Robbins Tire 7 Rubber Co. v. Comm'r of Internal Revenue, Docket No. 2287-67.

Citation52 T.C. 420
Decision Date12 June 1969
Docket NumberDocket No. 2287-67.
Parties*ROBBINS TIRE AND RUBBER COMPANY, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
CourtUnited States Tax Court

52 T.C. 420

*ROBBINS TIRE AND RUBBER COMPANY, INC., PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 2287-67.

Tax Court of the United States.

Filed June 12, 1969.


[52 T.C. 420]

Charles A. Poellnitz and James C. Herndon, for the petitioner.

Robert T. Hoffman, for the respondent.

Petitioner, an accrual basis taxpayer, and respondent entered into an agreement settling prior tax liabilities. During its taxable year ending Sept. 30, 1964, petitioner made certain payments pursuant to the terms of the settlement, in an amount less than the total of the compromised taxes and penalties. Held: In accordance with Rev. Rul. 58-239, 1958-1 C.B. 94, the payments are to be applied against the taxes, penalties, and interest, in that order, due for the earliest year, then to taxes, penalties, and interest, in that order, due for each succeeding year, until the payments are absorbed. The portions of the payments thus applied to interest liabilities are deductible for the taxable year 1964 under sec. 163(a), I.R.C. 1954. Held, further, petitioner's accruals of deductible interest are limited to the interest portions of the actual payments made.

FEATHERSTON, Judge:

Respondent determined a deficiency in petitioner's income tax for the taxable year ending September 30, 1964,1 in the amount of $173,180.40. Certain issues have been resolved by stipulation. Also, respondent concedes on brief that petitioner is entitled to an interest deduction for the taxable year 1964, in addition to that allowed in the notice of deficiency, of $540,002.16 paid with respect to income tax deficiencies for the taxable years 1952 through 1956. The sole issue remaining is what amount, if any, is petitioner entitled to deduct as interest under section 163(a)2 for the taxable year 1964, where the payments made during that year pursuant to a settlement of prior tax liabilities were less than the amount of taxes and penalties, exclusive of interest, covered by the settlement.

FINDINGS OF FACT

Robbins Tire & Rubber Co., Inc. (hereinafter referred to as petitioner) in an Alabama corporation, having its principal place of business at Tuscumbia, Ala. Petitioner filed its income tax return for the taxable year 1964 with the district director of internal revenue, Birmingham, Ala. (hereinafter district director). For all taxable years

[52 T.C. 421]

pertinent to this proceeding, petitioner maintained its books of account and filed its income tax returns on the accrual basis of accounting.

From the time of its organization in 1940 until the present, petitioner has been in the business of manufacturing rubber automobile tubes for tires, tread rubber, and, from time to time, miscellaneous rubber products.

Upon examination of the income tax and excess profits tax returns filed by petitioner for the taxable years 1942 through 1959, respondent determined deficiencies or overassessments in income, declared-value excess profits, and excess profits taxes and penalties for each taxable year except 1948 and 1949. Petitioner filed petitions with this Court contesting the deficiencies and penalties. These deficiencies, penalties, and overassessments, and the docket numbers in this Court (excluding the taxable years 1952 to 1956), were as follows:

+------+
                ¦TABLE ¦
                ¦I ¦
                +------¦
                ¦¦¦¦¦¦¦¦
                +------+
                
Docket No. Taxable year Income tax Excess profits tax Penalty
                 (1942 $17,007.81 $104,511.44
                 (1943 (4,265.84) O/A 48,732.66 $24,366.33
                 (1944 9,738.07 DVEP 4,869.04
                70072 (1944 (6,583.75) O/A 224,223.35 112,111.68
                 (1945 (11,631.72) O/A 263,380.45 118,801.63
                 (1946 150,782.99 63,714.80
                 (1946 225,208.87 94,287.51
                70071 1947 166,399.05 65,844.72
                 (1950 186,062.27
                 (1951 642,177.67
                467-62 (1957 59,288.68
                 (1958 74,153.91
                 (1959 34,298.04
                Total 1,382.114.99 801,368.96 483,995.71
                

Upon examination of the income tax returns filed by petitioner for the taxable years 1960 through 1963, respondent proposed the following deficiencies and penalty:

+-----------------+
                ¦TABLE II ¦
                +-----------------¦
                ¦¦¦Penalty sec. ¦
                +-----------------+
                
Taxable year Income tax 6655
                1960 $21,486.55
                1961 12,203.64
                1962 4,961.99
                1963 32,341.56 $898.65
                Total 70,993.74 898.65
                

[52 T.C. 422]

Respondent assessed manufacturer's excise taxes, fraud penalties, and interest against petitioner for the periods January 1, 1944, through December 31, 1948, and September 1, 1949, through September 30, 1953, as follows:

+---------+
                ¦TABLE III¦
                +---------¦
                ¦ ¦ ¦ ¦ ¦ ¦
                +---------+
                
Taxable year Date Excise tax Penalty Interest
                 assessed
                January to September 1944 11/ 8/56 $20,823.53 $85,642.66 $15,553.42
                1945 11/ 8/56 18,748.79 216,849.65 12,909.68
                1946 11/ 8/56 92,777.78 651,778.85 57,810.04
                1947 11/ 8/56 30,184.23 375,090.60 17,356.85
                1948 11/ 8/56 12,812.86 64,063.15 6,509.01
                October to December 1948 11/ 8/56 55.51 5,877.57 26.01
                September 1949 1 9/12/56 211,661.81 105,967.41 44,481.08
                1950 1 9/12/56 325,053.22 189,523.06 97,318.29
                1951 1 9/12/56 536,525.00 306,140.38 162,647.70
                1952 9/12/56 1,059,274.43 71,232.86 250,760.45
                1953 9/12/56 324,220.41 356,081.26 63,709.32
                (2 ) 11/27/59 30,354.67 7,588.68 6,174.23
                1949-53 3 1/12/61 6,690.07 183,815.61 171,346.63
                Total 2,669,182.31 2,619,651.74 906,602.71
                

On October 11, 1957, petitioner filed two claims with the district director requesting administrative abatement of all the taxes, penalties, and interest assessed on September 12, 1956, and November 8, 1956, except for the assessments of tax for the periods following July 1952.

By September 30, 1963, petitioner had made the following payments on the assessed excise tax liabilities:

+---------+
                ¦TABLE IV ¦
                +---------¦
                ¦ ¦ ¦
                +---------+
                
Taxable year Amount paid
                1952 $40,272.30
                1953 120,000.00
                1954 120,000.00
                1955 110,000.00
                1956 560,000.00
                1957 382,000.00
                1958 382,219.80
                1959 676,471.14
                1960 120,000.00
                1961 255,048.17
                1962 131,216.84
                1963 120,000.00
                Total 3,017,228.25
                

No part of these assessments or payments resulted, any any time, in a deduction for income tax purposes.

Petitioner claimed deductions, for the taxable years 1957 through 1963, for interest accrued3 on the assessments of excise tax underpayments as follows:

+-------+
                ¦TABLE V¦
                +-------¦
                ¦ ¦ ¦ ¦ ¦
                +-------+
                
Taxable year Accrued Amount Amount not
                 interest deducted deducted
                1955 1 $128,430.54 $128,430.54
                1956 9,333.34 $9,333.34
                1957 269,160.95 124,491.01 144,669.94
                1958 257,219.40 111,166.63 146,052.77
                1959 217,012.69 71,208.37 145,804.32
                1960 203,095.69 53,966.67 149,129.02
                1961 208,865.41 44,042.23 164,823.18
                1962 201,959.67 31,863.19 170,096.48
                1963 194,037.27 24,226.77 169,810.50
                Oct. 1, 1963, through Mar. 31, 1964 94,305.39 94,305.39
                Total 1,783,420.35 589,395.41 1,194,024.94
                

Petitioner's unpaid liabilities for excise taxes, penalties, and interest as of the date of the acceptance of the excise tax offer in compromise were as follows:7

+--------------+
                ¦TABLE X 1 ¦
                +--------------¦
                ¦ ¦ ¦ ¦ ¦ ¦
                +--------------+
                
 Unpaid amount Percent to total
                Excise taxes $407,201.98 7.343
                Penalties 2,585,947.32 46.634
                Assessed interest $897,030.96 16.177
                Accrued interest 1,654,989.81 29.846
                Total interest 2,552,020.77 46.023
                Total 5,545,170.07 100.000
                

--------

Notes:

1 The figures for these periods reflect amounts of assessed interest abated on May 2, 1957.

2 The precise period for which these assessments were made is not indicated in the record.

3 The figures for this period reflect amounts abated on Mar. 13, 1961.

1 Not based on assessments.

[52 T.C. 423]

No deduction was ever claimed, or reflected on petitioner's books, for any interest accrued on the assessments of penalties. Furthermore, no deduction was ever claimed for assessed interest, /4/ except for the taxable year 1956 in which a deduction was claimed in the amount of $157,395.34. However, assessed interest has been entered on petitioner's books of account since the taxable year 1955.

These claimed interest deductions were disallowed by respondent on the ground that the assessments were being contested by petitioner.5 Thus, at no time did petitioner receive a deduction for any interest, accrued or assessed, relative to its excise tax liabilities. Furthermore, at no time any interest deduction claimed with respect to the income tax liabilities which were under contest. See Table I.

All assessments of excise taxes, and penalties and interest thereon, for the periods after September 30, 1953, were paid by petitioner. However, petitioner of the validity of certain excise taxes and penalties asserted by respondent, four taxable excise periods would be selected and made the subjects of suits for refund. Pursuant to this agreement, refund suits were filed in the U.S. District Court for the Northern District of Alabama as follows:

+---------+
                ¦TABLE VI ¦
                +---------¦
                ¦ ¦ ¦ ¦ ¦ ¦
                +---------+
                
 Civil Excise
                Taxable period action tax Penalty Interest
                 No
                November 1947 1169 $3,565.51 $1,206.99
                January 1948 1175 3,616.65 940.99
                November 1952 1171 29,680.47 10,801.80
                4th quarter 1958 1137 $18.01
                Total 18.01 36,862.63 12,949.78
                

[52 T.C. 424]

These suits were disposed of by a settlement stipulation entered into by the parties on April 4, 1963, pursuant to which petitioner was allowed a total overpayment, including interest, of.$43,285.17. This amount was credited by the district director against petitioner's excise tax liabilities on August 26, 1963, as follows: $9 credited against tax, $33,704.42 against penalties, and $9,571.75 against interest. The cases numbered 1169, 1171, and 1175, involving the fraud penalty under section 3612(d)(2), I.R.C. 1939, were settled on the basis of computing the penalties for each period under section 6653(b).6 Case No. 1137, involving a product known as Decowal, was settled on the basis of crediting petitioner with 50 percent of the amount involved. The stipulation specifically provided that ‘the basis of settlement of these cases shall not be binding on either party with respect to periods not in suit.’

On November 1, 1956, petitioner and the district director executed a trust agreement to secure...

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