Court Opinion

ID: 4635208
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:17:39.559256+00
Date Added: 2024-06-11T07:59:59.929172
License: Public Domain

John B. Garrett, Jr., and Helen M. Garrett, Petitioners, v. Commissioner of Internal Revenue, RespondentGarrett v. CommissionerDocket No. 86306United States Tax Court39 T.C. 316; 1962 U.S. Tax Ct. LEXIS 37; November 2, 1962, Filed 1962 U.S. Tax Ct. LEXIS 37">*37 Decision will be entered for the respondent.  Amounts paid to builder, exceeding contract price, for completion of petitioners' residence held, on facts, not deductible as nonbusiness bad debts. Haywood P. Martin, 38 T.C. 188">38 T.C. 188 (1962), distinguished.  Thomas V. Kenny, Esq., for the petitioners.Ronald S. Schacht, Esq., for the respondent.  Opper, Judge.  OPPER39 T.C. 316">*316  Respondent determined a deficiency in petitioners' income tax for 1956 in the amount of $ 631.24.  Other adjustments being conceded, the sole remaining issue is whether payments made by petitioners for the construction of their personal residence in excess of the contract price constituted an allowable deduction as a nonbusiness bad debt.FINDINGS OF FACT.Some of the facts have been stipulated.  The stipulation1962 U.S. Tax Ct. LEXIS 37">*38  and contents of accompanying exhibits are hereby found as follows:1. The petitioners are individuals presently residing at Sage Hill Lane, Menands, New York.2. Petitioners filed their United States Federal Income Tax Return for the year 1956 with the District Director of Internal Revenue, Albany, New York, on April 15, 1957.  * * *3. During the year involved, the petitioner, John B. Garrett, was engaged as a partner in a physician and hospital supply house doing business under the name of John B. Garrett in Troy, New York.4. On October 28, 1955, the petitioners contracted with Andrew H. Ruth for the construction of a personal residence in the Town of Colonie, New York.  Notwithstanding the price stated in the contract, it is stipulated that the contract price was $ 32,810.00.  * * *5. The petitioners moved into the house in issue in October, 1956, prior to its completion. By December 31, 1956 the petitioners had paid to the builder and to others for labor and material the sum of $ 33,968.77 or $ 1,158.77 in excess of the contract price. Petitioners made additional payments in 1957 and in 1958 to complete the construction of the house.6. On April 17, 1957 Andrew H. Ruth filed1962 U.S. Tax Ct. LEXIS 37">*39  a petition in bankruptcy.  The petitioners were not listed as creditors in the schedule annexed to the bankruptcy petition.7. The last day for filing claims in the bankruptcy proceeding was November 9, 1957 and Mr. Ruth was discharged in bankruptcy on January 19, 1959.  Petitioners did not file any claim against Mr. Ruth during the period allowed for doing so.8. Petitioners concede the correctness of respondent's determination with respect to the inclusion in income of $ 2,383.93 as an addition to John B. Garrett's distributive share of partnership income.9. The sole remaining issue involved in this case is whether or not payments made by petitioners for the construction of their personal residence in excess of the contract price constituted an allowable non-business bad debt deduction within the purview of Section 166(d) of the Internal Revenue Code of 1954.39 T.C. 316">*317  10. The adjustment to the medical deduction is dependent solely upon the determination of the other two adjustments contained in the statutory notice of deficiency.In addition, petitioners request us to find "Andrew H. Ruth, the contractor, was insolvent and unable to reimburse the petitioners on December 31, 1956, 1962 U.S. Tax Ct. LEXIS 37">*40  and was insolvent and unable to reimburse the petitioners from the time that such excess payments were made." We so find.OPINION.Unlike the taxpayers in Haywood P. Martin, 38 T.C. 188">38 T.C. 188 (1962), the present petitioners were under no compulsion to make the loan to the contractor, which is the subject of their claim.  While in both cases the debt may have been worthless when created, the Martin case (at page 192) contains the following statement:Therefore, the creation of a debtor-creditor relationship as between the owner of the property and the original obligor of the claims as a result of subrogation was involuntary, and consequently the worthlessness of the debts at the time they were thus created [n2] is irrelevant in considering their deductibility.  [Footnote omitted.]Having found, as we have, that the debts were worthless when created, there is no significance to the debtor's subsequent bankruptcy.  In Caroline D. Thompson, 22 T.C. 507">22 T.C. 507, 22 T.C. 507">514 (1954), we quoted with approval from American Cigar Co. v. Commissioner, 66 F.2d 425, 427 (C.A. 2, 1933), affirming 21 B.T.A. 464">21 B.T.A. 464 (1930),1962 U.S. Tax Ct. LEXIS 37">*41  certiorari denied 290 U.S. 699">290 U.S. 699:The taxpayer takes the position that the notes taken on account of the advances were ascertained to be worthless at the very time the advances were made.  The Board has found as a fact that petitioner made the advances fully believing that the obligations they created were worthless and uncollectible, and there is evidence to support such a finding.  * * * Such advances, made with the belief they would not be repaid * * * are not deductible as bad debts.Petitioners here, moreover, were not, as in the Martin case, subrogated to the obligations of any third persons.  When they made the payments to the builder, they did so solely for the purpose of permitting him to complete their personal residence. Treating them as a loan and obtaining the builder's promise to repay was no more than a superfluous bit of meaningless decoration.But in the event that the debts were not uncollectible when acquired, there is no evidence that they ever became totally worthless. They are apparently still the liability of the builder and were not discharged by his bankruptcy.  11 U.S.C. sec. 35(a)(3) (19581962 U.S. Tax Ct. LEXIS 37">*42  ed.).  And his subsequent acknowledgment of the debt may well have been a waiver of any effect that the bankruptcy could otherwise have had.  Zavelo v. Reeves, 227 U.S. 625">227 U.S. 625, 227 U.S. 625">629 (1913).39 T.C. 316">*318  We conclude that all that petitioners did was to make an investment in their personal residence in excess of the amount they originally anticipated.  This may have been an unfortunate result but it can be taken into account, if at all, only at the time when the capital transaction to which it gave rise is finally closed out.Decision will be entered for the respondent.