North American Coal Corp. v. Commissioner

NORTH AMERICAN COAL CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. North American Coal Corp. v. Commissioner Docket Nos. 51712, 52492. United States Board of Tax Appeals 32 B.T.A. 535; 1935 BTA LEXIS 935; April 30, 1935, Promulgated *935 Respondent's action in including in income of 1927 and 1928 credit balances, consisting of items accrued on its books of account six years or more prior thereto as liabilities for merchandise coal, freight, wages, freight war tax refunds, and miscellaneous items, approved, where the evidence does not disclose that such items represented in the years involved true accounts payable which petitioner was obligated to pay or claims asserted against the petitioner. C. F. Taplin, Esq., for the petitioner. Allin H. Pierce, Esq., for the respondent. MCMAHON *535 These are proceedings for the redetermination of asserted deficiencies in income tax of $8,513.78 for the year 1927 (Docket No. 51712), and $14,599.39 for the year 1928 (Docket No. 52492). It is alleged in the petition that the respondent erred in the determination of deficiencies as follows: Docket No. 51712. - In including in income for the year 1927 certain accounts payable carried on the petitioner's books as follows: (a) Unclaimed coal liability $15,634.90 (b) Ore and coal pool 47,083.02 (c) Unclaimed freight liability 212.13 (d) Freight war tax refunds 987.61 63,917.66 *936 Docket No. 52492. - In including in income for the year 1928 certain accounts payable carried on the petitioner's books of account as follows: (e) Unclaimed coal liability $1,197.57 (f) Outside coal purchased 587.59 (g) Unclaimed freight liability 154.29 (h) Suspense account 12,005.27 13,944.72 (i) In including in 1928 income of the Standard Island Creek Coal Co., which income, as that of an affiliated company, has been consolidated with that of the petitioner, certain items constituting unclaimed wages in the aggregate amount of $3,982.31. (j) In including in 1928 income of the Powhatan Minning Co., which income, as that of an affiliated company, has been consolidated with that of the petitioner, certain items constituting unclaimed wages in the amount of $1,374.98. (k) The respondent affirmatively alleges that in computing the net income of petitioner for the years 1927 and 1928 he erroneously allowed as depreciation on the Johnson River tipple the amounts of $10,571.30 and $5,285.65, respectively, and that net income for those *536 years should be increased accordingly. [Order, statement, and lettering ours.] It appears from the*937 statement attached to the notice of deficiency dated November 29, 1930, covering the year 1927, and the statement attached to the notice of deficiency dated January 24, 1931, covering the year 1928, that the Standard Island Creek Coal Co. and the Powhatan Mining Co. for the years involved were subsidiary companies of petitioner; and that the respondent allocated to the petitioner the entire tax liability for 1927 since it was the only company which reported income for such year, and for 1928 because of and in accordance with the allocation agreement on file. FINDINGS OF FACT. The petitioner is a corporation organized under the laws of the State of Ohio, having its principal place of business at 1550 Union Trust Building in the City of Cleveland, Cuyahoga County, Ohio. Items (a) and (e) - unclaimed coal liability. - The petitioner caused to be loaded on boats at a lake front for shipment upon the Great Lakes a great deal of coal of its own and coal purchased from others. Loading of coal into the boats for shipment was evidenced by a cargo manifest or statement furnished by the railway company which carried the coal to the boats, setting forth the name of the boat, the*938 date it reported for loading, the time consumed in loading, the time it cleared the docks, a list of all the carloads of coal dumped into the boats, including each car number and weight of the coal, the amount of freight and other charges accruing on each car, the distribution of the tonnage between the different holds in the boat, and the name of the consignee. This manifest was checked against petitioner's shipping record. Many times petitioner found cars listed on the manifest which did not appear on its shipping record, and containing coal which had not been shipped by petitioner to the lake port for transshipment. So-called dummy purchase vouchers were made covering such carbloads of coal at what was considered a fair price, or at the price which petitioner was charging for coal from its own properties, or at the price it was paying for coal purchased by it. The amounts of such vouchers were credited to the unclaimed coal account. Under petitioner's system of accounting it was necessary to set up this liability for such unclaimed coal, as each month the purchase tonnage of coal was balanced against the coal sold, after giving consideration to the coal still on hand. It was*939 handled in this way every month in order to make up the monthly profit and loss statement. Although some claims for the coal credited to the unclaimed coal account were not made until two or three years after the coal was received for transshipment, usually sometime within a year after *537 petitioner was notified of the loading of the so-called unclaimed coal into the boat it received claims or invoices covering some of such coal from the owners or shippers thereof. These invoices were vouchered and the amounts thereof were charged or debited to the unclaimed coal account and credited to the owners, respectively, of the coal covered by such invoices. If the invoices received were for amounts less than those credited to the unclaimed coal account, such account would be debited with the amounts theretofore credited therein, but the difference between the amounts credited and the amounts of such invoices would be credited to the purchase coal cost account. The following is a statement of the debits and credits by years as shown by the petitioner's general ledger sheets marked "Unclaimed Coal": Year Debits Credits Credit balance at close of year [1916] $338.20 $455.93 $117.73 [1917] 637.98 1,934.39 1,414.14 [1918] 11,631.03 20,941.31 10,724.42 [1919] 4,823.98 4,559.63 10,460.07 [1920] 20,865.20 36,811.69 26,406.56 [1921] 30,782.57 20,618.18 16,242.17 [1922] 22,363.66 66,485.56 60,364.07 [1923] 62,577.03 22,585.51 20,372.55 [1924] 9,802.62 8,244.90 18,814.83 [1925] 4,813.59 4,708.42 18,709.66 [1926] 6,690.64 6,955.55 18,974.57 [1927] 3,887.37 3,642.51 18,729,71 [1928] 1,148.69 2,410.05 19,991.07 *940 The credits in such account represent aggregates of the amounts set up for coal which petitioner had been notified had been loaded on boats for transshipment. The debits in the account represent coal claimed or invoiced by the owners, and in any one year may offset in part credits entered in the current year and in part credits entered in a prior year or years. Of the credits entered in 1921 of a total of $20,618.18, the petitioner was able, in 1921, to identify and debit coal included in that credit to the extent of $20,229.02, and in 1922 to the extent of $314.42, leaving a balance of $74.74 covering about one car of coal unclaimed for which the petitioner has never been billed and has not paid. A credit balance at the end of any year represents the purported cost of coal transshipped in lake cargoes by the petitioner for which it has received no invoice or claim from the owners, the owners being unknown to petitioner. At the end of 1921 there was a credit balance of $16,242.17 in this account which represented the accumulative balance in the account from January 1, 1916, to December 31, 1921, $389.16 of which represented credits entered in 1921. Of this balance of $16,242.17, *941 the respondent restored to income in 1927 the amount of $15,634.90, being the amount found by the revenue agent in his examination of petitioner's books and records which remained unpaid *538 at December 31, 1927. The respondent restored to petitioner's income in 1928 out of this account the amount of $1,197.57. In September 1931 the amount of $18,533.74 from this account, including the items of $74.74 and $1,197.57, was transferred to surplus adjustment account. Item (b) - ore and coal pool. - In 1921, anticipating labor trouble and in an effort to expedite the shipment of coal by way of railway and boats, the railroads formed what was called an ore and coal pool or exchange. All coal shippers who cared to become members were permitted to do so. The petitioner was a member of this pool and shipped coal into the pool. The coal of the various members was classified and given a classification number. Coal of similar classification shipped by the various members was pooled for transshipment. All members participating in this arrangement made coal shipments from this pool. When petitioner desired to transship coal by boat it made an order upon the pool or exchange*942 to issue an order to the railroad company to load a cargo of coal of a specified classification. When a boat had been loaded the railroad company issued to petitioner a manifest or report showing the coal which had been loaded. In putting the manifest through its books of account, the petitioner credited the ore and coal pool with what it determined to be the market price of the coal loaded, taking as the market price the average of the cost of its own coal which had been shipped into the pool. For shipments made into the pool by the petitioner, debits were entered to such account. This account, at the end of 1921, had a credit balance of $47,083.02. This credit balance arose out of 1921 business although there were a few adjustments made in 1922. There were no entries in the account after 1922. The pool ceased operations sometime in December 1921. Item (f) - account payable - outside coal. - The credit balance of $587.59 in the outside coal account arose in 1921 in the same manner as the ore and coal pool account, out of the operations of the pool, but was allocated by respondent to 1922. The 1922 entries were corrections. There have been no entries in that account*943 since 1922 except the entry made in 1931 closing the balance into surplus adjustment account. The identity of the creditor or creditors is unknown to petitioner and petitioner is unable to state the nature of the claim of any individual. Items (c) and (g) - unclaimed freight liability. - The railroad company made a report to petitioner of the tonnage of coal loaded into boats for petitioner and from these reports the freight supposedly due the railroad company on every ton of coal so loaded was determined by the petitioner and set up as a liability in its unclaimed freight liability account. Within 24 hours, and never later than 48 *539 hours after the loading of a boat, the railroad company drew a draft upon petitioner for the amount of freight payable on the coal loaded into such boat. Sometimes freight on one or two cars listed in the notice of loading and set up in the unclaimed freight liability account was omitted from such draft. The item of $212.13 represents a freight liability thus set up by petitioner in its books of account in 1921. The item of $154.29 represents a freight liability thus set up in its books of account in 1922. No freight bill, *944 draft, or claim has ever been received by the petitioner covering either of these items and they have not been paid. Item (d) - freight war tax refunds. - The freight war tax refund was a refund made by railroads to petitioner upon documentary proof that coal loaded into boats at Lake Erie ports had been consigned to and actually discharged at Canadian ports. Immediately upon arrival of the vessel at a Canadian port petitioner filled out a claim for refund of the tax and refund was usually made within a week or two after the boat was discharged. The petitioner received refunds of freight war tax in the total amount of $987.61, which it had never paid over to whoever was entitled thereto, and for which it had never received any claim. The petitioner does not know to whom it owes this refund set up as a liability on its books. The amount of such refunds has remained unchanged upon petitioner's books of account since 1922. Item (h) - suspense account. - This suspense account is a "carrying account for items of all kinds and descriptions that are not finally disposed of." It contains items, representing "duplicating payments, small balances in account, both debit and*945 credit and most all kinds of transactions." It contains credit items which were later reversed when final disposition of such items was made. In most instances the items were not created or incurred in the year in which the entry was made. The following is a statement of the entries by year to the suspense account: Balance at close of year Year Debits Credits Debit Credit [1914] $2,073.80 $2,073.80 [1915] $847.08 1,226.72 [1916] 876.28 1,126.69 976.31 [1917] 99.60 650.57 425.34 [1918] 689.25 $263.91 [1919] 567.04 1,493.73 1,190.60 [1920] 1,092.24 3,659.57 3,757.93 [1921] 986.09 741.64 3,513.48 [1922] 3.02 3,501.00 7,011.46 [1923] 246.07 203.69 6,969.08 [1924] 556.84 232.94 6.645.18 [1925] 2.00 6,647.18 [1926] 206.87 6,854.05 [1927] 6,458,86 13,312.91 [1928] 5,732.85 19,045.76 *540 Item (i) - unclaimed wages - Standard Island Creek Coal Co. - The balance in this account of $3,982.31 at December 31, 1922, represents unclaimed wages earned by men employed by Standard Island Creek Coal Co. at its mines and accrued on the books of account of such company as follows: [1917] $504.62 [1918] 25.64 [1919] 652.68 [1920] 464.99 [1921] $905.86 [1922] 1,128.52 Total 3,982.31 *946 The money with which to pay the employees was sent to the mine, but they never called for it, and such wages still remain unclaimed and unpaid. These amounts were charged to expense for each year. Item (j) - unclaimed wages - Powhatan Mining Co. - The balance on December 31, 1922, in this account in the amount of $1,374.98 represents an accumulation of unclaimed and unpaid wages for work performed at the Jhnson River Mine prior to December 31, 1922. The Powhatan Mining Co. was incorporated in December 1925, and took over the Johnson River Mine and other property as of January 1, 1926. The Cleveland & Western Coal Co. (now the petitioner) owned the mine prior to January 1, 1926, and had acquired it from the A. J. Morgan Coal Co. The A. J. Morgan Coal Co. operated the Johnson River Mine from 1917 to 1920, inclusive. The Cleveland & Western Coal Co. operated the mine from January 1, 1921, to December 31, 1925. The Powhatan Mining Co. operated the mine from January 1, 1926, through March 1927, when the mine was closed because of a strike. Since then the mine never has been reopened and no men were employed there except a watchman for a while thereafter. The following*947 is a statement made from reports made by the traveling auditor in 1920, reports of the mine clerk made thereafter, and the general ledger, showing the amounts accrued for unclaimed wages and amounts thereof paid: Subsequent Amount Credit balance payment unclaimed 1917, 1918, 1919 $ 520.02 $ 520.02 [1920] $ 91.16 402.47 311.31 [1921] 31.18 103.78 72.60 [1922] 181.12 651.64 470.52 Unaccounted for .53 Total 1,374.98 These items of unclaimed wages of the Johnson River Mine are liabilities of the various companies for the year or years in which each operated such mine. The amount of $ 1,374.45 was transferred in 1931 to the surplus adjustment account and restored to income. In general. - In September 1931 the 10 items involved herein were transferred to surplus adjustment account. All items were reported *541 as income in the income tax returns for 1931 and the tax thereon has been paid. No claims were made against petitioner relative to any of these accounts after they were closed into surplus in 1931. The petitioner never set up the statute of limitations as a bar to any claim made in connection with any of the*948 items involved herein. The respondent, in determining the tax liability of the petitioner, restored to its income for 1927 items (a), (b), (c), and (d), and for 1928 items (e), (f), (g), (h), (i), and (j), for the reason, as stated in substance in the letters of deficiency, that the various liabilities set up in the accounts were incurred more than six years prior to 1927 or 1928, respectively, and were, therefore, outlawed under the statute of limitations of Ohio. OPINION. MCMAHON: At the hearing counsel for respondent stated as follows: Our theory of the case is that the statute gives the privilege to the Commissioner to check the books of the taxpayer and see whether they did reflect income, and if they did not, then make adjustments that do reflect income. * * * * * * I think we can agree with him [counsel for petitioner] that we could not set up the statute of limitations in this connection. But, there comes a time when it is unreasonable to carry these longer. There are various factors to be taken into consideration in determining whether they are or are not accounts payable. * * * The Commissioner has been liberal in its dealings and [has] not attempted*949 to set them up or set up the statute of limitations and throw them into income, but has allowed them to run along until 1927 for the first time. He challenged these items, and said not only are your creditors unknown, or the nature of their claims uncertain, but the statute has now run. Now, what are we going to do, where are we going to draw the line when we are going to throw them into income. He sees it [He seized] upon this particular year because of the accumulation of all these items and the running of the statute of limitations. Now, all that he is doing is challenging the fact that they are no longer true accounts payable. As conceded above by counsel for respondent, the tolling of the statutory period does not ipso facto change a deductible liability into taxable income. In G. M. Standifer Construction Corporation,30 B.T.A. 184, the Board stated: * * * Local statutes are not decisive of what constitutes income, Burnet v. Harmel,287 U.S. 103, nor what deductions may be taken. *950 Weiss v. Wiener,279 U.S. 333. We are of course bound to follow established state rules of property, Warburton v. White,176 U.S. 484, but there is no property right in a statute of limitations which affects the remedy alone and not the obligation. Campbell v. Holt,115 U.S. 620. So it has been held that local statutes *542 of limitations barring collection of debts are not sufficient to constitute ascertainment of worthlessness. Leo Stein,4 B.T.A. 1016; Ralph H. Cross,20 B.T.A. 929; affd., 54 Fed.(2d) 781. This disposes, adversely to petitioner, of its contention that if the statutory period of limitations is invoked to restore accounts payable to income, it must be limited to accounts which are exactly six years old, which is the statutory period of limitation of Ohio, and not to balances which include items more than six years old. Upon brief the respondent states, and correctly so, that the rule to be drawn from *951 Great Northern Railway Co. v. Lynch,292 Fed. 903, and T.D. 3147, 4 C.B. 277 based thereon; Chicago, Rock Island & Pacific Railway Co.,13 B.T.A. 988; affd., 47 Fed.(2d) 990; and Charleston & Western Carolina Railway Co.,17 B.T.A. 569; affd., 59 Fed.(2d) 342, is that "when a reserve or liability account, properly created in an earlier year, has ceased to be a true liability or reserve in a later year, it should be reversed and the amount thereof should be added to the income of the year when reversed." In this proceeding the petitioner did not reverse the items on its books of account until 1931. However, in that year when it reversed the items it does not appear that the petitioner determined that such accounts should be reversed because prevailing conditions disclosed that they had ceased to be liabilities in 1931, but, as stated by its counsel, this was done by the petitioner, after the notices of deficiency herein had been received, at his suggestion made to petitioner and the Bureau in an attempt to "settle this question with the Department in view of the fact that four different years*952 involved the same question." Presumably, without such suggestion the petitioner would not have reversed the items even in 1931. However, assuming that it had of its own volition reversed the items on its books either in 1931 or in any year prior thereto, such entries on its books would not have been controlling here. The United States Supreme Court, in Doyle v. Mitchell Bros. Co.,247 U.S. 179, stated that books of account "are no more than evidential, being neither indispensable nor conclusive. The decision must rest upon the actual facts." The Board stated in Daily Record Co.,13 B.T.A. 458, that "It is well settled that the income of the petitioner is to be determined by actual facts as to which the books of account are only evidential. Doyle v. Mitchell,235 Fed. 686; Southern Pacific Co. v. Muenter,260 Fed. 837." To the same effect are James William Everhart,26 B.T.A. 318, and cases cited therein. Nor does the failure of the petitioner to reverse in 1927 and 1928 the items involved, without other evidence showing that the petitioner was in 1927 and 1928 obligated to pay such*953 accounts, establish that such items represented valid and subsisting liabilities in 1927 *543 and 1928. A "failure to record an item as income [does not] permit it to escape taxation when the time arrives that it represents income." G. M. Standifer Construction Corporation, supra. The petitioner emphasizes the fact that it never set up the bar of the statute of limitations against any claim made in respect to any of the items involved herein and this apparently is the only ground upon which rests the petitioner's contention that the items were liabilities in 1927 and 1928. However, this policy alone does not justify indefinitely postponing the restoration of such items to income. While it was testified that petitioner never set up the statute of limitations as a bar to any claim in connection with these accounts, there is no evidence that claims were ever made as to these accounts after the expiration of the statutory period. There is no evidence showing that the petitioner carried out this policy to the extent of expressly acknowledging to any creditor, after the tolling of the statutory period, its liability for any items set up in these accounts. *954 There is no evidence that any item so set up was ever paid after the tolling of the statutory period. There is no evidence indicating that this policy was ever made known to creditors generally and that they relied thereon. All the burden of establishing any claim against the petitioner, as between it and its creditors, for items so set up as liabilities rested upon petitioner's creditors, although these liabilities were set up and retained on its books as liabilities. The petitioner, so far as the record shows, made no effort to establish the identity of those to whom it owed the items so set up or to correct or reverse the entries made, but remained passive in the matter and waited for claims to be made. No claims were made as to the balances involved herein and they were permitted to remain upon the books as liabilities until 1931, when reversed at the suggestion of counsel as heretofore stated. There is no evidence showing that the petitioner was obligated in 1927 and 1928 to pay the items involved in whole or in part or that there were any creditors asserting claims for any of these items. The evidence presented by the petitioner pertains chiefly to the reasons for the*955 creation of the accounts involved, the nature thereof, the amounts of the entries and the years in which such entries were made. The respondent does not claim that any of the items involved were improperly created or set up as liabilities. The burden of proof is upon the petitioner to show that the respondent erred in his determination that petitioner's books of account did not clearly reflect income for the reason that the liability accounts involved did not, in 1927 and 1928, represent true liabilities and therefore should be restored to income. The failure of petitioner to sustain this burden requires approval of the respondent's determination in these respects. *544 The petitioner on brief suggests the question whether the returns for earlier years should not be amended and the income increased therein on the theory that excessive deductions were taken, either erroneously or by virtue of the fact that such deductions never became real through payment. Ordinarily errors should be corrected in the year made. However, while it appears from the evidence that some errors may have been made in earlier years, we are unable to determine what amount or amounts, if any, *956 were set up in error. Furthermore we have before us only the years 1927 and 1928 for redetermination of the deficiencies asserted by the respondent for those years; and hence our jurisdiction herein is limited to those years, to which we here confine ourselves. The determination of the respondent is therefore approved with an exception as follows: The petitioner, in its returns for the years involved, did not claim depreciation on the Johnson River tipple. However, upon reaudit of such returns, the respondent allowed $10,571.30 in 1927 and $5,285.65 in 1928. It was stipulated by counsel of the parties that petitioner is not entitled to depreciation on the Johnson River tipple as such tipple had been fully depreciated prior to the taxable years here involved. See North American Coal Corporation,28 B.T.A. 807, 848. Effect will be given to this stipulation upon recomputation of the deficiencies under Rule 50. Reviewed by the Board. Decision will be entered under Rule 50.