DocketNumber: Docket No. 88214.
Judges: Opper
Filed Date: 8/11/1938
Status: Precedential
Modified Date: 11/2/2024
*881 Where petitioner on a cash basis was liable as endorser on a note of many years standing held by a bank, and during the tax year the bank took petitioner's own note for an amount sufficient to discharge the original note, and, for that purpose credited the proceeds to petitioner's account with it, honoring his check drawn thereon and using the proceeds to discharge the original note,
*312 This proceeding involves a deficiency of $2,693.54 in income tax determined against petitioners for the year 1934 as the result of the disallowance of a single deduction claimed on account of a transaction of petitioner T. Harvey Ferris.
FINDINGS OF FACT.
The following, appearing in a stipulation of the parties, are found as facts:
The petitioners are residents of the city of Utica, County of Oneida, State of New York.
The deficiency*882 here involved, all of which is in controversy, is for the calendar year 1934. All of said deficiency arises by reason of the disallowance of one certain deduction in the amount of $27,833.99.
On or about August 2, 1927, petitioner, T. Harvey Ferris, and one John W. Guibord were associated in certain business transactions entered into for profit, and on said date and in connection with said transactions said Ferris endorsed a certain promissory note executed by said Guibord in the principal amount of $25,110.11. The said note bore interest at the rate of 6 per cent per annum. Said note was discounted with the Citizens Trust Company of Utica, New York. which bank was thereafter on November 14, 1931, merged into the First Citizens Bank and Trust Company of Utica.
*313 From time to time during the period between August 2, 1927, and March 24, 1931, the said note was renewed and each time with the endorsement of said Ferris. During said period the principal amount due thereon was reduced by payments on account, to $22,700. On March 24, 1931, the note here in issue was given in renewal, said note like its predecessor being made by Guibord and endorsed by said Ferris.
*883 The maker of the said note, John W. Guibord, became bankrupt prior to 1934, and was unable to pay said note, and in the year 1934 was wholly insolvent and unable to make any payment whatsoever on the principal or interest of said note, and in said year 1934, the holder of the said note, First Citizens Bank & Trust Company of Utica, New York, made demand upon said Ferris for payment of the principal of said note together with interest due thereon.
Said Ferris had an account in the said First Citizens Bank & Trust Company and had credit with the said bank which enabled him to borrow money from said bank. On December 27, 1934, said Ferris negotiated a loan of money from said bank in the amount of $27,833.99 upon his own promissory note in said amount, which was the amount of principal and interest that was due at that time upon Mr. Guibord's note. Said loan was credited to the taxpayer's checking account in the said First Citizens Bank & Trust Company, and with the specific understanding between Ferris and the said bank that the money so borrowed would be applied by Mr. Ferris in payment of his liability upon the aforesaid note of Mr. Guibord.
On the same day, December 27, 1934, said*884 Ferris drew a check on his said account in the First Citizens Bank & Trust Company, said check being so drawn by him to the order of First Citizens Bank & Trust Company and in the amount of $27,833.99, and on the same day said Ferris delivered said check so drawn as aforesaid to said First Citizens Bank & Trust Company. In consideration thereof the said bank surrendered and delivered said note of John W. Guibord to said Ferris, and upon its books and records showed said note as having been paid.
The said check drawn and delivered by said Ferris (as set out in the last preceding paragraph) was duly debited and charged to the account of said Ferris in said bank and his balance in his said bank account was duly and accordingly reduced and diminished by the said amount of $27,833.99. The said check drawn and delivered by said Ferris (as set out in the last preceding paragraph) was cancelled by the said bank and marked "Paid" and returned to said Ferris. The amount of $27,833.99 so borrowed by Mr. Ferris and used for the purpose of discharging his liability upon the Guibord note, has never been repaid to the said First Citizens Bank & Trust Company or to anyone else. * * *
The*885 amount of the obligation of said Ferris on the Guibord note which was discharged as set out hereinabove was as follows:
Principal of note | $22,700.00 |
Interest to maturity | 340.50 |
Interest to Dec. 29, 1934, when note was taken up by Ferris | 4,793.49 |
$27,833.99 |
Said Ferris was unable to recover anything from John W. Guibord, the maker of the said note, and was without any source of recoupment in the transaction hereinabove recited in which he took up and discharged the Guibord note; and said Ferris has not been compensated therefor by insurance or otherwise.
*314 In his income tax return for the year 1934, which was filed on the cash receipts and disbursements basis, said Ferris took deduction for $27,833.99 * * * [as a bad debt]. The Commissioner disallowed the said deduction and added $27,833.99 to taxable net income. This action on the part of the Commissioner resulted in his determination of the deficiency here in controversy.
The transaction upon which the said deduction was claimed was a transaction of petitioner, T. Harvey Ferris, and no part of the deficiency here in question arises in or upon any transaction made by petitioner Elizabeth*886 B. Ferris, or to which she was a party, and no part of the deficiency here in question arises by reason of an increase in the income of petitioner, Elizabeth B. Ferris.
OPINION.
OPPER: Although the deduction sought by petitioner was claimed on his original return as a bad debt, *887 This proceeding must, it seems to us, be disposed of upon the authority of
It may be assumed - in spite of petitioner's earlier position that it is the duty of the Board and the courts to determine cases on whatever theory is applicable, and to grant relief to a taxpayer if he be entitled to it on any appropriate ground - that it would be possible for the Supreme Court to disregard one principle favorable to the taxpayer and decide against him on another. Such an implication should, if at all, be sparingly resorted to, and particularly since both grounds were considered in the course of the proceedings.
Petitioner's position seems in reality to be based upon a failure properly to analyze his contention. If his position be that an investment made many years before has turned out to be worthless and he has thereby suffered a loss, it would follow that the deduction could be allowed only in the year when the investment became valueless. Regulations*889 86, art. 43-2.
The remaining ground advanced by petitioner for distinguishing the
As was said in
1. The stipulation recites that it was taken as a loss, but we have refused to find this as a fact since the return, which is in evidence, shows the contrary. ↩
2. SEC. 23. (e) LOSSES BY INDIVIDUALS. - In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise -
(1) if incurred in trade or business; or
(2) if incurred in any transaction entered into for profit, though not connected with the trade or business; or
* * * ↩
3. Section 43, Revenue Act of 1934, provides: "The deductions and credits provided for in this title shall be taken for the taxable year in which 'paid or accrued' or 'paid or incurred', dependent upon the method of accounting upon the basis of which the net income is computed * * *." ↩