Southeastern Finance Co. v. Comm'r of Internal Revenue, Docket No. 601.

• Decision Date: 31 March 1945
• Docket Number: Docket No. 601.
• Citation: 4 T.C. 1069
• Parties: SOUTHEASTERN FINANCE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

4 T.C. 1069

SOUTHEASTERN FINANCE COMPANY, PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 601.

Tax Court of the United States.

Promulgated March 31, 1945.

1. Under certain contracts with dealers in merchandise petitioner received conditional sales contracts and supporting installment notes executed by purchasers of merchandise from the dealers. Under the contracts with the dealers petitioner agreed to pay the dealers 100 percent of the amounts of the unmatured installments and of this 100 percent petitioner agreed to, and did, advance 70 percent less its ‘charges‘ when the paper was received and accepted by it. The remaining 30 percent was to be, and was, paid the dealers only after the receipt by the petitioner, in the case of each installment note, of the full amount due thereon. In certain eventualities the dealers were obligated to repurchase the paper by payment of the entire unpaid balance thereof and payment of all installment notes at maturity was warranted by the dealers. Held, that the amount of its ‘charges‘ received by petitioner constituted interest; held, further, that petitioner was a personal holding company and the respondent did not err in taxing it as such.

2. Petitioner failed to file timely personal holding company tax returns. Held, that it is liable for the statutory penalty in failing to so file such returns.

3. Held, that certain additions to petitioner's reserve for bad debts were reasonable and therefore deductible from its gross income.

4. On March 1, 1941, petitioner declared a dividend payable in its stock or in cash. One stockholder requested and was paid his dividend in cash and the other stockholders requested and were paid their dividends in stock. Held, that the portion of the dividend paid in stock was a taxable dividend in the hands of the shareholders, and petitioner is entitled to have the entire dividend included as dividends paid in computing its basic surtax credit for the purpose of determining its dividends paid credit.

5. On August 25, 1941, petitioner declared a dividend and paid same during the taxable year ended August 31, 1941, in petitioner's stock. Held, that the dividend so paid was not taxable in the hands of the stockholders and is not to be included as dividends paid in computing the basic surtax credit in determining petitioner's dividends paid credit.

[4 T.C. 1070]

Herbert D. Cohen, Esq., for the petitioner.

Bernard D. Hathcock, Esq., for the respondent.

Respondent determined deficiencies and penalties as to petitioner's income tax, excess profits tax, and personal holding company surtax for the fiscal years ended August 31, 1940 and 1941, as follows:

+----+
                ¦¦¦¦¦¦
                +----+
                

 Deficiency Personal holding company
                 surtax
                

Year ended—
                 Income tax Excess profits Deficiency 25% penalty
                 tax
                Aug. 31, 1940 $228.50 $1,039.68 $259.92
                Aug. 31, 1941 2,934.49 $2,957.04 22,106.25 5,526.56
                 1 990.18 247.55
                

Respondent conceded at the hearing that the penalty computed at 25 percent for the fiscal year ended August 31, 1941, should have been computed at the rate of 5 percent, and further conceded that petitioner had paid, on December 15, 1941, the tax of $659.84 assessed on its delinquent personal holding company return for the fiscal year ended August 31, 1941, and had also paid, on March 25, 1942, the 5 percent penalty of $32.99 assessed thereon. Effect to these concessions will be given under Rule 50. The foregoing deficiencies result from respondent's determinations:

(1) That the petitioner was a personal holding company during the years involved and was taxable as such.

(2) That petitioner is liable for the statutory penalties during the

[4 T.C. 1071]

years involved provided for failure to file timely personal holding company returns.

(3) That amounts deducted by the petitioner from gross income during the taxable years as a reserve for bad debts and as an addition thereto should be disallowed as ‘excessive.‘

(4) That petitioner had a net income of $1,828 instead of a net loss of $739.92 in the taxable year ended August 31, 1940, and that consequently petitioner is not entitled to a net operating loss deduction of $739.92 claimed in its income tax return for the taxable year ended August 31, 1941.

(5) That an excess profits credit of $443.84 claimed by petitioner for the taxable year ended August 31, 1941, and based on a claimed investment in that year of $2,000 for 81 days in petitioner's stock by its president, W. M. Redelsheimer, should be disallowed.

(6) That petitioner is not entitled to $23,400 of a $23,800 dividends paid credit claimed by petitioner in the computation of its personal holding company surtax liability for the year ended August 31, 1941.

Petitioner contests the foregoing determinations.

FINDINGS OF FACT. Issue 1.

The petitioner is a corporation organized under the laws of the State of Florida, with its principal place of business at Miami, Florida. It was incorporated August 31, 1939, and began business operations March 27, 1940. It filed its tax returns on an accrual basis with the collector for the district of Florida. Its fiscal year ended on August 31.

Petitioner had 122.4 shares of capital stock outstanding on August 31, 1941, all of which was common stock. Of this stock 2.4 shares were owned by its president, W. M. Redelsheimer, and the remainder was owned or controlled by Charles Greenfield and Marvin Bronner, or members of their families.

Petitioner reported in its income tax returns for the taxable years that it was engaged in the business of ‘industrial and commercial loans.‘ It was then actually engaged in the business of discounting and rediscounting conditional sales contracts, and supporting installment notes, chattel mortgages, and other evidences of debt. It also made direct loans, with or without collateral, charging interest thereon.

Petitioner's original customer, and the one from which it received the greater part of the conditional sales contracts and notes involved herein, was the Maxwell Co., which was engaged in the business of selling furniture and equipment for hotels and restaurants. A majority

[4 T.C. 1072]

of its stock was owned or controlled by the Greenfield and Bronner families, who also owned the controlling stock in petitioner. Petitioner's president and general manager had been credit manager of the Maxwell Co. for several years before the petitioner was organized.

Petitioner and the Maxwell Co., under date of July 24, 1941, executed a contract which governed their transactions with each other. It was retroactive and reflected the oral arrangements under which all such transactions between them had been conducted prior to its execution. This contract was, in part, as follows:

WITNESSETH, THAT WHEREAS, the first party (The Maxwell Company Inc.) is desirous of obtaining the advantages of the services offered by the second party, which the second party hereby undertakes to perform, and desires to discount with second party Notes, Conditional Sales or Lease Contracts, and Chattel Mortgages or other Lien Instruments, hereinafter designated ‘Paper‘ evidencing sales and deliveries of merchandise usually dealt in by the first party, which paper shall reserve title to or a lien upon such merchandise.

NOW, THEREFORE, in consideration of the premises, the parties hereby agree as follows:

FIRST: Second party agrees to discount such paper belonging to first part (sic) as may be acceptable to second party and to advance thereon:

One Hundred per cent (100%) of the unmatured installments on paper acceptable to first party, of which Seventy per cent. (70%) of the actual net amount thereof, less the compensation and reimbursement of the second party as provided in Paragraph Fourth hereof, shall be paid in cash upon acceptance of such paper by the second party, and the remaining Thirty per cent. (30%), less any deductions and plus any interest paid by the respective debtors, shall, in the case of each installment, be paid to the first party on the tenth (10th) day of the following month: provided, however, that no payments of such remainder need be made by the second party, so long as any paper discounted by the second party from the first party shall be in any manner affected by any breach or violation of any warranty of the first part (sic) herein, but such remainder and any moneys, paper or property of the first party which may come into the possession of the second party may be by it held and thereafter applied to the payment of any such paper or any other obligations of first party to second party whether due or not due.

THIRD: The second party agrees to perform the following services for the first party:

1. To furnish by mail to the first party its credit information in hand about the customers of the first party, upon request of the first party.

2. Pay for all accounting, postage and credit investigations of paper discounted or offered for discount hereunder.

3. Obtain and have on hand at all times, sufficient funds to make prompt remittance to first party for all acceptable paper within the limits herein agreed upon.

4. Place its collection department at disposal of first party, and endeavor to collect from debtors any paper discounted hereunder.

5. Have its auditors give to the first party the report of each examination herein provided for, with full information and advice as to the most desirable method of keeping the books, records, and accounts of said first party.

[4 T.C. 1073]

FOURTH: In consideration of the foregoing the first party agrees to pay the second part, (sic) as and for its total compensation for the obligation to render and/or the rendering of all services and other considerations herein set forth, an amount which reduces the face value of the paper discounted hereunder, and, which shall be a sum equal to one and two-tenths per cent. (1 2/10%) per month of the net balance scheduled to be due on paper each month.

FIFTH: In consideration of the prompt discount of, and remittance for, paper...