*2307 The petitioner is the principal stockholder of a corporation to which he advanced on open account $6,800 to December 10, 1924. The corporation had not sufficient funds or assets to pay its indebtedness. The petitioner, who was the principal creditor, accepted the corporation's note for $1,500 in settlement of its obligation to him. He charged off the balance of $5,300 on his books of account as a bad debt. Held that the amount is a legal deduction from petitioner's gross income for 1924.
*895 This is a proceeding for the redetermination of a deficiency of $895.47 for 1924. The point in issue is the right of the petitioner to deduct from his gross income of 1924, $5,300 representing a debt ascertained to be worthless and charged off in the taxable year.
FINDINGS OF FACT.
The petitioner is a resident of Orange, Mass. He owns 41 of the 50 shares of capital stock of Pine Beach Association, Inc., which operates a camp with a bathing beach at Athol, Mass. The petitioner is employed by the Rodney Hunt Machine Co., and, in 1921, was given a three-year*2308 lease upon the camping grounds at Athol, which he assigned to Pine Beach Association, Inc., in exchange for shares of stock. The lease was entered upon the corporation's books at a value of $4,500. The lease was renewed in 1924 or 1925 for a similar period of three years and again renewed in 1927. The balance sheet of the company at January 1, 1924, showed as assets:
| Cash | $138.13 |
| Equipment consisting of bath house, lockers, cottage beds and bedding, dishes and cooking equipment at cost | 3,424.34 |
| Lease and rights | 4,500.00 |
| Total | 8,062.47 |
*896 and liabilities of:
| Notes payable | $2,801.28 |
| Common stock | 5,000.00 |
| Surplus | 261.19 |
In 1924 the corporation had gross profit from rentals and from sales of refreshments, etc., $4,453.23, and had the following expenses:
| Salaries and wages | $4,403.00 |
| General expense | 5,512.29 |
resulting in a loss from operation of $5,462.06. The petitioner advanced money to the corporation to enable it to continue in business in 1924. On December 10, 1924, it had as assets:
| Cash | $216.70 |
| Equipment | 4,500.00 |
| Deficit | 5,200.87 |
and as liabilities:
| Accounts payable | $10,777.56 |
| Capital stock | 5,000.00 |
*2309 Of the indebtedness, $6,800 represented an amount payable to the petitioner for advances made. Upon the equipment no depreciation had been charged from the beginning and the $4,500 represented the cost of the equipment. On December 10, 1924, the treasurer of the corporation made a settlement with the petitioner of his open account against the corporation by paying him the corporation's note for $1,500 in full settlement thereof. On his books of account the petitioner charged off the balance of the account due him from the corporation of $5,300 as a debt ascertained to be worthless during the year. He claimed the amount as a deduction from gross income in his income-tax return for 1924, which was disallowed by the Commissioner in the determination of the deficiency.
The $5,300 charged off as a bad debt in 1924 was uncollectible.
OPINION.
SMITH: Section 214(a) of the Revenue Act of 1924 provides that an individual in computing net income shall be allowed, among others, the following deductions:
(7) Debts ascertained to be worthless and charged off within the taxable year * * *; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such*2310 debt to be charged off in part.
The deduction of the alleged bad debt in the amount of $5,300 has been disallowed by the respondent upon the ground that the petitioner, almost the only stockholder of the corporation, to save the *897 corporation from bankruptcy, canceled a portion of the corporation's indebtedness to him and that the transaction was in the nature of a capital contribution by the petitioner.
We are of the opinion that the transaction by which the petitioner advanced money to the corporation was in good faith. The results of operations in 1924 proved to be disastrous. There can be no question as to the advancement of the moneys by the petitioner nor any question as to the fact that the corporation was not at the close of 1924 in a position to pay more than a small portion of its indebtedness. It had but few assets of value. Upon the record we are of the opinion that the $5,300 claimed as a deduction constituted a bad debt ascertained to be worthless and charged off within the year.
Judgment will be entered for the petitioner.