Court Opinion

ID: 4602114
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:29:01.306434+00
Date Added: 2024-06-11T07:52:36.804388
License: Public Domain

VAN SMITH BUILDING MATERIAL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Van Smith Bldg. Material Co. v. CommissionerDocket No. 19852.United States Board of Tax Appeals16 B.T.A. 875; 1929 BTA LEXIS 2505; June 3, 1929, Promulgated *2505  BAD DEBT. - Claimed bad debt deduction disallowed.  J. B. Grice, C.P.A., for the petitioner.  B. M. Coon, Esq., for the respondent.  MILLIKEN *875  This proceeding results from the determination by respondent of a deficiency in income and profits taxes for 1921 in the amount of *876  $1,387.94.  Error is assigned to the refusal of the respondent to allow as a bad debt deduction the sum of $3,461.88, which sum represented a deposit in the Enterprise Bank of Charleston, S.C., which petitioner was unable to withdraw or collect in the year 1921.  FINDINGS OF FACT.  Petitioner is a South Carolina corporation with its principal office in Charleston, S.C.  During the year 1921 it had funds on deposit subject to check in the Enterprise Bank of Charleston, S.C., and in two other banks.  On November 1, 1921, petitioner had $3,461.88 on deposit in the Enterprise Bank and on that day the bank was closed by order of its officials and placed in charge of the State Banking Department.  Representatives of the State Banking Department took charge of the bank and after investigation determined that it would be better to reopen the bank than to have an*2506  immediate liquidation through a receivership.  A plan was worked out by the State Banking Department of South Carolina whereby all depositors were to agree to a reopening of the bank for a period of one year and were not to claim their deposits during that time nor take steps to force liquidation.  There were about 11,000 depositors with $1,000,000 deposits and practically all agreed to the bank resuming business and signed a written agreement to that effect.  Petitioner signed the agreement and the bank reopened December 1, 1921.  It continued open and in business until November 1, 1922, when it was again closed and went into liquidation.  Petitioner's deposit of $3,461.88 remained in the bank during this period and since 1922 there have been paid thereon the following dividends: November, 1923, $174.29; February, 1924, $165.58; July, 1925, $157.30, - total $497.17.  These dividends were returned by petitioner as income in the years in which received.  After the reopening of the bank on December 1, 1921, it received new deposits subject to check.  Petitioner made new deposits and checked them out from time to time and closed the new account in the spring of 1922.  No loss was sustained*2507  on the deposits made after the reopening of the bank.  The principal efforts of the bank after reopening were to try to collect its outstanding bills receivable and to regain the confidence of the public by obtaining more depositors.  During 1921 the country contiguous to Charleston experienced severe business depression and there were a number of commercial and bank failures.  The deposits in the Enterprise Bank fell off and its surplus of $25,000 was absorbed.  Its capital was $50,000.  Its loans were mainly farm loans extending over a year or more, were not easily collectible and were not liquid.  The immediate cause of *877  closing the bank originally was its inability to rediscount its bills receivable.  The president of the petitioner interviewed the president of the bank after it was first closed in an effort to ascertain its condition, and after said interview and basing his conclusion thereon and his previous experience with business failures, closed banks, and present business conditions, concluded that petitioner's deposit was a total loss and worthless, and had it charged off petitioner's accounts as of December 31, 1921.  No promises were made to petitioner*2508  or other signers of the reopening agreement, but petitioner signed as a business courtesy to the former officials of the bank, and because of a community spirit to help one another, and not because of any hope that it would be benefited thereby.  Petitioner, as a business practice, kept in close touch with its debtors and usually charged off approximately $5,000 every year as bad debts.  It treated this bank deposit in substantially the same way.  It was not possible for petitioner to determine on December 31, 1921, what percentage of the bank deposit might be worthless.  The Enterprise Bank of Charleston, S.C., is still in process of final liquidation.  OPINION.  MILLIKEN: The only question for decision in this case is whether the deposit which petitioner had with the Enterprise Bank was ascertained to be worthless and charged off within the year 1921.  There can be no dispute that petitioner charged off the debt as worthless, and the remaining question is whether it ascertained it to be worthless or if it was in fact worthless at the close of the year in question.  The respondent has allowed the deduction for the year 1922, when the bank was finally closed.  Counsel for*2509  petitioner was given two extensions of time within which to file a brief.  No brief has been filed, and we are therefore not informed as to his views.  The evidence (depositions) in this case beyond question shows that petitioner suffered a loss by reason of its deposit in the Enterprise Bank.  The bank was not closed until November 1, 1921, and was reopened on December 1, 1921, pursuant to an agreement entered into by practically all the depositors whereby they allowed their deposits to remain with the bank for one year in the hope that in the interim the bank's financial condition would show improvement.  The petitioner not only allowed its then deposit to remain, but apparently had enough confidence in the bank to maintain an additional checking *878  account with it when it reopened.  Petitioner seeks to take as a bad debt deduction in the year 1921 the whole of the deposit and yet subsequent to that year it received back by way of liquidation approximately 15 per cent of its deposit and the attorney for the bank testified that liquidation was to this date still in process.  When the bank closed and reopened in 1921, it had many loans that had not then matured and it*2510  seems petitioner made no investigation of the amount of the loans or the possibility at date of maturity of their payment.  On the case as a whole we can not say that the deposit in its entirety was worthless at December 31, 1921, and accordingly approve the determination of the respondent.  Judgment will be entered for the respondent.