Court Opinion

ID: 4603520
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:32:07.840439+00
Date Added: 2024-06-11T07:52:51.728128
License: Public Domain

IRON CITY ENGINEERING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Iron City Engineering Co. v. CommissionerDocket No. 13087.United States Board of Tax Appeals13 B.T.A. 33; 1928 BTA LEXIS 3323; July 24, 1928, Promulgated *3323  Commissioner's denial of bad debt deduction proved where evidence fails to show whether or not he was in error.  Walter W. McVay, Esq., for the petitioner.  J. F. Greaney, Esq., for the respondent.  MURDOCK *33  This is a proceeding brought for the redetermination of a deficiency in income and profits taxes for the calendar year 1921, amounting to $8,813.28.  The petition assigns one error on the part of the Commissioner, such error being the disallowance of a deduction amounting to $28,675.74, representing a bad debt charge off within the taxable year and alleged to have been ascertained to be worthless in such year.  The fact that the debt was charged off is not in issue since it is admitted by the respondent.  FINDINGS OF FACT.  The petitioner was incorporated under the laws of the Commonwealth of Pennsylvania, in the year 1901, for the purpose of conducting an electrical engineering business.  In 1920, the petitioner entered into a contract with the Longacre Engineering & Construction Co., hereafter called the Longacre Company, for the electrial work in connection with the erection of a building known as the James Theatre Building.  The*3324  work under this contract was completed in the year 1921, and at that time there remained an unpaid balance due the petitioner in the amount which it sought to charge off as a bad debt, $28,675.74.  The account for the work in question was carried on the petitioner's books under the heading "James Theatre." All of the debits were opposite the letters "mdse." Payments were made on this account to the petitioner by a corporation designated "James Theatre Company." It does not appear, however, from the evidence what connection this company had with the petitioner or with the Longacre Company.  The petitioner sent its representative to the Longacre Company for whom the work was done in an attempt to collect the balance due but without success.  The vice president of the latter company called at the office of the petitioner and stated that if the petitioner pressed the Longacre Company for payment the latter would be thrown into bankruptcy.  Thereupon the petitioner took steps to *34  ascertain the financial standing of the Longacre Company and verified the statement made by its officers to the effect that any pressure would precipitate bankruptcy.  Thereafter, in 1921, the collection*3325  was placed in the hands of an attorney.  In May, 1921, a receiver was appointed for the James Theatre Co., and thereafter during 1921 the petitioner was advised that the estimated gross value of the property was $1,100,000.  Against this value there was a first mortgage bond issue of $680,000 and in addition there were creditors with claims aggregating about $300,000.  It was the opinion of Bickford, the secretary and treasurer of the petitioner, that in case of a forced sale the contracting creditors would receive nothing, since the bondholders had priority, and in 1921 general financial conditions were very bad.  Bickford was then of the opinion that the petitioner's claim was worth little or nothing and he thereupon instructed the petitioner's auditor to charge off the account as bad at the time of the closing of the books on December 31, 1921.  Bickford's information in respect to the petitioner's ability to collect the claim from the Longacre Company, with whom the contract had been made, was to the effect that there was no chance of collecting against such company.  This opinion was based on financial reports and information obtained from the vice president of the Longacre*3326  Company.  The petitioner was therefore of the opinion that the only recourse was by filing a lien against the building.  After investigations by the petitioner's attorney, it decided that any effort to collect the amount of the debt from the Longacre Company would be futile.  Thereafter, in 1921, the petitioner filed a mechanic's lien against the James Building.  In 1923, $18,000 was collected through the petitioner's attorney.  The amount collected was the result of a compromise with the James Building Co. in order to free the property from the claims of lienors.  OPINION.  MURDOCK: In order to establish its right to this deduction is was necessary for the petitioner to show that such a debt was actually ascertained to be worthless in the taxable year and that it was the kind of a debt that Congress intended should be deducted under section 234(a)(5) of the Revenue Act of 1921.  See , and . The petitioner introduced in evidence a transcript of its books of account which showed certain debits and credits in an account entitled "James Theatre." Opposite each of the debits in this account*3327  were the letters "mdse." The debit balance of this account was the amount sought to be charged off as a bad debt.  No effort was made *35  to explain what the various debits in this account represented.  The letters "mdse" would indicate that the charges were for merchandise furnished, but whether at cost or at some other figure we do not know.  If the petitioner furnished merchandise we do not know sufficient facts concerning this merchandise, such as its cost and the date of its purchase, to enable us to determine whether or not the Commissioner erroneously disallowed a deduction on account of it.  We do not know how the petitioner kept its books or made its income-tax returns or how it treated the items in question for income-tax purposes.  Without knowing more about this alleged bad debt we are unable to say whether or not the Commissioner was in error in denying the deduction in the taxable year.  Consistent with the facts which we already know, other facts in the case, if we knew them, might show that no part of the amount should be deducted or they might show that a part or all of the amount should be deducted as a bad debt in the taxable year.  Under these circumstances, *3328  it is unnecessary to discuss the question of whether or not the debt was ascertained to be worthless in the taxable year.  Judgment will be entered for the respondent.