Johnstone v. Commissioner , 17 B.T.A. 366 ( 1929 )

EDWARD K. JOHNSTONE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Johnstone v. Commissioner

Docket No. 30694.

United States Board of Tax Appeals

17 B.T.A. 366; 1929 BTA LEXIS 2306;

September 20, 1929, Promulgated

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DEDUCTIONS - BAD DEBTS. - A loan made by petitioner in 1921, found to be worthless and charged off in 1922, held to represent a proper deduction in arriving at net income for that year.

Ward Loveless, Esq., and F. O. Graves, Esq., for the petitioner.

R. H. Ritterbush, Esq., for the respondent.

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TRUSSELL

The deficiency of $1,115.49 here involved is for the calendar year 1922 and results from respondent's disallowance of a deduction by petitioner from gross income, in his return for that year, of $7,000, as representing a debt due him and ascertained to be worthless and charged off in that year.

FINDINGS OF FACT.

Petitioner is a resident of Keokuk, Iowa. On March 14, 1921, he loaned $7,000 to one Pittman, the latter giving him his promissory note in that amount, payable on demand with interest at 7 per cent. In making this loan it was verbally understood between the parties that Pittman was to use the amount loaned to purchase stock of a company by which he was employed and would thereupon deliver such stock to petitioner as collateral security on the note. Several weeks later Pittman delivered to petitioner a certificate for 80 shares of stock of the company in question, made out to Pittman and not assigned by him. The note in question did not provide for collateral.

About three months after the loan was made the debtor lost his position with the company whose stock he had purchased. In March, 1922, petitioner interviewed the debtor in an endeavor to have him pay interest due on the note and was advised that he had no money and could not make any payment. At that time the debtor was employed by another company in which petitioner was interested. Later in the year 1922 the debtor disappeared from this employment, leaving his account with the company overdrawn and leaving an unpaid indebtedness to the bank in the town in which he lived. Following this, in 1922, petitioner endeavored to locate him through acquaintances and through his family without success. His wife advised petitioner that he had disappeared and she did not even know his whereabouts. Petitioner on inquiry could learn of no property belonging to the debtor and what information he obtained from parties who knew him indicated that he had nothing and that a judgment would be uncollectible unless something could be realized upon the 80 shares of stock held as security. Petitioner thereupon took up with brokers and with a bank in Chicago, where this corporation was located, the matter of finding a purchaser for this stock but was unable to obtain an offer at any price. He then attempted to sell it to one of the officers of the company itself and was advised that no offer would be made.

Thereupon, petitioner took the stock and note to his attorney and requested him to do what was possible to save his loss or minimize it and the latter called his attention to the fact that the stock was not assigned and advised him that any action by him would necessitate two suits, one in Iowa to recover a judgment and attach the stock and another in Illinois to enforce a transfer of the stock by the corporation. The attorney in question knew the debtor and his financial condition and advised petitioner that a judgment against him would be worthless except as a basis for securing a transfer of the stock and that in view of the indicated lack of value on the stock the costs of suit to ultimately obtain a transfer would be in excess of anything possible to be realized therefrom and gave it as his opinion that the debt in question was worthless. Thereupon petitioner, at the close of 1922, charged off the debt as worthless.

OPINION.

TRUSSELL: We think that under the proof it is shown that petitioner made a sufficient investigation and effort to recover upon the debt and that the conclusion reached by him in the taxable year that it was uncollectible and worthless was, under the conditions shown and then known to him, reasonable and justified. We do not think that the circumstances required that he bring suit, against the advice and opinion of his attorney that the cost would exceed the recovery. .

Judgment will be entered for the petitioner.