Hecht Co. v. Comm'r of Internal Revenue, Docket No. 2599.
| Decision Date | 26 August 1946 |
| Docket Number | Docket No. 2599. |
| Citation | 7 T.C. 643 |
| Parties | THE HECHT COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner, having established its eligibility, elected under section 736(a) of the Internal Revenue Code to compute, for excess profits tax purposes, its income from installment sales on the accrual basis in lieu of the installment basis provided by section 44(a). During the taxable year ended January 31, 1941, certain installment accounts receivable arising out of sales made prior to February 1, 1940, became worthless and were charged off. In addition petitioner incurred collection expenses during the taxable year in connection with collections of installments arising out of pre-1940 sales. Held, respondent's regulation, in so far as it denies to installment basis taxpayers electing under section 726(a) any deductions (including deductions for bad debts) on account of pre-1940 sales, is invalid; held, further, petitioner is entitled to a bad debt deduction in the amount of its unrecovered cost of goods represented in the pre-1940 installment accounts receivable charged off in the taxable year, Mackin Corporation, 7 T.C. 648; and petitioner is also entitled to deduct the collection expenses incurred during the taxable year in connection with installment accounts receivable arising out of pre-1940 sales. I. Herman Sher, Esq., and R. A. Bartlett, Esq., for the petitioner.
Paul E. Waring, Esq., for the respondent.
This proceeding involves petitioner's excess profits tax liability for the fiscal year ended January 31, 1941. Respondent originally determined a deficiency in the amount of $109,611.71. By amended answer he asked an additional deficiency in the amount of $163,162.33. All the issues raised with respect to the original deficiency have been settled by stipulation of the parties, and effect will be given thereto in a recomputation under Rule 50. The issues remaining for decision are whether, in the computation of excess profits net income under the provisions of section 736(a) of the Internal Revenue Code, deductions should be allowed the petitioner for (1) bad debts of $55,392.45 on uncollectible installment accounts receivable arising from installments sales made prior to February 1, 1940, and (2) the amount of $33,211.22 representing moneys expended in collecting installment accounts receivable arising from installment sales made prior to February 1, 1940.
Substantially all the facts have been stipulated and are accordingly adopted. Only those material to an understanding of the issues will be set out in our findings.
Petitioner is a Maryland corporation. It operates on the basis of a fiscal year ending January 31. For the year ended January 31, 1941, its income and excess profits tax returns were filed with the collector of internal revenue at Baltimore. Said returns were prepared with income from installment sales computed upon the installment basis of accounting in accordance with the provisions of section 44(a) of the Internal Revenue Code.
At the close of its fiscal year ended January 31, 1943, petitioner became eligible to report its income from installment sales under section 736(a) of the code, since its average outstanding installment accounts receivable at the end of the four preceding years was more than 125 per cent of the amount of such accounts receivable at the end of that year. On June 12, 1943, it accordingly filed an amended excess profits tax return for the year ended January 31, 1941, electing therein to compute income from installment sales under section 736(a). In the amended return petitioner increased its excess profits net income by the amount of unrealized profits, $193,310.18, which had been deferred in the original return computed on the installment basis. A statement attached to its amended return explained the computation as follows:
Petitioner's total gross sales during the taxable year on the accrual basis amounted to $32,889,490.91. After adjustments for unrealized profits on installment sales, in the net amount of $193,310.18, and for sales returns of $3,885,559.03, petitioner's net sales on the installment basis amounted to $28,810,621.70, which figure was reported in its income tax return.
Petitioner's net sales on the accrual basis amounted to $29,003,931.88. That figure does not include any unrealized profits attributable to accounts receivable arising from installment sales made prior to February 1, 1940.
Normal tax net income reported by petitioner in its income tax return amounted to $2,741,424.45. A small upward adjustment of that figure made by respondent as a result of the disallowance of a contingent reserve is not challenged by petitioner.
Respondent's minor downward adjustment of petitioner's excess profits credit based on income, resulting from the disallowance of restoration to base period income of certain small abandonment losses, is likewise now agreed to by petitioner.
The amount of $236,732.42 so deducted included the net amount of $55,392.45 representing bad debts on uncollectible installment accounts receivable arising from installment sales made prior to February 1, 1940. Unrealized...
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Blatchford v. Commissioner, Docket No. 58107.
...difficulties of applying cash or accrual concepts to installment-basis taxpayers. See Blums, Inc. Dec. 2633, 7 B. T. A. 737; The Hecht Co. Dec. 15,348, 7 T. C. 643, affd. 47-2 USTC ¶ 5915 163 F. 2d 194; Mackin Corporation Dec. 15,349, 7 T. C. 648, affd. 47-2 USTC ¶ 5916, 164 F. 2d 527; and ......
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J. L. Goodman Furniture Co. v. Comm'r of Internal Revenue
...effect upon the computation to be made under section 718(a)(4). It has been held that the election does not affect other provisions. Hecht Co., 7 T.C. 643; affd., 163 Fed.(2d) 194; Mackin Corporation, 7 T.C. 648; affd., 164 Fed.(2d) 527. The decision of this Court in Basalt Rock Co., 10 T.C......
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MAY, STERN AND COMPANY v. Commissioner
...The first issue presented was decided in petitioner's favor upon the authority of Mackin Corporation, 7 T. C. 648 Dec. 15,349; and The Hecht Co., 7 T. C. 643 Dec. 15,348. The decisions of this Court in the above cases have since been affirmed. See Commissioner v. Mackin, 164 Fed. (2d) 527 4......
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