Opinion
Docket No. 16315.
1950-04-28
SAMUEL HELLERMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Harry Kwestel, Esq., for the petitioner. Whitfield J. Collins, Esq., for the respondent.
DEDUCTION.— During the years 1943, 1944, and 1945, in connection with wartime orders for spun yarn and apart from the regular price thereof, petitioner made certain deposits in escrow, pursuant to a written agreement that the deposits be applied on the cost of his postwar orders for spun yarn if made as prescribed by the agreement. Held, that petitioner is not entitled to a deduction for the deposits as made in each of those years as a business expense, or otherwise, for such respective years; held, further, that neither the total of such deposits nor any part thereof was forfeited in 1945 so as to be deductible in that year as an expense, or otherwise. Harry Kwestel, Esq., for the petitioner. Whitfield J. Collins, Esq., for the respondent.
This proceeding involves deficiencies determined by the respondent against petitioner in the amounts and for the calendar years as follows: $8,136.68 income and victory tax for 1943; $8,189.03 income tax for 1944; and $3,256.23 income tax for 1945. The computation of the deficiency for 1943 also involves income for 1942 pursuant to the provisions of the Current Tax Payment Act of 1943.
Petitioner assigns error in respondent's disallowance of claimed deductions in the amounts of $13,755.66 for 1943, $11,788.82 for 1944, and $4,141.64 for 1945, consisting of petitioner's deposits in an escrow fund and treated in the brief of petitioner as representing business expenses incurred in each of those years and, as such, deductible from its gross income for those respective years. In the alternative, and by amended petition, petitioner assigns error in respondent's failure to allow as a deduction for 1945 the total of the above amounts, or the sum of $29,686.12, also treated in the brief of petitioner as representing a business expense incurred in that year and, as such, deductible from its gross income for that year.
FINDINGS OF FACT.
The petitioner, a resident of New York City, conducts a business under the trade name of Emerson Yarn Co., with his principal place of business in New York City. His income tax returns for the periods involved were filed with the collector of internal revenue for the first district of New York.
Prior to and during the taxable years petitioner purchased wool waste materials from manufacturers and sold them to a spinning mill, which converted such materials into spun yarn. Commencing in 1942 or 1943 and throughout the taxable years, petitioner also engaged in the business of a jobber of spun yarn on his own account and in connection therewith he delivered wool waste material to the spinning mill, with orders that it be spun into yarn of the color and size specified by him to conform to orders of his customers, and he paid the mill's spinning charges. During the times material here petitioner's sales of waste material and orders for yarn to be spun were made to Hartford Spinning, Inc. (a corporation hereinafter referred to as Hartford), which operated a spinning mill at Unionville, Connecticut, and/or to Redstone Textile Co. (hereinafter referred to as Redstone), which was closely associated with Hartford as its sales outlet.
Early in 1943 Hartford's customers urged it to expand its facilities so as to provide increased wartime production of spun yarn. Hartford was reluctant to expand its facilities for fear that after the war emergency period it would be left with expanded facilities and no business. For that reason, it desired assurance from the customers, particularly those with whom it had not done business prior to the war, that such customers would continue to give Hartford business after the war. As a result and as a method for insuring the company continued postwar business from those customers, Hartford executed with each of 15 customers, including petitioner, identical written contracts, entitled ‘Post War Plan and Agreement‘ (hereinafter referred to as the agreement) for the purpose, inter alia, ‘To build up a back-log of orders for production after the war, thus lending assistance to the transition from war production to peace-time production * * * .‘
Briefly, the pertinent provisions of the agreement executed on April 28, 1943, by Hartford and petitioner under the name of Emerson Yarn Co. are that Hartford agrees to process into yarn the materials furnished by petitioner for the duration of the war, subject to the priority of Government orders and only in such amounts and quantities as Hartford deems advisable; that petitioner agrees ‘to deposit in escrow‘ and ‘apart from and in addition to the regular price per pound‘ charged by Hartford, ‘the sum of Six Cents (6¢) for each pound of yarn spun‘ for petitioner during the period between March 22, 1943, and the ‘end of the war,‘ designated as the cessation of hostilities by the United States with ‘the last country with which it is now at war‘; that the designated escrow agents shall receive all deposits and make disbursements pursuant to the agreement and invest the funds in United States Government securities; that, beginning at a date to be fixed by Hartford, said date to be within 18 months after the end of the war and continuing for a period equal in length to the period from March 22, 1943, to the end of the war, petitioner agrees to furnish Hartford the same kind and quantity of work as he did during the contract period before the end of the war and Hartford agrees to perform such work at the then prevailing price; that out of petitioner's escrow deposits the escrow agents shall pay to Hartford 6 cents for each pound of yarn spun for petitioner, who shall be credited therewith on his bills for such postwar work; that petitioner's failure to furnish Hartford such postwar work shall constitute a breach of the agreement and the escrow agents shall in such event pay over petitioner's remaining deposits to Hartford as ‘liquidated damages‘; that the agreement was assignable to Hartford, but not by petitioner, it being personal as to him; and that ‘either party may terminate this agreement at any time upon giving one week's notice in writing to the other party‘ and if so terminated by one party, the balance of the petitioner's escrow deposits shall be paid over by the escrow agents to the other party.
After the execution of the agreements Hartford expanded its facilities as requested by its customers.
On August 10, 1943, Hartford, with petitioner's written consent, assigned its interest in the agreement to Redstone and subsequently, on February 16, 1945, Redstone and petitioner entered into an identical agreement.
On May 28, 1945, petitioner gave written authorization to the escrow agents to invest his part and future escrow deposits under the agreement in the stock of Hartford instead of Government bonds. That action was taken to provide funds to finance continuance of Hartford's plant expansion, but petitioner agreed thereto only after Redstone gave assurances that it would expedite delivery of yarn then being processed for petitioner. Such yarn was delivered to petitioner in September, 1945, and in that month he made his last escrow deposits under the agreement, because he did not place any further orders for spun yarn.
Under the terms of the agreement and during the calendar years 1943, 1944, and 1945, petitioner's escrow deposits amounted to $13,755.56, $11,788.82, and $4,141.64 for those years, respectively.
On April 1, 1946, petitioner gave Redstone the following written notice:
In connection with our agreement, which we have with you, dated February 16, 1945, we hereby notify you that we have elected to terminate the said agreement in accordance with paragraph 14 of said agreement, and in accordance therewith we hereby give you the necessary one week notice of our intentions to elect to have this agreement terminated.
We are also notifying the escrow holders to pay over to your company all our deposits remaining in the hands of the said escrow agents.
I would appreciate your acknowledgement of this notice.
Prior to receipt of the above April 1, 1946, termination notice, Redstone had received no written or oral communication from petitioner to the effect that he intended to terminate the agreement.
On April 1, 1946, petitioner also gave the escrow agents named in the agreement the following written notice:
In connection with our agreement, which we have with the Redstone Textile Co., dated February 16, 1945, we have this day sent a notice to the said company giving them one weeks notice in writing in accordance with paragraph 14 in the said agreement, of our election to terminate the said agreement. In accordance therewith, you, as escrow holders shall pay over to the company all of our deposits remaining with you.
We respectfully request that you submit to us complete statement of all monies you have received under this agreement, and a statement showing what monies you have paid over to this company, in view of our election to terminate this agreement.
Will you please acknowledge receipt of this notice.
Pursuant to the terms of the agreement and the written notice of termination thereof, the escrow deposits theretofore made by petitioner during 1943, 1944, and 1945, and credited to his account maintained by the escrow agents, were paid over to Redstone on July 16, 1946.
For the purposes of the agreement, V-J Day was considered as the end of the war and Redstone under the terms of the agreement fixed a date approximately 18 months thereafter as the beginning of the operation of the postwar period of the agreement and, on February 12, 1947, notified its customers with whom contracts were then outstanding that it was prepared to accept orders and make deliveries in accordance with that portion of the agreement. Petitioner placed no orders for spun yarn with Redstone after June, 1945.
OPINION.
TYSON, Judge:
Petitioner's assignments of error do not specify the character of the deductions sought and on brief he fails to cite the sections of the Internal Revenue Code on which he relies in support thereof. However, upon consideration of the general allegations in the petition, the testimony, and the briefs in this proceeding, we conclude that the issues are as hereinbefore set out.
Petitioner's primary contention is that the sums he deposited in the escrow fund and which were credited to his account by the escrow agents, in the amounts of $13,755.66 in 1943, $11,788.82 in 1944, and $4,141.64 in 1945, constituted expense payments in the ordinary course of his business made to the manufacturer for processing wool waste material into spun yarn, and thus were proper deductions from gross income for each year, respectively. As to this contention, it is unnecessary to do more than point out the plain and unambiguous terms of the agreement and what was done by petitioner in connection therewith. Those terms, as set out in our findings, provided, inter alia, that the amounts deposited by petitioner in escrow were to be paid to Redstone (Hartford's successor as a party to the agreement) and petitioner was to be credited on bills rendered by Redstone for processing during the postwar period only. Such postwar processing was not to begin until on approximately February 12, 1947, the date fixed by Redstone in accordance with its right to do so under a provision of the agreement, and no such postwar processing was done for petitioner by Redstone. It is thus apparent that there is no merit in this contention of petitioner.
Petitioner makes the alternative contention that the total of his escrow deposits made in 1943, 1944, and 1945, in the amount of $29,686.12, constituted business expenses incurred in 1945 for the reasons: First, that on or about June, 1945, the provision of the agreement by which he was to furnish Redstone during a postwar period beginning on February 12, 1947 (approximately 18 months after V-J Day), with wool waste material to be processed into spun yarn for petitioner was abandoned by petitioner and Redstone through mutual consent and that thereupon the funds in escrow were forfeited by petitioner to Redstone; and, second, that, if not so abandoned, there was a breach on or about June, 1945, by the petitioner himself of that provision and that the funds of petitioner in escrow were thereby forfeited to Redstone.
As regards the reasons upon which petitioner's alternative contention is based, there was a conversation between petitioner and two of Redstone's officers in April, May, or June of 1945 in which petitioner requested lower prices for the processing by Redstone of materials furnished it by petitioner, and the two officers would not agree to comply with that request, because the O.P.A. prices obtaining at that time would not permit. Petitioner testified that after that conversation he decided that he ‘couldn't stand‘ the payment of the 6 cents per pound into escrow ‘any more‘ and ‘so I broke it off‘ and that thereafter he gave no new business to Redstone, since he considered the agreement as terminated. Petitioner did not testify that Redstone agreed to his decision or that it was informed thereof and there is nothing in the record to indicate that such was the case. To the contrary, the president of Redstone testified that there was nothing said in the conversation to indicate that petitioner was ceasing to do business under its contract with Redstone and that no communication, oral or otherwise, ever was received by Redstone from petitioner to that effect until receipt of the letter of petitioner of April 1, 1946. It thus is obvious that the agreement was not mutually abandoned in 1945.
We think it equally obvious from the testimony referred to just above that the petitioner did not in 1945 breach his obligation to deliver, in the postwar period which began on February 12, 1947, material for processing by Redstone. According to his own testimony he merely ceased to delivery materials prior to the postwar period because he decided he could not stand the payment of the 6 cents per pound into escrow required for the manufacture of such material during that period and considered that decision as breaching the entire agreement. Under the agreement petitioner was not obligated to deliver material for processing prior to the postwar period; so, when he decided to and did cease to deliver materials for processing during that period, not even a breach of the provision of the agreement relating to that period occurred; and it necessarily follows that no breach of the provision of the agreement relating to the postwar period occurred.
We disagree with the alternative contention of petitioner.
We hold that the agreement involved was terminated and the petitioner's $29,686.12 escrow deposit was forfeited not earlier than in April, 1946, and, accordingly, that such amount did not constitute business expenses incurred in 1945 and is not deductible as such, or otherwise, in that year. The respondent's determination is approved.
Decision will be entered for the respondent.