DocketNumber： Docket No. 19254.
Judges： Smith
Filed Date： 10/31/1929
Status： Precedential
Modified Date： 11/2/2024
*2178 A debt claimed to have been ascertained to be worthless and deducted from gross income by the decedent in its income-tax return for 1921,
*1185 This proceeding is for the redetermination of a deficiency in income tax of $8,505.14 for 1921 assessed against the decedent in his lifetime. The sole issue is the deductibility in the decedent's income-tax return for 1921 of a debt claimed to have been ascertained to be worthless in that year in the amount of $37,100.
FINDINGS OF FACT.
The petitioner is the executor of the last will and testament of Alexander Britton, deceased. The decedent was a prominent lawyer of Washington, D.C., who died June 24, 1926. He left him surviving two daughters and his widow.
In 1916 decedent's daughter, Catharine, married Prince Alfred Hohenlohe Schillingsfurst, of Austria, who was then residing in *1186 Washington as secretary of the Austro-Hungarian Embassy. Upon the declaration of war between Austria and the United*2179 States the embassy was removed and Prince Alfred Hohenlohe was transferred to the Austrian Legation at Berne, Switzerland, where he resided until November, 1919. When he went to Switzerland he was amply provided with funds in Austrian kronen and was comfortably well off. He was receiving an allowance from his father as well as his salary from the embassy. The currency of Austria, the kronen, had depreciated in value to some extent when he first went to Berne and he was able to receive only four Swiss francs for five Austrian kronen, whereas the normal rate of exchange was five Swiss francs for five Austrian kronen. Rather than take a loss which an exchange would have entailed he borrowed from various sources in Switzerland the sum of approximately $10,000 in American money with which to support himself and family, depositing the kronen which he had as collateral to secure the loans. He returned to America in December, 1919, and at that time saw his father-in-law, the decedent, and explained to him his financial condition and also that the loans which he had secured in Switzerland were drawing high rates of interest, and that he was anxious to pay them off. He told the decedent*2180 of the depreciation of his securities in detail and that he thought conditions in Austria would improve again and that the currency would go back to where it had been before the war and that he would be in a position to pay back to the decedent any money he might see fit to lend him for the purpose of liquidating the obligations which he had incurred. He asked the decedent to lend him sufficient money to do this and the decedent, at various times during the years 1919 and 1920, loaned him sums of money aggregating $37,100. With part of this money the Prince paid off his obligations in Switzerland in the amount of approximately $10,000; with another part thereof he bought, in the spring of 1920, property known as Friedstein, an estate of his ancestors, near Vienna, for the then equivalent of $15,000 United States currency. He was enabled to make this purchase by reason of a will of his grandmother who had owned the estate and who had stipulated that if the Prince's uncle did not occupy it the Prince should be permitted to purchase at a price which was the then equivalent to approximately $15,000 United States currency. The estate consisted of approximately 300 acres, upon which*2181 was a large castle, or country house. The Prince's reasons for buying this property was, first, because he thought he was getting it at a price far below its value and, second, because he thought he could make money from the operation of the farm land. Prince Hohenlohe took title to the estate in his own name and lived there with his family during 1920 *1187 and 1921. In 1925 he borrowed approximately $20,000 on the property. He is living on the property at present with his two children.
It was necessary for the Prince to make certain improvements on the property and a part of money advanced to him by his father-in-law, the decedent, was used for that purpose and the balance in meeting living expenses; since the operation of the property did not prove financially remunerative.
During the years 1919 and 1920, and up to the present time, Prince Hohenlohe has owned securities and had some expectancy of inheritance from his own family. He did not know what his property, exclusive of Friedstein, was worth. This all depended upon the question as to whether the Austrian kronen would appreciate in value as was expected by the Prince.
For all of the advances made by the*2182 decedent to his son-in-law no notes were ever given to the decedent and no arrangement was made for the repayment of the money at any particular time, nor was there any agreement for the payment of interest.
On or about April 10, 1922, the decedent addressed a letter to his daughter, Catharine, the Princess Hohenlohe, to which the Prince replied under date of May 2, 1922, as follows:
Catherine had your letter of April 10th and thanks you very much for it. Fortunately both she and the baby are doing very well and it wont be long, before she will be quite recovered and around again. I have read the copy of the explanation which you attached to your income return and entirely agree with your statement of the case. You will have seen by the newspapers that conditions in our poor Austria are still getting worse and that the Krone is so low that the money I owe you makes such an enormous sum that I am quite unable to raise it. I regret very much to say that even in case conditions do improve I will never be able to return my loan to you.
We are very glad to hear that you are well and are looking forward to your visit this summer. Catherine and I both send you our love.
The*2183 decedent's last will and testament was executed on June 17, 1924. This will makes no reference to the debt owed to the decedent by Prince Hohenlohe. The residuary estate of the decedent was left in trust with a provision that the income therefrom should be divided equally between his two daughters and his widow during their joint lives. The net estate of the decedent amounted to approximately $150,000, including insurance on the life of the decedent amounting to approximately $49,000, payable to the estate. The decedent kept no books of account as to his transactions with Prince Hohenlohe.
In his income-tax return for 1921, the decedent claimed as a deduction from gross income $37,100 as a debt ascertained to be worthless during the year. The Commissioner amended the income-tax return filed by disallowing this deduction.
*1188 OPINION.
SMITH: The only issue presented by this proceeding is the right of the decedent to deduct from gross income in his income-tax return for 1921, $37,100 as a debt ascertained to be worthless in 1921. This is the amount of money which the decedent had advanced to his son-in-law, Prince Hohenlohe, of Austria, during the years 1919 and*2184 1920.
The respondent submits, in the first place, that the advances to Prince Hohenlohe were gifts by the decedent and not loans. He submits, in the second place, that if they were loans they were not ascertained to be worthless during the year 1921, and that there is no evidence that the decedent ever charged them off his books of account.
The only evidence that the amounts advanced by the decedent to Prince Hohenlohe were loans consists of the testimony of Prince Hohenlohe himself. He states definitely that he borrowed the money from his father-in-law; that at the time he borrowed the money he expected that conditions in Austria would improve and that his securities constituting his sole property would again become valuable, in which event he would be able to repay the amounts advanced. This evidence is in no way refuted by any testimony presented by the respondent and we think that the evidence warrants a finding that the money was loaned by the decedent to his son-in-law and that it was not a gift to him.
The evidence is further to the effect that the kronen had depreciated to a very great extent in 1920 and that the securities owned by the Prince had little value during*2185 that year. The political conditions in Austria were worse in 1921 than in 1920. The decedent visited his son-in-law in Austria twice during his lifetime, the last time in 1925 and the first time in either 1921 or 1922. The Prince was not sure in which year the decedent made this visit. It was contended that at the time of this visit the decedent ascertained the actual conditions and knew for a certainty that the debt was worthless. The letter from the Prince to the decedent dated May 2, 1922, conclusively proves to our mind that the visit was made in 1922. We are of the opinion that the decedent had or should have had as good grounds for believing the debt recoverable in 1921 as in 1919 or 1920 at the time the money was loaned to the Prince. In 1921, the Prince owned the estate of Friedstein, which apparently had a value in excess of its cost to the Prince in the spring of 1920. The Prince believed that he purchased the estate for below its real worth. The evidence shows that in 1925 or 1926, the estate was mortgaged for an amount *1189 of $20,000. What the Prince's other assets or prospects were worth in 1921 is not shown by the evidence. We are of the opinion that*2186 the evidence does not warrant a finding that the decedent determined the debt to be worthless either in whole or in part in 1921.