*4081 Respondent's disallowance of deductions for bad debts approved.
*530 This is a proceeding for the redetermination of a deficiency in excess-profits tax for the calendar year 1917, amounting to $6,406.29. Petitioner alleges error with reference to a failure to allow as deductions from income bad debts amounting as follows:
| Williams Luman Mining Co. | $64,413.72 |
| Edward Adams | 3,100.00 |
FINDINGS OF FACT.
During 1917 petitioner was a partnership, with principal office at Buffalo, Johnson County, Wyo., and was engaged in the live stock business.
The books of petitioner were kept by David Young, a partner. Ordinarily, his duties required him to be out on the range about one-half of the time. During the World War petitioner experienced great difficulty in obtaining employees and it was necessary for David Young to put in nearly all of his time on the conduct of the business outside of the office. Therefore, during the period from 1916 to 1920 his duties were so numerous and pressing*4082 that he allowed the bookkeeping to get behind and gave to it only a minimum of his time and attention. In 1920, however, an inventory was taken and David Young went back over the records and endeavored to ascertain what were the assets and liabilities of petitioner. At that time entries on the books were made by David Young, charging off to profit and loss the amount of $40,000 out of the total indebtedness of Williams Luman Mining Co. and $3,100, being the debit account of Edward Adams. Prior to 1920 no bad debts of any considerable amount were charged off.
In 1922 an investigation of the books and records of petitioner was made by a revenue agent and petitioner was notified early in 1923 of additional taxes found due for 1917. In replying to this notice petitioner did not claim the deduction from income of a bad debt of the Williams Luman Mining Co. A further investigation was made by a revenue agent in 1923 and thereupon in the fall of 1923 a firm of public accountants was engaged to make an audit of the books and records of petitioner for the years 1917 to 1920, inclusive. A great *531 many correcting entries were made by the public accountants and the net income*4083 for the several years under audit was restated. Amended returns were prepared for all of the years. In these amended returns claims in full were made for the deduction from income of the bad debts of Williams Luman Mining Co. and Edward Adams.
The transactions reflected in the ledger account of Williams Luman Mining Co. on the books of petitioner had their beginning in the financial backing of petitioner by two friends, W. H. Thom and Tom Smith. Thom was the cashier of a local bank and was interested in a real estate firm called Thom & Co. Thom & Co. eventually became insolvent and Thom died two or three years ago. Smith was interested in a copper-mining venture in Fremont County, Wyoming, conducted through the medium of the Williams Luman Mining Co., a corporation. Petitioner endorsed notes of the Williams Luman Mining Co. and these notes were discounted at the bank. The Williams Luman Mining Co. was not successful, neither was Thom & Co., and it eventually became necessary some time between 1908 and 1914 for petitioner to take up the notes of the mining company discounted at the bank, and for the indebtedness of Thom & Co. petitioner accepted additional notes of the mining*4084 company. Capital stock of the Williams Luman Mining Co. was deposited with petitioner to hold as collateral to secure the indebtedness. In 1912 Tom Smith was killed in an accident in the mine and thereafter the mining project came to a complete standstill. Young Brothers knew nothing of mining and they endeavored to secure the cooperation of experienced miners in the development of the property. Their efforts, however, were without success. In November, 1916, the Williams Luman Mining Co. entered into an agreement with Charles P. Mety, providing for the development and operation of the mining property on a royalty basis, according to specified percentages of the value of the output. Included in the agreement was an option to Mety to purchase the property at any time within three years for a cash consideration of $275,000, provided Mety gave notice on or before July 1, 1917, of his intention to continue to operate the property thereafter. In the event of purchase, the royalties previously paid were to be credited upon and were to be deducted from the cash consideration named.
This agreement was signed by L. R. Van Houten, president, and W. J. Thom, secretary, of the Williams*4085 Luman Mining Co. Mety erected bleaching vats and endeavored to put the ores through concentration baths. After some four to six months, development and operation of the property by Mety ceased and he declined to continue, claiming that he was losing money. No further efforts were made *532 to develop the property. On the ledger of the petitioner, the account of the Williams Luman Mining Co. showed a debit balance on December 31, 1916, amounting to $64,413.72. Suit was never brought by petitioner against the Williams Luman Mining Co. After Mety abandoned the property, petitioner considered the debt was entirely bad and represented a dead loss.
The mine was located about 20 miles from the railroad.
The transactions reflected in the ledger account of Edward Adams, on the books of petitioner were loans of money to a brother of W. P. Adams. The latter was a partner of Young in the firm of Adams & Young, and was a close business associate and friend of the Young brothers. Edward Adams was a contractor, operating principally in teaming, and he conceived the idea of going to Alaska. The Young brothers and other friends advanced him money for this purpose. Two thousand*4086 five hundred dollars was advanced him by petitioner in 1908 and thereafter in the years 1909 to 1912, inclusive, further advances of $150 a year, aggregating $600, were made. Edward Adams went to Alaska and was last heard from by petitioner or by his brothers is 1917. His present whereabouts are unknown. He left behind him no assets whatever.
OPINION.
SIEFKIN: The question involved in this case is whether deductions from income for 1917 should be allowed for two bad debts, a debt of the Williams Luman Mining Co. in the amount of $64,413.72 and a debt of Edward Adams in the amount of $3,100.
The evidence discloses that due to numerous pressing duties outside of the office the bookkeeper of the petitioner could devote only a minimum of his time and attention to bookkeeping in the period from 1916 to 1920. In 1920 there was charged off to profit and loss the amount of $40,000 out of the total indebtedness of the Williams Luman Mining Co., and $3,100, the entire amount of the debt owing from Edward Adams.
The evidence shows that petitioner endorsed notes of the Williams Luman Mining Co. and these notes were discounted at the bank. The venture of the mining company being*4087 unsuccessful, it became necessary some time between 1908 and 1914 for petitioner to take up these notes, and the mining company gave additional notes to petitioner, capital stock being deposited as collateral security. Efforts were made thereafter until the latter part of 1917 to operate the mining property, but they were unsuccessful and no further efforts were made thereafter. The ledger of the petitioner showed that the Williams Luman Mining Co. was indebted to petitioner on December 31, 1916, in the amount of $64,413.72. Petitioner considered the debt entirely bad and suit was never brought to recover the amount.
*533 Loans totaling $3,100 over a period from 1908 to 1912 were made to Edward Adams, who went to Alaska. He was last heard of in 1917 and his whereabouts thereafter were unknown. He left behind him no assets whatever.
The Revenue Act of 1917, section 206, states that:
There shall be allowed (a) in the case of a domestic partnership the same deductions as allowed to individuals in subdivision (a) of section 5 of such Act of September eighth, nineteen hundred and sixteen, as amended by this Act.
Section 5 of the Revenue Act of 1916 holds:
That in*4088 computing net income in the case of a citizen or resident of the United States -
(a) For the purpose of the tax there shall be allowed as deductions -
* * *
Sixth. Debts due to the taxpayer actually ascertained to be worthless and charged off within the year.
We held in , that debts ascertained to be worthless were charged off as required, when actually charged off after the close of the year before the books of account were closed for the year in which the debts were ascertained to be worthless.
But in , we held that the charging off of bad debts should, in the case of a taxpayer keeping regular books of account, be evidenced by such book entries as would effectually eliminate the amount of the bad debt fom the book assets of the taxpayer, and that these entries should be made prior to the closing of the accounts for the taxable period. In a number of cases we have held that bad debts charged off after the close of the year may not be deducted, nor may they be deducted unless it is clearly shown that they were ascertained to be worthless and charged off within the taxable*4089 year. Donalsonville Oil Mill, B.T.A. 167; .
In the case of , it was said:
The reasonable interpretation of the law is that, in order to secure a deduction of worthless debts they must be charged off in the year they are ascertained to be worthless. A man is presumed to know what a reasonable person ought to know from facts brought to his attention. A taxpayer should not be permitted to close his eyes to the obvious, and to carry accounts on his books as good when, in fact, they are worthless, and then deduct them in a year subsequent to the one in which he must be presumed to have ascertained their worthlessness. To do so would enable him to withhold deductions in his less prosperous years, when they would have little effect in reducing his taxes, and then to apply the accumulation at another time to the detriment of the fisc. This would defeat the intent and purpose of the law.
*534 Under the Revenue Acts of 1916 and 1917, the deduction of a part of a debt is not allowable.
In this proceeding it is shown that in 1920, $40,000 of the*4090 total debt of $64,413.72, owing from the Williams Luman Mining Co., and the whole amount of the Edward Adams debt were charged off as of 1920. This would seem to indicate that at that time the Williams Luman Mining Co. debt had not been ascertained to be wholly bad. It was not until 1923 that the entire amount of the debts was charged off as of 1917.
The facts do not convince us either that these debts were actually ascertained to be worthless by the taxpayer within the taxable year, or that they were charged off within such year, and we must conclude that the requirements of the law have not been satisfied and that the deductions are not allowable.
Judgment will be entered for the respondent.