Clifton Mfg. Co. v. Commissioner of Internal Revenue

• Decision Date: 16 July 1943
• Docket Number: No. 5079.,5079.
• Parties: CLIFTON MFG. CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fourth Circuit

137 F.2d 290 (1943)

CLIFTON MFG. CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 5079.

Circuit Court of Appeals, Fourth Circuit.

July 16, 1943.

W. A. Sutherland, of Atlanta, Ga. (Ben F. Johnson, Jr., and Sutherland, Tuttle & Brennan, all of Atlanta Ga., on the brief), for petitioner.

Helen Goodner, Sp. Asst. to the Atty. Gen., (Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key and Helen R. Carloss, Sp. Assts. to the Atty. Gen., on the brief), for respondent.

Before SOPER, DOBIE, and NORTHCOTT, Circuit Judges.

SOPER, Circuit Judge.

Past due interest on a debt due the Clifton Manufacturing Company, the taxpayer, was collected during its fiscal year which ended March 31, 1937, and was held by the Tax Court of the United States, three members dissenting, to be taxable income in that year. The taxpayer's accounts were kept on an accrual basis; and the question is whether any part of the sum received in 1937 should have been included in the gross income of that year rather than in the gross income of an earlier year when it was due and payable and its collectibility was assured. The Commissioner included in the taxpayer's income for the fiscal year ended March 31, 1937, past due interest on the sum of $11,711.76 collected in that year, which comprised $302.19 for the fiscal year ended March 31, 1933, and $11,409.57 for the fiscal year ended March 31, 1934. No part of the sum of $11,711.76 was returned by the taxpayer as taxable income for 1937 or any other year. By the Commissioner's action deficiencies in income and excess profits taxes for the fiscal year ended March 31, 1937 were determined in the amounts of $3,006.04 and $681.01 respectively. If the sum collected in that year was properly accruable in any earlier year, the tax thereon is barred by the statute of limitations.

For many years the Hunter Manufacturing & Commission Company, a New York corporation, acted as selling agent for the taxpayer and other large textile manufacturers, and made it a practice to charge interest on debit balances and credit interest on credit balances. Hunter became financially involved during the taxpayer's fiscal year ended March 31, 1933, since it owed the principal sum of $392,651.14 to the taxpayer and large sums to other customers. Consequently Hunter was put into the hands of receivers for purposes of liquidation. It was thought at the time that Hunter would pay about fifty per cent on its indebtedness to the mills and that the best way to liquidate its remaining assets would be to form a new company in which the creditors would purchase stock. Later on, during the next fiscal year of the taxpayer while the reorganization was still in progress the situation became more hopeful and it seemed likely that the creditor mills would be paid in full. However, it was agreed amongst them to reduce the interest rate accrued for the period from February 1, 1933, to December 31, 1933, from 6 per cent to 4 per cent and settlement was finally made on this basis.

In October, 1935, during taxpayer's fiscal year ended March 31, 1936, Hunter received the sum of $1,000,000 in payment of a debt due it, and thereupon, if not before, Hunter became completely solvent and there was no reasonable doubt of the collectibility of the debts owing the taxpayer and other creditors.

In the meantime, the taxpayer treated the interest on the debt in the following manner: For the fiscal year ended March 31, 1933, the taxpayer included all of the interest except $302.19 as income in its return, which indicated a net loss for the year.

For the fiscal year ended March 31, 1934, the taxpayer did not accrue or report in its tax return any interest on its credit balance with Hunter.

In October, 1934, the taxpayer received from Hunter two notes dated July 1, 1934 — one for the principal and interest due January 31, 1933, less payments on principal to June 30, 1934, and the other for interest from January 31, 1933, to June 30, 1934, in the sum of $16,443.50 payable January 31, 1936. The taxpayer allocated the amount of the latter note on its books as follows:

                  February 1, 1933 to March 31
                    1933 ........................  $ 3,156.72
                  April 1, 1933 to March 31, 1934   11,409.57
                  April 1, 1934 to June 30, 1934.    1,877.21
                                                   __________
                                                   $16,443.50
                

For the fiscal year ended March 31, 1935, the taxpayer reported as income in its return for that year the sum of $1,877.21 as well as all other interest accruing on the account for that year. For the fiscal year ended March 31, 1936, the taxpayer reported interest accruing on the debt as income for that year and this action was approved by the Commissioner.

During the fiscal year ended March 31, 1937, as we have seen, the taxpayer received payment of the note for $16,443.50 but reported no part of this amount as income in its return for that year. Interest on this note which accrued during the fiscal years 1935, 1936 and 1937 was accrued on the taxpayer's books and reported as income for these years.

At the end of 1936 and the beginning of 1937 the Commissioner investigated the taxpayer's return for the year ended March 31, 1935, and proposed the inclusion of the sum of $11,711.76 as income for that year; but the taxpayer protested on the ground that this sum was not income in 1935 but in 1933 as to $302.19 and in 1934 as to $11,409.57. The Commissioner took the position that if the amount was not properly includable as income for the year 1935, it should be returned for the year 1937 when Hunter paid its note. Ultimately, the amount was excluded from income in determining the tax liability for the year 1935. The taxpayer has adhered to its position and has made no agreement with the Commissioner as to the year in which the sum of $11,711.76...