Petition for Review of Decision of the United States Board of Tax Appeals.
Before SPARKS, MAJOR and MINTON, Circuit Judges.
The taxpayer petitions for review of a decision of the Board of Tax Appeals denying it a deduction for a bad debt loss resulting from a series of advances to a wholly owned subsidiary. The denial was based on the theory that allowance for the loss in 1936, the year of liquidation of the subsidiary, would permit a double deduction for the taxpayer who, the Commissioner alleged, had previously availed itself of the same loss by means of a consolidated return filed by the two corporations for the year 1933.
Petitioner is a corporation engaged in the business of manufacturing metal stampings and kitchenware. In the year 1933, it decided to add a new line of goods, and organized a new corporation, Bruce-Hunt, Inc., to handle the sales of the new product. Pursuant to petitioner's regular policy with regard to its subsidiaries, the new corporation did not have any permanent assets, and petitioner invested $1,000 in its stock, paying that sum for all its authorized shares, which it held thereafter until liquidation of the corporation. The $1,000 was inadequate to carry on the business of the sales corporation, and additional funds were provided by petitioner by means of cash advances which were treated by both corporations as open account loans. Repayments were made by Bruce-Hunt at various times during the period of its operations. The Board found the following facts as to this running account:
Period Advances Repayments period
1933 $83,197 $52,742 $30,454
1934 113,089 84,932 58,611
1935 79,735 68,858 69,489
Jan. 1936 1,320 7,000 63,809
In January, 1936, Bruce-Hunt sold its inventory and accounts receivable to another subsidiary of petitioner for $33,504 in cash, which it thereupon turned over to petitioner with certain additional cash for a total of $34,859, constituting its only assets. Petitioner credited this on the open account, leaving an unpaid balance of $28,950, which petitioner ascertained to be worthless and charged off its books as a bad debt at the end of 1936. Bruce-Hunt was duly dissolved in February, 1936.
Petitioner's investment in Bruce-Hunt stock was recorded on its books by a debit of $1,000 to an account entitled, "Investment in Bruce-Hunt, Inc." This was written off by a credit of $1,000 in 1936. The evidence showed that all advances to Bruce-Hunt were ...