In re Trustees System Co. of Louisville

• Decision Date: 23 September 1939
• Docket Number: In Bankruptcy No. 2094,10866.
• Citation: 30 F. Supp. 361
• Parties: In re TRUSTEES SYSTEM CO. OF LOUISVILLE. TRUSTEES SYSTEM CO. OF LOUISVILLE v. UNITED STATES.
• Court: U.S. District Court — Western District of Kentucky

30 F. Supp. 361

In re TRUSTEES SYSTEM CO. OF LOUISVILLE TRUSTEES SYSTEM CO. OF LOUISVILLE v. UNITED STATES.

In Bankruptcy Nos. 2094, 10866.

District Court, W. D. Kentucky.

September 23, 1939.

J. Blakey Helm and Henry McElwain, both of Louisville, Ky., for debtor-plaintiff.

Eli H. Brown, III, U. S. Dist. Atty., of Louisville, Ky., for the United States.

HAMILTON, District Judge.

In the above-styled actions, the debtor-plaintiff seeks to recover income taxes alleged to have been overpaid for the calendar years 1930 and 1931 and resists the payment of an additional assessment for the calendar year 1932.

The Trustees System Company of Louisville, debtor in action No. 10866 and plaintiff in No. 2094, with its principal place of business at Louisville, Kentucky, was a wholly-owned subsidiary of the Trustees System Service Corporation, a Virginia corporation, with its principal place of business in Chicago, Illinois, which was a wholly-owned subsidiary of the Industrial Loan & Guaranty Company, an Alabama corporation, which owned all the capital stock of the Trustees System Extension Corporation, created under the laws of Illinois, with its principal place of business at Chicago.

The Trustees System Service Corporation was engaged in the industrial or small loan business in various cities of the United States through thirty-three wholly-owned subsidiaries of which the debtor-plaintiff was one.

It sold to the public, through the Trustees System Extension Corporation, guaranteed dividend preferred stock and six percent "gold notes" of its subsidiaries and executed its notes to them for the net proceeds of the sales and made advances without charge to each for their loans to customers and the subsidiaries remitted to the parent their collections out of which it paid dividends on the preferred stock and interest on "gold notes" of the subsidiaries.

The parent company kept in its Chicago office its books of account on an accrual basis, and those of its subsidiaries reflecting therein all inter-companies and outside transactions. The subsidiaries kept no books at their respective places of business except loan and collection sheets and the officers and directors of the parent and subsidiaries were inter-locking. The business was carried on without financial difficulties until October 1932 when the parent company was placed in equity receivership in the United States District Court for the Northern District of Illinois at Chicago, Illinois, and the debtor-plaintiff was placed in equity receivership in this Court on June 19, 1933. It later entered bankruptcy under 77B of the Bankruptcy Act, 11 U.S.C.A. § 207 from which it has emerged a going concern.

The parent company had on its books an account, designated "rent and service", to which was credited monthly to the debtor-plaintiff, sums equal to its actual Louisville office expenses including advertising and the salary of its manager, and also $250, which was estimated to be the fair monthly rental value of debtor-plaintiff's offices at 415 W. Market Street, Louisville, Kentucky, and other items unidentified except "additional rent and service."

This account was continued through the years 1930, 1931 and 1932 up to October. Countervailing entries were on the books of the debtor-plaintiff which it closed at the end of each year into profit and loss, but the parent company deferred its accounts. One of the bookkeepers in charge of the books of both parent and debtor-plaintiff prepared a temporary trial balance of the debtor-plaintiff at the end of each month and delivered it to the general bookkeeper of both, who in turn delivered it to the general auditor and comptroller of both, who noted on it in pencil the charges and credits to be made on account of rent and service. From these notations, permanent journal entries were made of the credit and debit items and entered on the respective ledgers of the companies.

During the calendar year 1930 the debtor-plaintiff, out of its rent and service accounts, charged to profit and loss $78,411.21 for the calendar year 1931, $74,891.16, and for nine months of the calendar year 1932, $55,796.21. In its tax returns for the calendar years 1930 and 1931, it included in taxable income the above sums but the receiver omitted them for the calendar year 1932. He timely filed claims for refunds for the years 1930 and 1931 and revised the corporation's returns by eliminating rent and service credits and claimed additional deductions of $37,901.14 for the year 1930 and $19,512.97 for the year 1931.

On audit and review, the Commissioner of Internal Revenue revised the receiver's return for the calendar year 1932 and included therein $55,796.21 rent and service as income, after which the receiver filed an amended return and claimed additional deductions of $21,036.64.

The plaintiff seeks to recover in action No. 2094 $8,102.19 alleged to have been overpaid in taxes and interest for the calendar year 1930 and $10,181.09 for the calendar year 1931.

In No. 10866, pursuant to the assessment of the Commissioner of Internal Revenue, the Collector of Internal Revenue for the District of Kentucky has filed a claim for additional taxes of $10,014.10. The burden rests on the debtor-plaintiff to establish by a fair preponderance of the evidence that the taxes which it seeks to recover and avoid are invalid.

This rule follows because the debtor-plaintiff must overcome two presumptions: first, that its books were cautiously kept and entries made with forethought and after a consideration of all the facts and that the statements therein are admissions against it; second, that taxes paid are lawfully collected upon assessments by the Commissioner of Internal Revenue and are due on a claim filed by the Collector of Internal Revenue pursuant to assessment theretofore made by the Commissioner. United States v. Rindskopf, 105 U.S. 418, 26 L.Ed. 1131; United States v. Anderson, 269 U.S. 422, 46 S.Ct. 131, 70 L.Ed. 347; Niles Bement Pond Company v. United States, 281 U.S. 357, 50 S.Ct. 251, 74 L.Ed. 901; Botany Worsted Mills v. United States, 278 U.S. 282, 49 S.Ct. 129, 73 L.Ed. 379.

Presumptions operate only to relieve the party in whose favor they work from going forward in evidence and the weight of evidence necessary to overcome them varies in relation to the weight of the evidential facts bringing them into existence. Thus, the presumption of the correctness of entries in books depends on the underlying facts producing them and likewise the presumption of the correctness of the determination of the Commissioner of Internal Revenue depends on the weight of the facts on which he made his assessment. Bernheim Distilling Company v. Mayes, D. C., 268 F. 629. An examination of the record shows that the Commissioner of Internal Revenue, in making his assessments, acted solely on information furnished by the debtor-plaintiff from its books. It therefore follows that, unless the real facts show it received the income taxed the presumptions fail and it is entitled to relief for there are no contrary proofs in the record. Lunsford v. Commissioner, 6 Cir., 62 F.2d 740, 741.

Income cannot be determined by bookkeeping unless the facts underlying the entries show it was income as defined in the Statute. Doyle v. Mitchell Bros. Co., 247 U.S. 179, 38 S.Ct. 467, 62 L.Ed. 1054; However, income may arise from a credit as well as from the receipt of money or other tangible property. Helvering v. Midland Insurance Company, 300 U.S. 216, 57 S.Ct. 423, 81 L.Ed. 612, 108 A.L.R. 436. No system of bookkeeping will justify the government in claiming taxes nor support a taxpayer in claiming exemptions, if the real facts show the contrary. Southern Pacific Railroad Company v. Muenter, 9 Cir., 260 F. 837; Doyle v. Mitchell Bros. Co., 247 U.S. 179, 38 S.Ct. 467, 62 L.Ed. 1054.

The bookkeeping supervisor of the parent and its subsidiaries, testified that the debtor-plaintiff made monthly reports to him which he checked and from which he had one of his subordinates prepare a temporary monthly trial balance showing income, expenses, assets and liabilities, which was delivered to the general auditor and comptroller of both the parent and its subsidiaries. This officer directed him to credit on the books of the parent to the debtor-plaintiff all of its expenses and to charge them to the parent on the books of the debtor-plaintiff.

He testified that, in addition to these items of expense actually incurred and shown on the reports of the debtor-plaintiff, the general auditor and comptroller made pencil notations arbitrarily increasing the charges and credits for rent and service. The bookkeeping supervisor then caused to be made final reflecting entries thus approved. He also caused to be made memoranda of the additions to the account as authorized by the general auditor and comptroller, all of which are in the record and in the same form, of which the following is typical:

                                                              No. 50287
                      Company: Trustees System Co. of Louisville Office Date Feb. 28-1930
                -------------------------------------------------------------------------------
                Dr. T. S. Extension Corp.       5,000.00  |   Cr Rent &amp
                                                          |   Services          5,000.00
                Additional Rent and Services for February |   1930
                Cust. Led.                                |     Journal 66
                Authorized         FDN                    |       CDS
                -------------------------------------------------------------------------------
                

For the calendar year 1930, $64,500 additional credits were set up on the books of the parent to the debtor-plaintiff; for 1931, $60,000 and for 1932, $51,500, none of which was an actual expense incurred in the operation of its Louisville office.

The bookkeeping supervisor testified he did not know the purpose of making these credits. The assistant secretary of the debtor-plaintiff testified he made up its expense reports and...