Coburn v. Commissioner , 16 B.T.A. 1344 ( 1929 )

R. T. COBURN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Coburn v. Commissioner

Docket No. 26970.

United States Board of Tax Appeals

16 B.T.A. 1344; 1929 BTA LEXIS 2404;

July 16, 1929, Promulgated

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1. Loss on account of guarantee of accounts held not to have been sustained in 1922.

2. Evidence insufficient to sustain allegations of error as to two other items of bad debts or losses.

J. Melville Broughton, Esq., for the petitioner.

James L. Backstrom, Esq., for the respondent.

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SIEFKIN

This is a proceeding for the redetermination of a deficiency in income tax for the year 1922 in an undisclosed amount. It is alleged as error that the respondent disallowed items of $2,729.04, $1,650, and $1,500 as deductions for losses or bad debts.

FINDINGS OF FACT.

The petitioner is a resident of Raleigh, N.C. During the year 1922 he was a traveling salesman, selling shoes on commission for manufactures and jobbers. One of such concerns was the George D. Witt Shoe Co., a manufacturer and jobber. During 1922 the petitioner, representing the George D. Witt Shoe Co., sold between $30,000 and $40,000 worth of shoes to the Wake Shoe Store of Raleigh, N.C., a partnership consisting of M. R. Swart and C. B. Garnett. He had no interest in the partnership, but in order to sell goods to it, personally guaranteed the accounts to the George D. Witt Shoe Co.

The partnership was in bad circumstances financially and had no credit. The petitioner's guarantee was required by the George D. Witt Shoe Co. before the orders taken by the petitioner were accepted and shipped. During the year 1922, as the result of such guarantee, the petitioner's account with the George D. Witt Shoe Co. was charged with $800, and he paid accounts of the Wake Shoe Store in the amount of $1,929.04. He attempted to recover the amount from the partnership but was unable to do so. The Wake Shoe Store was sold on forced sale to other parties in or shortly after 1923. In 1922 the partners in the Wake Shoe Store were insolvent and have been insolvent ever since. During 1923, and until the Wake Shoe Store went out of business, the petitioner continued to guarantee the accounts of the partnership, and they bought further bills of goods through him. His commission on goods sold to the Wake Shoe Store was 10 per cent, which he reported as income in 1922. The petitioner deducted $2,729.04 on account of this transaction from his gross income for 1922. The respondent disallowed the deduction.

On January 26, 1922, the petitioner loaned E. W. Griffin $1,650. Griffin was in the shoe business in Greenville, N.C. At the time the loan was made the petitioner knew that Griffin had an interest in a partnership which he had sold and for which he had not received the money. The petitioner was informed that Griffin would realize between $7,000 and $8,000 from such interest. When the partnership affairs were settled, however, Griffin not only got nothing for his interest but was indebted to the firm. At the time the loan was made and throughout the year 1922 and since, Griffin was insolvent. The indebtedness was evidenced by a note, without maturity, bearing 6 per cent interest. The money was to be paid to the petitioner in December, 1922, or the latter part of the year. Griffin never paid anything on the note. On account of this note the petitioner deducted $1,650 from his gross income for 1922. The respondent disallowed the deduction.

In October, 1921, a customer of the petitioner, B. J. Dunning, wanted to borrow $5,000 on some real estate at Aulander, N.C. He sought to induce the George D. Witt Shoe Co. to make the loan. The company finally agreed to loan $3,500, secured by a first mortgage, if the petitioner would loan $1,500 and take a second mortgage. That was done and the mortgages bore date of October, 1921, and became due in one year. When the mortgages came due and no payment was made, petitioner and a representative of the George D. Witt Shoe Co. went to look at the property. They concluded it was not worth even the amount of the first mortgage and the petitioner authorized the Shoe Company to charge him with $1,000 on account of their $3,500 loan because he had induced it to make the loan. The George D. Witt Shoe Co. charged the petitioner with $1,000, pursuant to such authorization, in 1923. There never has been a foreclosure of either mortgage, but in 1926, in order to settle Dunning's estate, $3,000 was paid by the estate to the George D. Witt Shoe Co. to satisfy both mortgages. The Shoe Company credited the petitioner with $500 in 1926 on account of such payment. Dunning had no assets other than the mortgaged property, either in 1922 or thereafter. The petitioner deducted $1,500 on account of the second mortgage loan from his gross income for 1922. The respondent disallowed the deduction.

OPINION.

SIEFKIN: Three items are involved, all taken as deductions from 1922 income. The first, $2,729.04, represents amounts paid out by or charged to the petitioner as the result of his guarantee of a customer's accounts. As a shoe salesman he got a commission of 10 per cent on between $30,000 and $40,000 worth of goods sold to this customer in 1922. The fact that he continued to guarantee the account in 1923 and continued to sell the customer in that year is the strongest fact against a determination that he had realized a loss in 1922. But that is weakened considerably by the surrounding circumstances and the motives impelling the petitioner. Although he received commissions in 1922 in excess of the loss on the guarantee, and although he could continue to operate in that manner and make money, we are unable to say that a loss of $2,729.04 was realized in 1922 so long as he was dealing with the customer upon the same basis in the following year. We think it a fair assumption that the petitioner did not consider the amount as lost to him and that, in 1922, conditions were not such that the loss was then sustained, nor do the circumstances justify the deduction of the amount as a bad debt, since the statutory requirements were not present.

The evidence is unsatisfactory to show that the respondent erred as to the other two items. The note of Griffin had no maturity expressed on its face. There is no evidence fixing the time when the hopes of the petitioner for payment out of Griffin's partnership interest were destroyed. We are unable to conclude either that there was a loss in 1922 or that a bad debt was ascertained to be worthless and charged off within that year. As to the other item, there is nothing which would lead us to say that the petitioner's loan of $1,500 to Dunning was worthless in 1922, and the act by which the petitioner was charged with $1,000 in the accounts of the George D. Witt Shoe Co. in 1923 leads to a definite conclusion that it was not until 1923 that the determination of worthlessness was made.

Reviewed by the Board.

Judgment will be entered for the respondent.