30 T.C. 716 (1958), 56996, Shippen v. C.I.R.

Docket Nº:56996.
Citation:30 T.C. 716
Opinion Judge:PIERCE, Judge:
Attorney:Thomas R. Ward, Esq., and R. B. Deen, Jr., Esq. for the petitioner. Lester R. Uretz, Esq., for the respondent.
Case Date:June 25, 1958
Court:United States Tax Court

Page 716

30 T.C. 716 (1958)




No. 56996.

United States Tax Court.

June 25, 1958

Thomas R. Ward, Esq., and R. B. Deen, Jr., Esq. for the petitioner.

Lester R. Uretz, Esq., for the respondent.

1. By agreement of petitioner and his partner, petitioner's capital account in the partnership was charged as of December 31, 1951, with the unpaid balance of certain cash advances made by the firm to one of its suppliers; and a contra credit was made on the same date to the supplier's account. The reason for such action was, that petitioner had, in the partnership agreement, guaranteed collection of such accounts ‘ in a reasonable time,‘ and that the supplier had made no payment or shipments for credit to the account for at least 6 months. Held, that such charge to petitioner's capital account did not effect any reduction of his distributive share of the partnership income for the year; and also that said charge did not result in any business loss to petitioner for the year deductible under section 23(e) of the Code, or any bad debt loss for the year deductible under section 23(k), because petitioner failed to prove that said account was worthless at the end of the year 1951.

2. During the last 4 months of the following year 1952, petitioner personally made additional advances to the same supplier; and, at the end of the year, there was an unpaid balance for such advances. Held, that petitioner has not established that the account was worthless at the end of the year 1952; and, therefore, that he is not entitled to a bad debt deduction for the year, in respect of the same.

3. Held, that additions to tax should be imposed for the year 1950, for failure to file a declaration of estimated tax within the time prescribed and for substantial underestimate of estimated tax, under section 294(d)(1)(A) and (d)(2), respectively. Held, further, that an addition to tax for the year 1951 should be imposed under section 294(d)(1)(B), for failure to pay installments of estimated tax declared. Held, further, that certain adjustments in the computation of the additions to tax should be made.

PIERCE, Judge:

Respondent determined deficiencies in petitioner's income taxes, and also additions to tax, as follows:

Additions to tax

Year Deficiency

Sec. 294 Sec. 294 Sec. 294

(d) (1) (A) (d) (1) (B) (d) (2)

1950 $614.38 $1,738.86 $782.86

1951 7,128.03 $150.00

1952 5,486.62

Page 717 Claims made by petitioner to a net operating loss deduction for the year 1950, and also to a net operating loss deduction for the year 1952 as to which the respondent has made certain concessions, depend on the determination of the other issues hereinafter mentioned; and, accordingly, such claims will be given consideration in connection with the computations to be made under Rule 50. The issues presented for decision are: (1) Where petitioner had under the terms of an agreement between him and his partner guaranteed the collection within a reasonable time of certain accounts receivable of the partnership, and pursuant thereto petitioner's capital account with the firm was charged on December 31, 1951, with the net amount owing to the partnership for cash advances made to one of its suppliers, did such adjustment of petitioner's capital account- (a) Reduce the amount of petitioner's distributive share of the partnership income for said year; or (b) Cause petitioner to sustain a business loss which is deductible under section 23(e) of the 1939 Code; or (c) Cause petitioner to become entitled to a bad debt deduction under section 23(k) of the 1939 Code? (2) Is petitioner entitled to deduct as a bad debt in the following year 1952, an amount due him for other cash advances made by him personally to the same debtor? (3) Should additions to tax be imposed against petitioner- (a) In the year 1950, for failure to file a timely declaration of estimated tax, and for substantial underestimate of estimated tax; and (b) In the year 1951, for failure to pay installments of estimated tax in respect of the declaration of estimated tax filed by him? In connection with the latter issue, there also is a question as to whether, if additions to tax are due for failure to file a declaration of estimated tax for 1950 and for nonpayment of installments of estimated tax for the year 1951, the amounts of such additions to tax as determined by respondent were properly computed. FINDINGS OF FACT. Petitioner, at all times material, was a resident of Camp Hill, Alabama. He filed an individual income tax return for each of the Page 718 years involved with the collector or director of internal revenue for the district of Alabama. FACTS RE ACCOUNTS RECEIVABLE. Beginning in 1945 and throughout all years here involved, petitioner and Charles M. Kyne were partners, engaged in the business of buying and selling lumber at wholesale under the firm name of Alabama Poplar Co. Prior to June 11, 1951, they had no written partnership agreement; but as of the last-mentioned date, they executed an agreement which read as follows: PARTNERSHIP AGREEMENT BETWEEN CHARLES M. KYNE AND FRANK J. SHIPPEN This partnership agreement is being written to confirm an oral agreement which has been in effect since January 1, 1946, between Charles M. Kyne of 2354 Frankfort Ave., Louisville, Kentucky, and Frank J. Shippen, of Camp Hill, Alabama. The name of the partnership will be The Alabama Poplar Company. The sales office of the partnership shall be located at Camp Hill, Alabama, and the financial office at 2354 Frankfort Ave., Louisville, Kentucky. The purpose of the Partnership shall be to engage in the buying and selling of lumber only. Frank J. Shippen agrees to devote his entire time and abilities to the active operation of the business and to engage in no outside business of any kind at any time. Charles M. Kyne will endeavor to furnish sufficient capital for the operation of the enterprise within his financial capabilities which are to be determined by him only. Frank J. Shippen will personally guarantee the collection, in a reasonable time of credits given to customers, or advances to lumber mills for the securing of lumber. He will also see that satisfactory accounting and booking records are kept. These records are to be available to either partner at any time. Profits or losses of the Partnership will be based on gross profit at the end of the fiscal year which shall be December 31st of each year. Charles M. Kyne will receive one-third of the gross profit and Frank J. Shippen two-thirds of gross profit. Each partner will pay his own expenses incurred in the operation of the business. The Partnership may be terminated at any time by either partner by written notice to other partner. (s)CHARLES M. KYNE (s)FRANK J. SHIPPEN Said partnership neither owned nor operated a lumber mill, but obtained all of the lumber which it required in meeting its sales contracts, from mills operated by other persons. When business was good, the partnership found it difficult to obtain lumber from the better established mills because of the latter's backlogs of orders; and, in such circumstance, the partnership found it necessary to buy its lumber from smaller mills which were sometimes not too reliable. It frequently made cash advances to mill operators against lumber to be supplied by them. Page 719 During the year 1950, the partnership made several such cash advances to one of its suppliers, W. H. Cornish (also known as Henry Cornish), of Marion, Mississippi, who operated lumber mills as a sole proprietor under the name of Cornish Lumber Company. Various shipments of lumber were received from Cornish during the year 1950, and were applied against these advances; but at the end of that year, the balance remaining unpaid on the account was $24,303.61. During the first half of the following year 1951, petitioner's partnership made additional advances to Cornish and also charged him with certain amounts for unsatisfactory lumber received; and, as of June 12, 1951, the amount owing to the partnership on said account was $27,545.77. None of this debt was paid or otherwise satisfied during the remainder of the year 1951. Cornish, in the early part of the year 1950, engaged a certified public accountant, Donovan Ready, of Meridian, Mississippi, to prepare an application to the Reconstruction Finance Corporation for a loan of $175,000, to be used in his business. Ready worked on this application throughout the year 1950 and the early months of 1951; and in connection therewith, he made an extensive investigation of Cornish's financial situation, and worked closely with appraisers and inspectors for R.F.C. in determining the values of Cornish's property. Two of the instruments which Ready prepared in connection with his work, and which were submitted to the R.F.C., were a balance sheet as of April 4, 1951, which showed the amounts of Cornish's assets, liabilities, and net worth; and an operating statement which showed the result of Cornish's business operations for the period from January 1, to April 4, 1951. These instruments are summarized as follows:




Accounts receivable; inventory of logs; lumber and

supplies; cash surrender

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