AMERICAN ARCH COMPANY v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 77269.

• Decision Date: 12 December 1935
• Docket Number: Docket No. 77269.
• Parties: AMERICAN ARCH COMPANY AND SUBSIDIARY, AMERICAN ARCH COMPANY, INC., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

33 B.T.A. 705 (1935)

AMERICAN ARCH COMPANY AND SUBSIDIARY, AMERICAN ARCH COMPANY, INC., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 77269.

Board of Tax Appeals.

Promulgated December 12, 1935.

George A. Price and H. W. Muller, for the petitioners.

R. N. McMillan, Esq., and Wilford H. Payne, Esq., for the respondent.

OPINION.

SEAWELL:

All of the evidence in these proceedings is embodied in a stipulation of facts, which is incorporated herein by reference as our findings of fact.

The American Arch Co., the petitioner herein, was organized in 1917 under the laws of Delaware, and the American Arch Co., Inc., was organized in 1920. Thereafter the corporations filed consolidated returns each year to and including 1921, in which they reported net income on the accrual basis.

For the fiscal years ended February 28, 1918, and February 28, 1919, the 10-month period ended December 31, 1919, and the calendar years 1920 and 1921, the petitioner claimed depreciation on certain patents owned by it on the basis of a useful life of 19½ years. As a result of a suit brought sometime prior to 1922 involving infringement of the patents, the petitioner determined that the patents had a useful life of only 17 years, and in its income tax return for 1921 it accordingly claimed depreciation on the patents on the basis of a life of 17 years. The return for 1921, showing a tax liability of $239,970.72, was accompanied by amended returns for the four preceding taxable periods, in which depreciation on the patents was recomputed on the basis of a 17-year life. The petitioner requested that the overpayments of tax in the amount of $128,160.21, as disclosed by the amended returns, be applied as a credit against its income tax liability for 1921.

In 1926, prior to any action by the respondent on the petitioner's claim for credit, the petitioner, upon the presentation of a writ of distraint by the collector, paid the remaining portion of $128,160.21 of its 1921 income tax liability, plus interest and penalty in the amount of $26,913.64, a total of $155,073.85. The petitioner, in pursuance of its contention that it should not be required to pay the tax and interest demanded by the collector for 1921, in view of the fact that it expected its claim for overpayment of tax for the years 1917 to 1920, inclusive, would eventually be allowed by the Commissioner, then set up on its books an account receivable under the title "Claim for United States Government Tax Refund" in the amount of $155,073.85. As the result of such entry, the petitioner failed to claim a deduction in its 1926 return for the interest and penalty paid in the amount of $26,913.64.

The income tax liability for the petitioner for 1921 was redetermined by the Board on February 16, 1931, based upon an agreement on the amount of the deficiency. In May 1931 the respondent completed his consideration of the petitioner's claim for credit for the years 1917 to 1920, inclusive, and determined that its taxes were overpaid for those years in the aggregate amount of $121,128.73, and that the petitioner was also entitled to interest thereon in the amount of $74,709.16, a total of $195,837.89, which was paid in 1931.

Upon receipt of the overpayment the petitioner credited $155,073.85 of the amount to the account previously set up under the title "Claim for United States Government Tax Refund" and reported the amount of $40,127.05 as income for 1931. The respondent treated all of the payment of $74,709.16 as taxable income in 1931 and increased the income reported by petitioner by $34,582.11. This action resulted in the determination of a deficiency of $3,229.64 in income tax for 1931. The petitioner concedes that it understated the amount of taxable interest for 1931 by $7,668.47, thereby reducing the amount of interest in controversy to $26,913.64, a sum equal to the interest and penalty paid in 1926. The taxability of such amount as interest received in 1931 is the only question before us.

Although it is stipulated that the item of $26,913.64 was paid by the petitioner in 1926 as penalty and interest, the amount of each not appearing, in the briefs filed on behalf of the parties the amount is referred to as a payment of interest. Since under our view of the case the point is not material, we will assume that the whole sum constituted interest on unpaid...