Hart Furniture Co.  v. Comm'r of Internal Revenue

• Decision Date: 21 June 1949
• Docket Number: Docket No. 19652.
• Citation: 12 T.C. 1103
• Parties: HART FURNITURE CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

12 T.C. 1103

HART FURNITURE CO., INC., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 19652.

Tax Court of the United States.

Promulgated June 21, 1949.

1. Petitioner maintained its own books and those of other corporations operated by the same family. In attempting to balance the intercompany accounts existing between it and one other corporation, it discovered that they were out of balance in the amount of $400. Petitioner has sought to claim the amount as a deduction. Held, under the facts, petitioner is not entitled to a deduction therefor under any subdivision of section 23, I.R.C.

2. Through error, petitioner failed to claim a 90 per cent credit to which it was entitled in paying in 1945 its excise tax under the Federal Unemployment Tax Act for the previous year, as a result of which it overpaid that tax. Petitioner deducted the full amount, including the overpayment. In 1946, pursuant to its claim, the overpayment was refunded. Held, petitioner is entitled to a deduction only to the extent of its actual and apparent liability for such excise tax. Cooperstown Corporation, 144 Fed.(2d) 693;certiorari denied, 323 U.S. 772.

3. Held, following J. L. Goodman Furniture Co., 11 T.C. 530, petitioner is not entitled to include in its equity invested capital as accumulated earnings and profits, its uncollected profits at the beginning of each year involved, resulting from installment sales made in previous years, notwithstanding its election under section 736(a), I.R.C., to have its income for excess profits tax purposes computed on accrual basis. Gerald R. Hart, Esq., for the petitioner.

Edward L. Potter, Esq., for the respondent.

Respondent determined deficiencies in declared value excess profits tax and excess profits tax for the fiscal years ended March 31, 1944 and 1945, as follows:

+------------------------------+
                ¦    ¦Declared     ¦           ¦
                +----+-------------+-----------¦
                ¦Year¦value excess ¦Excess     ¦
                +----+-------------+-----------¦
                ¦    ¦profits tax  ¦profits tax¦
                +----+-------------+-----------¦
                ¦    ¦             ¦           ¦
                +----+-------------+-----------¦
                ¦1944¦$152.57      ¦$6,403.97  ¦
                +----+-------------+-----------¦
                ¦1945¦50.90        ¦2,030.62   ¦
                +----+-------------+-----------¦
                ¦    ¦             ¦           ¦
                +------------------------------+
                

Three issues are presented:

(1) Whether petitioner is entitled to a deduction of $400 for the taxable year ended March 31, 1944, claimed on its return as a miscellaneous item, but now contended to be deductible as a bad debt, which resulted from the unexplained imbalance of intercompany accounts, petitioner having charged this against its former bookkeeper, who was entrusted with the task of maintaining the books of account;

(2) Whether petitioner can deduct for the fiscal year ended March 31, 1945, the whole of the sum of $856.99 erroneously paid through its own clerical error as excise tax under the Federal Unemployment Tax Act, overpayment in the amount of $766.54 having been refunded to it in 1946;

(3) Whether, in computing its excess profits tax credit, petitioner, which filed its income tax returns on the installment basis and which elected, as it could, to compute its excess profits net income on the accrual basis, may include as accumulated earnings and profits at the beginning of the fiscal years ended March 31, 1944 and 1945, its uncollected profits at the beginning of those years resulting from installment sales made in previous years.

FINDINGS OF FACT.

Petitioner, a Florida corporation, with its principal place of business in Jacksonville, filed its tax returns for the fiscal years involved with the collector at Jacksonville. It kept its books and filed its declared value and excess profits tax returns on the installment basis. Its excess profits tax returns were prepared in accordance with the method sanctioned by section 736(a) of the Internal Revenue Code, pursuant to its election.

During the years involved, petitioner engaged in the retail furniture business in Jacksonville, selling its merchandise generally on the installment plan. Its capital stock was held by the Hart family, which family also owned other stores in Georgia and Florida, each of which was operated as a separate corporation. Running accounts were kept between the various stores, and the books of each were maintained by a bookkeeper in petitioner's employ, for which a charge was made by petitioner to the other stores.

On March 17, 1944, when petitioner sought to balance the intercompany accounts maintained between it and the corporation which operated a store at Palatka, Florida, it discovered that the accounts were out of balance in the sum of $400. Petitioner's books revealed that the Palatka store owed $400 more than that reflected on the books of the Palatka store. Petitioner's former bookkeeper was thereupon requested to ascertain the source of the difference, and was notified that she would be charged with the amount if she could not explain it. She failed to make any attempt to locate this apparent discrepancy, denied any liability on her own part, and maintained that it was bound to be an error.

Because of lack of clerical employees and because the amount involved was too small to warrant any intensive checking, petitioner made no effort to locate the source or reason for the imbalance, nor to establish personal liability against the bookkeeper other than a charge made against her on petitioner's books on March 17, 1944. On March 31, 1944, this amount was charged off as ‘uncollectible.‘

On its income tax return, petitioner claimed this amount of $400 as a deduction, including it under the designation ‘Other Miscellaneous Items.‘ It now claims that this sum is deductible as a bad deb

In January 1945 petition filed its annual return of excise tax under the Federal Unemployment Tax Act for the calendar year 1944; On the return, it indicated that the amount of tax due was $856.99, which petitioner thereupon paid. On its tax returns for the fiscal year 1945, petitioner claimed a deduction in the total amount. In the notice of deficiency, respondent allowed a deduction only in the amount of $85.70.

Through error, petitioner failed to avail itself of a credit, later claimed by it to be available in the amount of $771.29, to which it was entitled by virtue of contributions paid in to its state fund.

Upon discovery of its error in January 1946, petitioner filed an amended excise tax return, and claimed a refund of overpayment of $771.29. In 1946 it received a refund of $766.54, representing overpayment of the excise tax.

Although the reason for the difference in the amount of the claimed overpayment, $771.29, and the amount of the refund, $766.54, is unexplained, respondent has conceded that only the amount actually refunded should be disallowed as a deduction.

When petitioner filed its corporation excess profits tax returns for the fiscal years ended March 31, 1944 and 1945, respectively, it elected to take advantage of the relief provision provided under section 736(a) of the Internal Revenue Code. For each year petitioner included in surplus, unrealized profits from installment sales in prior years. The amounts so included were $13,292.91 and $15,190.98 for the fiscal years ended March 31, 1944 and 1945, respectively.

Respondent eliminated those respective amounts from petitioner's equity invested capital in computing its excess profits credit base on invested capital.

OPINION.

KERN, Judge:

(1) Petitioner recognizes that the first issue ‘involves entirely a question of fact * * * .‘ Unfortunately for petitioner, it has not presented sufficient facts to warrant our overturning respondent's determination. Petitioner urges, upon brief, that the deduction should be allowed as a bad debt. Petitioner's theory is that its former bookkeeper could not explain the discrepancy, that she was then ‘charged‘ by it with the liability, and that she could not pay the claim.

The facts are that neither the bookkeeper nor petitioner made any investigation whatsoever to discover the reason for the imbalance. I a bookkeeping error was made, there is no evidence as to what the error was, and no evidence that it was made in the taxable year. There was no effort by petitioner to determine whether the former bookkeeper was liable and, further, no adequate determination, assuming her liability, of her inability to pay. It is at once apparent that petitioner can not be allowed the $400 as a bad debt deduction.

As to deduction under some other subdivision of section 23 of the Internal Revenue Code we need only observe that deductions are a matter of legislative grace, and the taxpayer must point to, and prove his right to deduction under, some provision of the statute New Colonial Ice Co. v. Helvering, 292 U.S. 435. This, petitioner has railed to do. In general, a charge-off to balance books is not sufficient in and of itself to entitle a taxpayer to a loss deduction. See Albert Nelson, 6 T.C. 764, 772; ...