*2072 Promissory notes executed April 15, 1919, secured by a life insurance policy, one note for $2,500 due two years from date, and the other note for $5,000, due four years from date, are not deductible in the year 1920 as debts ascertained to be worthless, where such notes were not charged off on taxpayer's income tax return for that year, and taxpayer kept no books of account.
*736 These proceedings are for the redetermination of a deficiency in income tax for the year 1920, proposed by the Commissioner in his notice of deficiency mailed August 6, 1925.
Petitioner alleges no error on the part of the Commissioner in determining the deficiency of $6,318.75, but contends that he is now entitled to offset it in part by the deduction from gross income of a debt ascertained in 1920 to be worthless, and being the unpaid portion of certain notes, amounting to $6,100, although petitioner did not change off such unpaid portion on his income tax return for that year.
FINDINGS OF FACT.
Petitioner and one E. B. Oscars have been friends for many years, since they*2073 were seventeen or eighteen years of age. In the early part of 1919, the Majestic Tire and Rubber Company (hereinafter referred to as "the company") was organized. Petitioner was a stockholder *737 therein. Oscars had had experience in the tire and rubber business with a nationally known concern, and due to friendship and experience of Oscars, petitioner lent him $7,500 with which to buy stock in the company, taking his promissory notes to cover the loan. There were two notes, each executed on April 15, 1919, one for $2,500 maturing two years after date, and the other for $5,000 maturing four years after date. On the two-year note there was paid, June 28, 1920, $600; July 1, 1920, $800. No payments were made on the four-year note. In every respect, except as above set forth, the notes were of the tenor and effect substantially as follows:
Secured by Life Ins. Policy, $ , Indianapolis, Ind., April 15, 1919, years after date I promise to pay to the order of Rufus H. Syfers, Dollars, and ten per cent Attorney's Fee. Negotiable and payable at The Indiana Trust Co., of Indianapolis, Indiana.
Value received, without any relief from Valuation or Appraisement laws, with*2074 interest at 6 per cent per annum from date until paid. The Drawers and Endorsers severally waive presentment for payment, protest and notice of protest, and non-payment of this note.
(Signed) E. B. OSCARS.
In 1920 Oscars sold some of his stock in the company to get the cash with which to make the payments on the $2,500 note. In that year he had no other income than his salary of, perhaps, $400 a month as sales manager and vice president of the company. He had no other assets. About December 1, 1920, and thereafter, there was no demand for the company's stock. Later, at an undisclosed time but about 1922 or 1923, the company went into a receiver's hands, or became bankrupt, and the payment of the insurance premiums on Oscars' life ceased and the policy lapsed.
During 1920 petitioner made no attempt to enforce, at law, the collection of these notes, or either of them, because, as he alleges, he determined, as the result of a thorough search and investigation, that Oscars did not have any money at all, and that an effort to enforce collection through the courts would cause petitioner additional expense and be unavailing. Petitioner kept no books of account and, hence, made*2075 no book charge-off. However, he did not claim any deduction on his return for 1920 on account of the worthlessness of the notes in question.
OPINION.
LOVE: Upon the facts, we approve the action of the Commissioner. The Revenue Act of 1918, which is applicable here, provides in section 214(a)(7) for the deduction from gross income of debts ascertained to be worthless and charged off within the taxable year, and it is to be observed that both the ascertainment of the worthlessness of the debt and its charge-off within the same taxable year, are conditions precedent to its deduction.
*738 It is admitted that the unpaid portion of these notes, amounting to $6,100, was not charged off or deducted on petitioner's income tax return in 1920, the year in which he claims to have ascertained that they were worthless. Even though he kept no books of account, if in 1920 he knew the notes were worthless he certainly would have indicated such knowledge by claiming a deduction on his return. Therefore, under the provisions of the statute, petitioner is not entitled to the relief which he seeks, even though we were convinced that the notes ultimately became worthless. Under*2076 the circumstances, it is of small moment that we believe that the evidence before us is not of sufficient strength to warrant such a conviction on our part, since in any event we must find for the Commissioner under the strict provisions of the statute.
Judgment will be entered for the respondent.