Steele Cotton Mill Co. v. Commissioner, Docket No. 488.

Docket No. 488. | B.T.A. | Jan 13, 1925

Lead Opinion

OPINION.

Graupner :

The' taxpayer contends that, having considered the debt of $26,875.28 worthless and written it off its books of account on December 31, 1920, the Commissioner erred in not allowing that amount to the taxpayer as a deduction in its tax return for the calendar year 1920. As an alternative the taxpayer asserts that the Commissioner, having disallowed the deduction of the entire amount of the debt, should have allowed a deduction of-$8,162.60, which is the difference between the sum of $18,712.68, for which it agreed to compromise on December 16,1920, and the amount of $26,875.28, the balance due on the original indebtedness.

The Commissioner contends that under the provisions of 234(a) (5) of the Revenue Act of 1918 his disallowance of the deduction was proper and that the alternative suggested by the taxpayer is not within the contemplation of that subsection.

Section 234(a) of the Revenue Act of 1918 provides in part:

That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * * (5) Debts ascertained to be worthless and charged off within the taxable year.

Under the provisions of this section two events must have occurred before the taxpayer was entitled to write off the balance due from the Piedmont Commission Co. as bad debt, viz: (1) The debt must have been ascertained to be worthless, and (2) it must have been charged off within the taxable year. The second of these may be considered as having been performed. Therefore, whether or not the debt was ascertained to be worthless remains to be determined.

The word ascertain has a definite and common meaning, both in law and in ordinary usage, i. e., “ To make certain to the mind; to make sure of; to determine.” See Webster's Unabridged Dictionary, Standard Dictionary, Bouvier's Law Dictionary, 1 Words and Phrases (1st series), 1 Words and Phrases {2d series). With this definition in mind the question naturally arises: What did the taxpayer do to determine that the balance due from the Piedmont Commission Co. was worthless before it was written off the books on December 31, 1920?

The evidence shows that the debt was incurred July 14, 1920; that a part payment of $4,000 was made on October 9, 1920; that on December 16, 1920, a conference was had between the directors of the Piedmont Commission Co. and the taxpayer, whereat the taxpayer agreed to accept promissory notes, indorsed by the individual directors, in the amount of $18,712.68 in full settlement of its claim; that the notes were not delivered on the day following the conference; that, between December 16 and December 31, 1920, the taxpayer made two demands for delivery of the notes but received no reply; that on December 31, 1920, it charged off the full amount of the debt as worthless. It also shows that the taxpayer made no endeavor to ascertain the actual assets of the Piedmont Commission Co.; that the men who composed the directorate of the company were men of high integrity, financial responsibility, and prominence in business in North Carolina, and that they did not desire the company forced into bankruptcy; that the taxpayer did not seek out or confer with any of the directors to ascertain whether or not the promised notes would be delivered or what was the cause of the delay in delivery. A summing up of these facts shows that the taxpayer reached its conclusion as to the worthlessness of the debts upon the facts that the notes were not delivered within 14 days after the conference with the directors and that it had received no reply to one letter and one telegram sent sometime after December 17, 1920. Before a taxpayer is entitled to take a deduction for a “ debt ascertained to be worthless,” he must take reasonable steps to determine that there is no probability of payment or collection and have prima facie evidence to prove that the debt has no value. Under the facts shown in this appeal, the time was too limited and the endeavor too restricted for us to consider that the taxpayer had thoroughly investigated the resources of the Piedmont Commission Co. or that sufficient effort had been made to make sure that the compromise agreement would not be fulfilled or that the company could not or would not pay. This taxpayer has hot made a showing which would entitle it to consideration under this test, and its first contention must be denied.

This decision leads to the consideration of the alternative contention made by the taxpayer, viz: The Commissioner should have allowed a deduction in the amount of $8,162.60, the difference between the debt of $26,875.28 and the amount of the promised notes, $18,712.68.

The Commissioner assumes the position that the word debt, as used in the act of 1918, means a debt in its entirety and does not permit the partition of a debt and the writing off of one part and the retention of the other part. A comparison of the wording of sections 234(a) (5) of the Revenue Acts of 1918 and 1921, respectively, leads us to the conclusion that Congress did not contemplate, in the act of 1918, the deduction of a part of a debt. The notes given in evidence of the compromise were not delivered until after the end of the calendar year 1920 and the taxpayer could not well write down its debt of 1920 until such time as it knew whether or not the compromise agreement was to be fulfilled.

For the foregoing reasons, the determination of the Commissioner is approved.