*43 Decision will be entered under Rule 50.
In its return for the year 1930, petitioner deducted and respondent allowed $ 22,228.17 as a bad debt loss resulting from the bankruptcy of Mico Curtain Co., a customer of petitioner. In 1930, Morris Robbins was the home manager of Mico Curtain Co., and it was through Robbins that petitioner dealt with Mico Curtain Co. Robbins was a minority stockholder of Mico Textile Co., the parent corporation. He owned no stock in Mico Curtain Co., and he was not an officer of either corporation. In 1945, when merchandise was scarce, Robbins gave his personal note to petitioner in the amount of $ 22,228 to pay this old debt of Mico Curtain Co. This note was paid in full by Robbins in 1945. Robbins paid the debt in order to secure merchandise for Ber-Mor Curtain Co., a sole proprietorship conducted by Robbins. Petitioner credited the payment to surplus account and in its income tax return treated the amount thus recovered as a bad debt recovery exclusion. The Commissioner determined that the amount thus recovered was ordinary income to petitioner. Held, the payment represented the recovery of a bad debt to petitioner under section 22 (b)*44 (12) and was a recovery exclusion under section 22 (b) (12) (D), Internal Revenue Code.
*704 In this proceeding respondent determined a deficiency in excess profits tax for the calendar year 1945 in the amount of $ 36,663.98. To this determination petitioner assigns only one error, as follows:
(a) The sum of $ 22,228.17 received by the taxpayer in 1945 and treated as recovery of a bad debt, prior tax, or delinquency amount, and its exclusion as taxable income is not recognized.
This assignment of error presents the only issue in this proceeding, namely, whether respondent erred in determining that the amount of $ 22,228.17 received in 1945 represented taxable income rather than the recovery*45 of a bad debt excludible from gross income under section 22 (b) (12) (D), Internal Revenue Code.
FINDINGS OF FACT.
Petitioner is a New York corporation with its principal office in New York City. Petitioner filed its returns for 1945 with the collector for the third district of New York on the calendar and accrual basis of accounting.
In October 1929, Morris Poley became associated with petitioner where he assumed the duties of running its curtain department. Poley has continued his association in that capacity through the taxable year 1945 and to the present time. Before joining petitioner, Poley was employed by Cohen, Hall, Marx and Co. as the operator of its curtain department and while so employed sold curtain fabrics to Mico Curtain Co. The home manager of Mico Curtain Co. was Morris Robbins, and all contact between Poley and Mico Curtain Co. was through Robbins. In 1930 after Poley joined petitioner, Robbins continued to buy merchandise for Mico Curtain Co. from Poley who then represented petitioner.
In 1930, Mico Curtain Co. was owned by Mico Textile Co. In 1930, Robbins owned no stock in Mico Curtain Co.; however, he was a minority stockholder of Mico Textile Co., but*46 he was not an officer of either corporation.
In 1930, Mico Textile and its subsidiaries failed and were discharged in bankruptcy. As a result of this failure petitioner sustained a loss of $ 22,228.17 which it charged off on its income tax return as a bad debt and the deduction was allowed by the Commissioner. *705 This loss taken in 1930 did not result in any tax benefit to petitioner, for even without this deduction petitioner showed no profit.
In 1945, the taxable year before us, Robbins was doing business as a sole proprietor under the name of Ber-Mor Curtain Co. In attempting to secure merchandise which was difficult to get, Robbins approached petitioner. Poley, on behalf of petitioner, advised Robbins that unless he paid the sum of $ 22,228.17 which had never been paid by Mico Curtain Co., he could not secure any merchandise from petitioner. In order to secure the merchandise needed for his business, Robbins gave petitioner his negotiable note dated March 1945, in the amount of $ 22,228. 1 The circumstances under which Robbins executed his note to petitioner are stated in a letter which petitioner's lawyers wrote to petitioner on March 15, 1945, and which reads as*47 follows:
March 15, 1945.
Bear Mill Manufacturing Co., Inc.,
470 Fourth Avenue, New York.
Gentlemen:
We had a long conference with Mr. Morris Robbins today respecting the balance due on the old account of Mico Textile Company amounting to $ 22,228. Mr. Robbins stated that it was his desire to liquidate this indebtedness to your company and after considerable discussion the following arrangement was arrived at:
Mr. Robbins executed his promissory note to the order of your company for $ 22,228, payable on or before March 15, 1946, which note is enclosed herewith. Mr. Robbins refuses to pay interest on the note, and after consultation with you, interest was waived. Mr. Robbins states that it is his intention to make payments on account of the amount of this note from time to time, and we suggest that the payments be forwarded directly to your office, so that credit can be made upon your books immediately. As payments are made, appropriate notations thereof should be placed on the back of the note and the note surrendered when the full amount is paid. At that time, it would be advisable to have photostatic copies made of the face and back of the note for preservation in*48 your records.
Very truly yours,
[Signed] Howie & Robertson.
The note which Robbins executed to petitioner reads as follows:
$ 22,228.
March 15, 1945.
On or before March 15, 1946 I promise to pay to the order of BEAR MILL MANUFACTURING CO., INC., Twenty-two thousand two hundred and twenty-eight and 00/100 DOLLARS Payable at Bear Mill Manufacturing Co., Inc. 470 Fourth Avenue, N. Y.
[Signed] Morris Robbins.
*706 The following payments are endorsed on the back of the note:
| Mar. 28, 1945 | $ 3,000.00 |
| Apr. 12, 1945 | 3,000.00 |
| May 14, 1945 | 3,000.00 |
| June 22, 1945 | 3,000.00 |
| July 3, 1945 | 3,000.00 |
| Aug. 8, 1945 | 3,000.00 |
| Sept. 5, 1945 | 2,000.00 |
| Oct. 16, 1945 | 2,228.17 |
| Total | 22,228.17 |
After Robbins made his first payment on the note, petitioner sold him merchandise on a cash basis and at O. P. A. ceiling prices. The payment by Robbins in 1945 to petitioner of the $ 22,228.17*49 in question was not a scheme to evade O. P. A. price regulations but was the bona fide payment by Robbins of the old debt of Mico Curtain Co. after an agreement to do so had been reached with petitioner under the circumstances narrated in our findings of fact above. Robbins, who operated Ber-Mor Curtain Co. as a sole proprietorship, did not charge the $ 22,228.17 as business expenses or as cost of goods sold and in his income tax return for 1945 he did not make any claim for a deduction of such amount. The taxpayer reported the amount repaid on the old debt, namely $ 22,228.17, as a bad debt recovery exclusion on its 1945 Federal income tax return. Upon the audit of that return the amount so collected was disallowed as a bad debt recovery exclusion by the Commissioner and in the determination of the deficiency was treated as ordinary income to the taxpayer in 1945.
OPINION.
The only question in this proceeding is whether the amount of $ 22,228.17 received by petitioner in 1945 represents a recovery of a bad debt within the meaning of section 22 (b) (12), Internal Revenue Code. 2
*50 *707 In its return for the calendar year 1930, petitioner deducted the amount of $ 22,228.17 as a bad debt loss, which loss resulted from the bankruptcy of one of its customers, Mico Curtain Co. This deduction did not result in any tax benefit to petitioner, for even without this deduction petitioner showed a net loss for 1930. We think it is clear that when in 1945 Robbins paid to petitioner the $ 22,228.17 in question, petitioner recovered the bad debt of that amount which it had charged off as worthless against Mico Curtain Co. in 1930. It seems to us that under the circumstances of the case this $ 22,228.17 was a bad debt recovery exclusion within the meaning of section 22 (b) (12) (D), I. R. C., and that the Commissioner erred in holding that it represented ordinary income to petitioner. It seems perfectly clear that if petitioner had received a tax benefit deduction in 1930 when it charged off this bad debt in 1930, it would have been income to it in 1945 when it recovered the $ 22,228.17 from Robbins, and doubtless the Commissioner would have so determined.
In Excelsior Printing Co., 16 B. T. A. 886, the taxpayer previously charged off*51 a bad debt in the amount of $ 7,900. Thereafter and over a period of 3 years it received from the trustee under the will of the sole stockholder of the debtor corporation repayment of the amount so charged off. Of this sum, $ 4,900 was received in 1923. In that year the taxpayer corporation did not include this sum in its income tax return, claiming that it represented a gift from the deceased stockholder of the old corporation, Philipsborn Outer Garment House, Inc., a bankrupt. The respondent contended, however, that the amount received in 1923 was, in fact, a collection upon a bad debt previously charged off, and that it was taxable to the corporate taxpayer in that year to the extent that the prior chargeoff had resulted in a tax advantage. The Board of Tax Appeals held that the deceased stockholder did not intend to make a gift to the taxpayer, but that he intended to pay the old debt, although he was not legally required so to do, and chose the medium of a bequest under his will as the method for carrying out this intent. The Board of Tax Appeals held that in accepting the money the taxpayer accepted it for the purpose which the deceased stockholder had intended, namely, *52 the payment of a debt, and as such, it constituted a recovery of a debt which had been previously charged off.
The facts in the instant case, we think, are similar in effect to the facts in the Excelsior Printing Co. case, supra. We have the positive testimony from Robbins that the sum of $ 22,228.17 was paid by him to the petitioner for the purpose of discharging the old debt of Mico Curtain Co. We have the positive testimony of Morris Poley for the petitioner that the sum of $ 22,228.17 was received from Robbins for *708 that purpose and was so treated by the corporation on its books. Why should it be treated otherwise? We see no reason why it should be. It is perfectly true that there was no legal obligation on the part of Robbins to pay this debt for the reason it was the debt of the old corporation, but there was none on the part of Philipsborn to pay the debt of Philipsborn Outer Garment House, Inc., bankrupt in the Excelsior Printing Co. case. The debtor corporation in that case had gone into bankruptcy and had been discharged as had the debtor corporation in the instant case, but notwithstanding that fact, we held the debt continued to exist. On that*53 point we said:
In the case of Zevalo v. Reeves, 227 U.S. 625">227 U.S. 625, the Supreme Court held that a discharge in bankruptcy destroys the remedy but not the indebtedness.
In the instant proceeding, therefore, the debt to the petitioner continued in existence. We have no doubt that Philipsborn did not intend to make a gift to the petitioner. He intended to pay the debts of the corporation. As far as appears from the record Philipsborn was under no legal obligation to pay such debts.
Just so, in the instant case, Robbins intended to pay the debt of the old corporation, although he was under no legal obligation to do so. He testified to that effect at the hearing and we see no reason to doubt his testimony.
Respondent in his brief stresses the fact that the reason that Robbins agreed to pay, and did pay, this old indebtedness of the Mico Curtain Co. was in order to be able to purchase certain textile goods from petitioner which were in scarce supply and which Robbins badly needed. That seems to be a fair inference from the facts but we do not see where it has any significance in deciding the question we have here to decide. Regardless of the motive which*54 prompted Robbins to pay the old debt, he did in fact pay it and by reason of his paying it petitioner recovered a bad debt which it had long since charged off and considered lost. Under the facts which are not in dispute, this debt was charged off in 1930 and allowed by the Commissioner without any tax advantage occurring to petitioner. That makes it a bad debt recovery exclusion under section 22 (b) (12) (D), I. R. C. On this issue, the only one in the case, we reverse the Commissioner and sustain the petitioner.
Decision will be entered under Rule 50.
Footnotes
1. Though the note was for $ 22,228, the amount in controversy in this proceeding is $ 22,228.17 which was also the amount paid on the note.↩
2. SEC. 22. GROSS INCOME.
* * * *
(b) Exclusions from Gross Income. -- The following items shall not be included in gross income and shall be exempt from taxation under this chapter:
* * * *
(12) Recovery of bad debts, prior taxes, and delinquency amounts. -- Income attributable to the recovery during the taxable year of a bad debt, prior tax, or delinquency amount, to the extent of the amount of the recovery exclusion with respect to such debt, tax, or amount. For the purposes of this paragraph:
(A) Definition of Bad Debt. -- The term "bad debt" means a debt on account of worthlessness or partial worthlessness of which a deduction was allowed for a prior taxable year.
* * * *
(D) Definition of Recovery Exclusion. -- The term "recovery exclusion," with respect to a bad debt, prior tax, or delinquency amount, means the amount, determined in accordance with regulations prescribed by the Commissioner with the approval of the Secretary, of the deductions or credits allowed, on account of such bad debt, prior tax, or delinquency amount, which did not result in a reduction of the taxpayer's tax under this chapter (not including the tax under section 102) or corresponding provisions of prior revenue laws, reduced by the amount excludible in previous taxable years with respect to such debt, tax or amount under this paragraph.↩