Sommers Oil Co. v. Commissioner , 23 B.T.A. 285 ( 1931 )

SOMMERS OIL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Sommers Oil Co. v. Commissioner

Docket No. 16204.

United States Board of Tax Appeals

23 B.T.A. 285; 1931 BTA LEXIS 1902;

May 15, 1931, Promulgated

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">*1902 BAD DEBT. - Where the debtor was the holder or in possession of a valuable location for a filling station and the petitioner as creditor obtained a judgment against the debtor and became the purchaser of the leasehold and certain personal property under execution in November and December, 1921, and took possession thereof, and thereafter within the period of redemption made a settlement with the debtor in June, 1922, by which it obtained its entire debt, the debt was not ascertained to be worthless in 1921, and is not deductible.

E. R. Campbell, Esq., for the petitioner.

T. M. Mather, Esq., for the respondent.

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BLACK

">*286 This proceeding is for the redetermination of a deficiency in income tax of $8,747.71 for the calendar year 1921. Some of the items going to make up the deficiency are not in dispute. Petitioner alleges as error that the respondent erred in not making proper deductions for depreciation in the amounts of $6,619.75 and $5,535.79, and in disallowing a deduction of $7,708.17 for a worthless debt for the year 1921. The issue of depreciation has been settled by stipulation leaving for consideration alone the correctness of respondent's">*1903 ruling relative to petitioner's claimed deduction for bad debt, charged off during the taxable year.

FINDINGS OF FACT.

The petitioner is a Colorado corporation with its principal office and place of business in Denver, Colo. Its business is and was during the taxable year the buying and selling of gasoline and oil as a wholesaler and jobber, to retailers, and also the operation of filling stations and retail establishments itself. During the taxable year the Bell Filling Station Company was a corporation engaged in the business of operating a gasoline and oil filling station at the corner of Fifteenth and Cleveland Streets in Denver, which was one of the most valuable locations in that city for gasoline filling station purposes. The Bell Filling Station Company became indebted to the petitioner for supplies until during the year 1921 the account amounted to the sum of $7,708.17, which petitioner was unable to collect. Petitioner ascertained that the Bell Filling Station Company was also indebted to the Home Savings Bank and to I. Rude. An arrangement was made by the petitioner with the bank and Rude by which they assigned their debts to the petitioner for the purpose of">*1904 bringing suit and controlling the ensuing litigation. Suit was thereafter brought by petitioner against the Bell Filling Station Company and judgment was rendered in its favor on October 24, 1921, for $18,279.68 and $14 costs. Execution was duly issued and levied on all the right, title, and interest of the Bell Filling Station Company in and to certain tracts and parcels of land described as lots numbered 29, 30, 31, and 32, in Block No. 232, East Division of the City and County of Denver, in Denver, Colo. This is the filling station located at Fifteenth and Cleveland Streets above mentioned. Execution was also levied upon office furniture and ">*287 supplies and all filling station equipment. At sales under the executions the petitioner became the purchaser of the personal property at $5,000 on November 7, 1921, and of the interest in the real estate at $8,000 on December 10, 1921, and received sheriff's certificates of purchase from the sheriff of the City and County of Denver. Whether these sums, less court costs, were credited to petitioner's judgment does not appear. The petitioner immediately took possession of the property purchased and operated the filling station">*1905 on its own behalf. Its operation of the station for the remainder of the year was at a loss of $500 to $600 a month.

A general order of attachment issued in the case of petitioner against the Bell Filling Station Company and several thousand dollars of unpaid accounts were garnisheed. In December, 1921, petitioner paid off, or purchased, claims of other small creditors against the Bell Filling Station Company amounting to $1,559.43, and also paid taxes on the property amounting to $1,399.08. This payment was made because the tax collector of Denver was threatening to distrain the property for the collection of the taxes due. These later claims which petitioner paid, taken together with the claims represented by petitioner's judgment, constituted all the fixed indebtedness of the Bell Filling Station at the end of 1921. There were other claims being asserted against it, but as to which it denied liability. On November 14, 1921, J. D. Nifong, a stockholder of the Bell Filling Station Company, instituted an action in the District Court for the City and County of Denver, in behalf of himself, other stockholders, and for the benefit of said company against the petitioner and others">*1906 to set aside the judgment and set aside or enjoin sales thereunder of the filling station property and further praying for the appointment of a receiver. This suit never came to trial. What became of it the record does not show. On November 2, 1921, Blanche L. Puntenney obtained a judgment against the Bell Filling Station Company for $3,750, which was set aside and a new trial granted on November 18, 1921. No new trial was ever had and the suit was dismissed November 18, 1924, for failure to prosecute.

In the latter part of 1921, Thomas Hext held a note for $10,000 against R. H. Bell, who was president of the Bell Filling Station Company, which was secured by stock in the corporation. Hext claimed that the loan of $10,000 was really for the benefit of the company and was asserting a claim against it for payment, but it does not appear what efforts, if any, were made to enforce the claim. During this same period the Biltwell Tire Company claimed that the filling station company was indebted to it on account for approximately $30,000, while the filling station company claimed that the tire company was indebted to it in large amounts because of adjustments ">*288 which it">*1907 had made to customers on account of bad tires. Along about this time, the Bell Filling Station returned to Biltwell Tire Company a carload of tires. Subsequently Biltwell Tire Company went into bankruptcy and no further effort was made to collect the remaining amount, if any, due it by the Bell Filling Station. A number of checks, amounting to approximately $1,700, had been given to petitioner in 1921 by the filling station company on its account and were returned uncollectible by the bank. The real estate at Fifteenth and Cleveland Streets, upon which the filling station was located was owned by the Evans Investment Company. On October 1, 1919, it leased it to R. H. Bell, for a period of ten years at $850 per month and the payment of certain taxes and fire insurance. The lease contained a covenant against an assignment thereof, or subletting without the written consent of the lessor, and a requirement that $10,000 be deposited with the lessor to secure the payment of rent and to serve as liquidating damages if the lessee violated the lease.

R. H. Bell was president of the Bell Filling Station Company. It has not been shown that he made a formal assignment of the lease to">*1908 the Filling Station Company, but the company occupied the premises and a portion thereof was sublet to the Bell Service Company and to P. N. Brillhart. On learning of the other claims being asserted against the filling station company, the treasurer of the petitioner, Sommers Oil Company, charged off as of December 31, 1921, its own account of $7,708.17 as a worthless debt. This was after it had secured the judgment against the Bell Filling Station Company for the amount of its debt, had levied execution on its property, and had purchased such property at execution sale and had received sheriff's certificate of purchase. The chief reason for the action of petitioner in charging off the debt as worthless December 31, 1921, was fear that it got no title to the filling station location at the sheriff's sale and fear of damages for taking possession prematurely.

During the latter part of 1921, after petitioner had secured its judgment, some of the stockholders of the Bell Filling Station Company employed a lawyer to make an investigation of the execution sale and other matters connected with Bell Filling Station, and to protect their interests. This attorney concluded that the petitioner">*1909 had taken possession of the filling station prematurely and was occupying it without legal right, because under the law of Colorado the Bell Filling Station Company had six months from the date of sale, December 10, 1921, to redeem the property by paying the amount bid therefor with interest and that during the period of redemption it had the right to occupy the property. The stockholders represented by this attorney early in 1922 gained control of the Bell Filling Station Company by amending its articles of incorporation and ">*289 electing a majority of the board of directors. This resulted in a vigorous assertion of the claim by that company against the petitioner for its right of possession of the filling station during the period of redemption, or to substantial damages for the destruction of its business during that period.

The petitioner continued to occupy the property after the sheriff's sale and paid the rent regularly to the landlord, but in receipting for it the landlord wrote the receipt to R. H. Bell. On February 10, 1922, the Bell Filling Station Company reported its assets and liabilities to the Secretary of State of Colorado as follows:

Assets
Cash	$6.98
Cash value life insurance policy	580.00
Accounts rec	2,963.63
Notes rec	912.37
Accounts garnisheed	5,247.56
Cash deposit rent	10,000.00
Unpaid subscription to stock	600.00
Building improvements on leasehold	10,531.99
	30,842.53
Liabilities
Deficiency a/c judgment	$3,829.81
Sommers Oil Co.	3,757.84
Other miscl. accts. pay	352.06
Biltwell Tire Co	3,351.33
Reserve for bad debts	4,000.00
	15,291.04
Capital stock	79,930.00
	95,221.04
Less deficit	64,378.51
	30,842.53

">*1910 The liabilities of the corporation were greater than shown in the above list and were of the amounts which we have stated elsewhere in our findings of fact, but were not greater than the assets of the corporation.

From December 31, 1921, to June 10, 1922, there were frequent discussions between counsel representing the Bell Filling Station Company, its stockholders, the petitioner, and R. H. Bell, as to the ownership and right of possession of the leasehold and the property which petitioner had purchased at the sheriff's sale and in addition the Evans Investment Company claimed that the lease had been forfeited because of violation of the covenant against assignments and subletting, but petitioner occupied the property and paid the rent until the conflicting claims were settled by written contract on June 8, 1922. Said contract is as follows:

FOR AND IN CONSIDERATION OF the mutual covenants, promises and agreements hereinafter set forth to be kept and performed by the parties hereto, and in further consideration of the sum of Ten Dollars ($10.00) each to the other in hand paid, the receipt whereof is hereby confessed and acknowledged, it is hereby mutually agreed by and between.

">*1911 THE BELL FILLING STATION COMPANY,

a corporation organized and existing under and by virtue of the laws of the State of Colorado, (hereinafter referred to as the Filling Station Company), as party of the first part, and

">*290 THE SOMMERS OIL COMPANY,

a corporation organized and existing under and by virtue of the laws of the State of Colorado, (hereinafter referred to as the Oil Company), as party of the second part, as follows, to-wit:

1. That on or about the twenty-first day of October, A.D. 1921, the Oil Company commenced suit against the Filling Station Company in the District Court within and for the City and County of Denver, Colorado, and thereafter obtained a judgment against the defendant company for the sum of $18,279.68, besides costs, for moneys due the Oil Company from the Filling Station Company.

2. That afterwards an execution was issued out of said court and placed in the hands of the sheriff of said City and County who levied upon the personal and real property mentioned and described in the schedules of property hereto attached, marked "Schedule A" and "Schedule B," and which are made a part hereof; that said property and all thereof was afterwards">*1912 sold by said sheriff to the Oil Company, and that the Filling Station Company's right to redeem its interest in the real estate described in said schedules will expire on or about June 10, 1922.

3. That the Filling Station Company's claimed interest in said real estate consists of a lease from the Evans Investment Company, a Colorado corporation, which lease will expire (unless sooner cancelled or forfeited) on or about October 1, 1929; and that in order to secure said lease the Filling Station Company deposited, and there is now on deposit, with said The Evans Investment Company the sum of ten thousand dollars (10,000.00) in cash.

5. That after allowing all just off-sets and discounts, the Filling Station Company is now justly indebted to the Oil Company in the just and full sum of Eighteen Thousand Two Hundred Three and 56/100 Dollars ($18,203.56), which said amount includes the balance due upon said judgment as well as all other indebtedness of whatsoever character, kind or nature; all of which the Filling Station Company desires to pay.

6. That it is to the best interest of both parties hereto that said litigation be terminated and settled and that the Filling Station">*1913 heretofore owned and operated by the Filling Station Company, located at 15th Street and Cleveland Place, Denver, and which (subject to the judgment and sales above mentioned) is the property of the Filling Station Company, should be hereafter operated and carried on by the Oil Company as one of its stations, and that the same shall be carried on and conducted by the Oil Company at its own expense to and until October first, A.D. 1929, when the Filling Station Company's lease expires, under the following terms and conditions and agreements, to-wit:

(a) The Filling Station Company has paid the Oil Company $10,000.00 in cash, the receipt whereof is hereby confessed and acknowledged by the Oil Company, which said amount shall be credited on the indebtedness which in paragraph four (4) hereof is stated and agreed to, and the Filling Station Company will execute and deliver to the Oil Company its promissory note for the balance of said indebtedness; viz., $8,203.56, with interest at 6 per cent per annum on all unpaid balances until paid in full; said note is to be paid only as hereinafter provided.

(b) The Oil Company agrees to accept said payment and said note as full payment of said">*1914 indebtedness, and to immediately commence the operation of said Filling Station under this agreement.

(c) The Filling Station Company agrees that the Oil Company shall have the exclusive use of all the personal property described in "Schedule A" ">*291 hereto attached, during the entire life of this contract, for which said use and the good will of the Filling Station Company and the said payment hereinabove referred to, the Oil Company agrees to pay the Filling Station Company one cent (1??) on each and every gallon of gasoline sold at or from said station during said period.

(d) Of the money coming and to come due to the Filling Station Company under the aforesaid arrangement, the Oil Company agrees to credit each month the amount due the Filling Station Company for sales during the preceding month on the aforesaid note of the Filling Station Company amounting to $8,203.56, until said note is fully paid and satisfied; and thereafter to pay to the Filling Station Company each month the amount due from such sales during the preceding month.

(e) The Filling Station Company agrees to address communications to its stockholders, calling their attention to this arrangement">*1915 and urging them to trade at this station and ask their friends to do likewise.

(f) The Oil Company agrees that it will not in the carrying on of its business during the life of this agreement, discriminate against this station in any way but on the contrary will cooperate with the Filling Station Company and endeavor with the latter Company to constantly increase the business done at this station to the end that the same may be profitable to both parties hereto.

(g) The Oil Company will during each month make to the Filling Station Company a written report showing the number of gallons of gasoline sold during the preceding month; and it will at all times keep separate accounts for this station so that the gallonage of gasoline sold to said station and from or by it, can be readily verified.

(h) The Oil Company agrees to permit the Filling Station Company to examine the books and accounts of the Oil Company pertaining to this station from time to time, during the life of this agreement, and have them audited by the Filling Station Company's officers, agents or attorneys, but not audited oftener than once in every six (6) months, unless by special agreement of the parties hereto.

">*1916 (i) During the life of this agreement the Oil Company is to pay from its own funds all expenses of operation including help and all repairs, taxes and insurance on the property herein referred to, no portion of which shall be charged to the Filling Station Company. If any of said property becomes worn out or obsolete and has to be replaced by new, then the worn out or obsolete parts shall be and become the property of the Filling Station Company, but any replacements or new additions made by the Oil Company shall be its property.

(j) At the expiration of this agreement, whether by forfeiture or otherwise, the personal property in said schedules and in this agreement mentioned shall revert to and become the property of the Filling Station Company, including any incidental repairs which may have been made thereto, but this shall not include replacements or new additions. Until such time the said personal property shall be and remain the property of the Oil Company.

The Oil Company has the right to, at its own expense, install such equipment as it deems necessary for the proper conduct of the business, such as tanks, pumps, etc., and at the expiration of this agreement it may">*1917 remove the same.

(k) During the life of this agreement, the Filling Station Company shall have the right to install meters or any other device for checking and determining the gallons of gasoline sold at this station, if it shall elect so to do, ">*292 but this shall not entitle it to install any meter or device which will put any burden, hardship, or expense on the Oil Company.

7. The Oil Company has attached by garnishment certain accounts due the Filling Station Company and which have not yet been paid to the Oil Company. As to these accounts, it is agreed that the Oil Company will forthwith release them and that the Filling Station Company will proceed vigorously to collect the same, applying the proceeds to the payment of any bills which it may now have outstanding against it, the balance to be turned over to the Oil Company and credited on the aforementioned note of $8,203.56.

The foregoing constitutes the entire agreement between the parties hereto.

The contract of settlement was performed by the transfer of the $10,000 on deposit with the Evans Investment Company to the credit of the account of petitioner as security for the performance of a new lease which">*1918 petitioner received from the Evans Investment Company to the property in question and the note for $8,203.56 was subsequently fully paid as agreed upon. The Home Savings Bank & Trust Company was paid $5,644.73 in settlement of its claim and I. Rude, $3,621.15. The personal property described in paragraph (j) of the contract, after the expiration of the agreement, was sold to petitioner by Bell Filling Station Company for $250.

OPINION.

BLACK: The parties have stipulated that the question of proper allowances for depreciation raised by paragraphs "4-a" and "4-b" of the petition may be disposed of by reducing the net income determined by the respondent for the year 1921, as set forth in the deficiency letter of March 23, 1926, in the sum of $592.98. This will be done upon redetermination.

The only question remaining is that raised by petitioner's assignment of error (c), which reads as follows: "(c) The Commissioner failed to allow proper deduction as a bad debt $7,708.17, owing to it by the Bell Filling Station Company, and charged off on the books of the taxpayer during the calendar year 1921." Respondent admits that the debt was charged off by the petitioner in 1921, but">*1919 denies that the worthlessness of the debt was ascertained during 1921; denies that it in fact ever became worthless, and asserts that, on the contrary, petitioner collected such debt in full in 1922. Cases of this kind depend mainly upon the facts in each case and only general rules can be laid down as guides to their decision. We do not think that the debt here in question can be said to have been ascertained as worthless in 1921, or that in fact it ever was worthless.

During the latter part of 1921, after a full and thorough investigation, petitioner, in order to protect itself and control whatever court proceedings were necessary and prevent bankruptcy of the Bell Filling Station Company, acquired by purchase or assignment, the ">*293 claims of the Home Savings Bank & Trust Company in the sum of $6,908.30 and that of I. Rude of approximately $3,663.21. Combining these claims with its own, it brought suit against the Bell Filling Station Company and obtained judgment for $18,279.68, upon which execution was issued and levied upon the filling station and its equipment and at sheriff's sale the petitioner became the purchaser and took possession.

By these proceedings">*1920 petitioner came into possession of all the property of its debtor except $10,000, which was on deposit with Evans Investment Company to secure payment of the rent due under the lease and claimed by both R. H. Bell and the Bell Filling Station Company. It is true that when the debt was charged off, December 31, 1921, the legality of petitioner's possession of these assets was being vigorously disputed and various and sundry suits were being threatened, but nevertheless petitioner was in possession of valuable property which it had seized for collection of its debt, and under these circumstances we do not think it could be properly held that petitioner ascertained its debt to be worthless in 1921.

The fact that it collected its debt in full from the debtor within the period of redemption allowed by the laws of the State of Colorado, while not a conclusive circumstance against petitioner's contention that it ascertained the debt to be worthless in 1921, nevertheless is a that it ascertained the debt to be worthless in 1921, nevertheless is a very persuasive circumstance against such contention and, taken in connection with other evidence in the case, negatives petitioner's contention">*1921 that it ascertained the debt to be worthless in 1921. ; ; and .

We, therefore, conclude that respondent did not err in refusing to allow petitioner to deduct the $7,708.17 as a worthless debt in determining its net income for 1921.

Decision will be entered under Rule 50.