Court Opinion

ID: 4600311
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:25:16.347538+00
Date Added: 2024-06-11T07:52:17.075107
License: Public Domain

JOSEPH RUBIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Rubin v. CommissionerDocket No. 8959.United States Board of Tax Appeals9 B.T.A. 1183; 1928 BTA LEXIS 4272; January 12, 1928, Promulgated *4272  Worthlessness of debt not established.  Paul L. Lowenwarten, C.P.A., for the petitioner.  Bruce Low, Esq., for the respondent.  LANSDON *1183  The respondent has determined a deficiency for the year 1923 in the amount of $163.32.  The deficiency arises from the disallowance by the respondent of petitioner's deduction from gross income of $1,799.32 as a bad debt.  FINDINGS OF FACT.  The petitioner is an individual residing in the City of New York.  During the taxable year he was president of two New York corporations, the Merit Hosiery Co., Inc., and the Rubin Brothers Millinery Co., Inc.  Petitioner, together with his brother, Jacob Rubin, owned a majority of the stock of both corporations.  David Rubin, another brother of petitioner, had bought merchandise from the two corporations for several years on an open credit account, but being unable to pay in 1923, further credit was refused.  In order that David Rubin might secure the merchandise necessary for the continuation of his business, petitioner and Jacob Rubin orally guaranteed his account to the two corporations.  Thereafter credit was extended to him until late in 1923, when demand was*4273  made for payment.  David Rubin did not discharge the indebtedness, and on November 15, 1923, in accordance with the previous oral guaranty, petitioner paid $1,530.56 and $268.76, respectively, to the Merit Hosiery Co., Inc., and the Rubin Brothers Millinery Co., Inc.  The amounts so paid represent one-half the account of David Rubin with the two corporations, the other one-half being covered by the guaranty of Jacob Rubin.  Soon thereafter, petitioner examined his brother's books and, concluding that he could not collect from him, the amounts were deducted as bad debts on the 1923 income-tax return.  David Rubin continued in business until his death in October, 1925.  He left no estate.  OPINION.  LANSDON: The deduction claimed by petitioner as a bad debt arises through payment on an oral guaranty of his brother's debts to two corporations, of which petitioner is president.  The respondent contends that payment under the oral guaranty, which was clearly unenforceable under the New York Statute of Frauds, does not create a debt, and that, assuming the existence of the debt, there has been no *1184  ascertainment of worthlessness during the taxable year, within the meaning*4274  of section 214(a)(7) of the Revenue Act of 1921.  The State of Frauds will not operate as a defense, in an action by one who has paid under a verbal guaranty, to recover from the original debtor.  The Statute only withholds remedial aid, and if the guarantor pays under the oral contract, the courts will give him a remedy against the original debtor.  Beal v. Brown, 13 Allen (Mass.) 114; ; ; Craig v. Vanpelt, 3 J. J. Marshall (Ky.) 489; Arnold on Suretyship, p. 136.  The existence in fact of the debt seems clearly established since petitioner could have recovered from his brother in an action at law.  Before a deduction can be allowed as a bad debt, the fact of worthlessness during the taxable year must be proved.  ; . The only evidence offered of David Rubin's financial condition at the time the debt was charged off was petitioner's testimony to the effect that his affairs were in "bad shape," and that "we saw what he had outstanding - he showed us his books; we saw he had*4275  nothing that we could collect on." The Board does not regard this statement of the petitioner as sufficient to enable it to determine that the debt was worthless.  The worthlessness of a debt is a question of fact to be determined by the Board from evidence concerning the assets of the debtor and his ability to pay.  The conclusion of the petitioner that the books showed nothing on which he could collect is not sufficient.  . David Rubin continued in business until his death in 1925, buying merchandise for resale to retailers.  Nothing in the record indicates that he was at any time insolvent, or that petitioner's claim could not have been paid, at least in part.  Neither is there any showing that it would have been futile to secure a judgment against David Rubin.  Reviewed by the Board.  Judgment will be entered for the respondent.