Court Opinion

ID: 4610053
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:46:03.132698+00
Date Added: 2024-06-11T07:53:59.424514
License: Public Domain

GEORGE D. DAVIDSON COMPANY OF CALIFORNIA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.George D. Davidson Co. v. CommissionerDocket No. 14659.United States Board of Tax Appeals14 B.T.A. 91; 1928 BTA LEXIS 3024; November 12, 1928, Promulgated *3024  Under section 234(a)(2) of the Revenue Act of 1921, held, a debtor may not deduct charges for interest on trade balance in years prior to the taxable year, although such interest charges were first billed to him during the taxable year.  A. Calder Mackay, Esq., for the petitioner.  Shelby S. Faulkner, Esq., for the respondent.  MARQUETTE *91  This is a proceeding for the redetermination of a deficiency in income and excess-profits taxes, asserted by the respondent for the fiscal year ending January 31, 1922.  The alleged deficiency amounts to $1,113.13, arising from the disallowance of interest expense amounting to $6,027.07, which the petitioner claims accrued during the taxable year.  FINDINGS OF FACT.  The petitioner is a corporation organized and existing under and by virtue of the laws of the State of California, with its principal place of business at Los Angeles.  During the period from 1914 to 1922, the petitioner traded with George D. Davidson Company of New Jersey, a corporation existing under the laws of the State of New Jersey, with its principal place of business at Jersey City, N.J.  The account kept on the books of George*3025  D. Davidson Company of California with the George D. Davidson Company of Jersey City was an open account between these two companies and was credited with all goods purchased from the George D. Davidson Company of New Jersey and likewise charged with all merchandise sales to that company.  This account fluctuated considerably during each year but there was at all times a credit balance in the account which represented a liability of petitioner to the George D. Davidson Company of New Jersey.  There was an understanding between petitioner and the George D. Davidson Company of New Jersey that there would be no demand made for payment of any balance due the latter company, but that such balance would be allowed to run along on open account and might be settled at any time convenient to the petitioner.  At no time during the period from 1914 to 1922 did the petitioner pay any interest on its open accounts and at no time during this period was there any agreement or understanding between petitioner and the George D. Davidson Company of New Jersey requiring the payment of any interest on the open account.  *92  During petitioner's fiscal year ending January 31, 1922, the George*3026  D. Davidson Company of New Jersey sent petitioner a bill in the sum of $6,862.51, representing interest at 6 per cent computed on the average monthly balance of petitioner's open account from April 1, 1914, to January 31, 1922, which average monthly balance amounted to $14,601.08, the total balances being $1,372,502.02 with 94 total months.  The petitioner's books of account for its fiscal year ending January 31, 1922, were kept upon the accrual basis, and, upon the receipt of the bill from the George D. Davidson Company of New Jersey of $6,862.51 for interest on the average monthly balances of said open account, petitioner, by its president, George D. Davidson, acquiesced in this interest charge, whereupon this interest item was entered on petitioner's books of account as "interest payable." The George D. Davidson Company of New Jersey included this interest item in its return as income for its fiscal year ended January 31, 1922.  The respondent in computing the petitioner's net income for its fiscal year ended January 31, 1922, disallowed as a deduction the sum of $6,027.07 of the interest payable, $6,862.51, on the ground that the former amount represented interest which should*3027  have been accrued in years prior to 1922.  The petitioner was not affiliated with the George D. Davidson of New Jersey.  George D. Davidson was the controlling stockholder in both companies.  Up to the time when the New Jersey Company rendered a bill for interest to the California Company, neither had considered that any interest was earned by one, nor owing by the other.  The bill for interest was apparently acquiesced in merely as a bookkeeping matter.  Accounts were kept on the accrual basis.  OPINION.  MARQUETTE: Section 234(a)(2) of the Revenue Act of 1921 reads 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: * * * (2) All interest paid or accrued within the taxable year on its indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this title.  To "accrue" means to come into existence; to accumulate; to become vested: Standard*3028  Dictionary; Webster's Dictionary; Bouvier's Law Dictionary; Words and Phrases Judicially Defined.  In the sense in which the word is used in the above statute, interest deductible *93  as accruing in any taxable year means interest which his come into existence, has become vested, during such taxable year.  The same statute, above quoted, in other sections provides for deductions for losses sustained during the taxable year; for ordinary and necessary expenses paid or incurred during the taxable year; for debts ascertained to be worthless and charged off within the taxable year.  It is, we think manifest that Congress did not intend to permit a deduction in any taxable year for interest which, if it became a debt at all, became so, prior to the year in which it is sought to deduct it.  The principle has been followed by this Board in numerous decisions respecting other deductions allowed by the statute, and we are of opinion that the rule, in pari materia, should apply here.  The petitioner is no more entitled under the statute to deduct interest charges which accrued, if at all, prior to the taxable year, than it would be to deduct losses, bad debts, or ordinary expenses*3029  which arose in prior years.  The object sought by the statute is, a reflection of the true net income of the taxpayer for the taxable year.  See section 232, Revenue Act of 1921, ; . In the instant proceeding, the interest on trade balances for years prior to the taxable year should be reflected in the accounts for such years.  To cumulate them all into one year does not reflect the true net income, as required by the statute, for either the taxable year or the prior years. There is no proper basis on which we can sustain the petitioner's allegations of error, and we shall enter Judgment for the respondent.