GIEPEN v. Commissioner, Docket No. 51268
| Citation | 1957 TC Memo 6,16 TCM (CCH) 20 |
| Decision Date | 15 January 1957 |
| Docket Number | 51269.,Docket No. 51268 |
| Parties | Erica Giepen and Henry J. Roger v. Commissioner. |
| Court | United States Tax Court |
Irving D. Isko, Esq., for the petitioners. Robert J. Cowan, Esq., and A. Jesse Duke, Esq., for the respondent.
The Commissioner determined deficiencies in income tax for the calendar year 1947 as follows:
Docket No. 51268 Erica Giepen .... $1,524.77
Docket No. 51269 Henry J. Roger .. 1,442.15
In each proceeding the Commissioner made the following determination:
In Docket No. 51269, Henry J. Roger, an additional determination was made; the Commissioner held that a deduction claimed as a net operating loss carry-back to 1947, allegedly attributable to a net operating loss in 1948, is not allowable under the provisions of subsections 4 and 5 of section 122(d), 1939 Code. The alleged net operating loss carry-back deduction was disallowed in connection with the Commissioner's rejection of a claim for refund of tax made by Henry J. Roger.
An issue is raised by petitioners in their respective petitions for the first time. Petitioners claim that the gross receipts and gross profit of their partnership, International Gift Parcel Service, for its fiscal year ended June 30, 1947, should be reduced to eliminate transactions entered into during the last ten weeks of the fiscal year because such transactions involved shipments made for customers which had not been received by donees of the customers before the end of the fiscal year. Under this issue, petitioners contend that the partnership's gross profit for the fiscal year involved should be reduced by $6,679.05.
Petitioners claim that tax for the calendar year 1947 has been overpaid.
The issues are: (1) Whether the partnership, International Gift Service, had a business debt, in the amount of $3,870, which became worthless during its fiscal year ended June 30, 1947, so as to be entitled to a bad debt deduction under section 23 (k), 1939 Code. (2) Whether the petitioner, Henry J. Roger, is entitled to deduction in 1947, under section 122(d), 1939 Code, of a net operating loss carry-back from 1948. (3) Whether the partnership, for its fiscal year, is entitled to deduction of $6,200 for a so-called "reserve for sales refunds." (4) Whether the partnership income for its fiscal year should be reduced by the amount of $6,679.05.
General Facts: — Each petitioner, Erica Giepen and Henry J. Roger, filed individual returns with the collector of internal revenue for the third district of New York. International Gift Parcel Service, a partnership, filed a partnership return (form 1065) for the fiscal year ended June 30, 1947 with the collector of internal revenue for the third district of New York.
Erica Giepen (hereinafter called Erica) was a resident of New York City in 1947. She reported her income on a cash basis and for a calendar year. She was born in Germany. In 1933, she was married to Hubert Giepen (hereinafter called Hubert, or Giepen.) One child, born of this marriage, was living in 1947. Erica and Giepen separated in 1945, but they were on friendly terms. They were divorced in 1953 or 1954.
Henry J. Roger (hereinafter called Roger) was a resident of New York City in 1947. He reported income on a cash basis and for a calendar year. He was born in Berlin, Germany, in 1913. At some time prior to 1947 he married. In his return for 1947 he claimed exemptions for his wife and one child.
Roger left Germany as a refugee in 1933, when he went to France. He came to the United States in 1939. His education took him through high school.
On or about July 1, 1945, Roger and Erica formed a partnership in New York for the purpose of carrying on a business under the name, International Gift Parcel Service. International Gift Parcel Service is referred to hereinafter as International, or as the partnership. They were equal partners, each having a 50 per cent interest in the assets and earnings and losses thereof.
The partnership kept its books and reported income in its partnership return on the basis of a fiscal year beginning on July first and ending on June thirtieth.
In the partnership return for the fiscal year ended June 30, 1947 (hereinafter referred to as either the fiscal year involved, or the 1947 fiscal year), the business of the partnership was described as "Food, etc. to foreign countries"; and the method on which the return was prepared was stated to be "accrual basis." In reporting income, the partnership used inventories which were stated in the return to be valued at "cost or market." The nature of the business of the partnership, the type of accounting records kept for the partnership, and the basis on which accounts were kept and income was reported are dealt with hereinafter.
Rogers ceased to participate actively in the operations of the partnership business on June 30, 1948. The partnership was dissolved as of January 31, 1949, when Roger withdrew his remaining interest.
Max Kochman is a certified public accountant licensed in New York. He was the accountant of the partnership from the beginning until the end of its existence. Kochman studied accounting and law in Germany. He became a certified public accountant in Germany in 1933, and in New York in 1942. He came to the United States in 1937.
During 1947, International had a place of business, a store, at 654 Amsterdam Avenue, New York City. International's business was, in 1947 and before, the selling of parcels of foodstuffs such as flour, bread, candy, coffee, chocolate, powdered milk, lard, butter, and pepper. Orders were received from individuals in New York City, and other places, in the United States who wanted to send parcels of food to persons located in various localities in Europe. International kept on hand, in its store, stocks of foodstuffs to be packed in parcels according to orders. International undertook to send parcels of food to donees in Europe, or to make arrangements for forwarding parcels of food to such donees.
In its fiscal year 1947, and before, the partnership did not sell clothing, or buy clothing for resale. It sometimes received clothing from a customer in the United States for forwarding to an addressee in Europe.
In 1947, and before, individuals in Europe were in need. There existed difficulties in sending and delivering packages and mail to people located in East Germany, Bulgaria, Greece, and other localities other than in England, France, and Italy. International made public offers to send and to obtain deliveries of packages of foodstuffs to individuals located in localities to which delivery service was not normal. There are set forth hereinafter additional facts about the operation of International's business.
Issue 1: — Alleged Worthless Debt of Idlewild. A deduction in the amount of $3,870 was taken in the partnership return of International for its fiscal year ended June 30, 1947, for a worthless debt. The Commissioner disallowed the deduction in determining the shares of Erica and Roger, respectively, in the partnership net income.
Idlewild Manufacturing Corporation (hereinafter called Idlewild) was, in 1946, engaged in a business of stamping sheet metal from which boxes, copper dishes, and other metal wares were made. Idlewild had a plant which was located somewhere on Long Island. It owned various assets including machinery. Its stock was owned in equal amounts by Hubert Giepen, who was president, and Charles Heidenreich, secretary, who was in charge of production. Idlewild had a bookkeeper; Heidenreich had nothing to do with the corporation's books and he was not acquainted with entries therein.
Roger was acquainted with Giepen and knew something about Idlewild's operations. In 1946, Hubert Giepen, as president of Idlewild, made a proposition to Roger, as a partner in International, which was, in general, that Idlewild would enter into a new business activity of buying used clothing, of repairing, cleaning, and packaging such articles of clothing, and of selling packages of reconditioned clothing to International for resale to its customers. The gist of the proposal was that International would add packages of reconditioned clothing to the merchandise it sold to people who wanted to send goods abroad to needy people; that Idlewild would buy articles of clothing and do all the work required to condition them and package them; and that International's payments to Idlewild would cover Idlewild's costs and yield it some profit.
Giepen told Roger that he had no funds with which to undertake such new activities, not did Idlewild.
Roger consulted Erica. He also discussed the plan with Heidenreich to get his cooperation. International had received packages of clothing for its customers and had sent the packages abroad to the customers' addressees. Some concerns in New York City, in the operation of their businesses sold used clothing for shipment to needy people in Europe. Roger and Erica believed that the sale of reconditioned clothing would be a profitable undertaking on the basis of Giepen's proposition to acquire and recondition used clothing. Accordingly, after various discussions an oral agreement was made at the end of 1946 by Roger, for International, and by Giepen, for Idlewild, to the effect that Idlewild would acquire necessary machinery for cleaning and repairing clothing for sale in packages to International, and International would loan funds to Idlewild to enable it to acquire machinery...
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