Meltzer v. Commissioner , 154 F.2d 776 ( 1946 )

PHILLIPS, Circuit Judge.

This is a petition to review a decision of the Tax Court. Petitioners Joseph Meltzer ¹ and Bertha Meltzer, husband and wife, filed a joint tax return for 1941, in which they claimed a deduction of $13,000 as a bad debt.

Sec. 23 of the Revenue Act of 1942, 26 U.S.C.A. Int.Rev.Code, § 23, provides:

“In computing net income there shall be allowed as deductions: * * *

“(k) (1) Debts which become worthless within the taxable year.”

The amendment was approved October 21, 1942, and by its terms was retroative so as to include the year 1941. Section 124(d), 26 U.S.C.A. Int.Rev.Code, § 23 note.

Mayper, the debtor, was a designer and a supervisor of construction of industrial buildings and apartment houses. In 1928, he built a residence at a cost of $50,000. It was encumbered by a first mortgage of $20,000 and a second mortgage of $12,500. Mayper obtained a loan of $13,000 from one Braloff. Mayper gave Braloff a personal bond and a note, bearing interest, each for the sum of $13,000, and a third mortgage upon the house to secure the note and bond. Meltzer gave Braloff a collateral bond for $13,000 to guarantee the loan. Mayper defaulted in the payment of interest, and Braloff made demand on Meltzer for payment of the indebtedness under the guarantee. After some negotiations, Braloff accepted $10,000 from Meltzer, in satisfaction of his bond, and assigned Mayper’s bond, note, and mortgage to Meltzer. By reason of the financial depression in 1929 and subsequent years, and the decline in building operations, Mayper was not able to make any payments on the note. He gave several notes to Meltzer for accrued interest. Through his friendship with Mayper, and for the purpose of tiding May-per over the financial depression, Meltzer made advances to Mayper in the years 1930, 1931, and 1932, aggregating $4,250. May-per’s financial condition deteriorated progressively. Meltzer made demands upon Mayper from time to time for payments on the indebtedness, without avail. In 1935, the first mortgagee foreclosed his mortgage. At the foreclosure sale, it sold for an amount sufficient only to pay the first mortgage indebtedness and arrears in taxes. Neither the holder of the second mortgage nor Meltzer obtained deficiency judgments against Mayper. From 1935 to 1941, May-per’s financial condition did not improve. By 1935, he was without property except wearing apparel and office furniture. From 1935 on, his liabilities were approximately $28,000 in excess of his assets.

The Tax Court found that the debt did not become worthless in the taxable year 1941.

Petitioners contend that it was not until the advent of the war, and the virtual suspension of the construction of buildings of a nondefense nature, and the resulting inability of Mayper to obtain employment, that the debt became worthless.

A finding of fact made by the Tax Court, if supported by substantial evidence, is conclusive.² We are of the opinion that the facts, with respect to Mayper’s financial condition from 1935 to 1940, fully warranted the Tax Court in finding that the debt did not become worthless in 1941.

Since deductions are a matter of legislative grace,³ we think there can be no doubt of the power of Congress to make the 1942 amendment retroactive so as to apply to the taxable year 1941.⁴

Affirmed.

1 Hereinafter referred to as Meltzer.

2 Helvering, Commissioner v. Kehoe, 309 U.S. 277, 279, 60 S.Ct. 549, 84 L.Ed. 751.

3 Antietam Hotel Corporation v. Commissioner, 4 Cir., 123 F.2d 274, 278.

4 Cittadini v. Commissioner, 4 Cir., 139 F.2d 29, 31; Milliken v. United States, 283 U.S. 15, 21, 51 S.Ct. 324, 75 L.Ed. 809.