Court Opinion

ID: 4590710
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:04:12.733964+00
Date Added: 2024-06-11T07:50:31.669674
License: Public Domain

S. R. DAVIS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Davis v. CommissionerDocket No. 6755.United States Board of Tax Appeals9 B.T.A. 755; 1927 BTA LEXIS 2523; December 21, 1927, Promulgated 1927 BTA LEXIS 2523">*2523  The petitioner was the guarantor of certain notes given by the Multitone Manufacturing Co.  This company went into the hands of a receiver in 1921.  The petitioner then gave to the payee of the notes his own notes and received the notes upon which he was guarantor.  He made a claim against the receiver of the corporation for the amount of the notes guaranteed by him and in 1921 received a final liquidating dividend from the Multitone Manufacturing Co.Held that since the petitioner made his income-tax return for 1921 on a cash receipts and disbursements basis, he is not entitled to deduct from the gross income of that year the amount of the notes given but not paid in that year.  P. M. Beach, Esq., for the petitioner.  J. B. Harlacher, Esq., for the respondent.  LITTLETON9 B.T.A. 755">*756  The petitioner appeals from a deficiency in income tax for the year 1921 in the amount of $3,601.92 arising in large part from the disallowance by the respondent of a deduction from gross income in petitioner's income-tax return of a loss sustained upon certain notes given by the Multitone Manufacturing Co. which were guaranteed by the petitioner.  FINDINGS OF FACT. 1927 BTA LEXIS 2523">*2524  The petitioner is a resident of the City of Eau Claire, Wis., and resided there in 1921.  In 1919, 1920, and 1921 he was president of the Multitone Manufacturing Co., a Wisconsin corporation, which was engaged in the manufacture of phonographs.  He owned 60 shares of its capital stock in 1921 and devoted part of his time to the business of the corporation.  In 1919 and 1920, as president of the corporation, he endorsed or guaranteed certain promissory notes of the Multitone Manufacturing Co., which company discounted the notes at various banks and received the money thereon and used the same in its business.  The notes so endorsed or guaranteed amounted in the aggregate to more than $41,904.49.  In February, 1921, the Multitone Manufacturing Co. was adjudicated a bankrupt by the Federal District Court for the Western District of Wisconsin.  The petitioner was thereupon asked by the holders of the notes he had guaranteed or endorsed to pay the same and he paid his share of those notes prior to December 31, 1921, in an amount of $41,904.49, by giving the holders of the notes of the Multitone Manufacturing Co. which he had either guaranteed or endorsed his personal notes without1927 BTA LEXIS 2523">*2525  any endorsement or guarantee of any kind or description.  During the year 1921 the petitioner did not pay anything on his personal notes referred to above.  The holders of the Multitone Manufacturing Co. notes delivered to the petitioner the notes he had endorsed or guaranteed and paid with his own notes and the notes received were subsequently filed with petitioner's claim against the Multitone Manufacturing Co. with C. L. Baldwin, referee in bankruptcy.  On December 13, 1921, the first and final dividend to creditors of the bankrupt estate of the Multitone Manufacturing Co. was paid by the referee in bankruptcy and the petitioner received on his claim which had been allowed the sum of $703.21.  The Multitone Manufacturing Co. permanently discontinued business in 1921 and was discharged as a bankrupt in December, 1921.  The petitioner during the years 1920 and 1921 kept his books and made his income-tax returns on a cash receipts and disbursements basis.  When he took up the notes of the Multitone Manufacturing Co. by the giving of his own notes he took into his investment account on his books of account the Multitone Manufacturing Co. notes 9 B.T.A. 755">*757  received and on or1927 BTA LEXIS 2523">*2526  before December 31, 1921, charged them off his books of account as worthless.  The petitioner during all of the years 1920 and 1921, and ever since, has been worth not less than $100,000 over and above all his indebtedness and liabilities.  In his income-tax return for 1921 the petitioner deducted from his taxable income the sum of $42,293.53, being the difference between his claim of $42,996.74 filed with the referee in bankruptcy and the only dividend paid by the bankrupt estate amounting to $703.21.  In the audit of the petitioner's return the respondent allowed the deduction of $6,000 representing the petitioner's investment in stock of the Multitone Manufacturing Co., which loss was claimed on the original return.  Of the $42,293.53 claimed as a deduction the respondent allowed the deduction of $389.04 and $166.66, which represented payment on a note in part of the Union National Bank of Eau Claire, Wis., in liquidation of the petitioner's notes and disallowed the balance, namely, $41,737.83, which is the amount in dispute in this proceeding.  OPINION.  LITTLETON: Section 212 of the Revenue Act of 1921 provides: (a) That in the case of an individual the term "net income" 1927 BTA LEXIS 2523">*2527  means the gross income as defined in section 213, less the deductions allowed by section 214.  (b) The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; * * * Section 214(a) of the Revenue Act of 1921 permits the deduction from gross income of individuals of all - (4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business.  Subdivision (6) of the same section provides: * * * Losses allowed under paragraphs (4), (5), and (6) of this subdivision shall be deducted as of the taxable year in which sustained unless, in order to clearly reflect the income, the loss should, in the opinion of the Commissioner, be accounted for as of a different period.  * * * The same section also provides for the deduction from gross income of - (7) Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that1927 BTA LEXIS 2523">*2528  a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.  Petitioner claims that inasmuch as he guaranteed the notes of the corporation and later gave his personal notes to the creditor of the 9 B.T.A. 755">*758  corporation, he was entitled to a deduction of $42,996.71 as a worthless debt.  The position of the Commissioner is that inasmuch as the petitioner kept his books of account and made his income-tax returns on the basis of actual receipts and disbursements, he is not entitled to deduct from gross income of 1921 the amount of the notes given by him as a result of the bankruptcy of the Motor Manufacturing Co. until he shall have paid them in cash.  In , the Board held that a taxpayer, keeping his books of account on a cash receipts and disbursements basis, was not entitled to deduct a gain as a bad debt charged off unless the amount had previously been reported as income.  In other words, the holding of the Board in that proceeding was that the income and outgo of cash were the determining factors of a return made upon the cash receipts and disbursements basis; that a taxpayer is not required to1927 BTA LEXIS 2523">*2529  include in income, when the return is made on such basis, cash that is not received, and likewise is not entitled to take deductions when cash is not paid unless the statute clearly allows such deduction.  In , it appeared that the petitioner reported his income on the cash receipts and disbursements basis and issued notes to his children for services rendered.  The Board in that proceeding said: The notes constituted evidences of promises to pay certain amounts in December, 1926.  The giving of the said notes did not constitute disbursements during the year 1921, and upon the cash basis of accounting and making of the income-tax return the amounts of the notes are not deductible as an expense paid during 1921.  Cf. . When petitioner gave his personal notes to the banks they delivered the notes of the corporation to him.  He filed these notes with the trustees in bankruptcy as a claim against the Multitone Manufacturing Co., but was allowed only $703.21.  We are of the opinion that petitioner is not entitled to deduct from gross income any amount on account of the notes given to the banks1927 BTA LEXIS 2523">*2530  until he shall have paid them.  The Commissioner allowed a deduction of $389.04 and $166.66, representing payments by petitioner on the notes given by him.  These amounts were proper deductions since they were paid within the taxable year; however, as to the remaining amount of the notes, petitioner was in no different situation than if he had incurred a liability in his trade or business deductible from gross income when paid, and had given his promissory notes therefor.  In such case the amount of the notes would not be deductible as expense on the cash basis.  . The Board is of the opinion that the petitioner was not entitled to a deduction of the amount 9 B.T.A. 755">*759  represented by the unpaid portion of his notes either as a worthless debt of the bankrupt corporation or as a loss.  While he was certain that he would be compelled to pay the notes he had not yet lost anything.  He had made no invested that had become valueless.  He had paid out nothing that could not be recovered.  Petitioner calls attention to subdivision (6), section 214(a) of the Revenue Act of 1921, which permits the deduction of a loss in the year in which sustained1927 BTA LEXIS 2523">*2531  "unless, in order to clearly reflect the income, the loss should, in the opinion of the Commissioner, be accounted for as of a different period" and insists that this provision establishes an intent upon the part of Congress to permit the deduction of losses in the year in which the losses logically fall regardless of the method of accounting employed.  The evidence does not show that the income of 1921 is more clearly reflected by the allowance of the loss in that year than in the year in which the notes were actually paid.  The Commissioner has not so found and has contended that the loss should not be allowed in that year.  The evidence is insufficient to support the contention of the petitioner that the loss should more properly be allocated to 1921.  Reviewed by the Board.  Judgment will be entered for the respondent.SMITH, PHILLIPS, and MILLIKEN dissent.