COMMISSIONER OF INTERNAL REVENUE v. SPRING CITY F. CO., 4912

• Decision Date: 10 November 1933
• Docket Number: 4994.,No. 4912,4912
• Citation: 67 F.2d 385
• Parties: COMMISSIONER OF INTERNAL REVENUE v. SPRING CITY FOUNDRY CO. SPRING CITY FOUNDRY CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Seventh Circuit

67 F.2d 385 (1933)

COMMISSIONER OF INTERNAL REVENUE v. SPRING CITY FOUNDRY CO.

SPRING CITY FOUNDRY CO. v. COMMISSIONER OF INTERNAL REVENUE.

Nos. 4912, 4994.

Circuit Court of Appeals, Seventh Circuit.

November 10, 1933.

G. A. Youngquist, Asst. Atty. Gen., Sewall Key and William H. Riley, Jr., Sp. Assts. to Atty. Gen., Pat Malloy, Asst. Atty. Gen., and F. Edward Mitchell, Sp. Asst. to Atty. Gen., for Commissioner of Internal Revenue.

Edgar L. Wood and Richard H. Tyrrell, both of Milwaukee, Wis., for Spring City Foundry Co.

Before ALSCHULER, EVANS, and SPARKS, Circuit Judges.

EVANS, Circuit Judge (after stating the facts as above).

The taxpayer was a Wisconsin corporation engaged in manufacturing automobile castings. It sold certain of its goods to Cotta Transmission Company of Rockford, Illinois, which company became indebted to it in 1920, in the sum of $39,983.27.

In the fall of 1920 the debtor's financial breathing became labored. It was unable to meet its obligations and frankly wrote to its creditors asking for a five year extension of credit. Pursuant to this request, the creditors met and appointed a creditors' committee who in turn selected an auditing company to examine the debtor's books. Pending such report a committee of Rockford citizens, interested in keeping the plant going, offered the creditors thirty-three and one-third cents for each dollar of unsecured claims. The creditors declined the offer. The citizens then offered forty cents on the dollar, and the offer was accepted. The time limit for fulfilment was short, and the citizens' committee failed to raise the money within the specified time, which was extended one week. The debtor was, upon petition of three creditors, thereupon adjudged a bankrupt. A receiver was appointed December 24, 1920, who immediately took possession of the property and conducted the business in a desultory sort of a way until the property was sold early in 1922.

The company's books showed it had conducted a successful business from 1911 to 1919, inclusive. Each year showed a substantial profit, and the volume of business grew from $100,000 to $1,963,000. Each year's business was conducted at a profit, the smallest amount being $2,702 and the largest year's profit being $70,203. In 1911, the capital stock was $39,600; raised in 1917 to $100,000. In 1919, it was increased by the addition of $166,000 preferred stock, and this amount was again increased in 1920. For reasons not appearing, the business turned sour in 1920, and for the first nine and one-half months of that year there was a loss of $84,790.

One asset item entitled to particular consideration was that known as the plant. It was carried on the books of the company at $425,714.91, which figure was accepted by the company making the audit. This item included land, $6,017; factory building, $55,328; building equipment, $23,722; machinery, $126,375; tool equipment, $192,323; and sundry equipment such as furniture, fixtures, hardening plant, etc., $21,946. Some of the goods manufactured were covered by patents which belonged to the debtor. There is no evidence of patent value other than that which might be inferred from the volume and growth of debtor's business.

Early in 1922, the receiver sold the plant for $175,000 and paid dividends to common creditors, aggregating 27½ per cent.

The appeals raise two questions, both of which bear on the taxpayer's deduction from 1920 income: (a) Was the account, for which the taxpayer claimed a deduction of the whole amount, worthless? (b) If not worthless, was the taxpayer in 1920 permitted to deduct a sum which measured its depreciation?

Was the account worthless?

We could justifiably answer this question by observing that the evidence was such as to warrant the negative answer which the Commissioner and the Board of Tax Appeals gave to it. And it might be added that there was evidence sufficient to sustain an affirmative answer. In other words, the testimony was conflicting, or at least conflicting inferences were deducible therefrom. Nevertheless, as counsel strongly attacked the Board's finding and as the outcome of its appeal depends on the success of this attack, we will discuss the evidence.

That the account was not good, not worth even fifty cents on the dollar, is established rather clearly. This is shown by the fact that the creditors, after learning of the debtor's embarrassment, appointed a committee which investigated the debtor's business affairs, and, after such investigation, secured an audit, and, on the receipt of a report on the debtor's business, agreed to take forty cents on the dollar for unsecured accounts.

That the account was not entirely worthless seems equally well established by the fact that the creditors refused to accept a cash offer of thirty-three cents on the dollar. This offer was made in December, 1920, the same month that petitioner charged its account off as worthless. From this evidence alone, the Board was justified in finding that the account was not worthless.

There was, too, the statement of an audit company. True, this audit was one of those valueless statements so commonly made where a balance is struck by copying figures furnished by the company and which showed the amount of the debts on the one side and a statement of the assets on the other. The purported value of the assets appearing in the audit had not the remotest relation to current values. This audit was well nigh worthless, but if it had any value at all, it showed the company was solvent, on which hypothesis the account was worth its face value.

Finally, supporting the Board's...