Court Opinion

ID: 4630047
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:06:40.132616+00
Date Added: 2024-06-11T07:57:28.437237
License: Public Domain

EQUITY SILK CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Equity Silk Corp. v. CommissionerDocket No. 42173.United States Board of Tax Appeals21 B.T.A. 1114; 1931 BTA LEXIS 2248; January 12, 1931, Promulgated *2248 Benjamin Nadel, C.P.A., for the petitioner.  P. A. Bayer, Esq., for the respondent.  MARQUETTE *1114  The petitioner seeks a redetermination of deficiencies in income taxes asserted against it by the respondent for the years 1924 and 1925, in the amounts of $250 and $859.42, respectively.  The only issue raised is the respondent's action in disallowing $2,000 and $4,610.92 of the total deductions claimed for bad debts in the returns for 1924 and 1925, respectively.  FINDINGS OF FACT.  The petitioner is a Delaware corporation with its principal office at New York, N.Y.On May 28, 1924, the Northampton Silk Co. was indebted to the petitioner in the principal sum of $16,211.64.  This indebtedness was *1115  represented by several trade acceptances, which fell due on various dates between June 6 and August 26, 1924.  On or about May 28, 1924, the assets and business of the Northampton Silk Co. were taken over by a committee, for the benefit of creditors, and the affairs of that company were thereafter conducted by the committee until the company was dissolved in 1926.  As the trade acceptances fell due demand was made for their payment, but they*2249  were not paid and were protested.  No payments were received from the creditors' committee during 1924 on account of the indebtedness.  At the close of 1924 entries were made on the petitioner's books charging bad debts account and crediting reserve for bad debts account, with the sum of $2,000.  During 1925, four entries were made on the petitioner's books charging bad debts account and crediting reserve for bad debts account, with the net sum of $3,610.92.  The purpose of the petitioner in making these entries was to charge off such portions of the account of the northampton Silk Co. as were believed to be uncollectible.  On June 30, 1924, the Robinson Silk Co. was indebted to the petitioner in the principal sum of $4,175.09.  Some time in 1924, after June 30, the affairs of the Robinson Silk Co. were taken over by a creditors' committee.  In the same year a new company was organized and took over the assets and business of the defunct company, and in 1925 the new company issued capital stock to the creditors of the old company in settlement of their claims.  In 1925 entries were made on the petitioner's books charging bad debts account, and crediting reserve for bad debts*2250  account, with the sum of $1,000.  The purpose of the petitioner in making these entries was "to write off in part common stock of the new company that took over the Robinson Silk Company." The foregoing amounts stated to have been credited to the reserve for bad debts account, totaling $2,000 for 1924 and $4,610.92 for 1925, were claimed as bad debt deductions in the returns, and have been disallowed by the respondent.  OPINION.  MARQUETTE: The petitioner contends that a portion of the account of the Northampton Silk Co. was determined to be worthless and was charged off in 1924; that a further portion of that account and a portion of the account of the Robinson Silk Co. were determined to be worthless and were charged off in 1925; and that the respondent erred in disallowing the amounts so charged off, as bad debt deductions from income.  The statute requires, as essential to the allowance of a bad debt deduction, ascertainment of worthlessness of the debt and a charge-off of the debt on the books.  Failure to comply with either of these *1116  requirements must result in disallowance of the deduction.  Conceding that the entries made on the books in 1924 and 1925 constitute*2251  substantial compliance with the statute as to charge-off of the debts, it remained for the petitioner to give proof of such facts as would enable the Board to determine that there had been an ascertainment of worthlessness.  The fact that the affairs of the Northampton Silk Co. were being carried on at the close of 1924 and 1925 by a creditors' committee does not establish the worthlessness of any part of the account of that company.  The issue required proof as to the prospects of liquidation of the account through the operations of the committee, and this has not been given by the petitioner.  As to the indebtedness of the Robinson Silk Co., that appears to have been liquidated through the issuance of capital stock of the reorganized company to creditors in settlement of accounts of the old company.  If the stock received by the petitioner had a fair value less than its claim against the defunct company, the burden of proving the fact rested with the petitioner, but it has not met that burden and the presumption of prima facie correctness attaching to the respondent's determination must prevail.  Judgment will be entered for the respondent.