King v. Commissioner

EDWARD S. KING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

King v. Commissioner

Docket No. 18291.

United States Board of Tax Appeals

16 B.T.A. 1049; 1929 BTA LEXIS 2457;

June 14, 1929, Promulgated

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">*2457 The petitioner has failed to sustain his burden of proof that an alleged debt was ascertained to be worthless and was charged off during the year 1920.

W. D. McBryar, Esq., for the petitioner.

C. H. Curl, Esq., for the respondent.

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LOVE

">*1049 This is a proceeding for the redetermination of a deficiency in income tax for the year 1920 in the amount of $2,090.95. The petition alleges error in eight forms, all relating to the denial of a deduction for an alleged bad debt.

FINDINGS OF FACT.

The petitioner is a resident of Freeport, Pa.

In 1913 the petitioner and his brother were engaged in a retail lumber and general contracting business at Freeport under the trade name of A. King & Sons. The petitioner's brother died during 1914 and thereafter the petitioner conducted the business individually, ">*1050 retaining use of the trade name. The name "A. King & Sons" and the term "petitioner" are hereinafter used interchangeably.

As general contractors, A. King & Sons engaged in building small houses on contract, apparently for mining companies, etc. When an opportunity to bid on such a contract was available, A. King & Sons would">*2458 secure from one Orrin S. Claypoole, who was a practical carpenter with a small organization of his own, an estimate of the labor cost involved. This estimate would be included in the bid which A. King & Sons submitted for the contract. If the contract was secured, Claypoole would be engaged as a subcontractor to furnish the labor.

As a part of his estimate, above described, Claypoole would state the amount of money he believed it would be necessary for him to draw from A. King & Sons semimonthly to meet the labor pay roll. Claypoole occasionally overdrew the amount for which he had agreed to furnish the labor. Eventually he regularly overdrew the amounts agreed to be paid him on each contract.

An account with Claypoole was opened on the books of A. King & Sons on August 29, 1913. This account was continued during their business relations until on May 23, 1919, all existing contracts between the parties were completed. The final ledger sheet of this account reads as follows:

Sheet No. 5.	Name: O. S. Claypoole
Rating	Address
Date	Items	Folio	Debits	Date	Items	Folio	Credits
1919				1919
May 7	To Balance		8,478.31	Dec. 31	By Mdse	475	2,101.60
23	To Cash	309	220.00		By Balance		6,596.71
			8,698.31				8,698.31

">*2459 The credit entry "By Mdse" of December 31, 1919, represents charges by Claypoole for certain extra contractual services he had furnished prior to May 23, 1919. Claypoole was always extremely slow in submitting such charges.

The entry "By balance $6596.71," dated December 31, 1919, represents the amount by which Claypoole had overdrawn payments during the existence of this account to May 23, 1919. It represents the debt which the petitioner seeks as a deduction in this proceeding.

Prior to May 23, 1919, and repeatedly thereafter through the year 1920, the petitioner requested Claypoole to refund the overpayments. Claypoole always promised to do so when he had some "good luck." Either in 1919 or 1920 the petitioner discovered that Claypoole was not living with his wife and that after each pay day he would "go to Pittsburgh to enjoy himself." The petitioner had also discovered ">*1051 that a house which Claypoole claimed to own, situated at Craigsville, Pa., stood in the name of Claypoole's wife.

When all of Claypoole's existing contracts with the petitioner were completed on May 23, 1919, the petitioner considered that their business relations were concluded. This">*2460 was because Claypoole's debt to him was constantly growing and because the petitioner had decided to give up the contracting business. At this time the petitioner was doubtful that he would ever collect the amount due from Claypoole. Within a month however the petitioner was able to secure two very desirable contracts and, being unable to engage a more desirable labor subcontractor, he again contracted with Claypoole to furnish the labor. The petitioner's new contracts were with the Pittsburgh Limestone Co. and the Saltsburg Collieries Co. When Claypoole's account with the petitioner by reason of his services arising from these contracts was entered on the petitioner's books it was entered, by direction of the petitioner, in a new account. The initial ledger sheet reads as follows:

Account No.	Name: O. S. Claypoole						Sheet No. 6
Rating	Address:
Date	Items	Folio	Debits	Date	Items	Folio	Credits
1919				1919
June 18	To Cash	333	475.00	Dec.31	By Mdse	475	5,813.10
July 3	To do	346	575.00		By Balance		1,091.90
31	To do	367	620.00
	To do	367	470.00
Aug. 13	To do	375	640.00
29	To do	384	565.00
Sept. 11	To do	393	490.00
26	To do	405	560.00
Oct. 10	To do	413	640.00
22	To do	423	460.00
Nov. 6	To do	435	380.00
21	To do	446	420.00
Dec. 6	To do	455	455.00
23	To do	464	155.00
			6,905.00		page 15		6,905.00

">*2461 The debit balance brought forward as a new ledger sheet at January 1, 1920, was $1,091.90. Material entries on this sheet follow:

Debit			Credit
1920			1920
Jan. 1	To Balance	1,091.90	Dec. 31	By Mdse. 200	22,026.03
		* * *
		22,026.03			22,026.03
1921			1921
Jan. 14	To Cash 205	785.00	Jan. 21	By Balance	546.08
28	To Cash 211	935.00		By Balance	1,193.92
Feb. 22	To Cash 226	20.00
		1,740.00			1,740.00
1922
Jan. 1	To Balance	1,193.92

">*1052 The debit balance of Claypoole, amounting to $6,596.71 at December 31, 1919, was never carried into the account opened in his name on June 18, 1919. The amount named was never formally charged off the books. The petitioner desired to open a new Claypoole account because, among other reasons, he wished to improve the condition of the books and not to have an account running back as far as Claypoole's first account ran.

Shortly after December 31, 1920, the petitioner furnished his attorney certain information to be used in the preparation of the petitioner's income-tax return for the year 1920. Among this information was a memorandum of alleged bad debts">*2462 totaling $7,524.74, which included the balance due on Claypoole's original account, amounting to $6,596.71. In his income-tax return for 1920, filed in March, 1921, the petitioner claimed a deduction for bad debts in accordance with the memorandum mentioned. The respondent has denied the deduction claimed so far as it related to the $6,596.71 balance of Claypoole's original account with the petitioner.

OPINION.

LOVE: The petitioner's claim to the deduction from income for the year 1920 of the amount of $6,596.71 as a bad debt owing from Orrin S. Claypoole is predicated upon section 214(a)(7) of the Revenue Act of 1918, which provides:

SEC. 214. (a) That in computing net income there shall be allowed as deductions:

* * *

(7) Debts ascertained to be worthless and charged off within the taxable year.

The Board has held that to be entitled to the benefit of the section quoted, a taxpayer must establish, first, that the debt was ascertained to be worthless during the taxable year, and, second, that the debt was charged off during the taxable year. ">*2463 . Under section 234(a)(5) of the same statute we construed an exactly similar provision concerning corporations, to the same effect. .

In our opinion the petitioner has failed to establish either of the essentials predicate to allowance of the deduction claimed. Upon the record before us we would even be hesitant in finding that the debt was in fact worthless or that the petitioner has ever ascertained it to be so.

In support of the alleged ascertainment of worthlessness during 1920, the petitioner testified that he repeatedly requested Claypoole to settle the account, such requests being made during 1919 and 1920. Claypoole's promise to do so when he had "good luck" never materialized. ">*1053 In 1919 he discovered that a house Claypoole claimed to own stood in the name of Claypoole's wife. In 1920 he learned that Claypoole was frequently spending time, and presumably money, in Pittsburgh and that he was not living with his wife. Upon these facts the petitioner asks us to find that he ascertained the debt to be worthless during 1920.

The petitioner testified that among">*2464 his reasons for opening a new account on June 18, 1919, was the fact that he "considered the other account was worthless." Again he testified that he thought his determination of worthlessness was made "during 1919, as shown on the last page there, where it is ruled off." This statement refers to December 31, 1919. At various other points he testified that it was during 1919 and again that it was during 1920. Among his reasons for believing that his ascertainment of worthlessness occurred in 1920 was the fact that he did not carry the old account into the new one at January 1, 1920.

The testimony mentioned above does not impress us with the idea that the petitioner can now state definitely that he ascertained the debt in question to be worthless during 1920. In fact, under examination the petitioner always found himself on very uncertain ground when trying to fix the ascertainment as occurring in that year. He freely admitted no independent recollection and his books give little support to such a conclusion.

On brief the petitioner's counsel contends that the original account could not have been determined to be worthless at May 23, 1919, when the last contract carried in">*2465 that account was completed, because until December 31, 1919, when Claypoole submitted his final bills under the contracts so carried, the petitioner could not balance the account to determine how the parties stood.

Admitting that a final balance awaited submission of Claypoole's bills, it does not necessarily follow that the account was neither worthless nor ascertained to be worthless prior to submission of such bills. Submission of the bills might well be merely the means of enabling the petitioner to determine with exactness his loss on an account long known to hold a loss. If such was the case, as appears, even the amount of the petitioner's loss was determined on December 31, 1919. It may be remarked that Claypoole had consistently overdrawn his account and the petitioner testified definitely that he had long sought to have the matter corrected.

We thus come to the conclusion that the petitioner has failed to sustain the burden of proof that the debt involved was ascertained to be worthless in the taxable year. It thereby becomes unnecessary for us to consider the effect, if any, of the second Claypoole account, which, upon the petitioner's theory, ran concurrently with">*2466 the first ">*1054 from June 18, 1919, to December 31, 1920. Neither have we to discuss whether the debt was charged off during the taxable year, but, as hereinbefore indicated, we believe that the petitioner has likewise failed to sustain his burden in relation to that point.

Judgment will be entered for the respondent.