*3360 1. Debts of German nationals discharged by payment of the amounts thereof in 1918 to the Treuhander, held deductible in 1918 as losses under section 214(a)(4) and (5) of the Revenue Act of 1918 and not in 1920 as bad debts.
2. Where practically all of the facts claimed to be determinative of worthlessness were ascertained in a prior year, and, furthermore, the debts were but partially charged off within the taxable year, deduction in the taxable year is not authorized by section 214(a)(7) of the Revenue Act of 1918.
*1325 This proceeding results from the determination of a deficiency in income tax for the calendar year 1920 amounting to $7,114.04.
*1326 Petitioner alleges error in the failure to allow the deduction from income of bad debts amounting to $59,179.84.
FINDINGS OF FACT.
Petitioner is the executor of the estate of Felix Fezandie, deceased, appointed by the Surrogate's Court of the County of New York, State of New York, on December 18, 1923.
(a) At the declaration of war on April 6, 1917, between Germany and the United*3361 States, Felix Fezandie, the deceased, had acquired in the conducting of his business in New York as an importer of chemicals and dyes certain deposits and accounts receivable in Germany. These accounts and deposits were unpaid on January 1, 1920.
(b) These accounts and deposits were found by the Mixed Claims Commission, United States and Germany, on November 19, 1925, as the result of claims filed with that body, in words and figures as follows:
UNITED STATES OF AMERICA ON BEHALF OF HECTOR FEZANDIE, Executor of the Estate of Felix Fezandie, Deceased, Claimant,
Docket No. 6357
List No. 6257
This cause having come before the Commission for a decision, the American and German Agents having been heard, the cause having been finally submitted and due consideration having been had, the Commission finds:
That a private debt in the amount of Marks five thousand (M. 5000.00) was due and owing as of April 6, 1917, from Gebruder Appolt G.M.B.H., Chemische Fabrik, a copartnership consisting of German nationals, having its place of business at Sulzbach bei Saarbrucken, Germany;
That a private debt in the amount of Marks fourteen thousand seventy-two and sixty Pfennigs (M. 14,072.60) *3362 was due and owing from Arzberger, Schoepff and Company, a copartnership consisting of German nationals, having its place of business at Eisenach, Germany, which sum was turned over by said debtor firm to the Treuhander on October 16, 1918;
That a private debt in the amount of Marks fifty-seven thousand six hundred fifty-three and eighty Pfennigs (M. 57,653.80) was due and owing from L. Pfeiffer, a German national, residing at Cassel, Germany, which sum was turned over by the debtor to the Treuhander on March 13, 1918;
That a private debt in the amount of Marks ten thousand (M. 10,000.00) was due and owing as of April 6, 1917, from Gebruder Heyl and Company, a copartnership consisting of German nationals, having its place of business at Charlottenburg bei Berlin, Germany;
That a private debt in the amount of Marks sixteen thousand four hundred twenty-one and seventy-five Pfennigs (M. 16,421.75) was due and owing as of April 6, 1917, from Samuel Friedrich Holtzapfel, a German national, residing at Grub bei Coburg, Germany;
That a private debt in the amount of Marks twenty-nine thousand nine hundred ninety-six (M. 29,996.00) was due and owing as of April 6, 1917, from Carl Jager, *3363 a German national residing at Dusseldorf, Germany;
*1327 That a debt consisting of a bank balance in the amount of Marks one hundred forty-four thousand fifty and thirty-five Pfennigs (M. 144,050.35) was owing as of April 6, 1917, from L. Pfeiffer, a German national, residing at Cassel, Germany;
That a private debt in the amount of Marks five thousand eight hundred forty-five and fifty Pfennigs (M. 5845.50) was due and owing as of April 6, 1917, from Carl Raspe, a German national, residing at Weissensee bei Berlin, Germany; and
That a private debt in the amount of Marks fifteen thousand eight hundred seventy-six and ten Pfennings (M. 15,876.10) was due and owing from L. Vossen and Company, a copartnership consisting of German nationals, having its place of business at Aachen, Germany, which said sum was turned over by said debtor to the Treuhander on May 31, 1918,
To Hector Fezandie, Executor of the Estate of Felix Fezandie, deceased, claimant as aforesaid, an American national, residing at New York, New York, which debts have not since been satisfied.
WHEREFORE, in accordance with the decisions heretofore made, the Commission decrees that under the Treaty of Berlin*3364 of August 25, 1921, the Government of Germany is obligated to pay to the Government of the United States on behalf of Hector Fezandie, Executor of the Estate of Felix Fezandie, deceased, the sum of forty-nine thousand fifty-three dollars and two cents ($49,053.02) with interest on thirty-three thousand eight hundred ten dollars and eighteen cents ($33,810.18) of said amount at the rate of five per cent per annum from January 1, 1920; with interest on two thousand four hundred forty-eight dollars and sixty-four cents ($2,449.64) of said amount at the rate of five per cent per annum from October 16, 1918; with interest on ten thousand thirty-one dollars and seventy-six cents ($10,031.76) of said amount at the rate of five per cent per annum from March 13, 1918, and with interest on two thousand seven hundred sixty-two dollars and forty-four cents ($2,762.44) of said amount at the rate of five per cent per annum from May 31, 1918, to the date of payment respectively.
Done at Washington, D.C., November 19, 1925.
(Signed) CHANDLER P. ANDERSON
American Commissioner.
(Signed) W. KEISSELBAGE
German Commissioner.
(c) In addition to the accounts against German nationals*3365 listed above the deceased held an account receivable on January 1, 1920, against Gebruder Vossen of Aachen, Germany, in the sum of marks 50,000.
(d) At the time of the declaration of war between the United States and Austria-Hungary, Felix Fezandie, the deceased, was the sole owner of the following account receivable, to wit, a private debt in the amount of kr. 75,816.63 due and owing from Bleiberger Bergworks Union, a corporation of Austria, owned by Austrian nationals, having its place of business at Klagenfurt, Austria. Claim for this account has been filed with the Tripartite Claims Commission, to which the United States and Austria are parties, but has not yet been decided.
*1328 (e) The respective amounts of the accounts and deposits, referred to above, on December 31, 1920, and their cost to the deceased were as follows:
| Marks | Dollars | |
| Gerbruder Appold | 5,000.00 | $987.00 |
| Samuel Friedrich Holtzapfel 1 | 24,418.75 | 4,916.76 |
| Carl Jager | 29,996.00 | 5,393.52 |
| L. Pfeiffer | 144,050.35 | 27,653.29 |
| Carl Raspe | 5,845.50 | 1,075.82 |
| Arzberger Schoepff2 | - 14,072.60 | |
| L. Pfeiffer 2 | -57,653.80 | 9,407.41 |
| Gebruder Vossen 2 | -50,000.00 | |
| L. Vossen & Co | 15,876.10 | 3,109.38 |
| Arzberger Schoepff | (balance written off) | 135.35 |
| AUSTRIAN ACCOUNT | ||
| Kronen | ||
| Bleiberger Bergwerke Union | 75,816.63 | 6,502.20 |
| 59,180.73 | ||
| Less difference in Holtzapfel account | 1,609.90 | |
| Amount claimed herein | 57,570.93 |
Inasmuch as the amount of the claim filed in this account was $1,609.80 less than shown by the books, the total is reduced by this difference.
(f) None of these accounts were paid on December 31, 1920, nor had any payment been made upon them since April 6, 1917.
(g) As of December 31, 1920, the deceased made upon his journal the following entries:
| December, 1920 | ||
| Page. | ||
| 192. | ||
| 140. A 31 Prof. and Loss a/c, to sundries, Dr. | ||
| 256. L. Pfeiffer, Old a/c: | ||
| Mks. 145,479.34, book value | $27,653.29 | |
| At 1 3/4 act. value | 2,545.89 | |
| $25,107.40 | ||
| 346. 31 Arzberger, Sch & Co.,diff. to balance | 135.35 | |
| 262. 31 L. Vossen & Co., Old account: | ||
| Mks. 15000, book value | $3,109.38 | |
| At 1 3/4 act. value | 262.50 | |
| 2,846.88 | ||
| 276. 31 Gebr. Appolt: | ||
| Mks. 4505, book value | $987.00 | |
| Act. value 1 1/2 | 67.58 | |
| $919.42 | ||
| 292. 31 Carl Raspe: | ||
| Mks. 5845.50, book value | 1,075.82 | |
| At 1 3/4 | 102.30 | |
| 973.52 | ||
| 296. 31 Carl Jaeger: | ||
| Mks. 29996 | 5,393.52 | |
| 1 3/4 act | 524.93 | |
| 4,868.59 | ||
| 306. 31 Sam. Fried. Holtzapfel: | ||
| Mks. 24,418.75, book value | 4,916.70 | |
| 1 3/4 | 524.93 | |
| 4,391.83 | ||
| 193. | ||
| 310. Vereing Farb Urban: * | ||
| Mks. 28,630.22, book value | 6,237.67 | |
| At 1 3/4 | 501.02 | |
| 5,736.65 | ||
| 360. Blieb B. Union: | ||
| A Kr. 75,816.63, book value | 6,502.20 | |
| At 31 1/2 per kron | 238.82 | |
| 6,263.38 | ||
| 380. Treuhander fur das feindl. verniagen: | ||
| Mks. 121,726.40 | 9,407.41 | |
| 1 3/4 act. value | 2,130.21 | |
| 7,277.20 | ||
| Total | 58,520.22 | |
| * Less Vereing Farb Urban account which was settled | ||
| privately by the debtor subsequent to 1920 and not | ||
| made a part of his claim filed in 1923 with Mixed | ||
| Claims Commission | 5,736.63 | |
| Balance | 52,783.57 |
*3367 *1329 These items totaling $52,783.57 were credited to the individual accounts of the debtors appearing in the petitioner's general ledger and charged to profit and loss.
(h) Of the total amount of the above accounts, i.e., $59,180.73, the deceased credited the debtor accounts and charged profit and loss on December 31, 1920, with a total of $52,783.57 and carried balances in the individual accounts in the total amount of $6,397.16.
(i) On the tenth day of September, 1920, the deceased entered into a contract with one Oscar E. Sperrle for the formation of a copartnership as follows:
The following articles of copartnership have been entered into this tenth day of September in the year one thousand nine hundred and twenty, by and between FELIX FEZANDIE, of the Borough of Manhattan, City of New York, and OSCAR E. SPERRLE of the Borough of Richmond, City of New York, that is to say: FIRST: The parties to these presents have agreed, and by these presents do agree to become copartners in trade under the firm name of FEZANDIE & SPERRLE for the purpose of carrying on the business of exporting, importing and selling colors and dyes in the City of New York and elsewhere.
*3368 *1330 SECOND: The said copartnership shall commence on the first day of January, 1921, and shall continue for a period of five years from said date, that is to say until the first day of January, 1926.
THIRD: The said Felix Fezandie will invest and contribute as or for the capital stock of the said copartnership, the amount which shall be shown on the books of the present business owned and conducted by him at 205 Fulton Street, New York, as the net value of such business, including stock and outstanding accounts, on the first day of January, 1921, after the books shall have been balanced and account of stock taken for the previous year, to the end that the said Oscar E. Sperrle may acquire an interest in said business and capital stock, he shall pay to the said Felix Fezandie on the first day of January, 1921, or as soon thereafter as the net value of said business shall have been ascertained, the sum of Ten Thousand Dollars ($10,000) and at the beginning of each year thereafter during the continuance of the copartnership the further sum of Two Thousand Dollars ($2,000) or such additional amount as he may desire, but in no event shall the total sum or sums so paid to the*3369 said Felix Fezandie by the said Oscar E. Sperrle or the amount of his interest in the business so purchased by him exceed one-half the net value of the business at any time, and the extent of his interest shall be measured by the amount so paid.
* * *
The following changes in the partnership contract of Fezandie & Sperrle have been agreed upon mutually today, to be effective as of January first, 1922.
Paragraph #3.
The capital of the business, for the purpose of partnership only is hereby fixed at $108,000, as of January first, 1922, making each share $54,000, equally, Oscar E. Sperrle to have the privilege to make payments as convenient during life of this contract.
* * *
Pursuant to the provisions of paragraph "Third" of this contract, the deceased transferred as of January 1, 1921, the assets of his individual business with the exception of (1) $12,045.06 in cash, (2) real estate valued at $21,401.50 net, (3) personal accounts due from his brother, and (4) all of the accounts with the German and Austrian debtors hereinbefore listed.
(j) The decedent, Felix Fezandie, was an inhabitant of the State of New York during the taxable year before the Board. Hector Fezandie, *3370 executor of the Estate of Felix Fezandie, deceased, was an inhabitant of the State of New York at the time of filing the petition in this case, and is an inhabitant of the State of New York at the time of this hearing. The return of the deceased for the taxable year 1920, was filed with the collector of internal revenue at New York, N.Y.
(k) The accounts described in paragraph (e) represent in general balances taken from debit entries in marks and dollars at varying rates and credit entries in marks and dollars at varying rates.
(1) The decedent did not claim all or any part of the abovementioned accounts as deductions in his return for the year 1920.
*1331 Under date of September 30, 1914, the Federal Council of Germany decreed that debts due and owing to British nationals should not be paid until further notice. If a debtor desired to satisfy his debt he had the right to pay the amount to the Reichsbank. On April 19, 1917, the Federal Council authorized the appointment of a Treuhander. Thereafter, any debtor who desired to satisfy his debt could satisfy it by payment to the Treuhander. On August 9, 1917, the decree of September 30, 1914, was made applicable to*3371 American nationals and the direct payment of obligations to American nationals was prohibited as also was the transmission of money or securities to the United States. Beginning with March, 1918, property belonging to American nationals was reported and/or turned over to the Treuhander.
Pursuant to the Treaty of Versailles, signed on June 28, 1919, as a forerunner to a possible adoption of a clearing house system under article 296, the Government of Germany on August 31, 1919, prohibited the direct settlement of debts owing from German nationals to nationals of the allied and associated powers.
On November 19, 1919, the Senate voted against ratification of the Treaty of Versailles without reservations, and on March 19, 1920, the Senate refused to ratify the treaty.
A treaty with Germany was signed on August 25, 1921, and ratifications were exchanged on November 11, 1921. A treaty with Austria was signed August 24, 1921, and with Hungary on August 29, 1921. Both treaties were subsequently ratified.
In 1919, decedent learned by correspondence with some of the debtors that direct payment to him was prohibited by the German Government.
The average rates of exchange for*3372 marks and Kronen were as follows: month of December, 1919, 65 cents per Krone, 2.10 cents per mark; month of December, 1920, 27 cents per Krone, 1.37 cents per mark.
OPINION.
LOVE: There is but one issue in this case. It relates to certain funds on deposit and accounts receivable, the property of decedent on April 6, 1917, when war was declared between Germany and the United States of America. One of the debts was owing by an Austrian corporation; all of the others were owing by German nationals.
In the return filed by decedent for the calendar year 1920 no deduction was claimed for the loss of the deposits and accounts receivable. It is now the contention of petitioner that the return was in error and the entire amount of the deposits and accounts receivable should have been allowed by respondent as a deduction *1332 from income. In the original petition claim was made for the deduction under the provisions of section 214(a)(4) and (5) of the Revenue Act of 1918, applying to "losses." In an amended petition filed upon motion duly made and granted, petitioner claims the deduction under the provisions of section 214(a)(7) specifically applying to "debts" ascertained*3373 to be worthless and charged off within the taxable year. The importance of the distinction lies in the fact that the statute permits bad debts to be deducted in the year in which ascertained to be bad, whereas it provides that losses are deductible only in the year in which suffered. ; ; ; .
It does not appear that the debtors were insolvent. The debts are claimed to have been practically worthless at the end of 1920 by reason of the situation which arose out of the World War and the subsequent peace negotiations. Petitioner contends that at the end of the taxable year the Treaty of Versailles had definitely failed of ratification and all that remained to decedent was a mere hope that sometime and somehow the respective governments would provide by treaty for payment of the debts. Respondent denies that the debts were ascertained to be definitely worthless and furthermore points out that decedent failed to charge off the debts within the taxable year as required by the statute.
*3374 Certain of the German debtors elected to discharge their obligations in 1918, as they were permitted to do under the decrees of the Imperial German Government, by payment of the amounts thereof to the Treuhander, an official corresponding broadly to our Alien Property Custodian. Thereafter there was no longer a debt. The property was transferred from private to public use; it was "confiscated," . It follows that a deduction, if allowable, would come within the loss provisions of section 214(a)(4) or (5). Thus was created a situation which we have already had occasion to consider in the , wherein we had this to say, in part:
* * * Since no provision was made for the ultimate return of the property or for compensation, the substance of the situation was that possession of and title to the property was taken from the taxpayers and vested in the German Government. All rights of the taxpayers in the property ceased, and it was only in the event that Germany should later, by treaty or otherwise, provide for its return or for compensation that any rights would arise in favor of the taxpayers.
*3375 * * *
We are accordingly of the opinion that the taxpayers sustained a loss in 1918 which they are entitled to deduct in their returns for that year.
We are of the opinion that the debts which were discharged by payment to the Treuhander in 1918, were definitely lost to decedent *1333 in that year and they are not deductible in the taxable year. Cf. .
The remainder of the debts owing by German nationals were not confiscated but direct payment of them by the debtors was prohibited by the German Government, so that they were in a state of suspension. Decedent had no present remedy but the right to sue would revive on the restoration of peace, . Being debts, they were deductible, if worthless, in the year in which their worthlessness was ascertained and they were charged off.
With reference to ascertainment of the facts by decedent, it appears that although the state of war with Germany endured technically until July, 1921, it was in 1919 that the ability to communicate with the debtors was restored to decedent and a search of his*3376 correspondence files shows that he was advised in 1919 by at least some of the debtors respecting the German decree prohibiting direct payment. In November of the same year the Senate refused to ratify the Treaty of Versailles without reservations. It is true that another vote was taken by the Senate in March, 1920, again resulting in rejection of the treaty. We do not see that anything occurred in 1920 of major significance with reference to the question of the worth of the debts and in our view, if the debts were indeed worthless, they were ascertained so to be by the decedent prior to the taxable year. This being so they are not deductible later. .
In view of our above opinion, we will be brief relative to the question of the charging off of the debts "within the taxable year." The accounts were only partially written off on the books in 1920. The journal entries are set out in the findings. After a careful consideration of the rather abbreviated explanations in the entries we believe decedent was endeavoring to write down the accounts to what he conceived was their then "actual value." The German debts were payable*3377 in marks, the Austrian in Kronen. Marks and Kronen were sadly depreciated in 1919 and 1920. Our conclusion that the debts were not charged off within the year is not altered by the failure of the partnership in the succeeding year to take over, or at least to enter upon their books at any value, the debts under consideration.
There is nothing in the record relative to the debt of the Austrian corporation which leads to a conclusion differing from the above.
Taking the record as a whole, we are not convinced of error on the part of the respondent in failing to revise the original return by an allowance of the bad debts claimed.
Judgment will be entered for the respondent.