Kyne v. United States
| Decision Date | 10 September 1958 |
| Docket Number | Civil Action No. 3485. |
| Citation | 180 F. Supp. 53 |
| Parties | Charles M. KYNE and Muryl Kyne, Plaintiffs, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Western District of Kentucky |
Dodd & Dodd (Allen P. Dodd) Louisville, Ky., for plaintiffs.
Paul K. Kirkpatrick, Jr., Atty., Tax Division, Department of Justice, Washington, D. C., J. Leonard Walker, U. S. Atty., Louisville, Ky., Charles M. Allen, Asst. U. S. Atty., W. D. Ky., Louisville, Ky., for defendant.
1. Charles M. Kyne, the taxpayer, and Frank J. Shippen formed a partnership styled The Alabama Poplar Company on January 1, 1946, for the purpose of buying and selling lumber. The partnership office was located in Camp Hill, Alabama and Shippen was the managing partner.
2. On or about December 22, 1953, Shippen proposed to the taxpayer that the partnership be dissolved as of December 31, 1953. The partners agreed to dissolve with the understanding that Shippen would continue buying and selling lumber for his own account under the name, Alabama Poplar Company.
3. Shippen proposed to taxpayer in December of 1953 that taxpayer accept for his interest in the partnership, $40,000 in cash and the balance later from the profits of Shippen's business. Taxpayer would not accept this proposition nor did the partners agree in 1953 as to how the partnership would be liquidated. They did agree, either in December of 1953 or January of 1954, that the partnership inventory would be assigned to the taxpayer and that the taxpayer would finance Shippen in his individual business.
4. The accounting records of The Alabama Poplar Company reflect that the partnership collected outstanding accounts and recorded liabilities up to and including December 31, 1953. On December 31, 1953, Shippen withdrew $6,000 from the partnership bank account with the taxpayer's approval. Although the partnership books reflect a collection on account from one of the partnership debtors, Hall-Owens, Inc., in the amount of $6,434.15, this amount had been collected by Shippen and deposited in his individual bank account. This amount was deposited to the partnership bank account in January, 1954.
5. On January 1, 1954, Shippen began doing business as, Alabama Poplar Company. He used the funds in the partnership bank account for his individual business. Around the middle of January, 1954, taxpayer made three withdrawals from the partnership account totaling $35,900. Taxpayer's withdrawals left $423 in the account which was later used by Shippen in his individual business.
6. Taxpayer's withdrawals of cash from the partnership bank account was not pursuant to any plan of liquidation previously agreed to by the partners, but Shippen was present and acquiesced to the last withdrawal.
7. On January 26, 1954, taxpayer began advancing money to Shippen upon assigned invoices, which practice taxpayer is still engaged in. Taxpayer charges Shippen $10 per invoice plus 6 per cent of the amount advanced. Taxpayer's total advances to Shippen to date are as follows:
1954 $182,641.14
1955 300,552.38
1956 255,954.86
1957 255,820.22
April 30, 1958 67,968.58
Shippen repays the advances as he collects from customers.
8. On March 11, 1954, Shippen sent taxpayer the partnership tax return for the year ended December 31, 1953. The partnership balance sheet set out on the last page of the return showed the following balances as of December 31, 1953.
Assets
Cash $38,972.20
Inventory 30,649.78
__________
Total assets: $69,621.98
Liabilities
Accounts payable $ 576.40
Accrued expenses 4,753.63
__________
Total liabilities: $ 5,330.03
Net Worth
Charles M. Kyne $75,318.40
Frank J. Shippen (11,026.45*)
__________
$69,621.98
==========
* deficit
9. On March 15, 1954, taxpayer filed his Federal income tax return for the year 1953 and claimed thereon a deduction in the amount of $11,026.45 as a business bad debt.
10. The partnership liabilities were not paid by the taxpayer and he was released by the remaining unpaid firm creditors in 1955. Taxpayer and Shippen did not have an accounting, arrive at a settlement nor agree to a plan of liquidation prior to 1954. Shippen agreed in March of 1954 that he was liable to the taxpayer.
11. If taxpayer and Shippen were to have an accounting, the accounts would appear substantially as follows:
Kyne Shippen
Balance per balance sheet
December 31, 1953 $75,318.40 ($11,026.45)
Less Cash received
January, 1954 35,900.00 3,072.20
__________ ___________
$39,418.40 ($14,098.65)
Less Inventory, December
1953 or January, 1954 30,649.78 - 0 -
__________ ____________
$ 8,768.62 ($14,098.65)
Add
Liabilities paid on
assumed January 1954-1955 - 0 - 5,330.03
___________ ____________
$ 8,768.62 ($ 8,768.62)
12. Beginning on April 16, 1954, taxpayer made the following loans to Shippen, evidenced by notes: April 16, 1954, $5,000; June 28, 1954, $2,000; December 27, 1954, $3,500; January 10, 1955, $3,500; April 30, 1955, $1,000; May 4, 1955, $3,000; June 1, 1955, $4,000. All of these loans had been repaid prior to September 26, 1955.
13. On December 31, 1953, Frank J. Shippen had a bank account in the Citizens National Bank of Milford, Indiana, with a balance of $10,836.55. Of this amount $6,434.15 was owed to the partnership and was paid thereto on January 16, 1954. On that date Shippen had other assets having a value of at least $1,882.37.
14. During the year 1954 Shippen operated the Alabama Company and another business, The Alabama Company. The net income from these two businesses amounted to $20,381.49 for the year 1954. During the years 1955 and 1956, Shippen had net losses of $21,942.81 and $12,911.30, respectively. For the year 1957 Shippen had net profits of $18,970.31. The outlook for his business in 1958 is favorable.
15. Taxpayer has not reduced any claim against Shippen to judgment although Shippen admitted a liability to the taxpayer subsequent to March 11, 1954, arising out of the termination of the Alabama Poplar Company. Taxpayer has never consulted attorneys in regard to either establishing or realizing upon Shippen's liability. In December of 1956, taxpayer asked Shippen to make a payment for the purpose of tolling the statute of limitations. Shippen paid $126.46. On July 3, 1957, Shippen paid taxpayer $130.79. Between 1955 and 1957, Shippen purchased for his own account over $15,000 of common stocks.
(1) The evidence failed to establish a debtor-creditor relationship between Shippen and taxpayer existing in 1953. In order for there to be a debt within the meaning of the Internal Revenue Code bad debt provisions, there must be an existing unconditional obligation of another to pay the taxpayer. Bercaw v. Commissioner of Internal Revenue, 4 Cir., 165 F.2d 521; Milton Bradley Co. v. United States, 1 Cir., 146 F.2d 541; Gilman v. Commissioner of Internal Revenue, 8 Cir., 53 F.2d 47, 80 A.L.R. 209. Claims arising from breach of contract or unadjudicated claims do not create...
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