*4097 A debt is not ascertained to be worthless within the meaning of section 234(a)(5) of the Revenue Act of 1918 where the petitioner's only effort toward such ascertainment was an investigation which showed the debtor to be in an unsatisfactory financial condition and the collection of the debt doubtful.
*491 This proceeding is for the redetermination of a deficiency in income and profits taxes for the year 1920 in the amount of $18,410.72. The deficiency arises from the disallowance by the respondent of a deduction in the amount of $68,538.41 taken by the petitioner in its income and profits-tax return for 1920 on account of a debt alleged to have been ascertained to be worthless and charged off in that year.
FINDINGS OF FACT.
The petitioner is a corporation with its principal place of business at 485 California Street, San Francisco, Calif.
In April, 1920, the Border National Bank of Eagle Pass, Tex., was requested by a client, one Joseph De Bona, to wire an irrevocable letter of credit to one Maldonado, who*4098 was a client of the petitioner. The cashier of the Border National Bank wired Maldonado and also the petitioner, in the Border National Bank's name, as follows:
We guarantee irrevocable payment for account Joseph De Bona covering purchase 200 long tons Orient white granulated sugar.
Two months later the Border National Bank wired the petitioner that the above guarantee or letter of credit was thereby revoked. The petitioner replied that it had already issued its letter of credit on the strength of the guarantee given it, and refused to accept the revocation.
Before issuing its letter of credit the petitioner had made inquiries as to the financial responsibility of the Border National Bank and received a favorable report; but the report had reference to the Border National Bank in El Paso, not the bank in Eagle Pass - a fact of which the petitioner was unaware until several months later.
The sugar arrived in November, 1920, drafts by Maldonado to cover its cost were refused by the Border National Bank, and the petitioner sold the sugar in December, 1920, at a net loss of $68,538.41. An immediate investigation of the Border Bank of Eagle Pass disclosed that it was not financially*4099 sound; that the cashier had wired the guaranty to the petitioner without authority from the bank directors; and the chances of recovering the money were doubtful. De Bona was financially irresponsible.
On December 31, 1920, the petitioner charged off on its books the said amount of $68,538.41 and deducted it from gross income for that year as a bad debt. In January, 1921, in order to protect itself as far as possible and not allow other creditors of the Border National Bank to get any priority, the petitioner brought suit against the Border Bank in the United States District Court for the Western District of Texas and recovered judgment. An appeal was taken by the Border National Bank and an appeal bond was furnished by the National Surety Co. The Circuit Court of Appeals affirmed the *492 judgment in July, 1922, and certiorari was refused by the United States Supreme Court November 23, 1922. In the meantime the Border National Bank turned over its assets to another bank and was dissolved. The surety company paid to the petitioner the amount of the judgment, which was returned as income by the petitioner for the year in which it was received from the surety company.
*4100 OPINION.
MARQUETTE: In April, 1920, one Maldonado contracted to sell a quantity of Orient sugar to one De Bona. Before accepting De Bona's order Maldonado insisted that De Bona's bank wire to this petitioner an irrevocable letter of credit covering the order. Thereupon the Border National Bank of Eagle Pass, Tex., wired the petitioner, "We guarantee irrevocably payment for account Joseph De Bona covering purchase 200 long tons white granulated sugar from Maldonado & Co.," and upon the strength of this telegram and a letter confirming it the petitioner issued its letter of credit to Maldonado. Later the Border Bank wired the petitioner a revocation of its letter of credit. The sugar arrived in November of 1920 and De Bona did not take it, and the Border Bank refused to pay drafts drawn by the petitioner. De Bona was financially irresponsible. Thereupon, in December, 1920, the petitioner sold the sugar at a loss of $68,538.41 and on December 31 of that year charged off that amount as a bad debt. This charge-off was made after the petitioner had investigated the condition of the Border Bank and found it to be unsatisfactory. It also considered the legal defense which the*4101 Border Bank might raise if suit were brought upon its "irrevocable guaranty." The petitioner brought suit promptly and recovered full judgment against the Border Bank. The judgment was paid in 1922 or 1923.
Section 234(a)(5) of the Revenue Act of 1918 provides for a deduction from income of "Debts ascertained to be worthless and charged off within the taxable year."
Two elements must be present before such a deduction is permissible, namely, the debt must be ascertained to be worthless and charged off, and both must take place within the taxable year. ; . The word "ascertain" means to render certain; to make confident; to assure; to free from obscurity or doubt; to make certain to the mind; to find out. See Webster's Dictionary; Words and Phrases; Bouvier's Law Dictionary. See also .
No hard and fast rule can be laid down detailing just what must be done in every instance to ascertain worthlessness of a debt, but there must be a reasonable, bona fide ascertainment from all the facts and circumstances. *4102 It is not always incumbent upon a creditor *493 to take legal steps to establish the fact that a debt is worthless, but he can not, under the revenue acts, write a debt off as worthless while he is at the same time pursuing measures through the courts to collect it and where such collection thereby is merely doubtful.
We are of the opinion that the petitioner was not justified, under the circumstances, in charging off as a bad debt its claim against the Border National Bank. Although that bank may not have been in sound financial condition at the time, it is fairly apparent that it did have assets. It was not then insolvent and the debt was not worthless, since the petitioner was able to collect and did collect the full amount thereof. While it may have been good banking practice not to carry this claim as an asset and to charge it off as the petitioner did, yet that is not enough to render the debt worthless within the meaning of the statute and the respondent's action in denying the deduction is sustained.
Judgment will be entered for the respondent.