Corporation Disputes Disallowance Of Bad Debt Deductions.
Ajax, Inc. v. Commissioner
- CourtUnited States Tax Court
- DocketDocket No. 601-93
- AuthorsBullock, J. Jay
- Code Sections
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 93-70230
- Tax Analysts Electronic Citation93 TNT 43-61
Ajax, Inc. v. Commissioner
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
- CourtUnited States Tax Court
- DocketDocket No. 601-93
- AuthorsBullock, J. Jay
- Code Sections
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 93-70230
- Tax Analysts Electronic Citation93 TNT 43-61