*2470 The petitioner acquired by assignment from his father on the day before his death in 1919 a one-third interest in an indebtedness, the value of which for Federal-estate-tax purposes was determined to be $922,744.19. The value of petitioner's interest therein was $307,581.39. The petitioner received payments upon the claim during the years 1921 and 1922 of $140,577.75. In 1923 and prior thereto it became apparent to the petitioner that he would not realize the full amount of one-third of the claim upon which his father's estate had paid an estate tax. Held, upon the evidence, the petitioner is not entitled to deduct from gross income, in his return for 1923, $30,000 representing a shrinkage in the value of the claim charged off in that year.
*986 The Commissioner determined deficiencies in income taxes for 1922 and 1923 of $344.24 for the former year and $8,903.07 for the latter year. This proceeding is for the redetermination of the deficiency determined for 1923. The only question in*2471 issue is whether the petitioner is entitled to deduct from his gross income of 1923, $30,000, representing an alleged partial loss of a debt with respect to his claim against the Democrata Cananea Sonora Copper Co., a corporation engaged in the mining of copper at Cananea, Sonora, Mexico.
FINDINGS OF FACT.
The petitioner's father died in 1919. On the day before he died he ordered his secretary, Herman W. Santen, who was the bookkeeper for the Democrata Cananea Sonora Copper Co. of Cananea, Sonora, Mexico (hereinafter called the company), to make an entry on the company's books assigning his claim against the company for moneys theretofore advanced to it, in the aggregate amount of $1,153,467.74, in three equal portions to his three children, Herbert H. Hoffman, the petitioner, Lillian Hoffman, and C. E. Hoffman. The company was a family affair, all of the stock being owned by the petitioner's father and immediate relatives. In 1923 substantially all of the stock was owned by the petitioner and his brother and sister, C. E. Hoffman and Lillian Hoffman.
The assignment of the claim of the petitioner's father against the company was held to be a transfer in contemplation of*2472 death and the value of the claim in the amount of $922,744.19 was included in the gross estate of the petitioner's father for the purpose of determining the Federal estate tax. In arriving at the value of the claim the Commissioner employed a balance sheet of the company as of December 31, 1919, as follows:
| FEDERAL APPRAISED VALUE | |||
| Assets | Liabilities | ||
| Boarding house | $3,231.87 | Democrata Store | $3,373.74 |
| Ore reserves and plant property | 309,915.59 | ||
| Cash | 32,841.31 | ||
| H. S. McKay, employee | 2,800.00 | ||
| Trade accounts | 68,823.26 | ||
| Inventory of copper | 508,505.90 | ||
| Net value appraised | |||
| Total | 926,117.93 | for tax purposes | 922,744.19 |
*987 On the basis of the valuation of the claim against the company as determined by the Commissioner for estate-tax purposes the value of the portion assigned to the petitioner was $307,581.39.
Through the liquidation of certain assets of the company it made the following payments on the indebtedness assigned to the three children of Herman H. Hoffman, the petitioner's father:
| April 28, 1921 | $ 150,000.00 |
| Dec. 31, 1921 | 121,733.25 |
| July 22, 1922 | 150,000.00 |
| Total | 421,733.25 |
These payments reduced*2473 the value of the remaining interest of the petitioner in the claim to $167,003.54.
The balance sheet of the company at December 31, 1923, shows as follows:
| Assets | ||
| Boarding house | $5,386.45 | |
| Depreciation | 2,872.74 | |
| $2,513.71 | ||
| Ore reserves | 2,950,000.00 | |
| Appreciation | ||
| Revaluation | 286,389.33 | |
| 3,236,389.33 | ||
| Depletion | 1,338,085.21 | |
| 1,898,304.12 | ||
| Plant | 660,298.94 | |
| Depreciation | 387,199.50 | |
| 273,099.44 | ||
| Cash | 350.31 | |
| H. S. McKay, employee | 2,850.00 | |
| Deficit | 1,977,940.54 | |
| 4,155,058.12 | ||
| Liabilities | ||
| Mercantile Bank, overdraft | 1,104.79 | |
| Herbert H. Hoffman | 254,411.50 | |
| Lillian Howard | 243,911.49 | |
| C. E. Hoffman | 250,543.95 | |
| Accrued interest | 237,070.11 | |
| Accrued officers' salaries | 38,000.00 | |
| C. E. Hoffman, Herbert H. Hoffman, | ||
| and Lillian Howard, loan account | 10,000.00 | |
| Revaluation surplus | 22,088.78 | |
| Treasury stock | 97,927.50 | |
| Capital stock | 3,000,000.00 | |
| 4,155,058.12 |
*988 On August 2, 1923, the Metals Valuation Section of the Bureau of Internal Revenue furnished the company with an engineering report covering the ore content of the mine owned by the company, such report being based upon information*2474 furnished the Commissioner by officials of the company.
Upon receipt of the above-mentioned report in August, 1923, Herman W. Santen and petitioner made a determination of the value of the ore reserves of the company which was determined to be $187,412.44.
In 1923 the only assets of the company, other than the ore reserves, consisted of a boarding house valued at $2,513.71, a claim against H. S. McKay, an employee, in the amount of $2,850, cash in the amount of $350.31, and the plant equipment. At that time the plant equipment of the company was in very bad shape. The iron corrugated sheds were almost entirely rusted out; the power plant and boilers had rusted; the mine tunnel had caved in; and the mine timbers had rotted and the mine shaft could not be used.
Herman W. Santen assisted the petitioner in the preparation of his income-tax return for 1923. Upon receipt of the metals valuation report in August, 1923, the petitioner, assisted by Santen, made a determination on the basis of all of the evidence then available that a partial loss had been sustained on the indebtedness of Herbert H. Hoffman against the company in the amount of $30,000.
In 1923 the stockholders*2475 of the company attempted to sell the assets of the company for $425,000. An offer was made to the Green Cananea Copper Co., whose property was adjacent to that of the Democrata Cananea Sonora Copper Co., to sell the mine at the above stated figure but the negotiations did not result in a sale.
The claimed partial loss of $30,000 deducted from gross income in the petitioner's tax return for 1923 was arrived at as follows:
The fair market value of the mine was determined to be $425,000, from which figure $14,000 was deducted to cover selling commissions and selling expense, leaving a balance of $417,000. The petitioner's one-third interest was placed at $137,000. Since this amount was $30,000 less than the unpaid balance of the petitioner's claim against the company, the $30,000 was deducted from gross income in the return for 1923 as a loss sustained in respect of the debt owing to the petitioner.
The operations of the company ceased in 1920, at which time the mine was permitted to flood. The incidental supplies necessary for operations, such as powder, mine shovels, picks, etc., were disposed of during 1920, 1921, and 1922, and by 1923 there were no prospects of the company*2476 making any more money except from the sale of its mine and plant equipment.
*989 The company made money only in 1916 and 1917, and suffered losses as follows in subsequent years:
| 1918 | $189,661.85 |
| 1919 | 254,009.42 |
| 1920 | 346,087.55 |
| Total to Dec. 31, 1920 | 789,758.82 |
| 1921 | $128,904.54 |
| 1922 | 159,078.94 |
| 1923 | 121,003.55 |
These losses included operating expenses, depletion, and depreciation.
The petitioner during the year 1923 maintained no set of books of account.
OPINION.
SMITH: The petitioner contends that his claim against the Democrata Cananea Sonora Copper Co. was worthless in 1923 to the extent of at least $30,000; that in 1923 on the basis of all the available evidence the petitioner made a determination that the debt was worthless in an amount of at least $30,000, and that therefore under the law he is entitled to deduct this amount as a partial bad debt loss.
The petitioner's return for 1923 was made under the provisions of the Revenue Act of 1921, which provides, so far as is here material, as follows:
SEC. 214. (a) That in computing net income there shall be allowed as deductions:
* * *
(7) Debts ascertained to be worthless*2477 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 record discloses that the petitioner's claim against the company, of which he was treasurer at or about the time of his father's death and president thereafter, was probably worth not in excess of $137,000 in 1923. The company had operated at large losses during the years 1918, 1919, and 1920, and there was no prospect that it would start operating again in the future. Apparently at the time the mine closed down in 1920, the only hope that the petitioner and his brother and sister had of recovering their claims against the company was from the sale of ore already mined and from the sale of supplies on hand and of the land and plant equipment. The evidence indicates that the petitioner made no determination himself on the worthlessness of any portion of his claim against the company in 1923. On cross-examination the petitioner testified as follows:
Q. After you allowed your mine to flood in 1920, of course there was*2478 very little chance starting work then?
A. Yes.* * *
*990 Q. Mr. Hoffman, did you make any actual determination in 1923 of the worthlessness in part of this debt?
A. No. Mr. Castle and Mr. Santen looked after that. I am not much on that end of it.
Q. And they rendered their report and placed this before you? A. Yes.Q. Which was the first knowledge you had of writing off the bad debt?
A. Yes, for 1923.* * *
Q. In view of your previous answer you do not know any more reason the debt should have been written off in 1923 than in 1920, 1921 or 1922?
A. I think it was brought to my attention at that time that there was a debt of that kind, not being overly familiar with the books and how those things were worked.
Q. You would have written it off in 1921 if it had been brought to your attention, as well as in 1923?
A. I imagine so.The evidence of record does not indicate an ascertainment of worthlessness by the petitioner of any part of the debt owed him by the company in 1923. It was suggested to him that, inasmuch as there was a very strong probability that he would never realize the full amount of his claim against the company, *2479 he was entitled to a deduction from gross income in his income-tax return for 1923 of the amount of the shrinkage in value. He therefore made the deduction. The evidence all goes to show that all of the facts forming the basis for the deduction were known to him prior to 1923. The data upon which the respondent made his determination of the value of the ore in the mine for depletion purposes were furnished to the respondent by the petitioner or those in his employ. A debt that is fairly determined to be worthless in a year prior to the taxable year may not be claimed as a deduction from the gross income of the taxable year. ; (C.C.A.) .
Conceding, but not deciding, that a taxpayer might take a deduction of a debt determined to be worthless in part, which debt was acquired by inheritance, the petitioner is not entitled to the deduction here claimed, because he has not proved that a portion of the claim against the Democrata Cananea Sonora Copper Co. was ascertained to be worthless in part within the taxable year. *2480 ; ; . The action of the Commissioner in disallowing the deduction of $30,000 from gross income is therefore sustained.
Judgment will be entered for the respondent.