Court Opinion

ID: 4612597
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:51:31.495532+00
Date Added: 2024-06-11T07:54:28.137021
License: Public Domain

MARY E. MCLEOD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  KEITH MCLEOD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.McLeod v. CommissionerDocket Nos. 104573, 104574.United States Board of Tax Appeals45 B.T.A. 289; 1941 BTA LEXIS 1148; October 7, 1941, Promulgated *1148  DEDUCTION - BAD DEBT - ASCERTAINMENT. - A debt, the value of which depended upon whether or not it was subordinate to other debts, was properly ascertained to be worthless in 1937, when the District Court reversed an order of the referee in bankruptcy and held that it was subordinate.  H. B. Holland, Esq., for the petitioners.  T. G. Histon, Esq., for the respondent.  MURDOCK *290  The Commissioner determined deficiencies of $1,368.77 and $750.54 in income tax of Mary E. McLeod and Keith McLeod for 1937.  The issue for decision is whether the petitioners are entitled to deduct in 1937 the amount of their investments in American certificates as debts ascertained to be worthless and charged off in that year.  FINDINGS OF FACT.  The petitioners are individuals who filed their returns for 1937 with the collector of internal revenue in Massachusetts.  The Kreuger & Toll Co., a Swedish corporation, issued a large quantity of participating debentures due in 2003.  It entered into an agreement with the Lee Higginson Trust Co. of Boston to facilitate the marketing of the debentures in this country.  Debentures were deposited with the trust company*1149  and American certificates were issued and sold.  Each debenture provided that all debentures should be paid after all other debts in case of liquidation.  Keith McLeod was the owner in 1937 of 330 American certificates which he had acquired prior to 1932 for $8,987.40.  His mother, Mary E. McLeod, was the owner in 1937 of 400 American certificates, acquired by her prior to 1932, which had a basis of $9,570.60 in her hands.  Kreuger committed suicide in 1932 and bankruptcy proceedings were promptly instituted against the corporation.  It was adjudged a bankrupt by the District Court in 1932.  There was great confusion as to the financial condition of the Kreuger & Toll Co.  The Lee Higginson Trust Co. filed a claim in the bankruptcy proceedings on behalf of the holders of the American certificates.  The matter first came up for discussion before the referee in 1936, and he signed an order on April 1, 1937, that the holders of the American certificates should share equally with general creditors.  A dividend of 3 percent on all claims was proposed in 1936 and was paid on some claims in 1937.  The trustee retained a sufficient amount to pay claims, including that of the American certificate*1150  holders.  The District Court held, however, On October 23, 1937, that the claim of the certificate holders was subordinate to that of general creditors.  A swedish court had held the same in 1935.  The 3 percent dividend was never paid on the American certificate holders' claim.  Additional dividends were paid later to other creditors.  Keith McLeod has managed his own affairs and those of his mother for many years.  He followed the affairs of the Kreuger & Toll Co. after the suicide of Kreuger as they bore upon the American certificates.  He was familiar with the price of the certificates on the New York Stock Exchange and he knew when they were taken off the exchange.  He believed they would have some value if they were not subordinate to the claims of general creditors.  When he read the opinion of the District Court in 1937, he concluded that the *291  certificates were worthless and charged them off his own books and the books of his mother.  He ascertained in 1937 that the debts were worthless.  OPINION.  MURDOCK: The statute allows a debt to be deducted in the year in which it is ascertained to be worthless and charged off.  No argument is made that these were not*1151  debts or that they were not charged off in 1937.  The parties disagree only on the question of ascertainment.  That question must be decided upon the facts in this case and not upon those in other cases in no proper way incorporated in this record. . "Ascertained" means ascertained by the taxpayer, or in the case of the mother, by her son acting in her behalf.  Thus the statute allows some latitude, since one person may ascertain a fact at one time while another person may ascertain the same fact at another time.  Cf. the Russian bond cases, ; ; and . The Commissioner has recognized this principle in regard to these American certificates.  1935 C.C.H. Federal Tax Service, vol. 3, P6223.  The taxpayer must act in good faith and must not close his eyes to that which is obvious to a reasonable person.  But within those limits it is his ascertainment which is decisive, not what someone else would have done under the circumstances.  *1152 ; ; . The petitioner, Keith McLeod, concedes that the certificates were in fact worthless in 1932 and, had he been able to obtain earlier the total information which eventually came to him, an earlier charge-off and deduction would have been proper.  He has shown that he was attentive and was obtaining promptly such definite information as was obtainable through the press and through the Lee Higginson Trust Co. about the extremely confused and doubtful situation which was gradually revealed following the suicide of Kreuger in 1932.  He rightly believed that he and his mother would recover something if their claims were not subordinate to those of general creditors.  The record shows that a substantial amount was paid to general creditors, beginning with the dividend proposed in 1936 and paid in 1937.  There was real doubt as to whether or not the claims of certificate holders were to be subordinate, despite the provision on the debentures.  It does not appear that the petitioner ever saw*1153  that provision or knew about it.  But the referee knew about it and still held in 1937 that there was no subordination.  The petitioner was certainly not unreasonable, so far as this record shows, in being unconvinced of the worthlessness of the certificates until the District *292  Court overruled that order of the referee.  He has testified that he was unconvinced until that time.  He has made a strong prima facie The respondent has not shown knowledge by the petitioner prior to 1937 of facts which should have led to an earlier ascertainment. . Facts in regard to stock exchange quotations relied upon by the Commissioner in his argument are not in the record.  See on this subject Nor are the facts which justified the deductions for 1932 in , and , present in this record.  The respondent put in evidence the returns of the petitioners for 1932 through 1937 to show that the petitioner made the charge-offs in 1937 because that was the first year they would be of benefit.  The returns*1154  fail to show that the petitioners were influenced in that way.  They had substantial income in other years and paid tax for some years, particularly 1936.  Income was offset by credits, principally credits for dividends, in the years for which no tax was paid.  The evidence preponderates in favor of the petitioners and we hold that they are entitled to the deductions.  Reviewed by the Board.  Decision will be entered under Rule 50.KERN concurs only in the result.  SMITH dissents.