Chandler v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 16259.

• Citation: 16 BTA 1248
• Decision Date: 29 June 1929
• Docket Number: Docket No. 16259.
• Parties: MARIAN OTIS CHANDLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

16 B.T.A. 1248 (1929)

MARIAN OTIS CHANDLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 16259.

Board of Tax Appeals.

Promulgated June 29, 1929.

A. Calder Mackay, Esq., Charles D. Hamel, Esq., Lee I. Park, Esq., and George M. Thompson, for the petitioner.

R. H. Ritterbush, Esq., for the respondent.

This is a proceeding for the redetermination of deficiencies in income and excess-profits taxes asserted by the respondent for the years 1920, 1921, 1922, and 1923. The deficiencies arise by reason of the respondent's determination that the interest accrued on certain promissory notes, although not paid, was constructively received by the petitioner. The amounts of the deficiencies are, for the respective taxable years, as follows: 1920, $19,067.17; 1921, $59,133.58; 1922, $41,361.41; 1923, $36,738.98, making a total of $156,301.14.

FINDINGS OF FACT.

In 1916 the husband of this petitioner incorporated the Chandis Securities Co. and transferred to it real and personal property in exchange for all of its capital stock — 500 shares. Soon thereafter Chandler transferred 200 shares of this stock to his wife and 280 shares to their children. From time to time thereafter Chandler transferred other properties to the company, taking the company's promissory notes in payment; these notes Chandler assigned to his wife and children in approximately the same proportions as their stock holdings. The notes bore interest at 5 per cent per annum, but no interest was paid prior to or during the taxable years, nor was any fund set aside for such interest payments. During the taxable years the amounts of annual interest accrued upon these notes were as follows:

                ----------------------------------------------------------------------------------------------
                                  Holders of notes        |   1920     |   1921     |   1922     |   1923
                ------------------------------------------|------------|------------|------------|------------
                Mrs. Chandler (petitioner) ______________ | $48,384.36 | $50,803.58 | $53,343.76 |  $56,116.13
                Children ________________________________ |  60,003.67 |  63,002.93 |  66,153.56 |   69,463.15
                                                          |____________|____________|____________|____________
                     Total interest _____________________ | 108,388.03 | 113,806.51 | 119,497.32 |  125,579.28
                                                          |            |            |            |
                ----------------------------------------------------------------------------------------------
                

During the taxable years, and the two years preceding, the Securities Company's books showed balances as follows:

                --------------------------------------------------------------------------------------------
                                    Year                                           | Net income |  Net loss
                -------------------------------------------------------------------|------------|-----------
                1918 _____________________________________________________________ | $57,076.19 | __________
                1919 _____________________________________________________________ |  40,305.89 | __________
                1920 _____________________________________________________________ |  37,886.82 | __________
                1921 _____________________________________________________________ | __________ | $18,109.18
                1922 _____________________________________________________________ | 105,549.04 | __________
                1923 _____________________________________________________________ | __________ | 446,124.52
                                                                                   |            |
                --------------------------------------------------------------------------------------------
                

The petitioner was vice president and secretary, and her husband was president and treasurer of the company throughout the years in question. During none of the taxable years did the company have cash sufficient to pay the current interest on its notes held by the petitioner and her children.

On December 31, 1923, there was credited to the petitioner and her children, on the journal of the Securities Company, the total amount of interest accrued upon the promissory notes of the company from 1917 to the close of 1923. Corresponding credits appear upon the ledger of the company in the separate "Notes Payable" account of this petitioner. The company, on December 31, 1923, executed renewal notes to the petitioner and her children. The new notes covered the principal of the old notes and all accumulated interest thereon.

The petitioner made her tax returns upon a cash receipts and disbursements basis. The company books were kept on the accrual basis, but did not accrue the interest upon petitioner's notes as it became due, year by year. In 1923 the company set up on its books the total amount of interest accumulated during the preceding six years.

The respondent asserts that petitioner received taxable income, through the constructive receipt of interest in the amounts above set forth, in each of the respective taxable years, and, adding these amounts to her reported gross income for those years, has determined deficiencies thereon as set forth above.

OPINION.

MARQUETTE:

The question presented here is one of possible constructive receipt of income. The petitioner held promissory notes of a company, bearing interest at 5 per cent per annum. No interest was paid during the taxable years, and the testimony shows that the company did not have sufficient surplus cash in any of the taxable years to pay the current interest upon its outstanding notes. The company did have assets which were acquired, in part, in exchange for its capital stock; in part for the promissory notes here involved; and in part by changes in the investments. That portion of the assets acquired by the company through cash purchases does not appear. The debtor company's stock was all owned by the petitioner, her children, and her husband. It is the respondent's contention that the assets of the company were available, year by year, to pay the interest due to the petitioner; but that she, an officer and large stockholder in the company, voluntarily gave up the interest for the time being in order that the company might reinvest its money and increase, or at least strengthen, the investments which it held. Therefore, the respondent concludes, the petitioner constructively received the interest due her and is taxable thereon. The petitioner kept her personal accounts and made her income-tax returns upon the cash receipts and disbursements basis.

Section 213 (a) of the Revenue Act of 1918 is identical in language with the same numbered section of the 1921 Act. So far as applicable here, the wording is as follows:

* * * The term "gross income" (a) includes gains, profits, and income derived from * * * interest, rent, dividends, securities * * *. The amount of all such items * * * shall be included in the gross income for the taxable year in which received by the taxpayer, unless * * * any such amounts are to be properly accounted for as of a different period.

Section 212 (b) of the Revenue Acts of 1918 and 1921, so far as here pertinent, reads:

The net income shall be computed upon the basis of the taxpayer's annual accounting period * * * in accordance with the method of accounting regularly employed in keeping the books of the taxpayer.

The question whether one on a cash receipts and disbursements basis may receive income constructively has been before the Federal courts. In Mutual Benefit Life Insurance Co. v....