Excelsior Printing Co. v. Commissioner

EXCELSIOR PRINTING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Excelsior Printing Co. v. Commissioner Docket No. 23083. United States Board of Tax Appeals 16 B.T.A. 886; 1929 BTA LEXIS 2497; June 4, 1929, Promulgated *2497 In 1914 petitioner, a corporation, charged off the account of a corporation which had been declared bankrupt. In his will the sole stockholder of the debtor corporation provided that the income from certain stocks be applied as payment of the debts of the corporation at the time it became bankrupt. Pursuant to the terms of the will petitioner, in 1923, received an amount of money from the estate. Held that this payment constituted a recovery of the debt previously charged off and is income to petitioner in 1923. H. A. Mihills, C.P.A., for the petitioner. A. J. Tall, Esq., for the respondent. SIEFKIN *886 This is a proceeding for the redetermination of a deficiency in income taxes for the calendar year 1923 in the amount of $618.46. It is alleged that the respondent has increased taxable net income originally reported by petitioner for the year 1923, to the extent of $4,947.70, erroneously alleging that this amount constituted additional income received in that year from bad debt collections. FINDINGS OF FACT. Petitioner is an Illinois corporation with principal office at 732 Federal Street, Chicago, Ill. Petitioner, in the*2498 year 1914, charged off the account of the Philipsborn Outer Garment House, Inc., bankrupt, amounting to $7,910.86. Six years later, or in 1920, petitioner was notified by the trustee for the estate of Mr. Philipsborn (who was the sole stockholder of the Philipsborn Outer Garment House at the time the company went through bankruptcy) that said Philipsborn had provided in his will that certain securities be set aside, the income from which should be applied on the accounts owed by the corporation when it became bankrupt in 1914. Pursuant to the provisions of the will mentioned, payments were made to the petitioner during the years 1921, 1922, and 1923, the payment received in 1923 amounting to $4,947.70. In determining the deficiency for the year 1923 the respondent increased the amount of taxable net income originally reported by petitioner by $4,947.70, on the ground that this amount represented the amount received by the petitioner during 1923 as a collection upon a bad debt previously charged off and thus was income. On December 30, 1919, Martin Philipsborn, Herbert Philipsborn, and Clara Philipsborn, who, presumably, were beneficiaries under the above mentioned will, *2499 executed an instrument conveying to N. J.*887 Stein, Trustee, and his successor in trust certain stock to hold in trust for the benefit of creditors of Philipsborn Outer Garment House, Inc. The conveyance was subject to certain conditions. The trustee had no power to sell and the creditors, called the beneficiaries, had no power to require him to sell or dispose of the stock. It was the duty of the trustee to collect the cash dividends from the trust property, and apply the proceeds to the payment of the beneficiaries, giving preference to those named in a schedule "A." The trustee was required to pay at least 50 per cent of the proceeds each year to such beneficiaries and also the remaining 50 per cent in like manner unless the circumstances of the transferors, called the donors, should, in his opinion, make it necessary or desirable to disburse to them some part or all of the remaining 50 per cent. Upon this question the judgment of the trustee was to be final. The trustee had full authority to determine the order in which the creditors named in the schedules should be paid. The trustee had the right to pledge the income of the trust property in whole or*2500 in part for the purpose of borrowing money to anticipate payments to the creditors. The trust was to continue so long as Martin Philipsborn was connected with Philipsborn's (a corporation) or any successor or reorganization thereof as officer, director, or employee, and until the next cash dividend paid thereafter within six months was distributed by the trustee. The donors, or any one or more of them, might at any time within the six-month period withdraw their donations of stock upon giving the trustee security for the payment of said dividend. If no dividend were declared in the six-month period, the trust was to end at the expiration of that period. It was provided that the trust should not terminate upon the death of any of the donors. Whenever the duties of the trustee were fully discharged it was provided that he should transfer to each of the donors the shares of stock which he had transferred to the trustee. OPINION. SIEFKIN: In 1914 the petitioner charged off the account of Philipsborn Outer Garment House, Inc., bankrupt, amounting to $7,910,86. One Philipsborn was the sole stockholder of this corporation. In his will Philipsborn provided that certain securities*2501 be set aside, the income from which should be applied on the accounts owing by the corporation when it became bankrupt in 1914. Philipsborn died and pursuant to the provisions of the will, the petitioner, in 1923, received the amount of $4,947.70. *888 The respondent contends that this amount is properly includable in petitioner's taxable income as the payment of a bad debt previously charged off. Petitioner contends that it was a gift and was, therefore, not taxable. In the case of , the Supreme Court held that a discharge in bankruptcy destroys the remedy but not the indebtedness. In the instant proceeding, therefore, the debt to the petitioner continued in existence. We have no doubt that Philipsborn did not intend to make a gift to the petitioner. He intended to pay the debts of the corporation. As far as appears from the record Philipsborn was under no legal obligation to pay such debts. The prevailing rule as to whether payment of a debt by a stranger discharges the debt is laid down in the case of *2502 ; . In that case the Supreme Court of Appeals of West Virginia said: * * * It was held in , that "payment of a debt, though made by one not a party to the contract, and though the assent of the debtor to the payment does not appear, is still the extinguishment of the demand." The opinion says that, as between the person paying and him for whose benefit it was paid, a question might arise whether it was voluntary, which would depend on circumstances of previous request, or subsequent, express or implied. This doctrine is sustained by ; ; ; ; ; , Bish. Cont. § 211, holds that, if payment "be accepted by creditor in discharge of debt, it has that effect." Sec. 2 Whart. Cont. § 1008. *2503 It seems utterly unjust, and repugnant to reason, that a creditor accepting payment from a stranger, of the third person's debt, should be allowed to maintain an action against the debtor pleading and thereby ratifying such payment, on the technical theory that he is a stranger to the contract. He has himself, for this purpose, allowed him to make himself a quasi party. He consents to treat him so, so far as payment is concerned. To regard the debt paid, so far as he is concerned, is but to hold him to the result of his own act. * * * As pointed out above, the intention of Philipsborn was to pay the debts owing by the corporation. The petitioner, in accepting the money under the terms of the will of Philipsborn, accepted it as payment of the debt. Since the payment constituted payment of a debt which petitioner had previously charged off, we must hold that it was taxable income to petitioner in 1923. Reviewed by the Board. Judgment will be entered for the respondent. MILLIKEN concurs in the result. SMITH, PHILLIPS, and GREEN dissent.