Toccoa Furniture Co. v. Commissioner

TOCCOA FURNITURE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Toccoa Furniture Co. v. Commissioner Docket No. 14429. United States Board of Tax Appeals 12 B.T.A. 804; 1928 BTA LEXIS 3447; June 25, 1928, Promulgated *3447 1. Loss from fire determined. 2. A debt must be ascertained to be worthless and charged off before it may be deducted in computing net taxable income under the Revenue Act of 1918. It is not sufficient that it may be knwon to be worth less than its face amount or that a reserve shall be set up for the portion estimated to be uncollectible. James L. Fort, Esq., for the petitioner. L. A. Luce, Esq., for the respondent. PHILLIPS *804 This proceeding is for a redetermination of a deficiency in income and profits taxes for the year 1920 amounting to $4,656.78. FINDINGS OF FACT. Petitioner, a Georgia corporation with principal office at Toccoa, was organized in 1907 to manufacture furniture. *805 In 1920, its plant and its inventory were destroyed by fire. The depreciated cost of its buildings, machinery and equipment was $19,220.70. The cost of its inventory was $44,484.47. It realized from insurance $40,005.57. In computing invested capital the Commissioner included the plant, machinery and equipment of the petitioner at $4,256.36 less than its depreciated cost. Petitioner made loans to the Piedmont Furniture Co.*3448 In 1920 petitioner held two notes made by the Piedmont Furniture Co. for $9,085.75 and $5,254.71, dated August 10, 1920, and December 31, 1920, respectively, and due November 20, 1920, and July 1, 1921, respectively. The indebtedness represented by these notes was unsecured. In 1920 the Piedmont Company was in financial difficulties and petitioner set up on its books a reserve for bad debts amounting to $10,151.04, representing a part of the sum of the two notes. Partial collections were made on the notes and the balances due were charged off as bad debts in 1921. Piedmont Furniture Co. was placed in bankruptcy in April, 1921. The Commissioner has disallowed a deduction of $10,151.04 on account of such debts. OPINION. PHILLIPS: The Commissioner computed the depreciated cost of petitioner's plant and machinery on the assumption that it was all acquired in 1907. The evidence shows that a substantial portion was acquired in later years. It also shows that certain purchases were made which were charged off the books as expense. Consequently the cost has been understated and the depreciation overstated. A recomputation of the depreciated cost gives the result set out in*3449 the findings. The petitioner is entitled to deduct a loss of $23,699.60 instead of $18,443.24 allowed by the respondent. The same errors have resulted in understating invested capital by $5,256.36. The evidence does not indicate that the petitioner ascertained the indebtedness of Piedmont Furniture Co. to be worthless in 1920. The most that can be said is that it was known that in all probability a part could not be collected. But the Revenue Act of 1918 does not permit deduction of a doubtful account or of a part of a debt; the debt must be ascertained to be worthless. Moreover, the indebtedness was not charged off, as the Act requires. A reserve equal to 75 per cent was set up, but the deduction of such reserves was not permitted until a later Act. ; . Decision will be entered under Rule 50.