Krueger Broughton Lumber Co. v. Commissioner

KRUEGER BROUGHTON LUMBER CO. (FORMERLY FULLERTON-KRUEGER LUMBER CO.), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Krueger Broughton Lumber Co. v. Commissioner Docket No. 17130. United States Board of Tax Appeals 18 B.T.A. 1270; 1930 BTA LEXIS 2490; February 20, 1930, Promulgated *2490 1. JURISDICTION. - This Board is held to have jurisdiction to hear and determine an appeal from a deficiency even though the appeal is unsatisfactory in form, if it was filed within the statutory period of 60 days after the mailing of the deficiency letter and was promptly amended to conform to the rules prior to answer by the respondent. 2. BAD DEBTS. - Where the evidence shows that a debt was partly uncollectible in an amount currently ascertained from definite facts, the uncollectible part was ascertained and charged off within the taxable year, it was consistently treated by the petitioner as a reduction of the profits, and the amount is not shown to have ever been collected or otherwise realized, the amount uncollectible is properly allowable as a deduction from income under section 234(a)(5) of the Revenue Act of 1921. A so-called "reserve for bad accounts" set up on the books for this single item is shown by the evidence to have been not a true reserve and therefore the bookkeeping procedure followed in making the charge-off is immaterial to the issue. Clark R. Fletcher, Esq., and A. E. Bolte, Esq., for the petitioner. G. S. Herr, Esq., for*2491 the respondent. TRUSSELL *1270 This is an appeal for a redetermination of a deficiency in income and profits taxes for 1921, amounting to $2,799.40. The petitioner alleges error in the failure to allow as a deduction from income an amount of $3,500 charged off at the end of the taxable year into a reserve account by way of allowance for a bad debt. At the beginning of the hearing the respondent moved for dismissal of the appeal for lack of jurisdiction on two grounds - (1) the petition was not filed with the Board within the statutory period of 60 days after the mailing of the deficiency letter; (2) the petition was not filed by the taxpayer. Decision was reserved and the hearing was allowed to proceed on the merits. *1271 FINDINGS OF FACT. The petitioner is an Illinois corporation with principal place of business at Minneapolis, Minn., engaged in the lumber business. During the taxable year the petitioner was known as the Fullerton-Krueger Lumber Co. In January, 1921, the petitioner, by contract in writing, entered into an operating arrangement with another corporation, the Littlefork Lumber Co., in which the Littlefork Lumber Co. undertook*2492 to operate its saw mill, obtain the necessary logs, and produce lumber of such dimensions and kinds as directed by the petitioner, at specified guaranteed cost prices of production, it being also provided that the petitioner would provide the necessary cash capital by advances to or for the account of the Littlefork Lumber Co., and would undertake to market the lumber produced at prices never less than the said guaranteed cost prices of production, the Littlefork Lumber Co. to receive in addition to the production costs as provided for, one-half of the amount by which the net sales exceeded such production costs, the other half of the excess to be retained by the petitioner. It was also provided that if there were no such profits for division the Littlefork Lumber Co. would reimburse the petitioner for any excess of advances made. As a result of the operations under the contract during 1921 the Littlefork Lumber Co. was indebted to the petitioner at the end of the year in excess of $22,000. The deficiency was caused by a flood which occurred in the spring of 1921, in which logs of the Littlefork Lumber Co. were washed away and lost although they had been carefully fastened on*2493 a high bank which had usually been proof against the usual spring freshets. Julius H. Krueger, the president of the petitioner, who had enjoyed an experience in manufacturing and wholesaling lumber since 1900, was in charge of operations and was actively in contact throughout the year with the Littlefork Lumber Co., and he was of opinion at the end of the year that the indebtedness to petitioner of the Littlefork Lumber Co. was in part a bad debt due to the inability of the debtor to pay the full amount owing. Accordingly, he carefully estimated the assets of the debtor and, considering its liabilities, concluded that an amount of $3,500 of the indebtedness was uncollectible and enforced collection would entail further loss. At his direction an amount of $3,500 was charged to profit and loss account on the petitioner's books of account, and was credited to an account designated as "reserve for bad accounts." This reserve account still stands unaltered upon the books. At the end of 1921 the following bad *1272 debts were charged off directly to profit and loss account, with corresponding credits to the accounts receivable: Ed. Thorell, $80.50; W. F. Siegel, $34.21; W. G. *2494 Thompson, $55.89; A. J. Johnson Lumber Co., $39.71; or an aggregate of $210.31. In the following year relations between the petitioner and the Littlefork Lumber Co. continued under a new contract for 1922 similar in its provisions to the contract of 1921. The accounts receivable of the petitioner at the end of 1921 aggregated in excess of $76,000. Krueger was employed by the petitioner under a contract providing that he was to draw no salary but was to receive 50 per cent of the net profits. In determining the profits and his share thereof for 1921, the reserve for bad debts, $3,500, was deducted from the profits as a loss. The deficiency letter was mailed on March 1, 1926. The appeal was filed by the taxpayer on April 27, 1926. An opportunity was immediately extended to the petitioner to file an amended petitioner conforming to the rules of this Board, and attention was called to the failure to forward the filing fee of $10. The petitioner filed an amended petition on June 10, 1926, and paid the filing fee. The answer filed by the respondent was an answer to the amended petition. OPINION. TRUSSELL: The motion to dismiss for lack of jurisdiction must be denied. *2495 It is apparent that the motion was made under a misapprehension of the facts. (1) The original appeal was filed within the 60-day period but not in proper form. Opportunity was promptly extended and was availed of by the petitioner to file an amended petition. The amended petition was filed subsequent to the expiration of the 60-day period but prior to the filing of an answer by the respondent. The only answer filed by the respondent, to whom full opportunity was accorded, was with respect to the amended petition. The propriety of the customary procedure here followed is fully discussed in , and need not be repeated here. (2) The petitioner is the taxpayer; the fact that the same corporation was known during the taxable year by a different name gave rise to misapprehension in this regard. Turning now to the petition, we find the petitioner claiming a right to a deduction in the amount of $3,500 of a bad debt. At the beginning of the taxable year the petitioner entered into contractual relations with another corporation owning and operating a sawmill. Operations under the contract during the year proved disastrous due to various*2496 circumstances, including a spring flood, and at *1273 the end of the taxable year the other party stood charged upon the books of the petitioner with an account receivable amounting in excess of $22,000, and for which it was liable under the provisions of the contract. Relations were close between the two corporations and the petitioner was fully informed as to the financial condition of the other party. The president of the petitioner made a careful ascertainment of the assets and liabilities of the other corporation, with the result that it was apparent that the debtor owed the petitioner $3,500 in excess of its actual net worth and forced realization would only result in a greater loss. Accordingly, an amount of $3,500 was charged off on the petitioner's books at the end of the taxable year and was deducted from the net profits in computing the amount of the compensation due the president of the petitioner under a contract of employment providing for a percentage of the net profits. We are satisfied that the amount of the claimed bad debt was reasonably definitely ascertainable from the facts available to the petitioner at the time, and that the entry upon the books*2497 was made in good faith and in the exercise of sound business judgment. If there were no complications this would bring the claimed deduction within the letter of section 234(a)(5) of the Revenue Act of 1921, which provides for the deduction of part of a debt where it is shown to be recoverable only in part. Before deciding the issue, however, it will be necessary to briefly consider the following points: In the following year contract operations were again entered into by the same parties, and we must decide whether this fact is material to the allowance of the deduction claimed. Bearing in mind that after the write-off the other corporation remained indebted to the petitioner to the utter limit of its net worth and probably in excess of any net realizable value through enforced liquidation, the renewal of relations would appear to be nothing more than good business practice, prospective in its outlook, but offering, in view of the past, nothing more than a hope of realization of the account or of profits from operations. Any advantage accruing through the securing of a supply of the lumber dealt in by the petitioner was also prospective in its intent and application. We think*2498 the point is immaterial to the issue. Cf. . The remaining point requiring consideration is whether, in crediting the uncollectible amount of $3,500 to an account headed "reserve for bad accounts," the petitioner has adopted a reserve method of accounting, since a so-called "direct" charge-off would have required posting the credit directly to the accounts receivable. In view of the fact that the evidence shows that the petitioner considered the amount of $3,500 definitely lost and treated it so in computing the *1274 additional compensation due the president, and has consistently carried the reserve account on its books for many years unchanged, and that thereis no evidence that the amount written off has ever been collected or otherwise realized, we are satisfied that the so-called reserve was in fact a mere posting of an amount written of. No confusion or ambiguity has resulted in the bookkeeping procedure followed. The entry still stands clear and distinct upon the books. Relative to a certain account and with respect to a single entry the facts must govern. A peculiarity of bookkeeping could have no effect upon the deductibility*2499 of the item. We think upon the evidence before us that the amount was charged off within the taxable year. Cf. . This brings us to a definite conclusion that the amount of $3,500 claimed by the petitioner is properly allowable as a deduction from income for the taxable year. Judgment will be entered under Rule 50.