*1519 1. The Commissioner's determination that the petitioner and the Contractors Machinery & Export Company were affiliated during the taxable year sustained upon the evidence.
2. The deductibility of alleged bad debts determined.
*1289 The Commissioner determined a deficiency of $2,234.68 in the petitioner's income and profits tax on the basis that the petitioner and the Contractors Machinery & Export Company were affiliated *1290 during the taxable year 1920. The petitioner alleges that the Commissioner erred (a) in holding that it was affiliated with the Contractors Machinery & Export Company; (b) in disallowing the deduction of $10,583.54 charged off by the Contractors Machinery & Export Company as bad debts in the year 1920; and (c) in refusing to allow special assessment. Upon motion of the Commissioner, the hearing was limited to the issues other than special assessment, in accordance with Rule 62(a) and (b) of the Boards' rules of practice in force January 11, 1930.
FINDINGS OF FACT.
*1520 The petitioner is a corporation, organized under the laws of the State of New York in 1913, with its principal office at 50 Church Street, New York City. It is engaged in the business of selling machinery as manufacturers' agent to other machinery dealers.
The Contractors Machinery & Export Company, hereinafter referred to as the Contractors Company, was incorporated in 1918 and engaged in the business of selling machinery to contractors and other users.
During the taxable year 1920, the capital stock of these corporations was held as follows:
| Richards & Hirschfeld, Incorporated | Contractors Machinery & Export Company | |||
| Owner | Shares | Per cent | Shares | Per cent |
| M. Aviles | 100 | 20 | 46 | 20 |
| Harry H. Hirschfeld | 30 | 6 | 92 | 40 |
| Lillie S. Hirschfeld | 170 | 34 | ||
| Chas. H. Richards | 30 | 6 | 92 | 40 |
| Claire B. Richards | 170 | 34 | ||
| Total | 500 | 100 | 230 | 100 |
Lillie S. Hirschfeld was the wife of Harry H. Hirschfeld, and they were living together as man and wife during all of the year 1920. Claire B. Richards was the wife of Charles H. Richards, and they were living together as man and wife during all of the year 1920. Harry H. Hirschfeld was president of*1521 Richards & Hirschfeld, Inc., and vice president of the Contractors Company.
In the statement attached to the deficiency notice is the following explanation:
Relative to your contention regarding consolidation, it is held that in this case husband and wife constitute one interest, and that the two companies are affiliated on account of ownership of the stock of both companies by the same interests.
*1291 The petitioner and the Contractors Company occupied the same offices, but the latter paid rent to the petitioner for its office space. The two corporations maintained separate books of account and filed separate income-tax returns for the taxable year under consideration.
By the terms of an instrument executed January 24, 1921, the petitioner acquired all of the assets of the Contractors Machinery & Export Company subject to its liabilities as they existed at the close of business on December 31, 1920. The consideration for said transfer was 370 shares of the capital stock of the petitioner, which were issued to the Contractors Machinery & Export Company on January 25, 1921. On July 1, 1921, the capital stock of the Contractors Machinery & Export Company owned by*1522 M. Aviles was acquired in equal portions by Harry H. Hirschfeld and Charles H. Richards. On January 5, 1922, the said 370 shares of the capital stock of petitioner were distributed by Contractors Machinery & Export Company in equal proportions to Lillie S. Hirschfeld and Claire B. Richards and the entire capital stock, 230 shares, of the Contractors Machinery & Export Company being then owned by Harry H. Hirschfeld and Charles H. Richards was surrendered to the company.
In its income-tax return for 1920, the Contractors Company claimed a deduction for bad debts in the amount of $10,583.54, which was disallowed by the respondent. This amount was charged off on the books of the Contractors Company as of December 31, 1920, and represents the account of Purdy & Henderson, of Havana, Cuba, in the amount of $8,294.96, and Bahmann Iron Works, of Dayton, Ohio, in the amount of $2,288.58.
Purdy & Henderson was one of the Contractors Company's several customers in Cuba to which shipments of machinery were made on account from time to time. During the later part of 1920, a business and financial depression occurred in Cuba of such proportions as to endanger all of these accounts, amounting*1523 at that time to approximately $50,000. In the fall of that year, Harry H. Hirschfeld went to Cuba for the purpose of investigating, and, if possible, collecting the accounts. He visited each of the creditors, and, upon the information obtained, determined and so advised the New York office under date of December 1, 1920, that all of the accounts would be collected except two, one of these being the Purdy & Henderson account. Hirschfeld's investigation had disclosed that business conditions in Cuba were in a demoralized state, owing chiefly to the collapse of the sugar market, and that many banks, principally the Spanish or Cuban banks, had failed or would have failed but for the protection of the moratorium which had been established. Officers of the firm of Purdy & Henderson advised Hirschfeld that it was unable at that time to make any payment on its account. It *1292 had a cash balance of about $140,000 in one of the Spanish banks, but was not permitted to withdraw more than 10 per cent of the amount. Upon this information, and upon Hirschfeld's recommendation, the account was charged off in the books of the Contractors Company as of December 31, 1920.
The following*1524 charges and credits were made on the Purdy & Henderson account in the Contractors Company's books during the year 1920:
| Date | Charges | Credits |
| Apr. 30, 1920 | $4,873.00 | |
| May 18, 1920 | 10.08 | |
| June 29, 1920 | $4,873.00 | |
| July 5, 1920 | 323.30 | |
| Do | 1,200.00 | |
| Do | 3,775.00 | |
| Do | 134.95 | |
| July | 11,1920 | |
| 4,979.75 | ||
| Aug. 19, 1920 | $15.75 | |
| Sept. 20, 1920 | $468.33 | |
| Sept. 24, 1920 | 44.62 | |
| Oct. 8, 1920 | 546.46 | |
| Dec. 30, 1920 | 9.60 | |
| Dec. 31, 1920 | 546.40 | |
| Total | 10,932.70 | 10,867.54 |
On February 21, 1921, Purdy & Henderson made a payment of $5,000 on its account and, later in 1921, a further payment of $1,200. On March 21, 1921, there is a charge of $436.20 on this account. The Contractors Company had sold machinery to Purdy & Henderson for many years, usually upon terms of net cash upon receipt of invoices. Purdy & Henderson has never been involved in bankruptcy or receivership proceedings.
The Bahmann Iron Works had been placed in the hands of a receiver in the fall of 1920. Upon notice of the bankruptcy of this customer, Hirschfeld went to Dayton, Ohio, to investigate this account and was told by a representative of the receiver that the creditors would probably*1525 recover nothing. Upon this information the account was charged off as of December 31, 1920. Subsequently, in the years 1921, 1922, and 1923, payments totaling $570 were made upon this account by the receiver and these amounts were reported in income in the years when received by the Contractors Company.
OPINION.
SMITH: The respondent's determination that the petitioner and the Contractors Company were affiliated during the taxable year 1920 is based upon a holding "that in this case husband and wife constitute one interest." The statute (section 240(b) of the Revenue Act of 1918) provides that:
* * * two or more domestic corporations shall be deemed to be affiliated * * * if substantially all the stock of two or more corporations is owned or controlled by the same interests.
The petitioner contends that since 68 per cent of its stock was held by Claire B. Richards and Lillie S. Hirschfeld, who owned no stock *1293 in the Contractors Company, and since the laws of the State of New York recognize the separate property rights of husband and wife, substantially all of the stock of the two companies was not owned by the same interests, but petitioner fails to show*1526 that Richards and Hirschfeld did not beneficially own or control the stock held by their wives. It is incumbent upon the petitioner to show that neither ownership nor control reposed in the same interests. While the property rights of husband and wife under the laws of the State of New York may be entirely separate and distinct, it does not follow that husband and wife may not constitute the same interests within the meaning of the taxing statute.
In ; affd. , the Supreme Court had under consideration the interpretation of section 240 of the Revenue Act of 1918. The court stated:
The purpose of § 240 was, by means of consolidated returns, to require taxes to be levied according to the true net income and invested capital resulting from and employed in a single business enterprise even though it was conducted by means of more than one corporation. Subsection (b) clearly reflects the intention, by means of such returns, to secure substantial equality as between shareholders who ultimately bear the burden. That intention is shown by the legislative history and was given effect by*1527 the regulations contemporaneously promulgated. It requires no discussion to show that such returns will not make against inequality or evasion unless the same interests are the beneficial owners in like proportions of substantially all of the stock of each of such corporations. . . . . Affiliation on any other basis would not make against inequality or evasion. It would require very plain language to show that Congress intended to permit consolidated returns to depend on a basis so indefinite and uncertain as control of stock without title, beneficial ownership or legal means to enforce it. Control resting solely on acquiescence, the exigencies of business or other considerations having no binding force is not sufficient to satisfy the statute.
At the hearing of this proceeding counsel for the petitioner stated: "It is upon the dissimilarity of the stock - of the stockholdings*1528 that we base our contentions that the interests controlling these corporations are not the same." No evidence was introduced as to whether the shares of stock of the petitioner owned by the wives of Hirschfeld and Richards were beneficially owned by their husbands nor was any evidence introduced to the effect that such shares of stock were not "controlled" by Hirschfeld and Richards. It is furthermore to be noted that on January 5, 1922, the shares of stock of the petitioner issued to the Contractors Machinery & Export Company for its assets were distributed to the wives of the petitioners even though *1294 they never owned any shares of stock of such company. Upon the evidence of record it must be held that the evidence adduced at the hearing does not overcome the prima facie correctness of the respondent's determination that husband and wife constituted the same interests in the instant case and that the petitioner and Contractors Machinery & Export Company were affiliated. His determination is accordingly sustained. Cf. *1529 ; ; .
The second issue relates to the alleged bad debt deductions taken by the Contractors Company. To be deductible, such debts must be ascertained to be worthless and charged off within the taxable year. There is no question as to the charge-off of the debts in the amount claimed.
The Purdy & Henderson account for the taxable year 1920 shows charges and credits thereto in approximately equal amounts. The exact debit balance in this account at the end of year is not shown, but we assume that it was $8,294.96, since that is the amount claimed as a bad debt deduction. Shortly after the close of the taxable year 1920, the debtor paid $6,200 on this account, and in March, 1921, the Contractors Company's books show a charge of $436.20. Such facts do not support the petitioner's claim that this account was worthless on December 31, 1920. The debtor was not insolvent at that time but was temporarily short of operating funds due to unusual conditions then prevailing in Cuba; it had a large cash*1530 balance in one of the Cuban banks under the protection of the moratorium. The evidence does not establish the worthlessness of this debt.
The record discloses a different situation with respect to the Bahmann Iron Works debt in the amount of $2,288.58, which was properly ascertained to be worthless and charged off within the taxable year under consideration. At the close of the year 1920, that company was in the hands of a receiver and upon the best information available it was ascertained by an officer of the Contractors Company that the creditors of the bankrupt would probably recover nothing. The fact that the receiver made small payments on this account in later years does not affect the reasonable ascertainment of its worthlessness at the close of 1920. The claimed deduction of this debt should be allowed.
Reviewed by the Board.
Further proceedings will be had under Rule 62(b).
LOVE and MURDOCK concur in the result.
MARQUETTE, STERNHAGEN, TRAMMELL, and GOODRICH dissent.