Petition for Review of Decision of United States Board of Tax Appeals.
Before EVANS and KERNER, Circuit Judges, and LINDLEY, District Judge.
Is there substantial evidence to support the Board's finding that the bad debt for which the petitioner seeks a deduction was ascertained to be worthless before the taxable year 1933? This is our quetion.
Most of the facts are free from doubt or dispute.
Petitioner was a contractor who constructed, pursuant to a contract entered into in 1926, a four-story building containing two lodge halls, a small hall, and two stores, for the Ring Lodge No. 8, Independent Order of Svithiod, for the agreed price of $134,969.
The building was completed in 1927 and $106,970 was paid that year by the Ring Lodge. Petitioner included the full contract price of $134,969 in its income tax return for the year 1927. The balance due petitioner, to-wit, $27,999, was never paid.
Petitioner claims that the debt became worthless in 1933. The Board found that the debt should have been charged off in 1931 or 1932.
The Facts. To finance the building, Ring Lodge in 1927 borrowed $200,000 from the Grand Lodge, giving a first mortgage on the building and premises as security for its loan. The Grand Lodge began foreclosure proceedings in 1929. Taxpayer intervened, asserting a mechanic's lien, but in October, 1931, the rights of the Grand Lodge were adjudged paramount to the mechanics' liens by the Illinois Appellate Court, and the property was sold in July, 1931, at foreclosure, the Grand Lodge bidding it in for $218,000. The period of redemption ended in July, 1932, without the property's being redeemed.
In 1930, taxpayer represented by an attorney, began an action against Ring Lodge in the Municipal Court of Chicago, to collect the balance due it. Following the adverse outcome of the foreclosure proceedings, taxpayuer, in 1931, discussed with its counsel the question of the debt owing from Ring Lodge. Counsel advised taxpayer that he was trying to get a judgment against Ring Lodge and, if successful, would levy on its assets and bring a creditor's bill against Ring Lodge and Grand Lodge alleging collusion. In 1931 or 1932, the same counsel also told taxpayer that an attempt was being made to arrange for a payment of the debt by an assessment of the members of Ring Lodge, so a stenogrepher testified. When making its income tax returns in 1931 and 1932, taxpayer took up the matter of the collection of this debt with its counsel and was advised that efforts were still being made to collect it.
The returns of the taxpayer for each of the years 1931 and 1932 showed net losses. In these same years the taxpayer was advised by an accountant not to charge off the debt as worthless because the suit for its collection was pending.
Ring Lodge, with the consent of the Grand Lodge, continued using the mortgaged premises subsequent to the foreclosure of the mortgage and the expiration of the redemption period. In 1933, the Ring Lodge was disbanded and in that year counsel advised taxpayer of its dissolution and that it had no assets and that collection was hopeless. The action at law was never pressed to judgment and was dismissed in 1934.
If this were a trial de novo and we were to make findings upon the impressions which the facts make upon us, a conclusion different from that found by the Board might well be recorded. But to say there is no evidence to sustain the finding of the Board - obviously that is a vastly different question.
As in many analogous situations where the test to be applied is somewhat relative in character, we may find enlightenment in a study of extreme cases over which ...