Court Opinion

ID: 4622183
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:48:50.911951+00
Date Added: 2024-06-11T07:59:45.353568
License: Public Domain

AMERICAN FINANCE & MORTGAGE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.American Fin. & Mortgage Co. v. CommissionerDocket No. 40018.United States Board of Tax Appeals22 B.T.A. 32; 1931 BTA LEXIS 2180; February 3, 1931, Promulgated *2180 Held, under the evidence, that certain debts were ascertained to be worthless and charged off.  Gordon C. Carson, Esq., for the petitioner.  L. W. Creason, Esq., for the respondent.  TRAMMELL *32  This proceeding involves a deficiency in income tax for the calendar year 1924 in the amount of $411.57.  The only question is the deductibility of certain debts claimed to have been ascertained to be worthless and charged off.  FINDINGS OF FACT.  Petitioner is a Delaware corporation with its principle office at Savannah, Ga.  During the year 1924 its president and principal executive officer ascertained that certain debts owing to the petitioner had become worthless during that year.  The amount of the various debts and the facts upon which the ascertainments were based are as follows: W. W. Wilder, $839.17. This account represented advances made on account of commissions to be earned upon sales of stock, which were never repaid.  Party left the city in March, 1924, and later in that year was ascertained to be living in the Salvation Army quarters in New York.  He had no property and his business had failed, leaving him penniless.  The*2181  commissions were never earned.  H. B. Hodgkins, $400. This represents defalcations in March and April, 1924, discovered in June, 1924.  Party gave note for it but shortly after left the city.  Petitioner's officers endeavored actively to collect the note and trace the maker, during 1924, but were unable *33  ever to collect anything, although party had been placed under arrest.  Pate Anderson, $21.25. This was portion of a loan secured by an automobile which burned up in February, 1924, without insurance.  Debtor died in April, 1924, or the latter part of March.  The estate was insolvent and nothing was ever collected.  Marie Joyce Christie, $330.77. Demand loan secured by personalty covered by trust receipt.  The debtor sold the security about July, 1924, and the matter was placed in the hands of attorney.  The party left the city in December, 1924, and nothing was ever collected.  William H. Fryer, $50. Loan secured by Ford automobile.  Shortly after the maturity of the note in June, 1924, the debtor disappeared and took the car with him, previous to which he had been moving his place of residence in the city at frequent intervals, leaving unpaid bills*2182  in the respective neighborhoods.  Petitioner's officers continued to search for him and about five years later, by accident, ascertained that he held a responsible position in Atlanta.  The account was collected on July 3, 1929.  L. C. Gill, $118.70. Notes purchased from original payee, secured by filling station equipment.  Said payee, however, returned the equipment to the maker under a rescinded trade and then disappeared.  Although the note was clearly negotiable, petitioner was advised by counsel that it was useless to undertake collection by legal proceedings in the maker's home county.  The payee was subsequently located in Florida in August, 1925, and under threats of arrest paid the account.  W. R. Lincoln, $219.45. Notes secured by second mortgage on real estate.  In the fall of 1924, the security was sold and produced less than the amount of the first mortgage.  Debtor had no other property.  In September, 1925, it was ascertained that he had made a commission upon the sale of real estate, which was garnisheed, enabling the amount to be collected.  William McEachern, $46.22. Note secured by two endorsers.  Maker and both endorsers left city in December, *2183  1924, and were not located until 1927, it then being found out that the maker and one of the endorsers had gone into bankruptcy.  The other endorser had secured a position with a railroad in Florida, the superintendent of which was a friend of petitioner's president.  By threats of garnishment, the amount was collected in 1927 in small installments.  Mrs. Irene Owens, $456.79. Notes secured by mortgage on land in Screven County, Ga.  In May, 1924, default having been made, attempt was made to collect the account through legal process, but attorneys advised that through some defect in the will under which *34  debtor had acquired the property, the lien was invalid and no recovery could be had thereunder.  Debtor had no other property and lived in proverty.  In October, 1925, it was learned that the property in question was to be sold under execution for several years' taxes, whereupon petitioner bought in, and, it was resold in 1927 at a profit just about equal to the amount of the debt.  Arthur M. Robinson, $143.75. Balance on notes dated June 12, 1924, payable monthly.  Debtor went bankrupt and left for the North in December, 1924.  The endorsers also left.  Attorneys*2184  in New York advised that both parties were absolutely insolvent, and that suit would be a waste of money.  A. C. and Mattie B. Strickland (husband and wife), $160. Notes secured by second mortgage and endorsement.  Property was sold by first mortgage holder, and the markers, and endorsers went into bankruptcy and nothing could then be collected.  In January, 1926, half of the amount, $80, was collected from one of the endorsers.  Dr. C. E. Weaver, $658.70. Secured by second mortgage on real estate, which was sold out by the first mortgage holder.  Loan was repayable $67.87 per month, the last installment payment having been made on May 17, 1924.  The borrower moved to Florida, and petitioner's officers at first were unable to locate any property upon which to levy and attorneys had given upon hopes of making collection.  However, although the debtor had a number of unpaid judgments outstanding in the local courts, petitioner's officers learned that he had an interest in a herd of dairy cows, which was attached, enabling the collection of part of the amount, $450, in the latter part of 1925 or in 1926.  During subsequent years, petitioner, by the active efforts of its*2185  officers, collected $964.37 of the $3,444.80 determined at the end of 1924 to have been worthless.  This was done through the location of makers or endorsers who had disappeared or through the discovery of assets not previously known to exist.  Shortly after January 1, 1925, petitioner's bookkeeper gave notice of his intention to leave and accept another position, and auditors were called in to supervise the closing of the books, but found that the nominal accounts had already been transferred, and profit and loss balance merged into surplus, and the several sheets ruled off, without making any charge-off for bad debts.  After consultation with the auditors, petitioner's president had a journal voucher prepared, listing the debts by name and amount and containing the statement that the entry was to charge off bad debts as of December 31, 1924, said voucher, however, being erroneously dated January 31, 1924.  The bookkeeper was instructed to enter it up, but when the auditors returned early in March, 1925, to assist in making petitioner's income tax return, it was discovered that this had not *35  been done.  The new bookkeeper was thereupon instructed to enter the voucher as*2186  of December 31, 1924, but instead of entering it on the December page on the cash book, entered in under date of January 31, 1925, on the January page.  The entry covered by this voucher debited profit and loss account with $3,444.80 and credited the same amount to an account labeled "Reserve for Bad Debts." The names of the debtors and the amounts due by each were copied on the ledger sheet representing this account.  The accounts of the debtors were left in the same places originally occupied in the ledger, but a notation was made upon each sheet representing an account that had been charged off that a new sheet had been opened for it in the bad debts portion of the ledger.  In the inactive portion of the ledger, a new sheet was inserted for each such account, merely bringing forward the balance.  On the balance sheet accompanying petitioner's income tax return for 1924, the full amount of the debts due petitioner was shown on the asset side, while the so-called reserve of $3,444.80 was shown on the liability side.  The Commissioner disallowed the deduction claimed on account of the debts above mentioned.  OPINION.  TRAMMELL.  We think that the facts conclusively show that*2187  the petitioner ascertained that the above mentioned debts were worthless during the taxable year and the only real question in our opinion is whether they were charged off within the meaning of the statute.  We think that the evidence shows that the action taken subsequent to the close of 1924 indicates that the petitioner intended to make bookkeeping entries as of December 31, 1924, in order to reflect its true income for that period.  The voucher prepared by the president of the corporation was dated January 31, 1924, but it appears merely to have been a typographical error.  The bookkeeper was instructed to enter the voucher disclosing the bad debts as of December 31, 1924, and erroneously made the entry under date of January 31, 1925.  The debts were listed by name and, while the offsetting credit was designated "Reserve," we think that the entries made are sufficient to indicate a purpose to charge off the accounts.  The method of charge-off in this case is not materially different from that approved by us in , and *2188 , and finds support in the case of . Judgment will be entered under Rule 50.