Court Opinion

ID: 4617818
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:37:20.637962+00
Date Added: 2024-06-11T07:55:21.691962
License: Public Domain

RALPH H. CROSS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Cross v. CommissionerDocket No. 33767.United States Board of Tax Appeals20 B.T.A. 929; 1930 BTA LEXIS 2002; September 23, 1930, Promulgated *2002  In 1925 the petitioner determined a certain debt to be worthless, charged it off his books and claimed a deduction therefor.  All the facts and circumstances upon which the determination of worthlessness could be based had existed without charge since the latter part of 1921, and were fully known to the petitioner during all that time.  Held, the petitioner is not entitled to the deduction claimed in 1925.  Ralph H. Cross pro se.  Eugene Meacham, Esq., for the respondent.  MARQUETTE *929  This proceeding is for the redetermination of a deficiency in income tax asserted by the respondent for the year 1925 in the amount of $1,209.69.  The petitioner alleges that the respondent erred in disallowing a deduction of $6,200 taken on account of a debt claimed to have been ascertained to be worthless and charged off in the taxable year.  FINDINGS OF FACT.  The petitioner is a resident of California.  He is, and has been for more than twenty-five years, engaged in the practice of law in that State.  Prior to June, 1920, the petitioner purchased 124 shares of the capital stock of the Scandanavian-American Bank at Seattle for $12,400, which amount*2003  he paid in cash.  In the early part of 1921 the petitioner learned from the president of the bank that the bank would be unable to pay dividends for four or five years.  The petitioner then tried to find a purchaser for his stock and in June, 1921, he sold the stock to his nephew, one J. F. Pullen, who was then a young lawyer in Sacramento.  The sale price of the stock was $6,200, for which Pullen gave his promissory note reading as follows: $6,200.  SAN FRANCISCO, June 20, 1921.On demand after date I promise to pay to the order of Margaret Lutts, F. E. Lutts and Maud L. Cross Six Thousand Two Hundred Dollars at Sacramento, California.  Value received with Interest at 7% per annum.  (Signed) J. F. PULLEN.  On December 21, 1925, the petitioner wrote in the lower right hand corner of the face of the note the following: "Outlawed P & L 12/21/25." There are no endorsements or assignments upon or attached to the note.  *930  The payees of the note are, respectively, the mother-in-law, sister-in-law and wife of the petitioner.  They owned a large estate, which was handled by the petitioner, and it was his intention to sell the Pullen note to them.  The sale was not made, *2004  however, and the petitioner entered the note on his books on June 22, 1921, as a note receivable.  He also made entry of sale of 124 shares of the bank stock at $50 per share, $6,200, and profit and loss, $6,200, balancing the account.  On June 30, 1921, ten days after Pullen gave his note for the stock, the bank went into the hands of the Superintendent of Banks, or Bank Examiner, of the State of Washington.  The petitioner made several demands from time to time for the payment of said note, but Pullen refused to pay because he felt he had not been treated justly in the stock transaction.  No suit was ever begun upon the note.  In November, 1923, Pullen was appointed to a judgeship.  His judicial salary was exempt from execution and at no time from the giving of the note until it became outlawed in 1925 did he have sufficient property, subject to execution, to satisfy a judgment of $6,200.  No part of the note has ever been paid.  The bank stock was retained by the petitioner as collateral security.  In 1925 the petitioner determined the Pullen note was a bad debt and charged it off his books.  In his income-tax return for that year he claimed a deduction of the amount of the*2005  note as a bad debt.  The respondent disallowed the deduction.  OPINION.  MARQUETTE: The petitioner contends that in computing his net income for 1925 he should be allowed a deduction of $6,200 on account of a debt ascertained to be worthless and charged off in that year.  The debt was evidenced by a demand promissory note for $6,200 signed by one J. F. Pullen in June, 1921, and payable to the order of petitioner's wife, and her mother and sister.  The consideration for the note was 124 shares of bank stock owned by the petitioner and by him sold to Pullen.  The payees of the note declined to take it and pay petitioner cash for it, as he had expected them to do, and he thereupon entered it on his books as a note receivable.  Pullen, a nephew of the petitioner, was a young lawyer with a dependent family, and had no property which he could not have exempted from execution.  In the autumn of 1921 he told petitioner he felt that he had not been treated fairly in the stock transaction, did not feel that he justly owed the amount of the note, and refused to make any payments thereon.  No suit was brought upon the note, partly because petitioner believed it would be a useless *931 *2006  proceeding, as any judgment against Pullen would be uncollectible, and partly because he feared a counter-action by Pullen, which would injure his (petitioner's) reputation.  Under these circumstances we are of opinion that the petitioner knew, or in the exercise of reasonable judgment should have known, that the debt was worthless long before 1925.  While it is true that the taxpayer must in the first instance be the judge as to the worthlessness of a debt, he can not shut his eyes to facts and circumstances which, in the mind of a reasonable and prudent man, would indicate a debt to be worthless.  . In , the court held that when a taxpayer "in good faith, believes that the legal situation of a debt is such, considering all the surrounding and attendant circumstances, that the debt is not, in fact, recoverable, and that legal action to enforce payment would in all probability not result in obtaining any substantial part of the debt, although there might be a remote possibility that a small part thereof might ultimately be recovered, in this situation he is justified in treating*2007  the debt as worthless and charging the same off on his books." The conditions and prospects for payment of Pullen's note were no poorer in 1925 than they were in any prior year.  The situation was unchanged except for the running of the statute of limitations, which was completed in June, 1925.  But that in itself is not an ascertainment of worthlessness. . The evidence clearly shows that the petitioner knew in 1921, shortly after the note was given, that Pullen had no assets which could be reached by execution, and that he could not pay the note if he would and would not pay it if he could.  It is our opinion that the debt was worthless prior to 1925 and was so known to the petitioner, and that it is not a proper deduction for that year.  ; . Judgment will be entered for the respondent.