The opinion of the court was delivered by: RYAN
This suit at law was filed by Stor-Aid, Inc., on December 18, 1947 under the provisions of Title 28 U.S.C.A. Sec. 41(20)
for the recovery of $ 7,990.63 paid under protest by Stor-Aid to have been erroneously or illegally assessed and collected for its fiscal year ending August 31, 1943.
Since the filing of this suit, Stor-aid has been adjudicated a bankrupt in this court and the plaintiff has been duly elected and has qualified as its Trustee in bankruptcy; it has accepted this suit as an asset of the bankrupt estate and has continued to prosecute it.
The question presented is whether the cancellation of an indebtedness of $ 11,098.10 admitted to have been due to Sears Roebuck, & Co. from Stor-Aid which was accomplished by a written agreement dated November 23, 1942 (executed and effective as of November 1, 1942) resulted in taxable income to Store-Aid or was properly treated upon its books of accounts and in its income tax returns as a non-taxable, voluntary, gratuitous forgiveness and discharge of a debt.
I have concluded that it produced taxable income for Stor-Aid, Inc. and was properly included in such income for the fiscal year involved. This conclusion I predicate upon the following findings of fact which I have set forth at length pursuant to Rule 52(a), Fed.Rules Civ.Proc. 28 U.S.C.A., and which I make upon the evidence presented on the trial had before me.
Stor-Aid was a New York corporation with its principal office at No. 347-5th Avenue, New York City, within the Third Internal Revenue District, N.Y. It was a manufacturer of collapsible wooden and cardboard wardrobes and chests. It kept its books and reported its income on an accrual basis for the fiscal year ending August 31. Stor-Aid of New Jersey, Inc. and Stor-Aid of Illinois, Inc. were wholly-owned subsidiaries of Stor-Aid, Inc.
A written agreement was made on October 27, 1941, as of September 1, 1941, between the three Stor-Aid corporations, which were designated in it as 'Sellers', and Sears, Roebuck & Co., nationally known mail-order and retail store merchants. This agreement was received in evidence as plaintiff's exhibit 1. In substance as I construe this agreement its essential and relevant provisions provided that the term of the agreement was five years with a right to Sears to cancel at the end of the first year, upon giving at least ninety days' written notice prior thereto. (Paragraph Second). The 'Sellers' agreed to manufacture and sell to Sears and it agreed to purchase, seventy-five percent of Sears' annual requirements of storage wardrobes and chests 'as presently purchased by Sears' for its Department 625, with an option to Sears to increase the quantities 'up to the Sellers' manufacturing capacity.' (Paragraph First). The price to be paid for the merchandise was provided in detail in the agreement; in substance it was to be 'equal to said Sellers' manufacturing cost,' 'plus 10% of such manufacturing cost.' (Paragraph Third). These costs were called by the parties 'contract prices', and they were to be arrived at quarterly during the first year and annually thereafter by the requirement that Sellers should furnish to Sears a written statement showing 'the manufacturing cost and a determination of the contract prices of product sold and delivered to Sears' during the preceding period. Sears was given the right 'to inspect and audit the books and records of Sellers for the purpose of ascertaining said manufacturing cost and contract prices.' (Paragraph Eighth). During these quarterly periods it was further provided that the 'billing prices' of the products so sold by 'sellers' to Sears were to be agreed upon by the parties and that 'said billing prices shall (should) not exceed the competitive prices defined by the agreement, nor those prices given by 'sellers' to their most favored customer for the same or similar products. (Paragraph Fifth). It was further provided in 'Eighth' that,
'In the event the aggregate of the billing prices of product sold and delivered to Sears hereunder during any quarterly period of the first year, or during any annual period of any succeeding year thereafter, exceeds the aggregate of the contract prices therefor determined as aforesaid, then Sellers will promptly credit, or at Sears' option pay, to Sears one-half of the difference.'
After the end of the first year of operations under this agreement- August 31, 1942, which was coincident with the end of its fiscal year, Stor-Aid for its part determined that the aggregate of the 'filling prices' for the period exceeded the 'contract prices' by $ 22,196.20. It then credited upon its goods of account to Sears one-half of this amount or $ 11,098.10, as a debt due and owing from Stor-Aid to Sears. The item was also reflected, since it was not then paid, in the statement of liabilities of Stor-Aid as an account payable. It is conceded by paragraph 3-c of the pre-trial order entered herein that 'the said liability and debt had occurred on August 31, 1942; and was then due and owing by Stor-Aid, Inc. to Sears, Roebuck & Co.'
For its fiscal year ending August 31, 1942 Stor-Aid filed an original income tax (Form 1120) and excess profits tax (Form 1121) return dated January 14, 1943. (Exhibit 2). In these original returns Stor-Aid failed to include the $ 11,098.10 in its report under Gross Income- Item #1 on Form 1120 of Allowances made against Gross Sales; and this omission was reflected in Item 30 on Form 1120 and in turn in Item 1 on Form 1121 by increasing the net income subject to normal tax from $ 13,308.66 to $ 24,406.76. On these original returns for the fiscal year ending August 31, 1942, Stor-Aid reported itself subject to and paid a normal tax of $ 4,074.44 and an excess profits tax of $ 6,315.37. Later and on July 22, 1943 it filed amended returns on Forms 1120 and 1121 and in these credit was taken for the $ 11,098.10 which it had determined was due Sears as a refund or allowance under paragraph Eighth of the agreement of October 27, 1941. (Exhibit3). With these amended returns, Stor-Aid filed a claim for refund of $ 6,298.56 made up of the over-payment of normal tax under Form 1120 of $ 1,377.34 and of excess profits tax under Form 1121 of $ 4,921.22. Upon audit of these amended returns, the Commissioner of Internal Revenue accepted the deduction of the credit given by Stor-Aid to Sears and upon that basis refunded the over-payment of tax made by Stor-Aid for its fiscal year ending August 31, 1942.
A second agreement was made on November 23, 1942, as of November 1, 1942 (Plaintiff's Exhibit 6). The parties were the same as in the agreement of 1941 save that Irving Blechman, the president and principal stockholder and executive of Stor-Aid, Inc. was added to those designated as 'Sellers'. It is this agreement which is the measure of plaintiff's claim and it reveals this claim to be without substance or merit.
The evidence shows that at the time it was made Stor-Aid was a prosperous and thriving enterprise and in no financial difficulty. The income tax return (Form 1120) filed by Stor-Aid, Inc. for its fiscal year ending August 31, 1943 (Plaintiff's Exhibit 5) shows that for the year its gross sales had more than doubled over the prior year with a greater than sixfold increase in operating profits. Its business provided neither a necessity nor an appropriate occasion for any one with whom it had been dealing to make it a gift in the form of a remission of an acknowledged indebtedness or otherwise.
When this agreement of November 1, 1942 is examined it is found that the preamble refers not only to the making of the prior agreement of September 1, 1941, which I have already considered, but also to a 'stock purchase' agreement of the same date (1941). This stock purchase agreement was not introduced in evidence by either plaintiff or defendant. Uninformed therefore as to its provisions or the operations under it, I have perforce entirely disregarded it except insofar as its cancellation which is provided for in paragraphs '1' and '2' supplies in law consideration for not only the accord to cancel it but for all of the other provisions of the 1942 agreement. The preamble also recites that
'* * * there are disputes between the parties as to the interpretation of said agreements and the obligations of the parties thereunder, as well as ...