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Corporation Disputes Disallowance Of Bad Debt Deductions.

JAN. 11, 1993

Ajax, Inc. v. Commissioner

DATED JAN. 11, 1993
DOCUMENT ATTRIBUTES
  • Court
    United States Tax Court
  • Docket
    Docket No. 601-93
  • Authors
    Bullock, J. Jay
  • Code Sections
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 93-70230
  • Tax Analysts Electronic Citation
    93 TNT 43-61

Ajax, Inc. v. Commissioner

====== CASE NAME ======

AJAX, INC.,

 

Petitioner,

 

v.

 

COMMISSIONER OF INTERNAL REVENUE,

 

Respondent.

====== SUMMARY ======

Ajax, Inc., challenges the IRS's disallowance of deductions for

 

bad debts and the resulting disallowance of an investment tax credit

 

claimed in 1989.

Ajax claims that it terminated business in 1989 and a substantial portion of the assets used in connection with the business were sold. Ajax adds that the accounts receivable were written off at the end of 1989 because it knew that any remaining unpaid accounts would be difficult to collect since the debtors knew that it was going out of business and would not be looking to them for future sales.

Period and Amount at Issue: 1989 -- $40,588

Code Section Classification: 166, 46

====== FULL TEXT ======

PETITION

The Petitioner hereby petitions for a redetermination of the deficiency set forth by the Commissioner of Internal Revenue in its Notice of Deficiency, Letter 531 dated October 9, 1992, and as the basis for its case alleges as follows:

1. The Petitioner is a corporation, with its principal office at 750 South Main Street, Tooele, Utah 84074.

2. The return for the period here involved, the year ending November 30, 1989 (the "Taxable Year") was filed with the office of the Internal Revenue Service at Ogden, Utah.

2. The Notice of Deficiency (a copy of which, including so much of the statement and schedules accompanying the notice as is material, is attached and marked Exhibit A) was mailed to the Petitioner on October 9, 1992, and was issued by the office of the Internal Revenue Service at Salt Lake City, Utah.

3. The deficiency as determined by the Commissioner and the amount in dispute is as follows:

                                                Deficiency as

 

                          Deficiency as         Determined by

 

                          Determined by         Commissioner Which

 

     Year                 Commissioner          Is In Dispute

 

     ----                 -------------         ------------------

 

November 30, 1989           $40,588.00                $40,588.00

4. That the determination of tax set forth in said Notice of Deficiency is based upon the following errors:

4.1 Gross Receipts

No amount or reference was made by the Commissioner

 

with respect to this item.

4.2 Bad Debts

The Commissioner erroneously determined deductions

 

claimed by the Petitioner on its return for the Taxable

 

Year were not allowable with respect to uncollectible

 

accounts receivable in the amount of $ 85,794.00.

4.3 Insurance

The Petitioner concedes to this adjustment.

4.4 Recapture of ITC

By reason of the adjustment by the Commissioner with

 

respect to Bad Debts, the Commissioner erroneously

 

disallowed an Investment Tax Credit claimed by Petitioners

 

for the Taxable Year.

4.5 Accuracy related penalty under section 6662.

The Commissioner erroneously determined the

 

applicability of an accuracy related penalty under section

 

6662.

5. That the facts upon which the Petitioner relies as the basis for its case are as follows:

5.1 Gross Receipts

No amount or reference was made by the Commissioner

 

with respect to this item.

5.2 Bad Debts

5.2.1 Respect to the Taxable Year the Petitioner

 

claimed a deduction for bad debts with respect to the

 

following accounts receivable:

         Customer Name                          Amount

 

         -------------                          ------

 

         ABC Angeles                            $   184.45

 

         Aquatech Pool                               66.65

 

         Artistic Concrete                        7,048.80

 

         Cenco Inc.                                 950.44

 

         Christiansen, Bud                          333.77

 

         Clegg, Bob                               1,643.62

 

         Close, George                              133.37

 

         East Valley Const.                       1,561.19

 

         Ebbenga, Clifford                          499.62

 

         Garcia, J. Don                          17,825.73

 

         G & W Concrete                          29,408.03

 

         Gillette, Ephraim                           15.03

 

         Henwood, Don                            17,564.29

 

         Jackson, Douglas                           307.93

 

         Jacobs, Kevin                               10.07

 

         All Seasons                                428.93

 

         Nunley, Ken                                 61.28

 

         Olson, Kim                                 691.17

 

         Other Mother Day Care                       45.94

 

         Pedersen, Terry                            228.53

 

         Jack Roberts Const.                         16.53

 

         The Sandbagger                             128.11

 

         Shaw, J.L.                                  76.90

 

         Shepard, Jon                             2,368.91

 

         Sprouse, Mike                              543.15

 

         Stevens Const.                             115.60

 

         Tooele Cable Co.                           141.25

 

         Torres, Matt                               393.45

 

         Valley Design                              354.30

 

         Westree Homes                            2,304.52

 

         Wrathall, James                            342.07

5.2.2 During the Taxable Year the Petitioner

 

terminated its ready mix concrete business and a

 

substantial portion of the assets used in connection with

 

the ready mix concrete business were sold.

5.2.3 As of the end of the Taxable Year the Petitioner

 

reviewed its unpaid accounts receivable and claimed a bad

 

debt deduction for the accounts receivable listed on the

 

table above in the total amount of $ 85,794.00.

5.2.4 Since the Petitioner had terminated the ready

 

mix concrete business in the Taxable Year, the Petitioner

 

knew that any remaining unpaid accounts receivable would be

 

difficult, if not impossible, to collect since the debtors

 

knew the Petitioner was out of the ready mix concrete

 

business and would not be looking to them for future sales.

5.2.5 Subsequent collection experience has confirmed

 

that the accounts receivable written off at the end of 1989

 

would be difficult to collect since through June 30, 1992,

 

two years and seven months later only $26,614.26, or 31%

 

were collected. During that time the collection costs were

 

$ 2,556.68.

5.2.6 A review of the report of the Examining Officer

 

opinion appears to conclude the following:

5.2.6.1 An account receivable is never worthless

 

under section 166 of the Internal Revenue Code of 1986

 

if at some subsequent time anything is ever collected

 

on the account, and

5.2.6.2 The referral of an account receivable to

 

a collection agency is a conclusive admission that the

 

account is not worthless at that time.

5.2.7 The Petitioner submits that the rational of the

 

Examining Officer is wrong and that the determination of

 

the worthlessness of an account receivable at any given

 

time, i.e. at the end of the Taxable Year, is to be

 

determined on the basis of all of the facts available to

 

the Petitioner at that time.

5.2.8 The position of the examining officer on the bad

 

debt issue represents a classical case of improperly using

 

hindsight when it is to the proponent's advantage

 

notwithstanding the irrationality of the use of such

 

subsequent facts. Presumably, the examining officer would

 

disallow a deduction claimed for a particular year if any

 

amount were collected in any subsequent year prior to the

 

conclusion of the examination and the preparation of the

 

examination report.

5.2.9 For the these reasons the determination of the

 

Examining Officer with respect to the deductibility of the

 

deduction claimed for bad debts is improper and the

 

deduction claimed by the Petitioner was proper.

5.3 Insurance

The Petitioner concedes to this judgment.

5.4 Recapture of ITC

By reason of the adjustment by the Commissioner with

 

respect to Bad Debt, the Commissioner erroneously

 

disallowed an investment tax credit claimed by Petitioners

 

for the Taxable Year.

5.5 Accuracy related penalty under section 6662.

The determination by the Petitioner in claiming the

 

deduction for bad debts was proper and consistent with the

 

facts known to the Petitioner at that time and accordingly

 

there is no factual basis for the imposition of any

 

accuracy related penalty.

WHEREFORE, Petitioner prays that this Court may hear the case and:

(1) Determine that the Commissioner erred as alleged in the assignments of error set forth in Paragraph 4 above;

(2) Find that there is no deficiency in income tax for the Taxable Year and that there is no basis for imposition of any penalties with respect to that year;

(3) Order the payment of attorneys' fees, costs and expenses computed in the manner provided for and authorized under the provisions of Section 7430 of the Internal Revenue Code of 1954, or any other applicable Federal Statute, and in connection with the determination under Section 7430, the Petitioner prays the Court will find:

(a) The Petitioner is the Prevailing Party under Section

 

7430(a) and that the position of the United States (i.e., the

 

Commissioner) is unreasonable, and

(b) The Petitioner has exhausted the administrative

 

remedies available to the Petitioner within the Internal Revenue

 

Service; and

(4) Grant such other relief as the Court deems just and proper.

DATED this 7th day of January, 1993.

J. JAY BULLOCK

 

T.C. BAR NUMBER BJ1495

 

Counsel for Petitioner

 

353 East 300 South

 

Salt Lake City, Utah 84111

 

Telephone: (801) 521-6660
DOCUMENT ATTRIBUTES
  • Court
    United States Tax Court
  • Docket
    Docket No. 601-93
  • Authors
    Bullock, J. Jay
  • Code Sections
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 93-70230
  • Tax Analysts Electronic Citation
    93 TNT 43-61
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