Justia Federal District Court Opinions

This is an appeal from a decision of the United States Tax Court in favor of the Commissioner. The issue presented is whether a deductible loss, which was realized by accrual-method taxpayers on the sale of their lumber mill, was to be accrued in 1965 when a contract of sale was entered into or in 1966 when the bill of sale was delivered and the sale price was paid.¹ Taxpayers used the calendar year as their accounting period.

Taxpayers were formerly partners doing business as the Snider Lumber Company (hereinafter the Partnership). Maloney, a former employee, who knew the partners were interested in selling, incorporated under the name, Snider Lumber Company, Inc. (hereinafter the Corporation). On December 20, 1965 he made an offer by letter to buy the Partnership assets. The letter provided in relevant parts:

I am willing to buy your plant if you and your partners can see fit to sell it to me under the conditions set forth below.

I will issue you and your partners notes for the facility and pay these off as rapidly as possible. I will pay you the following amounts and assume the following indebtedness and assets.

For your buildings, equipment, and rolling equipment, including logging equipment, I will pay $125,325.13.

For your inventories, lumber, logs, timber, etc. I will pay $446,989.75.

I will pay you for your good accounts receivable, deposits, employee advances, prepaid insurance less accounts payable at value determined as of closing date.

This offer is contingent on my being able to negotiable (sic) a suitable lease on the plant site property. I have been in contact within the property owners and it appears that the lease can be worked out.I will appreciate an answer to this offer within the next few days.

On December 23, 1965 the Partnership accepted the offer in a letter signed by appellant Charles Snider:

I have discussed your offer of December 20, 1965 with my partners and we have decided to accept your offer.

We would like to close the transaction effective 12:01 a. m. January 1, 1966, since our year ends December 31, 1965.

Prior to December 31, Maloney reached agreement on a lease with the owner of the plant site property. On December 31 he entered the mill premises and occupied an office. The Partnership closed its books other than payroll records at the end of the business day on December 31 and retained all receipts received up to that time. The Partnership payroll records were closed December 29 and the Corporation payroll records were commenced December 30. Insurance endorsements changing the named insured from the Partnership to the Corporation were signed in January, 1966 but the Corporation reimbursed the Partnership for all coverage subsequent to December 31. On January 1, 1966, presumably at some time other than 12:01 a. m. sharp, the bill of sale and lease were executed, and the purchase price paid.

Int.Rev.Code of 1954, Secs. 165(a) and 461(a) provide:

Sec. 165(a) General Rule.-There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.