Lakeland Grocery Company v. Commissioner of Internal Revenue
| Decision Date | 13 July 1937 |
| Docket Number | Docket No. 83392. |
| Parties | LAKELAND GROCERY COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Robert Ash, Esq., for the petitioner.
C. A. Gwinn, Esq., for the respondent.
This is a proceeding for the redetermination of a deficiency in income tax of $12,139.12 and excess profits tax of $4,257.97, a total of $16,397.09 for the taxable year 1933. The petitioner's tax return showed a net loss of $29,900.18 and the respondent made adjustments which resulted in a net income of $88,284.49. The only adjustment in issue is his addition of $89,237.55 as income realized from a composition settlement by the petitioner with its creditors.
FINDINGS OF FACT.
The petitioner, a corporation, with its principal office in Lakeland, Florida, was forced into receivership on December 26, 1930, as the result of a suit filed in the United States District Court for the Southern District of Florida, two receivers being appointed, from which it was discharged on March 29, 1933, after having effected a composition settlement with its creditors as hereinafter shown.
On March 3, 1933, the petitioner filed a voluntary petition in bankruptcy in the said United States District Court with the usual allegations, i. e., inability to pay its debts and offering to give up all of its assets in settlement thereof, listing an excess of debts over assets. After filing such petition, and prior to action thereon by the court, the petitioner, because of the pendency of a plan of composition then under consideration, requested the court to delay action upon the petition for adjudication until a decision by the creditors with respect thereto. This request was granted and the petition in bankruptcy was not acted upon.
In order to permit petitioner to remain in business, the creditors accepted a composition plan resulting in the cancellation and forgiveness of the petitioner's indebtedness to the extent of $104,710.16, in consideration of payments to the creditors in the sum of $15,472.61, or a net cancellation of $89,237.55 of debts. The petitioner was permitted to retain assets in the net amount of $39,596.93 which might have been applied against its indebtedness had it been adjudicated a bankrupt. The United States District Court confirmed this composition on March 29, 1933. Immediately prior to this composition settlement the petitioner was insolvent, having an excess of liabilities over assets. Immediately thereafter, on April 1, 1933, the petitioner as a result of the composition had net assets of $39,596.93. A summary of its balance sheet on that date is as follows:
The respondent made several adjustments of the taxpayer's income for the taxable year 1933, but the only one in issue is his addition to the petitioner's income of $89,237.55 as "Profit arising from composition settlement." This amount was determined by subtracting the total payment to creditors made in consideration of the composition, $15,472.61, from the total of debts which were canceled, $104,710.16. The petitioner claims that no "income" whatever was realized from the cancellation of indebtedness and the respondent, while contending that "income" was realized, concedes on brief that the "income" should be limited to the total of the petitioner's net assets immediately following the composition, namely, $39,596.93, which were made available to the petitioner free from the claims of creditors as a result of the composition.
Both parties are agreed on the fact that prior to the composition settlement petitioner was insolvent, having an excess of liabilities over assets. The parties are also agreed that immediately after the composition the petitioner had net assets of $39,596.93 which were freed from the claims of creditors as a result of the composition settlement.
The statute so far as applicable here merely provides that "`Gross income' includes gains, profits and income derived from * * * trades, businesses, commerce or sales, or dealings in property, or use of or interest in such property; also from * * * the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever." (Sec. 22 (a), Revenue Act of 1932.) The question here is whether the cancellation of indebtedness under the circumstances of this case resulted in "gains", "profits", or "income" within the meaning of the statute.
The cases which the petitioner claims are controlling on the facts are: Meyer Jewelry Co., 3 B. T. A. 1319; Burnet v. Campbell Co., 50 Fed. (2d) 487; Dallas Transfer & Terminal Co. v. Commissioner, 70 Fed. (2d) 95; and Porte F. Quinn, 31 B. T. A. 142. As we read these cases none of them appear to involve the facts we have before us. Although the reports in some of them are not clear as to the facts involved, it seems to us a fair conclusion that in all of them the petitioner was assumed to be insolvent before the forgiveness of indebtedness and to have remained in a state of insolvency or at least with no excess of assets over liabilities after the cancellation of indebtedness. On such facts it was properly held that no gain was realized, and a long line of cases reaches this result. Simmons Gin Co., 16 B. T. A. 793; affd., 43 Fed. (2d) 327; Eastside Manufacturing Co., 18 B. T. A. 461; Progress Paper Co., 20 B. T. A. 234; E. B. Higley & Co., 25 B. T. A. 127; Towers & Sullivan Manufacturing Co., 25 B. T. A. 922. However, in the case at bar the distinguishing factor is that although the petitioner was insolvent immediately before the composition it emerged from that settlement with free assets of $39,596.93.
The respondent rightly, it seems to us, perceives this to be a case of first impression on the particular facts present. He points out that the line of cases cited are applicable where the debtor is insolvent both before and after the cancellation of debts. He cites the other line of cases holding that gain is realized from forgiveness of indebtedness where the debtor is solvent both before and after the cancellation of indebtedness. B. F. Avery & Sons, Inc., 26 B. T. A. 1393; Knowles D. White, 34 B. T. A. 424; affd., sub nom Walker v. Commissioner, 88 Fed. (2d) 170, and he points out that this is an intermediate case where the debtor was insolvent before the cancellation but solvent immediately after it with an excess of assets over liabilities of $39,596.93. In this situation he contends that the rationale of United States v. Kirby Lumber Co., 284 U. S. 1, should apply and that gain is realized to the...
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