APPEAL OF STEELE COTTON MILL CO., Docket No. 488.

• Decision Date: 13 January 1925
• Docket Number: Docket No. 488.
• Citation: 1 BTA 299
• Parties: Appeal of STEELE COTTON MILL CO.
• Court: U.S. Board of Tax Appeals

1 B.T.A. 299 (1925)

Appeal of STEELE COTTON MILL CO.

Docket No. 488.

Board of Tax Appeals.

Submitted December 17, 1924.

Decided January 13, 1925.

James C. Peacock, Esq., for the taxpayer.

W. Frank Gibbs, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner.

Before GRAUPNER, LANSDON, and SMITH.

This appeal involves income and profits taxes for the calendar year 1920 and is from a deficiency in the amount of $10,554.23 determined by the Commissioner. Oral and documentary evidence was introduced at the hearing, from which the Board makes the following

FINDINGS OF FACT.

1. The taxpayer is a North Carolina corporation engaged in the manufacture of cotton yarn at Lenoir, in that State.

2. In July 14, 1920, the taxpayer sold 30,000 pounds of cotton yarn to the Piedmont Commission Co., of Charlotte, N. C., at an agreed price of $30,875.28, payment for which became due under the terms of the sale on September 2, 1920. No part of that amount was paid by the due date. Thereafter and on October 9, 1920, after several demands for payment had been made by the taxpayer, the Piedmont Commission Co. paid to the taxpayer, on account, the sum of $4,000.

3. During the period between July 14 and December 31, 1920, the market price of cotton yarn declined from a value of $1.30 to a quoted price of about 30 cents per pound, with a demoralized and stagnant market and little demand for yarn at the latter-named price.

4. After the payment of the $4,000 on October 9 and prior to December 16, 1920, the taxpayer made several demands on the Piedmont Commission Co. for payment of the balance of $26,875.28 which remained due on the sale of the yarn. No payment was made by the company and its officers admitted to the taxpayer that, due to the drop in prices on cotton yarn, it was financially embarrassed and could make no further payments at that time.

5. The Piedmont Commission Co. was incorporated with a capital stock of about $35,000; it was engaged in the manufacture of duck and madras, and its board of directors was composed of men of admitted integrity, financial responsibility, and prominence in business in North Carolina. These directors arranged a meeting between the board and some of the larger creditors of the company, which was held on December 16, 1920, and at which the secretary-treasurer of the taxpayer was present as its representative. The creditors were informed that the liabilities of the company approximated $200,000 and that if it was forced into bankruptcy the assets would be insufficient to permit any payments to the creditors. At this meeting it was orally agreed between the members of the board of directors of the company and creditors' representatives that the creditors would compromise their claims and accept the promissory notes of the corporation for 70 per cent of the amounts due, which notes were to be indorsed by the members of the board of directors as individuals. It was also agreed that the creditors represented would not institute proceedings in bankruptcy against the company.

6. At the above-mentioned conference of December 16, 1920, the taxpayer agreed to accept promissory notes of the company in the aggregate amount of $18,712.68, which notes were to be indorsed by the members of the board of directors and were to be in settlement of the taxpayer's claim against the Piedmont Commission Co. It was understood that the notes would be executed and mailed to the taxpayer on the next day. The promissory notes were not mailed by the company to the taxpayer on the prescribed day. On December 24 and again on December 29, 1920, the taxpayer made written or telegraphic demand upon the company for the delivery of the promissory notes but received no reply. On December 31, 1920, the taxpayer closed its books for the calendar year and at that time charged off the entire amount of $26,875.28, the balance of the sales price of the cotton yarn sold to the Piedmont Commission Co. as a bad debt.

7. The closing of the books of the taxpayer on December 31, 1920, was in accordance with its usual custom and was completed in order that a financial report on the affairs of the corporation might be made to the annual meeting of its stockholders, which was held on January 2, 1921.

8. Subsequent to the closing of the books and the stockholders' meeting and on January 4, 1921, the Piedmont Commission Co. mailed its promissory notes to the total amount of $18,712.68 to the taxpayer. Each of the notes was indorsed by the individuals composing the board of directors of the company and all were paid in the course of two years...