HH Brown Co. v. Commissioner of Internal Revenue
| Decision Date | 19 September 1927 |
| Docket Number | Docket No. 7967. |
| Citation | 8 BTA 112 |
| Parties | H. H. BROWN CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Thomas Proctor, Esq., and John T. Drury, Esq., for the petitioner.
T. M. Mather, Esq., for the respondent.
This proceeding results from the determination by the respondent of a deficiency in income and profits taxes for the fiscal year ended June 30, 1922, in the amount of $3,734.79. The deficiency is due to the disallowance by the respondent of deductions claimed for debts alleged to have been ascertained to be worthless and charged off within the year, and for local and state taxes accrued.
FINDINGS OF FACT.
Petitioner is a Massachusetts corporation with principal office at North Brookfield. It maintained its books of accounts and reported its income for the fiscal year ended June 30, 1922, on the accrual basis. It was engaged in the business of the manufacture and sale of shoes until June 30, 1922. On that date, Charles C. Beebe, who was and is its president, and, together with his family, the principal stockholder, wished to retire from active business and turn the same over to his associates. The H. H. Brown Shoe Co. was accordingly organized to carry out this purpose. The business of petitioner was taken over by the new corporation on June 30, 1922. Thereafter, petitioner carried on no active business, but remained in existence only for the purpose of winding up its affairs.
During the month of June, 1922, the president of petitioner and the bookkeeper went over a list of all accounts receivable. From their combined knowledge of financial conditions of the respective debtors, together with their belief as to possible future collections, they concluded that certain percentages of five debts were uncollectible, and the president accordingly directed the bookkeeper to charge off on the books of account such percentages as worthless. During the month of August, 1922, one of the employees of petitioner advised its president that a reserve should have been set up and the percentages of the worthless debts charged to the same, which was ordered done.
The J. W. Jenkins Shoe Co. account had been running since 1920. The company had stores at Dallas, Tex., and Shreveport, La. The financial difficulties of the company were caused by a large purchase of shoes just prior to a decline of 50 per cent in the price of shoes. Jenkins, the president of the company, was a personal friend of the president of petitioner and often called upon the latter for guidance and advice in the conduct of his business. The financial condition of the company was well known to the president of petitioner. In June, 1921, the financial condition of the company became precarious, and the creditors, including petitioner, met and agreed to accept participating certificates for 55 per cent of their accounts and notes payable at future dates for the remaining 45 per cent. Subsequently, during the year 1922, the creditors, including petitioner, held several meetings, to consider the financial condition of the company. Some of the creditors continued to consign goods to the company, despite its financial condition. These creditors, however, refused to continue to consign goods to the company, unless all the creditors made an assignment of their accounts. Such assignment to an adjuster was made in August, 1923, and Jenkins assigned the assets he had at that time for the benefit of his creditors. The company account on petitioner's books at the end of the fiscal year was $11,077.64. The last payment prior to the end of the fiscal year was for $186, made on May 19, 1922. During the month of June, 1922, the president of petitioner concluded that not more than 25 per cent of the company's accounts could be collected and instructed the bookkeeper to charge off 75 per cent thereof as worthless. Subsequently, during the years 1922 and 1923, petitioner collected $2,248.32.
An account owed petitioner by the Hollins Shoe Co., at the end of the fiscal year 1922, totaled $3,009.63 and had been running since 1920, in which latter year the company had become financially involved. Hollins, the president of the company, had stated to the petitioner that the company had disposed of all their assets save some real estate. With this information and knowledge of the value of the real estate, the president of petitioner concluded, in June 1922, that not more than 25 per cent of the account was collectible and gave directions for 75 per cent of the account to be charged off as noncollectible.
The account of D. W. Brunell Shoe Co. with petitioner, on June 30, 1922, was $1,286.05. It had been running since 1920 and 1921. The company made an assignment to A. W. Cox & Co. during the year 1921. Soon after such assignment, the assignee sent a statement to all creditors, showing that about 66 per cent could be expected to be collected if the assets were realized upon in full. By June 30, 1922, petitioner had received 25 per cent. The president of petitioner concluded, in June 1922, that not more than 25 per cent of the remaining balance could be expected and gave directions for the charging off of the remaining 75 per cent thereof. Subsequent to June 30, 1922, petitioner collected $526.02.
On June 30, 1922, a firm known as Basch, Jacobs & Schur owed petitioner $727.20. The president of petitioner, based upon his knowledge of the financial condition of the debtor, gave instructions to the bookkeeper to charge off 75 per cent of the account as uncollectible on June 30, 1922. On August 2, 1922, the creditors of the debtor accepted a settlement for 25 cents on the dollar.
An account of $96.51 appeared on petitioner's books on June 30, 1922, against the Bank of Greenwood, and was due to the failure of the bank between the time a check thereon was mailed by a customer and the presentation for collection by petitioner. The president of petitioner, based upon a knowledge of the resources of the bank, concluded that not more than 50 per cent thereof could be collected and directed his bookkeeper to charge off 50 per cent thereof before June 30, 1922. Subsequent to June 30, 1922, the sum of $58.45 was collected.
On June 30, 1922, petitioner followed its theretofore established practice of accruing local and state taxes, by setting up a reserve in the amount of $3,821.24. Such taxes were paid to the State of Massachusetts and the town of North Brookfield, on September 26, 1922, in the amounts of $2,522.71 and $1,264.85, respectively. The Massachusetts taxable year commences on April 1 of each year and the taxes are due and payable in the October following.
On September 27, 1922, petitioner received from the H. H. Brown Shoe Co. cash, as follows, to reimburse petitioner for portions of the state and local taxes, which the shoe company had theretofore agreed to pay: state taxes, $946.02, and town taxes, $948.64.
The first issue relates to the five accounts appearing on petitioner's books at June 30, 1922, totaling $16,197.03 and upon which a deduction of $12,149.45 is claimed. The action of the president of petitioner in charging off on the books of account the percentages recited in the findings of fact was based upon his detailed knowledge with respect to each account. The ascertainment of the worthlessness of a debt, either in whole or in part, is the exercise of sound business judgment based upon as complete information as is practicably obtainable. The president of petitioner, acting upon the detailed information known to him, reached the conclusion that the petitioner would not be able to recover more than certain percentages of the debts in question. Subsequent collections verified his judgment. We are of the opinion that the respondent should have allowed the deductions claimed by petitioner.
The taxes paid to the commonwealth of Massachusetts and to the town of North Brookfield resolve themselves into two classes — (1) direct taxes...
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