Keeney v. Commissioner , 15 B.T.A. 715 ( 1929 )

RAYMOND G. KEENEY, EXECUTOR, ESTATE OF GEORGE E. KEENEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Keeney v. Commissioner

Docket Nos. 11715, 14424.

United States Board of Tax Appeals

15 B.T.A. 715; 1929 BTA LEXIS 2801;

March 6, 1929, Promulgated

---

Held, that the petitioner's decedent was entitled to a deduction from his gross income in 1921 on account of the partial charge-off of a debt in that year.

Benedict M. Holden, Esq., and Daniel C. Flynn, Esq., for the petitioner.

Frank S. Easby-Smith, Esq., for the respondent.

---

LANSDON

The respondent has asserted a deficiency in income tax for the year 1921, in the amount of $3,083.76. The only issue is whether the petitioner is entitled to deduct the amount of $25,046.13 from the income of the estate of George E. Keeney for the year 1921. The two docket numbers relate to the same controversy, and each proceeding is a request for the redetermination of tax liability asserted in respondent's letter dated January 26, 1926. An informal appeal, to which was assigned Docket No. 11715, was filed with the Board on February 6, 1926. The perfected petition, to which was assigned Docket No. 14424, was filed with the Board on April 24, 1926. By order of the Board, the two proceedings were consolidated for hearing and decision.

FINDINGS OF FACT.

Except two other persons, each of whom held a single qualifying share, George E. Keeney, the decedent of the petitioner herein, and his son Raymond G. Keeney, were the only stockholders of the Brass Products Co., a Connecticut corporation, at the beginning of the year 1921 and for several years before that date. Prior to the taxable year the Brass Products Co. had sustained heavy losses and at the beginning thereof was indebted to George E. Keeney and Raymond G. Keeney in the respective amounts of $87,425.62 and $43,500 for money advanced. In addition to such debts it had outstanding accounts payable, notes payable, wages accounts and a salary obligation to Raymond G. Keeney, in the respective amounts of $25,000.17, $2,000, $196.50 and $2,166.07. It had outstanding capital stock of the par value of $25,000 and the book value of all its liquid and fixed assets was $77,846.94.

In order to reestablish the Brass Products Co. as an income-producing concern, the Keeneys, early in 1921, decided to employ a new manager and in pursuance with that purpose Lawrence P. Dickey became vice president and general manager on the conditions that he was to receive one-third of the capital stock of the company and that George E. Keeney would charge off, in 1921, $25,046.13 of the indebtedness due him, which was done by appropriate bookkeeping entries.

In his income-tax return for the year 1921, George E. Keeney, in addition to other bad debts not in controversy here, deducted the amount of $25,046.13 from his gross income as a debt ascertained to be worthless and charged off in part in the taxable year and to his return attached the following statement:

The deduction for bad debts of $25,046.13 is for funds loaned to the Cooperative Department Stores Co. and the Velvetone Powder Puff Co. both of New York City and both of which were merged into the Brass Products Co. of New York City early in 1921 and in the reorganization of the business in April 1921 I was obliged to charge off definitely a part of all loans made previous to July 1, 1920 which amounted to the deduction made in this report. I also agreed to charge off all loans made from July 1/1920 to April 1/1921 contingent upon the results of the companies business for the year 1921-1922 which ends in June 1922. This was necessary to perfect the reorganization of the business so it could be continued, and the amount if any cannot be determined until the end of their business year in June 1922.

Upon audit of the decedent's income-tax return for the year 1921, the Commissioner disallowed the deduction of $25,046.13 therefrom "in as much as there is not sufficient evidence to definitely substantiate its deduction," and asserted the deficiency here in controversy.

The Brass Products Co. continued in business until some time in 1923, when the business was sold under conditions not disclosed by the record.

OPINION.

LANSDON: In this proceeding the petitioner claims the right to take a partial deduction of a bad debt in the year 1921 under the provisions of section 214(a)(7) of the Revenue Act of 1921, which reads as follows:

Debts ascertained to be worthless and charged off within the taxable year * * * and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.

It is beyond dispute that the petitioner's decedent lost the amount here in controversy, and we must decide whether, in the circumstances disclosed by the record, such loss is deductible from his gross income for the purpose of determining his tax liability for the year 1921.

The amount here in controversy was charged off by the petitioner's decedent in the taxable year. The evidence is convincing that such amount was part of a debt ascertained to be worthless in that year, at least to the extent of the amount claimed. For several years prior to 1921 the Brass Products Co. had sustained losses in its operations and at the beginning of such year its liabilities, exclusive of capital stock, exceeded the book value of all its assets in the amount of $82,543.42. It may be that a part of this debt was worthless prior to 1921, but no partial charge-off was authorized prior to that year. In these circumstances, especially in the light of the facts incident to the reorganization of the business, we think the deduction of the charge-off falls within the provisions of section 214(a)(7) of the Revenue Act of 1921, and should be allowed.

Reviewed by the Board.

Decision will be entered for the petitioner.