Shubert v. Comm'r of Internal Revenue, Docket Nos. 91443

• Citation: 41 T.C. 243
• Decision Date: 21 November 1963
• Docket Number: 91444.,Docket Nos. 91443
• Parties: *JACOB J. SHUBERT, TRANSFEREE, AND E.F.G. CORPORATION, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

41 T.C. 243

*JACOB J. SHUBERT, TRANSFEREE, AND E.F.G. CORPORATION, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 91443

91444.

Tax Court of the United States.

Filed November 21, 1963.

Gerald Schoenfeld and William W. Schneck, for the petitioners.

Bernard Goldstein, for the respondent.

E.F.G. Corporation, a cash basis taxpayer, did not file a personal holding company return for 1948. Respondent's agent proposed deficiencies in 1948 income and personal holding company taxes and a penalty for failure to file a personal holding company return upon audit of income tax return, to which corporation did not agree. At the end of 1955, taxpayer had not executed waiver and consent to assessments or requested any assessment; agent's final report had not been made; no assessments of any deficiencies or of any interest had been made. In 1956, petitioner executed Form 870, the agent filed his final report, and deficiencies and interest were assessed. E.F.G. made a voluntary remittance on account of interest, only, on December 30, 1955, which the district director deposited in his suspense account. Held, there was no payment of interest in 1955 on indebtedness within section 163(a), 1954 Code, with respect to the disputed and proposed deficiencies in 1948 taxes, and a deduction for interest ‘paid’ is not allowable under section 163(a). Rosenman v. United States, 323 U.S. 658; Lewyt Corp. v. Commissioner, 215 F.2d 518; Fred J. Arheit, 31 T.C. 46, followed.

HARRON, Judge:

In docket No. 91444, E.F.G. Corp., the respondent determined for the year 1955, deficiencies in income tax and personal holding company tax in the total amount of $17,245.96, of which the personal holding company tax is $14,053.56. The question is whether E.F.G. Corp. is entitled to a deduction in 1955 for interest under section 163(a), 1954 Code, in the amount of $20,000. The claimed deduction in 1955 relates to interest on a deficiency in tax for 1948.

It is stipulated in docket No. 91443, Jacob J. Shubert, that if it is determined that there is a tax deficiency for 1955 owed by E.F.G. Corp., Jacob J. Shubert is liable therefore as the transferee of the corporation's assets under section 6901.

FINDINGS OF FACT

The stipulated facts are incorporated herein by reference and are found as stipulated.

E.F.G. Corporation, sometimes referred to hereinafter either as the petitioner or the corporation, a Delaware corporation, was organized in about 1937 and dissolved on December 26, 1956; it had its office in New York City. On about June 11, 1956, it filed its 1955 corporation income tax return and personal holding company tax return with the district director of internal revenue for the Manhattan District, New York City. It kept its books and prepared its returns on a calendar year basis under a cash method of accounting.

A partnership known as Lee and J.J. Shubert (Jacob J. Shubert) was the sole stockholder of E.F.G. Corp. When the corporation was dissolved, all of its assets were distributed to Shubert, the then surviving member of the former partnership and sole stockholder. The assets had a value at the time of the transfer of at least $17,245.96, together with statutory interest thereon. Shubert is a transferee of assets of the corporation within the provisions of section 6901.

In its 1955 corporation income tax return, E.F.G. Corp. took a deduction of $20,000 for interest; it reported and paid income tax for 1955 in the amount of $72.33. It filed a personal holding company return for 1955 in which it was reported that no personal holding company tax was due. The deduction of $20,000 related to the corporation's taxes for 1948. The Commissioner disallowed the deduction with the following explanation in the deficiency notice:

It is held that the amount of $20,000.00 claimed as a deduction on your return for advance payment of interest on an expected 1948 tax deficiency does not constitute an allowable deduction within the purview of Section 163(a) of the Internal Revenue Code of 1954.

The denial of the deduction, with certain adjustments not in dispute, resulted in income tax of $3,264.73 (rather than $72.33, reported) and personal holding company tax of $14,053.56; a total of $17,318.19; and a deficiency of $17,245.96.

The particular facts material to the issue to be decided are as follows: In 1948, E.F.G. Corp. sold a note and realized a profit of $100,000 (note of Magoro Corp. to Garrick Building Co.), which it reported in its 1948 corporation income tax return as gain from the sale or exchange of a capital asset under section 117(f) of the 1939 Code, rather than as personal holding company income consisting of gain from the sale or exchange of securities under section 502(b), 1939 Code. The corporation's 1948 income tax return was prepared under the supervision of a CPA and member of the firm of Homes and Davis, certified public accountants, the corporation's regular accountants. The accountants advised E.F.G. Corp. that a personal holding company return for 1948 was not required and none was filed.

An examining revenue agent, John T. Healey, audited the 1948 income tax return of the corporation in the early part of 1953. He questioned only a deduction for franchise taxes, found that a deduction for them was not allowable because they had not been paid in 1948, and advised the corporation of his determination. The corporation was willing to agree to that determination and the resulting income tax deficiency. The agent solicited and received from the corporation a signed consent (Form 870) to such proposed deficiency under section 272(d), 1939 Code, which also is a waiver of the restrictions in section 272(a) which stays the assessment of a deficiency if a petition is filed in this Court. The agent thereupon submitted his report and the consent (also called a waiver) to his reviewing superior in April 1953.

The reviewing officer did not accept Healey's report as a final one because he questioned the item of capital gain of $100,000 reported in the corporation's income tax return, and he suggested that Healey obtain more information about the sale of the Magoro Corp. note. Healey then continued his examination of the return and eventually concluded that the transaction did not result in capital gain but, rather, resulted in ordinary income of $100,000, and, also, personal holding company income. As part of this inquiry, Healey learned that no personal holding company return for 1948 had been filed. The reviewer requested Healey to consider whether a penalty (addition to personal holding company tax) should be asserted for failure to file such return.

In May or June 1953, Healey advised the corporation's comptroller, J. R. Becker, that he had disallowed capital gains treatment of the profit realized on the sale of the note and that on that determination there would be deficiencies in income and personal holding company taxes and a penalty for not filing a personal holding company return might be determined. Becker advised Healey by letter dated January 13, 1955, that the corporation would not agree to the disallowance of capital gains treatment. There was, therefore, a dispute about this determination and there was not consent.

The corporation referred the disputed adjustment to its accountant, X. The first conference of Z with Healey was on December 6, 1954, when Healey advised him about his determinations. Th next conference of X with representatives of the Internal Revenue Service was on March 31. 1955. The dispute about the capital gains treatment and a personal holding company return penalty was discussed. X's position at this conference was that after his study of the question whether the profit from the sale of the note was capital gain or ordinary income, he was of the opinion that the Internal Revenue Service was correct in its ‘contention’ that it was ordinary income, but he opposed the proposed penalty for the failure to file a personal holding company return. This conference was with Healey and another agent. They were not authorized to enter into any binding agreement with the taxpayer on behalf of the Treasury Department, and no agreement was entered into.

On April 1, 1955, E.F.G. Corp. wrote to the district director of internal revenue in New York City, for the attention of the agent, Healey, stating that Homes and Davis, its accountants, had advised it when its 1948 income tax return was prepared, that it was not a personal holding company in 1948. The purpose of this letter was to have the penalty (addition to tax) for failure to file a personal holding company return for 1948 waived by the Treasury Department.

On November 4, 1955, there was an informal conference of Bernard Harris, a conferee in the Internal Revenue Service, with X. Harris requested X to submit an affidavit about his supervision of the preparation of the corporation's income tax return for 1948, his opinion at that time about the nature of the gain from the sale of the Magoro note, his instructions to his assistant about how the gain should be treated in the return, and his opinion when the return was filed about whether the gain represented personal holding company income. X prepared the affidavit and executed it on December 8, 1955.

On December 9, 1955, at another conference with Harris, X gave him his affidavit in which X stated, inter alia, that when the 1948 return was prepared it was his opinion that the profit from the sale of the note did not come within section 502(b) and therefore was not personal holding company income, and that ‘there was no intention to defraud the United States Government of its just revenue,‘ and that it was urged that ‘no penalty will be imposed with respect to the non-filing of the Personal Holding Company Tax return for said year.’

X's understanding upon the conclusion of the conference on December 9, 1955, was that the agent and the conferee would recommend that the gain in question was ordinary...