Court Opinion

ID: 9653968
Source: CourtListenerOpinion
Date Created: 2023-08-23 18:00:29.908883+00
Date Added: 2024-06-11T18:13:04.122763
License: Public Domain

AUGUSTUS N. HAND, Circuit Judge
(concurring). At the end of 1918 the Brooklyn Rapid Transit Corporation was placed in the hands of a receiver. In about five years there was a reorganization, as a result of which there was a payment of $7,757.12 upon the $14,016.67 due the plaintiff on December 31, 1918, on account of unpaid interest. Hardly any better proof could be made of the practical worthlessness in the year 1918 of the item of $14,016.67, which plaintiff had entered on its books, than that it represented an unsecured claim for accrued interest against a company which went into the hands of a receiver; that the claim was subordinate to the prior payment of principal in full; that ultimate realization of any part of it involved, as a practical matter, the hazards of a receivership and a reorganization; and that the worth in 1918 of the $7,757.12 paid in 1923 on account of the claim was the equivalent of only about 43 per cent, thereof finally obtained almost by chance after years of delay and uncertainty. After such evidence, if the government wished to show that this claim had any market value in the year 1918, it should have offered some testimony, instead of resting on the plaintiff’s ease. In Sherman & Bryan v. Blair (C. C. A.) 35 F.(2d) 713, we held that a debt partially worthless was within the classification of “losses sustained during the taxable year and not compensated for by insurance or otherwise,” which might be deducted under section 234 (a) (4) of the Revenue Act of 1918 (40 Stat. 1078), to the extent that it was worthless. If subdivision (4) applies, the item may be deducted as a loss.
It may, however, be said that section 234 (a) (4) cannot apply if the claim for interest became wholly worthless in 1918, and that recourse in that ease would have to be had to subdivision (5) of section 234 (a), which allows deduction of “debts ascertained to be worthless and charged off within the taxable year.” Subdivision (5), supra, has never been authoritatively held to be exclusive of subdivision (4), but, even if subdivision (5) alone applies to the ease of debts which were once good and were later ascertained to be worthless, it can hardly affect this case. When a receivership of a large railroad system followed within less than six months after the loan here was made, and the claim for interest only yielded a little after years of delay, the reasonable inference is that the claim never had any substantial value. Consequently it was not income for the year 1918, and was no more assessable as such than the accruals upon the same loan during'the years succeeding the receivership, which ’ do not seem to have been claimed as taxable income.
If A loaned $100,000 to B, and the latter was a hopeless insolvent, but A did not know it, can it be thought that A would create taxable income by mistakenly entering interest upon the loan upon his books? What the government is permitted by the Constitution to tax is real and not supposed income. The only difference between the assumed ease and the present is that here the receivership followed instead of preceded the loan. But the circumstances gave rise to the inference that the interest was of no substantial worth. It was for the government to meet this presumption if it had proof to the contrary. Should the item of interest be shown on a new trial to have had some value in 1918, to that extent and to that extent only it was subject to tax for that year. Any excess tax paid would be recoverable.
I coneur with the view that the judgment should be reversed.