Western Casket Co. v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 2545.
| Decision Date | 25 June 1928 |
| Docket Number | Docket No. 2545. |
| Citation | 12 BTA 792 |
| Parties | WESTERN CASKET CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
William S. Bennet, Esq., for the petitioner.
W. Frank Gibbs, Esq., for the respondent.
The petitioner brings this proceeding for a redetermination of its income and profits taxes for 1917 and 1918. The proceeding results from the respondent's rejection of a claim for the abatement of taxes amounting to $61.51 for 1917 and $25,167.05 for 1918.
The proceeding presents two issues for determination:
(1) Whether the statute of limitations constitutes a bar to the collection of the proposed additional taxes; and
(2) Whether an amount of $132,385.33 was correctly deducted from 1918 income as a bad debt ascertained to be worthless and charged off within the taxable year.
FINDINGS OF FACT.
The petitioner is an Illinois corporation engaged in the manufacture of caskets with its principal office in Chicago. On April 1, 1918, the petitioner filed its income and profits-tax return for 1917, and on June 13, 1919, filed its income and profits-tax return for 1918.
On March 28, 1922, respondent mailed petitioner a registered letter, the pertinent portion of which is as follows:
You are informed that an audit of your income and profits tax returns for the years 1917 to 1919, inclusive, indicates that you are subject to an additional tax in the amount of $25,228.56 based upon revenue agent's report under date of May 10, 1921, a copy of which was furnished you at the conclusion of the examination. * * *
You will be given twenty days to present any exception to this proposed assessment and to show cause or reason why the same should not be listed and paid. * * *
On October 6, 1922, the respondent assessed against petitioner additional taxes amounting to $61.51 for 1917, and $25,167.05 for 1918. Thereafter, and on February 3, 1923, the petitioner filed with the collector of internal revenue for the first district of Illinois a claim in abatement of the additional taxes which had been assessed.
On March 13, 1923, petitioner filed a bond with the said collector, which reads as follows:
KNOW ALL MEN BY THESE PRESENTS, that I, Edward Hines, hereby guarantee Honorable John C. Cannon, Collector of Internal Revenue, First District of Illinois, that the Western Casket Company, Inc., of 1156 West 20th Street, Chieago, Illinois, has on hand assets worth $25,228.56 subject to his warrant of distraint; that pending action on its claim for abatement of tax assessed verified February 3, 1923, it will not dispose of any of its assets except in the regular course of business and that when the amount of tax due is finally settled by action upon the said claim for abatement of tax, that the said Western Casket Company will have in its ownership and possession, subject to his warrant of distraint, assets of the value of $25,228.56.
Witness my hand and seal this 13th day of March 1923.
EDWARD HINES L. S N. N. B.
On May 21, 1924, the respondent mailed to the petitioner a letter which stated that petitioner's claim in abatement had been examined and rejected. The last two paragraphs of this letter state:
The Collector of Internal Revenue for your district will be officially notified of the adjustment at the expiration of thirty days from the date of this letter, unless prior to that date evidence is furnished showing the adjustment is incorrect.
Under no circumstances should payment of the amount rejected be made until a bill is received from the Collector of Internal Revenue for your district and remittance should then be made to him.
Subsequently, and on January 20, 1925, respondent mailed the following letter to the petitioner:
TREASURY DEPARTMENT Washington, Jan. 20, 1925. Office of the Commissioner of Internal Revenue. Address reply to Commissioner of Internal Revenue and refer to IT: CR: A WLM WESTERN CASKET COMPANY 1156 West 20th St., Chicago, Illinois.
SIRS: Your claim for the abatement of $25,228.56 additional taxes assessed for the years 1917 and 1918, has been examined.
The claim is based upon the statement that the account of the Western Undertaking Company is a proper deduction from gross income and should be allowed.
The Bureau disallowed your claim under date of May 21, 1924 and upon receipt of your protest referred the case to the Solicitor of Internal Revenue.
In accordance with the recommendation of the Solicitor of Internal Revenue, the claim is again rejected.
This rejection will officially appear on the next schedule to be approved by the Commissioner.
Respectfully J. G. BRIGHT Deputy Commissioner, By L. V. LOHMAN, Head of Division.
On March 14, 1925, petitioner filed an appeal to the Board from the above letter of January 20, 1925. On April 7, 1925, the respondent filed a motion to dismiss the appeal on the ground that the letter of January 20, 1925, was not a deficiency letter within the meaning of section 274 (a) of the Revenue Act of 1924, and, therefore, the Board of Tax Appeals was without jurisdiction to hear and determine this appeal. The respondent's motion was denied by an order of the Board issued April 27, 1925, and the Board took jurisdiction of the appeal.
Sometime during 1909 the Western Undertaking Co., hereinafter referred to as the undertaking company, was organized to conduct an undertaking business, and it handled petitioner's caskets exclusively. The undertaking company was unable to dispose of petitioner's entire output, handling about 15 to 20 per cent of the latter's production.
An open account was entered on petitioner's books in 1909 with the undertaking company, which showed a credit balance on December 31, 1909, of $7,475.12, but for each year thereafter this account showed a balance due and owing to the petitioner. The debit balances on December 31 of each year, and on March 1, 1913, from 1910 through 1918, were as follows:
Balance of account
Year: (Dr.)
Dec. 31, 1910 __________ $55,375.79
Dec. 31, 1911 __________ 79,752.76
Dec. 31, 1912 __________ 85,657.96
Mar. 1, 1913 __________ 85,736.30
Dec. 31, 1913 __________ 100,038.20
Dec. 31, 1914 __________ $104,271.24
Dec. 31, 1915 __________ 112,492.93
Dec. 31, 1916 __________ 125,072.46
Dec. 31, 1917 __________ 130,235.45
Dec. 31, 1918 __________ 132,385.33
The year 1918 was one of unprecedented business activity for undertaking concerns and manufacturers of caskets, due to the influenza epidemic, which increased the business of concerns in Chicago from 45 to 300 per cent. The Western Undertaking Co. participated in this increase in the undertaking business and its gross receipts for the year were a great deal larger, but in spite of that fact it was unable to make a profit, although other undertakers were paying their bills and discounting them, something which they had not theretofore been able to do. The failure of the undertaking company to make a profit during 1918 influenced the petitioner's officers to make a thorough investigation of the financial condition of the undertaking company. As a result of this investigation they prepared a statement of the undertaking company's assets and liabilities on December 31, 1918, as follows:
Assets:
Automobiles __________________________________________ $1,000,00
Accounts receivable __________________________________ 42,215.16
Fixtures
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