Bank of London, etc. v. Commissioner

BANK OF LONDON & SOUTH AMERICA, LTD., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Bank of London, etc. v. Commissioner Docket Nos. 22015, 24282. United States Board of Tax Appeals 17 B.T.A. 1263; 1929 BTA LEXIS 2159; November 6, 1929, Promulgated *2159 Charles Garside, Esq., for the petitioner. J. L. Backstrom, Esq., and E. M. Niess, Esq., for the respondent. MURDOCK *1263 For the fiscal year ended January 31, 1919, the Commissioner notified the petitioner that its claim for abatement had been allowed in a certain amount and was rejected for $2,777.13. The proceeding as to this taxable period is at Docket No. 24282. The petitioner made several allegations of error, but at the hearing waived all issues thus raised. The respondent, however, has alleged that the petitioner in its return for this period deducted $10,000 as a debt ascertained to be worthless and charged off and that the Commissioner in his final determination had erroneously allowed this deduction. For the fiscal year ended January 31, 1920, the Commissioner determined a deficiency of $8,961.98. The proceeding as to this year is at Docket No. 22015. The petitioner now urges for our consideration but one allegation of error, which is the Commissioner's disallowance of a deduction of $25,000 claimed in the return as a debt ascertained to be worthless and charged off in the taxable year and/or a loss sustained during the taxable*2160 year and not compensated for by insurance or otherwise. The cases were consolidated. FINDINGS OF FACT. The petitioner is an English corporation which has an agency in New York City. On December 13, 1923, the London & River Plate Bank, Ltd., was merged with the London & Brazilian Bank, Ltd., under the name of Bank of London & South America, Ltd., the petitioner in this case. *1264 Beginning in the early part of 1917 and continuing until some time in 1918, the London & Brazilian Bank, Ltd., was doing business with a firm in New York known as Herman & Herman, Inc. From time to time this firm presented to the bank a number of drafts with shipping documents attached, on which the bank advanced a certain percentage of the face amount of the drafts. These drafts were drawn on persons or firms in the Argentine and in Brazil and were forwarded to the respective cities in those countries where the one on whom the draft was drawn did business. Some of these drafts were paid and the proceeds thereof were received by the bank which then credited the account of Herman & Herman, Inc., with the proceeds. At some time in 1918 the bank received notice that considerable merchandise*2161 shipped in connection with these drafts was not of the character or in the quantity ordered. The bank thereupon ceased to make any further advancement on drafts presented by Herman & Herman, Inc., and endeavored to sell all of the merchandise which it then had as a result of advancing money on these drafts. Herman & Herman, Inc., went into bankruptcy. The bank made a claim in the bankrupt estate, its claim was sustained and at some time it received its first and final dividend of 3 per cent. Thereafter, the last of the goods which it held were sold and the account finally closed on July 31, 1923, at which time the bank made provision for a debit balance not theretofore charged off of $1,747.03. From October 3, 1917, to and including February 18, 1919, the bank advanced $57,823.39 on certain fraudulent drafts with fraudulent documents attached thereto presented by Herman & Herman, Inc. Due to the necessary delays of shipping, it was some time after a draft was presented before the bank had any notice that there was any irregularity in connection with the draft, the shipping papers or the merchandise covered by the papers. On January 31, 1919, the bank had no knowledge that*2162 any of the drafts or papers above mentioned were fraudulent, but on that date it did have information that, due to the inferiority or unsatisfactory quality or quantity of the merchandise shipped, certain drafts would not be paid in full. On its income-tax return for the fiscal year ended January 31, 1919, the bank deducted $10,000 to cover its loss in connection with its dealings with Herman & Herman, Inc., on drafts, the proceeds of which were not sufficient to cover the advances made by the bank. After January 31, 1919, and on or before July 31, 1919, the petitioner learned that drafts on which it had made advances in the amount of $57,823.39 were fraudulent. It first received this information from certain officers of Herman & Herman, Inc., and it later verified the *1265 report by communicating with persons in the countries to which the goods were supposed to be shipped. The $25,000 which is claimed as a deduction in the fiscal year ending January 31, 1920, represented a part of the amount advanced on fraudulent drafts. On July 31, 1919, an item of $25,000 was entered in an account called replacement fund and was deducted from profit and loss on the books of the bank. *2163 OPINION. MURDOCK: The respondent and the petitioner must both fail in their respective affirmative contentions in these cases, for the reason that each has failed to offer sufficient proof to show that the Commissioner erred in his final determinations. The respondent contends that if the petitioner sustained losses it sustained those losses when the frauds were committed, and, on the other hand, if a deduction is claimed for a debt ascertained to be worthless and charged off, the debts could not be ascertained to be worthless and charged off until later years when the account was finally wound up. So far as the evidence discloses, the $10,000 might have been either a loss sustained or a debt ascertained to be worthless and charged off in the fiscal year ending January 31, 1919, which fiscal year began on February 1, 1918. But as to the deduction of $25,000, we must sustain the Commissioner. Here the burden of proof is upon the petitioner and the evidence does not show that this was a loss sustained in the fiscal year. It would not be inconsistent with the evidence to hold that any loss which was sustained in connection with the frauds in question was sustained in years*2164 prior to the fiscal year ended January 31, 1920. ; ; . The deduction is not proper as a debt ascertained to be worthless and charged off in this year, since the evidence does not show that it was ascertained to be worthless and charged off within the year and furthermore, if a debt at all, it appears to be only part of a debt, and the Revenue Act of 1918 did not permit a debt recoverable only in part to be charged off in part. . The deficiency for each year as determined by the Commissioner is approved. Judgment will be entered in accordance with the foregoing opinion, under Rule 50.