Black Motor Company v. Commissioner of Internal Revenue, Docket No. 97232.

• Citation: 41 BTA 300
• Decision Date: 13 February 1940
• Docket Number: Docket No. 97232.
• Parties: BLACK MOTOR COMPANY, INCORPORATED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

41 B.T.A. 300 (1940)

BLACK MOTOR COMPANY, INCORPORATED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 97232.

Board of Tax Appeals.

Promulgated February 13, 1940.

George E. H. Goodner, Esq., for the petitioner.

Philip M. Clark, Esq., and Stanley B. Pierson, Esq., for the respondent.

This proceeding involves a deficiency in income tax for 1936 of $3,758.29 and a deficiency in excess profits tax for 1936 of $1,073.31. The issues presented are (1) whether respondent erred in disallowing a $12,270.64 addition to petitioner's bad debt reserve; (2) whether petitioner is entitled to an additional deduction of $1,500 as salary which accrued to its manager; (3) whether respondent erred in failing to allow a dividends paid credit in computing surtax on undistributed profits; and (4) whether respondent erred in determining an excess profits tax, which is alleged to be invalid and unconstitutional. The other assignment of error was waived by the petitioner at the hearing.

By amendment petitioner alleges that the addition to its reserve for bad debts for 1936 should have been $94,680.87 instead of the $91,602.88 claimed on its return.

Upon these alleged errors petitioner asserts that it has overpaid its 1936 taxes.

FINDINGS OF FACT.

The petitioner is a Kentucky corporation, with its principal place of business at Harlan, Kentucky. It is engaged in selling automobiles at retail. Its income tax return for 1936 was filed with the collector for the district of Kentucky. It paid income taxes for 1936 of $765.82 in the following installments on or about the dates set forth:

                       May 13, 1937 _____________________________________    $192.89
                       June 15, 1937 ____________________________________     190.98
                       Sept. 11, 1937 ___________________________________     190.98
                       Dec. 13, 1937 ____________________________________     190.97
                                                                            ________
                             Total ______________________________________     765.82
                

It paid no excess profits tax. It filed the petition herein on February 24, 1939.

The petitioner kept its books and rendered its income tax returns on the accrual basis.

The deficiency letter shows that respondent disallowed $12,270.64 of the deduction claimed by petitioner as an addition to its reserve for bad debts. The respondent's explanation of his adjustment is stated in the deficiency notice as follows:

                                         EXPLANATION OF ADJUSTMENTS
                (a) Deduction for addition to reserve for bad debts per return _____  $91,602.88
                    Deduction allowable ____________________________________________   79,332.24
                                                                                      __________
                    Difference, disallowed _________________________________________   12,270.64
                

It is held that a reasonable addition to the reserve for the taxable year as provided in Section 23 (k) of the Revenue Act of 1936 is the amount required to bring the reserve as adjusted at the end of the year up to 32.13% of your accounts and notes receivable, and deferred certificates, based on your average annual losses for the six year period ended with the close of the taxable year, per the following computation:

                Accounts and notes receivable December 31, 1936 ___________________  $124,619.80
                Deferred certificates December 31, 1936 ___________________________    49,400.91
                                                                                     ___________
                Total of receivables to which reserve is applicable _______________   174,020.71
                Reserve December 31, 1936 as adjusted, 32.13% of $174,020.71 ______    55,912.85
                Add: Losses charged to reserve in the taxable year ____ $61,295.11
                     Less recoveries __________________________________     375.43
                                                                        __________
                                                                                       60,919.68
                                                                                      __________
                Total reserve for bad debts requirement ___________________________   116,832.53
                Deduct: Reserve as adjusted December 31, 1935 _____________________    37,500.29
                                                                                      __________
                Allowable addition to reserve for taxable year ____________________    79,332.24
                

The per cent of losses from bad debts to the total of accounts and notes receivable and deferred certificates as shown by your experience in the six year period 1931 to 1936, inclusive, is shown by the following schedule:

                -------------------------------------------------------------------------------------------
                                                                 | Accts. & Notes  |             |
                                     Year                        |   Receivable    |  Bad Debts, |  Per Cent
                                                                 |  & Deferred     |     Net     | of Losses
                                                                 |  Certificates   |             |
                -------------------------------------------------|-----------------|-------------|----------
                1931 ___________________________________________ |  $105,082.04    | $24,801.08  |  23.60
                1932 ___________________________________________ |    67,899.65    |  15,527.29  |  22.87
                1933 ___________________________________________ |    56,040.23    |  21,132.75  |  37.71
                1934 ___________________________________________ |    71,119.32    |  27,476.63  |  38.63
                1935 ___________________________________________ |    98,957.88    |  34,333.43  |  34.69
                1936 ___________________________________________ |   174,020.71    |  60,919.68  |  35.01
                                                                 |_________________|_____________|__________
                        Total __________________________________ |   573,119.83    | 184,190.86  |  32.13
                        Six year average ________________________|_________________|_____________|  32.13
                -----------------------------------------------------------------------------------------
                

In 1928 petitioner's board of directors elected E. V. Albert as its manager, with a salary of $400 per month. This action by petitioner's board of directors has never been rescinded or changed by formal action in any way. On account of adverse business conditions E. V. Albert did not draw, prior to and during the taxable year, the full salary he was entitled to receive. In 1936 he was paid $3,300. No additional amount was accrued on petitioner's books respecting Albert's salary, and only $3,300 was claimed as a deduction on its 1936 return. During the taxable year petitioner's bookkeeper was unaware of the amount of salary authorized by the board of directors to be paid to E. V. Albert.

Subsequent to 1936, Albert drew $3,000 from one of petitioner's wholly owned subsidiaries as back salary due him. The subsidiary charged this withdrawal to petitioner on its books, but no corresponding entries were made on petitioner's books to reflect its liability to its subsidiary up to the date of the hearing.

The minutes of the annual meeting of petitioner's board of directors on August 20, 1936, after reciting a discussion regarding the paying of a dividend, states that "* * * it was finally unanimously agreed that a 10% dividend be declared, same to be paid at the rate of 2½% monthly, the first installment to commence October 15, 1936, and each month thereafter until fully paid."

Under date of August 28, 1936, petitioner issued a general journal voucher which set up the $7,500 dividend as a liability of the company, charging it against surplus and crediting dividends payable. The explanation appearing on the face of the voucher reads as follows: "To set up amount of dividend declared at Directors Meeting Aug. 20, 1936; 10% of outstanding Capital Stock, payable 2½% monthly, beginning October 15, 1936."

During 1936 the petitioner paid $5,487.50 in dividends, of which its two principal stockholders received 100 percent of their pro rata share of the $7,500 dividend, E. V. Albert and one other stockholder received only 25 percent of their pro rata...