Delray Lumber Co. v. Commissioner

DELRAY LUMBER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Delray Lumber Co. v. Commissioner Docket No. 41867. United States Board of Tax Appeals 20 B.T.A. 8; 1930 BTA LEXIS 2220; June 2, 1930, Promulgated *2220 1. The assessment by respondent of a penalty for petitioner's failure to file a new return for the fiscal year ended July 31, 1925, under the 1926 Act, a return having been filed by it for that period under the 1924 Act, is not sustained, since petitioner's tax liability computed under both acts is less than the amount shown to be due in the return filed under the 1924 Act, and assessed by respondent. M. Cohn & Sons Co.,9 B.T.A. 87, followed. 2. Amounts claimed in amended returns for fiscal year ended July 31, 1926, as bad debt deductions disallowed. William S. Hammers, Esq., and P. Robert G. Sjostrom, Esq., for the petitioner. Maxwell E. McDowell, Esq., for the respondent. ARUNDELL *8 Respondent has asserted a penalty of $1,318.31 for the fiscal year ended July 31, 1925, and a deficiency in income tax for the fiscal year ended July 31, 1926, in the amount of $223.05. The issue for 1925 is whether the penalty was properly assessed and the issue for the fiscal year 1926 is whether accounts, aggregating in amount $36,060.61, are deductible as bad debts. FINDINGS OF FACT. The petitioner is a Florida corporation*2221 with its principal office at Delray, Fla. The only return filed by petitioner for the fiscal year ending July 31, 1925, was received in the office of the collector of internal revenue, district of Florida, October 15, 1925. C. W. Garner, petitioner's general manager in 1926, did not know that subsequent to the filing of the return a law was enacted increasing the tax rate on corporate income earned during fiscal years ending in 1925 and that corporations subject to the additional tax were required to file supplemental returns for such years. Neither did he have knowledge of any communication from the Commissioner of Internal Revenue or the collector directing that a supplemental return be filed. In his audit of petitioner's return for the fiscal year 1925, respondent imposed a 25 per cent penalty in the amount of $1,318.31 because of petitioner's failure to file a supplemental return for the taxable period on or before May 15, 1926, as required by Treasury Decision 3843 (C. B. V-I, p. 99). *9 In its return for the fiscal year ending July 31, 1925, received by the collector of internal revenue, district of Florida, October 15, 1926, the petitioner claimed a deduction*2222 for bad debts in the amount of $20,597.31. The return was prepared by an accountant from information furnished by C. W. Garner, who entered petitioner's service in October, 1925, as an assistant and clerk, and was in charge of petitioner's business. He had no previous experience in the same line of work or previous familiarity with petitioner's customers. In preparing the list of bad debts he went over the accounts and selected the ones which he was reasonably certain were bad and charged them off. In his selection of the accounts to be charged off, Garner did not have the benefit of the judgment of the other officers of petitioner, who were absent from the business. Garner realized a short time after the return was filed, and continued to be of the opinion, that he had not charged off enough of the accounts. During the early part of March, 1927, he had an amended return prepared and included therein other accounts, amounting to $21,987.10, which he was sure should have been charged off originally and which in his sole judgment were uncollectible. The amended return was received at the office of the collector of internal revenue, district of Florida, May 27, 1927. In May, *2223 1927, after the amended return was filed, W. J. Cathcart, petitioner's president since its organization in 1911, returned to Delray, Fla., after an absence of two years. A short time after Cathcart returned he and Garner discussed the affairs of petitioner and in June, 1927, they had an audit made of petitioner's books. Thereafter they determined that accounts in addition to those already charged off were worthless, and on October 13, 1927, a corrected amended return was filed in which additional bad debts, amounting to $14,073.51, were claimed as a deduction, the total amount deducted as bad debts in this return being $56,657.92. The additional accounts were charged off because in the judgment of Cathcart and Garner they were uncollectible as of July 31, 1926. Of the amount of the accounts charged off, less than $1,500 was subsequently recovered. Petitioner's books were closed every year on July 31. A statement of the business for the fiscal year 1926 was completed before the original return was filed in October, 1926. The statement reflected the item of $20,597.31 claimed in the original return as a deduction for bad debts. In May, 1927, when additional accounts were determined*2224 to be worthless, the only record made in the books to reflect the action taken was a notation in the ledger, the books for the fiscal year 1926 not being opened. Subsequently, all of the *10 bad debt accounts were charged to profit and loss. The entry was made in petitioner's books for the fiscal year 1927. Petitioner considered that that entry closed its books as of July 31, 1926. In his audit of the original and amended returns filed by petitioner, respondent allowed as a bad debt deduction the sum of $20,597.31 claimed in the original return, and disallowed the additional amounts claimed in the amended returns. OPINION. ARUNDELL: In connection with his determination of petitioner's tax liability for the fiscal year ending July 31, 1925, under the 1926 Act, respondent imposed a penalty equal to 25 per cent of the tax so computed by reason of the former's failure to file a supplemental return for the same period under the 1926 Act. Section 3176 of the Revised Statutes, as amended by section 1103 of the Revenue Act of 1926, reads, so far as its provisions are material here, as follows: In case of any failure to make and file a return or list within the time*2225 prescribed by law, or prescribed by the Commissioner of Internal Revenue or the collector in pursuance of law, the Commissioner shall add to the tax 25 per centum of its amount * * *. This provision of the statute is a reenactment of identical provisions in the Revenue Acts of 1918, 1921, and 1924. The first taxable year under the 1926 Act to be called the taxable year 1925, is, by section 200 thereof, defined as the calendar year 1925 or any fiscal year ending during the calendar year 1925. Section 207(a) of the 1926 Act provides a method of computing the tax of a taxpayer having a fiscal year ending in 1925, and subdivision (c) thereof provides for the crediting against taxes imposed by the 1926 Act amounts paid on account of taxes imposed by the 1924 Act. The Revenue Acts of 1918, 1921, and 1924 contain similar provisions for fiscal years ending in those years. Treasury Decision 3843, approved April 1, 1926, provides in part, as follows: Any corporation which has filed a return for a fiscal year ending in 1925 and paid or become liable for a tax computed under the Revenue Act of 1924, and is subject to additional tax for the same period under the revenue act of 1926, *2226 must file a new return covering such additional tax on or before May 15, 1926. Similar regulations were promulgated by the Commissioner respecting supplemental returns under the 1918 and 1921 Acts. T.D. 2797 and T.D. 3310. The statement attached to the deficiency letter shows that the only adjustment made by the respondent in his audit of the return filed by the petitioner under the 1924 Act was to reduce by $26,300 *18 the amount of profit reported on the sale of a lot. On the adjusted net income of $41,223.94 he computed a tax of $5,273.23 under the provisions of section 207(a) of the 1926 Act in lieu of a tax of $8,440.49 shown to be due by the return, resulting in an overassessment of $3,167.26. In M. Cohn & Sons Co.,9 B.T.A. 87, it was held that the amount of taxes paid under the 1917 Act should be credited against the tax determined to be due for the same fiscal year under the 1918 Act, and if the computation resulted in a balance of tax or a deficiency under the latter act, the delinquency penalty should attach to such deficiency, and if there were no additional taxes due, there was no basis for imposing a penalty for failure to*2227 file a supplemental return under the 1918 Act. It is admitted by respondent that the only change the 1926 Act made in the Act of 1924 affecting petitioner's tax liability was to increase the rate of taxation on net income from 12 1/2 per cent to 13 per cent. Petitioner's tax for the fiscal year 1925 was computed from the return filed by it, and the respondent's audit of the return actually resulted in a reduction of the tax liability rather than an increase in tax or a deficiency. The issue, in our opinion, is controlled by M. Cohn & Sons Co., supra. Accordingly, we hold that there is no basis for imposing the penalty. Of the amount of $56,657.92 claimed as a bad debt deduction, respondent allowed $20,597.31, the sum deducted in the original return, and disallowed the remainder of $36,060.61 claimed in the amended returns. The Revenue Acts of 1924 and 1926 allow as deductions in computing net income, "Debts ascertained to be worthless and charged off within the taxable year." Both of the conditions of the statute must be complied with to obtain the benefit of the deduction. Here, the facts clearly show that the debts disallowed by respondent were not ascertained*2228 to be worthless within the taxable year and were not charged off during that period. On this issue the respondent is sustained. Decision will be entered under Rule 50.