Inland Fin. Co. v. Commissioner , 23 B.T.A. 199 ( 1931 )

INLAND FINANCE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Inland Fin. Co. v. Commissioner

Docket Nos. 29916, 39686.

United States Board of Tax Appeals

23 B.T.A. 199; 1931 BTA LEXIS 1911;

May 13, 1931, Promulgated

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Subscribers to capital stock, after making partial payment on their subscription agreements, defaulted in meeting the remaining payments due. The subscription agreements, together with payments then made, were declared forfeited to the corporation, but with the privilege granted to the subscribers to resubscribe and thereby receive credit for the payments declared forfeited. Held, the payments declared forfeited are not income to the corporation.

G. M. Ferris, Esq., and B. H. Kizer, Esq., for the petitioner.

J. E. McFarland, Esq., for the respondent.

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BLACK

In these proceedings, which have been consolidated for hearing and decision, the petitioner seeks a redetermination of its incometax liability for the calendar years 1922 to 1924, inclusive, for which years the respondent has determined deficiencies of $1,622.31, $503.15, and $399.55, respectively. There is no disagreement as to the facts and the only point at issue is whether or not the amount received on incompleted capital stock subscriptions, which were subsequently canceled, is income and taxable to the petitioner.

FINDINGS OF FACT.

The petitioner is a corporation organized under the laws of the State of Washington, with its principal office at Spokane. The nature of its business is investments and loaning money. The capital stock of the petitioner was sold by it to numerous individuals in small amounts and a substantial amount of the stock was sold on the deferred payment plan. At the time of the sale, the purchaser signed a contract, called a subscription agreement, which provided in part as follows:

SUBSCRIPTION AGREEMENT.

AGREEMENT between the INLAND FINANCE COMPANY, a Washington Corporation, with an office at 620 Peyton Bldg., Spokane, Wash., hereinafter called "the Company" and , of , hereinafter called the "Subscriber".

WITNESSETH: The company agrees to sell to the Subscriber, and the Subscriber agrees to purchase shares of the Preferred Stock of the Company of the par value of One Hundred Dollars ($100.00) each fully paid and nonassessable, at and for the sum of $ payable as follows: $ in cash, receipt whereof is hereby acknowledged, and the balance in installments of $ or more on the day of each and every month hereafter until the full purchase price shall have been paid. All payments to be made by draft, money order or certified check payable to Inland Finance Company.

When the Subscriber has made all of the payments above specified the Company agrees that it will deliver to said subscriber, his heirs or representatives, certificate or certificates of said Preferred Stock so paid for, together with shares of the Company's Common Stock, par value $50 each.

If the subscriber shall fail to pay any of said installments when due and said default shall continue for at least thirty days, then and in such case the Company may, at its option, while such default continues, terminate this agreement and all rights of the Subscriber thereunder; and shall hold all sums paid hereunder as and for liquidated damages; but, in case of sickness actually preventing punctual payment, the Company will, if it receives prompt notice and satisfactory proof of such sickness grant reasonable extensions on payments so prevented, but such extensions taken together shall not exceed six months during the life of this contract.

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At a meeting of the stockholders of the corporation held December 19, 1922, it was moved and carried that "the following list of Inland Finance Company stock subscription agreements be declared canceled, due to nonpayment thereof" (here follows a list of the stock subscription agreements by number, which were declared canceled). The payments declared forfeited in 1922 vary in amount from $50 to $330, the total being $14,735. None of these was ever redeemed or resold to other parties. At a meeting of the stockholders May 29, 1923, it was moved that "the following list of Inland Finance Company contracts be canceled, due to default in payments on the same" (here follows a list of the stock subscription agreements by number canceled under above order). The payments on the stock subscription agreements thereupon declared canceled varied in amount from $50 to $320, the total being $6,146. Of this amount the company permitted the redemption of $350, leaving the net amount forfeited at $5,796 in 1923. At a meeting of the stockholders March 11, 1924, President Johnson, reported "the following Inland Finance Company contracts should be canceled as no payments have been made on them for several months" (here follows the numbers of the shares of stock subscription agreements, by numbers, canceled. The minutes of the corporation show that it was regularly moved and seconded that the above contracts be canceled and that such motion was carried. The payments which had been made on the stock agreements canceled were $8,834.30 for 1924. None of these was ever redeemed or resold to other parties. Other adjustments were made by respondent in petitioner's 1924 income, which were in its favor and to which no objection is raised in the appeal. The evidence shows that any holder of these stock subscription agreements who desired to pay up the back payments due on his contract at the time it was canceled was allowed to do so and that no other method or means of attempting to cancel the contracts on account of defaults in payment was ever taken, except as shown by the extract from the minutes heretofore set forth. Only a few took advantage of the privilege of reinstating their stock agreements and the respondent has made due allowance for these in his adjustments.

OPINION.

BLACK: In support of his contention that the amounts accruing to petitioner in the taxable years on account of payments previously made on stock subscription agreements canceled in such years are not income, counsel for the petitioner cites , and .

In , subscribers to capital stock, after making partial payment on their subscriptions, defaulted in meeting the remaining payments due. The stock so subscribed for, together with payments then made, was declared forfeited to the corporation, but with the privilege to the subscribers to resubscribe and thereby receive credit for the payments declared forfeited. Under this state of facts we held the payments declared forfeited were not income to the corporation. This case was approved and followed by us in

In , where we held that a corporation had no taxable gain in the acquisition of its own capital stock we cited as one of the cases in support of that opinion,

We do not think the transactions disclosed by the record in the instant case are materially different from those which we had before us in Therefore, on the authority of that case and the other cases above cited, we hold that petitioner had no taxable gain from the cancellation of the stock subscription agreements detailed in our findings of fact. Inasmuch as respondent in the deficiency notice seems to have made some other minor adjustments in petitioner's income which are not in controversy,

Reviewed by the Board.

Decision will be entered under Rule 50.