*1938 Petitioner, in 1920, purchased certain notes from another banking institution and claimed to have ascertained the same year that they were worthless and as such charged them off. The cost to petitioner of such notes not being shown, nor what particular efforts were made to collect same, held, the Commissioner committed no error in disallowing the face value of said notes as a proper deduction.
*30 The Commissioner determined a deficiency in income and profits taxes for the year 1920 of $7,693.57 and an overassessment for the year 1921 of $3,220.84.
Several issues were raised by the pleadings, but all except one were waived by petitioner's counsel at the hearing. The only issue remaining is whether the Commissioner erred in disallowing a claimed bad debt deduction of $15,000 for the calendar year 1920.
FINDINGS OF FACT.
The petitioner is a North Carolina banking corporation, with its principal office in Charlotte.
On December 31, 1920, the petitioner held four notes of $5,000 each, purchased from the Bank*1939 of Hoke at Raeford, N.C., each of said notes being signed "Willinghams Warehouse by R. F. Willingham, President," and bearing interest after maturity. Said notes were dated May 12, 1920, made payable to "ourselves or order" ninety days after date, and endorsed "Willinghams Warehouse by R. F. Willingham, President, R. F. Willingham."
In addition to the foregoing endorsements, each of said notes had the following thereon:
The within note is hereby transferred and assigned without recourse on us to W. P. Covington, together with claims filed against Willingham's Warehouse and R. F. Willingham, bankrupts, on account of said note; with this understanding: That any dividends or amount hereafter paid on said claims shall *31 be turned over to American Trust Co. That is to say, this note and the claims are transferred and assigned subject to the right of American Trust Co. to receive any dividends paid by the receiver or receivers on account thereof.
This 1st day of April, 1922.
AMERICAN TRUST CO.
By JNO. NICHOLS, Vice Prest.
The four notes were entered in the note register of petitioner, at their face value, as Nos. 4760, 4761, 4762, and 4763. All of said notes*1940 fell due August 10, 1920, but none were then paid and all were protested for nonpayment.
On note No. 4760 the following credits appear: Jan. 3, 1921, $1,000; May 6, 1921, $800; Sept. 19, 1921, $400. There is also this notation thereon relative to the credit of Sept. 19, 1921: "1st Div. 2% from R. F. Willingham Bankrupt."
In August, 1920, Willingham's Warehouse went into the hands of a receiver. All four notes were filed with the receiver, the date of filing not being shown.
Investigation as to the worthlessness of the notes resulted in the petitioner entering on its books on December 31, 1920, the following charge-off: "Loss on Willingham Warehouse notes $15,000." The record showing such charge-off fails to show which three notes constituted the $15,000.
What particular efforts were made or actions taken in 1920 to ascertain whether any or all of said notes could be collected or were worthless are not shown by the evidence.
The evidence does not show what petitioner paid for the four notes nor for any of them.
OPINION.
SEAWELL: The only issue raised by the pleadings and not waived by the petitioner at the hearing is the bad debt issue, which relates to the worthlessness*1941 in 1920 of three of four notes of $5,000 each, held by petitioner against the same debtor.
The petitioner insists that it is entitled to a deduction in its 1920 tax return of $15,000, the amount of three $5,000 notes, Nos. 4761, 4762, and 4763, purchased by it in 1920, and alleged to have been ascertained "worthless" in that year and so charged off.
The evidence relative to the ascertainment in 1920 of the worthlessness of the three notes, Nos. 4761, 4762, and 4763, each for $5,000, charged off in that year, is not in our opinion sufficient to justify such "charge-off."
The evidence that the debtor of petitioner went into the hands of a receiver in August, 1920, is not in itself sufficient evidence to establish the worthlessness of said notes.
*32 Bankruptcy or insolvency in itself is not, as this Board has heretofore held, sufficient to establish that a debt became worthless. ; .
The witness for petitioner stated that "every effort possible" was made to collect the notes and "our investigation disclosed that we would not recover anything." The witness*1942 himself apparently made no personal investigation, his statements being in the nature of conclusions based on information furnished by others. He did not state what particular acts were done or efforts were made to collect said notes. The Board is entitled to full information upon which conclusions are based and the question of the worthlessness of the debts is for the determination of the Board. We held in :
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*1943 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 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. .
As a possible further reason for disallowing the "charge-off" it is not certain that any proper basis for the amount of such "charge-off" has been given us in the evidence. This point, however, is not here discussed, for the reason that we prefer to put the decision on the ground first mentioned above.
In the circumstances of the instant case, we are of the opinion that the respondent's determination of deficiency in tax for 1920 is correct.
Judgment will be entered for the respondent.