Court Opinion

ID: 4605917
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:37:22.945471+00
Date Added: 2024-06-11T07:53:17.228209
License: Public Domain

GEORGE HYATT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hyatt v. CommissionerDocket No. 82594.United States Board of Tax Appeals36 B.T.A. 121; 1937 BTA LEXIS 773; June 15, 1937, Promulgated 1937 BTA LEXIS 773">*773  The taxpayer, licensed by the manufacturer to sell and apply a preparation against termites and guaranteeing effectiveness for five years, was required by the license contract to send to the licensor 10 percent of the price of his contracts with customers, to be held in escrow as a guaranty fund until expiration of the guaranty period; this requirement he fulfilled only in part.  The full amount of the contract prices should be included in the taxpayer's income.  A. John Pfeiffer, C.P.A., for the petitioner.  Hugh Brewster Esq., for the respondent.  STERNHAGEN 36 B.T.A. 121">*121  The Commissioner determined a deficiency of $80.15 in petitioner's income tax for 1933, increasing his gross income by $801.49, "based on a number of adjustments for depreciation, repairs, bad debts, etc." The petitioner does not contest these adjustments, but claims an overpayment by reason of his own failure in computing his income to exclude $4,340.91 under the circumstances hereinafter set forth, and also because of alleged improper treatment of surety bond premiums.  FINDINGS OF FACT.  The petitioner, in 1933, was under a five-year contract as licensee with E. L. Bruce Co. 1937 BTA LEXIS 773">*774  as licensor, for the use of Terminix, a preparation for the treatment of structures to combat termites.  By paragraph 2(n), the licensee is obligated: To keep and at all times maintain a fund to be held in escrow by the Licensor in a condition satisfactory to the Licensor, through remission to ten (10%) percent of the total amount of each and every contract for TERMINIX Application, to be made direct to the Licensor by Licensee's customer, or otherwise, promptly upon the completion of said application.  Such fund is to be held by the Licensor to protect and guarantee to Licensee's customer any and all reinspections and retreatments being made as required by contract in the event of failure, inability (or insolvency) of the Licensee so to do when and as required, and to be returned or otherwise credited to Licensee by Licensor when Licensee shall have completed full performance of said contract for TERMINIX Application.  Acting under the license of this contract, petitioner made contracts with customers to apply Terminix, necessary retreatments being guaranteed for five years.  This contract provided: As a consideration of this guarantee, twelve (12%) percent of this contract1937 BTA LEXIS 773">*775  price must immediately by paid by the purchaser direct to E. L. Bruce Company, Terminix Division, Memphis, Tennessee.  E. L. Bruce Company hereby guarantees that the terms of this contract will be fulfilled.  36 B.T.A. 121">*122  This guarantee was secured by a surety bond in the amount of the contract price.  In 1933 petitioner made contracts with customers for an aggregate price of $43,409.12.  Usually the customer paid 30 percent of the contract price immediately and the remainder in monthly installments.  Usually the customer did not pay the 12 percent directly to E. L. Bruce Co. as provided in the contract, although in some instances he did.  Of this 12 percent, 2 percent was regarded by the Bruce Co. and petitioner as covering the premium upon the surety bond.  In 1933 the petitioner did not, in pursuance of paragraph 2(n) above quoted, transmit to the Bruce Co. $4,340.91 (10 percent of the aggregate contract price, $43,409.12), but transmitted only $1,760.12 on account of the customers' contracts of 1933.  He thereafter sent $50 a month to the Bruce Co. on account of arrears in this fund.  Petitioner's accounts are kept and his returns filed on an accrual basis.  In his accounts, 1937 BTA LEXIS 773">*776  the full amount of the customer's contract price is credited when the contract is made, the cash received is debited to cash, and the notes received are debited to notes receivable.  No part of the 12 percent is specially accounted for by the petitioner, but the amounts transmitted by him to the Bruce Co. are credited to cash and debited to a bonded reserve account.  OPINION.  STERNHAGEN: The petitioner contends that, because of his contract with the Bruce Co., 10 percent of each customer's contract price must be regarded when received by him as being in trust and therefore not within his income.  He relies upon Commissioner v. Cleveland Trinidad Paving Co., 62 Fed.(2d) 85; Benjamin Franklin Patterson,21 B.T.A. 8">21 B.T.A. 8; petition for review dismissed, 59 Fed.(2d) 1055. In those cases, however, the customer retained an amount to assure the performance of the contract, and it was held that while so rightfully retained by the customer the amount could not be properly regarded as the contractor's income.  Here, however, the contractor, the petitioner, collected the contract price from the customer and accounted for it on his books immediately1937 BTA LEXIS 773">*777  as his own.  An amount of $1,760.12 was sent to the Bruce Co. "on account of the escrow fund", but it does not appear how this amount was computed.  As between the petitioner and his customer, it would appear that the petitioner rightfully received the full amount in consideration for the contract.  The obligation to the Bruce Co. in respect of part of the contract price was only an obligation to make a deposit in escrow to be held by the Bruce Co. during the term of the guarantee 36 B.T.A. 121">*123  of the contract.  Certainly such amounts as the petitioner omitted to transmit to the Bruce Co. could not be omitted from his income.  Consolidated Asphalt Co.,1 B.T.A. 79">1 B.T.A. 79; Uvalde Co.,1 B.T.A. 932">1 B.T.A. 932. Cf. Preston R. Bassett,33 B.T.A. 182">33 B.T.A. 182, 33 B.T.A. 182">191 (on review C.C.A., 2d Cir.); Gibbs & Hudson, Inc.,35 B.T.A. 205">35 B.T.A. 205. As for the $1,760.12 actually transmitted, it likewise was no less owned by the petitioner, even though subject to temporary possession in the escrow fund of the Bruce Co.  Whether this fund, while in the possession of the Bruce Co., was diminished by expenditures made in discharge of the guarantee, thus giving1937 BTA LEXIS 773">*778  rise to statutory deductions in subsequent income tax returns, needs not to be considered now.  It cannot be said, therefore, that the Commissioner erred in failing to readjust petitioner's income by excluding or deducting any part of the $4,340.91.  The Commissioner seems to have treated the amount paid by the petitioner in the taxable year as his share of the premiums upon the surety bonds as an advance premium amortizable over the five-year period of the bonds, and has allowed the deduction of only the proper amount of annual amortization.  Upon this point the facts do not appear clearly enough from the evidence to justify a finding, and for that reason alone the petitioner must fail.  On principle, however, it cannot be said that, to a taxpayer whose accounts are kept on an accrual basis, the premium on a five-year surety bond may be deducted in its entirety in the year when paid.  Cf. G.C.M. 13148, XIII-1 C.B. 67.  Reviewed by the Board.  Judgment will be entered for the respondent.LEECHLEECH, dissenting: It seems to me that petitioner, during the tax year, never received, as his own, the $1,760.12 he paid to E. L. Bruce Co.  That money was not then1937 BTA LEXIS 773">*779  subject to his "unfettered command * * * to enjoy at his option", as the Supreme Court said in Corliss v. Bowers,281 U.S. 376">281 U.S. 376. He received it merely as agent for his customers to pay to the Bruce Co. for the account of those customers under the contract of purchase.  As to that item, I think the case is controlled by Commissioner v. Cleveland Trinidad Paving Co., 62 Fed.(2d) 85, and Benjamin Franklin Patterson,21 B.T.A. 8">21 B.T.A. 8; petition for review dismissed, 59 Fed.(2d) 1055. Cf. Stoner v. Commissioner, 79 Fed.(2d) 75; reversing 29 BT.A. 953. BLACK and ARUNDELL agree with this dissent.