*3035 No error was committed by respondent in transferring a claimed deduction from the taxable year to the following fiscal year.
*68 The respondent has determined a deficiency of $1,642.20 in income and excess-profits taxes for the fiscal year ended June 30, 1920, in connection with which the petitioner alleges that error was committed in transferring to the succeeding taxable year an item in the amount of $3,550 claimed as a deduction from gross income.
FINDINGS OF FACT.
The petitioner, a corporation with principal offices at Canastota, N.Y., during July, 1918, advanced the sum of $3,550 to Rosenbaum & Co. of New York, under a written contract dated July 8, 1918, for the flotation of $65,000 of its bonds. The sum advanced was to be used to pay preliminary expenses and was to be returned in the event the bond issue was not sold.
On September 10, 1919, Rosenbaum & Co. asserted a claim against petitioner for $9,750 for damages resulting from the latter's refusal to comply with the provisions of the agreement. As an offset*3036 to this claim, on September 17, 1919, the petitioner filed suit against *69 Rosenbaum & Co., claiming damages to the extent of $8,000 because of its failure to carry out the terms of the contract.
In a letter dated January 12, 1920, to Levi Chapman, counsel engaged to represent it in connection with the bond issue and the pending claim and suit, the petitioner said:
We have come to the final decision that the thing to do with the bond issue is to forget it and we herewith give you authority to cancel same and return to us.
The letter also contains a request for the rendition by Chapman of a bill for his services. By January 12, 1920, Chapman had expended the sum of $750, for the petitioner's account, for printing the bonds to be issued, for traveling expenses, and for taxes and fees incident to the recordation of the mortgage prepared to secure the payment of the bonds.
Chapman continued his negotiations with Rosenbaum & Co. for a settlement after the receipt of the letter of January 12, 1920. On October 14, 1920, petitioner's president informed Chapman that if he could obtain the sum of $1,500 in settlement of the pending claim and suit, he should accept it. A*3037 compromise settlement of the matters was made some time in October, 1920, by the payment to the petitioner of the sum of $1,750. This amount constitutes the entire sum recovered by petitioner of its advance payment of $3,550. The amount advanced to Rosenbaum & Co. was not charged off the corporate books during the taxable year.
Petitioner did not have an agreement with Chapman covering his charges for representing it. During the early part of the year 1920, Chapman informed the petitioner that his charges would exceed the amount recoverable. Chapman retained all of the sum recovered for his services and disbursements, amounting to $1,000 and $750, respectively.
In fixing the petitioner's tax liability for the fiscal years ended June 30, in 1920, 1921, and 1922, the respondent disallowed the expenditure of $3,550 as a deductible loss in the year ended in 1920, but allowed $1,800 of the sum advanced, as a loss sustained, and the balance of $1,750 paid to Chapman, as a business expense, in the fiscal year ended June 30, 1921.
OPINION.
ARUNDELL: If the amount sought to be deducted is allowable, it must be either as a debt ascertained to be worthless and charged off during*3038 the taxable year or as a loss sustained during the taxable year. In his brief counsel for the petitioner argues that the amount is deductible as a bad debt.
*70 To be entitled to the claimed deduction as a bad debt the petitioner must prove not only that a debt, in fact, existed, but that it was ascertained to be worthless and was charged off within the taxable year. ; ; and . This burden it has failed to sustain.
At no time during the taxable year did Rosenbaum & Co. admit liability for the return of the whole or any part of the sum advanced to it. On the contrary, it was claiming damages for an additional amount. The efforts of the petitioner in the taxable year were directed to the establishment of its legal right to the fund rather than to an ascertainment of the worthlessness of the alleged debt. We have heretofore held that a debt does not become worthless because of inability to establish legally the liability for the debt. *3039 , and .
Counsel for the petitioner concedes in his brief that there was no charge-off of the account as of January 12, 1920. He argues, however, that the letter of January 12, 1920, referred to in our findings of fact, meets the requirements of the Act in this respect. Opposed to this argument we have the testimony of petitioner's secretary and treasurer that the charge-off was withheld pending the outcome of the suit instituted against Rosenbaum & Co. From this testimony it seems evident that there was no intention to charge off the item until the claims were compromised.
If the deduction be one that is governed by the loss provisions of the statute, we would nevertheless reach the same conclusion, for it was not until the final settlement of the claims between petitioner and Rosenbaum & Co., which occurred in October, 1920, that the former knew definitely what, if any, loss it might sustain.
The petitioner asks that in case we hold that the item is not deductible, the amount of $750 paid to Chapman, in reimbursement of sums expended by him during the taxable year incident to*3040 the bond issue and litigation, be allowed as an ordinary and necessary business expense for the fiscal year ended June 30, 1920. The record is silent on the question of whether petitioner was on the cash or accrual basis of accounting. The petitioner did not repay Chapman's expenses until after June 30, 1920, and the record does not show whether or not a bill for the expenditures was received during the taxable year to accrue on its books. The request must be denied.
Judgment will be entered for the respondent.