Lake View Trust & Sav. Bank v. Commissioner

LAKE VIEW TRUST AND SAVINGS BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Lake View Trust & Sav. Bank v. Commissioner Docket Nos. 58988, 63050. United States Board of Tax Appeals 27 B.T.A. 290; 1932 BTA LEXIS 1089; December 13, 1932, Promulgated *1089 Where the taxpayer ascertained certain debts to be worthless and charged same off on its books, claimed and was allowed deductions therefor on its returns, and in later taxable years made collections with respect to the debts previously deducted, held, such collections constitute taxable income. Allen H. Gardner, Esq., for the petitioner. T. G. Histon, Esq., for the respondent. SMITH *290 These proceedings, duly consolidated, are for the redetermination of deficiencies in income tax as follows: Docket No. Year Deficiency 58988 [1928] $585.27 63050 [1929] 355.70 The petition alleges that the Commissioner has erroneously included certain collections in petitioner's taxable income, and has failed to allow deductions for alleged bad debts in each of the taxable years 1928 and 1929. FINDINGS OF FACT. The petitioner is a corporation, organized under the laws of the State of Illinois, with its principal office at Belmont and Lincoln Avenues, Chicago, where it is engaged in the banking business. At the beginning of 1924, the J. P. Hartray Shoe Company, of Chicago, was indebted to the petitioner for money loaned*1090 in the *291 amount of $43,500. The Hartray Shoe Company became financially involved, its affairs were investigated by several creditors, including the petitioner, and a creditors' committee formed to liquidate the debtor's assets. During the taxable year 1924, the petitioner received payments amounting to $16,850 on the Hartray Shoe Company indebtedness and, in accordance with its conservative practice, charged off on its books of account $26,000 of the balance of the indebtedness. The petitioner claimed, and the Commissioner allowed, the deduction of the $26,000 as a bad debt in its Federal income tax return for 1924. The petitioner received payments of $650 and 1925, $684.03 in 1926, $501.32 in 1927, and $2,500 in 1928 on account of this indebtedness; the Commissioner added the amount collected in 1928 to the petitioner's taxable income for that year. On December 6, 1923, the petitioner loaned $5,000 to the Motor Mercantile Company of Salt Lake City, Utah. In March, 1924, when this indebtedness became due, the petitioner learned of the financial difficulties of the debtor, and in April, 1924, was notified of the appointment of a receiver for the Motor Mercantile Company. *1091 On October 28, 1924, the petitioner received a payment of $1,000 on this debt. In accordance with its practice the petitioner charged off $2,500 of this debt at the close of the taxable year 1924. The petitioner claimed, and the Commissioner allowed, the deduction of this $2,500 as a bad debt in its Federal income tax return for 1924. In 1928 and 1929 the petitioner received payments on this indebtedness in the respective amounts of $250 and $500, which the Commissioner added to the petitioner's taxable income of the respective years. On May 8, 1925, Rosenbaum Brothers & Company, of Chicago, owed the petitioner $62,540.17 for money loaned. Additional loans amounting to $51,892.30 were made by the petitioner to Rosenbaum Brothers & Company in May, 1925, making the total indebtedness $114,432.47. During 1925 the petitioner received payments amounting to $74,616.88 on account of the loans to Rosenbaum Brothers & Company. That debtor became involved and its affairs were taken over by a creditors' committee in or about June, 1925. At the close of the taxable year 1925, the petitioner charged off on its books of account $36,000 of the balance of the Rosenbaum Brothers & Company*1092 indebtedness. The petitioner claimed, and the Commissioner allowed, the deduction of this $36,000 as a bad debt on its income tax return for 1925. A further charge-off of $3,000 of this indebtedness was made in 1926, and that sum less collections was included in the total deduction for bad debts taken in petitioner's 1926 return. The petitioner received payments of $1,372.70 in 1926, $2,455.20 in 1927, *292 $134.76 in 1928, $2,915.55 in 1929, and $102.60 in 1931, on this indebtedness. The Commissioner added the collections on the Rosenbaum Brothers & Company indebtedness in 1928 and 1929 to the petitioner's taxable income for those years. On its income tax returns for 1924 and 1925 the petitioner reported net losses, and on its returns for 1926, 1927, 1928, and 1929 reported net income in substantial amounts for each year. OPINION. SMITH: The petitioner contends that the collections made in the taxable years before us, on the debts ascertained to be worthless, charged off on its books, and claimed and allowed as deductions from gross income of the earlier years, do not constitute taxable income. The argument is advanced that since the petitioner had net losses*1093 in the earlier years, it has received no benefit from the claimed deductions and that there was no detriment to the Government's revenue thereby. In other words, the assertion is made that such debts, though ascertained to be worthless and actually charged off on the taxpayer's books in a particular year, should not be reflected in the computation of tax liability unless the deduction of the debt actually reduces the taxpayer's taxable income. With this we can not agree. The deduction for bad debts is provided by statute and is predicated upon (a) the ascertainment of worthlessness, and (b) the actual charge-off, and not upon the ultimate resulting benefit to a taxpayer. A taxpayer may not defer the deduction of bad debts ascertained to be worthless and charged off on its books from the year of the ascertainment and charge-off to a later year when the deduction therefor will be of more benefit and effect a greater reduction of its tax liability. In , the Circuit Court of Appeals for the Fifth Circuit, in affirming the Board's decision *1094 (), said: It seems to be taken for granted, as indeed it must be, that, if the 1921 deduction was properly claimed and allowed; that is, if in law and in fact the bonds were in that year ascertained to be to that extent worthless, any later collection of such debt must be returned as income. ; ; ; L.Ed. ; T.D.R. 62, art. 151; T.D.R. 60, art. 50; ; L.Ed. . The petitioner now contends that the debts due from the Hartray Shoe Company and Rosenbaum Brothers & Company were not ascertained to be worthless to the extent of the charge-offs in the *293 earlier tax years, and that it was not until the tax years before us that the uncollected balances on these debts were ascertained to be worthless and should be allowed*1095 as deductions. Similar attacks by a taxpayer upon its earlier action in determining the worthlessness of debts charged off on its books, claimed and allowed as deductions on its returns, were without success, and the taxpayer held to be estopped to deny the correctness of its earlier action, in . From the record made by this petitioner, we are satisfied that the debts in question were ascertained to be worthless to the extent charged off on its books and claimed as deductions by the petitioner in the earlier years, and that collections on these debts in the later years (1928 and 1929) now before us, constitute income to this taxpayer as determined by the respondent. ; ; ; ;Cf. *1096 . Judgment will be entered for the respondent.