Jones v. Commissioner ( 1928 )

EZRA H. JONES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Jones v. Commissioner

Docket No. 13928.

United States Board of Tax Appeals

13 B.T.A. 1271; 1928 BTA LEXIS 3067;

October 30, 1928, Promulgated

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Respondent sustained in the disallowance of deductions for bad debts.

Prewitt Semmes, Esq., and Nettie A. Trail, C.P.A., for the petitioner.

W. Frank Gibbs, Esq., for the respondent.

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LOVE

This proceeding results from the determination of a deficiency in income taxes for the year 1921 amounting to $1,330.34.

Petitioner alleges error in the failure to allow the deduction from income of bad debts amounting as follows: loan to G. R. Harris, $2,875; loan to A. Jones, $2,550.

FINDINGS OF FACT.

The petitioner, a resident of Detroit, Mich., was engaged in the real estate business during the taxable year.

Guernsey R. Harris, a real estate salesman, was in the employ of the petitioner during the entire taxable year. He was a capable man who had participated in large transactions. In June of the taxable year Harris gave the petitioner his promissory note for an amount of $1,766.61, equaling the then amount of his account on the books of the petitioner. Thereafter, various payments, loans, and advances were made in cash to Harris or for his benefit by the petitioner.

It was not unusual for the petitioner to make advances in cash to a salesman in his employ whenever, in the opinion of the petitioner, there was a reasonably good prospect of closing pending deals in which the salesman would earn commissions. At the end of the taxable year the aggregate of the payments, loans, and advances exceeded the credits to the ledger account of Harris on the books of the petitioner for commissions earned, by an amount of $2,875. In addition, a portion of the note given in June was unpaid. Petitioner charged off to profit and loss, as a bad debt, the open account balance, amounting to $2,875. At this time Harris was in bad condition financially and had debts such as a grocery bill and a dentist's bill which he was unable to pay. Standing in his wife's name was a dwelling which the family occupied and which was not entirely paid for. The real estate business was stagnant at this time. Harris continued in the employ of the petitioner until September or October, 1922. The ledger account reflects further transactions of Harris which the petitioner had in 1922, including credits for commissions earned amounting to at least $455 and debits of cash payments. Harris subsequently carried on for a while a real estate business in his own interest. After that he was employed at a small salary by an automobile agency. Harris paid to petitioner an amount of $1,135 in 1924 on account of his indebtedness, and the petitioner holds his note for the balance. Harris is now employed at a good salary in a bank as manager of the real estate department. Petitioner kept himself informed of the financial status of Harris by personal investigation.

Arthur Jones, the father of the petitioner, aged 59 in the taxable year, a practicing attorney, was the recipient of eight payments of cash by the petitioner, beginning in February of the taxable year, and aggregating at the end of the taxable year $2,550. The last payment, amounting to $400, was made on December 20 of the taxable year. The payments were charged to the account of the father on the books of the petitioner, and were charged off to profit and loss at the end of the taxable year. It was understood by both parties that the cash was loaned and was to be repaid when the father was able to do so. The father was without resources; was not making money; he was in financial straits during the taxable year; his financial condition was unimproved and unchanged at the end of the taxable year; and he was unable to repay the loans. He has never repaid them. At all times the petitioner had full knowledge of the financial condition of his father. Similar relations and practices were continued subsequently, save that the payments were attributed to attorney fees rather than to loans. The father is still practicing law in Detroit.

OPINION.

LOVE: The question for decision is whether the respondent erred in disallowing deductions claimed in the return filed by the petitioner of two amounts of alleged bad debts.

The petitioner was in the real estate business in the taxable year employing salesmen on a commission basis to whom he made advances of cash repayable out of commissions whenever in his opinion the circumstances warranted it. At the end of the taxable year a salesman named Harris, in the employ of petitioner, was in bad condition financially, and he was unable to repay the petitioner for an excess of advances made during the taxable year, amounting to $2,875. The petitioner charged off the amount to profit and loss. The advances were obviously business transactions and not gifts. The question is whether the debt was ascertained to be worthless as provided under section 214(a)(7) of the Revenue Act of 1921. Harris was a man of ability who had participated in large transactions and who was capable of earning large commissions. He was the victim of the prevailing business depression. He did not deny the obligation and he still promises to pay. A portion of the indebtedness was repaid in 1924. Harris continued in the employ and under the same relations with the petitioner for about ten months after the taxable year. In testifying the petitioner was confused as to this fact, and we believe he may have also been confused in failing to remember any commission earnings in prospect for Harris at the end of the taxable year. The evidence does not convince us that the debt was definitely determined to be worthless at the end of the taxable year and we conclude that the respondent should be sustained.

At various times during the taxable year the petitioner advanced cash to his father, a practicing attorney, although the petitioner was well informed of his father's financial straits and inability to repay the loans. The payments were charged to the account of the father on the books of the petitioner, and at the end of the taxable year the amount thereof, $2,550, was charged off to profit and loss. The loans were not business transactions. The father was not in a position to have secured the loans from strangers. His financial condition was the same during all of the taxable year. The last loan was made a short time prior to the end of the taxable year. The question whether the various advances are deductible is not answered by the testimony of the parties that they considered them loans which were expected to be repaid. We have previously held that circumstances may show "loans" to have been practically gifts, and such are not deductible from income. Cf. ; ; (495). Certainly the loans were no more worthless at the end of the taxable year than they were at the moment they were made. We conclude that the respondent did not err in disallowing the deduction.

Judgment will be entered for the respondent.