Benton Harbor State Bank v. Commissioner ( 1930 )

BENTON HARBOR STATE BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Benton Harbor State Bank v. Commissioner

Docket No. 31369.

United States Board of Tax Appeals

20 B.T.A. 1106; 1930 BTA LEXIS 1974;

September 30, 1930, Promulgated

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John F. Jordan, Esq., and E. T. Pheney, C.P.A., for the petitioner.

Arthur Carnduff, Esq., for the respondent.

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VAN FOSSAN

The deficiency determined by respondent of $2,046.09 for the year 1923 arose from his disallowance of a bad debt deduction of $14,368.75 claimed on account of alleged worthlessness of certain notes of the Republic of China. The deficiency of $1,302.50 for the year 1924 arose from the disallowance by the respondent of a bad debt deduction of $8,420.

FINDINGS OF FACT.

Petitioner, a Michigan corporation, is engaged in the banking business at Benton Harbor. On November 7, 1919, it bought 2-year, 6 per cent, gold notes of the Republic of China of a face value of $5,000, paying $4,899.58 therefor. On September 28, 1920, it bought $10,000 worth of the same issue, paying $9,721.67 therefor. The notes were payable November 1, 1921, at Continental & Commercial Savings & Trust Bank of Chicago and were part of an issue of $5,500,000. Interest was paid on the notes up to November 1, 1921, but the last interest coupon and the principal of the notes have never been paid.

Following an examination of the bank in December, 1922, the Banking Department of the State of Michigan ordered petitioner to reduce the carrying value of the notes to the then present market value. In line with its policy of conservatism, petitioner wrote off the notes in the entire amount and claimed a deduction in its 1923 return of $14,368.75 as a bad debt. Petitioner has never attempted to sell the notes and has made no effort to collect the same other than to inquire on given occasions of the representative of the Chicago bank, from which they were purchased, as to when they were going to be paid. The Republic of China has not repudiated the notes.

The Chicago bank made additional purchases of the notes of the same issue in December, 1923, at the rate of $39.50 per 100. Sales were also made in January, 1924, at $40, in December, 1924, at $36, in November, 1925, at $25.25. The Chicago bank bought more of these notes in August, 1926, at $14. In 1923 the Republic of China was engaged in a revolution and was practically without funds.

In April, 1922, one Floyd Fitzsimmons was promoting a prize fight between Dempsey and Brennan to be held in Michigan City. He was engaged in erecting a stadium or arena for the purpose and was in need of additional funds. Fitzsimmons asked petitioner for a line of credit and, at the suggestion of the bank, saw Frank B. Shearer, reputed to be worth from $25,000 to $30,000, and asked Shearer to guarantee any loans. In consideration of an agreement by Fitzsimmons to pay Shearer $500, Shearer signed a bond for $5,000 and a loan was made to Fitzsimmons. Later, on July 13, 1922, Fitzsimmons needed additional funds and Shearer signed a second bond increasing his guarantee to $6,500. The loan was accordingly increased. The original loans to Fitzsimmons were evidenced by 90-day notes, which were renewed from time to time by the giving of new notes. The notes carried by the bank in 1924, when petitioner charged off the sum of $8,420, were renewals of the original notes and the sum represented principal and interest. After 1924 and up to 1928 petitioner continued to take renewals of Fitzsimmons' notes.

Petitioner was advised by counsel that it could not collect from Shearer because the bank had suggested to Fitzsimmons that he go to Shearer and get him to sign the bond. After receiving this advice petitioner never brought suit or made any attempt to collect from either Shearer or Fitzsimmons.

The scheduled prize fight was never held and Fitzsimmons lost all of his investment, including the stadium. He had no other funds from which collection could be made. On instruction of the Department of Banks of the State of Michigan petitioner in 1924 charged off the notes and claimed them as a bad debt deduction in its return for that year. Nothing has ever been paid on the notes.

OPINION.

VAN FOSSAN: Petitioner in 1923 charged off the notes of the Republic of China in their entirety, but on the witness stand its president admitted that they were not worthless at that time. Other evidence in the record is to the same effect. The evidence shows that the order of the State Banking Department was to reduce the notes to market value. For whatever reason, petitioner did not attempt to ascertain market value and reduce the carrying value accordingly, but wrote off the full cost and unpaid interest and now claims the same as a loss sustained in the taxable year. The evidence reveals no fact justifying its action in charging off the entire amount. Accordingly, petitioner's claim must be denied. .

The issue as to 1924 relates to alleged bad debts arising from loans to one Fitzsimmons, which loans, evidenced by notes of Fitzsimmons, were secured by a bond given by one Shearer. Petitioner contends that it was advised by counsel that the bond was not enforceable because given at the suggestion of petitioner and that it, therefore, made no attempt to collect from either Fitzsimmons or Shearer. In his brief counsel for petitioner states that the bond "was given as an accommodation, was without consideration and was illegal and void, and could not be realized upon under the Michigan law." He cites no statute or decision in support of his proposition. Moreover, his statement is contrary to the facts in evidence. Petitioner's president testified: "Mr. Fitzsimmons went to Mr. Shearer at my suggestion and he was to give Mr. Shearer $500 for signing his note. That was the consideration that he had." It is, therefore, unnecessary to discuss the correctness of the legal conclusion on which petitioner claims to have relied, and for which he cites no authority.

There is no evidence that Shearer was not entirely collectible in 1924, when the debt was charged off. If a debtor has given security for a loan, either in form of collateral or a bond, it is incumbent on him to exhaust the liability on same before he is entitled to claim the debt to be worthless. This petitioner did not do.

The evidence does not prove the debt due from Fitzsimmons to have been uncollectible in the taxable year.

Judgment will be entered for the respondent.