1929 BTA LEXIS 2202">*2202 The Commissioner's disallowance of a deduction for an alleged debt ascertained to be worthless and charged off in the taxable year approved, where the evidence fails to show that there was a debt and also fails to show that there was any ascertainment of worth-lessness within the taxable period.
17 B.T.A. 1015">*1015 The Commissioner determined a deficiency of $14,816.15 for the fiscal year ended January 31, 1920, and a deficiency of $92,619.42 for the period ended December 31, 1920. The issue in the present case is whether or not the Commissioner erred in disallowing a deduction of $174,565.33 claimed by the petitioner for an alleged debt ascertained to be worthless and charged off in the taxable year.
The facts were stipulated.
17 B.T.A. 1015">*1016 FINDINGS OF FACT.
The petitioner is a corporation organized and doing business under the laws of the State of Ohio with its principal place of business at Cincinnati, Ohio.
The petitioner, as agent of the Citizens Gas Co. of Indianapolis, Ind., sold the Hamilton Furnace Co., of Hamilton, Ohio, 1929 BTA LEXIS 2202">*2203 a quantity of coke, a part of which the principal delivered to the Hamilton Furnace Co. from April 7, 1920, to May 24, 1920, in the aggregate value of $174,565.33.
The Hamilton Furnace Co. refused to pay for the coke delivered, claiming the petitioner's principal, the Citizens Gas Co., had made breach of the contract under which the coke was sold and delivered.
The petitioner acted as agent only in negotiating the sale of the coke and was in no way responsible for delivery, price, quantity, or quality.
Under the contract with its principal, the Citizens Gas Co., the petitioner made collections, and paid its principal on the 20th of the month for all shipments made in the preceding month, and under this condition paid its principal for the coke shipped the Hamilton Furnace Co., without regard to its own collection from the consignee for shipments that had been made.
The Hamilton Furnace Co. having failed to pay for the coke delivered, shipments were stopped in May, 1920, by the Citizens Gas Co., upon the order of the petitioner, which instituted suit in the Court of Common Pleas of Butler Co., Ohio, August 2, 1920, against the Hamilton Furnace Co. for the recovery of the1929 BTA LEXIS 2202">*2204 amount of $174,565.33, which suit resulted adversely to this petitioner.
The petitioner prosecuted error to this finding of the Court of Common Pleas to the Court of Appeals of said county, being the First Circuit, and in case No. 170, filed on January 20, 1922, which resulted in the affirmance of the Court of Common Pleas.
The petitioner prosecuted error to this finding of the Court of Appeals to the Supreme Court of the State of Ohio, case No. 17667, in which appeal the judgments of the lower courts were reversed and the cause remanded to the Court of Common Pleas of Butler County, Ohio.
Amended Pleadings have been filed by the Hamilton Furnace Co. in said cause No. 29834 in the Common Pleas Court of Butler County, and also in suit No. 8233, being a suit previously instituted by the Hamilton Furnace Co. against the Citizens Gas Co. in the District Court of the United States, Southern District of Indiana, in which damage by reason of breach of c ontract by petitioner's principal was asserted. Further proceedings in the original cause were thus prevented.
17 B.T.A. 1015">*1017 On or about August 17, 1922, the petitioner, by appropriate resolution of its board of directors, resolved1929 BTA LEXIS 2202">*2205 "That from the current month's settlements with the Citizens Gas Company that the amount of the advances made to the Citizens Gas Co. on account of The Hamilton Furnace Co. amounting in the aggregate to more than $197,000 be deducted."
The minutes of the meeting of the directors of the petitioner for August 17, 1922 read, in part, as follows:
* * * And it appearing that the Hamilton Furnace Company's account is not a bad account within the meaning of the contract between this company and the Citizens Gas Co. and that it has clearly been the right of this company to charge this account back and to deduct the amount from its remittances to The Citizens Gas Co. * * *.
The petitioner, against the protest of its principal, Citizens Gas Co., since August 17, 1922, has withheld the amount of $174,565.33 on account of the Hamilton Furnace Co., together with interest to said date, amounting in all to $197,995.18, from its settlements with its principal, Citizens Gas Co. The petitioner has carried this amount since that date in its accounts to "Suspense."
The account against the Hamilton Furnace Co. was unpaid and in litigation in 1920 at the time it was charged off.
The Hamilton1929 BTA LEXIS 2202">*2206 Furnace Co. account was, on December 2, 1920, charged off in pursuance of a resolution of the board of directors of the petitioner. The minutes of the meeting of the board of directors on that date showed the following:
Mr. John Sargeant brought to the attention of the Board the account receivable of The Hamilton Furnace Co. of more than $175,000 including interest, and the note of The Central States Gas Co. originally for $10,000 subject to credits, a balance of $6,593.31 remaining. Mr. Sargeant reported that on both these claims the company had made diligent effort to collect and failed, that the same had been given to counsel for collection and upon failure to secure any settlement that suit had been entered on the account against The Hamilton Furnace Co. in the Common Pleas Court of Butler County, Ohio, to recover the same, that the defendant had answered denying any obligation on the account and by way of cross petition had asserted a claim for damages much in excess of the amount sued upon. That the case would not be reached for trial until in 1921 and its determination was wholly indefinite and uncertain as to recovery.
The petitioner's principal, the Citizens Gas Co. 1929 BTA LEXIS 2202">*2207 , protested and refused to allow the credit and carried the account against this petitioner claiming interest thereon until the latter part of September, 1928. Being unadjudicated, the petitioner did not carry the amount of $174,565.33, together with interest thereon, into its accounts nor distribute the same, but has at all times carried the entire amount since August 17, 1922, in "Suspense."
17 B.T.A. 1015">*1018 On October 1, 1928, the Citizens Gas Co., of its own account having maintained this account to be due from the petitioner, entered into an agreement with the Hamilton Furnace Co. by which each undertook to release the other from all claims and obligations whatsoever. This agreement recited the repayment by it to the petitioner of the amount theretofore paid it by the petitioner on account of coke shipped to the Hamilton Furnace Co. as aforesaid, and in the agreement asserted therefore that the Citizens Gas Co. became the sole party in interest on account of the coke sold and therefore was entitled to and did relinquish all claims on account thereof in consideration of the relinquishment by the Hamilton Furnace Co. of its claims for damage against the Citizens Gas Co.
The suit1929 BTA LEXIS 2202">*2208 of the Hamilton Furnace Co. against the Citizens Gas Co., case No. 8233 in the District Court of the United States, Southern District of Indiana, Indianapolis Division, was dismissed on the 2nd day of October, 1928.
The suit of the petitioner against the Hamilton Furnace Co., case No. 29834, on the docket of the Common Pleas Court of Butler County, Ohio, was dismissed on the 10th day of October, 1928.
Notice of the cancellation of claim of the Citizens Gas Co. against the petitioner arising out of the withholding of funds as hereinbefore set forth was received by the petitioner on October 11, 1928.
Settlement to the petitioner by the Citizens Gas Co. was effective as of October 11, 1928.
The account of the petitioner against the Hamilton Furnace Co. of $174,565.33, charged off in 1920, has never been paid by the Hamilton Furnace Co., either to the petitioner or the Citizens Gas Co., except in the manner as set forth in the agreement of October 1, 1928, referred to above.
The books of account of the petitioner were, in the year 1920, and now are, kept on the accrual basis.
OPINION.
MURDOCK: The petitioner claims that it is entitled to deduct $174,565.33 as a debt1929 BTA LEXIS 2202">*2209 ascertained to be worthless and charged off within the taxable period which ended December 31, 1920, and this, so far as we can determine from the pleadings, is the sole issue in the case. We have heretofore held that before a deduction can be allowed on account of a debt ascertained to be worthless and charged off, it must first be shown that there was a debt. , and cases cited therein. In the present case the petitioner has not shown that the Hamilton Furnace Co. was liable to it for the amount in question. The petitioner concedes that the Hamilton Furnace Co. was financially able to meet any 17 B.T.A. 1015">*1019 liability which it might have had on account of receiving the coke. Where a taxpayer is unable to establish legal liability on the part of an alleged debtor, he must necessarily fail to establish the worthlessness of the alleged debt, for in such case there is not an ascertainment of worthlessness of a debt, but rather an ascertainment of the nonexistence of any debt. 1929 BTA LEXIS 2202">*2210 ; Furthermore, even if there was a debt, the evidence in this case fails to show that the petitioner ascertained such debt to be worthless within the taxable year. .
Judgment will be entered for the respondent.