Lesh & Matthews Lumber Co. v. Commissioner , 17 B.T.A. 58 ( 1929 )

LESH & MATTHEWS LUMBER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Lesh & Matthews Lumber Co. v. Commissioner

Docket No. 11784.

United States Board of Tax Appeals

17 B.T.A. 58; 1929 BTA LEXIS 2372;

July 31, 1929, Promulgated

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">*2372 Evidence insufficient to show that a deduction for a bad debt or a loss was allowable in 1920.

John T. Richards, Esq., for the petitioner.

T. M. Mather, Esq., for the respondent.

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SIEFKIN

">*58 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the years 1920 and 1921 in the amounts of $2,729.38 and $4.63. The issue as to the year 1921 has been withdrawn by the petitioner and the only controversy is as to a deduction of $5,670.33 alleged to have been either a loss sustained or a bad debt ascertained to have become worthless and charged off in 1920.

FINDINGS OF FACT.

The petitioner is an Illinois corporation with its office at Chicago. In 1911, Kraetzer-Fischer & Co., to which the petitioner had sold goods for which the Kraetzer-Fischer & Co. owed the petitioner $2,790.56 on open account, became financially embarrassed. The petitioner and other creditors received, in settlement of their claims against the debtor, a certain parcel of real estate subject to a first mortgage, and the assignment of all interest that Kraetzer-Fischer & Co. had in a pending suit against the City of Chicago for damages">*2373 to said land. The claim for damages and the suit thereon were based upon alleged damages to the land in question caused by the elevation of railroad tracks crossing such land. The claim for damages and rights under the suit were assigned to the petitioner as trustee for all the creditors of Kraetzer-Fischer & Co., and the petitioner executed suitable declarations of trust in their favor. On October 31, 1912, the mortgage on the land having been foreclosed by the mortgagee and sold, the creditors, including the petitioner, redeemed the property by each advancing an amount equal to its indebtedness formerly owing from Kraetzer-Fischer & Co. The petitioner contributed $2,790.56. The property continued to be held by the petitioner as trustee for creditors pending settlement of the suit against the City of Chicago. That suit had been taken upon a contingent basis by attorneys in the expectation of a recovery of approximately $20,000 or more. The indebtedness of Kraetzer-Fischer & Co., for which the petitioner held the property as trustee, was $10,811.90 and the contributions of October 31, 1912, aggregated $12,854.47. ">*59 The action of October 31, 1912, was taken by the creditors, ">*2374 including the petitioner, upon the advice of counsel that such action was necessary to protect their claim for damages against the city involved in the pending litigation.

During the year 1920 the attorneys in charge of the litigation against the city advised the petitioner that, because of certain decisions of the Supreme Court of Illinois, they had arrived at the opinion that no recovery could be had in the case, and they abandoned the litigation.

Between 1911 and 1920 efforts were made to sell the real estate involved, but such efforts were unsuccessful. During that period, the petitioner paid its pro rata share of the taxes and carrying charges, which amounted to $89.21. The petitioner later sold its right to the proceeds from the property for $100.

OPINION.

SIEFKIN: While it does not appear clearly from the pleadings or the evidence whether the petitioner is claiming the deduction in question as a loss or as a bad debt, it is our opinion that it can not succeed under either possibility. If the deduction be claimed as a bad debt, proof is lacking as to the amount being charged off in 1920, and that requirement of the statute not being met, the petitioner's case must">*2375 fail. It is also clear that the amount contributed in 1912 could not be the subject of a bad debt deduction, since no relation of debtor and creditor arose from that transaction, and hence there was no debt. We regard the amount so contributed as money invested to protect the claim for damages in which the petitioner had an interest. That being so, let us examine the facts as they existed in 1920, to determine if the petitioner sustained a loss in that year. During that year the petitioner learned that its claim against the city was unfounded and could not succeed and its lawyers abandoned the litigation. The trustee for the creditors, however, continued to hold the real estate, out of which the litigation grew, and as to which the creditors had contributed over $12,000 to redeem the property from mortgage foreclosure sale. We are unable to say that the entire amount that the petitioner had spent was a loss in 1920. At some later date it sold its interest for $100, but we are not advised the year. We must approve the respondent's determination that the deduction was not proper in 1920.

Judgment will be entered for the respondent.