*1598 1. No option or election exists in section 234 of the Revenue Act of 1926 by which a taxpayer may take a deduction on account of a loss arising from a worthless debt, either in the year when the debt became worthless or in the year when the debt was ascertained to be worthless and charged off, but such deduction can only be allowed in the year when ascertained to be worthless and charged off.
2. Deductions denied on account of debts which were not ascertained to be worthless and charged off within the taxable year.
*752 This proceeding involves deficiencies in income tax as determined by the Commissioner for the fiscal years ended August 31, 1927, and August 31, 1928, in the respective amounts of $6,501.15 and $6,321.91. In the original petition, errors were assigned for both years on account of the failure of the Commissioner to allow deductions for debts ascertained to be worthless in the respective years, but at the hearing an amended petition was filed in which deductions in the*1599 same amounts were claimed on account of losses sustained during the taxable years and not compensated for by insurance or otherwise. In addition, it is contended that the Commissioner erred in failing to determine that net losses were sustained for the fiscal years ended August 31, 1925, and August 31, 1926, which should be carried forward and allowed as deductions in computing net income for the fiscal year ended August 31, 1927. It is alleged that the net losses arise on account of the failure of the Commissioner to allow deductions similar to those now sought for the years for which deficiencies have been determined.
*753 FINDINGS OF FACT.
The petitioner is a New York corporation and has its office in New York City.
The petitioner kept its books and rendered its returns on the accrual basis.
Fiscal year ended August 31, 1925
During 1924 and several years prior thereto the petitioner sold and delivered merchandise to the Perlman Cycle Company of Rochester. In or about 1924 the aforesaid company went into bankruptcy, at which time it owed the petitioner for the goods previously sold and delivered to it. On March 17, 1925, the petitioner received its final*1600 dividend from the bankrupt, and after giving credit for such payment there remained as owing to the petitioner $14,149.22. No part of the foregoing amount has been paid.
During 1924 and prior thereto petitioner sold goods to the Perlman Cycle Company of New York City. In or about 1924, the said company went into bankruptcy, at which time it owed petitioner for goods sold and delivered to it. The petitioner received its final dividend from the bankrupt on November 28, 1924, and after giving credit for such payment there remained as owing to the petitioner $34,278.68, which has never been paid.
During 1924 petitioner sold goods to Thomashower & Nagler Company, and of the amount due the petitioner on account of such sales $103.68 has never been paid.
During 1923 and 1924 petitioner made sales of goods to the National Farm Equipment Company. In 1924 the said company got into financial difficulties and was liquidated on or about June 24, 1924. There was then owing to the petitioner $15,506.30 and at that time the petitioner took over certain installment accounts of the said company on which small collections were made from 1924 to 1928. As collections were made, the account*1601 of the National Farm Equipment Company on the books of the petitioner was credited with the amounts collected. The last collection was made July 26, 1928, which reduced the account to $14,263.88. The aforementioned amount has never been collected and was written off petitioner's books on May 14, 1929.
Fiscal year ended August 31, 1926
During 1925 and several years prior thereto petitioner sold goods to Swartz & Company, and on April 21, 1926, there remained owing to the petitioner on account of such sales $40,184.52. On or about April 21, 1926, the business of Swartz & Company was liquidated. The liquidation was carried out by the petitioner, which satisfied its liabilities (other than those to petitioner) and sold its merchandise. Petitioner credited Swartz & Company with the amount received *754 from the sale of the merchandise and also accepted the assignment of certain accounts as credits on the amount due it. The last credit to the account was made on the final liquidation date, April 21, 1926, which left the aforementioned amount of $40,184.52 still owing to the petitioner. No further amounts were collected from Swartz & Company and the account was written*1602 off petitioner's books on August 21, 1929.
In 1924 petitioner sold goods to the Broadway Cycle Company in the amount of $16,296.55 which amount has never been paid. After seeking for some time to make collection, the creditors of said company were called together and the petitioner was given a promissory note for the amount of the account. Later, on April 1, 1925, the Broadway Cycle Company renewed the aforementioned note by giving a new note in the same amount payable October 1, 1925. The note was not paid at maturity, and the petitioner has never received any payments on account thereof.
In or about 1924 petitioner sold goods to J. Zobotinsky in the amount of $836.69, for which it has never received payment in any amount. In 1925 the said individual was adjudicated a bankrupt, but the final bankruptcy proceedings were not settled until 1930 or subsequent thereto.
In October and December, 1925, M. J. Connolly, an employee of the petitioner, embezzled funds from the petitioner in the amount of $97.05, and no amount was ever recovered on account thereof.
In the liquidation of Swartz & Company (heretofore referred to) the said company was credited on September 30, 1925, with*1603 accounts assigned by it to petitioner in the amount of $24,998.80. The petitioner then sought to make collection on the accounts, but not all the accounts were collected in full. Of the accounts which were not collected in full, the following tabulation shows the amounts due on the accounts when assigned, the collections made from September 30, 1925, to August 31, 1929, and the amounts outstanding when they were written off petitioner's books on August 31, 1929:
| Name | Amount of account when assigned | Collections | Date of last collection | Balance due on August 31, 1929 |
| A. W. Pyle | $888.89 | $10.00 | 5/20/26 | $878.89 |
| J. F. Padgett | 790.00 | 5.00 | 11/10/25 | 785.00 |
| Suttle Cycle Co | 950.00 | 175.00 | 3/3/26 | 675.00 |
| J. W. Heckett | 126.55 | 15.00 | 2/24/26 | 111.55 |
| Petersburg Cycle Co | 2,556.66 | 2,556.66 | ||
| Elmer S. Randler | 143.87 | 143.87 | ||
| Royal Cycle Co | 3,269.82 | 3,269.82 | ||
| Dillsburg Hardware Co | 8.49 | 5.44 | 2/24/26 | 3.05 |
| J. A. Baltimore | 591.79 | 591.79 | ||
| Andrew Redmond | 170.19 | 170.19 | ||
| H. G. Seward | 467.37 | 100.00 | 2/20/26 | 367.37 |
| Oil City Cycle Shop | 174.36 | 174.36 | ||
| L. Greenberg | 1,108.51 | 1,108.51 | ||
| I. Bagdon | 55.00 | 55.00 | ||
| W. W. Fortney | 996.44 | 275.00 | 4/17/26 | 721.44 |
*1604 *755 All of the collections referred to above were made prior to August 31, 1926. No deduction has been allowed by the Commissioner with respect to such accounts and no deductions were claimed on account thereof in the returns from 1925 to 1930, inclusive. All of the accounts were written off petitioner's books on August 31, 1929.
J. W. Heckett, referred to above, went into bankruptcy in April, 1926, and the petitioner received no dividends on account of such bankruptcy.
In the case of three of the above-mentioned accounts promissory notes were ultimately given by the parties liable therefor for the amounts finally charged off as follows:
Suttle Cycle Co., March 1, 1926, 30-day note (renewed April 21, 1926, by note payable "At Sight")
J. F. Padgett, August 7, 1925, 30-day note A. W. Pyle, October 15, 1925, on demandThe foregoing notes were not paid at maturity nor have they since been paid.
Fiscal year ended August 31, 1927
In addition to the accounts heretofore referred to as having been assigned to the petitioner through the liquidation of Swartz & Company, the petitioner received in the same manner the account of W. J. Rokos Company. The face*1605 amount of the account when assigned was $1,094.27. Between the date of assignment, September 30, 1925, and August 31, 1927, various collections were made on the account, the last collection having been made on August 6, 1927, and on August 31, 1927, the balance owing the petitioner was $794.49. No collections were thereafter made and the petitioner wrote the account off its books on August 31, 1929. Prior to August 6, 1927, the said company went into bankruptcy, and the last collection referred to above was the final dividend from the bankrupt estate.
On and prior to August 1, 1927, the petitioner owned a building which the J. W. Scott Hardware Company occupied as a tenant. The rent which accrued on August 1, 1927, was reported as income in petitioner's return, but such rent has never been paid. On examination the petitioner found that the said company had dissipated its assets and was unable to make payment. The account was written off by the petitioner on August 31, 1929.
Fiscal year ended August 31, 1928
During 1928 and several years prior thereto petitioner sold and delivered merchandise to the Johnson & Meyer Company, of Memphis, Tenn. Payments were made at*1606 different times on the account until March 28, 1928, when the last payment was received from *756 the said company. At that time a substantial amount was owing to the petitioner and on investigation the petitioner found that the said company was in a bad financial condition. The petitioner then determined to liquidate the company as a means of protecting the debt owing to it. In carrying out the liquidation, petitioner sold the assets of Johnson & Meyer Company and took over their accounts receivable, giving to said company credit on its account for the amounts received from the sale of assets as well as for the accounts receivable taken over. Liquidation as above indicated was completed in June, 1928, though the company was not then dissolved. Various debits and credits were made to the account between June, 1928, and August 31, 1929, when the balance owing to the petitioner was $67,794.60. On August 31, 1929, the petitioner charged the account off its books. Debits and credits were likewise made to the account during the fiscal year ending August 31, 1930, a cash payment of $3.50 being received on account of the indebtedness on March 3, 1930.
In addition to the accounts*1607 heretofore referred to as having been taken over in the liquidation of Swartz & Company, other accounts were taken over on September 30, 1925, as follows:
| Account | Amount of account when assigned | Credits to account between September 30, 1925 and August 31, 1929 | Amount outstanding when written off on August 31, 1929 |
| C. E. Rigney | $450.00 | $343.97 | $106.03 |
| F. N. Lanhan | 2,145.00 | 255.00 | 1,890.00 |
| Nathan Cohen | 300.53 | 48.32 | 252.21 |
| R. G. Hershey | 630.00 | ||
| Suttle Cycle Co | 318.82 |
The last payment on the Rigney account was received on October 12, 1927, such payment being a final distribution by the trustees under a deed of trust after a sale of real estate in foreclosure proceedings.
The last payment on the Lanhan account was received on November 22, 1927, such amount being paid on account of a judgment secured against Lanhan.
Nathan Cohen went into bankruptcy and on November 4, 1925, his assets were offered for sale at public auction by the trustee in bankruptcy. Petitioner received its first and final dividend from the bankrupt estate on September 16, 1927.
The last payment on the Hershey account was received on July 30, 1928. Subsequent*1608 to that time, namely, on September 7, 1928, the said Hershey went into bankruptcy, but the petitioner received no dividends on account of such bankruptcy.
*757 The Suttle Cycle Company went into bankruptcy several months prior to January 5, 1927, and the final dividend from the bankrupt estate was received on February 11, 1928.
The five accounts referred to above were written off petitioner's books on August 31, 1929.
During October and November, 1927, petitioner sold goods to The Gar Stores in the amount of $1,087.50. Payments on such account were made as follows: December 21, 1927, $659.50, and February 29, 1928, $214. The final payment of $214 was received from an attorney who offered a 50 per cent settlement, which was accepted. The balance of $214 has not been paid and the petitioner wrote it off its books on August 31, 1929.
During 1925 and 1926 petitioner sold goods to the Willard Bicycle & Toy Company to the extent of approximately $2,000 and payments were made from time to time on the account. On September 20, 1927, the said company went into bankruptcy and the petitioner received its first and final payment from the bankrupt estate on December 22, 1927, in*1609 the amount of $75.92. A balance then remained due of $1,275.67, which has not been paid. The account was written off petitioner's books on August 28, 1930.
Prior to February 7, 1928, petitioner sold goods to J. S. Wolf and on that date received a final payment on account, leaving an amount then due of $44.56. The account was written off petitioner's books on August 31, 1929.
Prior to 1927 petitioner sold goods to Wm. J. Wiesenfeld Company, on which payments were made from time to time. The last payment was made on May 5, 1927, which left a balance then owing to the petitioner of $3,935.37. Promissory notes were given in payment of the account and in renewal of notes previously given, but none was ever paid. The last note given, which was for the entire balance in the account, matured on March 20, 1928.
In all cases referred to above, where it is stated that goods or merchandise was sold to a given party, the amount of such sales was included in gross income for the respective years in which the sales were made. In no instances were the various unpaid amounts in question compensated for by insurance or otherwise, nor have the amounts now claimed as deductions been previously*1610 allowed.
OPINION.
SEAWELL: In the original petition, the deductions now sought were claimed on account of debts ascertained to be worthless in the several years under review, but at the hearing claims on that ground were abandoned and the same relief was asked in an amended petition on account of "Losses sustained during the taxable year and not compensated for by insurance or otherwise." (Section 234(a)(4) of the *758 Revenue Act of 1926.) In other words, we do not understand it is now contended that the deductions can be allowed under the "bad-debt" provisions of the statute (section 234(a)(5) of the Revenue Act of 1926), which require that the debt be "ascertained to be worthless and charged off within the taxable year," since the debts were not charged off in the respective years for which the deductions are sought. In fact, the evidence, so far as presented with respect to the dates when the various debts were charged off, shows that the essential requirement of the statute as to charging off the debts was not complied with in the years necessary to permit the deductions claimed and little evidence was furnished as to when the debts were ascertained to be worthless. *1611 On the other hand, the petitioner contends that because it can not comply with the bad-debt provision is no ground for a disallowance where the proof necessary for an allowance as a loss sustained can be furnished. The Commissioner, however, takes the position that the two sections are mutually exclusive so that a loss deductible under one section may not be deducted under the other. The proof offered was for the purpose of showing that losses were sustained in the various years on account of the debts in question, but before passing on the sufficiency of that evidence in so far as considered necessary, we will consider the preliminary question of whether a deduction may be allowed on account of bad debts when compliance is not had with the bad-debt provisions of the statute.
Since, and including, the Revenue Act of 1918, specific separate provisions have existed for the allowance of deductions to corporations on account of "Debts ascertained to be worthless and charged off within the taxable year" and "Losses sustained during the taxable year and not compensated for by insurance or otherwise." Of course, as we said in *1612 , "If a debt becomes worthless, it would seem that a loss has been sustained," and, as observed by the court in (Third Circuit), "Every worthless debt is a loss, but not every loss a worthless debt." We think it evident that Congress had in mind a distinction between the treatment to be accorded a loss arising from a bad debt and other losses, and certainly did not intend that a double deduction was to be allowed, namely, a deduction in the year in which he debt actually became worthless (that is, a loss was sustained), regardless of when ascertained and written off, and also a deduction when the debt was ascertained to be worthless and written off.
Here, however, we are not concerned with a double deduction, but more particularly with the question whether an option or election exists under which a taxpayer may claim a deduction on account of *759 a bad debt either in the year the debt became worthless or in the year of ascertainment and write-off. While proof was not offered for the purpose of showing date*1613 of ascertainment, apparently the situation here exists in some cases where the petitioner did not ascertain the debts to be worthless until 1929 when they were written off, whereas evidence was introduced in order to show that the debts actually and finally became worthless in 1925. Conceding for the purpose of this discussion that certain debts became worthless in 1925, but the petitioner did not ascertain their worthlessness until 1929, when they were written off, may the petitioner take the deductions in either 1925 or 1929? We are of the opinion that Congress made a distinction between losses arising from bad debts and other losses and that losses under the former class can only be recognized in the form of a deduction from gross income when the bad-debt provision of the statute is complied with. To hold otherwise would not only fail to give force and effect to the express provisions of the statute, but also would permit taxpayers to postpone to, or take the deduction in, the particular year when it would be most advantageous to them. For example, if in 1929 a taxpayer determines that a debt had become worthless in 1925, and writes it off in 1929, we do not think Congress ever*1614 intended that it should be permitted to take the deduction in 1925 or 1929 in accordance with the advantage which would accrue to it on account of a difference in tax rates or the amount of income realized or losses sustained in the respective years. As expressed by Judge Kenyon in another connection in the recent case of , "It is not given to parties to make choice as to the years in which they will take deductions," and by Justice Brandeis in , "He cannot choose the year in which he will take a reduction." In the absence of a specific provision which would permit such an unusual result and when we have an express provision to take care of bad debts, we are of the opinion that a bad-debt deduction can only be allowed when the bad-debt provision has been compiled with.
This question has been before the courts on many occasions. While expressions used in some instances may be at variance with the conclusion herein reached, an examination of the facts upon which the decisions were based shows nothing inconsistent with our views on this question; *1615 on the contrary, positive support is found in each case for the position indicated above. The earliest expression we find on the subject is in , wherein the court said:
Congress doubtless had in mind a distinction between a loss and a worthless debt. Every worthless debt is a loss, but not every loss is a worthless debt. *760 Every worthless debt is allowed as a deduction, if it is ascertained to be worthless, and is charged off within the taxable year. So far as allowance as a deduction is concerned, a loss and a worthless debt amount to the same thing, if the latter is charged off in time. [Italics supplied.]
While the case was reversed by the Supreme Court (), the reversal was on the ground that the loss in question (both courts agreeing that the deduction sought was not on account of a bad debt) was not sustained in the taxable year, as the Circuit Court had held. In discussing the issue involved the court said:
We assume without deciding, as was assumed by both courts below, that subsection (4) and subsection (5) are mutually*1616 exclusive so that a loss deductible under one may not be deducted under the other. * * *
In , the United States District Court for the District of Idaho said:
There appear to be two classes of deductions under the statute: "(1) Losses sustained during the taxable year and not compensated for by insurance or otherwise. (2) Bad debts ascertained to be worthless and charged off during the taxable year." The inquiry, then, presents itself: Why did Congress find it necessary to specify these two classes of allowable deductions, if it did not have in mind a distinction between a worthless debt and a loss? A loss and a worthless debt may amount to the same thing, if the debt is charged off in time as required by statute; but Congress has said that, to entitle one to a deduction for a worthless debt, it must be ascertained and charged off during the taxable year. * * *
* * *
The losses in the present case were nothing more than sums of money due upon express contracts, which the borrowers were bound to pay to the bank, and fall within the provisions of section 234(a)(5) of the Revenue Act of 1918, which brings them under*1617 the class of "debts." If Congress had intended that worthless debts, not ascertained and charged off during the taxable year, should include "losses," it would have been very easy to have said so, and, where such intention is not so expressed, the difficulty in attempting to apply the provision of the statute as to "losses" to "debts" is that we are confronted with the other express provision of the statute requiring the taxpayer, before deductions can be allowed, to first ascertain and charge them off as worthless within the time. It would seem impossible to take any other view, and at the same time recognize the force and effect of section 234(a)(5).
When the foregoing case was affirmed by the ), it same distinction was recognized:
* * * Losses, generally speaking, may include debts; but in the statute quoted, by the enumeration separately of losses and debts, Congress made a distinction which must be recognized. * * *
To a similar effect in , where the court said, "We agree with the Government's contention that the claim against the*1618 Navy Knitting Mills was a 'bad *761 debt' and could be deducted only as of the taxable year in which it was ascertained to be worthless and was charged off. (Italics supplied.) See also .
In , the question under consideration was whether, under the Revenue Act of 1918, a deduction might be allowed where a debt was written off during the taxable year, but there was an ascertainment of only partial worthlessness. The case came up on a petition for review of a decision by the ), in which the Board had held that the evidence did not justify the conclusion that the debt had been ascertained to be wholly worthless, and that an ascertainment that a debt was worthless only in part precludes any allowance until the entire debt was ascertained to be worthless. The Board accordingly denied the taxpayer the benefit of any deduction. On review the court sustained the Board on the point that the entire debt had not been ascertained to be worthless, but reversed the decision on the ground that a loss had been sustained*1619 to the extent of the uncollectible portion of the debt and that such amount should be allowed as a deduction. The court, however, made the following specific reference to the fact that the debt had been written off within the taxable year, evidently not overlooking the necessity for compliance with this provision of the statute:
Our own case of , contains a dictum that a debt of doubtful value could not be deducted as a "loss." In (C.C.A. 9), there is a similar dictum. In neither case was there any charge-off of the debt as worthless in whole or in part, nor had it become uncollectible by a receiver's seizure of the debtor's property. * * *
The seizure of the debtor's property by a receiver prevents collection, and definitely fixes the loss to be the difference between the face of the debt and whatever dividend the receivership may pay. The Commissioner's position leads to the conclusion that, if any dividend is likely, no loss can be deducted until the receivership is wound up, which may be many years later. Business men do not carry on their*1620 books at face value claims against a debtor in receivership, and it cannot be supposed that the Revenue Act of 1918 was intended to require them to do so. When a creditor's debtor goes into receivership, and the creditor believes the debt to be worthless and charges it off, he recognizes that he has sustained a loss at least to the extent that the receivership dividend which may thereafter be declared leaves the debt unpaid. Presumptively the taxpayer's decision that a debt is worthless, and so charged off, measures his loss. If the Commissioner surcharges his return because of a mistake as to the amount of the loss, we think he should not surcharge for so much of the loss as he admits has been suffered. * * * [Italics supplied.]
The case of involved a situation in which a deduction was allowed under the Revenue Act of 1918 where the debts were ascertained to be partially *762 worthless in the taxable year and where such parts were also written off in the same year. The opinion follows the reasoning set out in *1621 , but again we do not understand that the court would have allowed the loss on account of the bad debt in the year in which fixed "by the occurrence of events which prevent their collection" had there not also been a write-off in the same year of that amount. In fact, a greater loss was sustained on each debt than was actually written off, but there is no suggestion by the court that, even if claimed, the taxpayer would have been entitled to the entire loss sustained if such amount had not been written off.
In view of the foregoing, we are of the opinion that the contention of the petitioner to the effect that losses sustained on account of bad debts should be allowed as deductions in the years in which sustained, regardless of when ascertained and written off, must be denied. The fact that a debt has been ascertained to be worthless may mean that a loss has been sustained, but a deduction on account thereof can only be allowed when written off within the taxable year during which ascertained to be worthless. No claim is here made, nor was evidence introduced to show, that partial worthlessness was ascertained or sustained in*1622 any year when the debts were written off and therefore no deduction on that account may be allowed.
The petitioner contends further, however, that all of the items in question do not come within the category of debts, and therefore in no event would compliance with the bad-debt provision be requisite to a deduction when it could be shown that a loss had been sustained. One group of items consists of amounts owing to the petitioner on account of merchandise sold to various parties and these amounts are admitted by the petitioner to represent "debts" within the meaning of the statute. The second class involves accounts which arose in the same way as the first, but, in lieu of payment, promissory notes were given in the amount of the various accounts and they were not paid at maturity, nor have they since been paid. It is true that after the execution of the promissory notes the petitioner had evidence of indebtedness not theretofore had, but we fail to see why the notes were none the less debts than were the accounts receivable. There was still an existing indebtedness of the same creditors which answers every requirement of a debt. Still another group consists of accounts receivable*1623 which were assigned to petitioner in partial satisfaction of certain amounts which were owing to petitioner by other parties, but again we are of the opinion that the assigned accounts were debts owing to the petitioner within the purview of the statute. It might be said that the petitioner has acquired an asset through the assignment in the same sense that it might invest in a bond on the open *763 market, but the Board and the courts have held that bonds so acquired constitute debts as contemplated by the statute in question. , and .
It is also contended that the item of unpaid rent claimed as a deduction for the fiscal year ended August 31, 1927, does not constitute a debt within the meaning of the statute, though we have held to the contrary. . However, the evidence offered is so meager that, even if considered other than a debt, a deduction as a loss could not be allowed. We know that the rent which was due on August 1, 1927, was not paid then or at any other time and that upon examination the petitioner*1624 found that the tenant had dissipated its assets and was unable to pay, but that would not be sufficient to allow the deduction as a loss for the fiscal year ended August 31, 1927, when we do not know at what time the tenant dissipated its assets and became unable to pay. The amount was written off on August 31, 1929, and in explanation of the delay in making the charge-off petitioner's witness stated: "While we waited a year to deduct that account, we were in hopes that they would probably pay up that old indebtedness."
The amount embezzled from petitioner in the fiscal year ended August 31, 1926, is properly allowable as a deduction in that year on account of a loss then sustained. . The final item for which a deduction is asked is on account of a claim of the petitioner against the Philadelphia & Reading Railroad for a shipment of goods lost in transit, but we have no facts from which we can determine when the loss, if any, occurred and accordingly the allowance of a deduction on account thereof must be denied.
Reviewed by the Board.
Judgment will be entered under Rule 50.