George v. Commissioner , 16 B.T.A. 651 ( 1929 )

W. F. GEORGE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

MRS. W. F. GEORGE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

George v. Commissioner

Docket Nos. 28037, 28040.

United States Board of Tax Appeals

16 B.T.A. 651; 1929 BTA LEXIS 2538;

May 24, 1929, Promulgated

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Deduction for bad debt loss in 1922 disallowed where there is no evidence of a charge-off as required by the statute during the taxable year.

Harry C. Weeks, Esq., for the petitioners.

Maxwell E. McDowell, Esq., for the respondent.

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SMITH

These proceedings are for the redetermination of deficiencies in income tax for the year 1922 in the amount of $5,003.19 in the case of each petitioner. The proceedings being brought by husband and wife, who filed returns for the taxable year on the community basis, and the one issue being common to both petitioners the proceedings were consolidated. Such parts of the proposed deficiencies as are now in dispute result from the disallowance by the respondent from the gross income of the community of a bad debt deduction in the amount of $52,753.19.

FINDINGS OF FACT.

The petitioners are husband and wife residing in Iowa Park, Tex. For the year 1922 they filed separate returns under the community property laws of the State of Texas. During the years 1919 and 1920 the petitioner, W. F. George, loaned to one William Viner the sum of $200,000, taking as security therefor Viner's personal notes and a deed of trust on certain real estate known as the William & Mary Hotel, in Wichita Falls, Tex.The said hotel was constructed during the years 1919 and 1920 by Viner, at a cost of approximately $350,000. The additional construction cost above the amount of the loan obtained from W. F. George was furnished by Viner out of his own funds and funds obtained from other sources. Viner had acquired the land upon which the hotel was built during the year 1919 at a cost of $30,000.

The operation of the hotel proved unprofitable and in the fall of 1922 Viner, being unable to finance it further and being practically insolvent, voluntarily surrendered the hotel property to W. F. George, who operated it on his own behalf thereafter.

Later in the year 1922 the petitioner, W. F. George, began foreclosure proceedings in the state district court of Wichita County, Texas, against Viner, which resulted in a judgment in his, George's, favor for the full amount of the debt of $200,000, plus interest and attorneys' fees. Judgment was entered December 1, 1922, ordering the lien foreclosed and the property sold in satisfaction thereof. The order of sale was formally carried into effect in February, 1923, and the property was bought in by W. F. George at public auction for $10,000, which amount was credited on the indebtedness. The judgment for the balance of the indebtedness was held over until the year 1928, when by agreement Viner gave W. F. George his promissory notes in the amount of $15,000 in complete settlement.

During the year 1922 W. F. George expended for state and county taxes assessed against the hotel property the sum of $2,007.60 and incurred expenses incident to acquiring possession of the property in the amount of $745.59.

In their income-tax returns for the year 1922 the petitioners deducted as a bad debt loss resulting from the above described transaction the sum of $52,753.19, with the following explanation:

We loaned Wm. Viner $200,000.00 on the property known as Hotel William-Mary. In that taxable year we paid expenses, including taxes, in the sum of $2,753.19 representing a total cost to date of $202,753.19. This property at the close of the taxable year was possibly worth $150,000.00, resulting in a loss of $52,753.19 being the amount claimed as a bad debt. Subsequently, on February 6, 1923, the property was sold by foreclosure proceedings. We purchased same for a consideration of $10,000.00.

In his computation of deficiencies the respondent has disallowed the deduction in each return.

At the close of the taxable year 1922 Viner was insolvent. He owned no property in Wichita Falls or elsewhere that was not incumbered to the full extent of its value at that time. He had acquired the site on which the hotel was built in 1919, when real estate values were greatly inflated on account of an oil boom in Wichita County, and had constructed the hotel under conditions resulting in an excessive production cost.

An appraisal was made of the hotel property during the year 1922 for insurance purposes and the replacement value thereof, including permanent fixtures, was ascertained to be approximately $125,000, exclusive of the cement foundation. The fair market value of the hotel property subject to the deed of trust held by W. F. George at the close of the taxable year 1922 was not in excess of $150,000.

OPINION.

SMITH: The petitioners here contend that they are entitled to deduct in their returns for the taxable year 1922 as a bad debt loss the amount of $52,753.19, representing the difference between the face value of a loan made in prior years and the fair market value at the close of the year 1922 of the property held as collateral for the loan, the debtor at that time being insolvent.

The Revenue Act of 1921, section 214(a)(7), provides for the deduction in computing net income of:

Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.

We have stated in numerous cases that the requirement of the statute both as to the ascertainment of worthlessness and the charge-off on the taxpayer's books during the taxable year must be complied with in claiming deductions allowable thereunder. See ; . It is not alleged in the petitions in these proceedings that there was either an ascertainment of worthlessness or a charge-off of the amount in question during the taxable year 1922, when the deduction is claimed, nor is there anything in the record from which we are able to determine whether the petitioners made an ascertainment of worthlessness or a charge-off of the amount during the taxable year. The fact that the petitioners claimed the deduction of such amount in their returns for the year 1922, which returns were filed during the following year, is not proof of an ascertainment of worthlessness or a charge-off during the year 1922. Under these circumstances the disallowance by the respondent of the deduction as a bad debt loss is sustained.

Judgment will be entered for the respondent.