The opinion of the court was delivered by: BYERS
The following is the opinion of Castellano, Referee:
The Collector of Internal Revenue has filed a second supplemental priority claim in the sum of $ 26,097.66. The trustee in bankruptcy has filed objections and asks that this claim be disallowed. The objections are as follows:
1. The bankrupt is not justly and truly indebted to said claimant in any sum whatsoever for either income tax or excess profits tax for the year ending June 30th, 1945.
2. The Collector of Internal Revenue could not and should not have made any additional assessment for the year ending June 30th, 1945 for the reason that on the 10th day of August, 1948, when such assessment was levied, the Statute of Limitations had already run against the Collector of Internal Revenue for the said year.
3. That the disallowance by the Collector of Internal Revenue of commissions in the sum $ 22,122.17 paid by the bankrupt in the year 1945 was improper and such deductions for commissions should have been allowed.
4. That the "excessive deduction disallowed" for the year ending June 30th, 1946 in the sum of $ 27,850.90 should not have been disallowed and that such deduction was proper.
5. That the additional assessment for taxes and excess profits taxes filed herein by the Collector of Internal Revenue on August 10th, 1948 is not legally, morally nor factually justified under the circumstances existing on the filing of the involuntary petition herein in February, 1948.
Upon the hearing, objection number 2, based upon the Statute of Limitations was withdrawn by the trustee. The objections were heard and proof taken on September 26, 1949 and November 7, 1949. Julius Berkowitz an Internal Revenue Agent, and Morton Held a certified public accountant formerly employed by the bankrupt were called as witnesses on behalf of the trustee.
The claim asserted by the Collector of Internal Revenue is one based upon income taxes alleged to be due from the bankrupt and is made up of two items, one for $ 11,858.50 the amount of additional taxes due for the fiscal year ending June 30, 1945, and the second is an item of $ 14,239.16 the amount claimed to be due as additional excess profits tax for the fiscal year ending June 30, 1945, making a total sum of $ 26,097.66.
It appears from the record and I find that the bankrupt herein filed a Return for the fiscal year ending June 30, 1945, and also a Return for the fiscal year ending June 30, 1946. The 1945 Return showed a net taxable income $ 52,350.14. The Return for 1946, showed an operating loss of $ 50,740.72. The Commissioner of Internal Revenue disallowed the sum of $ 22,122.17 (s.m.22), representing certain payments made by the bankrupt during the fiscal year 1945; and he disallowed the sum of $ 27,850.90 (s.m.26), for certain payments made by the bankrupt during the fiscal year ending June 30, 1946, as commissions upon sales of bankrupt's products. By reason of carry-back provisions of the Internal Revenue Code, the taxpayer carried back for the fiscal year 1946 a loss against a profit shown on its Return for the previous year 1945.
The Government in support of the claim urges that the payments disallowed were made by the bankrupt for the two years in question in the amounts described for the purpose of avoiding the payment of a tax by the corporate taxpayer, that the payments were made by the taxpayer to persons who had an interest in the bankrupt corporation who had not performed any services to justify the payments, and that the payments did not reflect a return on invested capital.
The adjusted taxable income upon which this claim is based was the sum of $ 45,475.70 (s.m.8) for the fiscal year 1945. If the payments disallowed by the Commissioner were justified, the claim must be allowed for the amount filed.
I find that the bankrupt corporation commenced business June 30, 1944 when it purchased the assets of American Toy Works (not incorporated) and at that time, and for the fiscal year 1945 the officers of the corporation, the stock ownership held and salaries paid for this year were as follows:
Name Stock held Office Salary
Oscar Geller 62 1/2% President $ 12,000
Adolph O. Wien none Vice-President 7,500
David Mendozza 25% Treasurer 3,000
Samuel Held 12 1/2% Secretary none
The record shows and I find that Oscar Geller devoted his full time to his duties as President of the bankrupt and he rendered no services to Toy Sales Co. in connection with sales of bankrupt's products at any time.
Adolph O. Wien who formerly traded under the name of American Toy Works held no stock of the bankrupt and no deductions were made by the Commissioner as to ...