First Citizens Bank & Trust Co. v. Commissioner

FIRST CITIZENS BANK AND TRUST COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. First Citizens Bank & Trust Co. v. Commissioner Docket No. 71599. United States Board of Tax Appeals 32 B.T.A. 335; 1935 BTA LEXIS 965; April 3, 1935, Promulgated *965 DEDUCTIONS - DEBTS PARTIALLY WORTHLESS. - Where certain debts were properly ascertained to be partially worthless, in definite amounts, in the taxable year, held, petitioner was not required to formally charge off such amounts within that year, as a condition precedent to the allowance of their deduction in determining taxable income for that year under section 23(j) of the Revenue Act of 1928. Allie M. Turbeville,31 B.T.A. 283, followed. F. Morse Hubbard, Esq., for the petitioner. S. B. Anderson, Esq., for the respondent. LEECH *335 This proceeding seeks redetermination of a deficiency of $167.74 for the calendar year 1930. Petitioner denies the deficiency and contends that there has been an overpayment in tax. The errors assigned by petitioner are: (a) The disallowance of its deduction of $1,387.89 as a business expense, and (b) the failure to allow deduction of certain items alleged to represent portions of various debts due petitioner which were ascertained to be worthless to such extent during the taxable year. These items aggregate a total of $494,609. *336 FINDINGS OF FACT. Petitioner is a banking*966 corporation organized under the laws of the State of New York and located at Utica, New York. In the fall of 1930 the Banking Department of the State of New York, which supervised the banking activities of petitioner, caused an examination to be made of petitioner's business by one of its examiners to determine its condition. This examiner, in conjunction with the vice president and treasurer of petitioner, made an analysis of the loans appearing on the books of the bank. In this examination all facts obtainable with respect to the solvency of the debtor were considered, together with the value of such collateral as was held. Definite amounts of certain of these loans were determined by such examiner to be uncollectible. Petitioner's vice president and treasurer concurred in and agreed to this determination as correct. Thereafter, formal report was made by the examiner of his findings. A copy of this report was severed upon petitioner and is maintained as one of its permanent records. In this report the loans in question are listed and the amount in each case, deemed by the bank examiner to be uncollectible, is set out under the heading, "Examiner's Reserve." The loans*967 in question and the amount of each, so ascertained and determined to be uncollectible, are as follows: Debtor Amount of Amount de- loan termined to be uncol- lectible Albert H. Casey $16,930 $9,691 Carl D. Clapp 2,450 1,400 A. J. Eckert 16,770 9,750 Eckert Syndicate No. 1 4,200 3,150 Eckert Syndicate No. 2 7,000 5,250 M. K. Hart 147,556 85,757 M. K. Hart, Executor 35,122 16,000 Harrocks Desk Co $232,234 $29,950 Pixley & Son Co 92,519 25,000 Richard W. Sherman 12,251 6,616 Joseph Welsenbach 6,400 [750] One Stephan 5,176 3,976 Total 578,608 197,290 The debts, above listed, were in fact worthless to the extent so determined and reported by the bank examiner, as detailed above. During 1930, petitioner did not formally charge off these debts to the extent so ascertained as worthless. In making its return for the calendar year 1930, petitioner did not deduct any amount on account of such indebtedness. Subsequent to the filing of its return, petitioner presented to respondent a formal claim for refund of the tax paid for the calendar year 1930, upon the ground that certain of its accounts, including the items*968 above set out, had, in the calendar year 1930, been ascertained to be partially worthless, in an aggregate amount of $494,609, and requested that credit be allowed therefor *337 under section 23(j) of the Revenue Act of 1928. In determining the pending deficiency, respondent has made no allowance with respect to the partially worthless debts above listed. OPINION. LEECH: On the hearing of this proceeding no evidence was introduced upon issue (a), the disallowance by respondent of the amounts claimed as business expense. Accordingly, on this issue, respondent is sustained. This leaves for consideration the deductibility of certain debts alleged to have been ascertained to be partially worthless in the taxable year. The controlling provision is section 23(j) of the Revenue Act of 1928, which provides: (j) Bad debts. - 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. Certain debts, listed in our findings in an aggregate*969 amount of $578,608, are established by the evidence to have been ascertained and determined to have been worthless and uncollectible in an aggregate amount of $197,290. This ascertainment and determination was by an examiner for the New York State Banking Department and the vice president and treasurer of petitioner. On the hearing, evidence was presented with respect to each one of the loans in question which, in our opinion, amply sustains the determination made in each instance. The events in connection with these loans, transpiring subsequent to the taxable year, confirm the accuracy of the several determinations. We have, in a number of cases, considered subsequent events in testing the accuracy of determinations of worthlessness of debts, Imperial Furniture Co.,9 B.T.A. 713; H. H. Brown Co.,8 B.T.A. 112, as well as determination of value, James Couzens,11 B.T.A. 1040. In Liberty Insurance Bank,14 B.T.A. 1428, this Board held that the requirement of section 234(a)(5) of the Revenue Act of 1921, which is identical with section 23(j) of the Revenue Act of 1928, required that debts determined to be worthless*970 in part must be charged off to that extent within the taxable year, to entitle the taxpayer to the deduction. No distinction was drawn between debts determined to be wholly worthless and those worthless in part. On appeal, the Circuit Court of Appeals for the Sixth Circuit, Commissioner v. Liberty Bank & Trust Co., 59 Fed.(2d) 320, reversed that decision, holding that there was no necessity for the taxpayer to charge off, in the taxable year, that portion of a debt determined to be worthless. The court there said: *338 This statute deals with two classes of debts: Those that have become wholly worthless, and those recoverable only in part. It makes provision for the deduction of each from gross income, providing as to the first that, when "ascertained to be worthless and charged off," a deduction therefor "shall be allowed"; and as to the second, that, when "satisfied that a debt is recoverable only in part the Commissioner may allow such debt to be charged off in part." The allowance as to each class depends on the performance of a precedent act or acts. Those in the first are the ascertainment of worthlessness and the charging off, which must*971 be done by the taxpayer, subject, of course, to the review of the Commissioner as to the reasonableness of the ascertainment. Sherman & Bryan v. Blair, Comm. (C.C.A.) 35 Fed.(2d) 713; Deeds v. Commissioner, 47 Fed.(2d) 695 (6 C.C.A.). In the other class the precedent act must be performed by the Commissioner. He must be "satisfied that a debt is recoverable only in part," and, until he is, there can be no charge off, and then only with his permission. The taxpayer being under no duty to make the charge off in this class until the Commissioner permits it to be done, it is sufficient to give him a right to have the Commissioner's ruling reviewed that his claim to a charge off was made and rejected. In this case claims were presented and disallowed. Whether the disallowances by the Commissioner were because of the failure of the taxpayer to charge off the debts in part or were made in the exercise of the discretion which the Commissioner has does not appear. See Stranahan v. Commissioner, 42 Fed.(2d) 727 (6 C.C.A.) as to the extent of discretion. The Board of Tax Appeals, as we have said, based its decision upon the*972 failure of the taxpayer to charge off the debts in part. We think it should have considered and determined whether the Commissioner abused his discretion in not allowing the charge offs to be made. In Allie M. Turbeville,31 B.T.A. 283, in considering the same question here presented, we followed the decision of the Circuit Court in Commissioner v. Liberty Bank & Trust Co., supra, and applied the rule there announced. This Board then said: As to debts claimed in their entirety, the taxpayer must ascertain them to be worthless and must charge them off. As to debts claimed only in part the Commissioner "must be satisfied that the debt is recoverable only in part and until he is there can be no charge off and then only with his permission". But this ruling may be reviewed and reversed if it appears that in disallowing the charge off to be made he abused his discretion. We are not advised as to the position taken by respondent upon the application of this rule to the present proceeding. He has not filed a brief nor did his counsel argue the question at the hearing. It does appear, however, that the claim for the deduction of this partially*973 worthless indebtedness satisfies the requirements of the applicable regulation, 1 except, in the one particular, that there was no charge-off during the taxable year. It is assumed that it was for *339 this reason the disputed deduction was denied. However, since the hearing in this proceeding, we note the publication of G.C.M. 13114, C.B. XIII-1, p. 116, reading as follows: Advice is requested whether the decision of the Circuit Court of Appeals (Sixth Circuit) in Liberty Bank & Trust Co. v. Commissioner (59 Fed.(2d), 320) should be followed generally in determining the deductibility of partially worthless debts under the Revenue Acts of 1921, 1924, 1926 and 1928. * * * It is the opinion of this office that in order to have the benefit of such a deduction, there must have been an ascertainment by the taxpayer of partial worthlessness within the taxable year. The charge-off in such a case, being a technical requirement, may be made after the taxable year. The allowability of the deduction is, of course, subject to the discretion of the Commissioner. This conclusion is applicable to all cases involving the deductibility of*974 partially worthless debts under the Revenue Acts of 1921, 1924, 1926 and 1928. It would seem that petitioner's claim to the deduction of the uncollectible items, appearing in our findings, satisfies the requirement of the controlling statute as now construed and applied by respondent. 2 We hold that, in computing its taxable income for the calendar year 1930, petitioner is entitled to the deduction of those amounts of the several debts, properly ascertained to be worthless in that year, as set out in our findings of fact. *975 Judgment will be entered under Rule 50. Footnotes 1. ART. 191, Regulations 74. Bad debts.↩ * * * Where banks or other corporations which are subject to supervision by Federal authorities (or by State authorities maintaining substantially equivalent standards) in obedience to the specific orders, or in accordance with the general policy of such supervisory officers, charge off debts in whole or in part, such debts shall, in the absence of affirmative evidence clearly establishing the contrary, be presumed, for income tax purposes, to be worthless or recoverable only in part, as the case may be. 2. It may be noted that, a definite limitation upon the deductibility of partially worthless debts, to amounts charged off during the taxable year, appears in sections 23(j) and 23(k) of the Revenue Acts of 1932 and 1934, respectively. ↩