*2687 Commissioner's determination refusing a deduction for a bad debt approved where the evidence does not indicate an ascertainment of worthlessness in the year in which the deduction was taken.
*23 This is a proceeding for the redetermination of a deficiency for 1920 in the amount of $724.04. The deficiency results from the action of the Commissioner in disallowing a deduction from gross income of $31,251.72 for bad debts. The facts were stipulated.
FINDINGS OF FACT.
The petitioner, on December 31, 1920, was a creditor of the Bar D Cattle Co. in the sum of $31,251.72, exclusive of interest.
The books of the Bar D Cattle Co., debtor of the petitioner in this case, show the following:
Capital stock outstanding on December 31, 1919, $24,000; surplus as at that date, $2,052.09. Capital stock outstanding on December 31, 1920, $24,000; deficit as at that date, $71,855.63. Net deficit, December 31, 1920, $47,855.63. Notes outstanding on December 31, 1920, of the Bar D Cattle Co., the debtor of the petitioner, amounted to $186,115.28. Of this amount*2688 the following were unsecured:
| To John Lutz and his wife | $31,251.72 |
| H. H. Anderson | 11,016.00 |
| Denver Live Stock Commission | 31,985.56 |
However, these notes were endorsed by the petitioner and they have been included in one computation as secured. The total liabilities considered as having priority over the claim of the petitioner amounted to $143,847.56. The assets on December 31, 1920, amounted to $139,400.29.
During the latter part of 1920, the Bar D Cattle Co., debtor corporation to the petitioner, became financially embarrassed, and its creditor, the bank, insisted on liquidation, which was started in 1920 and practically completed in 1922, although the corporation is still in existence and there are liabilities still to be paid.
The petitioner was a stockholder to the extent of one-third of the capital stock outstanding, namely $8,000. The original return claimed a deduction amounting to the petitioner's investment in the *24 stock of the Bar D Cattle Co., plus 60 per cent of his claim on the Bar D Cattle Co. for advances made. The respondent has allowed the claim of the full amount of the investment in the capital stock, but disallowed the*2689 60 per cent of his claim for advances. The petitioner now claims the full amount of the advances made.
The Bar D Cattle Co. is on the accrual basis and the petitioner is on cash receipts and disbursements basis. The petitioner kept no books.
OPINION.
SIEFKIN: The sole question is whether petitioner is entitled under section 214(a)(7) of the Revenue Act of 1918, to deduct from 1920 gross income certain indebtedness due from the Bar D Cattle Co. It appears that the books of the debtor at the end of the year 1920 showed liabilities $4,447.27 in excess of the book value of the assets, which were prior to petitioner's claim. Such assets, as shown by the balance sheet of the debtor introduced in evidence, consisted largely of live stock.
Although the financial condition of the debtor, as disclosed by its books, may have looked black to petitioner in the year 1920, the fact remains that the debtor corporation was still to be liquidated, and is not entirely liquidated even now. We do not know whether the assets and liabilities as shown by the books of the debtor correctly reflected the amounts available to the petitioner. The fact that the petitioner took a deduction of only*2690 60 per cent of the debt in his return for 1920 is some indication that at that time he did not consider the debt wholly worthless, as it must be to permit a deduction under the Revenue Act of 1918. We do not believe that the petitioner has satisfied the requirement of the statute in ascertaining the debt to be worthless.
Judgment will be entered for the respondent.
Considered by TRAMMELL, MORRIS, and MURDOCK.