O'Sullivan Rubber Co. v. Commissioner of Internal Revenue

• Decision Date: 24 September 1940
• Docket Number: Docket No. 97399.
• Citation: 42 BTA 721
• Parties: O'SULLIVAN RUBBER COMPANY, INC. (IN DISSOLUTION), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

42 B.T.A. 721 (1940)

O'SULLIVAN RUBBER COMPANY, INC. (IN DISSOLUTION), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 97399.

Board of Tax Appeals.

Promulgated September 24, 1940.

Edward I. Devlin, Jr., Esq., and Peter V. D. Voorhees, Esq., for the petitioner.

Conway N. Kitchen, Esq., for the respondent.

The Commissioner determined deficiencies as follows for the calendar year 1935:

                    Income tax ________________________________________  $467.50
                    Personal holding company __________________________ 4,902.17
                    Penalty on latter for delinquency _________________ 1,225.54
                

The issues for decision are:

(1) Whether the petitioner should have accrued an item of $3,400, representing interest for November and December on notes of the Langdon Co., payable in 1936:

(2) Whether it should have accrued an item of $416.67, representing interest for a period in 1935 on bonds of Boston & New York Airline Railway payable in 1936;

(3) Whether the petitioner was a personal holding company within the provisions of section 351.

FINDINGS OF FACT.

The petitioner is a dissolved corporation in process of liquidation. It was organized under the laws of New York and it dissolved in the latter part of 1932. Since dissolution it has engaged in no business, but has endeavored to liquidate as rapidly as possible.

The petitioner made no distributions to its stockholders in 1935 because the amount available was small. Prior thereto it had distributed in liquidation about $7 per share. It had a deficit of about $2,000,000 in 1935, due in part to the prior liquidating distributions. The Commissioner ruled that the petitioner was exempt from capital stock taxes for 1933, 1934, and 1935 upon the ground that it was a dissolved corporation not doing business.

The stock of the corporation consisted of 40,000 shares, which was held by 56 stockholders. Fifty percent of the outstanding stock was owned during the latter half of 1935 by not more than five individuals. At least 80 percent of the gross income of the petitioner for the taxable year was interest. The petitioner did not file any personal holding company return for the taxable year. It filed with the collector of internal revenue for the second district of New York a corporation income and excess profits tax return for the taxable year.

The corporation had been engaged in the business of selling rubber heels. It sold that business, consisting principally of good will, in October 1932 to the Victor Products Corporation for $600,000, payable in annual installments of $40,000 or more. Payments in the total amount of $42,313.85 were made up to July 1934. No further payments were made, but a new contract was entered into on May 1, 1935. The new contract reduced the unpaid purchase price to $340,000. Notes in that amount of the Langdon Co., endorsed by others, were given to the petitioner. Langdon was a subsidiary of the purchaser. Langdon owned, as its only asset, all of the stock of another subsidiary, known herein as O'Sullivan of Delaware, which operated the O'Sullivan rubber heel business. The notes called for interest payable semiannually and were as follows:

                Amount Maturity
                $60,000 __________ May 1, 1936
                 60,000 __________ May 1, 1937
                 60,000 __________ May 1, 1938
                 60,000 __________ May 1, 1939
                 60,000 __________ May 1, 1940
                 40,000 __________ May 1, 1941
                

The first interest on the notes was due on November 1, 1935. It was not paid until December 16, 1935, after the exertion of great pressure by the petitioner. Langdon had to borrow most of the money to pay it. The petitioner knew at the close of 1935 that Langdon had no assets except the stock of O'Sullivan of Delaware. It knew that O'Sullivan of Delaware was not prospering and the value of the stock was slight. Both Victor and Langdon had always defaulted in their payments to the petitioner. The petitioner decided not to accrue on its books for 1935 the interest on the notes for November and December 1935 because the payment of that interest was so extremely doubtful. The interest for those two months in the amount of $3,400 was not accrued by the petitioner and was not reported by it as a part of its income for 1935. The Commissioner, in determining the deficiency, included the $3,400 in the income of the petitioner for 1935.

Langdon was unable to pay the interest on May 1, 1936, but again borrowed most of the money and paid the interest in the latter part of July 1936, after the petitioner had agreed to extend for one year the note due on May 1, 1936. O'Sullivan of Delaware paid dividends to Langdon as follows:

                     December 21, 1935 ____________________________    $500.00
                     December 20, 1936 ____________________________  37,500.00
                     During 1937 __________________________________  32,208.75
                

The only payment of principal on the notes by Langdon was $10,000 paid on June 30, 1937. Other extensions were given. Finally, another arrangement was made and an individual paid some cash and gave his notes to the petitioner in lieu of the Langdon notes.

The petitioner owned at the close of 1935 $25,000 face value of bonds of Boston and New York Airline Railway. The next interest payment date was February 1, 1936. The petitioner accrued on its books and reported as income for 1935 interest on those bonds in the amount of $416.67, which was payable on February 1, 1936. The interest was never paid and the petitioner sold the bonds for $7,000 in 1937.

OPINION.

MURDOCK:

The debtor which owed the petitioner the $3,400 "was chronically suffering from financial embarrassment" and the "petitioner was in imminent danger, not only of not collecting the interest" but of losing the principal payments due it. Cf. Turners Falls Power & Electric Co., 15 B. T. A. 983, 992. The petitioner had no reasonable anticipation at the close of 1935 of receiving the interest when it became due. Since collection was so doubtful, it did not have to accrue the item of $3,400. Cf. Great Northern Railway Co., 8 B. T. A. 225, 269; appeal dismissed, 40 Fed. (2d) 372; certiorari denied, 282 U. S. 855; Corn Exchange Bank v. United States, 37 Fed. (2d) 34; American Central Utilities Co., 36 B. T. A. 688.

The evidence does not show that at the close of 1935 there was any uncertainty about the collection of the interest on the Boston & New York Airline Railway bonds. The petitioner actually accrued the interest in the amount of $416.67. The mere fact of nonpayment is insufficient to show that it was not properly accrued. The reason given by a revenue agent for disallowing a loss for 1936...