Horner v. Comm'r of Internal Revenue, Docket No. 79370.
| Decision Date | 08 November 1960 |
| Docket Number | Docket No. 79370. |
| Citation | 35 T.C. 231 |
| Parties | HARRY HORNER AND ELZORA HORNER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
The petitioner in his individual capacity obtained from the manufacturer of certain merchandise a franchise to sell that merchandise in a stated locality and a line of credit. This merchandise was invoiced to petitioner as an individual but was sold through a corporation of which the petitioner was president, general manager, and major stockholder. He tried to have the invoicing and franchise changed to the corporation but the manufacturer refused to make the change and invoiced all of the merchandise to the petitioner. The invoices were paid by the corporation until it became insolvent. The manufacturer obtained a judgment against the petitioner for the balance due from him on the merchandise. Held, the amount of that judgment and related costs is deductible as a loss under section 165(c), and not as a nonbusiness bad debt under section 166(d), of the Internal Revenue Code of 1954. Robert R. Jordan, Esq., for the petitioners.
Richard J. Shipley, Esq., for the respondent.
The respondent determined deficiencies in petitioners' income tax for the years 1955 and 1956 in the respective amounts of $535.39 and $1,972.31.
The only issue presented is whether the 1956 payment by Harry Horner of a judgment, court costs, and appellate expense in the sum of $6,255.10 is deductible in that year as a loss under section 165, I.R.C. 1954,1 or as a bad debt under section 166, or as a nonbusiness bad debt, where the deduction is limited under section 166(d) to a short-term capital loss.
All of the facts were stipulated and they are found accordingly.
Petitioners are husband and wife, residing in Des Moines, Iowa, and they filed their joint income tax returns for the years involved with the district director of internal revenue at Des Moines, Iowa.
On or about November 1, 1953, the petitioner Harry Horner and Robert L. Bloomfield made the decision to enter into the aluminum window and door business. On November 3, 1953, Horner and Bloomfield, acting in their individual capacities, made application with Borg-Warner Corporation for a franchise to assemble and distribute in certain Iowa counties, Koolshade products manufactured by the Ingersoll Products Division of the Borg-Warner Corporation. At this time Horner was the owner of a business known as the Iowa School of Beauty Culture located in Des Moines, Iowa, and was also the owner of several farms located near Herman, Minnesota. Along with the application for franchise, the petitioner Harry Horner submitted his financial statement. The application for franchise was approved and at the same time the Borg-Warner Corporation established a line of credit for purchases to the petitioner Harry Horner, individually.
While the application for franchise was being processed, Horner, Bloomfield, and Glen Sheeder formed a corporation named the Iowa Home Improvement Company for the purpose of manufacturing and assembling the Koolshade products. The certificate of incorporation was issued November 23, 1953, by the secretary of state of Iowa, and the corporation commenced doing business at that time. All incorporators purchased an equal amount of capital stock. All three were directors and officers of the corporation, Horner being elected president. Between November 1953 and September 1955, the corporation assembled and sold aluminum windows and doors.
From the beginning, the petitioner devoted a substantial portion of his time to the business and affairs of the corporation acting more or less as general manager. This was especially so after February 1954 when Bloomfield withdrew from the corporation and the petitioner purchased his interest. By this change of interest, the petitioner became the major stockholder of the corporation. The other stockholder, Glen Sheeder, still retained one-third of the stock of the corporation.
From the beginning, all materials ordered for the corporation from Borg-Warner were invoiced to Harry B. Horner, d.b.a. Iowa Home Improvement Company. The invoices were paid by corporate checks signed by the petitioner and another officer of the corporation. In April of 1954 the petitioner submitted a financial statement of the corporation to the Borg-Warner Corporation. Borg-Warner refused to accept the Iowa Home Improvement Company as a debtor and continued its policy of invoicing merchandise purchased for the corporation to the petitioner individually.
The corporation failed to prosper and became insolvent in September 1955. The corporation executed an assignment for benefit of creditors which was filed September 12, 1955, in the District Court of the State of Iowa in and for Polk County, Equity No. 63401. The unpaid account of Borg-Warner at this time was $5,675.21, and this obligation was listed in the schedule of liabilities of the corporation filed with the assignment. Borg-Warner did not file any claim against the corporation in the assignment proceedings for their unpaid account. Pursuant to direction of the court, the assets of the corporation were sold by the assignee and the proceeds distributed to creditors who filed claims. Petitioner Harry Horner received a distribution of $1,217.24 on his claim of $5,200 for a loan to the corporation and a distribution of $1,720.25 on his claim of $4,900 for accrued salary. Horner never filed a claim of any nature in the assignment proceeding with respect to the merchandise involved in the Borg-Warner account, either by way of direct claim for merchandise advanced or by claim for reimbursement to save him harmless from a liability incurred. The affairs of the corporation were fully concluded by the court on March 6, 1956, when it entered a final order discharging the assignee, approving his reports, and closing the assignment proceeding.
On January 13, 1956, the Borg-Warner Corporation brought action against Harry B. Horner, d.b.a. Iowa Home Improvement Company, in the District Court of the State of Iowa in and for Polk County, Law No. 65850, for the balance due on the account in the sum or $5,675.21. This was an ordinary action of account for merchandise sold and delivered to the defendant at the defendant's special instance and request. The petitioner contested, denying liability for the account. The cause was tried to a jury in May 1956 and verdict was rendered against the petitioner for the balance due on the account. Judgment was entered May 28, 1956.
After dismissing appellate proceedings in December 1956, the petitioner, on December 5, 1956, paid the judgment, interest, and court costs in the sum of $6,193.79. During the year petitioner also paid attorney fees and expenses incurred in the Borg-Warner case of $399.40, making a total sum of $6,593.19, which he claimed as a deduction in full on his 1956 income tax return. The amount so claimed is itemized as follows:
+-----------------------------------------------------------------------------+
¦(a)¦Judgment per verdict ¦$5,675.21¦
+---+---------------------------------------------------------------+---------¦
¦(b)¦Interest on judgment from 6/28/55 to 12/5/56 at 5% per annum ¦338.09 ¦
+---+---------------------------------------------------------------+---------¦
¦(c)¦Court costs, Law No. 65850...To continue reading
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