Prescott State Bank v. Commissioner

PRESCOTT STATE BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Prescott State Bank v. Commissioner Docket No. 8155. United States Board of Tax Appeals 11 B.T.A. 147; 1928 BTA LEXIS 3861; March 22, 1928, Promulgated *3861 Evidence held insufficient to establish that certain city warrants were ascertained to be worthless in the taxable year. John A. Ellis, Esq., for the petitioner. Brice Toole, Esq., for the respondent. VAN FOSSAN *147 Error is alleged in the determination by the respondent of a deficiency of $2,040.48 for the year 1921, arising from the disallowance of a bad debt deduction. FINDINGS OF FACT. Petitioner is an Arizona corporation, with principal office at Prescott. In the year 1905 petitioner acquired warrants of the City of Prescott of the face value of $7,300.29. Immediately thereafter the warrants were presented for payment and payment was refused, notation being made on the face of the warrants "not paid for want of funds". Subsequently demand for payment was frequently made by the president of petitioner, usually in conversations with the mayor of Prescott, who was also vice president of petitioner. The warrants were carried by the bank in an account designed "Stocks and bonds" and each time an examination of the bank was made by a representative of the State Banking Department objection was made to the warrants as being worthless*3862 assets. These examinations occurred regularly twice each year. In 1921 the examiner directed petitioner to remove the warrants from the bank assets and charge them either to the contingent fund or to profit and loss. On December 31, 1921, petitioner charged the account off its books. Petitioner thereupon reported the sum of $7,300.29 as a loss and took a deduction therefor in its income-tax return for 1921. Some time in 1922 the warrants were paid in full, but without accrued interest, and the sum so received was reported as income. *148 OPINION. VAN FOSSAN: The evidence adduced in this case fails to establish that the city warrants were ascertained to be worthless in 1921 when they were charged off by direction of the bank examiner. When petitioner bought the warrants it knew that they were to be paid for out of a special fund under an ordinance which provided for their payment on demand "providing there are sufficient funds to pay the same; otherwise he (the treasurer) shall endorse on such warrant 'Not paid for want of funds,' annexing the date of presentation and sign his name thereto, and from that time until redeemed such street improvement warrants shall bear*3863 interest at the rate of 8 per cent per annum." Thus, when petitioner bought the warrants it was put on notice that payment might be delayed. There is no evidence that the city of Prescott repudiated the obligation or that it was insolvent. See . In fact, it may be questioned whether or not the conversations with the mayor of Prescott, which is the only evidence of a demand subsequent to the original presentation, was a compliance with the provision of the ordinance quoted in petitioner's brief. But assuming a legal demand, mere failure to pay on demand is not proof of the worthlessness of a debt. Nor is the direction of the bank examiner to charge off the account sufficient proof of worthlessness. ; . It may also be pointed out that all the facts bearing on the alleged worthlessness of the warrants were known to petitioner in the years prior to 1921. See . We find no error in the determination of the deficiency for the year 1921. The year 1922, in which the amount was paid and taken*3864 up in income, is not before us. Judgment will be entered for the respondent.