T. G. Northwall Co. v. Commissioner , 13 B.T.A. 881 ( 1928 )

T. G. NORTHWALL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

T. G. Northwall Co. v. Commissioner

Docket No. 5034.

United States Board of Tax Appeals

13 B.T.A. 881; 1928 BTA LEXIS 3151;

October 10, 1928, Promulgated

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1. In the absence of proof of value at March 1, 1913, debts ascertained to be worthless and charged off within the taxable period disallowed as deductions in computing net income.

2. Deduction claimed for depreciation or as ordinary and necessary business expenses disallowed.

D. J. Shorb, Esq., for the petitioner.

L. A. Luce, Esq., for the respondent.

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LANSDON

The respondent has asserted a deficiency in income and profits taxes for the period beginning January 1, 1918, and ending October 31, 1918, in the amount of $12,004.45. Only a part of the deficiency is in controversy. The petitioner alleges error on the part of the respondent in dissallowing a deduction in the amount of $1,154.60 for bad debts, and in disallowing a deduction of $4,315.87 for depreciation sustained. By amendment at the hearing petitioner alleged that the amount claimed for depreciation was in fact ordinary and necessary business expenses.

FINDINGS OF FACT.

The petitioner is a corporation organized under the laws of Nebraska. It maintains its principal offices at Omaha.

In November, 1909, petitioner received from the Valley Machine Co., of Underwood, Iowa, two promissory notes in the amounts of $300 and $1,176. Early in 1910 the Valley Machine Co. became insolvent and assigned all of its assets to a creditors' committee for the benefit of its creditors. Payments on the notes were received from the committee as follows: $70.40 on June 21, 1910; $100.40 on December 10, 1910; and $160.60 on March 2, 1911.

The assets assigned to the creditors' committee consisted in part of an equitable interest in land located in Holt County, Nebr., which was not liquidated in 1910 and 1911 with the rest of the assets. Petitioner hoped to realize something more on the notes when this property was sold. The balance of $1,154.60 was carried on its books until the early part of 1918 when the land was disposed of. Nothing, however, was received by petitioner as a result of the sale and no other assets remaining in the hands of the committee, the debts were determined to be worthless and charged off the books as of October 31, 1918.

At November 1, 1917, the petitioner carried as an asset account "office and warehouse fixtures," $10,207.07. At October 31, 1918, this account was carried on petitioner's books at $4,870.50. The account having decreased during the year $5,336.57, the petitioner deducted that amount on its income-tax return. The respondent allowed 10 per cent of the opening account, or $1,020.70 as depreciation and disallowed the balance of $4,315.87.

At November 1, 1917, petitioner's books showed a balance in the account "office expenses" of $4,182. At October 31, 1918, the balance in this account was $1,117.50, and $5,601.66 was charged to loss or gain. In the account "warehouse expenses" the balance at November 1, 1917, was $2,025.70, and at October 31, 1918, $753.

The balances in the accounts "office expenses" and "warehouse expenses" were included in the asset account "office and warehouse fixtures."

A report which was signed and sworn to by W. A. Johnson, president of petitioner, was submitted to the Commissioner of Internal Revenue on March 14, 1924. With regard to the depreciation deduction for the period here involved it states:

Taxpayer agrees to the use of the rate of 10% depreciation per year on these assets, but respectfully calls attention to the fact that on the books of the Company, no charge offs were made during the fiscal years ended 10/31/19 & 10/31/20, because such a heavy amount had been charged off in 1918. Due to the disallowance of this excess charge off in 1918, taxpayer now respectfully asks allowance for depreciation of $1,020.70, for the fiscal year ended October 31, 1919 and fiscal year ended October 31, 1920.

OPINION.

LANSDON: The notes in controversy here were acquired by the petitioner prior to March 1, 1913. No evidence of the value of such notes at the said date having been introduced, we are without any basis upon which to determine the deductible losses sustained when worthlessness was ascertained in the taxable years. On this point the determination of the respondent is approved. .

The record is not clear as to petitioner's position with regard to the second issue. In the petition the amount is claimed as a deduction for actual depreciation sustained. By amendment at the hearing it was alleged that the amount was deductible as ordinary and necessary business expenses. No evidence was introduced with regard to the amount being depreciation. The evidence introduced to establish that this was a business expense consisted merely of the amounts of the opening and closing accounts. The opening dates shown are different from the beginning date of the period herein involved. The expenses claimed were not itemized. Such evidence is insufficient to sustain a claim for deduction as ordinary and necessary business expenses. There must be a showing that each specific item of expense constitutes a proper deduction.

Reviewed by the Board.

Decision will be entered for the respondent.