*3442 Amount of deduction determined and allowed for loss on account of indebtedness ascertained to be worthless and charged off within the taxable year 1917, under section 12(a) of the Revenue Act of 1916, as amended.
*879 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the calendar year 1917 in the amount of $3,561.22. Only the amount of $3,001.56 is in controversy, which results from the disallowance by the respondent of a deduction claimed by the petitioner in the amount of $50,999.85 on account of indebtedness ascertained to be worthless and charged off within said calendar year.
FINDINGS OF FACT.
The petitioner is a Louisiana corporation, with its principal office at New Orleans.
On May 31, 1917, the petitioner had on its general ledger at page 267, the following account:
BURGUIERES & PHARR KENILWORTH SUGAR COMPANY
| 1914 | Dec. 2 by C.B. 18 | $2,500.00 | |
| Oct. 21 Ck. C.B. 291 | $500.00 | ||
| Oct. 30 Ck. C.B. 293 | 400.00 | 1915 | |
| Nov. 28 Ck. C.B. 17 | 2,500.00 | Jany. 9 By La. S. Co. C.B.40 | 10,000.00 |
| Dec. 7 E.R.T.C.B. 21 | 520.83 | ||
| 1916 | 1916 | ||
| Jan. 20 C.B. 191 | 2,284.50 | Jany. 27 By La. S. Co. 192 | 442.36 |
| Jan. 24 C.B. 193 | 884.72 | Sept. 30 By La. S. Ct. J. 83 | 830.56 |
| Jan. 27 C.B. 193 | 373.51 | 1917 | |
| Feby. 8 C.B. 199 | 201.00 | May 31 P. & Loss J. 91 | 50,999.85 |
| Dec. 2 C.B. 19 | 2,500.00 | May 31 J. 91 | 10,000.00 |
| 1917 | |||
| Jany. 24 C.B. 47 | 12,814.24 | ||
| Feby. 16 C.B. 57 | 150.00 | ||
| May 14 La. Sug. Co. J. 89 | 42,293.03 | ||
| May 31 Wiese Process J. 91 | 9,350.95 | ||
| 74,772.78 | 74,772.78 |
*3443 The Kenilworth Sugar Co. was a corporation organized in 1909 whith for some time thereafter operated a sugar-refining plant situated at Braithwaite Landing, about 18 miles below the City of New Orleans, known as the "Kenilworth Factory." Under the terms of a *880 contract dated June 12, 1913, the "Burguieres interests," represented by the petitioner, and the "Pharr interests," leased several thousand acres of sugar cane land, together with the Kenilworth Sugar Factory, for a term of 9 years. This lease contract was executed by the United Railway & Trading Co., Ltd. a corporation organized under the laws of Great Britain, as lessor, and Ernest A., Denis P.J., and Jules M. Burguieres, and J.A., H.N., and E. A. Pharr, as lessees.
The petitioner was a family corporation, all of its stock being owned by the six Burguieres brothers and two sisters. The interest of the Burguieres in the original lease, as well as in all subsequent transactions growing out of or pertaining to the venture, was owned by the petitioner corporation. All money advanced by the Burguieres interests, to or on account of the Kenilworth Sugar Co., belonged to the petitioner, and where stock was taken*3444 in the name of any of the Burguieres brothers individually, or any contract entered into or other transaction carried out by them individually, it was for the use and benefit of the petitioner.
The petitioner owned 150 shares of the stock of the Kenilworth Sugar Co., the Pharr interests owned 150 shares, and 186 shares were owned by other stockholders.
At December 31, 1916, the account on the petitioner's books entitled "Burguieres & Pharr - Kenilworth Sugar Company," above set out, showed debit items in the aggregate amount of $10,164.56, and credit items in the total amount of $13,772.93, or a net credit balance of $3,608.37. On May 31, 1917, said account showed debit items in the total amount of $65,421.83 and credit items in the total amount of $13,772.93, or a net debit balance of $51,648.90. On May 31, 1917, the account was charged with the amount of $9,350.95 and credited with the amount of $10,000, thus reducing the debit balance by $649.05 to the net debit balance of $50,999.85, which latter amount was charged off on the same date to profit and loss.
The item of $9,350.95 charged to the above mentioned account on May 31, 1917, being the last debit item appearing*3445 thereon, represented the total debit balance of an account carried on petitioner's ledger at page 266, entitled "The Weiss Process," and explained as "to one-half machinery at Braithwaite." The transfer of this balance to the account above set out was accomplished by an entry on page 91 of petitioner's journal, under date of May 31, 1917, as follows:
| Burguieres & Pharr - Kenilworth | $9,350.95 | |
| Weiss Process | $9,350.95 | |
| Transfer of Accounts. |
The "Weiss Process" referred to in the above entry was the Gordon-Weiss process for the refining of sugar, which was the subject of a resolution introduced and passed at a special meeting of the directors of the Kenilworth Sugar Co. on May 21, 1913. This resolution *881 provided for the installation of said process by said company, with the understanding that the Burguieres and Pharrs would pay for such installation and reimburse the Sugar Company for all outlays in that connection. It was specifically provided in said resolution that the Kenilworth Sugar Co. should have the free use of said refining process, but that it was distinctly understood that said Gordon-Weiss process was the property of "Messrs. Burguieres*3446 and Pharr," was to be paid for by them, and that any installation charges made by the Sugar Company should in turn be met by "Messrs. Burguieres and Pharr," and further that it was distinctly understood that the Kenilworth Sugar Co. was to act as agent of "Burguieres & Pharr" in the premises.
The last credit item appearing on the account of "Burguieres & Pharr-Kenilworth Sugar Company," and the only credit entered in 1917 except that charging off the balance of the account to profit and loss, was for the amount of $10,000 under date of May 31, 1917, which was explained by an entry under the same date on page 91 of the petitioner's journal as follows:
| New Orleans, May, 1917. | ||
| 31 | ||
| 24 - Kenilworth Sugar Refining Co., Inc. Stocks | 10,000.00 | |
| 267 - To Burguieres & Pharr - Kenilworth | 10,000.00 | |
| 1000 shares common stock. | ||
| Par value $100 per share. | ||
| Certificate 110 - 875 shares. | ||
| Certificate 112 - 125 shares. | ||
| Stock in name of E.A.B. |
The "E.A.B." referred to in the entry was Ernest A. Burguieres, an officer both of the petitioner and the Kenilworth Sugar Co. The stock referred to was stock in the Kenilworth Sugar Refining Co., which was a different corporation*3447 from the Kenilworth Sugar Co.
The entry charging off to profit and loss under date of May 31, 1917, the debit balance of $50,999,85 on the "Burguieres & Pharr-Kenilworth Sugar Company" account, was explained by an entry under the same date on page 91 of the petitioner's journal as follows:
| 31 | ||
| 11 - Profit & Loss | $50,999.85 | |
| To Kenilworth Sugar Co. - B & P | 50,999,85 | |
| Losses. |
The Kenilworth Sugar Co. operated a sugar factory and sugar plantation at Kenilworth below the City of New Orleans, leased from the United Railway & Trading Co. The lease on the sugar plantation was terminated in February, 1914, and the lessor took over all the property covered by the lease except the factory. Thereafter, *882 the factory occupied by the Kenilworth Sugar Co. was subleased to the Canadian-American Sugar Refining Co. by contract dated July 9, 1914, reading in material part as follows:
CONTRACT OF SUBLEASE From MESSRS. BURGUIERES & PHARRS, Sub-Lessors, to THE CANADIAN-AMERICAN SUGAR REFINING COMPANY, Sub-Lessee.
THIS AGREEMENT AND SUB-LEASE, made this ninth day of July, 1914, by and between Messrs. ERNEST A. BURGUIERES, of New Orleans; DENIS P. J. BURGUIERES, *3448 of Cypremort Plantation, Louisiana; JULES M. BURGUIERES, of New Orleans; J. A. PHARR, of St. Mary Parish, Louisiana; H. N. PHARR, of Iberia Parish, Louisiana; and E. A. PHARR, of St. Mary Parish, Louisiana, Sub-Lessors, herein called the Parties of the First Part, and THE CANADIAN-AMERICAN SUGAR REFINING COMPANY, a corporation organized under the laws of the State of Louisiana with its domicile in the City of New Orleans, herein represented by D. A. GORDON, its President, duly authorized by a resolution of the Board of Directors of said Company, passed on the 9th day of July, 1914, Sub-Lessee, herein called Party of the Second Part,
WITNESSETH:
1.
That the Parties of the First Part are now the lessees of a certain sugar factory, situated at Braithwaite Landing, in the Parish of Plaquemines, Louisiana, about eighteen miles below the City of New Orleans, known as the "Kenilworth Factory," which said factory is leased by the Parties of the First Part from the United Railway & Trading Company, Limited, a corporation organized under the laws of Great Britain, and carrying on business in the State of Louisiana, under a written lease dated June 12, 1913, and recorded in Plaquemines*3449 Parish, with the Clerk of Court and ex-officio Recorder of Mortgages and Conveyances, Book , folio . Said lease is for a period of nine years from January 25, 1914, and the right is given the Lessee to terminate said lease, at their option, on the 25th of January of any year, upon notice of such intention being given to the United Railway & Trading Company, Limited, prior to March 25th, previous. The lease contains other terms and stipulations not necessary to recite at length herein, the said lease being annexed hereto and made part hereof, as if specially written into this agreement.
2.
And, whereas, the Parties of the First Part have the right, under paragraph 12 of said lease, to sub-lease the Kenilworth Factory to any person, firm or corporation existing or to be formed for the purpose of installing and operating the Weiss process in the Kenilworth Factory, for the manufacture of refined sugars, provided and conditioned that under such sub-lease said person, firm or corporation undertakes all obligations of the lessees contained in said agreement of lease between the United Railway & Trading Company, Limited, and the Messrs. Burguieres & Pharrs, dated June 12, 1913, as*3450 aforesaid, and further provided that such sub-lease be approved by the lessor or its attorneys.
*883 3.
And, whereas, The Canadian-American Sugar Refining Company, Party of the Second Part, has been organized for the purpose of controlling and operating the Weiss or Gordon processes in the State of Louisiana, for the manufacture of refined sugars, and said Company desiring to sub-lease Kenilworth Factory from the Parties of the First Part under and in accordance with the terms provided for sub-leasing in the original agreement of lease between the United Railway & Trading Company, Limited, and the Messrs. Burguieres and Pharrs, dated June 12, 1913, above referred to, and the said Messrs. Burguieres and Pharrs having agreed to make a sub-lease of the Kenilworth Factory to The Canadian-American Sugar Refining Company upon the terms and conditions hereinafter recited.
Now, THEREFORE, for and in consideration of the allotment and delivery to the Messrs. Burguieres and Pharrs by The Canadian-American Sugar Refining Company of twenty-two hundred and fifty (2250) full-paid shares of its common stock, being part of its $1,000,000.00 capital stock, said stock to be delivered*3451 to the Messrs. Burguieres and Pharrs to be prorated among them as they desire, said Parties of the First Part do hereby sub-lease to The Canadian-American Sugar Refining Company, Party of the Second Part, the Kenilworth Factory at Braithwaite Landing, Parish of Plaquemines, State of Louisiana, more fully described in the original lease of June 12, 1913, from the United Railway & Trading Company, Limited, to the Messrs. Burguieres and Pharrs, above referred to, under the identical terms and conditions as are recited and set forth therein.
* * *
5.
As a further consideration for the allotment of the stock to be received by the Messrs. Burguieres and Pharrs, parties of the first part, from The Canadian-American Sugar Refining Company, Party of the Second Part, they do hereby assign and transfer to The Canadian-American Sugar Refining Company all of the rights acquired by them from Messrs. D. A. Gordon and Son of Wallaceburg, Ontario, Canada, in certain processes for making refined sugars, in the State of Louisiana, known as the "Weiss or Gordon Processes", as well as all of their rights in the "Akers" process, in the State of Louisiana, for the manufacture of refined sugars.
*3452 * * *
THUS DONE AND SIGNED, in quadruplicate, this the ninth day of July, A.D., 1914, in the presence of the two lawful subscribing witnesses, at the City of New Orleans, State of Louisiana.
ERNEST A. BURGUIERES.
DENIS P. J. BURGUIERES.
J. M. BURGUIERES.By DENIS P. J. BURGUIERES.
J. A. PHARR. E. A. PHARR. H. N. PHARR.THE CANADIAN-AMERICAN SUGAR
REFINING COMPANY.
By D. A. GORDON, President.
S. J. LIPSCOMB, Acting Secretary.
Witnesses:
H. DASPIT.HENRY M. BURGUIERES.
*884 The Kenilworth Sugar Co. operated the factory in question until it was taken over by the Canadian-American Sugar Refining Co. pursuant to the terms of the above sublease contract, after which time the Kenilworth Sugar Co. ceased active operations.
After July 9, 1914, the date of execution of said sublease contract, the Kenilworth Sugar Co. had no property or assets of any kind.
The Canadian-American Sugar Refining Co., some time subsequent to July 9, 1914, and prior to May 31, 1917, changed its name to the Kenilworth Sugar Refining Co.
During the time the Kenilworth Sugar Co. was in active operation, money was advanced to it by the petitioner to operate*3453 on, and money was also borrowed from the bank for the same purpose, the notes being endorsed by the Burguieres as sureties in behalf of the petitioner. Advances were thus made to said company, and its notes paid and other obligations discharged by the petitioner during the years from 1914 through 1916, as evidenced by entries on the ledger account hereinabove set forth.
OPINION.
TRAMMELL: The petitioner alleges that at May 31, 1917, the Kenilworth Sugar Co., hereinafter referred to for convenience as the debtor corporation, was indebted to it in the net sum of $50,999.85, which debt was ascertained to be worthless and charged off its books within that year. In its return for 1917, the petitioner claimed a deduction from gross income in said amount, which was disallowed by the respondent, and this action gave rise to that part of the deficiency here in dispute.
The deficiency letter does not disclose the ground on which the deduction in question was disallowed, and we are not advised in reference thereto. At the hearing, counsel for the respondent stated: "The respondent has disallowed the deduction, and for whatever reason is immaterial, the respondent's position being*3454 that the burden is upon the petitioner to show that it is entitled to the deduction. We do not admit any fact with reference to the transaction, except that this deduction was disallowed."
However, in his brief, the respondent suggests three reasons why the deduction should not be allowed, (1) because in a statement of open accounts due to the petitioner at December 31, 1916, attached to its 1917 income-tax return, there was no mention of any sum due to it from the Kenilworth Sugar Co.; (2) because the alleged debt was not ascertained to be worthless in 1917, since the debtor corporation had no assets after July 9, 1914, and the debt, if any, being worthless at that time, the petitioner should not be permitted to postpone the deduction out of all reasonable relation to the facts until 1917; and (3) because, if the alleged debt be held to be a bona *885 fide debt due to the petitioner, the amount of the indebtedness can not be ascertained for the reason that no evidence was offered to establish the fair market value, when received, of the 1,000 shares of stock of the Kenilworth Sugar Refining Co., having a par value of $100 per share, and for which the Kenilworth Sugar Company, *3455 the debtor corporation, received a credit of $10,000 on its account with the petitioner under date of May 31, 1917.
In respect of the first two grounds suggested by the respondent for disallowance of the deduction claimed, the evidence shows that the debt in question did not come into existence until 1917. The account of the Kenilworth Sugar Co. on the petitioner's books showed a credit balance of $3,608.37 at December 31, 1916. It is obvious, therefore, that the account could not properly have been listed on the statement of the petitioner's accounts receivable as of December 31, 1916, attached to its 1917 return. And for the same reason it is equally obvious that the indebtedness which arose in 1917 could not have been ascertained to be worthless in 1914, or at any time prior to the year 1917, whether the debtor corporation did or did not have any assets subsequent to July 9, 1914. The third ground suggested by the respondent is immaterial to the issue presented, as will appear from the matters referred to hereinbelow.
It may be noted at this point that the respondent has raised no specific objection to any item appearing on the account in question, with the exception of*3456 the last debit item of $9,350.95, and the last credit item of $10,000, both entered under date of May 31, 1917. At May 30, 1917, and just prior to the entry of the two items called in question by the respondent, said account showed a debit balance of $51,648.90, and in our opinion, the evidence adduced by the petitioner clearly establishes that said balance, which arose under the circumstances indicated in our findings of fact, represented a bona fide indebtedness due to it at that date, by the Kenilworth Sugar Co.
The petitioner was, during the years involved here, a family corporation, all of its stock being owned by the Burguieres brothers and sisters. The Kenilworth Sugar Co. the debtor corporation, was organized in 1909, and was controlled by the Burguieres interests, represented by the petitioner, and by the Pharr interests, each of which owned 150 shares of its stock.
The Kenilworth Sugar Co. operated a sugar factory and plantation located at Braithwaite Landing, or Kenilworth, about 18 miles below the City of New Orleans. The sugar factory, as well as the plantation, was leased from the United Railway & Trading Co., a British corporation, the lease contract being executed*3457 on the part of the lessees by three of the Burguieres and three of the Pharrs in their individual capacities, the Burguieres brothers acting for and in behalf of the petitioner. The arrangement under which the *886 properties were operated by the Kenilworth Sugar Co. is not definitely disclosed by the record. The venture did not prove successful in a financial way, and the lease on the sugar plantation was terminated in February, 1914. Thereafter, under date of July 9, 1914, the sugar factory, which up to that date had been operated by the debtor corporation, was subleased to the Canadian-American Sugar Refining Co., and the former company ceased active operations. Subsequently, and some time prior to May. 1917, the Canadian-American Sugar Refining Co. changed its name to the Kenilworth Sugar Refining Co.
The debtor corporation operated on funds supplied by the petitioner and the Pharr interests, and also on money borrowed by it from the bank, its notes being endorsed as sureties by the Burguieres and Pharrs individually. However, in all these transactions, the Burguieres brothers were acting for their corporation, the petitioner herein. Money was advanced by the petitioner*3458 to the debtor corporation, and its notes paid or other obligations discharged on the dates and in the amounts shown on the account set out in our findings of fact hereinabove. The debtor corporation also repaid to the petitioner certain amounts from time to time, with which it was credited as shown on the said account.
The evidence before us is very meagre with respect to the assets, if any, owned by the debtor corporation at any time. However, the record does, we think, quite clearly show that certain assets involved in this controversy were not at any time owned by said corporation. On May 21, 1913, a resolution was adopted at a special meeting of the directors of the debtor corporation, providing for the installation at the Kenilworth factory of the "Gordon-Weiss" process for refining sugar. This resolution provided that the Kenilworth Sugar Co. should have the free use of said process, but it was disinctly understood that said process was the property of "Messrs. Burguieres and Pharr," was to be paid for by them, and that any installation charge made by the sugar company was in turn to be met by Burguieres and Pharr; and further that it was distinctly understood that the*3459 sugar company was to act as the agent of Burguieres and Pharr in the premises.
It appears that thereafter the machinery necessary to operate the Gordon-Weiss process was installed, one-half of the cost being paid by the petitioner and charged on its books to an account styled "The Weiss Process." The debit balance of this account on May 31, 1917, was $9,350.95.
The principal witness for the petitioner, and the only one who testified respecting the assets of the debtor corporation, was Ernest A. Burguieres. On first being questioned about the matter, Burguieres stated that after July 9, 1914, the date on which the sugar factory was subleased to the Canadian-American Sugar Refining Co., the *887 Kenilworth Sugar Co., of which he was an officer, had no property or assets of any kind. This statement he confirmed and reiterated. Later, on further examination by petitioner's counsel, the witness stated that said company did posses assets after the date in question, consisting of machinery in the Kenilworth factory, but his testimony was so vague, indefinite and unsatisfactory that we are unable to give it weight. The witness could not state what the machinery consisted of, *3460 how or when it was acquired by the debtor corporation, or to what extent it included machinery other than that pertaining to the Gordon-Weiss process. Furthermore, this testimony apparently is in direct conflict with other facts established by the record.
Other than the testimony of Burguieres, there is no evidence before us to justify the conclusion that the Kenilworth Sugar Co. ever at any time owned any machinery at the Kenilworth factory, or ever at any time acquired any proprietary interest in the Gordon-Weiss process machinery. The record as presented establishes to our satisfaction that at a date certainly as early as the beginning of 1917, the debtor corporation possessed no assets of any kind and never thereafter acquired any. The uncontroverted evidence further shows that the Gordon-Weiss process machinery was paid for and owned by the petitioner and the Pharr interests, and that the petitioner charged the cost of its one-half interest therein to an account on its books styled "The Weiss Process."
In the early part of 1917, the petitioner and the Pharrs disposed of their last remaining interest in the original venture, and the outstanding obligations of the debtor*3461 corporation were discharged and its affairs wound up. The lease on the sugar lands had theretofore been terminated and the factory subleased to the Canadian-American Sugar Refining Co., which later changed its name to the Kenilworth Sugar Refining Co. The machinery at the factory was sold to the latter company, and for its interest therein the petitioner received 1,000 shares of stock of the vendee corporation having a par value of $100 per share. The stock was issued in the name of Ernest A. Burguieres, who held it as trustee for the petitioner. There is no evidence to show that the debtor corporation either sold the machinery or received the consideration therefor.
Upon the consummation of these transactions, there appeared upon the petitioner's books two accounts directly reflecting the results of its participation in the Kenilworth venture, namely, "The Weiss Process" account, which showed a debit balance of $9,350.95, and the account designated "Burguieres & Pharr - Kenilworth Sugar Company," which, prior to the transfer of the machinery account balance and the entry of the $10,000 credit, showed a debit balance of $51,648.90. The enterprise having been fully terminated, *3462 good accounting practice would seem to have required that the value of *888 the stock received by the petitioner be credited to its machinery account, and the credit balance then remaining transferred directly to profit and loss. Likewise, the debit balance of the Kenilworth Sugar Co. account, having been determined to be worthless and representing a loss, should have been charged to profit and loss. However, this procedure was not followed, but the balance of the machinery account, amounting to $9,350.95, was transferred to the Kenilworth Sugar Co. account, being explained in the journal entry as "transfer of accounts." The latter account was then credited with $10,000 on account of the stock received for the machinery, and the remaining debit balance of said account in the sum of $50,999.85 charged to profit and loss. Insofar as the closing of these accounts ultimately affected the petitioner's profit and loss account, the result would have been the same under either method, but the procedure followed resulted in distorting the apparent liability of the Kenilworth Sugar Co. to the petitioner, or the amount of the loss sustained by it in that connection.
For the reason*3463 that, as indicated above, the last bedit item of $9,350.95 and the last credit item of $10,000 appearing on the Kenilworth Sugar Co. account were solely bookkeeping entries, having no substantial basis in fact, they should be disregarded in determining the amount of the indebtedness due from said corporation to the petitioner, and which represents the deductible loss sustained.
That mere bookkeeping entries can not serve either to increase or decrease tax liability is too well settled to require discussion here. See ; ; ; ; ; ; .
The respondent concedes that the debt in question was charged off the petitioner's books and written out of its assets in 1917.
The Revenue Act of 1916, as amended, provides in section 12(a) that, in the case of a corporation organized in the*3464 United States, the net income shall be ascertained by deducting from the gross amount of its income received within the year from all sources, all losses actually sustained and charged off within the year, and not compensated by insurance or otherwise.
Since the facts in this case establish (1) that the account hereinabove referred to represented a bona fide indebtedness due to the petitioner, which arose in 1917, and (2) was properly ascertained to be worthless and charged off within that year, we must conclude that the petitioner has discharged its burden of showing that it actually sustained and charged off in 1917 a loss equal to the amount of the indebtedness in fact due to it, without regard to the erroneous bookkeeping entries.
*889 Accordingly, the deficiency should be redetermined on the basis of a net income ascertained by deducting from gross income the amount of $51,648.90.
Judgment will be entered under Rule 50.