*2926 Amounts claimed in 1921 and 1922 as deductions for bad debts disallowed for failure to show when such debts were ascertained to be worthless.
*729 These are proceedings, duly consolidated for hearing and decision, for a redetermination of deficiencies in income tax for the years 1921 and 1922 in the respective amounts of $26,253.57 and $18,496.32.
The petitioners, under Docket No. 17186, relating to the year 1921, allege error of the respondent in disallowing as a deduction the amount of (1) $69,749.80 claimed by the petitioners for a worthless debt from the E. C. Manufacturing Co., which decedent charged off his books in the year 1921, and (2) the amount of $50 claimed as a deduction for a worthless debt from John B. Rees, which decedent charged off in the year 1921.
The petitioners, under Docket No. 26581, relating to the year 1922, allege as error the disallowance by the respondent of a deduction of $51,287.30 claimed by petitioners for a worthless debt of the E. C. Manufacturing*2927 Co., determined to be worthless and charged off decedent's books in the year 1922.
*730 FINDINGS OF FACT.
The petitioners in the consolidated cases are the duly qualified executors of the estate of Arthur B. Jones, who died February 21, 1927.
Arthur B. Jones, from 1906 through 1922, was managing trustee of the estate of Marshall Field. In 1913 Hugh J. Ellis visited Jones and asked him to loan money to the E. C. Manufacturing Co., a corporation in which Ellis owned half the stock. Both Jones and Ellis were Welshmen, and because of this, Jones advanced money to the company from time to time and received therefor forty-seven notes. There follows a statement showing the amount and date of each loan made as evidenced by promissory notes:
| Statement showing cash invested (notes payable) | ||
| Year | Day of loan | Amount |
| 1913 | Sept. 26 | $6,420.00 |
| 1915 | Apr. 6 | 2,000.00 |
| 1916 | Dec. 6 | 3,000.00 |
| 1917 | Jan. 23 | 1,500.00 |
| Mar. 14 | 1,252.47 | |
| Mar. 16 | 1,577.57 | |
| Mar. 17 | 161.87 | |
| Mar. 20 | 7,398.10 | |
| Mar. 23 | 499.79 | |
| Mar. 26 | 1,875.46 | |
| Mar. 27 | 275.00 | |
| Mar. 29 | 2,627.67 | |
| Apr. 1 | 1,659.63 | |
| Apr. 23 | 2,000.00 | |
| Apr. 24 | 1,000.00 | |
| May 11 | 1,000.00 | |
| May 25 | 3,000.00 | |
| 1917 | June 30 | $3,500.00 |
| Aug. 29 | 1,500.00 | |
| Sept. 26 | 2,500.00 | |
| Oct. 20 | 3,000.00 | |
| Dec. 11 | 500.00 | |
| Dec. 18 | 500.00 | |
| Dec. 31 | 2,121.33 | |
| 1918 | Jan. 17 | 6,000.00 |
| July 6 | 1,000.00 | |
| Sept. 3 | 2,100.00 | |
| Oct. 17 | 10,000.00 | |
| 1919 | Apr. 21 | 5,000.00 |
| June 30 | 2,900.00 | |
| Aug. 19 | 1,500.00 | |
| Oct. 28 | 10,000.00 | |
| Dec. 13 | 8,000.00 | |
| 1920 | Nov. 10 | 8,000.00 |
| 1921 | Mar. 16 | $2,000.00 |
| June 15 | 3,000.00 | |
| Sept. 3 | 5,000.00 | |
| Sept. 6 | 5,000.00 | |
| Sept. 20 | 5,000.00 | |
| Oct. 24 | 4,000.00 | |
| Dec. 6 | 2,000.00 | |
| Dec. 24 | 500.00 | |
| 1922 | Jan. 18 | 300.00 |
| Apr. 18 | 1,500.00 | |
| June 1 | 1,000.00 | |
| July 19 | 6,000.00 | |
| Dec. 5 | 2,000.00 | |
| May 31, 1923, notes payable | 142,248.89 |
*2928 Jones took no security for any of the notes.
The note given September 26, 1913, for $6,420 was payable one year after date and provided for payment of interest of 7 per cent. This note was made by E. C. Manufacturing Co., by Hugh J. Ellis, president.
On its face, the second note, that of December 6, 1916, for $3,000, appears to be Ellis' personal note, but the evidence shows that these amounts were advanced to the E.C. Manufacturing Co. This is a demand note. All the notes given thereafter are payable on demand and carried interest at 7 per cent.
The notes given thereafter up to and including that of April 1, 1917, for $1,659.63, were made by E. C. Manufacturing Co., by Hugh J. Ellis, president. Notes given to Arthur B. Jones thereafter were made by E. C. Manufacturing Co., by Howard B. Jones, president.
The E.C. Manufacturing Co. was in the business of manufacturing nuts, bolts, automatic screw machines, parts for automobiles, parts for typewriters and parts for adding machines. The business was *731 conducted in a small shop and 15 persons were employed. A contract with the English Government had been obtained by Ellis for the manufacture of gun bars for*2929 English shells, but the contract had been taken at such a figure that the company operated at a loss. When the United States entered the war more machines were installed and the company continued to fill orders. Arthur B. Jones loaned money to the company to buy these machines. After the war the company did no business for about a year, then it went into the automobile business. Business improved in the latter part of 1919 and early part of 1920. Arthur B. Jones loaned the company more money then, in order to help it succeed. In the fall of 1920 the automobile business suffered a slump and it became apparent to the president of the company in 1921 that the company could not operate at a profit.
In the latter part of 1917 Ellis, at the instance of Arthur B. Jones, turned over his stock in the E.C. Manufacturing Co. to Jones' son, Howard B. Jones, to see if it were possible to keep the business from going into bankruptcy and thereby protect Arthur B. Jones' interest. Howard B. Jones acquiring all the stock of the E.C. Manufacturing Co., except one share held by the secretary of the corporation, he became president of the company and had entire control of it. Arthur B. Jones*2930 had previously given his son money to buy a bicycle business which was an off-shoot of a business the son had been in and which had been liquidated. Howard also had an income from some stocks and bonds which his father had given him when he was young. Financial statements of the E.C. Manufacturing Co. were furnished Arthur B. Jones monthly. In 1919 he stated to Richard H. Peel, who helped him prepare his return for 1921 and 1922, that he would never get his money out of the E.C. Manufacturing Co., but gave no reason for thinking so. In 1921 Arthur Jones became concerned about the business and at that time favored liquidation of the company. Efforts were made to combine with other corporations and to sell the business, but all attempts failed. Jones loaned the company more money, the purpose of which was to allow it to stop taking new business and finish up that which it had on hand, and in order to pay rent so that the company could stay long enough to liquidate the plant to the best advantage.
In the latter part of 1922 or in January, 1923, an auction was held, but the assets of the company were selling at such a low figure that the auction was stopped and the assets were*2931 sold piece by piece. After the bills were paid the sale of assets netted the company $16,748.26, exclusive of the amounts due to Arthur B. Jones. This money was given by Arthur B. Jones to his son.
*732 The only time the company showed a profit was in November and December, 1918. The loss during each year from 1918 to 1922 was as follows:
| 1918 | $18,667.60 |
| 1919 | 15,420.46 |
| 1920 | 16,487.46 |
| 1921 | 49,444.02 |
| 1922 | 48,805.88 |
The balance sheet of the E.C. Manufacturing Co. at December 31, 1919, was as follows:
| Bank Account | $338.26 | |||
| Petty Cash | 75.00 | |||
| $413.26 | ||||
| Accounts rec. ledger current | 17,167.69 | |||
| Accounts rec. ledger claim | 1,641.12 | |||
| 18,808.81 | ||||
| Suspense accts. 1919 | $615.50 | |||
| Suspense accts. old | 1,717.57 | |||
| 2,333.07 | ||||
| Less: Reserve for same | 2,547.15 | |||
| $214.08 | ||||
| H. B. Jones, per acct | 650.00 | |||
| Consignment acct | 300.00 | |||
| Merchandise acct., Raw | 7,956.22 | |||
| Inventory Work in process | 25,954.50 | |||
| 33,910.72 | ||||
| Machinery acct | 45,899.84 | |||
| Shop Equipment | 6,193.18 | |||
| Tool Acct | 11,474.89 | |||
| 63,567.91 | ||||
| Less: Reserve for dep'n.: | ||||
| Machinery | 14,364.93 | |||
| Shop equip | 754.45 | |||
| Tool acct | 3,130.90 | |||
| 18,250.28 | 45,317.63 | |||
| Office furniture | 140.50 | |||
| Deferred charges: | ||||
| Advertising | 120.50 | |||
| Stationery | 50.00 | |||
| Insurance | 1.44 | |||
| Shipping cases | 340.00 | |||
| Shop Expense | 150.00 | |||
| 660.50 | ||||
| Notes Payable | 96,948.89 | |||
| Accts. pay. Ledger | 21,938.51 | |||
| Accrued Pay Roll | 792.97 | |||
| Federal taxes | 32.02 | |||
| Interest reserve - Notes pay | 9,336.45 | |||
| Shop Pay Roll - uncalled for | 25.12 | |||
| Capital stock | 5,000.00 | |||
| Profit & loss Dec. 31, 1918 | $18,667.50 | |||
| Loss on steel 1919 | $608.13 | |||
| Loss on claim a/c 1919 | 487.25 | |||
| Loss for 11 months | 13,298.65 | |||
| Loss for Dec | 826.43 | |||
| 15,420.46 | ||||
| 134,289.48 | 134,289.48 |
*2932 *733 The books of the E.C. Manufacturing Co. showed assets and liabilities at December 31, 1920, as follows:
| Assets: | ||||
| (Current assets) - | ||||
| Cash Bank | $70.92 | |||
| Cash Drawer | 4.70 | |||
| Accts. rec | 7,513.96 | |||
| $7,589.58 | ||||
| Working assets - | ||||
| Mdse., raw | 8,859.04 | |||
| Mdse., in process | 34,628.83 | |||
| Stationery supplies | 50.00 | |||
| 43,537.87 | ||||
| Fixed assets - | ||||
| Machinery | $43,176,86 | |||
| Machinery dep'n | 16,711.50 | |||
| 26,465.36 | ||||
| Shop Equipment | 6,521.28 | |||
| Tools | 4,212.13 | |||
| Elec. wiring & Equip | 1,247.87 | |||
| Office furn. & fix | 258.84 | |||
| 38,705.48 | ||||
| Personal - H. B. Jones | 1,264.87 | |||
| Prepaid expense - | ||||
| Prepaid insurance | 734.80 | |||
| Prepaid shipping expense | 420.29 | |||
| Total prepaid expense | 1,155.09 | |||
| Total assets | $92,252.89 | |||
| Liabilities: | ||||
| Notes payable | 104,948.89 | |||
| Accounts pay | 14,167.84 | |||
| Accrued int. pay | 16,200.68 | |||
| Excess tax | 50.00 | |||
| Shop payroll uncalled for | 51.77 | |||
| Shop payroll accrued | 113.92 | |||
| Contingent | 2,280.82 | |||
| Reserve for bad debts | 14.49 | |||
| 137,828.41 | ||||
| Total liabilities | $45,575.52 | |||
| Represented by: | ||||
| Loss for year 1918 | 18,667.60 | |||
| Loss for year 1919 | 15,420.46 | |||
| Loss for year 1920 | 16,487.46 | |||
| Total loss | 50,575.52 | |||
| Capital | 5,000.00 | |||
| 45,575.52 |
*2933 *734 The balance sheet of the E.C. Manufacturing Co. at December 31, 1921, was as follows:
| Cash: | ||
| Bank | $44.64 | |
| Petty cash | 20.75 | |
| Accts. rec.: | ||
| A/c Rec | 13,525.50 | |
| H. B. Jones | 1,470.09 | |
| Inventories: | ||
| Raw material | 5,266.25 | |
| Fcty. material | 14,452.68 | |
| Miscellaneous Assets: | ||
| Stationery | 50.00 | |
| Insurance P.P | 207.30 | |
| Shipping exp. P.P | 72.25 | |
| Plant: | ||
| Office furn. & fix | 138.84 | |
| Shop equip | 6,872.89 | |
| Tools | 8,689.99 | |
| Machinery | 41,584.21 | |
| Accounts Payable: | ||
| A/c payable | $8,400.47 | |
| Res. for excise tax | 267.10 | |
| Notes pay. - A. B. Jones | 127,248.89 | |
| Reserves: | ||
| Res. for interest | 24,054.36 | |
| Shop pay roll accrued | 323.74 | |
| Allowance for dep. machinery | 20,045.19 | |
| Allowance for dep. tools | 5,624.30 | |
| Allowance for dep. shop equip | 1,035.50 | |
| Capital: | ||
| Capital | 5,000.00 | |
| P. & L. | 99,604.16 | |
| 191,999.55 | 191,999.55 |
The balance sheet of the E.C. Manufacturing Co. as of December 30, 1922, was as follows:
| Cash: | |||
| Bank | $195.86 | ||
| Petty cash | 12.73 | ||
| Accounts Receivable: | |||
| Accts. rec. | 2,563.33 | ||
| Howard B. Jones | 2,121.00 | ||
| Inventories: | |||
| Raw material | 3,027.88 | ||
| In process | 1,793.85 | ||
| Miscellaneous Assets: | |||
| Insurance prepaid | 107.10 | ||
| Office furn. & fix. | 100.00 | ||
| Plant: | |||
| Shop equip | $6,847.62 | ||
| All for depn | 1,743.48 | ||
| $5,104.14 | |||
| Tools | 8,848.53 | ||
| All for depn | 7,738.85 | ||
| 1,109.68 | |||
| Machinery | 41,643.66 | ||
| All for depn | 25,040.07 | ||
| 16,603.59 | |||
| Accounts Payable: | |||
| Accounts payable | $538.36 | ||
| Notes payable - A. B. Jones | 141,948.89 | ||
| Interest accrued - A. B. Jones | 33,566.55 | ||
| Pay roll accrued | 89.01 | ||
| Capital: | |||
| Capital | 5,000.00 | ||
| P. & L | 148,403.65 | ||
| 181,142.81 | 181,142.81 |
*2934 *735 The profit and loss account of the E.C. Manufacturing Co. as of May 31, 1923, showed the following:
| Sales | $2,197.07 | |
| Shop pay roll | $634.02 | |
| Shop exp | 114.90 | |
| Insurance | 6.29 | |
| Light, water, power | 54.91 | |
| Rent | 1,590.00 | |
| Taxes | 30.05 | |
| Advertising | 177.10 | |
| Cartage | 10.41 | |
| Exce. & dis | 67.60 | |
| Commission | 842.12 | |
| Legal | 127.65 | |
| Office salaries | 1,950.00 | |
| Office expense | 91.54 | |
| Factory mdse | 2,216.15 | |
| 7,912.74 | ||
| 5,715.67 | ||
| Interest earned | 4.05 | |
| Loss from mfg | 5,711.62 |
| BALANCE | ||
| Cash | $5,772.77 | |
| A/c rec | 3,332.25 | |
| H. B. Jones | 9,083.75 | |
| Prepaid insurance | 82.30 | |
| Notes payable | 142,248.89 | |
| Interest payable | 33,566.55 | |
| Capital | 5,000.00 | |
| P. & L. to December 31, 1922 | 148,403.65 | |
| Loss from mfg. to May 1, 1923 | 5,711.62 | |
| Loss from sale of shop | 8,429.10 | |
| 180,815.44 | 180,815.44 |
*736 Arthur B. Jones was a good business man and made good investments for the Marshall Field Estate over a number of years.
Authur B. Jones kept no books of account except his check book. In the fall of 1921 or in the spring of 1922 Arthur B. Jones expressed his opinion that a part of the notes were worthless. Richard H. Peel assisted*2935 Jones in making out his income-tax returns for the years 1921 and 1922. In preparing those returns Peel and Jones had the balance sheets of the E.C. Manufacturing Co. before them and by computation from them they determined that $69,749.80 of the total indebtedness of the E. C. Manufacturing Co. to Jones was not collectible at December 31, 1921, and that $51,287.30 of the remaining indebtedness was uncollectible at December 31, 1922. These amounts were claimed as deductions on the returns for 1921 and 1922, respectively.
These amounts were disallowed as deductions by the respondent.
OPINION.
SIEFKIN: Under docket No. 17186 the petitioner assigned as error the action of the respondent in disallowing as a deduction the amount of $50 claimed by the petitioner as a deduction for a bad debt owing from John B. Rees. However, no evidence was adduced with regard to this assignment of error and it will be decided in favor of the respondent.
The remaining question to be decided is whether the respondent erred in disallowing as a deduction from income for the year 1921, the amount of $69,749.80, and from income for the year 1922 the amount of $51,287.30, which amounts were claimed*2936 by the petitioner in his returns for the respective years as deductions for bad debts owing from the E.C. Manufacturing Co.
Section 214(a)(7) of the Revenue Act of 1921 provides:
That in computing net income there shall be allowed as deductions:
* * *
(7) Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.
The evidence discloses that A. B. Jones kept no books of account except his check book. During the years 1921 and 1922, and even as early as 1919, he was aware that the E.C. Manufacturing Co. was in poor financial condition. Richard H. Peel testified that he assisted Jones in preparing his returns for the years 1921 and 1922, and that at those times they had before them the balance sheets of the E.C. Manufacturing Co. and that from such sheets the extent of the worthlessness of the obligations of the E.C. Manufacturing *737 Co. to Jones was calculated. But there is no evidence as to when such calculations were made. We can*2937 not speculate, for example, as to whether the calculations with regard to the return for 1921 took place in 1921 or in 1922. We have repeatedly held that deductions for bad debts can only be allowed when the worthlessness is ascertained within the year for which the deduction is claimed. We must hold that no deductions are allowable.
Judgment will be entered for the respondent.