Pratt v. Commissioner , 23 B.T.A. 148 ( 1931 )

E. C. PRATT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Pratt v. Commissioner

Docket No. 30606.

United States Board of Tax Appeals

23 B.T.A. 148; 1931 BTA LEXIS 1924;

May 11, 1931, Promulgated

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Alvin E. Stein, Esq., for the petitioner.

John D. Kiley, Esq., for the respondent.

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MATTHEWS

This proceeding arises upon a deficiency in income tax for the calendar year 1925 in the amount of $1,211.11, resulting from the disallowance by the respondent of the sum of $7,797.89 claimed as a loss, a promissory note payable on demand in that amount having been given by the petitioner to a certain corporation pursuant to an agreement by which petitioner's partnership was to repay to the corporation amounts advanced by it to a second corporation in which petitioner had a substantial interest. Petitioner assigns as error the disallowance, alleging that giving the note was equivalent to the payment of cash in the note's face amount, since the first corporation was throughout the period in question indebted for considerable sums to petitioner's partnership.

FINDINGS OF FACT.

Petitioner has his principal office at 629 Palace Building, Minneapolis, Minn.

He was in the taxable year a member of the copartnership of Pratt Brothers, in which he held a one-half interest, the only other partner being his brother, Clyde E. Pratt.

The Pratt Corporation occupied the same offices as the partnership of Pratt Brothers.

There was a second corporation, the Midway Coal Company, of which petitioner was one of four directors and equal stockholders, the others being his two brothers, Clyde E. and Burton A. Pratt, and H. M. Graves.

The directors of the Midway Coal Company on January 2, 1925, entered into an agreement with the Pratt Corporation by which they agreed individually and severally to indemnify the Pratt Corporation against any loss it might sustain through the Midway Coal Company's inability to repay money which the Pratt Corporation agreed to lend it.

Pursuant to this agreement checks were from time to time paid by Pratt Corporation and Pratt Brothers to the Midway Coal Company aggregating an amount which after certain deductions for credits to the Midway Coal Company are allowed was equal to $31,191.54. When the Midway Coal Company became insolvent in December, 1925, one-quarter of this sum, or $7,797.89, was assumed by each of the four stockholders of the Midway Coal Company in accordance with the above agreement and each signed a promissory note for that amount and delivered it to the Pratt Corporation. The note signed by the petitioner was dated December 15, 1925, in the amount stated, was made payable to the Pratt Corporation on demand, and bore no interest.

At the time the note was delivered, the Pratt Corporation's books showed a very substantial credit balance to Pratt Brothers. It was the intention of the parties to the transaction that the note should be paid then by debiting it to this account, but it was not so paid, apparently through the bookkeeper's oversight, until March 31, 1927, when it was debited to E. C. Pratt's account in the Pratt Corporation's ledger.

The petitioner's accounts were kept on the cash receipts and disbursements basis.

OPINION.

MATTHEWS: No question is raised as to the loss sustained by the petitioner as a guarantor of the coal company, for it is admitted that that corporation was insolvent at the time the note was given. The only question, therefore, is whether this loss was as to the petitioner in 1925 actual or merely potential, considering petitioner's cash basis of accounting, and the delivery in the peculiar circumstances stated of a demand note admittedly not paid until 1927.

The present case is concluded by the decision of the Supreme Court in , affirming the , and this , in which the court held under similar facts that the amount of the note could not be deducted until it was paid.

Judgment will be entered for the respondent.