Morris Plan Company of St. Joseph v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 97814.

• Decision Date: 14 November 1940
• Docket Number: Docket No. 97814.
• Citation: 42 BTA 1190
• Parties: THE MORRIS PLAN COMPANY OF ST. JOSEPH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

42 B.T.A. 1190 (1940)

THE MORRIS PLAN COMPANY OF ST. JOSEPH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 97814.

Board of Tax Appeals.

Promulgated November 14, 1940.

Richard L. Douglas, Esq., for the petitioner.

Angus R. Shannon, Esq., for the respondent.

This proceeding involves a deficiency in income tax for 1936 of $6,917.90. The issue is whether petitioner sustained losses during 1936 from its purchase of forged and fictitious notes purporting to be secured by chattel mortgages of fictitious and nonexistent persons. If entitled to the deductions in 1936, petitioner asks the Board to determine that it has overpaid its tax for that year.

The principal facts were covered by stipulation, filed at the hearing, which was supplemented by oral testimony and exhibits. We adopt the stipulation as part of our findings, and from such stipulation, oral testimony, and exhibits determine the facts to be as hereinafter set forth.

FINDINGS OF FACT.

Petitioner is a Missouri corporation, with its principal office and place of business in St. Joseph, Missouri. It was organized and chartered as a loan and investment company. Its charter states that it was formed:

* * * to carry on and transact a general loan business; to loan and invest moneys upon property or security, real or personal; to issue, purchase and sell certificates, notes and written evidences of indebtedness in a manner not inconsistent with the law; to loan money and to carry on business in accordance with the Morris Plan; and in general to do any and all things pertaining to or incident to the transaction of any and all the matters and things aforesaid.

At the beginning and end of the taxable year 1936 petitioner's paid in capital, surplus, and undivided profits, before discovery of or taking into account losses on the transactions with the General Drug & Appliance Co., hereinafter more fully discussed, were shown by its books as follows:

                -----------------------------------------------------------------------
                                                      | As of Dec. 31, | As of Dec. 31
                                                      |     1935       |     1936
                --------------------------------------|----------------|---------------
                Capital _____________________________ |    $150,000.00 |    $150,000.00
                Surplus _____________________________ |      50,000.00 |      50,000.00
                Undivided profits ___________________ |     128,193.99 |     128,654.64
                -----------------------------------------------------------------------
                

During and prior to 1936 petitioner engaged generally in the business of purchasing for investment, at a discount, from others, notes of third persons payable in installments and secured by chattel mortgages on personal property of the makers of such notes. Approximately, three-fourths of petitioner's business came from the purchase of secured notes of this character.

The General Drug & Appliance Co., hereinafter referred to as the Appliance Co., was a Missouri corporation engaged, among other things, in selling radios, refrigerators, and other electrical and household appliances on the time payment plan. In the course of its business the Appliance Co. took notes of purchasers payable in monthly installments, secured by chattel mortgages on the articles sold to the makers of such notes. The Appliance Co. financed its operations by selling such notes and mortgages at a discount, principally to the petitioner.

During 1936, in the ordinary course of business, petitioner acquired from the Appliance Co. instruments purporting to be "monthly payment promissory notes secured by chattel mortgages on articles of merchandise represented by General Drug & Appliance Co. to have been sold by it to the persons whose names appeared on said instruments as the makers of such notes and chattel mortgages, respectively; * * *." All of said instruments were in the form of combined note with chattel mortgage provisions incorporated therein, and were endorsed and guaranteed at the time of sale by the Appliance Co. in manner and form as follows:

For value received the undersigned hereby sells, assigns and transfers to the

MORRIS PLAN COMPANY OF ST. JOSEPH

all right, title and interest in and to this agreement, the amounts payable hereunder and the property therein described, and warrants that this agreement was given for the purchase of merchandise described herein and delivered to said purchaser and that he has accepted same. (The undersigned further guarantees the payment of all amounts promised herein in accordance with the terms herein together with interest, attorney fees, court costs and other expenses in connection therewith.)

Signed _________________________________________________ By _____________________________________________________

The Appliance Co. first began discounting paper of its customers with petitioner about 1933. In the course of its business with the Appliance Co. petitioner purchased many genuine notes with genuine security, which were ultimately paid out, but during the taxable year it purchased forged instruments from the Appliance Co. having a total face value of $578,832.01, paying therefor the sum of $534,486.38. During 1936 and 1937 repayments or recoveries on these forged instruments amounted to $150,825.99, of which $22,561.44 was reported as income, $16,958.31 in 1936 and $5,603.13 in 1937, and $128,264.55 was considered repayment of petitioner's investments. After April 1937 the remaining investment in these forged instruments, namely $406,221.83, was considered an investment loss.

In the general course of dealings and business relationship between petitioner and the Appliance Co. with respect to the notes so acquired, the latter made collections and periodical remittances or payments to petitioner on the discounted notes. Petitioner did not follow the practice of notifying the makers, or purported makers, of such instruments of petitioner's ownership thereof. In the course of such transactions petitioner followed the uniform practice of notifying the Appliance Co. of defaults in the making of installment payments and did not notify the makers or purported makers of their defaults.

Petitioner kept a separate ledger card for each individual instrument acquired, which shows the date, amount, the household appliance sold, the name of the maker or purported maker, and the amount and date when payments were made. Petitioner credited each account with the amounts reported as paid by the Appliance Co. Some of the forged and fictitious instruments were paid in full, and all others acquired in 1936, except one, were credited with payments.

Petitioner kept its books and filed its income tax returns on a cash receipts and disbursements basis. Its income tax return for 1936 was filed with the...