  Petitioner agreed to cancel and charge off all its claims against the Ogden Co.  Petitioner subsequently paid this $5,083.97 cash which it received to the Taylor heirs, who were the owners of a majority of the Ogden Co. shares of stock.  Petitioner, of course, had the right, if*868  it chose to do so, to pay this $5,083.97 over to the Taylor heirs, but it can not claim to that extent a deduction of the debt against the Ogden Co. charged off.  It could at least have collected that much of the debt and therefore its failure to do so must be attributed to its own voluntary act.  The stockholders of the Ogden Co. were not entitled to receive anything for their stock until the creditors were paid, and petitioner was a creditor in the amount of $79,303.26 and should have applied as a credit thereon the $5,083.97 cash received.  But petitioner can not be charged with the $54,898.69 paid over by the Frank Grocery Co., Ltd., the purchasers, to the bank and other outside general creditors.  These were debts which petitioner had unconditionally guaranteed and had to be paid in full before petitioner was entitled to collect anything on the indebtedness of the Ogden Co. to it.  Therefore when all these debts were paid there was nothing left which petitioner could apply to its claim for $79,303.26, except the $5,083.97 paid in cash which we have already disposed of above, and the balance of petitioner's claim, amounting to $74,219.29, was thereupon definitely ascertained*869  to be worthless.  As to this $74,219.29, petitioner has never been reimbursed in any way and is entitled to a deduction as a debt ascertained to be worthless and charged off within the taxable yeat.  Cf. , reversing the Board on this point in . The transactions disclosed by the evidence in the instant case were not carried out in pursuance of any scheme of tax avoidance.  They were parts of a bona fide business transaction.  As said by the court in the Deeds case: The proper answer to this question depends, we think, upon the purpose and reasonableness of the action taken.  It cannot be used as a subterfuge, merely to avoid the payment of taxes nor as a means of benefaction and bounty; but, if the step be taken in the interest of the taxpayer, in the exercise of an experienced business judgment, and in an effort to avoid even greater and otherwise certain losses, we cannot see that the taxpayer should be precluded from taking the deduction, because the amount of the loss then to be suffered was thus definitely ascertained, and the fact of such partial loss made certain *870 *559  by the action of the taxpayer himself.  The facts are none the less clear that, after cancellation, the debts were in fact worthless, were realized to be so by the taxpayer, and were charged off on his books.  The facts in the instant case are stronger for petitioner than the facts were for the taxpayer in the Deeds case.  In the Deeds case the taxpayers retained a substantial continuing stock ownership interest in the Smith Gas Engineering Co. long after they had canceled and charged off $293,970 of their indebtedness against the corporation.  Notwithstanding this continuing stock ownership interest, the court held that the taxpayers should be allowed the deduction for their debt thus canceled and charged off.  In the instant case petitioner owned no interest whatever, nor did its stockholders in the Ogden Co. after the debt was canceled and charged off.  Now it is, of course, true that if when petitioner canceled and charged off its claim of $79,303.26 against the Ogden Co. it had a contract of reimbursement from some other solvent source, it would not be entitled to the claimed deduction.  Cf. *871 , affirming . But the action of the banks in permitting petitioner and the Taylor heirs to continue to hold 6,000 bales of cotton in the hope of there being later a rising market, a circumstance strongly relied upon by respondent in his brief, was no contract for reimbursement.  True, it turned out that petitioner and the Taylor heirs were fortunate in their judgment to hold the cotton.  Later there was a rising market and petitioner and the Taylor heirs succeeded in selling the cotton for $100,000 more than they could have sold it when the bank first demanded that it be sold.  But this increase in price must be accounted for by them in full in determining gain or loss on the sale of the cotton.  Their judgment to part with all their interest in the Ogden stores and apply the proceeds to the payment of the bank's indebtedness and other outside indebtedness of the Ogden Co. on which they were guarantors proved to be good, but there was no certainty that it would be so.  The market for cotton might just as easily have declined further, thereby increasing their losses.  Such transactions, *872  though intimately connected, are separate and are not parts of the same transaction; they must be separately treated for tax purposes and can not deprive petitioner of its right to a deduction of that part of the indebtedness of the Ogden Co. to petitioner which it ascertained to be worthless in 1933 and charged off.  This we have already held to be $74,219.29.  Now if respondent's contention that petitioner should be deprived of the deduction of this bad debt charge-off because it was incurred as a part of the consideration for continuing to hold the 6,000 bales of cotton in question is correct, then the amount charged off would become a part of the cost of the cotton and would be recovered taxfree *560  when the cotton was sold.  We think this treatment of the transaction would be artificial and untenable and should not be indulged in.  We do not have the cotton transaction before us for consideration in this proceeding, but we dare say that, when petitioner came to compute its gain or loss on the sale of the 6,000 bales of cotton, the Commissioner did not allow petitioner to use, as a part of its basis of cost of the cotton, the $79,303.26 or any part of its claim therefor*873  against the Ogden Co. charged off in 1933.  There would be no grounds for adding to petitioner's cost of the 6,000 bales of cotton the amount of its indebtedness against the Ogden Co. charged off.  The connection between the two transactions would be too remote and incidental to justify such treatment of them.  So the situation comes down to this: Petitioner has had an actual bona fide loss to the extent of $74,219.29 in its charge-off of the Ogden Co. indebtedness and if it does not get the deduction now, it will never get it.  We think it is entitled to the deduction now.  As said by the court in the Deeds case: * * * This was not the ordinary case of mere forgiveness of indebtedness.  It was not a gift.  It was the performance of an act which highly experienced and skillful business men honestly believe to be to their own best interests in the avoidance of loss and therefore to the interest of the government in maintaining income.  But it nevertheless was an event which definitely and permanently prevented the collection of the debt.  Compare the very closely analogous situation disclosed in *874  (C.C.A. 7). While under our decision petitioner's claimed loss as deducted on its return is reduced from $79,303.26 to $74,219.29, this reduction is not enough to result in any deficiency.  Petitioner's net loss shown on its return was $25,329.26.  The effect of our decision is to reduce this net loss to $20,245.29.  Decision will be entered for petitioner.