*3391 1. In the absence of evidence as to facts upon which debts were ascertained to be worthless, and as to the time of such ascertainment, held that no deduction is allowable in 1919 and 1920.
2. Alleged loss upon the sale in 1921 of a commercial law practice disallowed for lack of evidence as to the cost and the March 1, 1913, value thereof.
3. The March 1, 1913, value of the business not being shown, the inclusion by the respondent of the entire amount of the sales price in income for 1921, is approved.
*1197 This is a proceeding for the redetermination of deficiencies in income taxes for the years 1919, 1920, and 1921, in the respective amounts of $617.07, $175.85, and $2,337.82. Three issues are involved: (1) Whether the respondent erred in disallowing as deductions from gross income for the year 1919 items aggregating $1,796.41, claimed as bad debts ascertained to be worthless and charged off in 1919; (2) whether the respondent erred in disallowing as deductions from gross income for the year 1920 items aggregating $153.27, representing*3392 advances in behalf of clients, and items aggregating $617, representing personal loans made between 1917 and 1920, claimed as bad debts ascertained to be worthless and charged off during 1920, and (3) whether the respondent erred (a) in disallowing a deduction from gross income for 1921 of $7,100, claimed as a loss upon the sale in 1921 of a commercial law practice, and/or (b) in including in the petitioner's income the entire consideration of $2,900 received by him under the terms of said sale.
FINDINGS OF FACT.
The petitioner, for about 30 years, has been a practicing attorney in Stambord, Conn. Prior to 1921 a part of his practice was a commercial law business obtained from out-of-town clients through listing in certain law lists and publications.
Included in petitioner's income-tax return for the year 1919, as a deduction as bad debts ascertained to be worthless and charged off during the year 1919, was an item of $1,794.36, composed of about 150 debts ranging in amount from about $1.25 to about $570. Most of these were on the petitioner's books on March 1, 1913.
*1198 Included in this list were the following items: Herbert B. Lanyon, $571.35; A. B. Griswold*3393 Co., $151.40; Samuel Mandelson, $112.12; Sarver & Ames, $56,46; Fred P. Wood, $45.65; Frederick Whitehouse, $44.60; Brown & Boles, $28; Wilber Mercantile Agency, $12.34; Credit Insurance Adjustment Co., $17,68; Carthienour Watson, $35, and Louis H. Porter, $1.34.
Lanyon had the ability to pay, had some property and considerable earning capacity, and petitioner could have enforced payment of the amount owed at March 1, 1913, but Lanyon moved to New York and he could not be located by petitioner. Petitioner finally learned that Lanyon died about 1919.
A. B. Griswold operated a large contracting concern and at the time the service was rendered by the petitioner was able to pay, but Griswold got into difficulties and absconded. Petitioner could not locate him.
Samuel Mandelson was a man of known character for paying his bills and had some small property, but he died, leaving no estate, about the time petitioner charged this debt off.
Sarver & Ames was a commercial agency in Philadelphia or some city outside of Connecticut which had no property in Connecticut subject to execution.
Petitioner obtained a divorce for Fred P. Wood, who later got into difficulties and left Connecticut.
*3394 Frederick Whitehouse was a contractor in Stamford and removed to California about the time the debt was charged off by petitioner. On March 1, 1913, Whitehouse could have paid this bill but petitioner was unable to locate him in California. Brown & Boles at one time kept a garage in Stamford and the debt was collectible, but they have not been in Stamford since 1917.
Wilber Mercantile Agency was a large commercial agency having offices in several of the large cities. Petitioner made repeated efforts to collect this bill, and in 1919 determined the efforts were futile and charged off the debt.
Credit Insurance Adjustment Co. was a collection agency, and the circumstances with regard to that debt were similar to those of the Wilber Mercantile Agency debt.
Carthienour Watson resided in Stamford at the time the debt was incurred, but she removed to North Carolina, and petitioner determined in 1919 that the debt was worthless and that further attempts to collect the bill would be useless.
Louis H. Porter was a New York attorney who never paid the amount due petitioner, and petitioner did not think the debt warranted effort of collection.
*1199 The petitioner*3395 seldom filed suit for collection of any debts immediately after they became due. He never considered it worth while to bring suit to collect attorney's fees for amounts from $25 to $75.
There were on the books of the petitioner in 1920, 18 debts representing advances made to and expenses incurred for clients during the years 1917 to 1920, aggregating $153.27. This amount was included in petitioner's return for the year 1920 as a deduction, because the petitioner was convinced that there was no chance of collecting the debts. These amounts were not charged again as office expenses.
The petitioner also included as a deduction on his return for the year 1920, the amount of $617 representing personal loans made by the petitioner as follows:
| August Steifel, loan made February and April, 1919 | $135.00 |
| Edgar Atkin, balance due on loans made | 126.50 |
| Emmett Owen, loan made October 15, 1917 | 79.95 |
| August W. Kelly, loan made December, 1920 | 75.00 |
| Bayard Cole, balance on loan | 200.00 |
| Total | 617.00 |
August Steifel disappeared and the petitioner charged the amount of the debt off in 1920.
Bayard Cole got to drinking and died in a hospital.
Petitioner learned, *3396 about two months after the loan was made to Kelly, that Kelly filed a petition in bankruptcy either the month before or the month after the loan was made and the amount was uncollectible.
Edgar Atkin was a drunkard and when petitioner charged the debt off in 1920, collection thereof was hopeless.
Emmet Owen was an artist living in Stamford who moved away, and the debt was charged off in 1920.
By a contract dated February 16, 1921, and effective April 1, 1921, the petitioner sold his commercial law business to Bartram & Meade of Stamford for a total consideration of $2,900. Included in the business at the time the transfer was made were pending claims of a fixed value of over $10,000 and numerous pending cases where litigation had been instituted, aggregating over $6,000. The contract of sale provided in part as follows:
9. The Party of the Second Part agrees to and does hereby sell and turn over to the Parties of the First Part, as of the date of this Agreement, his said commercial law practice and agrees to faithfully use his best influence and endeavor to have transferred to the Parties of the First Part, in such manner as they may elect, his said representation in*3397 said law and mercantile lists, which said lists are (A) "Guaranteed Attorneys List," published by the United States Fidelity & Guaranty Co., Baltimore, Maryland; (B) "The National List," published by National Surety Company of New York; (C) "The Clearing *1200 House Quarterly," published by the Attorneys National Clearing House, Minneapolis, Minnesota; (D) "Directory of Attorneys," published by the Wilber Mercantile Agency, Chicago, Illinois.
10. The Party of the Second Part shall turn over to the Parties of the First Part all open and unfinished claims and cases incident to his said commercial law practice, and, for so long as they may reasonably require the same, all his office files, records and registers relative thereto. All claims and cases so turned over pursuant to this agreement shall be properly noted on the said registers and records of the party of the Second Part.
* * *
12. During the continuance of this working agreement, the Party of the Second Part will not engage in the practice of commercial law in said Stamford incident to the receipt of claims or causes of action forwarded through the medium of commercial and law lists, except at the request of*3398 the Parties of the First Part. Nor in any event shall the Party of the Second Part engage in such commercial practice in said Stamford for the period of 18 months from the date of this agreement, nor will he within said time, nor at any time during the continuance of this working agreement, endeavor to directly or indirectly obtain representation, without the consent of said Parties of the First Part, in any law or mercantile list and especially those referred to in paragraph 9 hereof.
* * *
24. * * * and the Party of the Second Part to accept, therefor the sum of $2,900.00 payable in manner following: The said five years' lease of said Room #4 and all and every of said other rights and privileges to said Party of the Second Part in the said offices of the Parties of the First Part as hereinbefore referred to and provided for, and in addition thereto the joint and several promissory notes of said Parties of the First Part for the sum of $1,000 bearing equal date herewith and payable two years after date, with interest at the rate of 6% per annum, payable semi-annually.
25. Should said Party of the second Part by required for reasons of ill health or otherwise to move from*3399 said Stamford and so entirely retire from the practice of law in said community, thereby rendering said lease of said Room #4 and said other rights and privileges of no further use or value to him, the Parties of the First Part will repay to said Party of the Second Part the sum of $31.67 a month, as representing the reasonable value of the monthly rent of said premises, as hereinbefore agreed, for the unexpired term of said lease, * * *.
The petitioner succeeded in transferring to Bartram & Meade the representation of the lists referred to in the contract.
For the 5 years preceding March 1, 1913, the annual gross receipts from the petitioner's commercial law practice were as follows:
| 1908 | $2,054.52 |
| 1909 | 1,712.66 |
| 1910 | 1,472.36 |
| 1911 | 3,842.04 |
| 1912 | 1,834.89 |
| 10,916.47 |
*1201 The petitioner built up his commercial law practice over a period of about 20 years. Until 1917, he did the commercial law work himself, with the assistance of one and sometimes two assistants. From 1917 to 1920, he was abroad on government business.
The petitioner apportioned about $500 of the total office expenses to the commercial law practice.
The petitioner kept*3400 his accounts and filed his income-tax returns for all years upon the basis of cash receipts and disbursements.
OPINION.
SIEFKIN: The issues in this proceeding are:
(1) Whether the respondent erred in disallowing as deductions from gross income for the year 1919, items aggregating $1,796.41 claimed as bad debts ascertained to be worthless and charged off in 1919;
(2) Whether the respondent erred in disallowing deductions from gross income for the year 1920, items aggregating $153.27, representing advances on behalf of clients and items aggregating $617.00 representing personal loans made between 1917 and 1920, claimed as bad debts ascertained to be worthless and charged off during 1920; and
(3) Whether the respondent erred (a) in disallowing a deduction from gross income for 1921 of $7,000 claimed as a loss upon the sale in 1921 of a commercial law practice, and/or (b) in including in the petitioner's income the entire consideration of $2,900 received by him under the terms of said sale.
(1) Section 214(a)(7) of the Revenue Act of 1918 provides:
That in computing net income there shall be allowed as deductions:
* * *
(7) Debts ascertained to be worthless and charged*3401 off within the year.
In , we held that the fact that debts were charged off in a particular year raises no presumption that they were ascertained to the worthless in the same year.
In , we stated:
Section 234(a)(5) of the Revenue Act of 1918 contemplates that before a taxpayer can charge a debt off and deduct it from gross income it must be determined to be worthless. That determination must be based upon facts. We are of the opinion that the evidence is not sufficient to establish worthlessness. The debts appear to have been charged off because a lawyer thought that collection thereof was doubtful, but the facts to justify such opinion are not before us.
In , we held that where nothing occurred during 1921 to indicate that a debt was more uncollectible in *1202 that year than in previous years, no deduction may be had for the year 1921, although the debt was charged off in that year.
In *3402 , we stated at page 578:
The burden then is upon the petitioner to establish that it did make certain during the taxable year that the debts claimed as deductions were without value. We take it for granted that when Congress authorizes this Board to decide the issues arising between a taxpayer and the Commissioner in such a case as this, such taxpayer has not established the correctness of his contention by his bald statement that he believed it to be worthless, or that he ascertained it to be worthless or that, on undisclosed information he came to the conclusion that it was worthless. To so hold would be to put the Government in the hands of the taxpayer and substitute his judgment as to the conclusion to be drawn from the facts for that of the body created to decide the issue.
Nor is it a question whether the taxpayer believed the debt to be worthless. To so hold would be to grant an undue advantage to the pessimist or to the taxpayer who made no investigation. In our opinion the burden upon the petitioner is to show what steps he took to collect the debt, what information came to his knowledge and what other circumstances*3403 existed which led him to his conclusion. It then becomes the duty of the Board to determine whether the debt was in fact ascertained to be worthless within the meaning of the law. .
In the instant proceeding the petitioner testified as to eleven of the items claimed as worthless debts, but no evidence was submitted to show when the debts were ascertained to be worthless, nor were the facts upon which such ascertainment was based presented in each case. Most of the debts were outstanding as of March 1, 1913, and it is not shown that they were more uncollectible in 1919 than in prior years.
We must uphold the action of the respondent in disallowing the deduction for bad debts for the year 1919.
(2) The petitioner claims as a deduction on account of bad debts for the year 1920, the amount of $153.27, representing advances made on behalf of clients during the years 1917 to 1920. The petitioner testified that they were charged off in 1920 because he was convinced that there was no chance of collecting them and that they were not large enough to warrant the bringing of suits for collection.
*3404 In , we stated:
The question for us is whether in fact the debts were ascertained to be worthless in the year claimed. Presumably the taxpayer thought they were or it would not have charged them off; but the mere repetition of the taxpayer's opinion does not prove that the charge-off was well founded.
See also We must hold that no deduction is allowable for this item.
*1203 Likewise, with regard to personal loans totaling $617 which the petitioner made in the years 1917 to 1920, the petitioner failed to show that the debts were ascertained to be worthless in the year 1920. With regard to one of the debts, the petitioner testified that he learned about 2 months after the loan was made that the debtor had, either a month before or a month after the loan was made, filed a petition in bankruptcy. Clearly, in this case, since the loan was made in December, 1920, the debt was not ascertained to be worthless in 1920.
No deduction is allowable for this item.
(3) The petitioner claims as a loss upon the sale of his business in 1921, the amount of $7,100. *3405 This is based upon his estimate that the March 1, 1913, value of his business was $10,000.
Section 202(a) and (b) of the Revenue Act of 1921 provides:
That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; except that -
* * *
(b) The basis for ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March 1, 1913, shall be the same as that provided by subdivision (a); but -
(1) If its fair market price or value as of March 1, 1913, is in excess of such basis, the gain to be included in the gross income shall be the excess of the amount realized therefor over such fair market price or value;
(2) If its fair market price or value as of March 1, 1913, is lower than such basis, the deductible loss is the excess of the fair market price or value as of March 1, 1913, over the amount realized therefor; and
(3) If the amount realized therefor is more than such basis but not more than its fair market price or value as of March 1, 1913, or less*3406 than such basis but not less than such fair market price or value, no gain shall be included in and no loss deducted from the gross income.
The petitioner has offered no evidence as to the cost of the business, nor is there any satisfactory evidence as to the March 1, 1913, value thereof. The evidence introduced as tending to show a March 1, 1913, value consists of earnings prior to that date, meager in amount and uncertain as to source, i.e., to what extent the personality of the petitioner entered into such earnings. No basis for the determination of gain derived or loss sustained upon the sale having been shown, the disallowance of a loss by the respondent is approved. See . The March 1, 1913, value of the business not being shown, the inclusion by the respondent of the entire amount of the sales price in income for 1921 is approved.
Judgment will be entered for the respondent.