*3444 1. In 1922 the respondent assessed against the petitioner additional income and excess-profits taxes for 1917 and 1918; the five-year period, provided for by section 250 (d) of the Revenue Act of 1921, within which such assessments may be made and a suit or proceeding for the collection of which may be instituted, expired prior to June 2, 1924, the date of the enactment of the Revenue Act of 1924, as to the 1917 tax, and subsequently as to the 1918 tax. Held, that the collection of the 1917 tax is barred by the statute of limitations, but that the collection of the 1918 tax is not barred.
2. The respondent's disallowance of a bad debt deduction approved.
*792 The petitioner brings this proceeding for a redetermination of its income and profits taxes for 1917 and 1918. The proceeding results from the respondent's rejection of a claim for the abatement of taxes amounting to $61.51 for 1917 and $25,167.05 for 1918.
*793 The proceeding presents two issues for determination:
(1) Whether the statute of limitations constitutes a bar*3445 to the collection of the proposed additional taxes; and
(2) Whether an amount of $132,385.33 was correctly deducted from 1918 income as a bad debt ascertained to be worthless and charged off within the taxable year.
FINDINGS OF FACT.
The petitioner is an Illinois corporation engaged in the manufacture of caskets with its principal office in Chicago. On April 1, 1918, the petitioner filed its income and profits-tax return for 1917, and on June 13, 1919, filed its income and profits-tax return for 1918.
On March 28, 1922, respondent mailed petitioner a registered letter, the pertinent portion of which is as follows:
You are informed that an audit of your income and profits tax returns for the years 1917 to 1919, inclusive, indicates that you are subject to an additional tax in the amount of $25,228.56 based upon revenue agent's report under date of May 10, 1921, a copy of which was furnished you at the conclusion of the examination. * * *
You will be given twenty days to present any exception to this proposed assessment and to show cause or reason why the same should not be listed and paid. * * *
On October 6, 1922, the respondent assessed against petitioner additional*3446 taxes amounting to $61.51 for 1917, and $25,167.05 for 1918. Thereafter, and on February 3, 1923, the petitioner filed with the collector of internal revenue for the first district of Illinois a claim in abatement of the additional taxes which had been assessed.
On March 13, 1923, petitioner filed a bond with the said collector, which reads as follows:
KNOW ALL MEN BY THESE PRESENTS, that I, Edward Hines, hereby guarantee Honorable John C. Cannon, Collector of Internal Revenue, First District of Illinois, that the Western Casket Company, Inc., of 1156 West 20th Street, Chicago, Illinois, has on hand assets worth $25,228.56 subject to his warrant of distraint; that pending action on its claim for abatement of tax assessed verified February 3, 1923, it will not dispose of any of its assets except in the regular course of business and that when the amount of tax due is finally settled by action upon the said claim for abatement of tax, that the said Western Casket Company will have in its ownership and possession, subject to his warrant of distraint, assets of the value of $25,228.56.
Witness my hand and seal this 13th day of March 1923.
EDWARD HINES [L.S.]
N.N.B.
*3447 On May 21, 1924, the respondent mailed to the petitioner a letter which stated that petitioner's claim in abatement had been examined and rejected. The last two paragraphs of this letter state:
*794 The Collector of Internal Revenue for your district will be officially notified of the adjustment at the expiration of thirty days from the date of this letter, unless prior to that date evidence is furnished showing the adjustment is incorrect.
Under no circumstances should payment of the amount rejected be made until a bill is received from the Collector of Internal Revenue for your district and remittance should then be made to him.
Subsequently, and on January 20, 1925, respondent mailed the following letter to the petitioner:
TREASURY DEPARTMENT,
Washington, Jan. 20, 1925.
Office of the
Commissioner of Internal Revenue.
Address reply to
Commissioner of Internal Revenue
and refer to
IT:CR:A WLM
WESTERN CASKET COMPANY,
1156 West 20th St., Chicago, Illinois.
SIRS: Your claim for the abatement of $25,228.56 additional taxes assessed for the years 1917 and 1918, has been examined.
The claim is based upon the statement that the account*3448 of the Western Undertaking Company is a proper deduction from gross income and should be allowed.
The Bureau disallowed your claim under date of May 21, 1924 and upon receipt of your protest referred the case to the Solicitor of Internal Revenue.
In accordance with the recommendation of the Solicitor of Internal Revenue, the claim is again rejected.
This rejection will officially appear on the next schedule to be approved by the Commissioner.
Respectfully,
J. G. BRIGHT,Deputy Commissioner,
By L. V. LOHMAN,
Head of Division.
On March 14, 1925, petitioner filed an appeal to the Board from the above letter of January 20, 1925. On April 7, 1925, the respondent filed a motion to dismiss the appeal on the ground that the letter of January 20, 1925, was not a deficiency letter within the meaning of section 274(a) of the Revenue Act of 1924, and, therefore, the Board of Tax Appeals was without jurisdiction to hear and determine this appeal. The respondent's motion was denied by an order of the Board issued April 27, 1925, and the Board took jurisdiction of the appeal.
Sometime during 1909 the Western Undertaking Co., hereinafter referred to as the undertaking*3449 company, was organized to conduct an undertaking business, and it handled petitioner's caskets exclusively. The undertaking company was unable to dispose of petitioner's *795 entire output, handling about 15 to 20 per cent of the latter's production.
An open account was entered on petitioner's books in 1909 with the undertaking company, which showed a credit balance on December 31, 1909, of $7,475.12, but for each year thereafter this account showed a balance due and owing to the petitioner. The debit balances on December 31 of each year, and on March 1, 1913, from 1910 through 1918, were as follows:
| Year: | Balance of account (Dr.) |
| Dec. 31, 1910 | $55,375.79 |
| Dec. 31, 1911 | 79,752.76 |
| Dec. 31, 1912 | 85,657.96 |
| Mar. 1, 1913 | |
| 85,736.30 | |
| Dec. 31, 1913 | 100,038.20 |
| Dec. 31, 1914 | $104,271.24 |
| Dec. 31, 1915 | 112,492.93 |
| Dec. 31, 1916 | 125,072.46 |
| Dec. 31, 1917 | 130,235.45 |
| Dec. 31, 1918 | 132,385.33 |
The year 1918 was one of unprecedented business activity for undertaking concerns and manufacturers of caskets, due to the influenza epidemic, which increased the business of concerns in Chicago from 45 to 300 per cent. The Western Undertaking Co. participated in*3450 this increase in the undertaking business and its gross receipts for the year were a great deal larger, but in spite of that fact it was unable to make a profit, although other undertakers were paying their bills and discounting them, something which they had not theretofore been able to do. The failure of the undertaking company to make a profit during 1918 influenced the petitioner's officers to make a thorough investigation of the financial condition of the undertaking company. As a result of this investigation they prepared a statement of the undertaking company's assets and liabilities on December 31, 1918, as follows:
| Assets: | ||
| Automobiles | $1,000,00 | |
| Accounts receivable | 42,215.16 | |
| Fixtures | 10,066.70 | |
| Liberty bonds | 680.80 | |
| Merchandise | 5,722.42 | |
| Total assets | 58,685.08 | |
| Liabilities: | ||
| Accounts payable sundry | $16,990.45 | |
| Accounts payable Western Casket Co | 132,385.33 | |
| Total accounts payable | 149,375.78 | |
| Bills payable sundry | 2,607.79 | |
| Bills payable special | 101,000.00 | |
| Total bills payable | 103,607.79 | |
| Peoples Medical Service Co | 127.50 | |
| Bank Overdraft | 540.76 | |
| Total liabilities | 253,651.83 |
*796 The accounts receivable of $42,215.16*3451 were considered good by the petitioner and were only a part of the accounts receivable of the undertaking company. Included in the liabilities shown above is an amount of $101,000 listed as Bills Payable Special, which represented a loan made by Edward Hines, a brother-in-law of the president of the petitioner, to the undertaking company. Hines made his loans to the undertaking company prior to or during 1912 or 1913, and has not made any additional loans to it since that time. Although the undertaking company has failed to pay Hines interest on his loan since 1918, he has not forced the collection of the loan.
The petitioner, as a result of its investigation, determined that the amount of the undertaking company's account was worthless, and on December 31, 1918, charged the total amount off as a bad debt. Of the total amount charged off, namely, $132,385.33, there was included therein the sum of $34,706.99, representing interest. The petitioner was on the accrual basis and had always included interest charges in income for the years prior to 1918.
After 1918 the petitioner continued to do business with the undertaking company, but on a strictly cash basis, the undertaking*3452 company putting up four or five thousand dollars cash, and keepting paid up in advance for a period of two or three years. At the expiration of this time the petitioner again extended credit because of expenses sustained by the undertaking company in moving its offices, so that on November 29, 1927, the balance due the petitioner was more than $12,000. The undertaking company has never paid a dollar on the indebtedness charged off on December 31, 1918. During the period from 1909 to 1927 the undertaking company's number of branch offices decreased from 16 in 1909, to 9 in 1918, and to 3 in 1927.
The respondent disallowed the deduction of $132,385.33 for the year 1918.
OPINION.
MORRIS: The first question presented is whether the statute of limitations constitutes a bar to the collection of the proposed additional taxes. The petitioner cites on brief numerous decisions of the Board, and four decisions of the Federal courts, including , which it is claimed supports petitioner's contention that the collection of the proposed taxes is barred by the statute of limitations. *3453 In , after discussing various court decisions, we held that where an assessment is made within the five-year period of limitation, and the Revenue Act of 1924 was enacted prior to the *797 expiration of such five-year period, the respondent has six years from the date of the assessment within which to bring suit or other proceeding for the collection of the tax, by virtue of section 278(d) of the Revenue Act of 1924. Accord: , and . The decision of the Supreme Court in , does not involve the question herein.
Upon the authority of the above cited decisions we hold that as to 1918 the proposed tax is not barred because the assessment was timely made, i.e., on October 6, 1922, the five-year period did not expire until June 13, 1924, and prior thereto the Revenue Act of 1924 was passed which gave the respondent six years from the date of assessment to begin a suit or other proceeding for collection of the taxes. *3454 As to the taxes for 1917, we are of the opinion that they are barred by the statute of limitations for the reason that the five-year period provided for by section 270(d) of the Revenue Act of 1921, expired prior to the enactment of the 1924 Act, namely, on April 1, 1923. The bond given by the petitioner was not a consent in writing as prescribed by the statute. .
The second question is whether petitioner is entitled to reduce 1918 income by the amount of $132,385.33 under section 234(a)(5) of the Revenue Act of 1918. The issue narrows itself to whether there has been a proper ascertainment of worthlessness, since the charge off on December 31, 1918, was stipulated.
The petitioner adduced evidence to show that the undertaking company failed to make a profit in 1918, an unusually good business year, that subsequent to 1918 the debtor has not only failed to pay up its back account but has incurred a new indebtedness to the petitioner of over $12,000, and that the debtor has been permitted to stay in business due to the tolerance of its two chief creditors, namely, the petitioner and Edward Hines, a brother-in-law of petitioner's president. *3455 The evidence indicates, however, that the undertaking company possessed certain valuable assets upon which partial recovery on the debt could have been made. We were not advised of the total amount of the accounts receivable of the debtor company, but of the total the petitioner considered $42,215.16 collectible. In our opinion the facts do not warrant an ascertainment of worthlessness. The Revenue Act of 1918 failed to provide for a partial charge off of a bad debt, and, therefore, it follows that the action of the respondent must be approved. Accord: ; and .
Judgment will be entered under Rule 50.