First Nat'l Bank v. Commissioner

FIRST NATIONAL BANK OF MARLOW, OKLA., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

First Nat'l Bank v. Commissioner

Docket No. 9889.

United States Board of Tax Appeals

9 B.T.A. 29; 1927 BTA LEXIS 2677;

November 10, 1927, Promulgated

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P. V. Rabb, Esq., for the petitioner.

Arthur H. Murray, Esq., for the respondent.

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GREEN

In this proceeding the petitioner seeks a redetermination of its income tax for the calendar year 1921 for which the Commissioner determined a deficiency in the amount of $169.67. The question is whether the respondent erred in refusing to allow as a deduction for "bad debts" a partial charge off in the amount of $2,000 on a $2,500 note acquired by the petitioner's predecessor and charged off in part in the taxable year.

FINDINGS OF FACT.

The petitioner is a banking corporation organized under the Federal Banking Act, with its principal place of business at Marlow, Okla. In the summer of 1920, the Guaranteed State Bank of Marlow, Okla., of which the petitioner is the successor, purchased from a correspondent bank in St. Louis, Mo., without endorsement, a $2,500 note of the Miller-Link Lumber Co., which note matured on December 30, 1920. In September, 1920, a receiver was appointed for the Miller-Link Lumber Co., and from that time on its affairs have been in the hands of a creditors' committee. As a result of instructions from a state bank examiner who decided that this note was in part uncollectible, $500 was charged to profit and loss on July 8, 1921, and $1,500 charged to profit and loss on December 31, 1921, making a total of $2,000 which was charged off on the books of the bank by reason of this note.

The officers of the purchasing bank were regularly in communication with the chairman of the creditors' committee seeking information in regard to the finances of the defunct lumber company and the possibility of collecting the note. They were furnished with a report of the creditors' audit and advised that one of the assets of the corporation was an insurance policy on the life of the aged president. Later they were advised that the president had died and that litigation had been instituted by the heirs against the creditors seeking to establish their right to the proceeds of this insurance. They also received information from the St. Louis bank, from which they had purchased the note, that this bank had charged off $200,000 of notes of the Miller-Link Lumber Co. The petitioner continued to carry the note on its books at $500 until February 24, 1922, when the Comptroller of Currency caused this amount to be charged off before a national charter would be granted converting the state bank into a national bank. The petitioner has been able to recover $925 on this note by a 30 per cent dividend on December 1, 1923, and a 7 per cent dividend on September 9, 1924.

OPINION.

GREEN: The First National Bank of Marlow, Okla., contends that it is entitled to deduct, under the provisions of section 234(a)(5) of the Revenue Act of 1921, $2,000 which its predecessor charged off on a $2,500 note within the taxable year, it having been determined by the predecessor that the probable recovery thereon would not exceed $500.

The facts here show that the Guaranteed State Bank of Marlow, Okla., of which the petitioner is the successor, purchased a $2,500 note of the Miller-Link Lumber Co. from a correspondent bank in St. Louis, Mo. The Miller-Link Lumber Co., before the maturity of the note, was placed in the hands of a receiver. In 1921, after the maturity of the note, the state bank examiner compelled the bank to charge $2,000 of the principal of the note to profit and loss.

The record shows that the bank was in regular communication with the creditors' committee of the insolvent lumber company, but received no satisfactory statements in regard to the collectibility of the note. Information had also been received from the bank in St. Louis, from which the note had been purchased, that it had charged off notes of this company in the amount of $200,000. The only possible recovery appeared to be from the proceeds of a life insurance policy on the life of the president to the company, which was involved in litigation between the heirs of the deceased and the creditors of the corporation.

We conclude that that debt represented by the note was recoverable only in part and that there was ample reason for charging off $2,000 in 1921.

Judgment will be entered for the respondent.

Considered by STERNHAGEN, LANSDON, and ARUNDELL.