Court Opinion

ID: 4627988
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:02:24.471201+00
Date Added: 2024-06-11T07:57:08.334377
License: Public Domain

KELLOGG-MACKAY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Kellogg-Mackay Co. v. CommissionerDocket No. 21594.United States Board of Tax Appeals20 B.T.A. 635; 1930 BTA LEXIS 2070; August 29, 1930, Promulgated 1930 BTA LEXIS 2070">*2070  Certain amounts owed to the petitioner and charged to profit and loss on December 31, 1920, held to have been ascertained to be worthless in 1920, and therefore a legal deduction from gross income.  Allen R. Smart, C.P.A., for the petitioner.  John D. Foley, Esq., for the respondent.  SMITH 20 B.T.A. 635">*635  This is a proceeding for the redetermination of a deficiency in income and profits tax for 1920 of $21,498.98.  One of the allegations of error contained in the petition has been settled by stipulation of the parties.  The only issue for our determination is the right of the petitioner to deduct from the gross income of 1920 bad debts disallowed by the Commissioner in the amount of $42,275.24.  FINDINGS OF FACT.  The petitioner is a Maine corporation with its principal place of business in Chicago, Ill.  It is engaged in the sale of plumbing, steam, water, and gas supplies.  In 1920 one of its customers was the Roberts Plumbing Co.  The petitioner had sold large quantities of supplies to this company for many years.  In September or October, 1920, the Roberts Plumbing Co. became financially embarrassed and the petitioner, who was its principal1930 BTA LEXIS 2070">*2071  creditor, took over the business of the corporation for the purpose of making the most advantageous settlement possible.  The capital stock of the plumbing company was transferred to it.  The Roberts Plumbing Co. was under contract to furnish plumbing supplies on a number of jobs.  After investigation the petitioner determined that it should furnish supplies and money, if necessary, for the completion of the jobs.  It put in charge a man by the name of Patterson, who carried out its orders in the management of the plumbing company business.  Prior to December 31, 1920, considerable progress had been made in the fulfillment of the contracts and from an examination of the accounts receivable of the plumbing company the petitioner foresaw that it would sustain a large loss upon the indebtedness of the plumbing company to it.  The amount of this loss at December 31, 1920, was ascertained to be $39,735.24.  Upon the petitioner's books of account this amount was first charged to a reserve for bad debts, and at December 31, 1920, was closed into its profit and loss account.  The petitioner never collected any part of the amount thus charged off.  It did, however, in 1922 sell to 20 B.T.A. 635">*636 1930 BTA LEXIS 2070">*2072  Patterson for $5,000 the then assets of the plumbing supply company, which included furniture, fixtures, tools, and good will of that company.  One of the debtors of the plumbing supply company was one W. E. J. Keller.  He was also indebted to the petitioner in the amount of $2,540.  He was a contractor engaged in the erection of a number of buildings.  He became insolvent in December, 1920, and went into bankruptcy early in 1921.  At the close of 1920 the petitioner ascertained that its claim against Keller in the amount of $2,540 was worthless and charged it off to profit and loss and claimed it as a deduction from gross income in its income-tax return.  In the determination of the deficiency for 1920 the respondent disallowed the deduction from gross income of the claimed worthless debt of the Roberts Plumbing Co. in the amount of $39,735.24 and the note of W. E. J. Keller in the amount of $2,540.  OPINION.  SMITH: The respondent determined the deficiency for 1920 largely by disallowing as a deduction from gross income bad debts claimed upon the return as a deduction in the amount of $42,275.24.  He contends that these debts were never ascertained to be worthless in 1920, 1930 BTA LEXIS 2070">*2073  nor charged off the petitioner's books of account as required by the statute.  (Sec. 234(a)(5), Revenue Act of 1918.) The evidence is conclusive that the debts were charged off the petitioner's books of account in 1920.  We also have no question that there was a bona fide ascertainment of the worthlessness by the petitioner of these accounts in 1920.  The amount charged off was the balance between the amounts owed to the petitioner by the Roberts Plumbing Co. and the realizable assets.  The respondent contends that inasmuch as the entire amount owed to the petitioner by the Roberts Plumbing Co. was not charged off, the balance due could not be taken as a deduction.  We are of the opinion that there is no merit in this contention.  A balance of a debt ascertained to be worthless and charged off is a legal deduction from gross income.  . The evidence satisfies us that the debts were bona fide ascertained to be worthless in 1920.  We think the fact that in 1922 the petitioner succeeded in selling the assets of the Roberts Plumbing Co. to Patterson for an amount of $5,000 does not disprove the bona fide character of the1930 BTA LEXIS 2070">*2074  ascertainment of worthlessness by the petitioner.  Judgment will be entered under Rule 50.