1942 BTA LEXIS 835 | B.T.A. | 1942
Lead Opinion
Davis contends that he is entitled to a deduction for 1936 of $2,000 as a debt due from Holmes to him, which debt he ascertained to be worthless and charged off in that year. The respondent claims that the payment to Holmes did not constitute a loan but represented money advanced to him for use in a stock venture in which Holmes and Davis were to share the profits and that the transaction was not a loan by Davis to Holmes. There is also some argument that on the evidence the advance was made not by Davis but by the M. T. Davis Co.
In our opinion, the evidence definitely shows that the money advanced, whether or not it was in the nature of a loan, was advanced by Davis and not by the corporation, and no extended discussion on that point is required. With respect to the character of the advance the record is not so clear. Davis in his testimony refers to it as a loan by him to Holmes and that characterization of the advance receives some support from the letter written by Mrs. Holmes to Davis under, date of August 21, 1936. After carefully following the testimony of Davis while he was on the stand and later reviewing the transcript thereof and the exhibits introduced at the hearing, we are convinced that Holmes and Davis did not regard the advance as a loan at the time it was made and that the money was not repayable by Holmes in any event but only upon successful termination of the venture. The agreement between them was not reduced to writing and the matter of losses was not discussed. The record is silent as to whether or not Holmes personally was putting cash into
It is true that Davis in the course of his testimony characterized the advance to Holmes as a loan and that Mrs. Davis in her letter of August 21,1936, referred to the matter as a borrowing of money from Davis stating, “I do not know what his part of the loss or profit was, but I want to straighten that up too.” This letter was written, however, after she had made an inquiry of Davis as to the value of certain insurance policies and had received a reply from Loewenthal advising her that he had been retained by Davis to look into the matter for her free of any expense. In our opinion, the references made to the matter by Mrs. Holmes in her letter are not conclusive of the character of the transaction between Davis and Holmes, and, considering the facts as revealed by the testimony of Davis, we think it not unlikely that Mrs. Holmes, knowing the money used in the venture or a part of it came from Davis, assumed it was received as a loan without really knowing the terms of the agreement between her husband and Davis, or whether Holmes in fact owed Davis anything. Davis’ explanation of the transaction, his attitude toward Holmes, and his conduct with respect to the transaction are much more revealing and, regardless of the use in his testimony of the term “loan”, indicate to us that there was no intention as between him and Holmes that the money should be repaid by Holmes in any event, but that its repayment was dependent upon the outcome of
The sole question remaining is whether that portion of the compromise amounts agreed to and paid by Davis and the corporation for prior tax years attributable to interest on the tax for such prior years was interest within the meaning of section 23 (b) of the Eevenue Act of 1936 and therefore deductible by them. The petitioners contend that said amounts were claimed by the Government to be due from them as interest and were paid by them as interest and are therefore deductible as such, while the respondent rests his case on the contention that the amount agreed to and paid was a lump sum compromise of liability for income tax, penalty, and interest and in mitigation of criminal liability for evasion of income taxes and that no portion thereof was interest within the meaning of the statute.
A compromise is a contract. Although compromises are favored in the law, nevertheless a compromise contract is a proper subject for judicial consideration as to its meaning, validity, or consideration, in the light of the language used and in the light of the circumstances surrounding the making of it. Big Diamond Mills Co. v. United States, 51 Fed. (2d) 721; Colorado Milling & Elevator Co. v. Howbert, 57 Fed. (2d) 769. As was said in Insurance Co. v. Dutcher, 95 U. S. 269: “The practical interpretation of an agreement by a party to it is always a consideration of great weight. The construction of a contract is as much a part of it as anything else. There
Our conclusion is that, regardless of any additional purpose served, payment of the $104,131.96 did represent and effect the payment of the income taxes, penalties, and interest claimed by the Government to be owing. The parties having so regarded the payment, we shall do likewise here. Accordingly we hold that the amounts of $9,066.63 and $24,437.15 included in the $104,131.96 represented interest on the taxes of Davis and the corporation, respectively, for the years there involved. Interest paid on Federal taxes is interest on a debt and is deductible from gross income in computing income taxes. United States v. Jaffray, 97 Fed. (2d) 488; affd., 306 U. S. 276. On this issue the contention of the respondent is therefore rejected.
Decision will be entered under Bule SO.