Petitions for Review of Order of the United States Board of Tax Appeals
Before ALSCHULER, PAGE, and SPARKS, Circuit Judges.
The question before us is whether or not the facts presented by the record are sufficient to justify the action of the Board of Tax Appeals in affirming respondent's determination that the taxpayer was not entitled to deduct the worthless and unrecoverable parts of the bad debts, referred to in the statement of facts, in arriving at his net income for 1921 and 1922.
The ruling of the Commissioner of Internal Revenue being prima facie correct, the burden of proof is upon the taxpayer to establish his right to the deduction claimed. United States v. Rindskopf, 105 U.S. 418, 26 L. Ed. 1131; Wickwire v. Reinecke, 275 U.S. 101, 48 S. Ct. 43, 72 L. Ed. 184.
The provisions of the statute relating to deductions for worthless debts are contained in the Revenue Act of 1921, and the regulations of the Treasury Department thereunder. They are as follows:
"Section 214. (a) That in computing net income there shall be allowed as deductions: * * *
"(7) 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. * * *" 42 Stat. 239, U. S. Code, title 26, c. 19, § 955 (a) (7) [26 USCA § 955(a)(7)].
"Regulation 62, Art. 151. Bad debts may be treated in either of two ways -- (1) by a deduction from income in respect of debts ascertained to be worthless in whole or in part, or (2) by a deduction from income of an addition to a reserve for bad debts. * * *
"Where all the surrounding and attending circumstances indicate that a debt is worthless, either wholly or in part, the amount which is worthless and charged off or written down to a nominal amount on the books of the taxpayer shall be allowed as a deduction in computing net income. There should accompany the return a statement showing the propriety of any deduction claimed for bad debts. "No deduction shall be allowed for the part of a debt ascertained to be worthless and charged off prior to January 1, 1921, unless and until the debt is ascertained to be totally worthless and is finally charged off or is charged down to a nominal amount, or the loss is determined in some other manner by a closed and completed transaction. Before a taxpayer may charge off and deduct a debt in part, he must ascertain and be able to demonstrate, with a reasonable degree of certainty, the amount thereof which is uncollectible. * * * Partial deductions will be allowed with respect to specific debts only."
In dealing with the question of the deduction on account of a partially worthless debt, the three essential requirements of the statute which must be met before it may be allowed are: First, there must be an existing debt; second, that part of the debt sought to be deducted must have been ascertained to be worthless during the taxable year; and, third, it must have been charged off within the taxable year.
That there was an existing debt is beyond question. Whatever might be surmised as to an accommodation gift on the part of decedent to his friend Ellis or to his son Howard is wholly without evidence to support it, and such an inference cannot prevail over the uncontradicted evidence to the contrary.
It is equally clear that $26,253.57 of the debt was worthless in the year 1921. This is practically admitted and is conclusively shown by the financial statements and balance sheets of the Company for that period, and no evidence to the contrary was submitted. The exact figure was correctly calculated from the balance sheet of December 31, 1921.
One of the matters upon which the parties do not agree is as to the time that decedent ascertained the worthlessness of this part of the debt. This is indeed a vital question, for, unless the evidence proves that decedent ascertained this fact during the year 1921, the petitioners cannot prevail. Death having sealed the lips of decedent, we are to determine this fact from his conversations with others, his business qualifications, and his opportunity for observing the actual financial conditions of the Company during 1921. The evidence is uncontradicted that he was a business man of unusual experience in financial matters and in judging the worth of securities and investments. Monthly and annual financial statements and balance sheets of the Company for 1921 and 1922 were regularly submitted to him during those respective years; and they correctly reflected its condition at those times. In fact, it may be said that he was well informed as to its condition for many years prior to 1921. As early as 1919 he said to a friend that he would never get his money out of the Company, but gave no reason. During 1921 he talked with his son, who was then president of the Company, concerning its financial condition, and they both decided to sell the property and to go into liquidation, for the reason that the Company was not making expenses, and was unable to meet its obligations. During the years of 1918, 1919, and 1920 the Company had shown a substantial loss, and the balance sheet on December 31, 1921, showed that the debt owing to decedent was worthless to the extent of $26,253.57. With these uncontradicted facts in possession of decedent in 1921, we are forced to the conclusion that in that year he was fully cognizant of the fact that his debt was ...