*3683 1. Held that the collection of the deficiency for 1917 is barred, but the deficiency for 1919 is not barred by the statute of limitations.
2. Held that no deduction is allowable on account of a bad debt in the taxable year claimed.
3. The inventory value of cotton as determined by the petitioner approved on the evidence.
*903 This proceeding involves deficiencies in income taxes for the years 1917, 1918 and 1919, in the amounts of $861.34, $1,970.77 and $6,316.18, respectively.
The issues are whether the periods of limitation for the assessment and collection of the deficiencies for 1917 and 1919 have expired; whether the petitioner is entitled to deduct the debt claimed to have been ascertained to be worthless and charged off in 1918, and whether the closing inventory for 1919 was correct.
FINDINGS OF FACT.
The petitioner is an individual residing in Savannah, Ga. For more than fifty years he has operated a cotton pickery as his principal business. During the fiscal years involved he was engaged as a cotton merchant*3684 in Savannah, carrying on his business under the name of Floyd & Co., although it was his individual business. He was also president and sole stockholder of the Putnam Mills & Power Co., a corporation, operating a hydro-electric plant.
The petitioner did not keep a regular set of books of account during the taxable years in question but kept merely one or two books showing the cotton received and delivered as it was bought and sold.
The entire capital stock issue of the Putnam Mills & Power Co., hereinafter designated as the corporation, was $75,000, par value. This corporation had been in existence for ten years or more prior to the taxable years.
The property of this corporation consisted of a hydro-electric plant and a small cotton mill. The cotton mill was sold long prior to 1918 *904 but the power plant was retained and was in operation. Several years prior to 1918 there were issued bonds of the corporation in the amount of $42,000. These bonds were not sold but were deposited with the Citizens & Southern Bank as collateral security for loans due from Floyd & Co. and the corporation. A mortgage was given to the bank to secure the bonds and this enabled the*3685 corporation and Floyd & Co. to secure money from the bank.
In or about April, 1918, the power plant of the corporation was sold to one Simmons for $100,000 in notes. The corporation at that time was indebted in the amount of approximately $81,500, made up as follows:
| Bonds | $42,000 |
| Accrued interest (approximately) | 18,000 |
| F. B. Floyd advances (approximately) | 20,000 |
| Current bills for help (approximately) | 500 |
Simmons, the purchaser of the power plant, did not pay the notes given by him and the petitioner as soon as he could legally do so took the property back. Thereafter the property was turned over to the Citizens & Southern Bank in satisfaction of the indebtedness represented by the bonds. The corporation kept a full set of books which, however, were destroyed by fire or became water-soaked and the exact amount of the indebtedness due the petitioner by that corporation could not be determined. It was, however, between $15,000 and $20,000 and arose on account of advances made by the petitioner to meet current expenses over a period of years.
When the petitioner ascertained that Simmons could not pay his notes he made efforts to sell the property to*3686 others as he had done prior to the trade and offered it for $60,000 cash in an effort to obtain sufficient money to liquidate the bank loan which was secured by corporation funds. Failing to find a purchaser, the bank agreed to take the property for the amount due, being the face value of the bonds and accrued interest, $42,000 and $18,000, respectively, making a total of $60,000. The petitioner thereupon turned over the property to the bank upon that basis, receiving nothing upon his indebtedness or his stock. This occurred within a year after the property was taken over from Simmons.
At the time of making the Simmons trade, upon the insistence of Simmons's lawyers, the petitioner relinquished and satisfied his claim against the corporation in order to clear the corporation's title to this property and to permit its delivery unincumbered by obligations other than the bonds and interest thereon, and the small amount of sundry indebtedness amounting to approximately $500.
On December 31, 1919, the petitioner had 2,261 bales of miscellaneous cotton stored in two or three warehouses belonging to others. *905 The cotton consisted of irregular, damaged and unmerchantable*3687 grades and sweepings, none of which, even after having gone through the pickery, could be tendered on contract under the rules of the New York Cotton Exchange. The bales varied from 301 to 1,000 pounds. There was no quoted market for this kind of cotton and its values, according to grade, ran from 3 cents to 31 cents per pound. The demand for low grades of cotton was light on December 31, 1919, having fallen off considerably during the latter part of the year.
On December 31, 1919, the petitioner determined the market value of all the cotton on hand to be $134,000. The respondent increased this value to $164,726.90, but later valued it at $155,458, upon which value the deficiency was computed. The petitioner used the figure of $134,000 as the inventory value. This was less than cost. The only inventory kept by the petitioner consisted of a book showing the number of bales received and the number sold and taken out of the warehouses. The number of bales on hand was arrived at by the process of elimination.
The petitioner's return for 1917 was filed March 31, 1918. An additional tax of $2,215.77 was assessed for that year before March 6, 1923. A claim for abatement in*3688 the amount of $1,354.43 was subsequently allowed, leaving a deficiency of $861,34 for that year.
The return for 1919 was filed on March 15, 1920. On February 28, 1925, the petitioner and the Commissioner entered into a written consent as provided by section 278(c) of the Revenue Act of 1924, by the terms of which the assessment period was extended to December 31, 1925, with the further provision that if an appeal was filed with the Board following the mailing of the deficiency notice, the time for assessment would then be further extended by the number of days between the date of mailing the deficiency notice and the date of final decision by the Board. The deficiency notice was mailed to the petitioner December 31, 1925.
OPINION.
TRAMMELL: We will first consider the question as to whether the deficiencies for 1917 and 1919 are barred by the periods of limitation. For 1917 a return was filed on March 31, 1918. The tax was assessed before March 6, 1923. A portion of the assessment was abated but no proceeding for the collection of the tax has been instituted and under the decision in *3689 , the collection of the deficiency is now barred.
For 1919, however, the return was filed on March 15, 1920. Five years from that date were allowed by statute within which to assess *906 and collect the tax for 1919. This gave the respondent until March 15, 1925, to assess and collect the tax unless a consent in writing was entered into in accordance with the statute. Under date of February 28, 1925, within the lawful assessment period, the petitioner and the Commissioner entered into a written consent as provided by section 278(c) of the Revenue Act of 1924, extending the assessment period until December 31, 1925, and in the event of the mailing of a deficiency notice and an appeal was filed with the Board therefrom, the time for assessment would be further extended until the final decision by the Board. The deficiency notice was mailed December 31, 1925. Since, by virtue of the written consent, the respondent still has the right to assess a deficiency, neither the assessment nor the collection thereof is barred by the period of limitation. The respondent has, under the Revenue Acts of 1924*3690 and 1926, six years from the time of the assessment in which to collect. ; .
With respect to the deduction claimed on account of the alleged bad debt, it appears that this debt was owing to petitioner from the corporation of which he was the sole stockholder, and that the petitioner voluntarily canceled this obligation and forgave the indebtedness. This is not such a situation as would authorize a deduction on account of a bad debt provided by statute. In order that a debt may be allowed as a deduction as a worthless debt, it must appear that during the taxable year the taxpayer ascertained that the debt could not be collected. Unless the debt was in fact wortheless and was ascertained and charged off for that reason during the taxable year, the deduction is not permitted. It does not appear that this was the case with respect to the debt here involved but that the debt was forgiven and canceled. While there is evidence to the effect that the petitioner turned over to the bank, in satisfaction of the bonds and accrued interest, the assets of the corporation, there is no evidence*3691 as to the year in which this was done. While the corporation's property was sold to Simmons in 1918 and was taken back some time during that year, the testimony is indefinite as to when the assets were turned over to the bank in settlement of the bonds and interest. A witness testified that this was done within a year after the property was reacquired from Simmons, but the record does not disclose when the property was reacquired from Simmons. It may well have been in 1919 when the assets were turned over to the bank and it became definitely known that any indebtedness which the corporation owed the petitioner could not be paid even if we should disregard the fact that the petitioner had forgiven the indebtedness.
In view of all the evidence relating to this matter, we are of the opinion that the petitioner is not entitled to a deduction claimed on account of the bad debt in 1918.
*907 With respect to the inventory question, it appears from the evidence that the petitioner had been engaged in the cotton business, handling the kind of cotton dealt in during the taxable year, for approximately fifty years and was familiar with the market prices of that character of cotton. *3692 He determined the market price of the cotton on hand to be $134,000. On account of the petitioner's long experience and familiarity with the market prices of the property dealt in by him, and the fact that no conflicting or impeaching testimony was introduced, we accept the petitioner's valuation of $134,000 as the market price of his cotton on hand at the close of the calendar year 1919. In our opinion, the market value of this cotton was $134,000 at the close of 1919.
Judgment will be entered on 15 days' notice, under Rule 50.