Hendershot & Smith, Inc. v. Commissioner

MEMORANDUM FINDINGS OF FACT AND OPINION

IRWIN, Judge: Respondent determined deficiencies in petitioner's income tax as follows:

FINDINGS OF FACT

Some of the facts have been stipulated and these facts are found accordingly.

Petitioner, Hendershot & Smith, Inc., is an Ohio corporation having its principal place*192 of business in Wickliffe, Ohio. During the years in issue petitioner kept its books on the accrual method employing a fiscal year ending June 30. Corporate income tax returns were filed with the district director of internal revenue, Cleveland, Ohio, for each of these years.

On November 5, 1968, petitioner's board of directors adopted the following resolution:

RESOLVED, that the corporation purchase 232 common shares of the Corporation from Robert J. Hendershot at a purchase price of $508.29 per share, or an aggregate purchase price of $117,923.28; that the Treasurer execute and give to Robert J. Hendershot a check as of this date in the amount of $2,923.28 to apply against such aggregate purchase price; that the Treasurer is hereby authorized and directed to execute a cognovit promissory note of the corporation in the face amount of $115,000.00, providing for principal payments of $13,000.00 each January 1, beginning with the year 1970 and ending with the year 1977, with the balance of $11,000.00 to be payable on January 1, 1978, together with interest at the rate of 5% per annum, payable annually on January 1 on the unpaid balance; and the Treasurer is hereby authorized and directed*193 to retire and cancel such shares. Pursuant to this resolution, the 232 shares of common stock were redeemed in November 1968 and petitioner delivered to Robert J. Hendershot (hereinafter sometimes referred to as Robert), a calendar year cash method taxpayer, a check for $2,923.28 and a cognovit promissory note for $115,000. The note is set forth in the margin. ² After the redemption, Robert ceased to be a shareholder of petitioner. He did, however, remain as a director and a vice president.

*194 The ownership of petitioner's stock during the years in issue is set forth below:

Petitioner's officers and directors during the years in issue were as follows:

For the period January 1, 1969 through June 30, 1969, petitioner accrued interest in the amount of $2,875 on the promissory note issued to Robert and deducted this amount on its income tax return for the fiscal year ended June 30, 1969. For the period January 1, 1970, through June 30, 1970, interest was accrued in the amount of $2,550*195 on the promissory note and petitioner deducted this amount on its income tax return for the fiscal year ended June 30, 1970.

With respect to the years in issue petitioner made the following payments on the note by check to Robert:

During the period in issue Robert had the authority to sign checks requiring only one signature on petitioner's commercial checking account with the Lake County National Bank of Painesville. At the end of each fiscal year in issue and during the 2-1/2 months immediately thereafter the balance on deposit in this account was in excess, on a majority of days, of the amount needed to pay the interest accrued on the note to Robert.

In the notice of deficiency, respondent disallowed petitioner's deduction for accrued interest in the amounts of $2,875 and $2,550 for the respective fiscal years ended June 30, 1969 and June 30, 1970, stating that these amounts "were not paid within two and one-half months after the close of your taxable years, and*196 were not otherwise constructively received by Robert Hendershot during that time" as required by section 267.

This case involves the applicability of section 267(a)(2) ³ to the factual situation herein. The major point of contention between the parties is whether there has been a constructive payment ⁴ within 2-1/2 months following the close of each fiscal year in issue. The question is purely one of fact. F. D. Bissett & Son, Inc.,56 T.C. 453 (1971). The parties are in agreement that all the other requirements requisite to the applicability of section 267(a)(2) have been met.

*197 Petitioner's primary basis in claiming the inapplicability of section 267(a)(2) rests upon the allegation that Robert was in constructive receipt of the accrued interest within 2-1/2 months following the close of each fiscal year in issue even though payment was not in fact made until the following January of each fiscal year. It is submitted that even though the interest was not due nor paid ⁵ until January following the close of each fiscal year, it was in fact payable at any time after the accrual. Respondent, on the other hand, argues that the January 1 due dates, as set forth on the note and corporate resolution, impose a substantial limitation on payment, and that consequently there could be no constructive receipt by Robert within the 2-1/2 month period following the close of each fiscal year.

Upon reviewing the record it is our opinion that there has been no constructive payment within the prescribed time period and that, therefore, respondent's determination must be sustained. *198 Compare Fetzer Refrigerator Co. v. United States,437 F. 2d 577 (C.A. 6., 1971), and F. D. Bissett & Son, Inc.,supra, with Young Door Co., Eastern Division,40 T.C. 890 (1963). ⁶

In support of its contention petitioner points out the good relationship between Robert and the rest of the directors and officers, Robert's authority to write checks on petitioner's account, the ample balance in such account, and petitioner's president's stated willingness to have made the payments early if Robert had so requested.

Petitioner's evidence only indicates that Robert had the power to receive payment. Petitioner had no duty to pay prior to the due date and Robert had no right to an early payment under the terms of the note. Without the right to receive income, there cannot be constructive receipt. F. D. Bissett & Son, Inc.,supra at 463.*199 While nothing in the evidence before us would have prevented an early payment, the fact remains that there was no early payment and no indication of any formal or informal authorization for such payment. Without such evidence we cannot find a constructive receipt. ⁷

Petitioner further contends that since the January 1 due date was selected only as a matter of convenience we should give it little weight. This we cannot do. Petitioner has selected the due date and with respect to the years in issue its action was entirely consistent with such date. It is bound by its choice.

Petitioner finally argues that the January 1 due date is the date the payment must be made, not the first date which it may be made. Be that as it may, section 267(a)(2) still requires a payment, either actual or constructive. The evidence*200 of this case clearly precludes the finding of a constructive payment. See section 1.451-2, Income Tax Regs. (footnote 4, supra.)

Petitioner has also contended that Congress did not intend section 267(a)(2) to apply to the type of situation herein since there was no intention of tax manipulation. We have reviewed the relevant legislative history and find no merit to this contention. As we so recently stated in Kenneth Farmer Darrow, 64 T.C. , (May 14, 1975), (a case involving section 563):

When the congressional language is so clear, arguments such as petitioner's are in effect requesting us to reqrite a section of the Code, an action we simply cannot take in the instant situation.

In Summary, even though it has been shown that petitioner accrued the interest and that Robert had the authority to write checks on the company account, it has not been demonstrated that Robert had the right to draw the interest prior to the due dates. Petitioner did not issue the payments to Robert until the due dates with respect to the years in issue and no objective manifestation of any intent to allow early payment was presented to this Court. Petitioner's hypotheticals ⁸ cannot*201 supplant the reality of this situation. In this instance petitioner has fallen within the grasp of section 267(a)(2) which compels disallowance of the interest deductions.

Decision will be entered for the respondent.