[857] OPINION.
Ajrundell:
In 1920 the First National Bank sold 108 shares of stock of the Traders Oil Co. for $6,480. This stock had been acquired by the bank in settlement of a debt, at a cost of $7,020. Consequently, on the sale a loss of $540 was sustained, for which it is entitled to a deduction for the year 1920. Instead of claiming a loss on this transaction the bank erroneously reported a profit of $1,080 due to using an incorrect cost basis. • The income should accordingly be reduced by the amount of $1,080, in addition to allowing the loss of $540.
The First National Bank claims a deduction of $21,200, representing unsecured notes of the Fontana Farms Co., charged off in 1921. The evidence shows that the Fontana Co. was in poor financial condition and that for a number of years its operating expenses had exceeded its income. In 1921 it effected a reorganization which enabled it to reduce its interest payments and to obtain funds from its security holders to meet its carrying charges and operating costs. Some of its bondholders deemed the securities of so little value that they surrendered their bonds for land having a market value of not more than 50 per cent of the face value of the bonds.
While the poor financial condition of the Fontana companies might at first glance indicate that the unsecured notes held by the petitioner were of little value, an analysis of the Fontana balance sheet set out in the findings of fact shows substantial assets in excess of the liabilities. The evidence shows the book value ascribed to the land to have been at least one-third greater than its true' value. [858] Allowing for this over-valuation reduces the value of the land by $1,240,000 in round numbers, and serves merely to wipe out the greater part of the book surplus. The extent of the overvaluation of the other assets is not disclosed by the evidence, but even applying to all of them, including the land, a write-down of one-third of the book values, there remains a value of $4,229,970 which is $1,666,127.69 in excess of the total bonded indebtedness and notes and accounts payable. Taking this view of the case, the petitioner has failed to establish that any part of the Fontana notes were worthless at the close of 1921 and we must sustain the respondent in his refusal to allow the deduction claimed.
The loans by the First National Bank to C. H. & O. B. Fuller Co. and affiliated companies were secured mainly by capital stock and mortgages and trust deeds on property of corporations in which the Fullers were interested. As shown by the findings of fact, these securities in the aggregate were insufficient to secure'the indebtedness for which they were held. All of the assets shown in the Fuller Co. balance sheet and the balance sheets of the other companies listed in the findings of fact were greatly overvalued. The indebtedness of the Fuller Co. to the petitioner constituted over 40 per cent of its liabilities exclusive of capital stock liability. Even if the balance sheet is taken as representing the true assets and liabilities, it works out that 40 per cent of the deficit, excluding capital stock liability, is $94,602, which, if established, is more than sufficient to warrant the allowance claimed. However, as set forth in the findings of fact, the excess of liabilities over assets was greater than shown by the balance sheet. The several companies had in fact no net worth and their stocks were of little value as security for the Fuller indebtedness. A true picture of the woeful lack of security for the Fuller indebtedness can best be shown by a summary which appears as follows:
Indebtedness-_$1,075,551.11
Security. Actual value.
Assignment of credit-None.
Flying V chattel mortgage. $102, 342. 73
Jalama chattel mortgage-120, 000. 00
Pioneer trust deed-184, 439. 00
Jalama trust deed_ 140, 050. 00
Capital stock pledged-None.
Fuller indorsements-None.
Total value as security. 546, 831.73
Deficiency in security- 528,719.38
The officers of the bank were aware of this situation and at the close of 1921 had ascertained that the Fuller account was worthless to the extent of more than $50,000. Under section 234(a) (5) of the [859] Revenue Act of 1921 a debt which is recoverable only in part may be charged off in part. It is not necessary under this provisión, as it had been under the Revenue Act of 1918, to ascertain that a debt is worthless in whole in order to support a claim for deduction. In Appeal of John E. Saddler, 2 B. T. A. 1305, we had under consideration the partial charge off of an item under section 214(a) (7) which is identical with section 234(a) (5) of the 1921 Act. We said there,
The ascertainment of the worthlessness of a debt, either in whole or in part, is the exercise of sound business judgment based upon as complete information as is practicably obtainable.
In the case of Stieglitz, Treiber Co., 1 B. T. A. 452, where the taxpayer’s debtor was in financial difficulties and it was found that the debt at the close of the year could not be regarded “ as reasonably worth more than 50 per cent of its face amount,” the taxpayer was permitted a deduction of one-half the amount of the debt.
In view of the evidence we believe that the petitioner is entitled to a deduction in the amount of $50,000, the amount of the Fuller indebtedness that it charged off in 1921.
The petitioner, First National Bank, claims as a deduction for 1921 the amount of $7,018.32, representing the difference between a note of the Sutherland Fruit Co. for $7,500 and the amount of $481.68, which is the amount of the final liquidating dividend received in 1921 as the result of the bankruptcy of the debtor. The original indebtedness of the Sutherland Fruit Co. was $10,000. This amount was charged off in 1918 but was disallowed by the Commissioner as a deduction for that year. The bankruptcy of the Sutherland Fruit Co. and the receipt of a final dividend in 1921 constitute sufficient proof to permit the deduction of the balance of the account as a bad debt in 1921. The deduction allowable is the difference between $7,500 and the dividends of $226.16 and $481.68, received in 1921.
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[857] OPINION.
Ajrundell:
In 1920 the First National Bank sold 108 shares of stock of the Traders Oil Co. for $6,480. This stock had been acquired by the bank in settlement of a debt, at a cost of $7,020. Consequently, on the sale a loss of $540 was sustained, for which it is entitled to a deduction for the year 1920. Instead of claiming a loss on this transaction the bank erroneously reported a profit of $1,080 due to using an incorrect cost basis. • The income should accordingly be reduced by the amount of $1,080, in addition to allowing the loss of $540.
The First National Bank claims a deduction of $21,200, representing unsecured notes of the Fontana Farms Co., charged off in 1921. The evidence shows that the Fontana Co. was in poor financial condition and that for a number of years its operating expenses had exceeded its income. In 1921 it effected a reorganization which enabled it to reduce its interest payments and to obtain funds from its security holders to meet its carrying charges and operating costs. Some of its bondholders deemed the securities of so little value that they surrendered their bonds for land having a market value of not more than 50 per cent of the face value of the bonds.
While the poor financial condition of the Fontana companies might at first glance indicate that the unsecured notes held by the petitioner were of little value, an analysis of the Fontana balance sheet set out in the findings of fact shows substantial assets in excess of the liabilities. The evidence shows the book value ascribed to the land to have been at least one-third greater than its true' value. [858] Allowing for this over-valuation reduces the value of the land by $1,240,000 in round numbers, and serves merely to wipe out the greater part of the book surplus. The extent of the overvaluation of the other assets is not disclosed by the evidence, but even applying to all of them, including the land, a write-down of one-third of the book values, there remains a value of $4,229,970 which is $1,666,127.69 in excess of the total bonded indebtedness and notes and accounts payable. Taking this view of the case, the petitioner has failed to establish that any part of the Fontana notes were worthless at the close of 1921 and we must sustain the respondent in his refusal to allow the deduction claimed.
The loans by the First National Bank to C. H. & O. B. Fuller Co. and affiliated companies were secured mainly by capital stock and mortgages and trust deeds on property of corporations in which the Fullers were interested. As shown by the findings of fact, these securities in the aggregate were insufficient to secure'the indebtedness for which they were held. All of the assets shown in the Fuller Co. balance sheet and the balance sheets of the other companies listed in the findings of fact were greatly overvalued. The indebtedness of the Fuller Co. to the petitioner constituted over 40 per cent of its liabilities exclusive of capital stock liability. Even if the balance sheet is taken as representing the true assets and liabilities, it works out that 40 per cent of the deficit, excluding capital stock liability, is $94,602, which, if established, is more than sufficient to warrant the allowance claimed. However, as set forth in the findings of fact, the excess of liabilities over assets was greater than shown by the balance sheet. The several companies had in fact no net worth and their stocks were of little value as security for the Fuller indebtedness. A true picture of the woeful lack of security for the Fuller indebtedness can best be shown by a summary which appears as follows:
Indebtedness-_$1,075,551.11
Security. Actual value.
Assignment of credit-None.
Flying V chattel mortgage. $102, 342. 73
Jalama chattel mortgage-120, 000. 00
Pioneer trust deed-184, 439. 00
Jalama trust deed_ 140, 050. 00
Capital stock pledged-None.
Fuller indorsements-None.
Total value as security. 546, 831.73
Deficiency in security- 528,719.38
The officers of the bank were aware of this situation and at the close of 1921 had ascertained that the Fuller account was worthless to the extent of more than $50,000. Under section 234(a) (5) of the [859] Revenue Act of 1921 a debt which is recoverable only in part may be charged off in part. It is not necessary under this provisión, as it had been under the Revenue Act of 1918, to ascertain that a debt is worthless in whole in order to support a claim for deduction. In Appeal of John E. Saddler, 2 B. T. A. 1305, we had under consideration the partial charge off of an item under section 214(a) (7) which is identical with section 234(a) (5) of the 1921 Act. We said there,
The ascertainment of the worthlessness of a debt, either in whole or in part, is the exercise of sound business judgment based upon as complete information as is practicably obtainable.
In the case of Stieglitz, Treiber Co., 1 B. T. A. 452, where the taxpayer’s debtor was in financial difficulties and it was found that the debt at the close of the year could not be regarded “ as reasonably worth more than 50 per cent of its face amount,” the taxpayer was permitted a deduction of one-half the amount of the debt.
In view of the evidence we believe that the petitioner is entitled to a deduction in the amount of $50,000, the amount of the Fuller indebtedness that it charged off in 1921.
The petitioner, First National Bank, claims as a deduction for 1921 the amount of $7,018.32, representing the difference between a note of the Sutherland Fruit Co. for $7,500 and the amount of $481.68, which is the amount of the final liquidating dividend received in 1921 as the result of the bankruptcy of the debtor. The original indebtedness of the Sutherland Fruit Co. was $10,000. This amount was charged off in 1918 but was disallowed by the Commissioner as a deduction for that year. The bankruptcy of the Sutherland Fruit Co. and the receipt of a final dividend in 1921 constitute sufficient proof to permit the deduction of the balance of the account as a bad debt in 1921. The deduction allowable is the difference between $7,500 and the dividends of $226.16 and $481.68, received in 1921.
The last item for consideration is the claim of the Los Angeles Trust & Savings Bank for a deduction of $8,922.21 written off in 1921 as a bad debt of the Union Supply Co. The bank had as security for this account a warehouse receipt covering a quantity of secondhand, pipe and before the close of 1921 secured a chattel mortgage on some pipe-cutting machines, office furniture, and an automobile. The bank took over the assets of the debtor and attempted, without success in 1921, to sell them in order to liquidate the indebtedness. While it appears that there was no ready market in 1921 for the property taken over from the Union Supply Co. we are not satisfied that the account was ascertained to be wholly worthless in 1921. As set out above, the Revenue Act of 1921 permits the charge-off of the portion of a debt which it is ascertained can not [860] be recovered, but in this case the evidence does not show to what extent the account had been ascertained to be uncollectible in 1921 and we can not say what portion of it may be allowed.
Judgment will be entered on IS days’ notice, u/nder Rule 60.