Montana Nat'l Bank v. Commissioner

MONTANA NATIONAL BANK OF BILLINGS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Montana Nat'l Bank v. Commissioner Docket No. 4710. United States Board of Tax Appeals 12 B.T.A. 22; 1928 BTA LEXIS 3622; May 18, 1928, Promulgated *3622 Deduction for alleged loss or bad debt disallowed. Arthur C. Thomsen, Esq., for the petitioner. Benton Baker, Esq., for the respondent. LANSDON *22 The respondent has asserted a deficiency in income and profits taxes for the year 1920, in the amount of $2,712.91. The only issue presented for determination is whether petitioner is entitled to deduct from its gross income for 1920 an alleged loss or bad debt in the amount of $15,000. The petition alleges that a deficiency asserted against the Montana National Development Co., a corporation affiliated with petitioner, *23 in an amount of $529.13, is also in controversy. No appeal having been filed relative to such deficiency, it is not involved in this proceeding. FINDINGS OF FACT. The petitioner is a national bank, organized under the National Banking Act, with its principal office at Billings, Mont. In May, 1920, petitioner held notes signed by Thomas Hurley, given in exchange for a loan in the amount of $30,800. The notes were secured by a chattel mortgage upon cattle owned by Hurley. Because of the death of many of the cattle during the winter and the reduced value of*3623 those remaining, additional security, consisting of a mortgage upon 1,920 acres of land owned by Hurley, was taken by petitioner upon the renewal of the notes in the latter part of May, 1920. A life insurance policy upon Hurley's life was also issued in favor of the petitioner. In November, 1920, the cattle covered by the chattel mortgage were sold and the proceeds in the amount of $4,925 applied to reduce the indebtedness. On Dcember 28, 1920, the petitioner ascertained that Hurley had nothing of value in addition to the land then mortgaged to it, and on December 31, 1920, it sold the notes, together with the real estate mortgage, to the Montana National Development Co., an affiliated corporation, the stock of which was owned exclusively by the stockholders of petitioner in proportion to their stockholdings, for a consideration of $10,875. The amount of $10,875 was petitioner's determination of the fair market value of the 1,920 acres of land covered by the mortgage. On December 31, 1920, petitioner debited its profit and loss account in the amount of $15,000, which was the difference between the face amount of the indebtedness of Hurley and the consideration for the sale to*3624 the Development Company, and charged the notes off its books. Foreclosure proceedings were instituted by the Development Company in 1921, and in that year title to the land was acquired. OPINION. LANSDON: Petitioner presents three theories upon which it claims a right to deduct from gross income the amount of $15,000 for the year 1920, namely, (1) that the item was a bad debt ascertained to be worthless and charged off during the taxable year; (2) that petitioner sustained a loss in the amount of $15,000 from the sale, during the taxable year, of Hurley's notes to the Montana National Development Co., and (3) that there was an exchange of property in 1920, which resulted in a loss of $15,000 to petitioner during 1920. Section 234(a) of the Revenue Act of 1918 provides: That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * * * * * *24 (4) Losses sustained during the taxable year and not compensated for by insurance or otherwise; (5) Debts ascertained to be worthless and charged off within the taxable year; In view of the provisions of section 240 of the Revenue Act of 1918 that*3625 transactions between affiliated corporations must be disregarded in determining the taxable income of either corporation, the sale by petitioner to the Montana National Development Co. of the notes and mortgages has no effect with regard to the question whether petitioner is entitled to a deduction of $15,000 for an alleged loss or bad debt. ; . The petitioner's contention that this was a debt ascertained to be worthless and charged of during the taxable year must fail. The debt was not worthless, although its value had been impaired, in as much as the whole amount was secured by a mortgage on 1,920 acres of land. In , where the question involved is very similar to the one at bar, the Board stated: * * * The evidence discloses as to these points that, at the close of the year 1920, N. P. Sloan & Company was indebted to taxpayer in the sum of $91,492.92 on account of loans made to it, against which cotton was held as security. N. P. Sloan & Co. failed during the year 1920, and at the close of the*3626 year taxpayer credited the loan with the estimated value of the cotton and charged off the balance as a bad debt. Subsequently, in the year 1921, the cotton was sold at $12,172.16 less than its estimated value on December 31, 1920, and taxpayer now claims that it should be permitted to take as a deduction in 1920 the entire amount of the difference between the amount of the loan to N. P. Sloan & Company and the amount realized from the sale of the security. It is the opinion of the Board that, under the circumstances as disclosed by the record, taxpayer was not entitled to charge off as a bad debt in 1920 the amount owing to it by N. P. Sloan & Company or any part thereof. The debt was not worthless in that year although its value was impaired. Taxpayer had security for at least a part of the amount owing to it. It did not take steps in that year to dispose of the security and ascertain what part of the debt, if any, was incapable of collection, but merely estimated the value of the security, credited the loan with such estimated value and continued to hold the security until 1921. The transaction was not closed until 1921 and it can not be said that the debt was ascertained*3627 to be worthless in 1920. Whether or not it became worthless thereafter is not before the Board and we express no opinion on that question. See also, ; ; ; ; . We are of the opinion that petitioner is not entitled to deduct $15,000 as a loss in 1920. The transfer by petitioner to the Development *25 Company being of no effect, there remains no completed transaction which could have given rise to the alleged loss. The petitioner contends that the mortgage on 1,920 acres of land has been exchanged for the notes and that it has sustained a loss in the amount of the difference between the value of the land and the face of the notes. Such contention is purely fiction. There has in face been no exchange of property on which a loss could be determined. The mortgage was held as security until foreclosure in 1921, at which time the face of the notes amounted to $25,875. Judgment will be entered for the respondent.*3628