*3489 1. WORTHLESS DEBT. - Where a debt was ascertained to be worthless in 1920, but was not actually charged off by an entry on the books until April, 1921, it is allowable as a deduction for 1920, if made for the year 1920, and before the books for that year were closed.
2. CREDITS. - The fact that credits were applied to the note after 1920, but before the charge-off, is immaterial if the credits had the same value as on December 31, 1920.
*652 This proceeding is for the redetermination of a deficiency of $2,053.39 in income and profits taxes for the year 1920. Petitioner alleges as error that respondent failed to allow the deduction of a note as a worthless debt.
FINDINGS OF FACT.
Petitioner is a banking corporation organized under the laws of North Carolina, which its principal office at Wallace.
On August 20, 1918, the bank loaned to W. J. Yarboro and W. E. Merritt the sum of $35,000, for which they executed their note payable on demand with interest at 6 per cent. Yarboro and Merritt*653 were*3490 partners engaged in conducting a tobacco warehouse at Wallace from the time the loan was made until the latter part of 1920, when the business proved a failure and they left the State. Upon investigation by the petitioner through its cashier and president prior to December 31, 1920, it was ascertained that neither the partnership of Yarboro and Merritt, nor the individuals composing it had any assets of any kind or description, and that the balance due on its note was worthless.
Prior to the failure of the partnership, $15,000 had been paid on the note, leaving a balance due of $20,000. At the time of the failure Yarboro & Merritt had on deposit with the petitioner, $366.91; W. E. Merritt, $3,102.29, and W. J. Yarboro $2,178.55, making in all $5,647.75, which the bank retained and which left $14,352.25 as the balance due on the note. In the credit applied from Merritt, was represented stock in a warehouse company which was credited at par. In the sum of $14,352.25 is represented interest in the amount of $3,295.01, which had never been reported as income, leaving a balance due on December 31, 1920, of $11,057.24. The note was not actually charged off on the books prior to December 31, 1920, nor*3491 were entries made relative to the above-mentioned credits. In its original tax return, petitioner claimed a deduction of $9,000 only on account of this note and the reason was given that it did not like to show such a large loss in one year. On April 9, 1921, it credited on the note the deposits of the partnership and the individual members, and on April 28, 1921, the balance due on the note as of December 31, 1920, was charged off as worthless as of the latter date. The books had not been closed for 1920 at that time. There was no payment on the note, and no change in the accounts of Yarboro & Merritt or either of them subsequent to December 31, 1920.
Upon being informed that a deduction could not be permitted for part of a debt under the Act of 1918, petitioner filed an amended return claiming the entire amount of $14,352.25. The entire unpaid balance of $11,057.24 was worthless and petitioner ascertained its worthlessness during the taxable year 1920, and which was charged off before the books of account were closed for 1920.
OPINION.
MILLIKEN: Here it is plain that this note was worthless in 1920, and that petitioner ascertained that fact in 1920, and determined to*3492 charge it off as a loss for the year 1920. The actual physical act of making the entry was not performed until April 1921; but it was done as a 1920 loss and before the books were ruled off and closed for that year. Under such circumstances, we have frequently held *654 that the Act of 1918 was substantially complied with and the deduction allowable.
In , it was said in part:
The law does not contemplate unreasonable things. The proper entries charging off the sum of $170,879.91 were made on the general books of the copartnership within a reasonable time and before its books were closed for the calendar year 1918. This is sufficient to comply with the requirements of the statute.
Relative to the requirement that the debt be charged off within the taxable year it was said in :
This language must be interpreted in the light of the ordinary course of business practice. It is not the physical act done within the year to which Congress has referred, but to the setting up of evidence of the ascertainment of worthlessness substantially as of the date of such ascertainment*3493 and in confirmation thereof.
In , the Board said:
The purpose of the statute appears to be to require that some record be made of the ascertainment of worthlessness. An interpretation of the statute which would deny and deduction except when a charge-off was made upon books of account within the limits of the calendar year, especially when it is considered that closing entries are not usually made until after the close of the year, would work a hardship which we can not believe was intended or is required and would attach to acts which are merely clerical an importance as great as is to be given to the substance of the situation. The statute must be given a reasonable interpretation, if possible. Clearly it was the intent that a deduction should be allowed for worthless debts in the year in which worthlessness was ascertained and that the charging-off of the debt might take other forms than entries on the books of the taxpayer.
In , debts ascertained to be worthless in 1920, and which were not charged off until January 15, 1921, were held deductible.
*3494 In , certain debts were ascertained to be worthless in 1920, but bookkeeping entries charging them off were not made until March 7, 1921. In holding that they were allowable, the Board said:
While it appears that the petitioner did not make the bookkeeping entries charging off the accounts until after the end of the year, it did so as of December 31, 1920, before the books were closed. The petitioner treated the matter as a part of the year's transactions and determined its profits for the year on the basis of the elimination of accounts. In our opinion the petitioner is entitled to the deductions claimed on account of the said debts.
To the same effect is , where the actual entries charging off were made in February or March of the succeeding year.
*655 The cases of , and , are not in point as in both it was held that the debt was not ascertained to be worthless within the taxable year.
*3495 In , the taxpayer sought to write off for 1920 a debt for which it had security of which it had not disposed, but the value of which it estimated and substracted from the debt. It was held that under such facts the debt had not been ascertained to be worthless in 1920, but the Board said:
If taxpayer at the close of the year 1919 had disposed of the security and applied the proceeds thereof to reducing the debt, the debt as reduced, if in fact worthless, and so ascertained after usual and reasonable means had been exhausted to collect it, would have been the proper subject of a charge off.
This is peculiarly applicable to the instant case. The note was worthless in 1920 and petitioner's officials ascertained the fact. All that was done thereafter was merely to make a record of the transaction on the books as to what happened in 1920.
We think these decisions are controlling and hold that the balance of $11,057.24 on the note of Yarboro & Merritt is deductible as a worthless debt from 1920 income.
Judgment will be entered under Rule 50.