1925 BTA LEXIS 2622 | B.T.A. | 1925
Lead Opinion
The taxpayer claims that the transaction outlined above in the findings of fact is a loss sustained under the provisions of section 214 (a) of the Revenue Act of 1918, which reads in part as follows:
Sec. 214. (a) That in computing net income there shall be allowed as deductions : * * *
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business;
(5) Losses sustained during the taxable year and not compensated by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *.
The taxpayer further claims that the loss was sustained in the year 1920, since in that year, and in that year alone, did he actually expend the cash incident to the failure of Watson & Co. and his voluntary assumption of the loss therein sustained by James J. HiH.
The Commissioner in denying the deduction argues that the transaction was either a purely voluntary one and a gift on the part of the taxpayer to the estate of J ames J. Hill, or that, if it was a loss, it was either sustained in 1911, when the note was given Hill, or in 1916, when Hill died and the note passed from the hands of the original payee into the hands of the executors of the estate.
The Commissioner also contends that the transaction can not be regarded as one arising from a business carried on by the taxpayer, since the business of Watson & Co. ended in 1907, the loss occasioned by its failure must have been sustained in that year, and the taxpayer in 1920 was engaged in the wholly different business of publishing a newspaper.
Nor is the Commissioner’s reasoning that the transaction was merely a gratuity to the estate of James J. Hill persuasive. Certainly no strained interpretation should be given to that portion of the Revenue Act of 1918 comprised in section 218 (b) (3) which excludes from gross income “ the value of property acquired by gift, bequest, devise, or descent,” and which by implication excludes from deductions as personal items the funds so disposed of by a donor. The distinction between a gift on the one hand and the recognition of a moral obligation arising out of a business transaction on the other may be difficult to frame in exact language, but it is not a distinction difficult of recognition when a concrete case is presented. The taxpayer in giving his note to James J. Hill or in paying that note to the executors would neither in his own mind nor in the mind of any other person be thought of as bestowing a gratuity on Hill. Because he thought he ought to, he was merely assuming a loss which Hill had sustained in a business transaction in which they were associated. As such the loss was one incurred in business or in a transaction entered into for profit within the meaning of the Revenue Act of 1918.
The difficult question presented is whether the taxpayer incurred the loss in 1911, when he voluntarily assumed the obligation to Hill and gave his note in 1916, when Hill died and the note passed into the hands of the executors, or in 1920, when the taxpayer actually paid the note in cash.
We do not believe, as contended by the taxpayer, that the test of this question rests on the narrow distinction that the taxpayer was keeping his accounts and making his returns in that year on the basis of cash receipts and disbursements. It would hardly be contended, for instance, that, if the taxpayer had surrendered to Hill in 1911 a note of some third person in payment of the obligation he then recognized, he would not have then sustained the loss which he is here claiming as a loss in 1920. But in 1911 the taxpayer did not surrender to Hill anything of value nor otherwise close the transaction between them. The note he gave was given without consideration and as between himself and Hill was nonenforceable except with his consent. The evidence is silent even as to whether the note was an ordinary negotiable instrument. As so given it was, moreover, accompanied by the definite understanding that Hill would never press for payment. Under such conditions it was at best a mere written evidence of the understanding between them.
In 1916 this note passed into the hands of the executors of the Hill estate. The taxpayer in his petition alleges that “ his executors had no choice but to reduce the note to cash for the purpose of administering the estate. In the year 1920 the taxpayer was compelled to pay the face of the note.” The Commissioner does not admit these allegations, but admits only that the note was paid in 1920. At the best this allegation is equivocal and is equally consistent with a moral compulsion as with a legal compulsion upon the taxpayer.
As the personal representatives of Hill, the executors stood in his shoes as the holder of the note and in their hands it was subject
Under these circumstances it is clear that the taxpayer in paying his note in 1920 for the first time made effective his loss on account of the business transaction entered into in 1904 and terminated in 1907 through the failure of Watson & Co. His loss was sustained, then, in 1920 and he should be allowed to deduct from his income for that year the amount of $71,949.23 paid at that time, and the deficiency computed by the Commisioner should be recomputed accordingly.
