Clifton Mfg. Co. v. Commissioner

Facts

Hunter Manufacturing & Commission Company, acted as a selling agent for P and other large textile manufacturers and made it a practice to charge interest on debit balances and credit interest on credit balances. In 1933, Hunter owed the principal sum of $392,651.14 to P and large sums to other customers. Hunter was put into the hands of receivers for purposes of liquidation. It was thought at the time that Hunter would pay about fifty percent on its indebtedness to the mills and that the best way to liquidate its remaining assets would be to form a new company in which the creditors would purchase stock. The situation became more hopeful but it was still agreed amongst the creditors to reduce the interest rate accrued for the period from February 1, 1933, to December 31, 1933, from 6 percent to 4 percent, and settlement was finally made on this basis. In October 1935, during taxpayer's fiscal year ended March 31, 1936, Hunter received the sum of $1,000,000 in payment of a debt due it, and thereupon, if not before, Hunter became completely solvent and there was no reasonable doubt of the collectibility of the debts owing the taxpayer and other creditors. P had treated the interest on the debt in the following manner: For the tax year 1933, the P included all of the interest except $302.19 as income in its return, which indicated a net loss for the year. For 1934, P did not accrue or report any interest on its credit balance with Hunter. In October 1934, P received from Hunter two notes dated July 1, 1934 - one for the principal and interest due January 31, 1933, less payments on principal to June 30, 1934, and the other for interest from January 31, 1933, to June 30, 1934, in the sum of $16,443.50 payable January 31, 1936. P allocated the amount of the latter note on its books as follows:

February 1, 1933 to March 31, 1933 $3,156.72

April 1, 1933 to March 31, 1934 $11,409.57

April 1, 1934 to June 30, 1934 $1,877.21

In 1935, P reported as income in its return for that year the sum of $1,877.21 as well as all other interest accruing on the account for that year. In 1936, P reported interest accruing on the debt as income for that year, and this action was approved by D. In 1937, P received payment of the note for $16,443.50 but reported no part of this amount as income in its return for that year. Interest on this note which accrued during the fiscal years 1935, 1936, and 1937 was accrued on the taxpayer's books and reported as income for these years. D claimed that the sum of $11,711.76 was income in 1935. P protested on the ground that this sum was not income in 1935 but in 1933 as to $302.19 and 1934 as to $11,409.57. D then stated that if the amount was not properly includable as income for the year 1935, it should be returned for the year 1937 when Hunter paid its note. The amount was excluded from income in determining the tax liability for the year 1935. P made no agreement with D as to the year in which the sum of $11,711.76 should be included in income. All the years before 1937 are now barred by the statute of limitations. The Tax Court agreed with D and P appealed. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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