Court Opinion

ID: 4595335
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:14:49.862709+00
Date Added: 2024-06-11T07:51:25.536342
License: Public Domain

LANDERS BROTHERS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Landers Bros. Co. v. CommissionerDocket No. 28393.United States Board of Tax Appeals17 B.T.A. 1078; 1929 BTA LEXIS 2190; October 25, 1929, Promulgated *2190  1.  Evidence considered and held insufficient to sustain respondent's determination that the petitioner's return of income for 1922 was false and fraudulent with intent to evade tax.  2.  The petitioner in 1921 agreed to pay, and credited on its books, a specified amount because of canceled contracts, and in 1922 issued to its credit memoranda covering three-fourths of the agreed amounts.  Held, this was not a deductible loss for the year 1922.  Clarence M. Mulholland, Esq., for the petitioner.  Harold Allen, Esq., and W. R. Lansford, Esq., for the respondent.  MARQUETTE *1079  This is a proceeding for the redetermination of a deficiency in income tax asserted by the respondent for the year 1922 in the amount of $9,619.15, together with a fraud penalty in the amount of $4,809.58.  The deficiency arises from the disallowance by the respondent of deductions for losses claimed by the petitioner to have been sustained during the taxable year.  FINDINGS OF FACT.  The petitioner is a duly organized corporation, located in Toledo, Ohio.  Its business is that of a jobber in rubberized cotton fabrics.  The Toledo Auto Fabrics Co. was a*2191  manufacturer of such fabrics.  Prior to and during the taxable year the petitioner was the selling outlet for about 75 per cent of the product of the Auto Fabrics Co.  The two companies occupied the same premises and their books were kept by the same bookkeeper.  R. S. Landers was the president and also the majority stockholder of both companies.  During 1921, because of rapidly falling prices, the petitioner's customers urgently demanded cancellation of their contracts for purchase of goods from the petitioner.  In most instances these demands were granted, as a matter of business policy.  In other cases the customers were required to make good their contracts and the petitioner collected from them $17,255.16 in 1922.  The petitioner tried to secure releases from its commitments to the Auto Fabrics Co., but was unsuccessful.  Adjustments were finally made on the basis of payment of the difference between the then market price and the contract price.  Pursuant to this arrangement, on December 31, 1921, the Auto Fabrics Co. was credited with $127,978.25 by the petitioner on its books.  This amount was to be paid quarterly, in four installments of $31,994.56 each.  During 1922*2192  the petitioner issued to the Auto Fabrics Co. three credit memornda aggregating $95,983.68.  In its income-tax return for the year 1922 the petitioner claimed as a deductible loss $78,255.16, which represented the difference between its credit memoranda of $95,983.68 as above set forth, and the amount it collected from its customers upon their contracts.  The respondent disallowed this deduction and asserted a deficiency in tax amounting to $9,619.15, and also asserted a 50 per cent fraud penalty thereon, amounting to $4,809.58.  The petitioner's return of income for 1922 was not false and fraudulent with intent to evade payment of tax.  *1080  OPINION.  MARQUETTE: The deduction claimed by the petitioner, if allowable, must come within the provisions of section 234(a)(4) of the Revenue Act of 1921.  So far as applicable to this proceeding, the provisions are as follows: SEC. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * * (4) Losses sustained during the taxable year and not compensated for by insurance or otherwise; unless, in order to clearly reflect the income, the*2193  loss should in the opinion of the Commissioner be accounted for as of a different period.  In our opinion the petitioner is not entitled to its claimed deduction in 1922 for the reason that no loss is shown to have been sustained in that year.  If any loss occurred, it was in 1921, when the petitioner agreed to the adjustment of its contracts with the Auto Fabrics Co. and entered upon its books a credit to that company for the amount due under the adjustment.  The controlling statute permits deductions for "losses sustained during the taxable year." Here, the loss, if any, was definitely fixed in 1921 and was deductible for that year, but there is no provision of the statute for carrying a loss over to later years for purposes of deduction.  See ; ; ; . The time of actual payment of a loss does not necessarily determine the time when the loss occurred.  *2194 . Whether or not the petitioner would be able to make adjustments with its customers similar to that exacted from the petitioner by the Auto Fabrics Co. does not in any way affect the situation.  The petitioner was party to two groups of business contracts - group A, by which the petitioner obligated itself to buy from the Fabrics Co. certain goods at specified prices, and group B, by which the petitioner agreed to sell these or similar goods to its customers for specified prices.  Each group of contracts was separate and distinct from the other; each was enforceable between the contracting parties without regard to what might occur regarding the other group.  The rights, powers, and privileges, and the duties and obligations created by one set of contracts were entirely independent of those created by the other set.  So far as we are advised, there was no legal relation between the two groups of contracts.  The obligation to the Fabrics Co. was not made dependent upon the petitioner's ability to enforce its contracts with its customers.  Therefore, under the statute, the petitioner was not entitled to defer its deduction for *1081 *2195  the loss claimed until such time as it might be determined whether that loss could be covered by collections from customers.  The respondent asserted a penalty under section 250(b) of the Revenue Act of 1921, amounting to 50 per cent of the deficiency in tax.  That section, so far as is here applicable, provides that: If any part of the deficiency is due to fraud with intent to evade tax, then * * * there shall be added as part of the tax 50 per centum of the deficiency in tax.  The record does not, in our opinion, disclose any evidence of fraud.  Even if the petitioner was mistaken as to the deductibility of its alleged loss, an error in judgment as to what does, and what does not, fall within the purview of the statute is not an indication of bad faith to be branded as fraud and penalized as such.  The petitioner's income tax for 1922 should be recomputed, and the penalty asserted by the respondent should be remitted.  Judgment will be rendered under Rule 50.