*2615 BAD DEBT. - Petitioner had extended credit to a tobacco company which became bankrupt in November, 1921. The company's direct liability on loans and its indirect liability on discounted trade acceptances totaled $141,713.23. On December 30, 1921, petitioner's directors in the exercise of prudent business judgment determined $30,073.23 of the debt to be worthless and charged off that amount. Held that said $30,073.23 was a proper bad debt deduction from gross income of 1921.
*686 The respondent has determined the following deficiencies in petitioner's income and excess-profits taxes: $4,732.91 for 1919, $4,228.39 for 1920, and $10,939.32 for 1921. For the year 1922 respondent determined an overassessment in the amount of $1,704.75.
The respondent has made a motion that the Board dismiss the petition with respect to the year 1922 for lack of jurisdiction. The petitioner's return for the year 1922 showed a tax of $3,700.79 and the respondent has determined an overassessment of $1,704.75 for that year. No deficiency having been determined*2616 for the year 1922, the Board lacks jurisdiction as to that year and respondent's motion to dismiss is granted. .
The petitioner and respondent have agreed and stipulated as to three of the assignments of error and the only remaining issue is whether petitioner is entitled to a deduction for 1921 of $30,073.23 as bad debts.
FINDINGS OF FACT.
The petitioner is a National Bank duly organized under the laws of the United States, having its principal office at Tampa, Fla.
*687 It has been agreed and stipulated that for the year 1920 petitioner is entitled to further deductions as ordinary and necessary business expenses in the amounts of $197 expended for advertising calendars and $284.80 expended for repairs to adding and bookkeeping machines used in the bank.
With respect to the amount of nonexempt interest received by petitioner from United States obligations, the parties have agreed and stipulated the following:
| 1919 | 1920 | 1921 | |
| Correct amount received by petitioner | $22,073.03 | $26,081.78 | $23,557.87 |
| Amount respondent included in petitioner's taxable income | 26,535.81 | 27,635.15 | 18,620.62 |
*2617 Francisco Arango y Ca, hereinafter referred to as the Arango Co., was a Florida corporation engaged in the tobacco business at Tampa. During 1919, 1920, and a part of 1921, petitioner extended credit to the Arango Co. by making loans to it direct and also by discounting its trade acceptances.
Owing to a strike in Tampa in 1921 among the cigar makers, and other conditions, the Arango Co. became unable to meet its obligations and on November 29, 1921, a petition in bankruptcy was filed against it. At that time the Arango Co. was liable to petitioner on direct and indirect obligations totaling $141,713.23, consisting of the following:
| Direct obligations (loans) | $68,500.00 |
| Overdraft | 4,373.23 |
| Trade acceptances of W. J. Seidenberg & Co., discounted for the company | 21,000.00 |
| Trade acceptances of Casa del Rey Co., discounted for the company | 32,500.00 |
| Trade acceptances of H. M. Lott, discounted for the company | 15,340.00 |
| Total | 141,713.23 |
On March 25, 1920, a guarantee of the Arango Co.'s indebtedness to petitioner was given by Francisco Arango, William J. Seidenberg, and Jose Villazon, as follows:
The purpose of this letter is to guarantee all of the indebtedness*2618 of Francisco Arango y Company to the Exchange National Bank of Tampa, Florida, up to $100,000 in amount, no matter how said indebtedness may be evidenced, whether by notes, bills of exchange, endorsements, acceptances, or in whatsoever form they may be; and likewise to guarantee any future indebtedness that may be due and owing from Francisco Arango y Company to the Exchange National Bank of Tampa, up to $100,000 in amount, no matter how the same may be evidenced, whether in the form of notes, bills of exchange, endorsements, acceptances or in whatsoever form they may be. This guarantee to continue indefinitely until the same may be released or discharged by the voluntary action of the bank, or by the payment of any and all indebtedness due or that may become due in the future.
*688 In December, 1921, Francisco Arango assumed the said guarantee of the Arango Co.'s debts up to $100,000 and executed a mortgage on his property located in Havana, Cuba, which the petitioner accepted as security. Francisco Arango had put practically all he owned into the company in his effort to stave off the bankruptcy proceedings.
Francisco Arango was a stockholder in and a director of the*2619 petitioner which on November 29, 1921, had a capital of $250,000 and a surplus of $500,000. Under the National Bank Law the petitioner's legal lending limit on direct obligations of any one corporation or individual was 10 per cent of its combined capital and surplus, or $75,000.
The Casa del Rey Co. of New York dishonored its trade acceptances and claimed them to be accommodation paper. H. M. Lott, a tobacco dealer in Tampa, refused to honor his trade acceptances because he had not received the tobacco which he had purchased and the bankruptcy proceedings tied up the assets of the Arango Co. Lott had agreed to take the tobacco from the Arango Co. in an effort to help it, but the price of tobacco having dropped, he refused to honor his trade acceptances. W. J. Seidenberg & Co. of Chicago had become financially involved and its capital had been impaired, so it determined to liquidate, but advised the petitioner that it would pay a part of its obligations on its trade acceptances.
On December 12, 1921, at a special meeting, the bankruptcy of the Arango Co. was reported to the petitioner's board of directors, who authorized the president of the bank to accept the above-mentioned*2620 mortgage as security for Francisco Arango's guarantee. The directors adopted the policy of allowing Arango a period of five years to work out the indebtedness, for in their judgment that was the only hope they had of recovery of the funds. At that time there was in force in the Republic of Cuba a moratorium under the provisions of which Cuban debtors could not be required to pay their debts until such moratorium was discontinued. It was doubtful if the mortgage could be foreclosed and, further, land values in Havana had decreased, due to the business depression and the moratorium. While petitioner accepted the mortgage as security, it looked to Arango's future earning capacity for the recovery of the debts guaranteed by him.
Petitioner's board of directors held a meeting on December 30, 1921, at which the bank examiner's report as of November 17, 1921, and a letter of the Comptroller of Currency were read. Both the letter and the report criticised the bank on the amount of the indebtedness of the Arango Co. The officers and directors and particularly *689 the finance committee of the bank, after having given full consideration to all the facts pertaining to the situation, *2621 were convinced that the bank would lose a considerable portion of the debt of $141,713.23 and they determined that a portion thereof was then worthless and directed a charge-off of the following items:
| 7 trade acceptances of Casa del Rey Co., past due and dishonored | $17,500.00 |
| 2 trade acceptances of H. M. Lott, dishonored | 8,200.00 |
| Cash overdraft of the Arango Co | 4,373.23 |
| Total | 30,073.23 |
That amount of $30,073.23 was ascertained to be bad debts and charged off by petitioner at the close of the year 1921. Petitioner deducted that amount from gross income in its return for 1921, and respondent disallowed the deduction.
In 1922 petitioner brought suit against the Casa del Rey Co. and obtained judgment, but it has never been able to collect any portion of the total of $32,500 due in 1921 on that company's trade acceptances and petitioner's loss proved to be $32,500 instead of only $17,500 written off in 1921.
During 1922 petitioner and H. M. Lott arrived at some agreement concerning the delivery of the tobacco he had purchased from the Arango Co. and petitioner received about $5,655.34 in cash from Lott. Also, during 1922 petitioner received several payments*2622 from W. J. Seidenberg & Co. and $13,580.70 in two dividends from the bankruptcy court on the obligations of Arango Co., making a total recovery of $32,998.20.
Petitioner had to look to Francisco Arango for the balance of the debt. The Comptroller of Currency required petitioner to write down Arango's debt to $75,000, the bank's legal lending limit to any one person, so at the close of the year 1922 petitioner applied the collections against the total remaining debt and wrote off as a bad debt an amount which would leave a balance of $75,000.
Up to the time of the hearing Francisco Arango had from time to time paid petitioner a total of $43,000 on the indebtedness and there remained an unpaid balance of about $57,000.
OPINION.
TRUSSELL: The law in respect to the charge-off or write-down of debts in the year 1921, as found in section 234(a)(5) of the Revenue Act of 1921, is as follows:
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*2623 * * *.
*690 There is no dispute in the case at bar with respect to the law, which is applicable nor with respect to the fact that a part of the debt was charged off in 1921. The issue is whether in 1921 the debt was worthless in part.
On the last of November, 1921, the Arango Co. was indebted to petitioner on direct and indirect obligations in the amount of $141,713.23 and at that time it became bankrupt. During the month of December the petitioner's directors had the matter under consideration and in the exercise of their reasonable business prudence and judgment ascertained that the debt was then worthless to the extent of $30,073.23, which was charged off. The facts of record sustain their judgment.
The obligations of the Casa del Rey Co. amounted to $32,500 and in December, 1921, petitioner charged off $17,500 as worthless. Subsequent events occurring in 1922 showed that petitioner could not recover any part of the $32,500.
The obligations of H. M. Lott amounted to $15,340 and in December, 1921, petitioner charged off $8,200 as worthless. Petitioner recovered from Lott about $5,655.34 in cash. The record discloses some testimony to the effect that in 1922*2624 Lott agreed to pay petitioner $8,200 in addition to the said cash payment, but the testimony is not clear on that point. However, it is definitely established that the total amount recovered up to the date of the hearing was $32,998.20 received from the bankruptcy court, H. M. Lott, and W. J. Seidenberg & Co.
The Arango Co. had direct obligations to petitioner amounting to $68,500 on account of loans and $4,373.23 resulting from an over-draft and it also had indirect obligations on the various trade acceptances. In December, 1921, petitioner charged off $4,373.23 of the Arango Co.'s obligations which were guaranteed up to $100,000 by Francisco Arango, personally. The only security he could give petitioner was a mortgage on property in Havana, Cuba, which mortgage constituted very uncertain security due to the conditions then prevailing in Cuba. The most that petitioner could look forward to was the hope that Arango would get back in business and pay off the debt. Over a period of years petitioner has received from Arango $43,000 and there still remains an unpaid balance of $57,000.
In view of all the facts and circumstances here detailed, we are of the opinion that the directors*2625 of the petitioner bank were fully justified in their conclusions reached in 1921 that out of the $141,713.23 indebtedness, at least $30,073.23 was worthless. Furthermore we are of the opinion that the deduction of that amount agreed upon by petitioner's directors in the exercise of prudent business judgment *691 should be allowed as a deduction from gross income for the year 1921, which is in accord with both the letter and spirit of section 234(a)(5) of the Revenue Act of 1921, and Treasury Department Regulations 62, articles 151 to 155, inclusive, made in respect thereto. Cf. .
Upon the recomputation of the taxes for the years 1919, 1920, and 1921, proper adjustments should be made in accordance with the stipulations set forth in the findings of fact and the decision herein with respect to the deduction of $30,073.23 charged off as worthless debts in the year 1921.
Judgment will be entered pursuant to Rule 50.