Alexander County Nat'l Bank v. Commissioner , 12 B.T.A. 1238 ( 1928 )

ALEXANDER COUNTY NATIONAL BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ALEXANDER COUNTY SAVINGS BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Alexander County Nat'l Bank v. Commissioner

Docket Nos. 12075, 12616.

United States Board of Tax Appeals

12 B.T.A. 1238; 1928 BTA LEXIS 3383;

July 9, 1928, Promulgated

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Notes canceled and surrendered in 1920 held to be proper deductions from gross income in that year.

David S. Lansden, Esq., for the petitioner.

J. E. Marshall, Esq., for the respondent.

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SIEFKIN

These are proceedings, duly consolidated for hearing and decision, for the redetermination of deficiencies for the year 1920 in the amount of $593.38 in Docket No. 12075, and for the year 1920 in the amount of $3,060.85 in Docket No. 12616. The errors alleged are in adding to net income of the Alexander County National Bank and Alexander County Savings Bank the respective sums of $6,000 and $8,500, said sums having been taken as deductions from gross income of the petitioners as bad debts.

FINDINGS OF FACT.

The Alexander County National Bank is a corporation organized under the laws of the United States with its principal office at Cairo, Ill. The Alexander County Savings Bank is a corporation organized under the laws of Illinois with its principal office at Cairo. The Alexander County National Bank, in its income and profits-tax return for 1920, deducted from gross income the sum of $6,000 on account of a cancellation of indebtedness in that amount due the bank from the Patier Dry Goods Co. The respondent disallowed the deduction, increased the net income by $6,000, and the deficiency in question in part resulted. Similarly, the Alexander County Savings Bank deducted $8,500 on its return, and respondent disallowed it and determined the deficiency in question.

The Patier Dry Goods Co., an Illinois corporation, was organized several years prior to 1920 with a capital stock of $10,000 by C. A. Patier, a merchant and a director and stockholder in both the petitioners, in an attempt to save notes or claims amounting to several thousand dollars which the petitioners had against the Samuel White Dry Goods Co. Patier gave the Alexander County Savings Bank, at the time the Patier Dry Goods Co. was organized, a note for $10,000, and he put up as collateral all except two or three of the shares of the capital stock of the Patier Dry Goods Co. The transaction between Patier and the Savings Bank was not intended as a loan. Patier was acting in the interest of the Savings Bank, and it was hoped that the debt of the White Dry Goods Co. to the bank taken over by the Patier Company might be paid. The hope was not realized for the Patier Dry Goods Co. lost money from the start. By 1920 the business was in a desperate state and five men who were directors of the two petitioner banks agreed to each put up $2,000 to make up $10,000 to take over the stock of the Patier Dry Goods Co. E. A. Buder, acting for himself and four other persons, Neff, Gallaghan, Forkter, and Lansden, made the following proposition to the two petitioners:

CAIRO, ILLINOIS, June 29, 1920

ALEXANDER COUNTY NATIONAL BANK

and

ALEXANDER COUNTY SAVINGS BANK,

Cairo, Illinois.

GENTLEMEN: I will pay $10,000 for the stock of the Patier Dry Goods Company held by the Alexander County Savings Bank for the note of C. O. Patier, provided you will surrender said note to me and will cancel and surrender other notes given to you by said Patier Dry Goods Company to the amount of $14,500.

Very truly yours,

(Signed) E. A. BUDER.

The petitioners accepted the proposition and $10,000 was paid to the Alexander County Savings Bank, which turned over to Buder the stock of the Patier Dry Goods Co. and the $10,000 note of Patier, and canceled and surrendered to Buder $8,500 of other notes owing from the Patier Dry Goods Co. to the Savings Bank. The National Bank canceled and surrendered to Buder $6,000 of notes owing to it from the Patier Dry Goods Co. The amounts of $8,500 and $6,000 were charged off on the books of the petitioners in 1920 as losses. Prior to that time none of the five men represented by Buder had any interest in the Samuel White Dry Goods Co. or its successor, the Patier Dry Goods Co. The indebtedness canceled by the two banks was only part of the total indebtedness, about $33,000 remaining. It was hoped by the new stockholders of the Patier Dry Goods Co. and by the petitioners that with new management and less of a financial load to carry the Patier Dry Goods Co. would be successful and that the petitioners would eventually recover the remainder of the amounts owing from the Dry Goods Co., and that the five individuals ultimately would recover the $10,000 they had invested. Those hopes were not realized; the business of the Patier Dry Goods Co. continued to be unsuccessful and was liquidated. The petitioners realized only a portion of their remaining indebtedness and the individuals received nothing for their stock.

The two petitioner banks were closely related by stock ownership and as to business transactions.

OPINION.

SIEFKIN: This proceeding is an example of the phrase "throwing good money after bad." The banks had become substantial creditors of the Samuel White Dry Goods Co. and were instrumental in organizing the Patier Dry Goods Co. to solve the financial difficulties of the first company. The management of the Patier Company was inefficient, if not dishonest, and the banks became more heavily involved than before. In 1920 five men, directors of the banks, thought they saw a chance to salvage a part of the indebtedness to the banks and perhaps make some money individually by taking over the management of the Dry Goods Company by each putting in $2,000 for the stock of the Dry Goods Company on condition that the banks together reduce the notes of the Dry Goods Company by $14,500. This was done and, the new management being inefficient though honest, the banks lost most of the remaining indebtedness due from the Dry Goods Company and each of the five men lost $2,000.

When the petitioners canceled and surrendered the notes in 1920, the possibility of recovery of those amounts was gone forever. The petitioners were not stockholders of the Dry Goods Company but were creditors only, and in a reduced amount. It is easy to conceive the impulses which moved the petitioners to consent to the cancellation of the notes. It was hoped that with this management of the Dry Goods Company and by taking a present loss, the remainder of the indebtedness might be paid in full. That the hopes were not realized only shows the fallibility of human judgment. The fact that the amounts were charged off the books as losses but claimed on the returns as bad debts, does not prevent their allowance in this proceeding as losses, since the allegations of the petitioners are sufficiently broad. We conclude that the amounts of $8,500 and $6,000 should be allowed as deductions from gross income for the year 1920 to the Savings Bank, and the National Bank, respectively. In all other respects, the deficiencies asserted not being put in issue by the pleadings, the determination of the respondent is approved.

Judgment will be entered under Rule 50.