*3737 Under the evidence held, that the petitioner in computing its net income for the fiscal year ended February 28, 1919, is entitled to deduct the amount of $4,858.82 involved herein.
*740 This proceeding is for the redetermination of a deficiency in income taxes asserted by the respondent for the year 1919 in the amount of $2,896.15. The petitioner alleges that the respondent erred in disallowing a deduction in the amount of $4,858.82 taken by the partnership of Wood Brothers, as a loss sustained during the fiscal year ended February 28, 1919.
*741 FINDINGS OF FACT.
The petitioner during all of the year 1918 was, and ever since then has been, a member of the partnership of Wood Brothers. He held a one-half interest therein. The firm was engaged in the live stock commission business in Chicago, Ill. It not only sold, as a factor, live stock shipped to it on consignment, but was accustomed to advance money to the shippers, deducting the amount of such advances, together with its selling commission, from the proceeds of sales of*3738 live stock as such sales were made.
During the summer of 1918, Wood Brothers advanced the sum of $20,000 to one Earl McCullough, to enable him to buy cattle in Minnesota for consignment to Wood Brothers. Several carloads of cattle were so consigned, reaching Wood Brothers in Chicago about the third or fourth of September, 1918, and were sold that day. The total amount of the sales of such cattle was $15,141.18. Thereafter the petitioner went to McCullough's home town and spent several days trying to discover assets belonging to McCullough to cover the loss on the cattle. No assets were found. Further effort along that line was made by the petitioner's attorneys in St. Paul, but with no better result. Wood Brothers then charged off the amount, $4,858.82, as a loss in 1918. The books of Wood Brothers were kept on the basis of a fiscal year ended February 28.
The morning the cattle arrived in Chicago the petitioner was visited by several men who stated they had sold the cattle to McCullough and that the checks given to them by McCullough in payment had not been honored by the bank; and the men demanded possession of the cattle. This demand was refused and later these men*3739 individually brought suit in tort against Wood Brothers for an aggregate amount of $16,734.19. Having been advised by their attorneys that they could not successfully defend these suits, Wood Brothers effected a compromise of them in June, 1919, by the payment of $8,511.72, and the assignment of all claims which Wood Brothers might have against the bank which had dishonored McCullough's checks. It was also agreed that suit should be brought against the bank, Wood Brothers to contribute a portion of the expenses, and if and when anything was recovered from the bank, Wood Brothers were to be paid a part of such proceeds. This latter was an oral promise by the man, Elwood, in whose name suit was to be brought. Suit was begun and resulted in a judgment against the bank, which with interest amounted to $8,757.07. This was paid by the bank in 1923 and in that year Wood Brothers received $1,140 from Elwood. They have received nothing from McCullough. The partnership of Wood Brothers in computing its net income for the fiscal year ended February 28, 1919, deducted the amount of $4,858.82 mentioned above.
*742 The respondent disallowed the deduction and increased the petitioner's*3740 distributive share of the partnership income accordingly.
OPINION.
MARQUETTE: The petitioner claims that the partnership of Wood Brothers, of which he is a member, is entitled in computing its net income for the fiscal year ended February 28, 1919, to deduct the amount of $4,858.82, either as a debt ascertained to be worthless and charged off within the taxable year, or as a loss growing out of the transaction with McCullough, under section 214(a)(4) and (7) of the Revenue Act of 1918, which provides as follows:
SEC. 214. (a) That in computing net income there shall be allowed as deductions:
* * *
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business;
* * *
(7) Debts ascertained to be worthless and charged off within the taxable year.
We are of the opinion that the petitioner's contention is sound and should be sustained. Whether the deduction is claimed on account of a bad debt or a loss makes little difference in the present proceeding. If it was a debt it was clearly ascertained to be worthless and charged off by the partnership within the fiscal year ended February 28, 1919. If it was*3741 a loss it was clearly sustained in that year. In either case it was a proper deduction in computing the partnership income for that fiscal year. The respondent apparently has confused the issue. The transaction between the partnership and McCullough was complete when the partnership was unable either to sell the cattle for a price sufficient to cover the advances made to McCullough, or to recover anything from McCullough. While the law suits which were subsequently brought grew out of the same transaction, they did not change the fact that as between the partnership and McCullough the transaction was completed in the fiscal year ended February 28, 1919, so as to result in either a loss to the partnership or a debt due to it from McCullough which was worthless and was so determined and charged off.
The net income of the partnership and the petitioner's distributive share thereof should be recomputed accordingly.
Judgment will be entered on 15 days' notice, under Rule 50.