*3482 Deduction allowed for notes aggregating $46,000, which were ascertained to be worthless and charged off in the taxable year.
*679 This proceeding is for the redetermination of a deficiency of $6,405.39 in income and excess-profits taxes for the year 1920. The petitioner assigns as error the action of the respondent in disallowing as a deduction second mortgage notes aggregating $46,000, charged off as worthless.
FINDINGS OF FACT.
The taxpayer is a Louisiana corporation with principal offices at Shreveport. It kept its books on the accrual basis.
Some time prior to December 31, 1919, the petitioner, in full settlement and satisfaction of an open account with F.O. Hudson for money and supplies furnished him for producing his 1919 crop, accepted eight $2,500 notes signed by the debtor and eight $2,500 *680 notes and one $6,000 note signed by F. O. Hudson and his brother W. M. Hudson, secured by a second mortgage on 1,246.55 acres of farming land in Bossier Parish, La., known as the Allen Plantation, part of which was owned by F. O. Hudson, *3483 individually, and the balance jointly with W. M. Hudson. F. O. Hudson had no other security to give for the payment of the debt. At the time of the execution and delivery of the notes, the property was covered by a first mortgage running from W. E. Connell and a Mr. McClanahan to J. P. Allen, the original owner, for $67,523.37, the payment of which the Hudsons assumed when they acquired the acreage from the two former persons. At the time the second mortgage was executed, neither F. O. Hudson nor the petitioner considered the farm to be worth more than the amount of the first mortgage.
On December 31, 1919, the petitioner released W. M. Hudson from further liability on the notes he had signed because of the fact that F. O. Hudson had arranged to buy his brother's interest in the farm.
Some time in 1920, F. O. Hudson admitted insolvency to the petitioner and informed it that he had no property aside from the farm, and that he had other debts in addition to the mortgages. Prior to the latter part of 1920, he also informed the petitioner of his inability to pay the second mortgage notes and offered to convey the farm to it in consideration of the petitioner's assumption of the*3484 first mortgage. The latter did not consider the property to be worth the amount of the first mortgage and declined to accept the offer.
At about this time, W. E. Connell, who was still liable under the mortgage he and Mr. McClanahan had given J. P. Allen, in order to prevent threatened foreclosure proceedings if the first mortgage notes were not paid on their near maturity dates and to avoid a deficiency judgment against him in case the property sold for less than the amount of the first mortgage, proposed to the petitioner that they purchase the farm under terms which would give it a three-fifths interest for an assumption of one-half of the first mortgage. The petitioner was still of the opinion that the farm was not worth the price of the first mortgage. Due, however, to the fact that W. E. Connell was a practical farmer and had agreed to manage and operate the farm for their joint account in the event they acquired it, and because it would obtain a three-fifths interest for one-half of the purchase price, in 1920 it contracted to buy the property. The property was conveyed to the buyers, in the proportions just stated, on February 10, 1921.
In 1920, the farm was in the*3485 hands of several real estate dealers for sale but they were unable to interest anybody in its purchase.
In 1920 and for several years prior thereto, the petitioner was thoroughly familiar with the financial condition of the debtor, and *681 knew of no property of his, aside from the mortgaged farm, out of which the amount of its claim could have been collected.
In December, 1920, F. O. Hudson had no property other than the farm and had debts in addition to the mortgages. The value of the farm was then less than the amount of the first mortgage.
No foreclosure proceedings were ever instituted under the second mortgage. The full amount of the notes was charged off as worthless December 31, 1920. Nothing has been paid on them since then.
OPINION.
ARUNDELL: The evidence shows that at December 31, 1920, the maker of the notes was without resources of any kind out of which the amount charged off could have been collected and that he had financial obligations to meet aside from what he owed under the two mortgages on the farm. The value of the land was less than the amount of the first mortgage and it would have been a useless procedure for the petitioner to have*3486 instituted foreclosure proceedings under the second mortgage it held as security for the payment of the notes. The petitioner through its business relations with the debtor was fully aware of his insolvent financial condition and knew of no assets out of which judgment for the amount due could have been collected. The treasurer of the petitioner corporation testified that before the notes were charged off as worthless, the petitioner made every effort to collect them but without success. Nothing was paid on the notes prior to December 31, 1920, and no payments have been paid on them since then.
From all the evidence, it is our opinion that the notes were worthless at the time they were charged off as bad debts. The deduction was proper and the respondent is reversed.
Judgment will be entered under Rule 50.