San-Knit-Ary Textile Mills, Inc. v. Commissioner

SAN-KNIT-ARY TEXTILE MILLS, INCORPORATED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. San-Knit-Ary Textile Mills, Inc. v. Commissioner Docket No. 46117. United States Board of Tax Appeals 22 B.T.A. 754; 1931 BTA LEXIS 2068; March 17, 1931, Promulgated *2068 1. An employee of petitioner while driving its automobile had an accident resulting in an injury to another person, who brought suit and obtained judgment against him, which could not be collected in full. Petitioner was threatened with suit for the same cause of action and, to prevent suit, borrowed money to enable it to effect a settlement of the judgment, which it did in June, 1927. The evidence fails to show that the employee at the time of the accident was performing any service for his employer, or was then acting within the scope of his employment. Held, the amount of money so borrowed and used may not be deducted as an ordinary and necessary expense paid or incurred in the taxable year involved in carrying on the business of the petitioner and the Commissioner's action in disallowing such is approved. 2. Held, further, that the evidence adduced fails to show that the petitioner in the taxable year had a net income of only $25,000 or less and that the presumption of correctness of the Commissioner's determination is not overcome. David H. H. Felix, Esq., and Harry Felix, Esq., for the petitioner. Miles J. O'Connor, Esq., for the respondent. *2069 SEAWELL *754 The Commissioner determined a deficiency in income tax in the amount of $1,362.62 for the fiscal year ended June 30, 1928, of which amount there is in controversy $1,224.65. The errors assigned are: (a) Commissioner disallowed $7,442.82, being the expenses incurred by the petitioner; and (b) Commissioner did not allow $2,000 exemption for fiscal year 1927 as provided by law for corporations having net income of $25,000 or less. The evidence indicates that the last assignment of error has reference to the fiscal *755 year ended June 30, 1928, although designated by petitioner "fiscal year 1927." FINDINGS OF FACT. The petitioner is a New Jersey corporation engaged in the manufacture of textiles, with its principal office in Philadelphia, Pa. Simon Friedberger was in its employ and was also its president. In 1926, while in its employ and driving an automobile owned by it, he had an accident, resulting in injury to one Helen T. Flanagan. What particular business or kind of work, if any, he was on or doing for the petitioner at the time the accident occurred, the evidence does not disclose. On account of the injury to Helen T. Flanagan, *2070 suit was instituted by her parents for her against Simon Friedberger and also by them in their own right against him. Suit was not brought against the petitioner on account of said accident. Friedberger and the petitioner both employed counsel to defend the suits against him. A judgment for $60,000 was rendered in favor of Helen T. Flanagan against Friedberger, but the same could not be collected from him. A compromise settlement of the judgment was effected in the latter part of June, 1927. To assist in bringing about the compromise settlement and to avoid threatened suit against the petitioner because of said accident, it borrowed money from E. M. Goldsmith and J. S. Eshler and used same in the amount of $7,442.82 to settle said judgment against Friedberger and pay legal expenses in connection therewith. After borrowing the money as stated and effecting settlement of the judgment in June, 1927, the petitioner during the period July 1, 1927, to June 29, 1928, inclusive, repaid of the money borowed and paid to attorneys for legal services the sum of $4,467.37 in 1927 and $3,475.45 in 1928. The petitioner's return for the fiscal year ended June 30, 1928, shows that, with*2071 the single exception of the items last above mentioned and returned as "Legal expense & Verdict a/c Auto Accident," it was prepared on the accrual basis. Other evidence also indicates that the petitioner's accounts were kept on the accrual basis. There is no evidence adduced showing that the petitioner in the taxable year involved had a net income of only $25,000 or less. OPINION. SEAWELL: The petitioner is not entitled to claimed deductions amounting to $7,442.82 as expense items, unless the same are allowable under section 234(a)(1) of the Revenue Act of 1926 or section 23(a) of the Revenue Act of 1928, such being the applicable sections of *756 the law and both providing that all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business may be deducted from gross income. The taxable year involved is the fiscal year begun July 1, 1927, and ended June 30, 1928. The evidence shows that a judgment was rendered against Simon Friedberger in 1926, at which time he was in the employ of the petitioner and its president. The judgment was the result of a suit brought against him on account of an automobile accident*2072 in which he was involved and which occurred while he was driving the petitioner's automobile. The evidence does not disclose what his particular mission or business, if any, for the petitioner was at the time the accident occurred. No suit was brought against the petitioner because of said accident, but the evidence shows that the petitioner employed counsel to defend the suit against Friedberger and after the judgment against him borrowed money of two individuals, which was used to compromise and settle said judgment and expenses incurred following said accident and suit. The money was borrowed for the purpose stated prior to July 1, 1927, and the judgment was settled the latter part of June, 1927. The evidence does not show that any legal liability was imposed on petitioner by reason of the automobile accident or the judgment against Friedberger. Although the attention of petitioner's counsel was called to the fact during the hearing that the statement that Friedberger at the time of the accident was on the business of the petitioner was a statement of a conclusion, it was not shown what duty or business if any, Friedberger was performing for petitioner at the time of the*2073 accident. In the light of the evidence, it is our opinion that it has not been shown that the expense incurred or paid by petitioner and claimed as deductible was an ordinary and necessary expense incurred or paid in the taxable year in the carrying on of its business and, therefore, the same may not be deducted from petitioner's gross income. Futhermore, if, as the evidence indicates, petitioner's accounts were kept on the accrual basis and there was any obligation resting on petitioner because of the borrowing of the money to make a compromise settlement of the judgment against Friedberger, that obligation was incurred in June, 1927, when the money was borrowed and judgment compromised and is not a deductible item in the fiscal year ended June 30, 1928, although the borrowed money may have been in fact repaid in such latter fiscal year. The authorities cited and relied on by petitioner are not such as to sustain its contention, under our findings of fact. Judgment will be entered for the respondent.