Corn Exchange Bank v. United States

37 F.2d 34, 8 A.F.T.R. (P-H) 9954, 1930 U.S. App. LEXIS 2491, 2 U.S. Tax Cas. (CCH) 455, 8 A.F.T.R. (RIA) 9954

• Court: Court of Appeals for the Second Circuit
• Decided: January 6, 1930
• Docket: 49
• Status: Published

Opinions

MANTON, Circuit Judge.

During the year 1918, the appellant made loans to the Brooklyn Rapid Transit Corporation. Interest on the loans was accrued on the appellant’s books, kept on an accrual basis. The Brooklyn Rapid Transit Corporation went into receivership on December 31, 1918, before the close of the business day. The bank received knowledge thereof the same day. The then accrued interest amounted to $14,-014.67. The taxpayer’s return for the year was made on an accrual basis; a tax was paid on this interest under duress. The court below gave judgment for the appellee, holding that, since appellant kept its books on an accrual basis, the interest item must be treated as taxable income unless otherwise properly deductible. The collector ruled that the interest item was not found to be worthless and , ii charged off the books of the appellant during the taxable year.

The appellant contends that, as the income tax return was made for the taxable year ending December 31,1918, and a receivership of the Brooklyn Rapid Transit Corporation had taken place, and this fact was known to the bank before the close of that day, it was improper to accrue, as income for the year, interest on an obligation of the corporation known to be in receiver’s control and from whom, it was known it could not expect to receive interest. When a tax is lawfully imposed on income not actually received, it is upon the basis of a reasonable expectancy of its receipt, but a taxpayer should not be required to pay a tax when it is reasonably certain that such alleged accrued income will not be received and when, in point of fact, it never was received. A taxpayer, even though keeping his hooks upon an accrual basis, should not be required to pay a tax on an accrued income unless it is good and collectable, and, where it is of doubtful collectability or it is reasonably certain it will not be collected, it would be an injustice to the taxpayer to insist upon taxation. Edwards v. Keith (C. C. A.) 231 F. 110 ; United States v. Frost, 25 Fed. Cas. 1221, No. 15172; Spencer v. Lowe (C. C. A.) 198 F. 961.

A taxpayer cannot be charged to have realized an income unless there exists reason for believing that the income is likely to be paid or can be collected. Such has been the ruling of the Board of Tax Appeals. Turner’s Falls Power & Electric Co. v. Commissioner of Internal Revenue, 15 B. T. A. 983; Great Northern Ry. Co. v. Commissioner of Internal Revenue, 8 B. T. A. 225. Certainly the interest account could not be collected in due course after the receivership. Receivership gave notice that the account might not be collected, and, if collected, it might be reduced and very much delayed. It therefore may not be treated as accrued income. It is not necessary that there be equally as strong evidence as warrants writing off an account as a loss, as in the case of a bad debt. It is sufficient, in asking for a deduction of accrued income, to be able to state that in all probability the income will not be received. The government should not tax under the claim of income, that which is not received during the taxable year and in all probability will not be paid within a reasonable time thereafter. When and if such income is received, it must be returned as such for the year received.

Bookkeeping entries which do not correctly reflect income do not estop the taxpayer from questioning the taxation. Doyle v. Mitchell Bros. Co., 247 U. S. 179, 38 S. Ct. 467, 62 L. Ed. 1054; Haugh & Keenan Storage & Transfer Co. v. Heiner (D. C.) 20 F.(2d) 921; In re Sheinman (D. C.) 14 F.(2d) 323, 325; American Can Co. v. Bowers (D. C.) 33 F.(2d) 187; Douglas v. Edwards (C. C. A.) 298 F. 229; Forty Fort Coal Co. v. Kirkendall (D. C.) 233 F. 704.

Judgment reversed.