*1406 1. In the taxable year petitioner referred a debt of $95.74 for collection to his attorney, who in turn referred the debt for collection to a correspondent attorney at the debtor's situs. The correspondent attorney reported that he was unable to collect anything on the debt. The debtor filed a voluntary petition in bankruptcy. The debt was charged off on petitioner's books within the taxable year. Held, that the debt was ascertained to be worthless within the taxable year and was deductible as a bad debt in that year.
2. In the taxable year petitioner on the accrual basis received without restriction as to its disposition the total sales price of coal which he sold as agent for the X corporation in that year. Under a claim of right he deducted from the total sales price certain expenses, totaling $6,408.74, incurred by him on such sales and paid the balance less commissions on such sales to the X corporation. At the end of the taxable year the X corporation disputed petitioner's right to deduct such expenses from the total sales price. In the following year the dispute was settled by petitioner's payment of $1,000 to the X corporation. Held that the amount of*1407 such expenses deducted by petitioner from the total sales price is includable in his income in the taxable year.
,3. A joint income tax return was filed by petitioner for the taxable year for himself and his wife. His wife had no income from any source in the taxable year. Held, that his wife is not liable for any deficiency in tax in the taxable year.
*1148 Respondent determined a deficiency of $1,105.45 in income tax for the year 1937. Petitioner Richard Downing filed a joint income tax return for the taxable year for himself and his wife, Irma Downing. Inasmuch as any deficiency arises entirely out of the income of petitioner Richard Downing, he will be referred to hereinafter as the petitioner. The questions are: (a) Whether a debt of $95.74 owed to petitioner by the City Coal Co. is deductible as a bad debt in the taxable year; (2) whether $6,408.74, which petitioner deducted as additional expenses from the total sales price of coal sold by him as agent for the Culmerville*1408 Coal Co. in the taxable year is includable in his income in that year; and (3) whether petitioner's wife is liable for any deficiency in tax for the taxable year.
FINDINGS OF FACT.
Petitioner and Irma Downing are husband and wife and reside at Shaker Heights, Ohio. Petitioner filed a joint income tax return for the year 1937 with the collector of internal revenue for the eighteenth district of Ohio. Irma Downing had no income from any source in the year 1937.
Petitioner is engaged in the coal operating and coal brokerage business and does business as the Downing Coal Co. He maintains a place of business at Cleveland, Ohio. During 1937, the taxable year, and prior thereto petitioner kept his books of account and filed his income tax returns on the accrual basis and on a calendar year basis.
*1149 In December 1936 petitioner sold a quantity of coal to the City Coal Co. of Warren, Ohio, for which he charged $95.74. That amount was entered on his books as an account receivable from the City Coal Co. under date of December 22, 1936, and was reported by him as income on his income tax return for the year 1936. In 1937 petitioner referred the debt for collection to*1409 his attorney at Cleveland, who in turn referred the debt for collection to a correspondent attorney at Warren. The correspondent attorney reported to petitioner's attorney that he was unable to collect anything on the debt. On or about December 8, 1937, the City Coal Co. filed a voluntary petition in bankruptcy. Thereafter, petitioner was advised by his attorney that the debt was worthless. Petitioner did not file a claim as a creditor in the bankruptcy proceedings and never collected anything on the debt. At the time petitioner's books were closed for the year 1937 entries were made on such books under date of December 31, 1937, charging off the debt of $95.74 owed by the City Coal Co. The debt of $95.74 owed to petitioner by the City Coal Co. was ascertained to be worthless and charged off on his books within the taxable year.
In July 1933 petitioner purchased approximately 50 percent of the common stock of the Culmerville Coal Co., a Pennsylvania coal mining corporation, hereinafter referred to as Culmerville, and then entered into a sales agency agreement with that corporation. Under the agreement Culmerville employed petitioner as its exclusive sales agent to sell the*1410 entire product of its mines. Petitioner was to make diligent effort to sell the entire product of Culmerville's mines. In so far as reasonably possible he was to sell direct to consumers and local dealers for retail distribution, but he was to have the right to sell to brokers and others. He was to use his "best endeavors to secure the highest possible price" for Culmerville's coal but was not to be restricted as to the price at which he sold coal. All sales were to be made by him for the account of Culmerville, but were to be invoiced to the purchaser in the name of petitioner. Payment was to be made by the purchaser to petitioner. Culmerville was to pay him "a commission of eight per cent of the selling price f. o. b. mines, on all coal shipped by railroad from" its mines. Petitioner was to have the right to make allowances and adjustments on account of poor preparation of coal and for other causes within the control of Culmerville and such allowances and adjustments were to be deducted from the sales price of the coal before his commissions were computed. Petitioner guaranteed payment of all accounts. He was to pay Culmerville on or before the 25th day of the month for*1411 all coal shipped during the previous calendar month, less the commissions to which he was *1150 entitled. Nothing contained in or done under the agreement was to be construed as a sale of coal to petitioner. The agreement was to operate during the life of Culmerville's mines but for no greater period than ten years.
From the time of the execution of the agreement to the end of the taxable year and thereafter petitioner sold coal for Culmerville under the agreement as its exclusive sales agent. The sales of coal made by petitioner for Culmerville were largely on credit. In some cases he sold coal for Culmerville through other brokers and in other cases he purchased coal from other brokers so that he could sell coal for Culmerville to them. In connection with these sales through and purchases from other brokers, petitioner incurred certain expenses hereinafter referred to as additional expenses.
Petitioner maintained a Culmerville account and a Culmerville commissions account on his books. At the end of each month petitioner deducted from the total sales price of coal sold for Culmerville during the month the commissions due on such sales and the additional expenses*1412 incurred on such sales and credited the balance to the Culmerville account; and he credited the commissions due on such sales and the additional expenses incurred on such sales to the Culmerville commissions account.
The Culmerville account was a running account. Petitioner did not make payments to Culmerville on or before the 25th day of the month for coal shipped during the previous calendar month as the agreement provided. He made such payments to Culmerville as that corporation required, even though such payments were not due under the agreement. The payments made by him to Culmerville were debited to the Culmerville account.
The purchasers to whom petitioner sold coal for Culmerville made all payments to him. The amounts which petitioner collected from purchasers on account of sales of coal for Culmerville were deposited by him in his own bank account.
From the time of the execution of the agreement until some time near the end of the taxable year Culmerville never objected to the deduction by petitioner of additional expenses from the total sales price of coal sold by him for it. On his income tax return for each of the years prior to the taxable year petitioner*1413 reported as income the amount of additional expenses deducted by him from the total sales price of coal sold by him for Culmerville in the year.
During the taxable year petitioner deducted a total of $6,408.74 as additional expenses from the total sales price of coal sold by him for Culmerville in that year, and earned a total of $21,717.96 in commissions on sales of coal for Culmerville in that year. At the end of each month during the taxable year the Culmerville commissions *1151 account was credited with the total amount of additional expenses deducted from the total sales price of sales for Culmerville during the month and the total amount of commissions earned on such sales. During the taxable year the Culmerville commissions account was credited with a total of $28,126.70 ($6,408.74 plus $21,717.96).
Near the end of the taxable year Culmerville entered into a controversy with petitioner with respect to the deduction by petitioner of additional expenses from the total sales price of coal sold by him for it in the taxable year. Petitioner caused a new account to be opened on his books, entitled "Commissions Special Account." As of December 31, 1937, $6,408.74, *1414 the total amount deducted by petitioner as additional expenses from the total sales price of coal sold by him for Culmerville in the taxable year, was debited to the Culmerville commissions account and credited to the commissions special account. On or about July 26, 1938, Culmerville commenced a suit against petitioner in the United States District Court for the Northern District of Ohio to recover, inter alia, $6,408.74, the total amount deducted by him as additional expenses from the total sales price of coal sold by him for Culmerville in the taxable year. On or about November 28, 1938, the suit was settled out of court upon payment of $1,000 by petitioner to Culmerville, and Culmerville released petitioner, inter alia, from any claim to the $6,408.74 which had been deducted by him as additional expenses from the total sales price of coal sold by him for Culmerville in the taxable year.
The commissions special account on petitioner's books was debited with $1,000 under date of November 30, 1938, and with $5,408.74 as transferred to profit and loss account under date of December 31, 1938. On an amended income tax return for the year 1938 petitioner reported $5,408.74*1415 as "additional income derived from settlement of law suit."
OPINION.
HARRON: The first question is whether the debt of $95.74 owed to petitioner by the City Coal Co. is deductible in the taxable year as a bad debt. The question arises under section 23(k) of the Revenue Act of 1936, which provides in part that a debt "ascertained to be worthless and charged off within the taxable year" shall be allowed as a deduction. Petitioner deducted the amount of the debt in question on the joint income tax return filed by him for the taxable year; and respondent disallowed the deduction in the statement attached to the deficiency notice.
Respondent does not contend that the debt in question was not charged off by petitioner on his books within the taxable year. *1152 And it is clear that the debt in question was charged off within a reasonable time after the close of the taxable year by entries on petitioner's books made in the usual course with other closing entries as of the close of the taxable year and before his books were closed finally for that year. *1416 ; ; . However, respondent does contend that petitioner had failed to prove that the debt in question was ascertained to be worthless within the taxable year.
In our opinion, petitioner has introduced sufficient evidence to prove that the debt in question was ascertained to be worthless within the taxable year. The debt in question was relatively small, i.e., $95.74. See Paul and Mertens, Law of Federal Income Taxation, vol. 3, sec. 28.54. In the taxable year petitioner did refer the debt for collection to his attorney at Cleveland, who, in turn, referred the debt for collection to a correspondent attorney at Warren, the situs of the debtor. The correspondent attorney reported to petitioner's attorney that he was unable to collect the debt and "that he was unable to find anything." Cf. . On December 8, 1937, the debtor filed a voluntary petition in bankruptcy. Petitioner was then advised by his attorney that the debt was worthless. *1417 Cf. In view of the fact that the investigation made by the correspondent attorney disclosed that the debt was uncollectible, petitioner was not required to wait until the affairs of the bankrupt debtor were liquidated before deducting the debt in question as a bad debt. ;. Accordingly it is held that the debt in question was ascertained to be worthless and charged off within the taxable year, and thus is deductible as a bad debt.
The second question is whether $6,408.74, the total amount deducted by petitioner as additional expenses from the total sales price of coal sold by him for Culmerville in the taxable year, is includable in his income for that year. Petitioner did not report the amount in question as income on the joint income tax return filed by him for the taxable year; and respondent included the amount in question in petitioner's income for the taxable year in the statement attached to the deficiency*1418 notice.
Petitioner contends in substance that in the taxable year the amount in question was subject to a substantial contingency of litigation, and that no part of the amount in question is includable in petitioner's income until 1938 when the contingency was terminated by the settlement *1153 of the litigation. Respondent contends in effect that the amount in question was received by petitioner in the taxable year "under a claim of right and without restriction as to its disposition" and is includable in his income for that year even though "subsequent events may result in the determination that the recipient or claimant is not entitled to it", and relies on ; and .
In ,the Supreme Court enunciated the following principles:
* * * If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the*1419 money, and even though he may still be adjudged liable to restore its equivalent.
See also ; certiorari denied, ; ; ; certiorari denied, ; ; ;.
The application of the principles set forth above to the facts present here compels the conclusion that the amount in question is includable in petitioner's income in the taxable year. During the taxable year petitioner kept his books on the accrual basis. He invoiced the sales of coal for Culmerville to the purchasers in his own name; he guaranteed payment of all accounts; and payments were made directly to him. The total sales price of the coal sold by him for Culmerville during the taxable year presumably was debited on his books to the purchasers. From such total sales price he deducted commissions earned on sales and additional*1420 expenses incurred on sales (which totaled the amount in question), and the balance was credited to the Culmerville account. The commissions earned on sales and additional expenses incurred on sales (which totaled the amount in question) were credited to the Culmerville commissions account. Thus, on the accrual basis, the amount in question was received by petitioner in the taxable year. Moreover, the record indicates that the amount in question was received by him under a "claim of right." Since the time of the execution of the sales agency agreement petitioner had deducted additional expenses from the total sales price of coal sold by him for Culmerville, and Culmerville never objected to this practice until near the end of the taxable year. That the amount in question was transferred from the Culmerville commissions account to the commissions *1154 special account as of the end of the taxable year does not indicate an abandonment of his claim of right. That he persisted in his claim of right even after the end of the taxable year is shown by the fact that Culmerville instituted suit against him in July 1938 to recover the amount in question. Furthermore, the record indicates*1421 that the amount in question was received by petitioner "without restriction as to its disposition." All payments by purchasers were made to petitioner directly and deposited by him in his own bank account. As petitioner states in his reply brief, all money that he received from the sale of coal for Culmerville was his own money. It is true that the amount in question was subject to a contingent liability to pay Culmerville an equivalent amount if the controversy over the deduction of the amount in question from total sales price went against petitioner. See And in fact petitioner's testimony shows that the amount in question was transferred from the Culmerville commissions account to the commissions special account in order to reflect such a contingent liability. However, the contingent liability imposed no restriction upon petitioner's use of the amount in question which he had already received. See The settlement of the suit instituted by Culmerville to recover the amount in question merely determined petitioner's right to retain income already*1422 received. See Whatever effect the payment of $1,000 made by petitioner in connection with the settlement of the litigation in 1938 has upon his income should be reflected in a correct return of his income for 1938. See Accordingly, it is held that the amount in question is includable in petitioner's income for the taxable year. See ;;;;;;
The final question is whether petitioner's wife, Irma Downing, is liable for the deficiency in tax. The deficiency in tax arises entirely out of petitioner's income. His wife had no income from any source in the taxable year. Therefore, she is not liable for any tax in that year, even though a joint return for husband and wife was filed. *1423 ; ; .
Decision will be entered under Rule 50.