*2238 In view of all the evidence in this case, the determination of the Commissioner is approved.
*1313 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the year 1920 in the amount of $10,833.73.
The sole issue is whether or not the Finance Trust, hereinafter referred to as the Trust, a subsidiary of the petitioner, was engaged during 1920 in buying and selling silk and is therefore entitled to make its return on an inventory basis. The respondent has determined that the petitioner and its subsidiaries were merely engaged in financing other businesses and has denied a deduction representing a loss on an alleged silk inventory. The parties agree that if the Trust is entitled to report on an inventory basis, the amount of the deduction may be settled upon recomputation under Rule 50.
FINDINGS OF FACT.
The petitioner is a Delaware corporation with its principal office at Baltimore, Md. It is a commercial finance company, whose charter empowers it, among other things -
To buy, sell, *2239 exchange, hold and own * * * commercial papers, bills of lading, warehouse receipts, bonds and securities, * * * choses in action of any and every kind, nature and description, and other personal property of any *1314 kind whatsoever, and to loan to any person, partnership, corporation or association any moneys * * *.
* * *
To manufacture, purchase, or acquire in any lawful manner, and to hold, own, mortgage, pledge, sell, transfer or in any manner dispose of, and to deal and trade in goods, wares, merchandise and property of any and every class and description, and in any part of the world.
* * *
To enter into, make and perform contracts of every kind with any person, firm, association or corporation * * *.
* * *
To do any and all of the things herein set forth to the same extent as natural persons might or could do, and in any part of the world, as principals, agents, contractors, trustees or otherwise, and either alone or in company with others.
In general to carry on any other business in connection therewith, whether manufacturing or otherwise, not contrary to the laws of the State of Delaware, and with all the powers conferred upon corporations by the*2240 laws of the State of Delaware.
The petitioner did business in all States east of the Mississippi River, including the State of New York, except that in New York City it operated through a so-called "Massachusetts trust," known as the Finance Trust and taxable as an association.
The Trust was created on or about December 31, 1917, with three of the petitioner's directors as trustees, and it was owned entirely by the petitioner. It had no capital and was operated wholly on money loaned it by the petitioner. The Trust submitted monthly reports to the petitioner and meetings of its trustees were held in the office of the petitioner's president at Baltimore.
Sometime in the fall of 1919 the Trust entered into a contract with the Morcott Co., of New York, under the terms of which the Trust purchased in Japan and imported into the United States certain silk. In addition to the purchase price and shipping charges the Trust paid custom duties, warehouse charges, etc. The silk was purchased to meet sales which the Morcott Co. had made or was to make. The silk was warehoused in the name of the Trust and when it was sold was shipped out on orders of the Morcott Co., being paid for*2241 as shipped. Some of the silk was held in bonded warehouses without duty payments, to be sold for exportation. The silk was carried on the books of the Trust as an account receivable from the Morcott Co., shipping charges, duties, etc., being added to the purchase price. Sometime in 1920 the Morcott Co. failed.
The petitioner and the Trust filed a consolidated return for 1920, the entire tax being allocated to the petitioner. The business of the petitioner was reported as "financing of manufacturers and jobbers." No inventories were reported. In the consolidated return a deduction of $37,384.66 was claimed as a bad debt arising from *1315 the business relations between the Trust and the Morcott Co. The amount of the deduction claimed represents the difference between cost of the silk as carried on the Morcott Co. account and the market value at the close of the taxable year as determined by an inventory of silk on hand. The respondent has disallowed the claimed deduction upon the theory that the silk was held by the Trust as collateral for advances on credits given the Morcott Co. and the contention that no loss was realizable until such collateral had been disposed*2242 of.
Consolidated balance sheets of the petitioner and the Trust at January 1, 1920, and January 1, 1921, follow:
| January 1, 1920 | January 1, 1921 | |||
| RESOURCES | ||||
| Cash on hand and in banks | $434,884.73 | $594,247.18 | ||
| Liberty bonds | 18,450.00 | 16,900.00 | ||
| Prepaid interest, insurance, | ||||
| etc. | 31,888.90 | 27,541.36 | ||
| Bills and accounts receivable | 3,721,998.21 | 2,890,957.00 | ||
| 4,207,221.84 | 3,529,645.54 | |||
| LIABILITIES | ||||
| Bills payable | 2,549,719.87 | 2,071,000.00 | ||
| Reserves | 696,855.46 | 450,468.03 | ||
| Reserve commissions | 7,624.46 | 13,424.88 | ||
| Capital stock | $778,000.00 | $813,950.00 | ||
| Surplus and undivided profits | 175,022.05 | 180,802.63 | ||
| 953,022.05 | 994,752.63 | |||
| 4,207,221.84 | 3,529,645.54 |
The records of the petitioner were maintained on the basis of a banking institution, all assets except cash and minor items being included in accounts receivable. The petitioner sold the Trust in 1924.
OPINION.
LOVE: The sole issue in this proceeding is whether or not the consolidated return for the year 1920 may properly be made as that of a business having an inventory and this turns upon the business relations existing between*2243 petitioner and the Morcott Co. Because of the unusual record we desire to first discuss the basis upon which the findings have been made. The only testimony presented was that of F. R. V. Williams, who was president of the Finance Co. during the taxable period involved and was one of the three organizing trustees of the Trust. Mr. Williams was not a trustee during 1920.
The business of the Trust was directed in New York by Charles W. Hodell, one of the trustees and a director of the petitioner. The two other trustees were in Baltimore and conferences regarding *1316 the affairs of the Trust were held there in the office of Williams, who, although not a trustee, attended these conferences as president of the petitioner, which was the owner of the Trust. He was familiar with its books of account and the general method of its operations and had discussed relations between the Trust and the Morcott Co. with officials of the latter while in New York at various times.
The respondent objected to the testimony of Williams as hearsay, contending that his only knowledge material in this proceeding was obtained from Hodell and possibly a certain employee of the Trust named Hartfield. *2244 Hodell and Hartfield are now dead. In 1923 the petitioner sold the Trust, and many of its papers and books of account relative to its relations with the Morcott Co. have been lost.
In our opinion Williams had personal knowledge of the essential factors. These are that the silk was purchased in Japan by the Trust for its own account, and was warehoused in New York in the name of the Trust. Williams testified that the Trust had no capital of its own and that he as president of the petitioner signed the checks in payment for the silk for the account of the Trust. It further appears that, as the silk was released from the warehouse to fill orders secured by the Morcott Co., that company paid the Trust for it. We are of opinion that the silk was in fact owned by the Morcott Co., although the record title was in the Trust. That record title was so held by the Trust in lieu of a mortgage lien simply for convenience and better security for the debt due by the Morcott Co., and that in fact the relation of debtor and creditor existed between the Morcott Co. and the petitioner.
The foregoing conclusion of fact is reached by taking into consideration all the evidence in the case, *2245 and particularly the following facts:
1. Petitioner's primary business was that of financing other companies in their business activities.
2. The silk in question was purchased to fill orders theretofore received by the Morcott Co., as well as to fill orders anticipated by that company.
3. The account was carried on the books of petitioner as an account receivable against the Morcott Co.
4. Petitioner at first treated the alleged loss as a bad debt.
In view of the conclusion we have reached, we approve the action of the Commissioner.
Judgment will be entered for the respondent.