Gatlin v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 06 March 1936 |
| Docket Number | Docket No. 68444. |
| Parties | E. C. GATLIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Philip D. Johnston, Esq., for the petitioner.
Eugene G. Smith, Esq., for the respondent.
This proceeding is for the redetermination of a proposed deficiency in income tax for the year 1929 in the sum of $2,016.49. Petitioner claims there is no deficiency and that he is entitled to a refund of $406.30.
FINDINGS OF FACT.
The petitioner was doing business as an individual, in the name of the California Grape Concentrators, and continued as an individual until August 31, 1929, at which time the business was incorporated in the name of the California Grape Concentrators, Ltd. All accounts and assets were transferred to the corporation and the business was thereafter conducted by the corporation.
The business consisted of selling concentrates, or condensed grape juice, to jobbers or wholesalers and through them to retailers. Contracts in writing made with petitioner's customers provided that petitioner would resell 75 or 80 percent of the amount of merchandise ordered. As resales were made, petitioner's customers were to pay 25 percent of the total bill when 25 percent of the goods had been resold, and 25 percent more when an additional 25 percent had been resold, and the balance when 75 or 80 percent had been resold. Bills did not become due and payable unless petitioner made the resales for his customers within the period specified, generally 90 days. Petitioner paid the freight to destination and furnished and paid salesmen for making resales until the required 75 or 80 percent had been resold. If the required amount had not been resold within the time specified, petitioner was under obligation to repurchase all remaining unsold merchandise at cost, or continue his selling efforts until the required amount was resold. The customer was under no obligation to make resales until after the 75 or 80 percent of the merchandise ordered had been resold by the petitioner. As merchandise was shipped to customers, bills for the entire purchase price were made out and entered on the books of the petitioner to be paid by the customers as resales progressed, as above stated. Petitioner made all collections from his customers and credited all collections on his books as made.
Petitioner needed money to carry on his business. He could not get sufficient bank credit, and on March 15, 1929, entered into a written contract with Pacific Factors, Inc., in which it was provided that Pacific Factors, Inc., were to buy such accounts of petitioner as were acceptable to it and agreed to pay petitioner therefor, upon acceptance, 80 percent of the full face value of such accounts, less a discount of 1¼ percent per month of their accepted face value, prorated per day over the time required to make collections, less a service charge of ½ percent on the first $200,000 annual business. The contract further provided that if Pacific Factors, Inc., received more than the acceptable face value of the accounts so purchased, it was to pay in cash the excess thereof to petitioner at the end of the credit term of such accounts, less any deductions, discounts and the service charge. It was further provided that any moneys, accounts, or properties of petitioner in the hands of Pacific Factors, Inc., might be held to satisfy any breach of contract or warranty, and later applied to any accounts or further indebtedness of petitioner to Pacific Factors, Inc. Thoughout the contract expressions of "sale" by petitioner and "purchase by Pacific Factors" are used.
As merchandise was shipped by petitioner to his customers, bills therefor were made out for the purchase price and a list of the bills by invoice numbers, together with bills of lading, was listed on a schedule and the schedule and bills of lading attached were delivered to Pacific Factors, Inc.
The accounts of the petitioner were never delivered to Pacific Factors, Inc. All it received was a schedule or printed form listing the names and amounts of the invoices with copies of bills of lading attached. The accounts were retained by petitioner and collected direct by him from his customers, and as collections were made they were turned over to Pacific Factors, Inc., either in cash or by delivering checks given in payment on the accounts. Customers had no dealings with Pacific Factors, Inc., nor had Pacific Factors, Inc., with petitioner's customers. If payments received from customers and delivered by petitioner to Pacific Factors, Inc., did not repay Pacific Factors, Inc., by the end of 60 days, petitioner was required to use his own funds for this purpose, or substitute other schedules of accounts. Upon receipt of the amount advanced on a schedule, after making deductions aforesaid, the schedules were returned to petitioner and any accounts on the schedule not paid were released to petitioner and petitioner was entitled to any payments thereafter made on accounts listed in such schedule. Accounts listed on the schedule turned over to Pacific Factors, Inc., were kept on the books of petitioner as open accounts and were not closed on his books until paid by his customers. In the schedules listing the accounts delivered to Pacific Factors, Inc., petitioner certified the parties named as owing the accounts were indebted to him in the amounts specified for personal property sold and delivered, or for work and labor done. Petitioner represented in the schedules that they set forth undisputed open accounts then owing to him for bona fide sales and deliveries of merchandise; that he sold, assigned, and set over to Pacific Factors, Inc., all his right, title, and interest in and to the open accounts and contracts listed, represented by invoices and shipping documents, including all moneys due and to become due upon the same and absolute title to the merchandise represented thereby, including all merchandise returned, rejected, or reassigned, together with the right of stoppage in transit. The schedules further recited that the accounts and contracts listed were purchased and paid for by Pacific Factors, Inc., and that the same were sold and purchased pursuant to and in accordance with the terms of the contract of March 15, 1929.
Under this arrangement petitioner received from Pacific Factors, Inc., from time to time during the period from January 1 to August 31, 1929, $135,223.28. Petitioner claims the moneys received from Pacific Factors, Inc., under the contract of March 15, 1929, were advancements in the nature of loans. Respondent claims it was money received by petitioner on a sale of accounts to Pacific Factors, Inc., under the contract of March 15, 1929. The business finally went bad, resales could not be made, customers did not pay their accounts to petitioner, and petitioner was in default with Pacific Factors, Inc. Suit was instituted by Pacific Factors, Inc., to recover the balance it claimed petitioner owed it.
Petitioner further contends that the unsold merchandise in the hands of his customers at the time the business was incorporated was out on a consignment and should be added to his inventory at the time the business was taken over by the corporation. Respondent contends the undisposed of merchandise in the hands of petitioner's customers had been sold by petitioner to his customers and that the same was customers' property until repurchased or taken back by petitioner.
Under the above state of facts was the $135,223.28 received by petitioner from Pacific Factors, Inc., prior to the incorporation of petitioner's business, income to petitioner from the sale of his accounts, or was it money advanced to him in the nature of loans? Respondent contends that under the contract of March 15, 1929, petitioner sold and Pacific Factors, Inc., bought outright the accounts of petitioner's customers and the use of the words, sale and purchase, and other like expressions in the contract are controlling on the issue here presented. He further contends that any evidence tending to prove the moneys received from Pacific Factors, Inc. were received as advancements in the nature of loans, is in conflict with the contract of March 15, 1929, and is incompetent, and that such construction would be in effect placing the stamp of approval on a contract in violation of the law of California as to usury. While the...
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