*3246 Where the petitioner in the year 1921 charged off on its books the amount of an investment in Imperial Russian Government bonds purchased in prior years, but did not during the taxable year dispose of the bonds, and where it appears that the bonds were not worthless at the close of the taxable year but had a readily realizable value of at least 10 per cent of their cost to the petitioner, held, that no deductible loss was sustained.
*467 A deficiency has been determined for the calendar year 1921 in the amount of $3,358.08. The total deficiency results from the disallowance by the Commissioner of the deduction of an amount claimed by the petitioner in its income and profits-tax return for 1921 as a debt ascertained to be worthless and charged off during the taxable year.
FINDINGS OF FACT.
During the year 1921 the petitioner was the owner of certain Imperial Russian Government bonds consisting of $40,000 par value *468 of 6 1/2 per cent bonds dated June 18, 1916, and due June 18, 1919, and $11,000 par value of*3247 5 1/2 per cent bonds dated December 1, 1916, and due December 1, 1921. It had purchased the 6 1/2 per cent bonds on July 10, 1916, and the 5 1/2 per cent bonds on May 31, 1917, at their par value.
In March, 1917, the Imperial Russian Government was overthrown. The Soviet Government in 1918 repudicated certain financial obligations of the Imperial Russian Government, among which were the bonds held by the petitioner herein. The petitioner last received interest on the 6 1/2 per cent bonds on January 11, 1919, and on the 5 1/2 per cent bonds on June 6, 1919. It has received no further payments of interest or principal on any of the bonds since the above dates.
Several times during the year 1921 the state banking commissioner for the State of Michigan directed the petitioner to write off its books the above described bonds to the full extent of their par value. The officers of the bank discussed this matter and came to the conclusion during the year 1921 the these bonds were worthless and should be charged off as the state banking commissioner directed. The petitioner, therefore, charged the full amount of the par value of the bonds, to wit, $51,000.00, to profit and loss*3248 account.
On March 10, 1922, the state banking commissioner wrote the petitioner the following letter:
In order that your records may more clearly indicate the exact condition of your institution, we desire to request that a definite reserve be set up for your investment in Russian bonds. It is our understanding that this reserve account will carry a credit balance of $51,000.00.
As of December 31, 1921, the petitioner set up in its books under an account entitled "Reserve" an item of $72,266.97, of which amount $61,558.74 was taken from "Premium Account" and $10,708.23 from "Unearned Discount on U. S. Bonds." It also transferred from the "Reserves" account the item of $51,000 which it entered as of December 31, 1921, in an account entitled "Special Reserve Account," with the following notation:
This account set up to take care of loss on bonds of the Imperial Russian Government
Pur. July 10, 1916, due June 1919. Int Pd to Jan. '19-40M
Pur. May 31, 1917 due 12/1/21 Int Pd to June 1919 11M
The above in accordance with instructions from State Banking Dept.
At the close of the year 1921 each class of the above-described bonds was quoted on the exchange at about 10*3249 per cent of their par value.
During the year 1921 all of the bonds in question were held by the National City Bank of New York with which they had been deposited *469 by the petitioner under an agreement referred to as a "Certificateholders' Protective Agreement." This agreement conferred a power of attorney and agency on a designated committee empowered to act on behalf of the petitioner and other owners of similar bonds in the matter of disposing of such bonds to the best interest of the bondholders, but did not make any guaranty to the petitioner or other bondholders for the recovery of any amount whatsoever.
The petitioner kept its books on the cash receipts and disbursements basis. In its return for the year 1921 it deducted as a bad debt loss the amount of $51,000, representing its total investment in the above-described bonds.
OPINION.
SMITH: The only allegation of error contained in the original petition filed with the Board is that:
The Commissioner disallowed as a deduction from gross income in computing net taxable income for the year 1921 an amount of $51,000 representing a loss claimed by the taxpayer corporation in its return for the said year as*3250 originally filed.
At the hearing of this proceeding the petitioner, by leave of the board, amended its petition by adding the following assignment of error:
The Commissioner erred in disallowing as a deduction from gross income, in computing the net taxable income for the year 1921, an amount of $51,000 representing a debt ascertained to be worthless and charged off within the taxable year.
After the taking of testimony the petitioner, with leave of the Board, further amended its petition by assigning as error the failure of the respondent to allow the petitioner as a deduction from gross income of the year 1921 a portion of the cost of the Imperial Russian Government bonds as a partial bad debt.
It is the petitioner's contention that it sustained a loss in the year 1921 in the amount of at least the difference between the cost to it of the bonds in question and their market value at the close of the year 1921, and that either under the provision contained in the Revenue Act of 1921 for the deduction of "losses sustained" or under the provision for the deduction of "debts ascertained to be worthless" it should be allowed to deduct its loss in its income-tax return for 1921.
*3251 The section of the Revenue Act of 1921 upon which the petitioner relies reads in part as follows:
SEC. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise; * * *
(5) *470 Debts ascertained to be worthless and charged off within the taxable year (or in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.
The petitioner's statement in its petition that it relies upon sections 214(a)(4) and (7) is obviously in error, since section 214 pertains to individuals and not corporations.
The facts in this case do not appear to differ in any material respect from those in , where the petitioner was seeking a deduction in the year 1921 on account of an alleged loss on its investment in Imperial Russian Government bonds similar to those involved in the case before us. We held in*3252 that case that an investment in such bonds is not a debt within the meaning of the bad debt provision of the Revenue Act of 1921 and prior and subsequent acts, and that the loss sustained on account of such an investment is not deductible under such provision. That decision, we believe, is controlling in the case before us. We therefore need not further consider whether the petitioner has complied with all of the requirements of the bad debt provision of the act.
We also held in , that the petitioner could not take a deduction on account of a loss on its investment in the bonds under the loss provision of the statute since it had realized no loss on account of its investment during the taxable year. In the case before us it does not appear that the petitioner actually sustained a loss in the year 1921 in respect of its holdings in the bonds in question. It did not sell or otherwise dispose of the bonds during the taxable year nor is there any evidence that the bonds were not worth equally as much on the market at the beginning of the year as at its close. The mere fact that the petitioner deemed the bonds worthless and*3253 charged the full amount of their cost to profit and loss account and set up a reserve to cover its theoretical loss at the close of the year 1921 does not establish that it sustained any actual loss in that year. The evidence further shows that the bonds had a market value at the close of the year 1921 of at least 10 per cent of their face value. It is not in evidence that the bonds have ever been disposed of by the petitioner. We are of the opinion that the petitioner did not sustain any loss in the year 1921 in respect of its investment in the bonds for which the statute authorizes a deduction in computing taxable income. See ; ; ;
Judgment will be entered for the respondent.