O'Sullivan Rubber Co. v. Commissioner

O'SULLIVAN RUBBER COMPANY, INC. (IN DISSOLUTION), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. O'Sullivan Rubber Co. v. Commissioner Docket No. 97399. United States Board of Tax Appeals 42 B.T.A. 721; 1940 BTA LEXIS 960; September 24, 1940, Promulgated *960 1. ACCRUAL. - An item need not be accrued as income for a year if at the end of the year there is no reasonable anticipation of its receipt when due. 2. PERSONAL HOLDING COMPANY - ANY CORPORATION. - A dissolved corporation continued under the laws to wind up its affairs is, during the period of liquidation, a corporation within the meaning of section 351 of the Revenue Act of 1934. 3. Id. - INTEREST. - Interest on purchase money notes is interest within the meaning of that term as used in section 351. Edward I. Devlin, Jr., Esq., and Peter V. D. Voorhees, Esq., for the petitioner. Conway N. Kitchen, Esq., for the respondent. MURDOCK *721 The Commissioner determined deficiencies as follows for the calendar year 1935: Income tax $467.50 Personal holding company 4,902.17 Penalty on latter for delinquency 1,225.54 The issues for decision are: (1) Whether the petitioner should have accrued an item of $3,400, representing interest for November and December on notes of the Langdon Co., payable in 1936: (2) Whether it should have accrued an item of $416.67, representing interest for a period in 1935 on bonds*961 of Boston & New York Airline Railway payable in 1936; (3) Whether the petitioner was a personal holding company within the provisions of section 351. FINDINGS OF FACT. The petitioner is a dissolved corporation in process of liquidation. It was organized under the laws of New York and it dissolved in the latter part of 1932. Since dissolution it has engaged in no business, but has endeavored to liquidate as rapidly as possible. *722 The petitioner made no distributions to its stockholders in 1935 because the amount available was small. Prior thereto it had distributed in liquidation about $7 per share. It had a deficit of about $2,000,000 in 1935, due in part to the prior liquidating distributions. The Commissioner ruled that the petitioner was exempt from capital stock taxes for 1933, 1934, and 1935 upon the ground that it was a dissolved corporation not doing business. The stock of the corporation consisted of $40,000 shares, which was held by 56 stockholders. Fifty percent of the outstanding stock was owned during the latter half of 1935 by not more than five individuals. At least 80 percent of the gross income of the petitioner for the taxable year was*962 interest. The petitioner did not file any personal holding company return for the taxable year. It filed with the collector of internal revenue for the second district of New York a corporation income and excess profits tax return for the taxable year. The corporation had been engaged in the business of selling rubber heels. It sold that business, consisting principally of good will, in October 1932 to the Victor Products Corporation for $600,000, payable in annual installments of $40,000 or more. Payments in the total amount of $42,313.85 were made up to July 1934. No further payments were made, but a new contract was entered into on May 1, 1935. The new contract reduced the unpaid purchase price to $340,000. Notes in that amount of the Langdon Co., endorsed by others, were given to the petitioner. Langdon was a subsidiary of the purchaser. Langdon owned, as its only asset, all of the stock of another subsidiary, known herein as O'Sullivan of Delaware, which operated the O'Sullivan rubber heel business. The notes called for interest payable semiannually and were as follows: Amount Maturity $60,000 May 1, 1936 60,000 May 1, 1937 60,000 May 1, 1938 $60,000 May 1, 1939 60,000 May 1, 1940 40,000 May 1, 1941 *963 The first interest on the notes was due on November 1, 1935. It was not paid until December 16, 1935, after the exertion of great pressure by the petitioner. Langdon had to borrow most of the money to pay it. The petitioner knew at the close of 1935 that Langdon had no assets except the stock of O'Sullivan of Delaware. It knew that O'Sullivan of Delaware was not prospering and the value of the stock was slight. Both Victor and Langdon had always defaulted in their payments to the petitioner. The petitioner decided not to accrue on its books for 1935 the interest on the notes for November and December 1935 because the payment of that interest was so extremely doubtful. The interest for those two *723 months in the amount of $3,400 was not accrued by the petitioner and was not reported by it as a part of its income for 1935. The Commissioner, in determining the deficiency, included the $3,400 in the income of the petitioner for 1935. Langdon was unable to pay the interest on May 1, 1936, but again borrowed most of the money and paid the interest in the latter part of July 1936, after the petitioner had agreed to extend for one year the note due on May 1, 1936. O'Sullivan*964 of Delaware paid dividends to Langdon as follows: December 21, 1935 $500.00 December 20, 1936 37,500.00 During 1937 32,208.75 The only payment of principal on the notes by Langdon was $10,000 paid on June 30, 1937. Other extensions were given. Finally, another arrangement was made and an individual paid some cash and gave his notes to the petitioner in lieu of the Langdon notes. The petitioner owned at the close of 1935 $25,000 face value of bonds of Boston and New York Airline Railway. The next interest payment date was February 1, 1936. The petitioner accrued on its books and reported as income for 1935 interest on those bonds in the amount of $416.67, which was payable on February 1, 1936. The interest was never paid and the petitioner sold the bonds for $7,000 in 1937. OPINION. MURDOCK: The debtor which owed the petitioner the $3,400 "was chronically suffering from financial embarrassment" and the "petitioner was in imminent danger, not only of not collecting the interest" but of losing the principal payments due it. Cf. *965 . The petitioner had no reasonable anticipation at the close of 1935 of receiving the interest when it became due. Since collection was so doubtful, it did not have to accrue the item of $3,400. Cf. ; appeal dismissed, ; certiorari denied, ; ; . The evidence does not show that at the close of 1935 there was any uncertainty about the collection of the interest on the Boston & New York Airline Railway bonds. The petitioner actually accrued the interest in the amount of $416.67. The mere fact of nonpayment is insufficient to show that it was not properly accrued. The reason given by a revenue agent for disallowing a loss for 1936 on that item is likewise insufficient to show that the accrual was improper for 1935. He may have been in error in denying the deduction for 1936. *724 The petitioner quotes the legislative history of section 351 of the Revenue*966 Act of 1934 to show that the purpose of Congress was not to penalize such a taxpayer as this one, which was not tainted with the faintest trace of the evil at which Congress aimed and which could not make a distribution taxable to its shareholders as an ordinary dividend. However, the only means of escape from the plain language of section 351 suggested by the petitioner is that it is not a corporation within the meaning of that word as used in section 351 of Title IA. It is inconsistent in not making the same contention in connection with its income tax liability, under Title I, since section 351(b)(4) of Title IA provides that "the terms used in this section shall have the same meaning as when used in Title I." The stockholding and income for the year bring it squarely within the definition of a personal holding company, if it is a corporation. See sec. 351(b)(1). The term "corporation" when used in the act, includes associations. Sec. 801(a)(2). The Commissioner has provided in article 801-2 of Regulations 86 that a corporation becomes an association if it continues to conduct its affairs after the expiration of its charter or after the termination of its existence. *967 The petitioner argues that there can be no association taxable as a corporation within the statute and the regulations where, as here, the dissolved corporation is carrying on no business but is merely winding up its affairs and liquidating. It attempts to find some analogy between itself and a liquidating trust. Cf. ; ; . We do not think, however, that either the regulation or the term "association" is necessary to bring this taxpayer within the term "corporation." This was not a trust but an actual corporation. The law of New York provides that after dissolution "Such corporation shall continue for the purpose of paying, satisfying and discharging any existing liabilities or obligations, collecting and distributing its assets and doing all other acts required to adjust and wind up its business and affairs, and may sue and be sued in its corporate name." Sec. 105, Stock Corporation Law of New York. See also Fletcher's Cyclopedia of the Law of Private Corporations, Permanent Ed. *968 , vol. 16, secs. 8113 and 8158. Thus, the petitioner was continued under the law as a corporation for the very purpose of doing those things which it did in 1935 (; ; ) and, clearly, it comes within the words "any corporation" used in section 351(b)(1) as those words are commonly understood. Cf. . Since the words of the act *725 are clear, we can not change them to relieve this taxpayer, even though we may feel that those words include more than was actually necessary to accomplish the purpose which Congress had in mind. The correction, if any is necessary, should come from Congress. The petitioner cites the regulations in an effort to show that interest in section 351 means only interest on loans, and reasons that, since its interest on the Langdon notes was not from loans, less than 80 percent of its income was from interest. We disagree with that argument. Interest there means the same as it does in Title I. Sec. 351(b)(4). *969 The penalty for failure to file a return is mandatory where no return is filed. Sec. 406, Revenue Act of 1935. ; . Reviewed by the Board. Decision will be entered under Rule 50.