Court Opinion

ID: 4615635
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:32:46.399561+00
Date Added: 2024-06-11T07:54:58.801074
License: Public Domain

J. S. WAHL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Wahl v. CommissionerDocket No. 24762.United States Board of Tax Appeals21 B.T.A. 822; 1930 BTA LEXIS 1784; December 19, 1930, Promulgated *1784  DEDUCTION - BAD DEBT. - Held that petitioner properly deducted $10,929.13 from his gross income for 1922, where evidence establishes that the debt in that amount was ascertained to be worthless and charged off in that year.  Robert L. Ward, Esq., for the petitioner.  T. M. Mather, Esq., for the respondent.  TRUSSELL *822  The respondent has determined a deficiency of $1,250.12 in this petitioner's income tax for the calendar year 1922, due to his disallowance of a claimed bad debt deduction of $10,929.13.  The amount of the debt is not in controversy and the sole issue is whether the said debt was ascertained to be worthless and charged off in 1922.  FINDINGS OF FACT.  Petitioner is a resident of Caruthersville, Mo.In March or April, 1913, petitioner was made a director of the Pemiscot County Bank.  He was not familiar with the affairs or financial condition of the bank until he attended his first directors' meeting, at which time he learned of the cashier's defalcation and also that $75,000 had to be deposited in the bank to save it from failing.  At that meeting J.A. and F. J. Cunningham, directors and owners of 80 per cent of the*1785  stock of the bank, requested petitioner to loan the bank $15,000, but he refused to do so, with the explanation that he had had nothing to do with the operation of the bank and would not help it borrow money.  The petitioner had known the two Cunningham brothers for a number of years, knew that they owned stores, cotton gins, a bank, and a great deal of land, and so when they came to him personally and asked him to loan them his name and credit to the extent of $15,000, he agreed to do so upon their promise to save him from any loss in the event the bank did fail.  The Cunninghams advised petitioner that the $15,000 would save the bank from failure.  On May 20, 1913, petitioner met J. A. Cunningham in St. Louis and they *823  went to the Lemp Brewery Co., where petitioner borrowed $15,000 on his own personal note.  J. A. Cunningham again reiterated his promise to save petitioner from loss of any part of the said amount and thereupon petitioner handed the money over to the former, who deposited it in the Pemiscot County Bank.  On or about June 5, 1913, the said bank failed.  After receiving a couple of liquidating dividends which were applied on his personal note for $15,000, *1786  petitioner paid the balance due the Lemp Brewery Co. in order to stop the 8 per cent interest he had agreed to pay.  Up to and including the year 1919, the petitioner received from the bank commissioner liquidating dividends totaling $4,070.87.  At various times during that period the Cunninghams reiterated their promise to save petitioner from any loss, but told him he would have to wait until the bank was finally liquidated to determine the balance due from them.  After the final dividend was paid in 1919, petitioner made demand upon the Cunninghams for payment of $10,929.13, and they agreed to have a meeting and pay him the balance due on account of his loan to them for the benefit of their bank.  During 1920 and 1921, while the final audit and report on the affairs of the bank were being made, the petitioner continued to rely upon the Cunninghams' oral promise to save him from any loss because, so far as he knew, both of the Cunninghams were well to do financially and he believed their word was good.  In 1922 petitioner employed an attorney who, in December of that year, finally succeeded in getting J.A. and F. J. Cunningham and petitioner together for a meeting at which the*1787  Cunninghams repudiated their oral agreement.  At the close of the year 1922 the petitioner found that he had only his own testimony as evidence of the oral agreement between himself and J.A. and F. J. Cunningham; that they had repudiated the agreement; and that he had practically no chance to recover by suit, and he thereupon determined that the debt in the amount of $10,929.13 was worthless and charged it off.  In his income-tax return for 1922 petitioner deducted from gross income the amount of $10,929.13 as a bad debt and the respondent disallowed the deduction upon his determination that the bad debt or loss was incurred in 1914, or at least prior to 1922.  In 1923 petitioner's attorney, employed upon a contingent fee basis, brought suit against the Cunninghams, resulting in a directed verdict in favor of the defendants.  Upon appeal to the Supreme Court of Missouri the cause was reversed and remanded for a new trial which had not been had at the time of the hearing on this proceeding.  Both of the Cunninghams were insolvent at the date of the hearing *824  OPINION.  TRUSSELL: The undisputed testimony given in this proceeding convinces us that in 1913 petitioner loaned*1788  $15,000 to the two Cunningham brothers to be used to bolster up the finances of their bank and that he looked to them and relied upon their agreement for repayment of the said amount.  While the bank was being liquidated the Cunninghams reiterated their promise to save petitioner from any loss on account of the loan and both parties waited for the final liquidating dividend, which was paid in 1919, making a total of $4,070.87 received by petitioner as liquidating dividends from 1913 to 1919.  Petitioner then made demand on the Cunninghams for payment of $10,929.13 due from them pursuant to their oral agreement and they acknowledged their debt to petitioner, who continued to rely upon their renewed promises until December, 1922, when they repudiated their oral agreement to pay that balance due petitioner.  At the close of the year 1922 petitioner ascertained that the debt was worthless and charged it off.  The facts of record sustain petitioner's ascertainment that the debt in the amount of $10,929.13 became worthless in 1922.  We are of the opinion that petitioner properly deducted the said amount from his gross income on his return for the year 1922 under the provisions of section*1789  214(a)(7) of the Revenue Act of 1921.  Judgment will be entered for the petitioner.