Opinion
Docket No. 37874.
1953-05-29
CHAS. SCHAEFER & SON, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Martin M. Lore, Esq., for the petitioner. John J. Hopkins, Esq., for the respondent.
1. Interest for prior years on cumulative debentures previously unpaid but eventually payable held not deductible by accrual basis taxpayer in subsequent years when payment made.
2. Failure to file excess profits tax return held not due to reasonable cause. Martin M. Lore, Esq., for the petitioner. John J. Hopkins, Esq., for the respondent.
This proceeding is for a redetermination of deficiencies in taxes and penalty determined against petitioner as follows:
+-------------------------------------------------------+ ¦ ¦ ¦Deficiency ¦ +----+-----------------------------+--------------------¦ ¦ ¦ ¦ ¦Delinquency¦ +----+-----------------------------+--------+-----------¦ ¦Year¦Kind of tax ¦Taxes ¦penalty ¦ +----+-----------------------------+--------+-----------¦ ¦1945¦Income ¦$700.58 ¦ ¦ +----+-----------------------------+--------+-----------¦ ¦ ¦Declared value excess-profits¦248.29 ¦ ¦ +----+-----------------------------+--------+-----------¦ ¦ ¦Excess profits ¦2,806.11¦$701.53 ¦ +----+-----------------------------+--------+-----------¦ ¦1946¦Income ¦9,973.58¦ ¦ +----+-----------------------------+--------+-----------¦ ¦1947¦Income ¦2,438.60¦ ¦ +-------------------------------------------------------+
The only issues are (1) whether accumulated interest for prior years which was paid in the taxable years 1945, 1946, and 1947 is deductible in those years by petitioner which reports its income on the accrual basis of accounting, and (2) whether a delinquency penalty should be imposed on petitioner for failing to file an excess profits tax return for the taxable year 1945.
FINDINGS OF FACT.
Most of the facts have been stipulated and are hereby found accordingly.
Chas. Schaefer & Son Inc., the petitioner, was organized under the laws of New York on December 27, 1934, and has its principal office at 304 Meserole Street, Brooklyn, New York. Its business is that of a wholesaler dealing in hay, grain, flour, and salt.
Petitioner's corporation income and declared value excess-profits tax return for the taxable year 1945 and its corporation income tax returns for the taxable years 1946 and 1947 were filed with the collector of internal revenue for the first district of New York. These returns were prepared on the accrual basis of accounting.
Petitioner's business was originated by Charles Schaefer and operated by him until his death. On December 31, 1934, the four children of Charles Schaefer transferred all of the assets of the business known as Charles Schaefer & Son to petitioner. In return, petitioner assumed the outstanding obligations of Charles Schaefer & Sons and issued to each of the four children 50 shares of its no par value common stock and an instrument entitled ‘7% Income Note‘ bearing a face value of $75,000. The stock was subsequently transferred by the children to Charles Schaefer & Son of New Jersey, Inc., in exchange for all of the stock of that corporation. The notes have remained the property of the four children.
Each of the instruments designated ‘7% Income Note‘ was in the following form:
+---------------------------+ ¦¦UNITED STATES OF AMERICA ¦¦ ++-------------------------+¦ ¦¦ ¦¦ +---------------------------+
STATE OF NEW YORK Number Dollars
CHAS. SCHAEFER & SON, INC.
7% Income Note, Due January 1st, 1985
CHAS. SCHAEFER & SON INC., a corporation duly organized and existing under the laws of the State of New York, hereinafter called the Corporation, for value received, hereby promises to pay to * * * by order, the sum of Seventy-five Thousand ($75,000.00) Dollars on January 1st, 1985, at the office of the Corporation, in the Borough of Brooklyn, County of Kings, City and State of New York. Interest on said principal sum will be paid on December 31st, 1935, and annually thereafter on the 31st day of December in each year at a rate not to exceed 7% per annum out of the income of the Corporation during the preceding twelve (12) months period, as and when declared by the Board of Directors. The Bard of Directors shall declare interest payable when and as the net income of the Corporation will permit. Interest on this note shall be cumulative from and after December 31st, 1935, and any installment of such cumulative interest which shall not be so declared payable on any interest date, shall be paid whenever thereafter the net profits of the corporation shall permit the same to be paid, but accumulations shall not bear interest.
The Corporation, whenever the principal of this note shall become due by declaration or otherwise, will pay all arrears of, or accumulated interest to such due date whether theretofore declared payable or not.
This note is subject to redemption at any time at the option of the Corporation, on any interest date, at par, together with all unpaid accumulated interest accrued to the date of redemption, upon sixty (60) days' prior notice.
IN WITNESS WHEREOF, Said Chas. Schaefer & Son, Inc., has caused this note to be signed in its name by its president, and its corporate seal to be hereunto affixed, and to be attested by its secretary, this 31st day of December 1934.
+------------------------------------------------------------+ ¦ ¦CHAS. SCHAEFER & SON, INC. ¦ +------------------------------+-----------------------------¦ ¦ ¦By --------------------------¦ +------------------------------+-----------------------------¦ ¦ ¦President. ¦ +------------------------------+-----------------------------¦ ¦Attest: ¦ ¦ +------------------------------+-----------------------------¦ ¦------------------------------¦ ¦ +------------------------------+-----------------------------¦ ¦Secretary. ¦ ¦ +------------------------------------------------------------+
CHAS. SCHAEFER & SON, INC. By . . . President.
Attest:
Secretary.
On March 9, 1946, the face amount of each of these notes was reduced to $37,500. The reduction of the notes by $150,000 in the aggregate was at the request of the note holders. Accumulated but undeclared and unpaid interest on that $150,000 was not paid on March 9, 1946, and all subsequent payments of note interest were calculated on the basis of only the remaining $150,000, whether for current or for prior years.
The books and records of petitioner show for the years 1935 to 1947, inclusive, the following losses or profits and amounts of interest declared and paid on the instruments entitled ‘7% Income Notes‘:
+-------------------------------------------------------------+ ¦ ¦ ¦ ¦ ¦Interest ¦ +--------------------+---------+---------+----------+---------¦ ¦ ¦ ¦ ¦ ¦declared ¦ +--------------------+---------+---------+----------+---------¦ ¦Year ¦Loss ¦Profit ¦Percentage¦and paid ¦ +--------------------+---------+---------+----------+---------¦ ¦ ¦ ¦ ¦ ¦on income¦ +--------------------+---------+---------+----------+---------¦ ¦ ¦ ¦ ¦ ¦notes ¦ +--------------------+---------+---------+----------+---------¦ ¦1935 ¦$679.27 ¦ ¦3% ¦$9,000.00¦ +--------------------+---------+---------+----------+---------¦ ¦1936 ¦ ¦$228.48 ¦ ¦ ¦ +--------------------+---------+---------+----------+---------¦ ¦1937 ¦13,992.31¦ ¦ ¦ ¦ +--------------------+---------+---------+----------+---------¦ ¦1938 ¦3,877.42 ¦ ¦ ¦ ¦ +--------------------+---------+---------+----------+---------¦ ¦1939 ¦ ¦247.79 ¦4% ¦12,000.00¦ +--------------------+---------+---------+----------+---------¦ ¦1940 ¦ ¦4,321.47 ¦3% ¦9,000.00 ¦ +--------------------+---------+---------+----------+---------¦ ¦1941 ¦ ¦7,374.04 ¦ ¦ ¦ +--------------------+---------+---------+----------+---------¦ ¦1942 ¦ ¦3,554.83 ¦ ¦ ¦ +--------------------+---------+---------+----------+---------¦ ¦1943 ¦ ¦3,603.87 ¦7% ¦21,000.00¦ +--------------------+---------+---------+----------+---------¦ ¦1944 ¦ ¦12,285.16¦7% ¦21,000.00¦ +--------------------+---------+---------+----------+---------¦ ¦Accumulated for 1942¦ ¦ ¦3% ¦9,000.00 ¦ +--------------------+---------+---------+----------+---------¦ ¦1945 ¦ ¦8,950.29 ¦7% ¦21,000.00¦ +--------------------+---------+---------+----------+---------¦ ¦Accumulated for 1942¦ ¦ ¦2% ¦6,000.00 ¦ +--------------------+---------+---------+----------+---------¦ ¦1946 ¦ ¦22,790.69¦7% ¦12,483.33¦ +--------------------+---------+---------+----------+---------¦ ¦Accumulated for 1942¦ ¦ ¦2% ¦3,000.00 ¦ +--------------------+---------+---------+----------+---------¦ ¦Accumulated for 1941¦ ¦ ¦7% ¦10,500.00¦ +--------------------+---------+---------+----------+---------¦ ¦Accumulated for 1940¦ ¦ ¦4% ¦6,000.00 ¦ +--------------------+---------+---------+----------+---------¦ ¦1947 ¦ ¦13,969.22¦7% ¦10,500.00¦ +--------------------+---------+---------+----------+---------¦ ¦Accumulated for 1938¦ ¦ ¦2% ¦3,000.00 ¦ +--------------------+---------+---------+----------+---------¦ ¦Accumulated for 1939¦ ¦ ¦3% ¦4,500.00 ¦ +-------------------------------------------------------------+
In its tax returns for the taxable years 1945, 1946, and 1947, petitioner deducted $30,330.13, $33,242,84, and $18,567.64, respectively, for interest. Respondent disallowed $6,000, $19,500, and $7,500, respectively, which amounts represent accumulated interest allocable to the years 1938 to 1942, inclusive.
On November 21, 1950, the Tax Court entered its decision in Chas. Schaefer & Son Inc., Docket No. 24160 (the same petitioner), involving the year 1944, holding that the 7 per cent income notes here in question constituted indebtedness and that the interest thereon was deductible as interest on indebtedness.
The note interest which was not declared payable currently was never accrued or shown as a liability on petitioner's books or income tax returns prior to the time it was declared payable by the board of directors.
Accumulated interest not therefore paid was payable whenever the principal became due, by declaration or otherwise, or upon redemption at petitioner's option.
Petitioner did not file an excess profits tax return for the taxable year 1945. Its failure to file such return was not due to reasonable cause.
OPINION.
OPPER, Judge:
Since the interest was payable by petitioner at all events in already settled amounts, it was properly accruable in the year for which payable. See Heer-Andres Investment Co., 17 T.C. 786; United States v. Anderson, 269 U.S. 422; cf. Pierce Estates, Inc. v. Commissioner (C.A. 3), 195 F.2d 475. That payment may not have been presently due because the directors had not ‘declared‘ the interest could affect only the time, not the liability, for payment. That is a consideration applicable to cash rather than accrual basis taxpayers. Even if earnings were never sufficient to cover the interest, it was expressly made cumulative and would have to be paid when petitioner was liquidated or upon the earlier call of the bonds. Inability of petitioner ever to pay the interest might be a bar to accrual. See Zimmerman Steel Co., 45 B.T.A. 1941, revd. (C.A. 8) 130 F.2d 1011; Florence Pearlman, 4 T.C. 34, affd. (C.A. 3) 153 F.2d 560. But there is no evidence whatever of that element here. Since the interest accrued in the earlier years, it could not again be deducted when paid. Warner Co., 11 T.C. 419, 431, affd. (C.A. 3) 181 F.2d 599; Cumberland Glass Mfg. Co. v. United States, Ct.Cl.) 44 F.2d 433, 455.
Pierce Estates, Inc. v. Commissioner, supra, is readily distinguishable. There no interest became due unless and until the directors declared it payable. It was not otherwise cumulative, was not an obligation at any time, and was not ultimately payable at all events as were the amounts here in dispute.
No evidence whatever was introduced to sustain petitioner's burden of showing that its failure to file any excess profits tax return was due to reasonable cause and not wilful neglect. No expert advise was sought and no implication arises that any was given. Cf. Hatfried, Inc. v. Commissioner, (C.A. 3) 162 F.2d 628. The more belief that a return was unnecessary, entertained by a layman without seeking any assistance in reaching his conclusion, cannot be the sort of reasonable cause which Congress intended. P. Dougherty Co. v. Commission, (C.A. 4) 159 F.2d 269, certiorari denied 331 U.S. 838; West Side Tennis Club v. Commission, (C.A. 2) 111 F.2d 6, certiorari denied 311 U.S. 674; Lone Pine Lawn Corporation, 41 B.T.A. 638, affd. (C.A. 2), 121 F.2d 935.
Decision will be entered for the respondent.