*1060 1. Debts were ascertained to be worthless in 1932 by the executive committee of a taxpayer bank and by the state bank examiner, and were directed by the banking commissioner to be charged off. Part was charged off in 1932 and the remainder in 1933. Held, the amount charged off in 1933 is not deductible in that year.
2. The effect as a deduction upon a mortgagee-taxpayer of the foreclosure of a mortgage and his purchase of the property at auction for a bid price less than the mortgage loan must be tested by the bad debt provision of the statute and not by the loss provision.
3. The mortgagee-taxpayer acquired the mortgaged property for a bid price less than his loan, and on his accounts he transferred the full amount of the loan from the loan account to the real estate account so as to show the property as having a cost equal to the loan plus foreclosure expenses. Held not a charge-off within the meaning of the bad debt provision of the statute.
*1061 *191 Respondent determined a deficiency of $6,460.71 in petitioners' income tax for the year 1933. They assail the disallowance of a deduction for bad debts and also claim a deduction, not taken on the return, for losses on the foreclosure of mortgages.
FINDINGS OF FACT.
1. The petitioners 1 are affiliated corporations, doing business in Malden, Massachusetts. They filed a consolidated return.
In September 1932 the petitioner's accounts were examined by an examiner for the Massachusetts Commissioner of Banks. When this examination was ended the officials of the petitioner knew the substance of what he would report.
On December 22, 1932, the executive committee voted "That this Committee recommends for action at the next regular meeting of the Board of Directors the transfer of $100,000. from our Surplus account to Profit and Loss and charging to Profit and Loss the following notes: [Here follows a list of 110 notes showing the dates of the notes, the names of the makers and endorsers, and the amounts charged, aggregating $103,963.30.]"
*1062 Under date of December 29, 1932, the Commissioner of Banks made his report, which was received by petitioner December 30, 1932. It was the first official communication which had been received from him in regard to a requirement of a write-down of assets. The report listed the same notes as those listed in the aforesaid vote of the executive committee.
On December 31, 1932, petitioner charged off bad debts aggregating $50,422.55, consisting of items included in the aforesaid list of the executive committee. 2
On January 5, 1933, the executive committee voted:
To amend the vote of December 22, 1932, so that it will read as follows: That this committee recommends for action at the next regular meeting of the Board of Directors the transfer of $200,000 from our surplus account to profit and loss, and the charge to profit and loss the notes as listed in the original vote.
On January 9, 1933, the board of directors met, and, as shown by the minutes:
The acts of the Executive Committee and Investment Committee at meetings held December 8th, 1932 to January 5th, 1933*1063 inclusive, and the acts of the Trust Committee at meeting held December 29th, 1932, as recorded, were read and approved.
* * *
*192 On motion, duly made and seconded, it was
VOTED: To transfer $200,000, from our Surplus Account to our Profit & Loss account and charge to Profit and Loss notes totalling $103,963.30, as recommended by the Executive Committee at their meeting of December 22nd, 1932, and amended at January 5, 1933 meeting.
On January 20, 1933, the remaining items on the list, aggregating $53,515.75 (sic), were charged off. They had in 1932 been ascertained by the petitioner to be worthless. This amount was taken as a deduction on the petitioner's 1933 return.
2. In 1933 the bank foreclosed mortgages on real estate and itself purchased the properties at the foreclosure sale. The outstanding indebtedness to the bank at the time of the foreclosure, plus expenses of foreclosure and taxes paid, the bid price, and the assessed values of the properties as of April 1933, and the claimed losses, aggregating $37,690.32, are:
| Properties | Assessed value | Indebtedness | Bid price | Claimed loss |
| 236-238 Bryant St., Malden | $8,300 | $6,421.01 | $3,700 | $2,721.01 |
| 19-21 Eliot St., Medford | 7,800 | 6,173.69 | 4,700 | 1,473.69 |
| 623 High St., Medford | 6,400 | 5,579.25 | 3,000 | 2,579.25 |
| 47-49 Holyoke St., Malden | 7,050 | 5,697.01 | 3,000 | 2,697.01 |
| 57-59 Home St., Malden | 6,900 | 6,100.47 | 3,000 | 3,100.47 |
| 12-14 Kenmore Rd., Malden | 8,300 | 7,275.39 | 4,000 | 3,275.39 |
| 7 Pinevale Ave., Reading | 4,400 | 3,478.52 | 2,000 | 1,478.52 |
| 173-175 Walnut St., Malden | 4,000 | 3,511.98 | 2,000 | 1,511.98 |
| 280 Washington St., Malden | 3,400 | 3,951.76 | 2,000 | 1,951.76 |
| 32-34 Wedgemere Rd., Malden | 8,200 | 6,913.34 | 3,000 | 3,913.34 |
| 45 Wheeler St., Malden | 5,000 | 4,902.70 | 1,000 | 3,902.70 |
| 26 Winchester St., Malden | 7,150 | 7,092.64 | 4,000 | 3,092.64 |
| 25-27 Clapp St., Malden | 8,300 | 6,693.68 | 3,000 | 3,693.68 |
| 146 Hancock St., Everett | 5,600 | 3,298.88 | 1,000 | 2,298.88 |
*1064 All the properties were bought in by the bank at public auction under the power of sale contained in the mortgage deed. No suits were instituted for deficiency judgments on the mortgage notes. The petitioner's practice was to bring such suits whenever it believed it could recover.
Prior to foreclosure the mortgage loans were entered on petitioner's books as loans on real estate, representing assets or investments in the mortgages. When default occurred it published a notice once a week for three consecutive weeks, the first publication being at least twenty-one days before the date of the public auction, as required by Massachusetts law. In harmony with its usual accounting practice the loans were, after foreclosure, taken out of the loans on real estate account, and entered in the "foreclosed real estate" account, together with legal, advertising, and other expenses incidental to the foreclosures. The bid price was not entered or accounted for. The books thereafter indicated that the petitioner was the owner of the property acquired on the foreclosure at a cost equivalent to the original *193 mortgage, plus any incidental costs which were paid. The debts represented*1065 by the mortgage loans were not charged off but were accounted for by petitioner as part of the cost of the property acquired on foreclosure. It did not take a deduction in respect of the mortgage loans in its income tax return for 1933.
OPINION.
STERNHAGEN: 1. In disallowing the deduction taken by the petitioner in 1933 of $53,515.75, the Commissioner stated in the notice of deficiency: "Bad debts claimed in the amount of $53,515.75 have been disallowed as a deduction for the year 1933 for the reason that they were determined to have been worthless in 1932 and in accordance with section 23(j) of the Revenue Act of 1932 should have been charged off within the taxable year 1932." The petitioner assails this determination.
The evidence does not, we think, establish that this determination was incorrect, but, on the contrary, supports it. Both the bank examiner and the executive committee of the petitioner were clearly of the opinion in 1932 that the debts aggregating $103,938.30 should be charged off. Instead, however, the charge-off at that time was limited to $50,422.55. Why it was thus limited does not clearly appear, although the suggestion is made - and not unreasonably*1066 - that this was the extent to which a tax deduction would be useful in 1932. When the later charge-off was made on January 20, 1933, nothing more had happened to demonstrate worthlessness beyond what was known at the end of 1932. As against this considered and expressed judgment of the executive committee recorded in 1932 and approved fully at the board meeting of January 9, 1933, the testimony of the assistant treasurer as to his appraisal of the worth of the individual items making up the $53,515.75 is not persuasive.
It has, therefore, been found as a fact, upon a consideration of all the evidence, that the debts aggregating $53,515.75 which were charged off on January 20, 1933, had in 1932 been ascertained by the petitioner to be worthless. They reasonably should have been charged off in that year as were those aggregating $50,422.55. The Commissioner allowed the deduction of the latter amount and it may be assumed that he would not have disallowed the deduction of the entire amount which the Commissioner of Banks directed (see T.D. 4633, XV-1 C.B. 118) and which the executive committee voted. The circumstance that such a deduction in the full amount might*1067 have availed the taxpayer nothing of tax advantage is adventitious and may not influence the decision. The determination as to this item is sustained.
*194 2. The petitioner now claims a deduction, not taken on its return, for losses aggregating $37,690.32, said to have resulted from the foreclosure of the mortgages as set forth in the findings. The statutory deductions allowed for bad debts and those allowed for losses are mutually exclusive, Spring City Foundry Co. v. Commissioner,292 U.S. 182">292 U.S. 182. Petitioner, however, in its petition, at the trial, and in its brief, has made no claim for deduction under the bad debt provision; and this, despite the fact that the respondent has argued that the deduction must be tested entirely by the standards of the bad debt provision. Since deductions are entirely statutory and their allowance may not go beyond the statutory conditions upon which they are made to depend, Burnet v. Thompson Oil & Gas Co.,283 U.S. 301">283 U.S. 301; Helvering v. Independent Life Insurance Co.,292 U.S. 371">292 U.S. 371, it is important that a taxpayer bring himself within the correct statutory category.
*1068 Assuming arguendo that the petitioner after the foreclosure was really worse off than before, and that the measure of its worsening is the difference between the amount of its loans plus foreclosure expenses and the actual value of the properties now held, it seems clear that the worsening is not in the acquisition of the foreclosed property, but in the worthlessness of the mortgage loan. No matter what the value or the bid price or the total cost of the real estate acquired on foreclosure, its acquisition could not be a loss. Hadley Falls Trust Co. v. United States,22 Fed.Supp. 346. Quite the contrary, its only effect could be to salvage something from a worthless loan.
The bad debt provision of the statute requires not only that the asset consisting of the credit side of the loan be ascertained by the taxpayer within the taxable year to be worthless, but also that it be charged off within the taxable year. This is where the petitioner has failed. It has continued to carry on its books the full amount of the outstanding loans, the only change being that the amounts have been transferred from an asset account called loans on real estate to an asset*1069 account called foreclosed real estate. This is not a charge-off within the meaning of the statute.
It must, therefore, be held that the petitioner upon its return correctly omitted any deduction in respect of the several mortgage loans shown by the findings. It may not, however, be amiss to add that, even if the deduction were to be considered under the loss provision of the statute, there would be doubt whether the petitioner's evidence is adequate to establish that notwithstanding its own accounting it had sustained a loss.
Decision will be entered under Rule 50.