1928 BTA LEXIS 3975">*3975 1. The Revenue Act of 1918 does not permit the deduction as a bad debt of a part of an account or debt, the remainder being considered collectible.
2. A debt due to the decedent at the time of his death passes to his estate as capital or corpus of the estate, and the subsequent payment thereof, not in excess of the value of the debt at the date of decedent's death, is not taxable income to the estate.
3. The sale of stock under the circumstances obtaining and approximately six months after the date of decedent's death is not alone sufficient to establish the value of such stock as of the date of death. In the absence of other evidence of value, the respondent's determination cannot be disturbed.
4. Acceptance of notes by petitioner to cover deferred payments on sale of personal property did not operate to defeat his right to the benefits of section 212(d), Revenue Act of 1926, covering installment sales.
10 B.T.A. 1055">*1056 The respondent has determined deficiencies of $147.37, $461.53 and $13,604.94 in income taxes for1928 BTA LEXIS 3975">*3976 the periods January 1, 1920, to July 9, 1920; July 10, 1920, to December 31, 1920; and the calendar year 1921, respectively. The petitioner alleges that the respondent erred (1) in refusing to allow a deduction from income for the period July 10, 1920, to December 31, 1920, for a judgment ascertained to be worthless and charged off within the period; (2) in adding $9,105.88 to taxable income for the year 1921, the amount of a debt due the decedent at the time of his death and collected by the petitioner in 1921; and (3) in his valuation of stock of the Fayette Title & Trust Co. as of July 9, 1920.
FINDINGS OF FACT.
The petitioner is the estate of A. Plumer Austin, located at Uniontown, Pa., R. W. Austin being the duly appointed and qualified executor of the estate. The estate-tax return and income-tax returns for the periods in question were duly filed by the executor. Both the deceased and his estate kept accounts and made income-tax returns upon the cash receipts and disbursements basis. A. Plumer Austin died July 9, 1920.
A. Plumer Austin was an attorney residing and practicing his profession at Uniontown, Fayette County, Pa. For several years prior to his death he1928 BTA LEXIS 3975">*3977 was a stockholder and president of the Fayette Title & Trust Co., of Uniontown, Pa.
During 1913 and 1914 the decedent loaned to J. V. Thompson various sums of money upon notes drawn or endorsed by him. The notes were not paid at maturity and decedent instituted two suits for collection of the amount due. On December 6, 1915, decedent obtained two judgments upon the notes in the amounts of $44,558.47 and $11,000, with interest thereon from date of judgment. Of the total amount of the judgments, $45,556.47 was due to the decedent, judgment for the balance of $10,002 having been obtained on behalf of decedent's brother for whom decedent acted as trustee. On March 1, 1915, a receiver was appointed to take over the affairs of J. V. Thompson, but thereafter the appointment of the receiver was held 10 B.T.A. 1055">*1057 invalid, and in January, 1916, there was appointed a Creditors Protective Committee, of which the decedent was a member. The appointment of the Committee also was ineffective and on September 17, 1917, bankruptcy proceedings were instituted against J. V. Thompson and a referee was appointed, the Creditors Protective Committee being continued in an advisory capacity to the referee.
1928 BTA LEXIS 3975">*3978 Between January 1 and July 9, 1920, a dividend of 5 per cent was paid to the decedent upon his judgment against Thompson and between July 9, 1920, and January 1, 1921, the petitioner was advised (by whom does not appear) that a further and final dividend of 5 per cent upon the judgment would be paid. (The date of receipt of this dividend, if paid, does not appear.) Decedent's judgment was valued for state inheritance tax purposes at $4,455.84, and for Federal estate tax purposes at $5,128.05. It was understood generally in the community that the bankrupt estate of Thompson would not pay unsecured creditors more than ten cents on the dollar. Petitioner employed an attorney to investigate the collectibility of the judgment and was advised that not more than 10 per cent thereof could be collected and that the balance, 90 per cent thereof, should be charged off as worthless. In making his income-tax return for the period July 10 to December 31, 1920, although the petitioner considered 90 per cent of the judgment, in the amount of $56,155.21, worthless, he omitted the item from the return entirely. At a later date petitioner claimed a loss of $56,155.21 on account of the judgment, 1928 BTA LEXIS 3975">*3979 as a deduction for the period January 1 to July 9, 1920. In the petition in this case, however, petitioner claimed the judgment, in the amount of $56,155.21, as a bad debt deduction from taxable income for the period July 10 to December 31, 1920. At the trial and in the brief petitioner claimed 90 per cent of the judgment, in the sum of $44,558.47, as a deduction for the period January 1 to July 9, 1920. Not more than 10 per cent of the judgment has been received by the decedent and his estate at the date of the hearing of this appeal, but the estate of the debtor has not been closed. The respondent determined that the debt had not been ascertained to be worthless and charged off in the taxable period and disallowed the deduction.
As a member of the Creditors Protective Committee the decedent was entitled to compensation. By resolutions adopted April 14 and May 14, 1920, the Committee authorized the distribution of certain funds to its members as compensation for services rendered. The amount due to the decedent as compensation for his services was $9,105.88, which was paid to the petitioner on September 26, 1921. At the time of decedent's death the exact amount of compensation1928 BTA LEXIS 3975">*3980 due him was not known to his executor and was estimated to be $10,000, which sum was reported by the petitioner and included in the gross estate of the decedent for Federal estate tax purposes. The 10 B.T.A. 1055">*1058 petitioner reported the sum of $9,105.88 as income in its income-tax return for 1921. The respondent determined that the $9,105.88 paid to the petitioner for services rendered by the decedent was taxable income for 1921, when received.
At the time of his death the decedent owned 200 shares of stock in the Fayette Title & Trust Co. of Uniontown, Pa., a close corporation with a total of 1,500 shares of capital stock then outstanding. On or about September 1, 1920, the petitioner, after some negotiation for the sale of the stock, granted to Jack Lynn an oral option, open until January, 1921, to purchase 85 shares at $650 per share. On or about January 3, 1921, Lynn exercised his option and the petitioner sold him for cash 85 shares of the stock at $550 a share. Prior to this purchase Lynn was not a stockholder in the Fayette Title & Trust Co. In October or November, 1920, the petitioner granted to Peter E. Shepperd, a stockholder and vice president of the Fayette Title1928 BTA LEXIS 3975">*3981 & Trust Co., at his solicitation, an oral option, open until the first of January, 1921, to purchase the remaining 115 shares of stock at $700 per share. About a month later John M. Core, a stockholder of the Fayette Title & Trust Co., offered to purchase from the petitioner the 115 shares of stock at $750 a share, which was refused by the petitioner because of the option granted to Shepperd. Shepperd failed to exercise his option to purchase and on or about January 3, 1921, the petitioner sold the 115 shares to John M. Core at $700 per share and received in payment therefor $500 cash and two notes for $40,000 each, payable one and two years, respectively, after date, with interest. Core was a man of wealth and financially responsible, and both notes were promptly paid at maturity.
Following the death of the decedent, it became necessary to elect a new president of the Fayette Title & Trust Co., and during the latter half of the year 1920 there was some competition between various groups of stockholders for the office. The regular meeting of the stockholders was held on or about January 3, 1921, and directors were elected. Thereafter, about two or three weeks later, Peter E. 1928 BTA LEXIS 3975">*3982 Shepperd was elected president of the bank and held office until May, 1926, when John M. Core was elected president to succeed him.
All the stock of the Fayette Title & Trust Co. was closely held and it was not an active stock on the market. No sales were made at or about the time of decedent's death and there is no record of any sales prior or subsequent to that time, except the two sales above mentioned made by the petitioner. The 200 shares of stock acquired by the petitioner from the decedent were appraised at $300 per share as of the date of decedent's death for state inheritance tax purposes, and were included in the gross estate of the decedent at $300 per share as of the date of decedent's death for Federal estate-tax purposes. The respondent determined that the value of this stock at the 10 B.T.A. 1055">*1059 date of decedent's death was $300 per share, upon the basis of which he determined the taxable gain derived by the petitioner from the sales thereof in January, 1921.
OPINION.
VAN FOSSAN: With reference to the claimed bad debt deduction, the record leaves in doubt the amount of the deduction claimed, and the taxable period for which it is claimed. In the pleadings1928 BTA LEXIS 3975">*3983 the error assigned is that the Commissioner failed "to include among deductions from taxable income for the period July 10, 1920, to December 31, 1920, an item of $56,155.21" as the loss sustained on notes for "money loaned to J. V. Thompson * * * and determined to be worthless and charged off within the period in question." It is alleged in the statement of facts, and admitted in the answer that the amount due the decedent on the judgments was $45,556.47. At the hearing evidence was introduced only as to the judgment for $44,558.47. In neither the pleadings nor the evidence offered is the alleged bad debt stated in a specific sum. It is alleged and proved that 5 per cent of the judgment was paid to decedent and that petitioner was advised that an additional 5 per cent of the judgment would be paid, but there is no allegation or proof of any specific sum having been paid or to be paid on the judgment. It was then alleged, and some evidence offered, that 90 per cent of the judgment was worthless and charged off as a bad debt, but the exact amount of the debt is not disclosed. The petitioner is equally vague and indefinite as to the taxable period in which the debt was ascertained1928 BTA LEXIS 3975">*3984 worthless and charged off, as appears from the findings of fact. Such confusion of proof of essential facts makes impossible an accurate determination of the issue and, were no other defect present, would require a ruling adverse to petitioner.
Aside from this lack of definiteness in the pleadings and proof, upon which our decision on this issue might well rest, it is evident that the petitioner here seeks a deduction, as a bad debt, for a portion only of the total debt. It is not claimed that the entire judgment, or the unpaid balance thereof, was worthless and charged off in either taxable period. It is claimed that the petitioner ascertained 90 per cent of the judgment (in what amount does not appear) to be worthless and charged off that amount as a bad debt (in what period does not appear). At the time of this alleged ascertainment of worthlessness and charge-off 95 per cent of the judgment remained due, so that the petitioner seeks to carry 5 per cent of the judgment as good and collectible and to charge off 90 per cent as uncollectible. The Revenue Act of 1918, under which this case comes, makes no provision for the deduction of a portion of a debt ascertained to be 1928 BTA LEXIS 3975">*3985 10 B.T.A. 1055">*1060 worthless and charged off. (See , and .) The respondent did not err in denying the deduction claimed.
The sum of $9,105.88 was due to the decedent as compensation for services as a member of the Thompson Creditors Protective Committee and remained unpaid at the date of his death. This debt was included in decedent's gross estate for Federal estate tax purposes in the estimated amount of $10,000. The correct amount of the debt, $9,105.88, was paid to the petitioner in September, 1921, and reported by it as taxable income of the estate for 1921. The value of this debt at the date of decedent's death was $9,105.88. Both the decedent and the petitioner were, at all times material here, on the cash receipts and disbursements basis. The petitioner contends that the sum received in 1921 was not taxable income to it, but was merely the conversion of a capital asset from which no gain was derived, and that it erroneously reported the same as taxable income in its tax return for 1921. The respondent maintains that this sum was taxable income1928 BTA LEXIS 3975">*3986 to the petitioner for 1921, the year in which it was received, and that it was correctly reported as such. We sustain the petitioner.
The debt due to the decedent at the time of his death passed to the petitioner as a part of the corpus of the estate. It was a capital asset and at the date of acquisition by the petitioner its value was $9,105.88. When the debt was paid the petitioner acquired nothing in addition to what it previously owned. The payment simply reduced to cash an asset of the same value as the amount of money received, and thus was nothing more than a change in the form of a part of the corpus. Had the decedent lived and collected the sum due him for services, the amount received might have been taxable income to him, but it does not follow that it was taxable income to the petitioner. The decedent and the petitioner are separate and distinct taxable entities. The estate is taxable only on the income derived by it. The revenue laws do not impose an income tax upon the corpus of an estate or upon the conversion of a part thereof into the cash equivalent of its value at date of acquisition. (See 1928 BTA LEXIS 3975">*3987 ; ; ; and .)
The receipt of $9,105.88 by the petitioner in 1921 in payment of the debt due for services rendered by the decedent was not taxable income to it and was erroneously included as income for 1921.
At the time of his death the decedent owned 200 shares of the capital stock of the Fayette Title & Trust Co., a close corporation 10 B.T.A. 1055">*1061 with a total of 1,500 shares of stock outstanding. This stock was valued at $300 per share for both Federal estate tax and estate inheritance tax purposes. The stock was not active on the market and there was no record of any sales of stock prior or subsequent to decedent's death, except the 200 shares sold by petitioner. The petitioner sold the 200 shares on January 3, 1921, to two individuals. Eighty-five shares were sold for cash at $550 per share, and 115 shares were sold for cash and notes at $700 per share. The decedent was the president of the bank and his death1928 BTA LEXIS 3975">*3988 necessitated the election of a successor. Between the date of decedent's death and date of sale of his stock, there was a contest between different groups in the bank for the office of president, which in some degree, at least, affected the selling price of this stock. The petitioner contends that the value of the stock at the date of decedent's death was $636.25, the average price received upon the sales in 1921, and that no taxable gain was derived. The respondent determined that the value of the stock at the date of decedent's death was $300 per share and that the difference between such value and the amount received from the sales in 1921 is taxable gain.
The burden is upon the petitioner to prove that the respondent erred in his determination of value. The petitioner relies solely upon the two sales of the stock in question to establish its value at the date of decedent's death. Noevidence was offered of the book value of the stock, or the net worth of the corporation, or the earnings of the corporation, or dividends paid or authorized by the corporation, or the assets of the corporation, as of the date of decedent's death, or of any other facts sufficient to establish1928 BTA LEXIS 3975">*3989 the fair value of this stock.
This stock may have been worth more than $300 per share at the date of decedent's death, but the record fails to afford us any basis upon which to determine what the actual value was. We may not indulge in speculation to supply a shortage of evidence. The sale of 200 shares of this stock approximately six months after the decedent's death was under peculiar circumstances tending to inflate the price and is not a proper measure of fair market value at the death of decedent. The petitioner having offered no other evidence of value, we must hold that the petitioner has failed to establish that the respondent erred in his valuation of the stock.
At the hearing and in its brief the petitioner asserted the right to compute and return the income derived from the sale to Core of the 115 shares of stock upon the installment basis, as provided in section 212(d) of the Revenue Act of 1926, made retroactive by section 1208 of that Act. Section 212(d) provides that in the case of a casual sale of personal property for a price exceeding $1,000, where the 10 B.T.A. 1055">*1062 initial payments do not exceed one-fourth of the purchase price, the income may be returned1928 BTA LEXIS 3975">*3990 on the installment basis. The concluding sentence of paragraph (d), section 212, is as follows:
As used in this subdivision the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. (Italics ours.)
Under the general rule of law the giving of notes does not, in the absence of evidence of an express agreement to that effect, constitute payment of the obligation or extinguish the original debt. This is the law in Pennsylvania, where this case arose. ; . As said in 21 Rawle C. L. 71, the above "doctrine proceeds on the obvious ground that nothing can be justly considered as payment in fact but that which is in truth such, unless something else is expressly agreed to be received in its place. That a mere promise to pay can not, of itself, be regarded as an effective payment is manifest." The law being as stated, it will be presumed that the notes were not given or received as payment. They were "evidences of1928 BTA LEXIS 3975">*3991 indebtedness of the purchaser" and did not defeat the right of petitioner to the benefit of section 212(d). This ruling is not in conflict with the previous rulings of the Board holding that notes are "property" which may, within certain limits, properly be included in invested capital.
The total payments received within the taxable year amounted to $500. The balance of the purchase price was represented by notes due one and two years, respectively, after date. It follows that petitioner is entitled to return the income of this sale upon the installment basis and its taxable income for 1921 should be recomputed accordingly.
Judgment will be entered on 15 days' notice, under Rule 50.