Industrial Loan & Inv. Co. v. Commissioner

INDUSTRIAL LOAN & INVESTMENT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Industrial Loan & Inv. Co. v. Commissioner Docket No. 20664. United States Board of Tax Appeals 17 B.T.A. 1328; 1929 BTA LEXIS 2137; November 8, 1929, *2137 Petitioner sold its capital stock on the installment plan. Upon default in meeting the payments due, the stock and the amounts paid thereon were declared forfeited. Under the laws of Oklahoma such forfeiture is void and the subscriber may redeem his stock at any time before foreclosure. Held that the amounts so forfeited are not income in the hands of petitioner. Harris L. Danner, Esq., and J. G. Beavers, C.P.A., for the petitioner. L. A. Luce, Esq., for the respondent. LANSDON *1328 The respondent has asserted a deficiency in income tax of $445.17 for the year 1922. Only that part of the deficiency is in controversy which arises from the respondent's action in including in net income the amount of $2,671.42 which respondent alleges represents amounts declared forfeited when installment contracts for the purchase of shares of petitioner's capital stock were canceled. FINDINGS OF FACT. The petitioner is an Oklahoma corporation, organized in 1917. It maintains its principal office at Oklahoma City. It sold its capital stock on the installment plan. Upon audit of the petitioner's income-tax return for 1922 the respondent*2138 included in taxable income the amount of $2,671.42, explaining such adjustment as follows: This item represents collections on partly paid stock canceled as payments were not completed. One of the many canceled installment subscriptions that make up the amount in dispute was that of C. H. Albert, who subscribed for one share of petitioner's stock on January 10, 1921. His subscription called for the payment of 75 cents on Saturday of each week. Albert defaulted in his payments on June 4, 1922, and on December 31 of that year the certificate of stock was canceled and the amount which had been paid thereon was declared forfeited. At the time of cancellation there was a balance owing of $15.25. On February 13, 1929, Albert's stock certificate was demanded by one Wood, to whom Albert had assigned all his rights under the contract and the balance due thereon was tendered. A new share of stock was issued to Wood. All forfeitures under the subscription contracts were credited to petitioner's surplus account, from which dividends were paid to its stockholders. *1329 No reserve was set up by petitioner to provide for any liability on account of the cancellation of stock*2139 certificates and the forfeiture of amounts paid thereon. OPINION. LANSDON: The Compiled Oklahoma Statutes (1921) provide: 7412. Contracts for forfeiture of property. All contracts for the forfeiture of property subject to a lien, in satisfaction of the obligation secured thereby, and all contracts in restraint of the right of redemption from a lien, are void, except in the case specified in Section 1122. 7419. Every person having interest may redeem lien. Every person having an interest in property subject to a lien, has a right to redeem it from the lien, at any time after the claim is due, and before his right of redemption is foreclosed. 7421. Redemption - how made. Redemption from a lien is made by performing, or offering to perform, the act for the performance of which it is a security, and paying, or offering to pay, the damages, if any, to which the holder of the lien is entitled for delay. The purchasers of petitioner's stock could redeem at any time before foreclosure by paying the balance due. Petitioner has not foreclosed its lien. Upon default in each case the stock certificate was stamped "cancelled" and the money which had been paid thereon*2140 was transferred to surplus. The petitioner was liable for conversion on all such cancellations. ; ; ; . The question presented herein is similar to that involved in , where we said: The payments on account of the stock subscriptions, at the time they were made, were undoubtedly capital payments, being made to provide capital for the corporation, and were in its hands capital receipts as distinguished from income. The fact that payments were made in installments and stock was never issued for such payments, because they were not made to the full amount of the subscriptions, does not alter their character. We think the respondent erred in including as income the amount received by petitioner from the sale of its capital stock. The fact that petitioner in violation of law has canceled the stock certificates and converted the amounts paid thereon does not alter the character of the money in its hands. Decision will be entered under Rule 50.*2141