*1991 The Commissioner did not err in disallowing, either as a bad debt or as a loss, a deduction claimed by the petitioner from its gross income for 1920.
*993 The Commissioner determined a deficiency of $11,424.96 in the petitioner's income and profits taxes for the calendar year 1920. The petitioner alleges that the Commissioner erred in disallowing a deduction of $25,302.80, or at least $22,008.80, either as a loss sustained during the taxable year 1920 and not compensated for by insurance or otherwise, or as a debt ascertained to be worthless and charged off within the taxable year.
FINDINGS OF FACT.
The petitioner is a corporation with its principal office at Uniontown, Pa.
On October 18, 1919, the petitioner agreed to sell and convey to H. C. Dunfee, doing business as the Dunfee Lumber Co., a partnership, the merchantable timber situated on two tracts of land of approximately 1,800 acres in Fayette County, W. Va., for $75,000. By the same instrument, and included in the $75,000 purchase price, it also agreed to sell two circular sawmills, *1992 manufactured lumber, camp buildings, tracks, mules, horses, and lumbering machinery and equipment. The petitioner's books contain the following entries covering the acquisition of these properties by it:
| Property | Date acquired | Date sold | Cost | Depletion or depreciation |
| Timber rights | July , 1916 | Oct. 18, 1919 | $50,000.00 | $14,457.26 |
| Do | Oct. , 1918 | do | 250.00 | |
| Constructions | Jan. 1, 1917 | do | 3,139.67 | 889.58 |
| Do | May 1, 1917 | do | 789.40 | 184.70 |
| Machinery and equipment | Jan. 1, 1919 | do | 63.81 | 19.14 |
| Do | May 1, 1919 | do | 1,523.20 | 76.16 |
| Sundry property | Oct. 1, 1919 | do | 40,000.00 | |
| 95,776.08 | 15,626.84 |
The petitioner acknowledged in the agreement that the purchaser had paid $1,000 of the purchase price, and it was agreed that an additional $4,000 would be paid in cash upon the execution of the *994 conveyance. The balance of the purchase price was to be paid in installments represented by eleven notes, executed by H. C. Dunfee and his partner, D. D. Hazeltine, one of which notes was to become due every two months after the date of the conveyance. The first eight of the notes to become due were for $5,000 each, and the last three*1993 for $10,000 each. They were to be secured by a deed of trust covering all of the property conveyed, except the manufactured lumber. On October 20, 1919, the deed of conveyance was executed, and on the same date the deed of trust from Dunfee, Hazeltine and their respective wives, to Frank R. Hurlbutt, trustee, was executed.
The parties stipulated that the following table shows the total amounts received by the petitioner as a result of the sale, the dates on which the various amounts were received, the manner in which they were received, and certain amounts by which the receipts were reduced:
| RECEIPTS | |
| 1919 | |
| Oct. 25. Cash | $1,000.00 |
| 25. Cash | 2,000.00 |
| Nov. 7. Cash | 999.00 |
| 7. Cash | 999.00 |
| 7. Collection Fee | 1.00 |
| 7. Collection Fee | 1.00 |
| Dec. 19. Cash-payment note due 12/20 | 2,000.00 |
| 19. Cash-payment note due 12/20 | 1,000.00 |
| 19. Cash-payment note due 12/20 | 2,000.00 |
| 29. Note discounted 10/20 4 mos | 5,000.00 |
| 1920 | |
| Feb. 19. Cash | 2,500.00 |
| 27. Note discounted 10/20/19 6 mos | 5,000.00 |
| 27. Note discounted 10/20/19 8 mos | 5,000.00 |
| Apr. 19. Cash Bal. note 2/20 | 2,500.00 |
| June 24. Cash a/c note - 6/20 | 1,000.00 |
| 28. Cash a/c note - 6/20 | 1,000.00 |
| July 8. Cash a/c note - 6/20 | 1,000.00 |
| 19. Cash a/c note - 6/20 | 1,000.00 |
| Aug. 5. Cash Bal. note - 6/20 | 1,000.00 |
| 28. Cash a/c note - 8/20 | 1,500.00 |
| Sept. 13. Cash a/c note - 8/20 | 1,500.00 |
| 27. Cash a/c note - 8/20 | 1,000.00 |
| Oct. 7. Cash Bal. note - 8/20 | 1,000.00 |
| 40,000.00 |
| REDUCTION IN RECEIPTS | ||
| Feb. 19. | Note due 2/20/20 which has been discounted at First National Bank of Dunbar, Pa., not paid by Dunfee Lumber Company when due, and amount was paid to bank by Lafayette Lumber Company | $5,000.00 |
| Apr. 19. | Note due 4/20/20 same as above | 5,000.00 |
| July 3. | Note due 6/21 same as above | 5,000.00 |
| Oct. 13. | Check of Sept. 27 protested and not paid by Dunfee Lumber Co. ($1,000.00 - Fee $1.45) | 1,001.45 |
| Oct. 30. | Check of Oct. 7 protested and not paid by Dunfee Lumber Company ($1,000.00 - Fee $1.35) | 1,001.35 |
| 17,002.80 | ||
| Net amount received | 22,997.20 |
*995 The sale to the Dunfee Lumber Co. was negotiated by a man named Palmer, who was the general manager of the petitioner, but not an officer or stockholder. He knew Dunfee and Hazeltine, and was thoroughly familiar with the properties sold. At the time of the sale there was about $20,000 worth of manufactured lumber on the property, ready to be shipped for sale, and there were about 12,000,000 feet of standing timber, consisting principally of poplar with some red and white oak and hemlock. The lumbering equipment was in good condition at the time of the sale, and lumbering*1995 operations had been carried on until then. Palmer visited the property on several occasions between June and October, 1920, because the notes and checks of the Dunfee Lumber Co. were not being paid, and discovered that the manufactured lumber had been marketed by the Dunfee Co. During this period Palmer met Dunfee and told him that the payments due would have to be made. Dunfee related the financial condition of the company to Palmer, and the latter conferred with two or three bankers in Charleston, W. Va., who had been lending money to the Dunfee Lumber Co. He tried to procure a loan of $15,000 for the Dunfee Co. from them, and offered on behalf of the petitioner to advance $10,000 in order to save the Dunfee Co. from bankruptcy. The bankers declined to make a loan.
In October, 1920, Palmer discovered that Dunfee and Hazeltine were in the lumber brokerage business in Charleston and that they owed various persons about $200,000 for the purchase of lumber. He also learned that Dunfee and Hazeltine were in financial distress at the time they purchased the properties from the petitioner, and that the purchase had been made by them with the idea of marketing the $20,000 worth*1996 of manufactured lumber and thus attempting to save themselves. Thereafter he tried to discover what assets, if *996 any, Dunfee and Hazeltine had. He learned that each owned a separate lumbering plant, but that each plant was mortgaged for more than its value. Excepting the properties in question, these were the only assets of the Dunfee Co. or of Dunfee and Hazeltine individually which he discovered. As the purchase money notes of the Dunfee Lumber Co. became due and unpaid, they were placed in the hands of the petitioner's attorney in Charleston.
On December 3, 1920, the balance due the petitioner from the Dunfee Lumber Co., without taking into account interest on the notes, was $52,002.80. On that date the Dunfee Lumber Co. filed a petition in bankruptcy with the United States District Court for the Southern District of West Virginia, and on December 8, 1920, the company was declared and adjudged a bankrupt. Palmer knew of the bankruptcy of the Dunfee Co. prior to the end of the year 1920.
Attached to the petition in bankruptcy of the Dunfee Lumber Co. were schedules of the assets and liabilities of that company, and of Dunfee and Hazeltine individually. On these*1997 the total of the debts of the partnership was shown as $70,626.22, which included $55,000 representing the debt due the petitioner, and the assets were valued at $112,850, consisting of valuations of $55,000 and $57,850 upon the timber rights and lumbering equipment, respectively, which had been sold to the Dunfee Co. by the petitioner. Dunfee's individual liabilities were shown in the amount of $98,104.14. His assets were valued at $22,200, which included a claim of title to certain standing timber in Vaughn, W. Va., valued at $17,000, for which he was at the time being sued. Hazeltine reported no individual assets or liabilities.
On January 10, 1921, the appraisers appointed by the court appraised the properties of the bankrupt company which had been sold to it by the petitioner. The timber rights were appraised at $10,000 and the personal property, consisting of machinery and equipment, was appraised at $27,925. Prior to January 31, 1921, these properties were offered for sale at public auction under an order of the court. The petitioner bid $15,000 therefor, but the bid was rejected by the trustee in bankruptcy and by the court. The petitioner then bid $26,700, which*1998 bid was accepted, and the properties were reconveyed to it. At that time there were about 7,000,000 feet of standing timber left on the property. The petitioner, upon reacquisition, undertook certain improvements with the view of selling the properties. They were sold at an undisclosed date to the Buffalo Lumber Co., and in 1923 were practically destroyed by fire and flood. Between the date of reacquisition and the date of the transfer to the Buffalo Co. the petitioner cut no timber from the property. It never realized from any source the balance due it from the Dunfee Lumber Co.
*997 On January 31, 1921, an order was issued by the referee in bankruptcy of the Dunfee Co., stating that the petitioner had paid $5,000 of its bid of $26,700, and directing that the balance of the $5,000, after paying expenses amounting to $1,669.74, be held for the petitioner, and that the petitioner's account with the bankrupt be credited with and reduced to the extent of the balance of the bid price, or $21,700, subject to final approval by the court.
In its income-tax return for 1919 the petitioner had reported a loss of $5,139.24, which amount represented the difference between $95,776.08, *1999 the cost of the properties as shown by the petitioner's books, less $15,626.84, depletion and depreciation, and $75,000, the sale price to the Dunfee Co. On December 31, 1920, the petitioner charged off its books $22,002.80, being the difference between the unpaid consideration of $52,002,80 and $30,000, which latter figure was estimated at that time to be the maximum amount that the petitioner could realize from the properties of the Dunfee Lumber Co. Subsequently, in the year 1921, the petitioner made an additional charge-off of $3,300 as of December 31, 1920, making a total charge-off of $25,302.80. The additional charge-off was made subsequent to and as a result of the sale to the petitioner of the properties for $26,700. In its income-tax return for 1920 the petitioner deducted $25,302.80 from its gross income. The Commissioner disallowed the deduction.
OPINION.
MURDOCK: On December 3, 1920, and at the end of that year, the Dunfee Lumber Co. owed the petitioner $52,002.80, which indebtedness was evidenced by several promissory notes. The notes were secured by a deed of trust on the property for which they were given. The petitioner is seeking to deduct that part of*2000 the total indebtedness which it estimated would not be recovered by it from the property or from the bankrupt debtor's estate. We have held in numerous cases, beginning with Steele Cotton Mill Co.,1 B.T.A. 299">1 B.T.A. 299, that under similar circumstances a debt may not be deducted in part for any year governed by the Revenue Act of 1918, even though it is ascertained to be worthless in part and charged off in part within the taxable year. See Minnehaha National Bank,8 B.T.A. 401">8 B.T.A. 401; affd., 28 Fed.(2d) 763; Selden v. Heiner, 12 Fed.(2d) 474.
It is further contended that the amount in question, or a part thereof, is properly deductible as a loss sustained during the taxable year. Section 234(a) of the Revenue Act of 1918 provides that in computing the net income of a corporation there shall be allowed as deductions:
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise;
*998 (5) Debts ascertained to be worthless and charged off within the taxable year.
In *2001 Sherman & Bryan, Inc. v. Blair, 35 Fed.(2d) 713, reversing Sherman & Bryan, Inc.,9 B.T.A. 213">9 B.T.A. 213, the Second Circuit Court of Appeals decided that a debt could be deducted as a loss. This case was followed by the Court of Appeals of the District of Columbia in Davidson Grocery Co. v. Lucas, 37 Fed.(2d) 806, reversing Davidson Grocery Co.,12 B.T.A. 181">12 B.T.A. 181. This Board has always held that bad debts may not be deducted as losses under subsection (4). See Emil Stern et al.,5 B.T.A. 89">5 B.T.A. 89; First National Bank of St. Paul,10 B.T.A. 32">10 B.T.A. 32; Davidson Grocery Co., supra; Hector Fezandie, Executor,12 B.T.A. 1325">12 B.T.A. 1325. On the question of whether or not subsections (4) and (5) are mutually exclusive, see Porter v. United States, 20 Fed.(2d) 935; affd., 27 Fed.(2d) 882; United States v. Klausner, 25 Fed.(2d) 608; Minnehaha National Bank, supra;Selden v. Heiner, supra;*2002 Lewellyn v. Electric Reduction Co.,275 U.S. 243">275 U.S. 243.
However, this question need not be decided in the present case, for we do not think that the evidence establishes that the petitioner's loss, if any, was sustained in 1920. In Lewellyn v. Electric Reduction Co., supra, the Supreme Court, in disallowing the deduction of an alleged loss, said in part:
* * * It may well be that he whose house has been burned has sustained a loss whether he knows it or not and may recover a tax paid in ignorance of that material fact. But we cannot say that the merchant whose action has been based not merely on ignorance of a fact but on faith in a prophecy - even though the prophecy is made without full knowledge of the facts - can claim to have sustained a loss before the future fails to justify his hopes.
* * * There is nothing in the findings from which we could conclude that the respondent in 1918 had ceased to regard his rights under the contract as having value or that there was then reasonable ground to suppose that efforts to enforce them would be fruitless. On the findings respondent is not entitled to recover.
In the instant case the petitioner*2003 at the end of 1920 knew that it could recover the property in question under its deed of trust, but the evidence does not establish the value of the property at that time. Furthermore, the petitioner had a right as a general creditor against the bankrupt estate for the amount of its claim in excess of the value of the property. We know now that the petitioner recovered nothing from the bankrupt except the property, but the evidence does not establish that its right was valueless in 1920 or that the petitioner so regarded it.
Judgment will be entered for the respondent under Rule 50.