Pioneer Fruit Co. v. Commissioner

PIONEER FRUIT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Pioneer Fruit Co. v. Commissioner Docket No. 27299. United States Board of Tax Appeals 21 B.T.A. 833; 1930 BTA LEXIS 1787; December 19, 1930, Promulgated *1787 1. Evidence not sufficient to establish deductibility of a debt alleged as worthless in 1920. 2. Petitioner's claim that it sustained a loss in 1921, when a subsidiary corporation was liquidated, not proved. 3. Effect given to respondent's admission that invested capital was erroneously computed. J. E. Hammond, Esq., for the petitioner. John D. Foley, Esq., for the respondent. LANSDON *833 The respondent has asserted deficiencies in income and profits taxes for the years 1920 and 1921, in the respective amounts of $4,687.01 and $8,548.31. For its causes of action the petitioner alleges that the respondent erred in the following particulars: (1) In disallowing as a deduction from gross income in 1920 a certain amount alleged to represent a debt ascertained to be worthless and charged off in that year; (2) In disallowing as a deduction from gross income in 1921 a certain amount alleged to represent a loss sustained in the liquidation of a subsidiary corporation in that year; and (3) Understatement of invested capital for the year 1921, due to incorrect adjustments of income and profits taxes for prior years. FINDINGS OF FACT. *1788 The petitioner is a California corporation with its principal office in San Francisco, where it handles fruit on commission. In the regular course of the business it frequently advances cash to growers for use in their operations. In September, 1920, the petitioner, by corporate action, required its president, one C. B. Bills, to resign because of his mismanagement of its affairs. At the date of his resignation, Bills was indebted to it in the amount of $74,246.14, secured by collateral stipulated to have a value of $67,638. Prior to June, 1914, the petitioner advanced cash in the aggregate amount of $152,789.24 to R. H. Shoemaker, Jr., who, as an individual, was the owner and operator of a fruit ranch at Lindsay, Calif. Shoemaker was unsuccessful and unable to repay the amounts so advanced. Some time in 1914 the Shoemaker Orchard Co. was organized with authorized capital of the par value of $200,000, of which 87 1/2 per cent, or $175,000, was issued to the petitioner and *834 12 1/2 per cent, or $25,000, to Shoemaker. As consideration for the stock received by the petitioner, it canceled Shoemaker's indebtedness to it. In 1921, at a cost of $4,750, it acquired*1789 the stock of the Shoemaker Orchard Co. theretofore issued to Shoemaker. In 1921 the petitioner, after it became the sole stockholder of the Shoemaker Orchard Co., received in liquidation of that concern a ranch in Kern County, California, which it claims it took into its assets at a net book value of $38,943.30; the tools and equipment of the ranch, which it sold for $8,400; and the cancellation of a debt in the amount of $23,690.32, which it owed to the Shoemaker Co., all of a total value of $71,013.66. OPINION. LANSDON: The petitioner claims a deduction of $18,266.14 from its gross income in 1920 on account of a debt which it alleges was ascertained to be worthless and charged off in that year. The record discloses that, at the date of his requested resignation in 1920, the president of the petitioner was indebted to it in the amount of $74,246.14, secured in part by collateral which the parties stipulated had a value of $67,638. No evidence as to the ability of its former president to pay the unsecured balance of this debt to the petitioner in the taxable year, or at any other time, was offered at the hearing. The petitioner has failed to establish its claim for the*1790 deduction of a bad debt from its gross income in 1920. It may be that petitioner lost the amount of $86,525.58 by the liquidation of its subsidiary corporation in 1921, but it has failed to prove that it is entitled to a deduction from its gross income in that amount in the taxable year. At December 31, 1921, it was the sole owner of the capital stock of the Shoemaker Orchard Co. Probably that company was liquidated in the taxable year and it may be that in such liquidation the petitioner received assets or other valuable consideration on account of the stock ownership of the value of only $71,013.66, but even if these facts are proven, which is somewhat doubtful, it has not established the cost to it of the stock of the Shoemaker Orchard Co. It claims a cost of $152,789.24, the aggregate amount advanced to Shoemaker prior to the incorporation of the Orchard Co., plus the amount of $4,750, which it paid for Shoemaker's stock in 1921. This claim is based on the theory that it paid in $152,789.24 for the 87 1/2 per cent interest in the Orchard Co. stock which it received in June, 1914. This, or course, is not true; what it did pay in was a claim or book account against the individual, *1791 Shoemaker, which seems to have had little value at that time. At any rate no evidence has been offered to prove its value at the date it was paid in for stock. ; A. D.*835 ; ; ; ; . In his brief, counsel for the respondent disposes of the third issue by the following admission: As to the invested capital feature of the case, the respondent admits that the following adjustment should be made: [1921] Additional 1918 tax $19,741.02 $19,741.02 1919 total tax $13,801.85 prorated 5,816.10 An adjustment for overpayment of 1919 tax credited to 1918 additional tax 4,938.49 Decision will be entered under Rule 50.