*1780 Amount of debt ascertained to be worthless and charged off in the taxable year within the meaning of the statute, allowed as a deduction.
*859 The petitioner is seeking the redetermination of a deficiency of $990.60 in income tax for 1921. The error alleged is the refusal of the respondent to allow a bad debt deduction in the amount of $11,483.42.
FINDINGS OF FACT.
In the fall of 1914, the petitioner, a resident of Portland, Oreg., received a request from his father-in-law, Finley Morrison, for a loan to meet payments then due under mortgages covering some of his properties. Petitioner made the loan, and in December, 1914, the borrower gave petitioner a deed covering the property the Morrisons were occupying in Portland as a residence to hold as security for the loan.
Thereafter petitioner made other loans to Morrison, and on August 28, 1916, when the loans amounted to $6,746.64, the latter, in order to eliminate the doubt the former had as to the effectiveness of the deed given him in 1914, and to secure past loans and future borrowings which*1781 Morrison desired to make of petitioner, gave petitioner another deed to the property, subject to tax liens and a mortgage for $10,000. The deed was filed for record on September 9, 1916. At that time a value of $25,500 was placed upon the property by an appraiser.
Petitioner made additional loans to Morrison during the remainder of 1916 and in 1917, 1918, and 1919. After the death of Morrison in 1919, he made some advances to and on behalf of Morrison's wife. After her death in February, 1920, petitioner paid some of the expenses incident to her last illness and the death of Morrison. The *860 monies advanced to and on behalf of the Morrisons were used principally to pay interest on notes and mortgages, taxes, insurance, and expenses incident to the death of Morrison and the last illness of his wife. All of the loans and payments, amounting to $16,188.42, were made on the security of the deed and with the understanding that they would be repaid.
The Morrisons occupied the property deeded to petitioner until the time of their respective deaths. After the death of Mrs. Morrison petitioner rented the property for six or eight months, and in 1921 he sold it for $15,000, *1782 the selling and other charges incident to the sale amounting to $295.
No part of the amount advanced the Morrisons has been repaid except the sum of $5,705, of which amount $4,705 was realized on the sale of the property deeded to petitioner as security, and the balance of $1,000 was paid to petitioner by Irving J. Philipson, a son-in-law of the Morrisons, sometime between the date on which he was able to determine the amount of his loans and June, 1921, in order to reduce petitioner's loss. The Morrisons did not leave any property other than personal effects of little value and there was no administration of their estates.
Prior to 1914 Morrison was actively engaged in the logging business in Portland with his son under the firm name of Finley Morrison & Son. From the time in 1914 when Morrison suffered a stroke of paralysis until his death, he was practically an invalid, and during that time the business affairs of the firm were conducted by the son. After 1914 Morrison received only a small amount of income from his business. During that period, however, the firm had a number of transactions pending, any one of which, if successfully concluded, would have provided Morrison*1783 with funds sufficient to pay all of his financial obligations. Morrison's wife had no income.
Petitioner did not keep a set of books. Such records as he maintained of financial transactions consisted of notations on the stubs of checks issued by him and other memoranda of income and disbursements.
OPINION.
ARUNDELL: There is an abundance of evidence in the record that the monies paid to and on behalf of the Morrisons were not gifts, but loans, creating the relation of debtor and creditor between them and petitioner, and that the deeds given in 1914 and 1916 (the second one having been given because of doubt as to the sufficiency of the first one) to the home occupied by the Morrisons up to the time of their respective deaths were not intended as absolute conveyances of title, but were executed and delivered by Morrison *861 and accepted by the petitioner merely as security for loans theretofore made and thereafter to be made. Such being the purpose of the deeds, they would be declared to be mortgages by the courts. *1784 ; ; ; .
We also think the account became worthless and was charged off in 1921 within the meaning of the statute. Until his death Morrison appears to have entertained the hope that by the successful conclusion of one or more of the transactions pending in his business he would receive a sufficient amount of income to pay off his indebtedness to petitioner. The failure of the Morrisons to leave estates large enough to pay their debts did not render the debt worthless, as the property conveyed to petitioner had been appraised by a qualified appraiser at a value of $25,500 and petitioner was fully justified in believing that his loans were amply secured. It was not until the sale of the property in 1921 that petitioner could ascertain the amount of his loss.
The petitioner did not keep a set of books. In such cases a taxpayer is not required to make a formal charge-off of the debt to obtain the benefits of the statute. *1785 .
From the sale of the property in 1921 petitioner realized the sum of $4,705. In addition thereto he recovered $1,000 of his loss from Irving J. Philipson, for which no credit appears to have been given. Petitioner's loans having amounted to $16,188.42, the amount he is entitled to take as a deduction is $10,483.42.
Decision will be entered under Rule 50.