Boston Consol. Gas Co. v. Commissioner of Internal Rev.

• Decision Date: 29 May 1942
• Docket Number: No. 3733.,3733.
• Citation: 128 F.2d 473
• Parties: BOSTON CONSOL. GAS CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — First Circuit

128 F.2d 473 (1942)

BOSTON CONSOL. GAS CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 3733.

Circuit Court of Appeals, First Circuit.

May 29, 1942.

John E. McClure, of Washington, D. C. (Maude Ellen White and Miller & Chevalier, all of Washington, D. C., and J. Rex Dibble and Miller, Chevalier, Peeler & Wilson, all of Los Angeles, Cal., on the brief), for petitioner for review.

Samuel O. Clark, Jr., Asst. Atty. Gen. (Samuel H. Levy, J. Louis Monarch, Gerald L. Wallace, and Joseph M. Jones, Sp. Assts. to Atty. Gen., on the brief), for Commissioner.

Before MAGRUDER, MAHONEY, and WOODBURY, Circuit Judges.

WOODBURY, Circuit Judge.

This is a petition by the Boston Consolidated Gas Company for review of a decision of the Board of Tax Appeals (44 B.T. A. 793) determining an income tax deficiency against it in the amount of $32,170.98 for the calendar year 1935.

The petitioner was incorporated in Massachusetts in 1903 for the purpose of acquiring the assets and assuming certain of the liabilities of eight pre-existing gas companies. Since 1905 its business has been principally that of manufacturing, producing and selling gas for light, heat and power. It supplies the City of Boston and suburban territories.

In the regular course of its business the petitioner bills its customers monthly for gas consumed, but, to insure that gas bills will be paid, the petitioner, as its predecessors did before it, requires a cash deposit from certain of its customers at the time their meters are installed. By the terms of a deposit agreement signed at the time, the petitioner agrees that the net amount of the deposit remaining after the payment of all charges will be returned to the customer upon the termination of the contract to supply him with gas and the discontinuance of service to him. From prior to 1905 to the taxable year 1935, such of these deposits as had fallen due, but were unclaimed, had been accumulated by the petitioner and its predecessors all of which were accounted for in a general ledger account which, on December 31, 1935, showed a credit balance of $431,014.44.

On December 31, 1935, the petitioner, to support its general ledger, set up a detailed customers' ledger which showed a credit balance of $328,143.28. To bring the general ledger into balance with the detailed customers' ledger the petitioner on the above date credited the difference between them — $102,871.16 — to its profit and loss (surplus) account. The Commissioner determined that this difference of $102,871.16 as "unclaimed amount of deposits made in the distant past by inactive customers, credited to surplus in 1935" constituted taxable income during that year, and his determination was sustained by the Board of Tax Appeals.

This is the first issue. The second is closely related to it.

In the regular course of its business the petitioner uses in certain districts, as it always has done and as its predecessors did before it, a method of collecting in advance for gas supplied by the use of a device referred to as a quarter meter, that is, a machine which automatically delivers a measured quantity of gas when a twenty-five cent piece is deposited in it. The use of these meters results in an initial overpayment for gas by the customer, so, to make the rates charged to all customers the same, quarter meters are read monthly and those who use them are credited on the petitioner's books with the amount of their excess payments. It often happens that customers using this type of service move away, in which event the petitioner makes an effort to locate them in order to refund the amount due, but, this failing, the petitioner carries the amount on its books as a liability and stands ready to make a refund to such customers upon the presentation of a valid claim. The same accounting methods were used with respect to these unpaid refunds as were used with respect to unclaimed deposit balances and, on December 31, 1935, when the detailed customers' ledger was set up, it was brought into balance with the general ledger with respect to unclaimed refunds by a credit to the profit and loss (surplus) account of $53,453.55. This sum also was determined by the Commissioner to be income received by the petitioner in 1935, and his determination was sustained by the Board of Tax Appeals.

The third issue involves an embezzlement. The petitioner's treasurer and head cashier died on January 30, 1935, having last worked on January 21, of that year. An audit of the petitioner's books made during 1935 by certified public accountants showed that he had embezzled $99,139.09, $98,323.55 of which had been embezzled before December 31, 1934. No shortage through embezzlement was brought to light by the annual audit of the petitioner's books made early in 1934 for the calendar year 1933. On account of this shortage the petitioner in 1935 recovered from a bonding company $25,000; from the treasurer's beneficiaries $10,000; and from cash found hidden in a safe $2,599.15; making a total recovery of $37,599.15. The balance of the shortage — $61,539.94 — it charged off on its books in 1935 and claimed as a deduction in its 1935 income tax return. The Commissioner, by computations which need not be described, in determining the petitioner's deficiency allowed as a deduction only $506.24 on the ground that this was the net amount embezzled in 1935. The Board of Tax Appeals sustained the Commissioner and entered its decision accordingly.

The first two issues can conveniently be considered together.

The petitioner makes the point that: "The mere act of balancing the books in the current year in order to bring them into balance with respect to prior year items, resulting in a credit to surplus, is not in itself a basis for saying that the book credit is realized income." It contends that in crediting the amounts in question to surplus it was merely simplifying its method of bookkeeping, not appropriating the sums involved as its own property, which, indeed, it could not do because both the unclaimed refunds and unclaimed deposits were debts which it owed, and the one who owes a debt is not the one who has the power to forgive it. The Commissioner, on the other hand, takes the position that the petitioner, in adjusting its general ledger to conform with its newly set up detailed customers' ledger, eliminated "the necessity for continuing to hold in reserve deposits or overpayments made by such former customers." So that "When the company thus transferred a portion of the reserve to profit and loss (surplus), it made that amount fully available for its general use. The items could then, for the first time, be classified as income of the company." The Board of Tax Appeals affirmed the Commissioner's determination of deficiency on the authority of Chicago R. I. & P. Ry. Co. v. Commissioner, 7 Cir., 47 F.2d 990, and Charleston & W. C. R. Co. v. Burnet, 60 App.D.C. 192, 50 F.2d 342, adding: "It is true that subsequent to 1935 petitioner paid out the sum of $3,108.93 against the amount of $102,871.16 and there is a possibility more claims may be presented and paid. If so, such payments should be deducted from income in the year in which paid. Obviously they do not affect the status of the $102,871.16 and $53,453.55 which petitioner transferred to profit and loss (surplus) in 1935 and made available for general uses including the payment of dividends." 44 B.T.A. 797.

We affirm the decision of the Board on these two issues.

If we cannot take judicial notice of the fact that refunds and deposits once unclaimed are more than likely to remain unclaimed forever, it is clearly evident from the sums involved that such is in fact the case. The net accumulation of unclaimed deposits over a thirty year period amounted to $102,871.16 and the net accumulation over the same period of unclaimed refunds amounted to $53,453.55. Between December 31, 1935, and December 31, 1939, it appears that the petitioner on demand returned deposits to former customers, or credited to them in the detailed customers' ledger which it established in 1935, an aggregate net amount of $3,108.93. It does not appear how much, if anything, was during the same four year period refunded to departed customers who had been on the quarter meter service. From the...