Court Opinion

ID: 4592641
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:08:25.491726+00
Date Added: 2024-06-11T07:58:52.137352
License: Public Domain

PROGRESS PAPER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Progress Paper Co. v. CommissionerDocket No. 39648.United States Board of Tax Appeals20 B.T.A. 234; 1930 BTA LEXIS 2173; July 15, 1930, Promulgated 1930 BTA LEXIS 2173">*2173  Cancellation of indebtedness by agreement of creditors, under the circumstances involved herein, held not to constitute income.  Gladwin M. Mead, Esq., for the petitioner.  L. W. Creason, Esq., for the respondent.  MARQUETTE 20 B.T.A. 234">*234  This proceeding is for the redetermination of deficiencies in income tax asserted by the respondent in the amounts of $1,395.96 for 1924 and $327.17 for 1925.  The deficiencies arise from the action of the respondent in treating as income to the petitioner for 1924 the amount of $49,032.84, representing an increase in book surplus which arose from the compromise of certain accounts payable effected by the petitioner in that year.  FINDINGS OF FACT.  The petitioner, which was formerly known as Stone & Andrew, Inc., is a corporation organized in 1911 under the laws of Massachusetts, with its principal office and place of business at Boston.  It is and has been since it was organized, engaged in business as a wholesale jobber of paper.  Its books are and were, during the years involved herein, kept on the accrual basis.  In the year 1923 the petitioner's financial affairs became involved and a creditors' protective1930 BTA LEXIS 2173">*2174  committee was appointed, which caused an examination of the petitioner's affairs to be made by a firm of certified public accountants.  The creditors' committee decided to keep the petitioner in business if possible, and on November 28, 1923, it sent to each of the creditors a statement signed by the committee, 20 B.T.A. 234">*235  containing a balance sheet of the petitioner as of October 15, 1923, and recommending that all the other creditors join with the subscribing creditors in accepting 5 per cent of their claims in cash, 35 per cent in seven time notes of equal amounts dated October 16, 1923, and payable April 1, 1924, and each four months thereafter, and 60 per cent in demand notes, the demand notes to be endorsed without recourse by the respective creditors and turned over to the creditors' protective committee, said committee to have full power to make such terms with the petitioner as to the date and manner of payment of said notes, as might be deemed expedient.  All but two of the petitioner's creditors accepted the recommendation of the creditors' protective committee and signed agreements accepting said terms.  On or about January 18, 1924, one Thomas Goddard Bradlee became1930 BTA LEXIS 2173">*2175  interested in the petitioner and submitted to the creditors' protective committee a written offer to furnish the petitioner with $20,000 capital in exchange for stock, on the condition that the creditors would extend the time for payment of their 60 per cent demand notes to December 1, 1947, with the option to exchange each of said demand notes for a debenture note of the petitioner in the amount of 40 per cent of the face of the demand note, payable in installments on April 1, 1927, April 1, 1928, April 1, 1929, and April 1, 1930, respectively.  The creditors' protective committee accepted Bradlee's offer and notified the creditors thereof.  The creditors accepted the offer, and all but one of them elected to exchange their demand notes for the petitioner's debenture notes.  One creditor, who had refused to accept a demand note, elected, however, to accept a 40 per cent debenture note for his claim.  The total amount of demand notes and claims so exchanged was $83,144.61, and the amount of debenture notes issued therefor was $33,257.86.  The difference between the amount of said demand notes and claims and the amount of debenture notes issued in settlement thereof, to wit, $49,886.75, 1930 BTA LEXIS 2173">*2176  was credited to surplus on the petitioner's books.  The petitioner filed a return of income for the years 1922 and 1923 and reported thereon net losses of $9,668.36 and $25,182.95, respectively.  In computing the net loss for 1923 gross sales were taken as $589,128.51.  From said gross sales there was deducted the amount of $499,328.13, representing the cost of goods sold.  The cost of goods sold was determined by adding to inventory at the beginning of the year, as shown by the return, to wit, $27,642.66, the amount of $503,237.72 as the cost of merchandise purchased during the year, and deducting from the sum of the opening inventory and the cost of merchandise purchased, the inventory at the close of the year, to 20 B.T.A. 234">*236  wit, $31,552.25.  Included in said inventory at the beginning of the year, and/or merchandise bought for sale during the year, and in said inventory at the end of the year, was the cost of merchandise which created the accounts payable which stood on the petitioner's books at or about October 15, 1923, and which were liquidated by the 60 per cent demand notes heretofore mentioned, the demand notes subsequently being exchanged for the 40 per cent debenture1930 BTA LEXIS 2173">*2177  notes.  The petitioner filed a return of income for the year 1924 showing a net loss of $1,423.07.  The respondent, upon audit of the return, added as income the amount of $49,032.84, representing the adjustment to notes payable as a result of the compromise effected by the petitioner with its creditors in 1924, as above set forth.  From the income thus determined the respondent allowed and deducted the net losses of $9,668.06 and $25,182.95 reported by the petitioner on its returns for 1922 and 1923, and determined that there is a deficiency in tax for 1924 in the amount of $1,395.96.  The respondent also disallowed as deductions from income for 1925 net losses for 1923 and 1924 taken on the return for that year, and determined a deficiency in tax in the amount of $327.17.  OPINION.  MARQUETTE: This Board in a number of cases has held that under circumstances such as we have here the forgiveness or cancellation of a debt, in whole or in part, by a creditor does not result in income to the debtor. ; 1930 BTA LEXIS 2173">*2178 ; ; and . These cases are not distinguishable in principle from the instant case and we therefore hold that the petitioner realized no income in 1924 as a result of the compromise and reduction of its indebtedness effected by it with its creditors.  See also ; ; ; and . The respondent contends, however, that if the petitioner did not realize income in 1924 directly as a result of the compromise of its indebtedness, the compromise nevertheless represented a reduction of the cost of the goods for which the compromised obligations were incurred, and that the part of the obligation remitted or forgiven by the creditors, to wit, $49,886.75, should be deducted from the cost of the goods purchased in 1923.  Assuming, but not deciding, that the amount saved to the1930 BTA LEXIS 2173">*2179  petitioner by the compromise should be regarded as a reduction of the cost of the goods for which the obligations 20 B.T.A. 234">*237  were incurred, the evidence does not warrant us in making that adjustment in 1923.  The parties have stipulated that some of these goods were included in the opening inventory for 1923 as well as in purchases made in that year, and in the closing inventory.  To the extent that these goods were in the opening inventory for 1923, they must have been purchased prior to that year, and it would be manifestly unfair and would result in a distortion of income for 1923, to deduct the entire amount of the compromise adjustment from 1923 purchases, and it should be pointed out that if purchases are changed to reflect the compromise, subsequent inventories, so long as any part of the merchandise remains, must also be changed to reflect the new price.  The respondent has raised no issue respecting 1922 and that year is therefore not before us.  In the absence of more specific information as to the amount of the goods in question purchased in each of the years 1922 and 1923, also the amount thereof remaining in the closing inventories for the same years, we have no basis1930 BTA LEXIS 2173">*2180  for making any adjustment in the petitioner's income for 1923.  Judgment will be entered under Rule 50.