*2034 Held that certain alleged debts were not ascertained to be worthless in the taxable year.
*1039 This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1925 in the amount of $1,111.82. It is alleged that the respondent erred in failing to allow as deductions from the gross income of the decedent for the year 1925 amounts claimed as debts ascertained to be worthless and charged off in the taxable year as follows:
| Debtor | Amount |
| Howard Morris | $4,936.50 |
| Ambrose (Thomas, Jr.) Morris | 4,634.00 |
| Douglas R. Morris | 1,960.00 |
| Carrie Morris | 5,000.00 |
*1040 FINDINGS OF FACT.
Thomas Morris, who is hereinafter referred to as the decedent, died September 17, 1928, and the petitioner, Lillia Morris, his widow, is administratrix of his estate. He left nine children, Lillian Weston, Kathron Speer, Margaret O'Donnell, Howard Morris, Paul Morris, Douglas Morris, Thomas Morris, Jr., Robert Morris, and Stephen Morris.
During 1924 decedent was a lawyer. He received a yearly salary of $25,000*2035 from the Universal Chiropractor Association of Davenport, Iowa. At the beginning of the year 1925 his salary was reduced to $12,000. From 1920 to 1924 the decedent still owed money on his residence. His net worth during that time was little more than the amount of certain loans to his sons and his sister.
Between 1921 and 1924 the decedent loaned his sister, Carrie Morris, a total of $5,000 in various amounts ranging from $50 to $1,000, to enable her to operate a beauty parlor in Chicago. These advancements were made during the entire period she was operating the business. It was understood between her and decedent that she was to pay it back as soon as possible. She entered the business in 1922 or 1923. A few months after she entered into the business she was robbed of everything she had. After the robbery decedent loaned her more money and within a few months thereafter she started business again. Decedent continued to make advancements from time to time and she operated the business until some time in 1925, when it became a total failure. She had no property of her own at the time she entered into business. In 1925 she did not have any money and none could have been*2036 collected from her in a suit. In 1925 decedent talked to Carrie Morris and found that she had no property. Carrie Morris told him that she could not pay the debts and would have to resort to working in a beauty parlor in Chicago. She further told him that she could not sell the business, so decedent advised her to close it out. She has never paid back any of the money which the decedent loaned her.
During the fall of 1920 decedent's son Thomas Morris, Jr., entered Marquette University Law School. Prior to entering the law school he had a conversation with his father concerning his expenses while there. The decedent agreed to send him $150 each month while he was in school. The decedent, however, told his son that inasmuch as he was under heavy expenses it would be necessary for him to repay the money after about four or five years. Thomas Morris, Jr., agreed orally to repay with interest all amounts that his father gave him. He attended the law school three regular school years and one summer school and left in the fall of 1923. During this *1041 period decedent sent his son approximately $4,500. In September, 1923, decedent also sent Thomas Morris, Jr., $500 to*2037 go to California to establish a law practice. Thomas Morris, Jr., did go to California and used all this money. Thereafter for a period of over a year he wired his father occasionally for money and received at various times amounts in excess of $100. He did not give his father a receipt or any evidence of indebtedness as these amounts were received, nor did he himself keep any record of the amounts received. Between the fall of 1923 when he went to California and the summer of 1926 when he entered into the practice of law, Thomas Morris, Jr., worked as a law clerk for $100 a month. He had no other source of income during this time. He was married on May 7, 1925. The following note was executed by Tom Morris, Jr.:
$4,634.00
LOS ANGELES, CALIF., January 5, 1925.
On demand after date, for value received I promise to pay to Thomas Morris, Sr., or order at La Crosse, Wisconsin the sum of four thousand six hundred and thirty-four Dollars with interest at the rate of 7 per cent per annum from date until paid, interest payable on demand and if not so paid to be compounded annually, and bear the same rate of interest as the principal; and should the interest not be paid then*2038 the whole sum of principal and interest shall become immediately due and payable at the option of the holder of this note. Principal and interest payable in gold coin of the United States.
(Signed) TOM MORRIS, JR.
During 1924 and 1925, the decedent wrote to Thomas Morris, Jr., occasionally asking for repayment of the money which he had furnished him. Thomas Morris, Jr., was unable to repay the decedent because the salary he was drawing was only sufficient for his living expenses. He informed his father each time that he had not yet been admitted to the bar, that he was making only $100 per month, and that it would be quite some time before he would be able to begin to repay him. He has never repaid any part of the money which the decedent furnished him. During the summer of 1927 when the decedent went to California, he discussed with Thomas Morris, Jr., the probability of his repaying the money. His son told him that he had no means of repaying it, that the probability of doing so was very remote and that his condition had not changed from what it was during the year 1925 and prior thereto.
During 1920, 1921, and 1922, Douglas Morris, son of the decedent, attended Palmer*2039 School of Chiropractic, Davenport, Iowa. During this time Douglas Morris was of age. During this time decedent sent him money with which to go through school. After he left school he borrowed money from the bank and decedent endorsed his note for $900. At some time later the decedent paid $150 of this when Douglas could not meet the payment. He entered into the practice of chiropractic, but it proved not to be a success. In 1925 *1042 he had no assets and he told the decedent that he was not in a position to repay the amount which he had let him have. At that time he was getting a salary of $30 per week, was attending law school at night and was paying on his note at the bank. The following note, executed by Douglas R. Morris at the request of the decedent, represents approximately the amount of money sent to him by decedent while he was going through school:
$1,960.00
January 17, 1924.
One year after date I promise to pay to the order of Thomas Morris, Nineteen Hundred and Sixty Dollars at Batavian National Bank, La Crosse, Wisconsin. For Value received, without any relief whatever from Valuation or Appraisement Laws with 6 per cent interest from maturity*2040 until paid and Attorney's Fees.
(Signed) DOUGLAS R. MORRIS
No part of the above note was ever paid. Douglas Morris had no more property in 1920 than he had in 1925. When the note was executed his financial condition had not changed in any way.
In 1920 decedent's son, Edward Howard Morris, who was then about 25 years of age, started to attend Palmer School of Chiropractic at Davenport, Iowa. He stayed there 18 consecutive months, which is the length of the school course. From the time he entered school until he finished, his father furnished him money. Amounts ranging from $45 to $100 were sent him monthly by decedent. The total received was $4,936.50.
After finishing school Edward Howard Morris went to Honesdale, Pa., on February 20, 1922, and started in the practice of chiropractic. To start in business he borrowed $1,000 in January, 1922, from the bank. The decedent was surety on the note. The note was for six months, but was renewed once or twice, the principal amount never being reduced. This note ran for about two years and then decedent paid it in 1924 or 1925, Howard having no money with which to pay it. Edward Howard Morris stayed in Honesdale for about*2041 five or six months and then sold the physical assets of his business to a chiropractor named Jaynes for $285. He did not apply this money on the note because he needed it to live on. He left no unpaid debts in Honesdale. He left Honesdale and after a stay in his father's home in La Crosse, Wis., went to Bloomington, Ill., in 1922, and worked for a chiropractor named LamBeau. In the absence of LamBeau, he attended to the business, from which he received a bare living. He stayed there for about six months, and in February, 1923, went back to Pennsylvania and was married. At this time he had only about $150. His wife practiced chiropractic at Scranton, Pa. Howard had no interest in that business. This business was sold because it did not make living expenses. After this business was sold out he still had $400 or $500 of the money he had *1043 gotten from decedent. Howard did not tell his father that he had any of this money left. After his wife's business was sold, Howard went to Philadelphia and worked for the Philadelphia Drug Company for $22.50 a week. He then went to Menominee, Mich., and set up a new business. The decedent furnished him money for buying his equipment, *2042 since all the other money which he had received was then gone. His father agreed to let him have $125 a month as long as Howard felt it was necessary. The equipment cost about $400 or $450, which was paid for in installments. Howard stayed in Menominee about 11 months. During this time his father sent him $125 a month and on another occasion in May, 1924, decedent sent him $200. Howard made about $260 in his business in Menominee. He gave up his business, put his furniture in storage and paid about $12 a month storage on it. In June, 1924, he left Menominee.
In September, 1924, Howard worked with Palmer School at Davenport for $150 a month. He stayed there for about 13 months. His wife came from Scranton to live with him in December, 1924, or January, 1925. At that time decedent sent Howard $200 or $300 in order for Howard to buy a small apartment. Howard stayed with the School up to about October 1 or 15, 1925, and his salary remained the same. His father sometimes asked him if he was able to repay the money, but he told his father that he was not. The decedent then said that he would have to wait until things were better. Howard's salary was just enough to support*2043 himself.
Howard then went to Scranton in October, 1925. In the early part of November, 1925, he went to New York City and took a job in an apartment hotel, operating an elevator and switchboard, his wife staying in Pennsylvania with her people. While there he was getting a salary of $90 a month plus tips, which were not very plentiful. Howard stayed in New York until the middle of April, 1926. He then went back to Scranton, where he received a message from his father that he had a job for him. This job was in Davenport, Iowa, and paid Howard $250 a month. Six months later his salary was raised to $300 a month. In May, 1926, when he went to Davenport, to take up the job, his father gave him $150 for railroad fare. Howard never kept any record of the amounts which he received from his father. He depended upon his father's word as to the amount. He never repaid any of the money, nor has he paid any interest on it. The following note was executed by E. Howard Morris, on July 2, 1924:
$4,936.50 LA CROSSE WIS., July 2, 1924
Thirty days after date for value received, I promise to pay to Thomas Morris or order Four Thousand nine hundred thirty six & 50/100 Dollars with*2044 interest until paid at the rate of six per cent. per annum, payable annually on the .
(Signed) E. HOWARD MORRIS, D.C.
*1044 The decedent kept no books of account. In 1925 he looked up the law as to deducting bad debts in computing his income tax and then inquired into the financial condition of his sons, Howard, Douglas, and Thomas, and his sister Carrie, and charged off in his mind the amount which he had furnished them. Decedent had furnished his daughter, Margaret O'Donnell, $500, but she paid this back. None of the other children received any money from decedent.
In 1920 when the decedent started furnishing his sons with money the sons had no property holdings of their own.
In computing the decedent's deficiency in tax for the year 1923 the respondent disallowed a deduction in the amount of $17,030.50, claimed by decedent as debts ascertained to be worthless and charged off within the taxable year. The deficiency letter states in this regard: "Inasmuch as it has not been established that these debts were actually bad for 1925 they have been disallowed."
OPINION.
MCMAHON: The question here presented is whether the petitioner is entitled to deduct*2045 from the gross income of the decedent for the calendar year 1925 certain amounts claimed by the decedent as debts ascertained to be worthless and charged off in the taxable year.
Section 214 of the Revenue Act of 1924 provides in part:
(a) 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.
We are satisfied that the amount of $5,000 which the decedent advanced to his sister between 1921 and 1924 constituted a debt owing to him which was in fact worthless in the year 1925. The evidence discloses, however, that a few months after she entered business in either 1922 or 1923, decedent's sister was robbed of everything she had and that the decedent then advanced her more money to start in business again. It seems clear to us that that portion of the debt incurred prior to the time of the robbery was ascertained to be worthless at the time of such robbery. Therefore, *2046 it can not be said that the total debt of $5,000 was, in 1925, ascertained to be worthless. Since we are precluded by lack of evidence from making an allocation of the amounts advanced by the decedent to his sister before and after the robbery, we must approve the action of the respondent in disallowing the full amount of the claimed deduction.
The remainder of the claimed deductions represents amounts which the decedent furnished his sons for the purpose of education and *1045 starting in business. The evidence shows that decedent's sons, Douglas and Edward Howard, were of age when they received money from decedent, but the record is silent as to the age of Thomas Morris, Jr., when he received amounts from his father. In , we held that it is presumed that money transferred by a parent to his son, even though the son is of age, is a gift and not a loan. It has also been held that transfers of money from a father to a minor son can not create a debt. . In the instant proceeding we are not completely satisfied that the amounts which the decedent transferred to his sons constituted*2047 loans, but for another reason we believe that the claimed deductions must be disallowed.
Even if the items in question were debts, there is no evidence to show that there was any change in the financial condition of any of the sons in the year 1925 upon which the decedent could base an ascertainment of worthlessness. The evidence shows that the alleged debts were no more worthless in 1925 than in prior years, and the decedent was at all times conversant with the financial condition of his sons. See ; ; and . The fact that the note for $4,634 was executed by Thomas Morris, Jr., in favor of the decedent on January 5, 1925, does not, in our opinion, have any bearing upon the date the debt was incurred. The debt, if any existed, was in existence prior to the time the note was executed and, as stated, was worth no less in 1925 than in previous years.
The determination of the respondent must be approved.
Judgment will be entered for the respondent.