Court Opinion

ID: 4492654
Source: CourtListenerOpinion
Date Created: 2020-01-17 22:03:31.882862+00
Date Added: 2024-06-11T14:54:09.714870
License: Public Domain

*413OPINION.
ARundell:
The respondent has determined that the sum taken from petitioner’s active card file at the close of 1920 did not represent debts ascertained to be worthless and has disallowed that amount as a deduction. Petitioner alleges that this was error on the part of the respondent and claims that the total of the sum in its delinquent file plus the additional sum taken from its active cards in 1920 represented the total of its worthless accounts for that year.
*414The evidence fully justifies respondent’s disallowance as a bad debt deduction of that portion of the amount claimed which was taken from petitioner’s active file for the year 1920. It is established clearly that no effort was made to ascertain the worthlessness of the the amounts written off from the active cards. The proof was so clear that counsel for petitioner in his brief says, “ On the evidence the respondent is apparently correct as to 1920.” We accordingly sustain the respondent’s disallowance of $279,240.68 as a bad debt deduction for 1920.
The next question, raised in the alternative by petitioner, is whether the amount recovered in 1920 on similar items charged off for 1919 should be included in 1920 income. The same question was involved in Commissioner v. Liberty Bank & Trust Co., 59 Fed. (2d) 320; reversing 14 B. T. A. 1428. The close similarity of the two cases is apparent from the following quotation from the opinion of the court:
In its returns for 1916 to 1919, inclusive, the taxpayer charged oft and reported as worthless certain debts owing to it. Due allowances were made for these debts by the Commissioner in the assessment of taxes for those years. Upon the payment of the debts in whole or in part in 1920 and 1921, the Commissioner treated the amounts received as a part of gross income. The Board of Tax Appeals reversed this ruling, holding, to which there were dissents, that these payments were not a part of gross income for the years .received because they were not in fact ascertained to be worthless for the years for which they were so reported and charged off.
In that case, as in this, the contention of the respondent was that the taxpayer, having asserted that the debts were ascertained to be worthless and charged off, and having received the benefit of such assertion, was estopped to deny its truth to the prejudice of the Government. The taxpayer contended, and the same contention is made here, that there was no basis for the application of the doctrine of estoppel. On this phase of the case the court held:
It is said tbat it was the duty of the Commissioner, before allowing the deductions in the former years, to exercise reasonable diligence to discover whether the debts were worthless, and if he liad done so, he could have ascertained that they were not. While it may be conceded that the Commissioner may not blindly accept every statement which a taxpayer makes as to a fact, and by acting thereon preclude the taxpayer from showing at some other time that the statement was mistakenly made, we cannot assent to the view that a taxpayer which has been allowed a deduction for a debt, on its statement under oath that the debt has been ascertained to be worthless, is not estopped thereafter from denying the truth of the statement to the prejudice of the Government. The Commissioner of necessity does and must rely largely upon the representations of the taxpayer, and in order to estop the taxpayer from assuming a contrary position he is not compelled to look with suspicion upon all such representations and himself examine or cause to be examined the financial condition of all the taxpayer’s debtors. It is the duty of the *415taxpayer to deal fairly and truthfully with the Government. The taxpayer was in a better position to ascertain the facts in this case than the Government, and it cannot now say that the Government, by the exercise of reasonable care, ought to have done what it failed to do. The officers of the Government charged with the duty of assessing and collecting taxes have the right to assume that a taxpayer will do his duty, and we think it is to be presumed from the fact that these deductions were allowed for the years in which they were claimed that the Commissioner relied upon the taxpayer’s sworn statements that the debts were worthless. It is also to be presumed, in the absence of evidence to the contrary, that the Government was prejudiced by such reliance, for it is obvious that a deduction from gross income reduces the net income subject to taxation. The purpose which the statute has in view in authorizing deductions for bad debts is to permit the taxpayer to reduce his taxable income. It is fair to infer from the fact that deductions were claimed and allowed for these debts in former years, nothing else appearing, that there was a consequent reduction in taxable income.
In the case before us the respondent has a stronger ground for invoking estoppel against a taxpayer than he had in the Liberty Bank case, for in this case, as set out in our findings of fact, the taxpayer insisted over a period of years that the deduction claimed represented debts actually ascertained to be worthless. By reason of its representations made at conferences and affidavits filed with the respondent, petitioner was able to convince the respondent of the verity of its claims and obtained the benefit of the deductions of gross income for which it asked.
In Burnet v. Sanford & Brooks Co., 282 U. S. 359, the principle was laid down that recoveries on losses previously claimed and allowed constitute income. That decision, it is pointed out in the Liberty Bank case, is controlling in the case of recoveries on debts for which deductions had been claimed and allowed, and accords with the respondent’s long established interpretation of the revenue acts. See art. 110, Regulations 33; art. 52, Regulations 45; art. 51, Regulations 62.
In view of the foregoing, we are of the opinion that respondent properly included in income for 1920 the collections in that year on the accounts making up the amount claimed and allowed as a bad debt deduction for 1919.
On the invested capital question, petitioner alleges that the accounts making up the amount of $308,504.35 collected in 1920 were good accounts receivable and as such should be included in invested capital. As we have held that the 1920 collections constitute income, it necessarily follows that the same items can not at the same time be invested capital.
Reviewed by the Board.

Decision will be entered for the respondent.

TRAmmell dissents.