1940 BTA LEXIS 1244 | B.T.A. | 1940
Lead Opinion
Petitioner contends, in substance, that it borrowed from the bank and loaned the money to Smith, which loan was secured by collateral, part of which had been originally pledged with the bank on Smith’s loan there, and that Smith used the proceeds of this loan from petitioner to pay his indebtedness to the bank. Petitioned
Respondent counters with the argument that petitioner bought the Smith note and collateral thereto but that, if this is not so, and petitioner did become a creditor of Smith by the transaction of the bank, the debt was worthless and reasonably ascertainable as such before 1934.
We agree with petitioner. After a thorough consideration of the evidence, we think that petitioner never acquired full legal title to the Smith note to the bank or the collateral securing it. Petitioner became a creditor of Smith and this collateral secured that debt. Kessler, petitioner’s president, testified that he held title to the collateral, consisting of Petroleum stock and Nash Motors stock, only as trustee for the liquidation of Smith’s account. The agreement between Smith and Kessler stated not that Smith assigned these securities to Kessler, but that he would leave- them with Kessler to be sold to liquidate the obligation when, as, and if necessary. It is true that when petitioner took over the obligation from Kessler, the transaction was entered on its books three times as a purchase of the stocks comprising the collateral. But Kessler testified that this was done without his knowledge or authority, while he was away, and by a bookkeeper who did not know how to record the transaction. Respondent introduced no evidence to rebut this explanation except the entries themselves. On the third entry made without Kessler’s knowledge it is expressly stated that the stock was held only as collateral on Smith’s note account.
The allegedly mistaken entries were corrected by Kessler’s order as soon as he learned of them, and this was done in December of 1933, prior to the taxable year. We are satisfied that the correction, which changed petitioner’s records to show that the stocks were held and one of them disposed of only as pledged collateral, was made in good faith. The evidence independent of the book entries shows clearly that a pledge, rather than an outright transfer, of the securities took place, and the book entries can not control where they conflict with the actual facts. Doyle v. Mitchell Brothers Co., 247 U. S. 179; San Joaquin Light & Power Co. v. McLaughlin, 65 Fed. (2d) 677; Ohio Brass Co., 17 B. T. A. 1199.
Respondent insists that petitioner knew Smith was insolvent in 1931, having charged off a debt of his in that year as worthless, and that the bad debt deduction, if such it was, should have been taken in that year. In support of this he cites Dexter v. Commissioner, 99 Fed. (2d) 769. But this argument is beside the point, the Smith note account was at all times secured by collateral, which was not the case in Dexter v. Commissioner, where the notes in question were wholly unsecured.
Decision will be entered for the petitioner.