
    SHERMAN B. HARLAN, RECEIVER FOR GENERAL CREDIT CORPORATION v. THE UNITED STATES
    [No. 546-57.
    Decided January 11, 1963]
    
      
      H. Cecil Kilpatrick and Charles H. Dickmann for the plaintiff. Evan Howell was on the briefs.
    
      8. Lawrence Shaiman, with whom was Assistant Attorney■ General Louis F. Oberdorfer, for the defendant. Edward 8. Smith, Lyle M. Turner and Philip B. Miller were on the brief.
   Davis, Judge,

delivered the opinion, of the court:

This is an unusual income tax refund suit in which the taxpayer’s receiver claims that, under its former management, the corporation deliberately overstated its income, and overpaid its taxes, for 1949 and 1950. We find the charge true, but not to the extent claimed by the plaintiff.

The taxpayer, General Credit Corporation, is an Indiana corporation engaged during the taxable years in the discount and small loan business in the northern part of the state. It was under the control of the Anderson family which largely staffed its main office and held the more important positions. At that time taxpayer had outstanding 14,717 shares of regular common stock, the only voting stock so long as dividends were paid regularly on the Class A non-voting common stock; there were 100,000 outstanding shares of this Class A common, which was wholly non-voting unless and until four semiannual dividends were passed. The Ander-sons held ownership control of the voting stock but had no substantial interest in the Class A shares, which were widely distributed throughout Indiana. The plaintiff asserts that the Andersons, then in control of the company, improperly reported non-existent income for 1949 and 1950 so that they could, concomitantly, continue paying dividends on the Class A common and thus ensure their remaining in control.

The alleged overpayments of federal income taxes came to light after the company’s board of directors appointed a management committee in July 1952. On this committee’s recommendation, the Andersons resigned their offices and new management was installed to attempt to salvage the corporation. This effort was unsuccessful and plaintiff was subsequently appointed receiver by an Indiana state court. Meanwhile, the new management hired new accountants to review the company’s financial condition. This suit was brought as a result of those accountants’ studies.

The several different types of alleged overstatements of income require separate treatment. They are not all governed by the same principles or the same facts.

1. For both 1949 and 1950, plaintiff claims that the “Accounts Financed” shown on the taxpayer’s books were fictitious and/or worthless accounts, and therefore that the interest accrued on those accounts, on the company’s books, was fictitious or nonexistent income. These “Accounts Financed” items represented debts owed to General Credit on various loans made by it to merchants who sold goods on credit. Since the taxpayer was on the accrual basis, it recorded, at the end of the fiscal year, the accrued interest rightfully earned on those loans, whether or not any such interest was actually paid or received during the year. Spring City Co. v. Commissioner, 292 U.S. 182, 184-85 (1934); Estate of Putnam v. Commissioner, 324 U.S. 393, 399 (1945); Commissioner v. Hansen, 360 U.S. 446, 464 (1959). The plaintiff challenges this accrual of interest, to some extent on the ground of insufficient proof that such loans were ever really made by the taxpayer (i.e., that the loans were entirely “fictitious”), but primarily on the ground that in the taxable years the loans, even if initially valid, were so delinquent that they had become wholly “worthless” and therefore no longer validly capable of earning interest. Insofar as plaintiff charges that these accounts were purely fictitious, we find that he has failed to carry his burden of proving that valid loans were not made at the inception by General Credit to real debtors. There are a number of external materials supporting the existence of those loans— contracts, confirmations received, ledger cards, record entries, etc. Plaintiff points to the absence of affirmative confirmation from the individual customer-debtors (rather than the company selling the product) and to gaps in the corporation’s incomplete records for the taxable years; but in our view these factors are inadequate to vitiate what otherwise appear to be valid loans which were unexceptionable at their outset. The alternative claim of invalidity-through-worthlessness (in 1949 and 1950) must also be rejected because it largely rests on a misconception of tbe principles of accrual accounting for tax purposes. Under tbe accrual system a taxpayer should accrue interest on a debt (admittedly owed to him) which he has a right to receive, even though no interest payments were actually received; such interest can be accrued until the debt is declared worthless and deducted as a bad debt. See Spring City Co. v. Commissioner, supra, 292 U.S. at 185-86. This taxpayer did not declare the challenged •debts to be worthless in 1949 or 1950, nor did it deduct them as bad debts or charge them off. Under the law it had a certain discretion in the treatment of these items. See Reed v. Commissioner, 129 F. 2d 908, 912-13 (C.A. 4, 1942); Moock Electric Supply Co. v. Commissioner, 41 B.T.A. 1209, 1211-1212 (1940); 5 Mertens, Law of Federal Income Taxation, Secs. 30.30, 30.65, ch. 30, pp. 57,95. Although the judgment exercised by the then management may not have been the preferable course, it cannot be attacked by a subsequent .management unless the prior choice was so erroneous that it could not in fairness be made. That cannot be said here. There is an insufficient showing by plaintiff (who has the burden) that the debts were definitively worthless in the taxable years. There is evidence, on the other hand, of bona fide attempts to collect in later years from two of the important debtors whose accounts are now said to have been completely worthless in 1949 and 1950. Hindsight may suggest that the Andersons were too optimistic in deeming the debts alive enough in 1949' and 1950 to warrant the accrual of interest, but hindsight does not show the prior management to have been arbitrary or unreasonable in. taking this action. New management, be it a receiver or a new board of directors, cannot obtain a refund of income taxes ■simply by showing that the treatment of bad debts adopted by the earlier management, although lawful and reasonable, •did not lead to as great a tax saving as some other plan. See In the Matter of Florida Rock Products Co., S.D. Fla., decided April 28, 1933, 15 A.F.T.R. 887.

2. In 1949 the taxpayer made a bookkeeping entry transferring $5,000 from the capital surplus account to the earned surplus account, thereby reflecting or creating an income item of $5,000 which was incorporated in its return. The books give no clue to the nature of this item, but the accountant for the former management, who testified for the Government, did give an explanation. He said that originally this part of capital surplus arose from the reevaluation of' assets purchased in 1944 from the American Security Company; by 1949 these particular assets had been liquidated and the gain or loss absorbed in current operations; therefore, according to this accountant, the balance in the capital surplus account should be transferred to earned surplus. One conclusive difficulty with this explanation is that the witness admitted, on cross-examination, that the assets in question were not liquidated in or before 1949, but instead in 1950. The item, if it existed at all, could not have represented income to the corporation in 1949. Plaintiff is therefore correct that in that year this amount of $5,000 represented non-existent income.

3. The corporation made bookkeeping entries on June 30, 1950, debiting an asset account designated “Discounts” and crediting an income account called “Discounts Collected,” thus showing an income item of $17,000. The Government says that this income reflected discounts earned and accrued in that year on customer’s obligations, such as instalment sales, financed by the taxpayer for various retail establishments. For support, the defendant relies on the accountant-who contemporaneously went over the company’s books for-that year; he testified that he did not go behind these summary items as shown on the books but assumed them to be correct since they were consistent with what might be expected in a loan and discount business like General Credit Corporation’s. Plaintiff presented the accountant chiefly responsible for the review made under the auspices of the • new management in 1952; he testified that these entries were not backed by any other data in the corporation’s files, of the kind usually demanded by accountants, and that in his opinion the company had simply attempted to create a wholly fictitious item of income. In this instance we are constrained to agree with the plaintiff that the entire absence of normal supporting data (or indication that any existed) means that this income item was created by the former management out of whole cloth — that it was truly fictitious in the elemental sense. The fact that the company’s records are now incomplete in some respects is not enough to sustain an item so wholly lacking in foundation.

4. The same holding must be made with respect to entries on June 30,1950, debiting the asset account “Discounts” and crediting an income account called “Miscellaneous Income” so as to show income in the amount of $5,600. Like the $17,000 item discussed in paragraph 3, supra, this $5,600 item appears to have been a fictitious increment to earnings in 1950, wholly unsustained by any detailed records or data in which credence can be placed.

5. At the close of its fiscal year on October 31, 1950, the taxpayer made entries debiting Floor Plan Eenewals with offsetting credits to Floor Plan Interest Collected, reflecting an income item of $3,360.10. Floor plan financing is the lending of money to an automobile dealer (or other supplier of goods) so that he may purchase cars (or other articles) to include in his inventory; the loan is secured by the automobile while in the dealer’s possession, and is gradually reduced as the cars are sold. With respect to this item, the plaintiff alleges that (a) many or all of these floor plan loans, purporting to have been made to dealers, were improperly secured or wholly fictitious; (b) that many accounts were “pyramided” or “rolled over” (at the end of a period in which no interest had been paid) by the creation of new debts (wiping out the old ones) for the amount of the original principal plus accrued but uncollected interest; and (c) floor plan loans were made to two entities (“Motor Sales Company” and “General Sales Company”) which were nothing but names used for the taxpayer’s own divisions or operations handling repossessed cars and trailers. The latter loans were obviously fictitious and interest accrued thereon must be eliminated; a business cannot earn or accrue income on monies it “lends” or diverts to itself. We are not persuaded, however, by the plaintiff’s other contentions on this item. The sole question we are to decide is whether the corporation could properly accrue interest' (for income tax purposes) on these floor plan loans in 1950; we are not concerned whether the taxpayer’s treatment of these loans was proper or misleading in other respects or for other ends. See Spring City Co. v. Commissioner, supra, 292 U.S. at 189-90. Confining our inquiry to the tax sphere, we find that the floor plan loans (other than those purportedly made to “Motor Sales Company” and “General Sales Company”) have not been proved to be fictitious, i.e., sham or invalid from the beginning. From the testimony on both sides it seems fairly clear that such loans were actually made prior to 1950. It may perhaps be bad practice or misleading to’ stockholders or potential creditors to “pyramid” a valid loan, but the “pyramided” obligation is not fictitious or void. It follows that, as we have earlier said as to comparable items of accrued interest (see paragraph 1, supra), the former management could properly accrue interest in these floor plan loans until they were declared worthless (or were required to be so treated). Since the loans were not so declared in 1950 and have not been shown to have been worthless in that year, interest could be accrued. In sum, part of this income item of $3,360.10 was validly reported, but there must be excluded the portions reflecting interest accrued on “loans” to “Motor Sales Company” and “General Sales Company”.

6. On October 31, 1950, the last day of its fiscal period, the taxpayer entered an item of $40,000 to reflect a sale of 5,280 shares of stock of Travelmaster Coach Corporation to Mr. W. A. Anderson, taxpayer’s officer and director. Plaintiff’s claim is that the General Credit Corporation did not own or sell this Travelmaster stock in 1950 and that the bookkeeping entries created fictitious income for that year. Resolution of this issue turns on conflicting evidence. The defendant’s position — supported by the specific testimony of the taxpayer’s former accountant and by some vague references in the corporate minutes and other records — is that the company did own these Travelmaster shares (which are said to have had a zero basis) and did sell them on October 31, 1950, to Anderson and Company (the alter ego of W. A. Anderson, one of the senior officers in control) in return for a $40,000 note, which was later reduced by payments to $4,600. On the other hand, plaintiff ’s evidence is that two years later no data existed in the taxpayer’s files which unequivocally reflected the ownership of this stock or the alleged sale; that the Travelmaster Company’s own stock records (which are not wholly complete) do not show or indicate any such transaction ; that the former accountant’s notes on the transaction (in his audit for 1950) were proved to be false in referring to “Anderson and Company” as a registered securities dealer which could dispose of the shares; that this accountant admitted on cross-examination that the taxpayer’s records showed that it held the same amount of Travelmaster shares at the end of 1950 as at the close of 1949; and that there were other, cumulative, reasons why the taxpayer could not have earned this sum of $40,000 on a sale of Travelmaster shares. On this record, there is no reason to disturb the Trial Commissioner’s finding that this $40,000 item was fictitious and non-existent. The plaintiff’s evidence is the more persuasive.

7. Defendant admits the final items — an overstatement of $11,566.06 in 1949 on discounts retail instalment sales contracts purchased at a discount from the retailer) earned in that year on accounts sold in the next year to A.S.C. Corporation, but entered on taxpayer’s records as sold in 1949; and an overstatement of $11,877.66 in 1950 due to the taxpayer’s erroneous failure to record this sale to A.S.C. Corporation as a 1950 (rather than a 1949) transaction. See findings 11 (a) and 13 (e).

8. The total of the items, discussed in paragraphs 1-7, which we have allowed will reflect the taxpayer’s overpay-ments for 1949 and 1950. The exact amount will have to be determined by the Trial Commissioner under Buie 38(c). But since it is probable that from this computation there will emerge a net operating loss for 1950 (but only a reduced tax for 1949) we must decide whether plaintiff is also entitled to utilize this loss as a carryback to 1949 to increase its recovery for that year. The defendant denies this right because, it says, the plaintiff’s claim for refund did not assert, as a ground of recovery, the taxpayer’s entitlement to a carryback of a net operating loss for 1950. Plaintiff counters that the refund claims for each year clearly asserted that there was a loss in that period, and that if the Internal Eevenue Service had agreed with this contention as to 1950 it would necessarily have been led to consider a carryback to 1949. Plaintiff is right. In filing claims for both 1949 and 1950 and in asserting that there were losses for both years, the taxpayer adequately alerted the Commissioner of Internal Eevenue to the potential existence of a carryback from the later to the earlier period. The Commissioner would not be required to search for any possible year to which a 1950 loss might be carried; but, his attention being riveted on 1949-1950, it is reasonable to assume that he would and should have considered whether a loss in one of those years would affect the tax for the other (which was itself claimed as a loss year). This would not be “forcing the inquiry into an unexplored territory, into strange and foreign paths”; the Commissioner is simply being asked “to take action upon discoveries already in the making or perhaps already made. * * * At that point discovery has gone on to such a stage that the Commissioner may not rid himself of the duty of pressing forward to the end.” Bemis Brothers Bag Co. v. United States, 289 U.S. 28, 35 (1933); see also Pink v. United States, 105 F. 2d 183, 186 (C.A. 2, 1939). The refund claims were adequate to permit plaintiff to take advantage of a carryback of a net operating loss from 1950 to 1949.

The plaintiff is entitled to recover on the items and to the extent we have indicated, with interest as provided by law. Judgment will be entered to that effect. The amount of recovery will be determined under Eule 38(c).

Dureee, Judge; Laramoke, Judge; Whitaker, Judge; and JONES, Chief Judge, concur.

FINDINGS OF FACT

The court, having considered the evidence, the report of Trial Commissioner Paul H. McMurray, and the briefs and arguments of counsel, makes findings of fact as follows:

1. General Credit Corporation (hereinafter called the taxpayer) is an Indiana corporation with its principal office located at Anderson, Madison County, Indiana. It was organized in 1929 to engage in the discount and small loan business. Pursuant to a petition duly filed with the Circuit Court of Madison County, Indiana, plaintiff was, on April 6,1955, appointed Receiver for the taxpayer, which appointment is still in effect.

2. Prior to 1950 the taxpayer filed its income tax returns on the basis of the calendar year. Thereafter it filed its returns on the basis of a fiscal year ending October 31. The taxpayer’s income tax returns filed for the calendar year 1949 and for the period January 1 to October 31, 1950, reported net income and tax liability as follows:

Net Tam
Year Income Liability
1949_ $59,361.84 $21,452.64
1950_ 17, 578.94 4,125.88

The reported tax liabilities were paid as follows:

1949
March 22, 1950_$5,363.16
June 20, 1950_ 5, 363.16
September 21, 1950_ 5, 363.16
January 26, 1951_ 5,363.16
1950
January 19, 1951_$1, 031.47
February 23, 1951_ 206.29
June 21, 1951_ 962.71
September 20, 1951_ 962.71
December 19, 1951_ 962. 70

3.During 1949 and 1950, taxpayer’s affairs were under the control and supervision of two brothers, M. D. Anderson and W. A. Anderson, their wives, children, and other relatives, including Richard E. Anderson, Walter George Anderson, Robert Henry Anderson, Vincent M. Anderson, and Marie S. Anderson. All of these members of the Anderson family worked in the office of the taxpayer.

4. Throughout 1949 and 1950, taxpayer had 14,717 shares of its regular common stock issued and outstanding. This, stock was the only voting stock of taxpayer as long as dividends were paid regularly on the Class A common stock.

5. Throughout 1949 and 1950, taxpayer had 100,000 shares of Class A common stock issued and outstanding. This stock was widely held throughout the State of Indiana by many shareholders. The Class A common was nonvoting stock, with the exception that if four semiannual dividends payable on the Class A common stock were unpaid, the holders of said stock were entitled to one vote for each share-outstanding in the same manner as the regular common voting stock. On April 12, 1950, taxpayer applied for and obtained authority from the Secretary of State of Indiana to issue an additional 100,000 shares of the Class A common, nonvoting stock, but taxpayer did not request and did not obtain authority to issue any additional regular common voting stock.

6. The Anderson family enjoyed ownership control of the regular common voting stock of taxpayer and, in effect, elected taxpayer’s directors and officers. The Anderson family had substantially no ownership of the Class A common, nonvoting stock. The Anderson family could thus control the taxpayer corporation as long as they prevented the Class A common stock from becoming voting stock through nonpayment of dividends.

7. On July 22, 1952, the taxpayer’s board of directors appointed a management committee consisting of James Sans-berry; Harold Whitlock, Indiana Securities Commissioner; and Harold Cannon to conduct the business affairs of the corporation.

8. Subsequently, as a result of a recommendation of the management committee, on September 30,1952, M. D. Anderson resigned as director, W. A. Anderson resigned as president and director, Robert H. Anderson resigned as assistant treasurer and director, Richard E. Anderson resigned as assistant secretary and director, Marie S. Anderson resigned as an employee, and W. Gr. Anderson resigned as treasurer and director of taxpayer corporation.

•9. On October 1, 1952, new management was installed to ■conduct the affairs of taxpayer and attempt to salvage the ■corporation. Such attempt was not successful and a Receiver was subsequently appointed (see finding 1).

10. In October 1952 the new management employed Mc-Williams, King & Co., an accounting firm of Anderson, Indiana, to review the books and records of taxpayer. Mr. King and Mr. Faris, both Certified Public Accountants associated with the accounting firm, conducted the review in taxpayer’s principal office, then in Elkhart, Indiana. They were not asked to express an opinion concerning subsequent financial statements submitted to taxpayer’s board of directors on August 5, 1953, which showed an earned surplus deficit of $860,727.20, and did not do so. In fact the accounting firm advised the board of directors that no opinion could be furnished as to the financial condition of the taxpayer (General Credit Corporation).

11. The books and records of the taxpayer for the calendar year 1949 reflected fictitious or nonexistent income which was included as taxable income in taxpayer's federal income tax return for the calendar year 1949 as follows:

(a) A bookkeeping entry on December 31, 1949, indicates that the taxpayer sold discounts (retail installment sales contracts) to A. S. C. Corporation. The anticipated income on said discounts sold was $23,443.72. Taxpayer debited an asset account (Prepaid Discounts A. S. C.) instead of debiting (decreasing) an income account (Discounts Received), thereby setting up, or creating, an item of fictitious or nonexistent income in the amount of $23,443.72 for 1949.

The sales agreement was actually transacted on January 3, 1950, not in 1949, and should properly be entered in the books in 1950. Since the sale was in 1950, the taxpayer accrued some income on these installment sales contracts in 1949. These contracts, which had a face value of $165,229.47, were not included in total discounts (receivables) in taxpayer’s books as of December 31, 1949, in computing the taxpayer’s 1949 income tax. At the end of any given tax period the taxpayer estimated that 7 percent of any balance remaining in the Discounts account was unearned. Therefore, 7 percent of $165,229.47, or $11,566.06 of Discounts, was unearned income for 1949, with the remainder of total anticipated income in these accounts of $11,877.66 accruing to the taxpayer as income in 1949. This results in an overstatement of $11,566.06 in taxpayer’s 1949 income. Additionally, when these accounts were sold in 1950 this would produce an overstatement in 1950 income of $11,877.66 to reflect the additional rediscounting expense (see finding 18(e)).

(b) Taxpayer made a bookkeeping entry in 1949 transferring $5,000 from the capital surplus account to the earned surplus account, thereby reflecting, or creating, an entry of fictitious and nonexistent income of $5,000.

12. The “Accounts Financed” shown on taxpayer’s books during 1949 were not fictitious or worthless accounts, and lawful interest earned on those accounts, reflected in the taxpayer’s books for 1949 in the amount of $30,999.56, was properly accrued.

13. The books and records of the taxpayer for the fiscal period ending October 31, 1950, reflected fictitious and nonexistent income, which was included as taxable income in taxpayer’s federal income tax return for the period ended October 31, 1950, as follows:

(a) Taxpayer made unsupported bookkeeping entries on June 30, 1950, debiting an asset account designated “Discounts” and crediting an income account “Discounts Collected,” thereby setting up, or creating, fictitious and nonexistent income in the amount of $17,000.

(b) Taxpayer made unsupported bookkeeping entries on June 30, 1950, debiting an asset account “Discounts” and crediting an income account “Miscellaneous Income,”' thereby reflecting, or creating, fictitious and nonexistent income in the amount of $5,600.

(c) Part of taxpayer’s bookkeeping entries on October 31, 1950, debiting “Floor Plan Renewals” with offsetting credits to “Floor Plan Interest Collected,” and showing income in the amount of $3,360.10, represented interest purportedly collected from General Sales Company and Motor Sales Company, which were not separate entities or businesses but parts of taxpayer’s own business. This part of the sum of $3,360.10 reflected or created fictitious and nonexistent income.

(d) Taxpayer made bookkeeping entries on October 31, 19.50, the last day of the fiscal period, debiting Miscellaneous Loans and crediting Miscellaneous Income for $40,000 to reflect a sale of 5,280 shares of Travelmaster Coach Corporation stock owned by taxpayer to Mr. W. A. Anderson, an officer and director of taxpayer. Taxpayer did not own or sell such Travelmaster stock in 1950. These entries reflected or created fictitious and nonexistent income in the amount of $40,000.

(e) Taxpayer’s 1950 income was overstated by $11,877.66 as a result of additional rediscounting expense from the sale of discounts and erroneous bookkeeping entry in connection therewith, as explained in finding 11(a) above.

14. (a) The “Accounts Financed” shown in taxpayer’s books during 1950 were not fictitious or worthless accounts, and lawful interest earned on those amounts, reflected in the taxpayer’s books for 1950 in the amount of $9,502.86, was properly accrued.

(b) Except as indicated in finding 13(c) or if prohibited by state law, the taxpayer’s credits on October 31, 1950, to “Floor Plan Interest Collected” in the amount of $3,360.10, reflected interest properly accrued on floor plan accounts which were not fictitious or worthless.

15. On March 14,1953, the taxpayer filed claims for refund of alleged overpayments of income taxes for 1949 and 1950. Copies of the claims were annexed to plaintiff’s petition as Exhibits A and B, respectively. For both 1949 and 1950, the claims stated that the taxpayer “actually suffered a loss during period of return and further that losses of assets chargeable to the said period were in excess of the income for said period * * Taxpayer’s representatives met with the Agent in Charge for the Internal Revenue Service at South Bend, Indiana, and another Revenue Agent, and later with representatives of the Appellate Division of that agency in Indianapolis. At those meetings the issues set out in the petition, and treated in findings 11-14, were discussed. The claims for refund were assigned to an Examiner of the Internal Revenue Service, who examined the taxpayer’s books and records, and recommended the allowance of a deduction of $9,575.90 for the 1950 period, based upon the carryback of an operating loss for the fiscal year 1951, but denied the claims for refund filed March 14,1953. The Examiner’s adjustments were approved on review, resulting in an overassessment of $2,270.03 for the period ending October 31, 1950, which has been refunded. Plaintiff was informed by notices dated April 10, 1957, from the District Director of Internal Revenue at Indianapolis, Indiana, that the claims for refund were disallowed. This suit was filed on December 2,1957.

16. The plaintiff, as Receiver for General Credit Corporation, is the owner of the claims herein sued upon and has not at any time assigned or transferred any part of them.

17. No action other than as set forth in finding 15 has been taken with respect to these claims by the Congress or any other department or agency of the United States.

CONCLUSION OP LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to recover in accordance with the opinion herein, and judgment is entered to that effect with the amount of recovery to be determined pursuant to Rule 38(c).

In accordance with the opinion of the court and with a stipulation of the parties, it was ordered on March 1, 1963, that judgment for the plaintiff be entered for $23,308.49, with interest according to law computed on the amounts and from the dates set forth below:

On $2,259.32 from September 21,1950;
On $1,031.47 from January 19, 1951;
On $5,363.16 from January 26, 1951;
On $206.29 from February 23, 1951;
On $618.09 from June 21, 1951;
On $13,830.16 from March 14, 1953. 
      
       The defendant now admits that the company did overstate its income in one particular. See paragraph 7, infra.
      
     
      
       In April 1950 taxpayer obtained authority to issue an additional 100,000 shares of Class A.
     
      
       The “pyramiding” or “rolling over” of these loans (as described in paragraph 5, infra), so as to substitute new liabilities for the old, would not ¡render the obligations fictitious for income tax purposes, though it might well be misleading for the purpose of borrowing money or showing the true financial condition of the company. See Spring City Co. v. Commissioner, supra, 292 U.S. at 189-90. If, however, Indiana law made it illegal to accrue interest on interest, then the interest accrued on portions of “pyramided” accounts which represented previously accrued but uncollected interest was nonexistent income to the taxpayer and should not have been reported. See paragraph 5, infra, fn. 6.
     
      
       The taxpayer maintained a reserve for bad debts instead of deducting bad •debts directly; in 1949 and 1950, deductions for additions to this reserve were ^properly taken on the tax returns.
     
      
       Motor Sales and General Sales were not separate corporations.
     
      
       If state law forbade the “pyramiding” of interest, then there should be excluded from income that part of the new “rolled over” or “pyramided” principal representing interest accrued in prior years but not collected.
     
      
       A ground for refund not raised or fairly comprised within the application made to the Internal Revenue Service cannot ordinarily be considered by the ■court from which the refund is sought. Real Estate Land Title & Trust Co. v. United States, 309 U.S. 13, 17-18 (1940); International Curtis Marine Turbine Co. v. United States, 74 Ct. Cl. 132, 140, 56 F. 2d 708 (1932).
     