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Hobby, W. P..

980

Hodge, Edwin, Estate..

Hoffman, Claire Giannini.

Hofheimer, Lester, Estate.
Horsford, Cornelia C. F.
Houghton, Mabel H., Estate..
Howze, Rosa A..

Illinois Water Service Co..

Janeway, Edward G., and Wife.

Jones, Charles L., and Wife..

Kaufmann Department Stores, Inc..

Kaufmann Department Stores Securities Corporation
Keeble, David M...

Keeble, John Bell..

Kellogg, John Harvey.

Ketcham, Katharine C..

Kirby Petroleum Co..

Klau Mine, Inc..

Kleberg, Alice G. K..
Koppers Co.‒‒‒‒‒

Koppers Products Co.

Krusko, Helen..
Law, Richard.

Lightner, Camille V.

Lindsay, Helen P., Estate..

Lindsay, Samuel S., Estate_
Litwin, Harry.

Low, Bertha, Estate.

Mallinckrodt, Edward, Jr.

Marshall, Robert, Estate.

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Massengale, Elizabeth C..

328

Mattox, Ronald..

586

McCann, Harrison K.

702

McConway & Torley Corporation_

593

McCullough, William D., Estate..

445

McDonald, Mildred E...

840

McFaddin, James Lewis Caldwell..

395

McFaddin, W. P. H., Jr..

395

McFaddin, W. V.

395

Meier, Eleanor E..

458

Mercantile Bridge Co..

166

Middlekauff, Peter D., Estate__.

203

Miller, Lawrence.

285

Miller, Malcolm D., and Wife..

267

Monitor Sugar Co.

488

Montreal Mining Co.......

688

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Wells Fargo Bank & Union Trust Co., Trustee and Transferee

Wemyss, William H..

Western States Corporation__

Whiteley, George H..

Wiedetz, Harry.

Wild Horse Quicksilver Mining Co..

Willmott, Irene E.

Willmott, John W.

Wilson, Henry, Estate.

Wilson Athletic Goods Mfg. Co.

Wilson Sporting Goods Co....

Winkler, Eli, and Wife..

Winter Realty & Construction Co.

Wood Process Co.....

Yale Petroleum Co..

203

876

549

618

1262

412

321

321

1059

70

70

735

38

810

1039

DECISIONS

OF THE

THE TAX COURT OF THE UNITED STATES

ESTATE OF PAUL M. BOWEN, DECEASED, J. B. ANGELL AND E. P. WRIGHT, EXECUTORS, PETITIONERS, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 111348, 111494. Promulgated June 1, 1943.

Petitioners' decedent was in debt to a national bank at the time of his death in December 1935. The bank was insolvent and in the hands of a receiver. The notes evidencing the indebtedness were secured by collateral. By agreement, the receiver was paid direct from year to year the dividends on the stock and also the proceeds resulting from the sale of the collateral. Payments were thus made in 1936, 1937, 1938, 1939, and 1940 and were applied by the receiver first to principal, then to interest. The legal representatives of decedent's estate directed the receiver in June 1937 to apply all payments first to interest, then to principal. Held, the general rule is that, where partial payments are made by a debtor on indebtedness without direction as to how such payments should be applied as between principal and interest, payments should first be applied by the creditor to interest and the remainder to principal. This general rule is applicable in the instant case from the date of decedent's death and partial payments received by the receiver should have been so treated, and the Commissioner's action in disallowing all interest deductions to petitioners in 1939 and 1940 is reversed. The amount of deductions of interest to which petitioners are entitled in 1939 and 1940 is determined under the facts.

John M. Hudson, Esq., for the petitioners.
Melvin S. Huffaker, Esq., for the respondent.

OPINION.

BLACK, Judge: The Commissioner determined deficiencies of $396.02 and $1,380.13, in petitioners' income tax for the years 1939 and 1940, respectively. The deficiency for 1939 is due to the disallowance by the Commissioner of a deduction of $18,902.73 claimed by the taxpayer on its income tax return filed for that year as interest paid. This adjust

1

ment is explained by the Commissioner in his deficiency notice, as follows:

(a) In your income tax return for the year 1939 an interest deduction was claimed in the amount of $18,902.73 representing payments allegedly made by you during said year to the Receiver of First National Bank of Detroit. These payments in fact represented collections received by the said Receiver in 1939 either as income from collateral or from the proceeds of the sales of collateral previously deposited with the First National Bank by Paul M. Bowen, deceased, sometime prior to 1939, as security for three certain loans made to him by said bank. The Receiver's records disclose that said amount of $18,902.73 was applied as credits against principal and not against interest due thereon. Accordingly, the sum of $18,902.73 has been disallowed as a deduction from your gross income for the calendar year 1939.

The deficiency for the year 1940 resulted from the disallowance by the Commissioner of a deduction of $4,538.10 claimed by the taxpayer as a deduction on its income tax return filed for that year as interest paid. This adjustment was explained in the deficiency notice as follows:

(a) In your income tax return for the year 1940 an interest deduction was claimed in the amount of $4,538.10 representing payments allegedly made by you during said year to the Receiver of First National Bank of Detroit. During the year 1940 said Receiver collected certain income from collateral and also certain amounts from sales of collateral, a portion of which collections was applied against principal and the balance of $10,827.46 was applied against interest.

There was $41,210.51 accrued and unpaid interest due the Receiver of First National Bank, Detroit, Michigan, at the date of decedent's death which amount has been allowed as a deduction for Federal estate purposes as a debt of the estate. Since the amount of $10,827.46 applied by the Receiver against interest in the year 1940 did not equal the amount of interest accrued at the date of decedent's death, no deduction is allowable for Federal income tax purposes as said amount is chargeable against the corpus of the estate. Accordingly, the amount of $4,538.10 claimed in the return as an interest deduction has been disallowed.

Petitioners by appropriate assignments of error contest the correctness of both the foregoing adjustments. As to the year 1940 petitioners claim an overpayment of $14,012.48 under their main contention. They claim an overpayment of $9,954.10 under their alternative contention in case their first contention is not sustained. Petitioners' respective contentions will be stated in more detail later in this opinion.

The facts have been stipulated and as stipulated are adopted as our findings of fact. The following statement of some of these facts will suffice for the purpose of this opinion.

Petitioners are the duly appointed executors of the estate of Paul M. Bowen, who died December 17, 1935, a resident of the State of Michigan. For the years 1939 and 1940 petitioners filed fiduciary income tax returns with the collector of internal revenue for the district of Michigan at Detroit. At the date of death, Paul M. Bowen,

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