143 F.2d 712 | 5th Cir. | 1944
Failing in the Tax Court to obtain a re-determination of deficiencies for the fiscal year ending August 31, 1937, satisfactory to it, petitioner is here seeking a reversal. The facts as stipulated and testified to are fully set out in the opinion of the Tax Court.
The first is whether the petitioner, a corporation, on a cash receipts and disbursements basis, is entitled to a bad debts deduction of $77,088.20 charged off in the tax year on account of interest on secured notes and accounts not received as cash but accrued and returned as income in prior years. These are the pertinent facts: Petitioner, a cotton factor since its incorporation in 1916, has kept its books, and made and filed its Federal income tax returns, on a cash receipts and disbursements basis, except that for fiscal years prior to 1937, to-wit, 1927 to 1935, inclusive, it accrued and reported as gross income in its returns for those years, interest on certain collateralized accounts and notes receivable. In 1937 it charged off on its books of account and deducted in its income tax return the $77,088.28 interest previously accrued and reported.
The second question is whether petitioner is entitled to deduct, as a bad debt loss, $34,832.39, the difference between the amounts it had advanced on 3,996 bales of cotton,
The third question is whether the sale in 1937 of the 1,336 bales of cotton for a price $21,913.52 greater than the price at which the bales had been taken from the trustee resulted in a taxable gain of that amount.
As these two questions are answered by determining whether or not petitioner bought the cotton from the trustee at an agreed price, the same statement of facts will suffice for them both. Between August, 1929, and November, 1931, a cotton partnership forwarded petitioner, and petitioner made advances against, 3,996 bales of cotton. On January 4, 1932, the partnership owed petitioner the sum of $244,393.46 evidenced by notes and accounts receivable and secured by the cotton. On that date an involuntary petition in bankruptcy was filed against the partnership, and it was adjudicated bankrupt as of that date. Petitioner filed its proof of claim in the amount of $303,936.59 as a claim secured by factor’s lien on said 3,-996 bales of cotton. After some negotia
We think that under the facts stipulated and found, the answer the Tax Court gave to each of these questions was the only proper answer. As to the first question, the deduction for loss of interest as a-bad debt loss, Art. 23 (k) 2 of Regulation 94 provides in part: “Worthless debts arising from unpaid wages, salaries,. rents and similar items of taxable income will not be allowed as a deduction unless the income such items represent has been ir.i.iuded in the return of income for the year for which the deduction as a bad debt is sought to be made'or for a previous year”, and it is settled .law that interest cannot be charged off as a bad debt unless it has first been charged on. Petitioner concedes that this is so, but, argues that since it did in earlier years accrue the interest and return it as income, this fully satisfied the regulation and the decisions. It insists that the view of the commissioner and the Tax Court, that since taxpayer was not on the accrual but on the cash basis, there was no improper accruing of interest, adds to the law a provision which it does not contain, in effect, that for an interest item to be charged off as a bad debt, it must have been properly charged on. Agreement with petitioner’s contention would be to throw out of the window petitioner’s entire system of tax accounting, leaving to the varying caprices and whims of the taxpayer whether or not particular items should be deferred, advanced or returned. A taxpayer on the cash basis is on that basis uniformly as to both receipts and deductions, and he cannot be permitted any irregular and sporadic variation from that basis. The accruing and returning as income of the interest, therefore, in the earlier years before it was actually received was not, in accordance with petitioner’s system of accounting, a charging of it on. Interest is charged on under the regulations and the decisions when the taxpayer is on a cash basis only when it is actually received. It is charged on when the taxpayer is on an accrual basis only when it is properly accrued. The conditions for a bad debt charge-off not being met here, the claim for it was properly disallowed.
It is equally obvious that the Tax Court made right answers to the second and third questions. Petitioner’s argument to the contrary proceeds by ignoring what actually occurred with respect to the purchase of the cotton. It seeks an as if solution, that is, it urges a position based upon the wholly incorrect assumption that instead of buying the cotton from the trustee at an agreed price, the petitioner merely took the cotton as a credit on the indebtedness. The fact'-that petitioner continued to carry the indebtedness on its books was,, of course, to be looked' to in determining what was actually done. But the weight this might have had is completely overborne by the admitted facts of record: (1) that petitioner purchased the property from the trustee at an agreed figure; (2) credited the agreed amount on the debt, and was recognized as an unsecured creditor for the balance; and (3) that in 1933 occurred the identifiable event, the complete winding up of the bankruptcy estate without anything for the creditors, which fixed the bad debt loss for that year. Looking at the matter from the standpoint not of what might have, but of what actually, occurred, it is quite clear that the cotton was sold to petitioner in 1932, for the amount agreed on with a realized loss in 1933 of the balance of the debt by the closing out of the estate without paying
2 T.G. 347.
When its debtor in 1932 went into bankruptcy the trustee transferred these bales to it at an agreed price to be credited on the debt.