Bissell v. Commissioner

ANNA BISSELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Bissell v. Commissioner Docket No. 24784. United States Board of Tax Appeals 23 B.T.A. 572; 1931 BTA LEXIS 1853; June 4, 1931, Promulgated *1853 1. The mere failure of respondent to discuss in his brief one of the assignments of error made in the petition does not of itself entitle petitioner to judgment on such assignment. 2. During 1916 petitioner purchased certain Imperial Russian Government bonds. In 1922 she ascertained her investment in such bonds to be recoverable only in part. She charged off the part ascertained to be worthless and deducted the amount charged off as a bad debt. Upon the record, held, petitioner is entitled to the deduction as claimed. J. S. Seidman, C.P.A., and F. E. Seidman, C.P.A., for the petitioner. John D. Kiley, Esq., for the respondent. LOVE *572 This proceeding is for the redetermination of a deficiency in income taxes for the calendar year 1922 in the amount of $8,567.38. The sole issue is whether petitioner is entitled to deduct from her gross income, either as a bad debt or as a loss sustained, that part of her investment in certain Imperial Russian Government bonds which she ascertained became worthless during the taxable year 1922. Petitioner also assigned an error pertaining to the year 1924, but since the respondent has*1854 determined no deficiency for that year, we do not have jurisdiction to pass upon that question. FINDINGS OF FACT. Petitioner is an individual with her principal office at 210 Erie Street, Grand Rapids, Mich. On July 18, 1916, petitioner purchased from the Grand Rapids Trust Company $15,000 face value out of a total issue of $50,000,000 of Imperial Russian Government 6 1/2 per cent External bonds, dated June 18, 1916, and due June 18, 1919. The bonds were payable, *573 principal and interest, in dollars. Petitioner paid $15,000 for the bonds. On October 10, 1916, petitioner purchased from A. B. Leach and Company, 15,000 rubles face value out of a total issue of 2,000,000,000 rubles of Imperial Russian Government 5 1/2 per cent Internal bonds, dated February 14, 1916, and due February 14, 1926. These bonds were payable, principal and interest, in rubles in Russian. Petitioner paid $4,965 for the bonds. The Imperial Russian Government was overthrown in March, 1917, and was succeeded by the Provisional or Kerensky Government. The Provisional or Kerensky Government was overthrown by the Soviet Government in November, 1917. The Soviet Government by a decree issued*1855 on January 21, 1918, repudiated the bond issues and certain other financial obligations of the Imperial Russian Government, including the bonds of the issues held by petitioner. The Soviet Government, on the overthrow of the Provisional Government, did not immediately become either the de jure or the de facto government of Russia, being in January, 1918, in control of only a relatively small part of Russian territory. Counter-revolutionary, movements had developed throughout Russia and Siberia, the leaders of these movements, among others, being Admiral Kolchak, Generals Denniken, Wrangel, Yudenitch and Korniloff. Several of these leaders recognized the validity of the bonds issued by the Imperial Russian Government. The Allied Powers gave aid to these counter-revolutionary efforts, and in June, 1919, Admiral Kolchak was recognized by the Supreme Council in Paris as the de facto ruler of all Russia. The counter-revolutionary movements were not overcome by the Soviets until the defeat of General Wrangel in November, 1920, and it was not until the year 1920 that it became certain that the Soviets were to be in a position to enforce and make good their decree repudiating*1856 the debts of the Imperial Russian Government, including the bonds of the issues held by petitioner. Petitioner's financial, bookkeeping, and tax matters have, since 1909, been in the charge of her son, Melville R. Bissell. As part of his duties he made it a point to keep in touch with her investments and their standing. He traded in bonds himself, and tried to maintain close contact with security markets. In 1919, when the bonds were in default, a bondholders' protective committee was formed in New York, consisting of prominent men. The committee called for a deposit of the 6 1/2 per cent bonds with it for a three-year period, that is, until 1922. Petitioner's son deposited his mother's bonds with the committee. He felt that the committee would know more about the matter than he did, since the committee had access to records in New York and Washington that he did not *574 have. The committee was in a better position to investigate the situation than he was. During the deposit period, he made no effort to collect on the bonds, as he did not know of any means whereby he could make an investigation of his own or attempt collection. He did not hear from the committee*1857 until the deposit period expired in 1922. At the end of the deposit period in 1922, the committee reported to its depositors, offering no hope at all for realizing on the bonds. No plan, arrangement, or course of action by which the principal or interest on the bonds could be collected was offered. It was on the receipt of this unfavorable report from the committee that petitioner for the first time had any definite indication or conclusion that the bonds were uncollectible. Thereafter, in 1922, a letter from a bank came to the petitioner's attention, saying in substance, that the Audit Department of the National Comptroller's office had directed the national banks to charge these bonds off in 1922, as the Department considered them worthless. This letter had the effect on petitioner's son of sustaining his opinion reached at the time of the receipt of the committee's report earlier in the year that the bonds were worthless. In the late fall of 1922 he abandoned all hope of making any recovery on the bonds. The year 1922 was the first time that he came to the conclusion that the bonds were definitely uncollectible. At the time petitioner's son reached the conclusion as*1858 to the External bonds, he arrived at the same conclusion with respect to the Internal bonds. He put both issues in substantially the same category, believing that if the External bonds were taken care of, the Internal bonds would be next in line. And, correspondingly, if the External bonds were ascertained to be worthless, the Internal bonds would certainly be so. The first time he abandoned hope for recovery on the Internal bonds was in 1922, when he recognized that all possibilities of collecting on the External bonds were gone. The parties have stipulated that, according to the Commercial and Financial Chronicle, the par value sales of the 6 1/2 per cent External issue during the first three months and the last three months of the following years, together with the high and low price thereof, were as follows: 3-month period Low High Sales par value Last 3 months 1919 21 1/4 [48] $1,299,000 First 3 months 1920 [39] 1,409,000 Last 3 months 1920 [28] 69,500 First 3 months 1921 [20] 208,000 Last 3 months 1921 [16] 194,000 First 3 months 1922 13 1/4 22 1/6 452,000 Last 3 months 1922 9 1/6 13 1/4 379,000 First 3 months 1923 9 1/7 16 1/2 209,000 *1859 *575 A similar table by the same authority, as agreed to by the parties, shows that between the dates of November 26, 1921, and April 1, 1923, only $93,000 par value rubles were sold at prices varying from $2.50 per thousand rubles to $5.25 per thousand rubles. The parties have also stipulated that, according to the Commercial and Financial Chronicle, during the period from November, 1919, to December, 1923, the bid price on the 6 1/2 per cent issue ranged from 8 1/10 to 35; that the asked price on the 6 1/2 per cent issue ranged from 9 1/4 to 40; that the bid price on the 5 1/2 per cent issue ranged from $2.50 per thousand rubles to $72; and that the asked price on the 5 1/2 per cent issue ranged from $2.25 to $77 per thousand rubles. On December 31, 1922, petitioner's son, acting for the petitioner herein, charged off the External bonds to profit and loss, leaving in the account $1,500 based on a prevailing stock exchange quotation. No market existed for the Internal bonds, and he charged them off at the end of 1922, leaving $15 in the account for the sole purpose of retaining a current record of the bonds on the books. These charge-offs were made on the strength*1860 of the report of the bondholders' committee, the letter from the Banking Department, and his own conclusions in the matter, formulated for the first time in 1922. At the end of 1922 he regarded the investment in the bonds, to the extent of the amounts charged off, as worthless. No interest or principal has been collected on the bonds subsequent to 1922. The bonds are physically still with the committee. The Soviet repudiative decree of 1918 has not been rescinded or modified. The United States Government never has recognized the Soviet Government. Petitioner claimed as a deduction in her 1922 return the amounts charged off in 1922 with respect to the Russian bonds. The respondent disallowed the deduction. OPINION. LOVE: The question in this proceeding is whether petitioner is entitled to deduct from her gross income for the year 1922, either as a bad debt or as a loss sustained, that part of her investment made in 1916 in certain Imperial Russian Government bonds which she in 1922 for the first time ascertained to be worthless and charged off on her books as such during the taxable year. At the hearing petitioner obtained leave to amend her petition so as to claim*1861 the charge-off in the amount of $18,450 either as a bad debt deduction under section 214(a)(7) of the Revenue Act of 1921, or, in the alternative, as a loss sustained under section 214(a)(5) of the same act. Petitioner has briefed the case from the standpoint of both her paramount and alternative contentions, *576 respectively. Counsel for the respondent in his brief did not discuss petitioner's alternative contention, but argued solely the proposition that, "if deductible at all, the deduction must fall within the provisions of section 214(a)(7) supra," and that under this section it could not be held that the bonds in the instant case were ascertained to be worthless during the taxable year 1922, for the reason that the Board had heretofore determined, in the cases of , and , that investments in both the bond issues here in question were worthless and deductible in the year 1920. In her reply brief, petitioner points out that respondent has argued the case solely from the standpoint of "bad debts" and that, therefore, "as to the loss aspect, the situation must be regarded*1862 in the nature of a demurrer by the respondent, since he has entered no defense" and in that regard petitioner prays that judgment be entered for her. At the hearing, however, the respondent filed a general denial to petitioner's alternative assignment of error. The mere failure of the respondent to discuss such alternative assignment of error in his brief does not ipso facto entitle petitioner to judgment thereon. Petitioner's alternative contention will, therefore, be given further consideration in this opinion, if such a course should become necessary. Article 154 of the respondent's Regulations 62 provides in part as follows: ART. 154. Worthless securities. - * * * Bonds purchased since February 28, 1913, when ascertained to be worthless, may be treated as bad debts to the amount actually paid for them. * * * The above identical provision appears in article 154 of Regulations 45, 62, 65 and 69, and article 194 of Regulations 74, which regulations were made and promulgated in pursuance of the Revenue Acts of 1918, 1921, 1924, 1926 and 1928, respectively. In *1863 , the taxpayer had purchased during 1916 and 1917 certain Imperial Russian Government 6 1/2 per cent External bonds dated June 18, 1916, and due June 18, 1919 (i.e., of the same issue as purchased by petitioner herein), and certain 5 1/2 per cent Imperial Russian Government bonds dated December 1, 1916, and due December 1, 1921. The officers of the taxpayer in that case, after having been directed several times during the year 1921 by the State Banking Commissioner to write off its books its entire investment in Russian bonds, and after having discussed the matter between themselves during the year 1921, came to the conclusion during that year that the bonds were worthless and should be charged off, which they did, and as a result of such action the taxpayer there deducted the amount *577 so charged off from its gross income as a bad debt. The Commissioner of Internal Revenue disallowed the deduction. We sustained the Commissioner's action, but on a different basis, namely, that the deduction, if allowable at all, was authorized under the loss provision of the statute, rather than the bad debt*1864 provision. See , and . The Court of Appeals of the District of Columbia, however, reversed the Board, and after quoting the provision of article 154 quoted above and citing numerous cases in support of the proposition that the reenactment by Congress, without change, of a statute which had previously received long continued construction by the Department charged with its execution, is an adoption by Congress of the Department's construction, said: In the present case, the contemporaneous and continued interpretation by the Treasury Department was both equitable and reasonable, and apparently met with the approval of Congress, as otherwise we must assume there would have been a change in the wording of the staute. There is no cogent reason for now adopting the more technical interpretation which the Board has placed upon the statute. It follows, therefore, that the Board erred in not allowing a deduction of 90 per cent of the cost of the bonds as a bad debt. The applicable statute cited above, provides as follows: SEC. 214. (a)(7) That in computing*1865 net income there shall be allowed as deductions: * * * Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part. As stated in his brief, the respondent "respectfully urges that the bonds here in question were not ascertained to be worthless during the taxable year within the meaning of section 214(a)(7) supra, for the reason that the Board has heretofore determined that both the 6 1/2 per cent External Russian bonds and the 5 1/2 per cent Internal Russian bonds were worthless and deductible in the year 1920." The effect of the respondent's contention is that actual worthlessness and the ascertainment thereof must both occur in the year for which the deduction is claimed. These two factors may occur in the same year, but such a coincidence is not a prerequisite to an allowance for debts ascertained to be worthless. As we said in *1866 , "it is not worthlessness which controls, but ascertainment of worthlessness." The same thought was expressed in , wherein we said: *578 That the bonds might have been worthless prior to 1921 is not material. We are here concerned with the year 1921, and the evidence certainly does not justify the conclusion that in 1921 there was any determination or ascertainment that these bonds were worthless. And, again, in the Higginbotham case, p. 578: Since a debt may become worthless in one year, but may be ascertained to be worthless in a different year, and since it seems certain that Congress had no intention that the deduction of the same debt should be twice allowed, it becomes incumbent upon the taxpayer whose claimed deduction is disallowed by the Commissioner to establish that he did ascertain the debt to be worthless in the taxable year in which he claims it to be deductible. The real question here is whether, from the evidence, petitioner in 1922 ascertained the bonds in question to be recoverable only in part, and whether all the surrounding*1867 and attending circumstances indicate that her judgment was justified and in accord with what the ordinary prudent person would have done under the same facts and circumstances. . When we weigh the facts and circumstances present in this case from this viewpoint, we can not escape the conclusion that not only was petitioner entirely justified in doing what she did, but that any other course of action upon these facts which would tend to ask for the deduction in any year other than the taxable year 1922 would not have been warranted. The principal fact that distinguishes this case from all the other Russian bond cases that have been before us is that in 1919 petitioner, through her son as agent, deposited the 6 1/2 per cent bonds with a bondholder's protective committee. This committee was composed of prominent New York men of finance who had access to files and records that were beyond the practical reach of either the petitioner or her son. The deposit of the bonds with this committee was the most reasonable way open to petitioner to ascertain the facts and realize the greatest possible return on her investment. *1868 The bonds were in default when the committee was formed, but no one knew the ultimate outcome. The Russian Government had paid its debts in the past. The repudiation had been made by the revolutionists. There was no telling how long they would be in power. The counter-revolutionists acknowledged the debts. The revolutions repudiated them. Petitioner decided to wait and be governed by the recommendations of the committee, which, in 1922, reported no hope at all for realizing on the bonds. No plan, arrangement, or course of action by which the principal or interest on the bonds could be collected was offered. It was on the receipt of this unfavorable report from the committee that petitioner for the first time had any definite indication or conclusion that the bonds were uncollectible. Under such circumstances, we think petitioner's *579 action in charging off her books the amount of $18,450 in question was entirely justified and in accord with the intendment of the statute permitting a deduction for debts ascertained to be worthless and charged off. It follows that the respondent erred in refusing to allow the deduction as claimed. Reviewed by the Board. Judgment*1869 will be entered under Rule 50. MURDOCK MURDOCK, concurring: I concur in the result because I think the Board was wrong in holding in prior cases (as, for example, First National Bank of St. Paul, supra, and Commonwealth Federal Savings Bank, supra ) that bonds were not debts.