Court Opinion

ID: 4591786
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:06:33.98641+00
Date Added: 2024-06-11T07:50:43.438273
License: Public Domain

HURD MILLWORK CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hurd Millwork Corp. v. CommissionerDocket No. 101956.United States Board of Tax Appeals44 B.T.A. 786; 1941 BTA LEXIS 1273; June 24, 1941, Promulgated 1941 BTA LEXIS 1273">*1273  1.  INCOME. - Petitioner accrued, but did not pay, real estate taxes which were deducted from income on its returns for several years prior to 1936.  During 1936, while it was solvent, petitioner discharged its liability for such prior years' taxes by payment of a lesser sum than its accrued liability and the balance of the liability was canceled.  Held, that, petitioner having derived the benefit of deductions from income in prior years on account of accrued but unpaid realty taxes in the amount of $5,336.30 and having been relieved through cancellation in 1936 of its liability to pay such taxes, the amount of liability of which it was relieved constituted taxable income in 1936.  2.  DEDUCTION. - Petitioner's 1936 real estate taxes were accrued, but not paid, and before end of that year it was determined with reasonable certainty that petitioner itself would never have to pay such taxes.  Held, that such taxes were not a proper accrual deductible from gross income for 1936.  Alden Losby, Esq., and C. A. Bertelson, C.P.A., for the petitioner.  Gerald W. Brooks, Esq., for the respondent.  TYSON 44 B.T.A. 786">*787  The respondent has determined1941 BTA LEXIS 1273">*1274  a deficiency of $1,609.40 in petitioner's income tax for the calendar year 1936.  The two issues presented for our consideration are: (1) Whether respondent erred in increasing petitioner's income as reported for 1936 by the amount of $5,901.82 as representing income derived through the cancellation of an indebtedness, effectuated by the petitioner's payment in 1936 of $1,001.40 in discharge of its indebtedness of $6,903.22 for real estate taxes accrued and deducted from income on its returns for several years prior to 1936.  (2) Whether respondent erred in disallowing a claimed deduction of $1,772 real estate taxes accrued for 1936, the liability for which was assumed by the city of Medford, Wisconsin, in 1936 and paid by that city in 1937.  Petitioner alleges that the amount respondent included in income on account of the discharge of its indebtedness for taxes accrued in the several years prior to 1936 and the amount of petitioner's taxes accrued for 1936 were both paid by the city of Medford as a business subsidy to petitioner and therefore are nontaxable.  A third issue, as to the amount allowed by respondent as a deduction for depreciation, has been abandoned.  FINDINGS1941 BTA LEXIS 1273">*1275  OF FACT.  Petitioner, a corporation, was organized in 1917 as the Hurd Lumber Co. and in 1934 its name was changed to Hurd Millwork Corporation.  Its income tax return for the taxable year was filed with the collector of internal revenue, Milwaukee, Wisconsin.  Petitioner's manufacturing plant and principal office is located in the city of Medford, Taylor County, Wisconsin.  At the time its manufacturing plant was destroyed, as hereinafter set out, petitioner employed about 160 persons at its plant and that plant was the 44 B.T.A. 786">*788  principal industry in the city of Medford, which had a population of approximately 2,400 people.  In 1936 petitioner's delinquent real estate taxes due the city of Medford, Taylor County, and the State of Wisconsin, with penalties and interest for prior years, amounted to a total of $6,903.22, and of that amount $6,336.30 had been accrued and deducted on petitioner's income tax returns filed on the accrual basis for years prior to 1936.  For the taxable year 1936 petitioner's accrued real estate taxes for the city, county, and state amounted to $1,772.  On June 28, 1936, a fire entirely destroyed petitioner's main factory building, manufacturing1941 BTA LEXIS 1273">*1276  equipment, and a large warehouse in which cut stock was stored and also damaged the walls of others of its structures.  Its remaining plant facilities had some value, but could not be utilized without a manufacturing plant.  After the fire the petitioner's remaining properties had a value of at least $25,000 and it was solvent in that it had ample assets to meet all of its then existing liabilities, but it was not in a position to rebuild its plant without some financial assistance.  Shortly after the fire the mayor of Medford called a mass meeting of the citizens, at which it was decided that a referendum would be held on a proposal that the city make a gift of $20,000 to petitioner in order to encourage petitioner to remain in business in Medford.  The business men of Medford raised about $4,500 which was donated to petitioner for use in rebuilding its plant and the taxable effect of petitioner's receipt of that donation is not in controversy herein.  The mayor of Medford personally requested the chairman of the board of supervisors of Taylor County, which then held the tax certificates for petitioner's delinquent taxes, to call a special meeting with reference to such taxes and1941 BTA LEXIS 1273">*1277  also stated to the chairman that if petitioner would pay $1,000 of its delinquent taxes the city of Medford would pay the balance thereof to help petitioner.  At a special session on July 17, 1936, the board of supervisors of Taylor County adopted a resolution which recited that it was "now the owner and holder" of tax certificates for the years 1932 to 1935, inclusive, covering certain property (that owned by petitioner); that due to fire and the destruction of buildings on that property the tax certificates were worth considerably less than face value; that section 75.34(2) of the Statutes of Wisconsin prohibited the sale of tax certificates at less than face value unless there was prior publication of the board's intention to do so.  The resolution directed the county clerk to make the required publication.  On July 17 the county board, by a resolution, appointed a committee to "determine the reasonable value of those tax certificates" and also, later on the same day, adopted the committee's report that, "after considering all 44 B.T.A. 786">*789  the circumstances and after consulting with and having the approval of the several Supervisors of the City of Medford", the then "fair, reasonable1941 BTA LEXIS 1273">*1278  value of such certificates" covering petitioner's property was $1,000.  At its annual session on November 16, 1936, the board of supervisors of Taylor County adopted a resolution which, after referring to its above mentioned resolutions of July 17 and to the due publication as required by statute of notice of its intention to sell the tax certificates at less than face value, stated that Harry Hurd had made an offer of $1,000 cash for said certificates and "that said offer be and is hereby accepted and the county treasurer is hereby ordered and instructed to accept said sum of one thousand dollars in full payment of said certificates, and upon payment of said amount in cash, the said county treasurer sell and assign to said Harry Hurd, said unpaid certificates as provided by section 75.35, Statutes of Wisconsin." (Italics ours.) Harry Hurd was at that time, and has ever since remained, president of petitioner, and his offer of $1,000 cash for the tax certificates was made for and on behalf of petitioner.  During 1936 the petitioner paid the sum of $1,000 to Taylor County and acquired its delinquent tax certificates or receipt for the taxes in full, and the tax lien on its property1941 BTA LEXIS 1273">*1279  was released.  At a date not shown, but shortly after the fire, 266 electors and taxpayers of Medford signed a petition that there be submitted at the next regular city election the question, "Shall the city make an annual appropriation for commercial and industrial development?" The petition further requested that, as an inducement to petitioner to rebuild and resume its operation in Medford, the common council of Medford, upon affirmative answer at the city election to the question submitted, apropriate for a period of 10 years a sum sufficient to pay petitioner's real estate taxes on its plant but not in excess of $2,000 annually.  At an undisclosed date during 1936 the above question was voted upon by the citizens of Medford and was answered in the affirmative by a big majority of votes.  As a guarantee to petitioner that the proposed annual contribution to it would be forthcoming, the above mentioned petition contained a further provision that in the event of any default in such appropriation by the city the signers of the petition agreed to make the annual contribution.  On June 21, 1937, there was duly passed by the common council of the city of Medford a resolution which1941 BTA LEXIS 1273">*1280  recited, inter alia, that there had been appropriated the sum of $2,000 for the commercial and industrial development of the city; that the citizens had filed the above mentioned petition for the purposes set forth therein; and 44 B.T.A. 786">*790  that petitioner, relying thereon, had rebuilt its plant and was employing upwards of 180 men.  The resolution then directed the city clerk "to pay out of such appropriation of $2,000 the real estate taxes assessed upon the real estate of said Hurd Millwork Corporation within said city for the year 1936, not to exceed said sum of $2,000." Similar resolutions were adopted in subsequent years authorizing the payment of petitioner's real estate taxes for the years 1937, 1938, and 1939.  In determining the deficiency, the respondent determined that in 1936 petitioner paid $1,001.40 in discharge of its liability for delinquent real estate taxes totaling $6,903.22, which had been accrued and deducted from income in petitioner's tax returns for prior years, and that the difference, or $5,901.82, constituted taxable income for 1936 under section 22(a) of the Revenue Act of 1936.  The respondent further determined that petitioner's real estate taxes, 1941 BTA LEXIS 1273">*1281  in the amount of $1,772 for the year 1936, were paid for it by the city of Medford and were not deductible by petitioner under section 23(c) of the Revenue Act of 1936.  The petitioner's liability for delinquent taxes, with penalties and interest thereon, in the stipulated total amount of $6,903.22 for years prior to 1936, was discharged in full by the petitioner's payment of $1,000 in cash during 1936 and the difference, or $5,903.22, was canceled in that year.  It is stipulated that of such delinquent taxes petitioner accrued and deducted the amount of $6,336.30 on its tax returns for years prior to 1936.  The respondent determined that such deductions were from income reported on those prior years' returns and there is no proof of record or even any contention controverting that determination of fact.  The petitioner's real estate taxes, in the amount of $1,772, for 1936 were accrued and deducted on petitioner's return for 1936.  During 1936 petitioner received definite assurance that such taxes would be paid on its behalf either by the city of Medford or by a certain group of citizens, and in 1937 such taxes were paid by the city.  In the taxable year 1936 the petitioner1941 BTA LEXIS 1273">*1282  was relieved of the obligation of paying its real estate taxes.  OPINION.  TYSON: As to the petitioner's delinquent taxes in excess of the $1,000 paid by petitioner in 1936, the mayor of Medford, testifying from recollection and with an evident lack of exact knowledge as to what actually had transpired, stated that such excess in the sum of $5,903.22 was charged back by Taylor County against the city of Medford, which, he presumed, was still paying such delinquent taxes out of the above mentioned $2,000 annual appropriations.  However, the documentary evidence of record clearly establishes that Taylor County44 B.T.A. 786">*791  "owned and held" the tax certificates covering petitioner's delinquent taxes; that the board of supervisors of that county, by formal action and in their official capacity, determined the value of such certificates to be $1,000 in 1936 subsequent to the fire, and accepted the $1,000 in cash offered by petitioner's president "in full payment of said certificates", which were sold and assigned to petitioner.  Accordingly, we conclude, and have found as a fact, that the petitioner's liability totaling $6,903.22 for delinquent taxes, penalties, and interest for years1941 BTA LEXIS 1273">*1283  prior to 1936, was fully discharged in consideration of petitioner's payment of $1,000 on account thereof in 1936.  At that time petitioner was solvent and its liability for delinquent taxes, which constituted one form of indebtedness incurred in the conduct of its business for profit, was canceled to the extent of $5,903.22 by its creditor, Taylor County.  Such cancellation was in consideration of the payment of $1,000 of the indebtedness and the cancellation was not gratuitous nor a capital contribution to petitioner.  The amount of $6,336.30 of petitioner's delinquent taxes was accrued, but not paid, and deducted from income on its tax returns filed on the accrual basis for years prior to 1936.  There is no showing that it did not thereby derive a tax benefit and we must assume that it did.  Only $1,000 of such accrual was actually paid in 1936 and in the same year it became definitely certain that by reason of such payment, the surrender to petitioner of the delinquent tax certificates, and the release of the tax lien on its property, petitioner would never have to pay the balance in the sum of $5,336.30.  The question then is, Did this latter amount constitute taxable income1941 BTA LEXIS 1273">*1284  to petitioner in 1936, as contended by respondent?  In numerous prior cases where a taxpayer had been allowed a deduction for taxes, bad debts, losses, or expenses in the year in which paid and in a subsequent year the taxpayer, through refunds or collections, actually recovered all or a part of the amount theretofore deducted, it has been held that where the amount recovered had been previously deducted to offset income resulting in a tax benefit, it should be reported as part of the gross income for the year in which recovered.  ; ; ; certiorari denied, . Cf. , affirming ; ; ; affd., 1941 BTA LEXIS 1273">*1285 ; certiorari denied, ; ; , affirming ; certiorari denied, , and the various authorities cited in those cases. 44 B.T.A. 786">*792  In the instant case there was no actual recovery in the taxable year of money paid out in previous years.  However, petitioner's deductions from income for real estate taxes in prior years rested upon the accrual of its liability to actually pay such taxes at some subsequent date and for income tax purposes such accruals were properly treated as if payment had been made in the years the deductions were allowed.  Having been so treated, we think the cancellation in part of the liability represented by such accruals was, for tax purposes, the equivalent of a recovery in the taxable year of the amount of the cancellation.  In  (reversing 1941 BTA LEXIS 1273">*1286 ); certiorari denied, , interest on a loan was accrued, but not paid, and deducted from income on the taxpayer's returns over a period of years prior to the taxable year there involved.  In the taxable year, while the taxpayer was solvent, the accrued interest debt was canceled and forgiven for a consideration and not as a gratuity or a contribution to capital.  The court held that the interest indebtedness theretofore deducted from income constituted taxable income in the year it was canceled.  The court reviewed and discussed some of the above cited cases and numerous other prior decisions involving an analogous principle and said: The above cases recognize the principle that an obligation, once deducted but not paid, represents income when, because of subsequent circumstances, it is cancelled or it may be determined with reasonable certainty that it will never be enforced.  None of the cases attach any importance to the means by which the cancellation is effected.  That is immaterial, the controlling factors being the previous deductions offsetting income otherwise taxable and the subsequent release of the indebtedness before payment. 1941 BTA LEXIS 1273">*1287 In the instant case the petitioner, having derived the benefit of deductions for its liability for accrued but unpaid real estate taxes in the amount of $5,336.30, to offset income subject to tax in years prior to 1936, and having been relieved, through cancellation in 1936, of its liability to pay such real estate taxes, that amount of $5,336.30 constituted a part of its gross income for the year 1936.  . The second issue herein involves the question of whether respondent erred in disallowing a deduction of $1,772, claimed as real estate taxes accrued as a liability of petitioner for the year 1936, but not paid in that year.  The record herein fails to show that the amount of $1,772 taxes assumed and paid by the city of Medford has been included in petitioner's gross income for 1936, either as reported by petitioner on its return or as determined by respondent in his deficiency notice, and no issue has been raised by this proceeding as to whether this item of 44 B.T.A. 786">*793  $1,772 should now be included in petitioner's gross income for the taxable year 1936.  Accordingly, we express no opinion as to whether this amount constituted1941 BTA LEXIS 1273">*1288  a nontaxable business subsidy to petitioner under the primciples announced in , as contended by petitioner.  The respondent's disallowance of the claimed deduction did not have the effect of including the amount of the alleged nontaxable subsidy in gross income for 1936, as contended by petitioner, for his determination resulted merely in the disallowance of a claimed deduction from petitioner's gross income derived from its own operating revenues, exclusive of the alleged subsidy.  The sole question herein is whether respondent erred in disallowing the claimed deduction of $1,772 as real estate taxes accrued as a liability of petitioner for the year 1936.  The facts disclose that prior to the end of the taxable year 1936 it was determined, with reasonable certainty, by the favorable vote on the city's appropriation of $2,000 annually to pay petitioner's real estate taxes and also by the guaranty contained in the petition of the 266 citizens of Medford, that petitioner's accrued liability for 1936 real estate taxes would never be enforced against it, that is, that petitioner would never have to pay such taxes out of its1941 BTA LEXIS 1273">*1289  own operating revenues.  Accordingly, we hold that petitioner's 1936 real estate taxes were not a proper accrual deductible from its gross income for 1936 under section 23(c) of the Revenue Act of 1936.  Decision will be entered under Rule 50.