Sherman & Bryan, Inc. v. Commissioner

SHERMAN & BRYAN, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Sherman & Bryan, Inc. v. Commissioner

Docket No. 9085.

United States Board of Tax Appeals

9 B.T.A. 213; 1927 BTA LEXIS 2644;

November 21, 1927, Promulgated

---

Deduction claimed on account of bad debts disallowed upon the ground that the debts were not ascertained to be wholly worthless during the taxable year.

R. S. Doyle, Esq., for the petitioner.

C. C. Holmes, Esq., for the respondent.

---

TRAMMELL

This is a proceeding for the redetermination of deficiencies in income and profits taxes for the fiscal years ended September 30, 1919, and September 30, 1920, in the amounts of $2,814.23 and $8,390.15, respectively. The errors assigned are: (1) Disallowance of bad debts for the fiscal year ended September 30, 1919, in the sum of $14,148.51; (2) disallowance of good will in the computation of invested capital in the amount of $40,000 for the fiscal year ended September 30, 1919; (3) disallowance of the deduction for bad debts in the sum of $47,913.60 for the fiscal year ended September 30, 1920; (4) deduction of good will in the sum of $40,000 in the computation of invested capital for the fiscal year ended September 30, 1920.

All errors assigned, except (3), that is, with respect to the disallowance of the alleged bad debt in the amount of $47,913.60, were waived.

FINDINGS OF FACT.

The petitioner is a corporation organized under the laws of New York, with its principal office in New York City. During the years 1919 and 1920 it was engaged in the advertising business.

For some time prior to September 30, 1920, the petitioner had performed sundry services and had made advances of monies in payment of advertising space and postage for the Fulton Motor Truck Co., a corporation organized under the laws of Delaware, and said corporation had become indebted to the petitioner in the sum of $47,595.19.

The Fulton Motor Truck Co. became involved in financial difficulties in August, 1919, with the result that a bill in equity was filed in the United States District Court for the Southern District of New York, for the appointment of a receiver, and on November 8, 1919, John S. Sheppard was appointed receiver.

The petitioner filed a claim with the receiver for the amount of its account against the Fulton Motor Truck Co. but received no payments in the form of dividends or otherwise on its account prior to the end of the fiscal year ended September 30, 1920.

George C. Sherman, president of the petitioner, became president of the Fulton Motor Truck Co. in the spring of 1919 and continued in that office until the appointment of the receiver. He was familiar with the affairs of that company and had knowledge of the nature of its assets and the extent of its liabilities at the time of the appointment of the receiver.

During 1920 the receiver sold at public auction all the assets of the Fulton Motor Truck Co. for $290,000, payable in 30, 60, and 90 days. In September, 1920, the purchaser, Hackett, was in default in his payments and owed a balance of $142,572.77. Sherman was informed by the receiver and his attorney that they would probably have to resell the property.

Sherman estimated that the preferred claims against the Fulton Motor Truck Co., which included mortgages, Federal and State taxes, fees of the auctioneer, receiver, special master, and attorneys, would amount to $134,000. He also estimated that the claims of creditors other than preferred creditors would amount to between $500,000 and $600,000.

A statement prepared from the records of John S. Sheppard, receiver, containing a statement of assets and liabilities September 30, 1920, is as follows:

ASSETS
Cash in bank		$17,410.31
Certificates of deposit		104,699.96
		122,110.27
Less:
Preferred claims (Schedule 1) -
Federal and State taxes	$6,909.66
Receiver's account payable	1,832.50
	8,742.16
Secured claims -
Mortgages payable	50,000.00
		58,742.16
Net cash available		63,368.11
Due from purchaser of plant		142,572.77
Total assets		205,940.88
LIABILITIES
Claims of general creditors filed with receiver		$473,525.37
Excess of liabilities over assets		267,584.49

NOTE. The foregoing statement does not include interest accrued on mortgages payable, contingent liabilities in litigation, nor allowances paid by court order on December 21, 1920, as follows:

First allowance to receiver	$10,000.00
Attorneys' fees	8,500.00
Allowance to special master	3,500.00
	22,000.00

The total amount of claims of general creditors, including the claim of the petitioner filed with the receiver, amounted to $473,525.37.

The indebtedness of the Fulton Motor Truck Co. in the amount of $47,595.19 was charged off on the books of the petitioner in September, 1920, as being a bad debt based upon knowledge that the petitioner had received through Sheppard, its president and other sources.

OPINION.

TRAMMELL: In view of the fact that all other errors assigned in the petition were waived, the determination of the respondent with respect thereto is approved.

With respect to the debt of the Fulton Motor Truck Co. it is necessary that two facts be shown. First, that the indebtedness was ascertained to be worthless during the taxable year, and, second, that it was charged off.

It is clearly shown by the evidence that the debt was actually charged off during the taxable year. This leaves only the question as to whether it was ascertained to be worthless during that year. Under the Revenue Act of 1918 the entire debt must be ascertained to be wholly worthless in order that an allowance may be made with respect thereto. An ascertainment that a debt is worthless only in part does not meet the requirements of the statute.

It is undisputed that the purchaser of the assets of the Fulton Motor Truck Co. owed $142,572.77 to the receiver. While there is evidence that he did not meet his payments promptly and was in arrears at the end of the petitioner's fiscal year, there is no evidence to indicate that Hackett, the purchaser, was not financially responsible and that a judgment against him for the amount of his notes with interest thereon was not collectible. In addition to this fact, Hackett had already paid more than $142,000 in cash and the assets were security for the balance of their purchase price. If Hackett had not made the payments as agreed, the amount already paid would have become forfeited and the assets could have been sold by the receiver the second time if the receiver was not able to recover from Hackett.

In our opinion, the fact that no dividends were paid by the receiver before the close of the petitioner's taxable year ended in 1920, is not conclusive. The real question is whether the petitioner ascertained before the close of its taxable year the facts as to whether the debt could be collected or could not be collected. The evidence clearly shows that it was ascertained that the debt could not be collected in full, but there is not a preponderance of evidence that the debt was ascertained to be wholly worthless in 1920. On the other hand, from the facts in the record, it appears that it was ascertained that only a portion of the debt could not be collected. The total assets were $205,940.88 which, when reduced by the receiver's, special master's and attorneys' fees in the total amount of $22,000, leaves $183,940.88 to be divided among the general creditors, including the petitioner, whose claims totaled $473,525.37.

There was some testimony to the effect that the actual amount of the assets was not known at the end of the petitioner's taxable year, that certain assets were not considered of value, but this fact is immaterial since all the assets had been sold to Hackett and the receiver had received the cash and notes representing the purchase price.

In view of the foregoing, it is our opinion that the indebtedness was ascertained to be worthless only in part and that this does not meet the test of the statute to entitle the petitioner to the deduction claimed.

Judgment will be entered for the respondent on 15 days' notice, under Rule 50.

Considered by MORRIS, MURDOCK, and SIEFKIN.