*2186 1. The amount of debts ascertained to be worthless and charged off from the books of account for 1923 and 1924 determined.
2. Profits realized in 1923 and 1924 upon the sale in 1921 of certain shares of stock upon the installment basis, held not taxable as capital gains.
3. Where petitioner filed joint returns for himself and wife for 1923 and 1924 showing net losses for both years and the Commissioner in his audit of the returns determined a net income for each year, held that such income may not be taxed one-half to the petitioner and one-half to his wife as community income, the filing of the joint returns constituting an election binding on the petitioner.
*14 This proceeding is for the redetermination of deficiencies in income tax of $14,939.95 for 1923 and $13,343.46 for 1924. The issues are, (1) whether the petitioner is entitled to deductions of $59,975 for 1923 and $123,511 for 1924 on account of debts ascertained to be worthless and charged off in those years; (2) whether the profits realized in 1923 and 1924 from the sale of*2187 certain shares of stock are taxable as capital gains; and (3) whether the petitioner's income for 1923 and 1924 is community income taxable one-half to himself and one-half to his wife.
FINDINGS OF FACT.
The petitioner is a newspaper owner and publisher. In June, 1922, he formed a copartnership on an equal basis with one Richard Lloyd Jones to operate a chain of newspapers in the name of "Perry-Lloyd Jones Newspapers."
On March 1, 1923, the partnership, pursuant to an agreement entered into in December, 1922, acquired from the Reading Printing Company 90 per cent, or 540 shares of the 600 shares outstanding of the capital stock of the Reading Times Publishing Company, a corporation engaged in the publication of a newspaper at Reading, Pa. The remaining 60 shares of stock were acquired at that time by one William E. Hall. The partnership paid no consideration for the shares of stock acquired by it other than the assumption by the petitioner and Jones individually of a bonded indebtedness of the Reading Times Publishing Company in the amount of $160,000. Interest was not to be paid on the bonds for a period of three years. The bonds had been issued previously for the purpose*2188 of acquiring the assets of certain other newspapers operated by the Reading Printing Company and certain real estate owned by Hall. This real estate was conveyed by Hall directly to the Reading Times Publishing Company in exchange for $38,000 par value of the aforesaid bonds. The balance of the bonds were issued to acquire from the Reading Printing Company its plant equipment and other assets.
The aforesaid bonds bore interest at the rate of 5 per cent per annum and the principal became due March 1, 1943. The bonds were secured by a mortgage or deed of trust upon all of the assets, *15 tangible and intangible, of the Reading Times Publishing Company. There was an accelerating clause authorizing foreclosure of the mortgage upon default of any of the covenants relating to the bond issue.
The partnership, Perry-Lloyd Jones Newspapers, published the Reading Times from and after March 1, 1923. Shortly after that date the principal merchant of Reading, Pa., who theretofore had done a large amount of advertising in the Reading Times, established a rival newspaper in Reading - the Reading Tribune. The Reading Times soon lost about 80 per cent of its advertising to the rival*2189 paper. The assets of the Reading Times Publishing Company had but a small liquidating value. The real estate owned by it was set up on its books of account at $60,000, although it had been acquired for $38,000 par value of its bonds. The plant equipment had a liquidating value not to exceed $5,000 or $10,000. The circulation structure and good will of the Reading Times soon became unsalable and worthless.
The partnership, Perry-Lloyd Jones Newspapers, suffered operating losses almost from the date of its formation. Jones contributed no money to meet these losses. The petitioner had to advance money to meet operating deficits. By reason of a disagreement between Jones and the petitioner in 1923, it was decided to dissolve the partnership. It was computed in October, 1923, that the total losses of the partnership were in excess of $200,000. The partnership was dissolved in October, 1923, Jones paying to Perry $100,000 to meet his share of the losses. Upon the dissolution of the partnership the petitioner acquired the stock of the Reading Times Publishing Company, which was then worthless, and agreed to assume Jones' liability upon the bonds of that company.
The petitioner*2190 in 1923 advanced to the Reading Times Publishing Company $59,975, and in 1924, $123,511. The amounts advanced were used principally for purchases of supplies and for pay roll and other operating expenses. The books of account show that the operating loss of the Reading Times Publishing Company from March 1 to December 31, 1923, was $56,256.29, and for 1924, $117,39298.. These losses were without allowances to the petitioner and his secretary of any amounts for compensation to them.
The assets of the Reading Times Publishing Company at the close of 1923 consisted of its real estate, plant and equipment, and good will or circulation structure. The real estate and plant and equipment had but a small liquidating value and the good will of the paper was practically valueless. The petitioner endeavored to find a purchaser for the paper. The petitioner offered to give the shares of the Publishing Company to any person financially responsible who would assume the petitioner's liability upon the bonds of the company. No purchaser could, however, be found. Newspaper experts *16 after investigating the field invariably advised against the purchase of the paper. The petitioner*2191 was unwilling to cease publication of the paper, inasmuch as he would immediately have become liable to pay off the bonds in the amount of $160,000, and further because it would reflect seriously upon his other newspaper enterprises. He accordingly continued to advance money to meet the deficits of the Publishing Company. In the years 1925, 1926, and 1927 the petitioner continued to advance large sums of money to the Publishing Company to enable it to continue the publication of the newspaper. The rival newspaper continued in the field and the petitioner was unable to recover from the Reading Times Publishing Company any part of the monies which he had advanced to it.
Petitioner kept no regular set of books. His private secretary, who managed the details of his finances, kept a record of checks paid out and amounts owing to the petitioner. A file was kept for this purpose on a separate sheet for each debtor. Credits of payments by debtors were shown on these sheets. At the end of each year the secretary would check this record against statements furnished by the debtors. A separate sheet was kept for the account of the Reading Times Publishing Company and at the end of 1923*2192 the sheet for that year was placed in a dead file and a new sheet was started for the succeeding year. The advanced made to the Reading Times Publishing Company for 1923 were not carried forward on the 1924 sheet. The petitioner charged his secretary to claim the amounts in his income tax returns, prepared for him by his secretary, as bad debts ascertained to be worthless and charged off within the year.
The advances of the petitioner to the Reading Times Publishing Company in 1923 were ascertained to be worthless at the close of 1923, and those made in 1924 were ascertained to be worthless at the close of 1924.
In his income tax return for 1923 the petitioner claimed a deduction on account of "My loss from partnership in Perry-Lloyd Jones Newspapers" in the amount of $142,964.21. The following explanation of this item is contained in a statement attached to the petitioner's 1923 return:
| Richard Lloyd Jones and I entered into partnership operating a chain of daily newspapers. These papers in 1923 lost the following sums, which amounts I paid in to the papers: | |
| Minneapolis News (suspended publication) | $79,932.11 |
| Jacksonville Journal | 55,149.38 |
| Pensacola Journal | 20,846.66 |
| Charleston American (suspended publication) | 31,213.49 |
| Reading Times | 54,738.15 |
| New York Office | 4,084.42 |
| 242,964.21 | |
| Richard Lloyd Jones and I dissolved partnership, he buying my one-half interest in the Tulsa Tribune, Tulsa, Okla., for $250,000.00, while I took over his interest in the above papers and assumed his losses therein. | |
| Originally I purchased one-half of the Tulsa Tribune from Richard Lloyd Jones for the sum of $300,000.00. I had paid him $150,000.00 of this amount. In view of my assumption of his share of the above losses, he paid to me $250,000.00 and took back my one-half interest in the Tulsa Tribune, therefore, refunding to me $100,000 of the above losses | $100,000.00 |
| My net loss for 1923 | 142,964.21 |
*2193 *17 In his computation the Commissioner denied the loss deduction claimed on the return, stating in his deficiency letter that:
1. and 2. The deduction of $142,964.21 claimed under Item 4 of your return as a "Loss sustained in connection with the operation of various newspapers" has been disallowed. It appears that this amount represents advances made for the rehabilitation of several newspapers, which would indicate an investment of capital and therefore would not be deductible until the investment was proven worthless. In accordance with the information secured by the Agent and that submitted at the conference held in this office, three of the five newspapers, in connection with which the loss was claimed, were in operation and no decision had been reached as to whether or not a dissolution would be effected.
The loss claimed in connection with the Minneapolis News and Charleston American, which the agent has determined to be $98,346.32, is offset by the profit of $100,000.00 received from the sale of your interest in the Tulsa Tribune, resulting in a taxable profit of $1,653.65.
In his 1924 return the petitioner claimed a deduction of $96,374.19, representing*2194 an alleged loss sustained in respect of advances to the Reading Times Publishing Company, which the respondent has disallowed on the grounds that the corporation continued to operate after the close of the taxable year "and that a net asset value existed from which a part at least of the indebtedness to you could have been satisfied."
On September 18, 1921, the petitioner by written agreement negotiated a sale to Josephine S. Scripps of 190 shares of stock of the Star Publishing Company, a Washington corporation, 113 1/3 shares of stock of the Portland News Publishing Company, an Oregon corporation, and 34 1/2 shares of common stock and 63 5/6 shares of preferred stock of the Tacoma Times Publishing Company, a Washington corporation, for a total consideration of $640,000. The petitioner received $64,000 in cash and the balance in nine promissory notes of $64,000 each, one of which became due and payable on September 1 of each of the years 1922 to 1930, inclusive. Under the terms of the sale agreement, the said shares of stock were deposited with a trustee as security for the payment of the notes. *18 The respondent has computed petitioner's profit on the transaction on*2195 the installment sales basis at $55,473.15 in 1923 and $56,764.05 in 1924. Petitioner contends that the profits from this transaction are taxable as capital gains.
During the years 1922, 1923, and 1924 the petitioner and his wife were living together and were domiciled in the State of Washington. It was the petitioner's practice during the years 1918 to 1924, inclusive, to file a joint return for himself and wife when there was no net income and to file separate returns for himself and wife when there was net income to either. Separate returns were filed for the year 1922, in which the petitioner and his wife each reported one-half of the income earned by the petitioner. The petitioner and his wife filed joint returns for 1923 and 1924 showing a net loss in each year. The respondent determined that the petitioner had a net income of $80,514.67 in 1923 and $76,037.82 in 1924.
OPINION.
SMITH: 1. Petitioner alleges that the respondent erred, (a) in not allowing the deduction in 1923 of a bad debt of $59,975 due from the Reading Times Publishing Company, and (b) in not allowing as a deduction in 1924 a bad debt of $123,511 due from the Reading Times Publishing Company. The*2196 applicable statute is section 214(a) of the Revenue Act of 1921, which provides in part that in computing net income there shall be allowed as deductions:
(7) 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.
Article 151 of Regulations 62, promulgated under the provisions of the Revenue Act of 1921, provides in part:
Where all the surrounding and attending circumstances indicate that a debt is worthless, either wholly or in part, the amount which is worthless and charged off or written down to a nominal amount on the books of the taxpayer shall be allowed as a deduction in computing net income. There should accompany the return a statement showing the propriety of any deduction claimed for bad debts. * * *
The evidence adduced to prove the worthlessness of the debt of the Reading Times Publishing Company to the petitioner is voluminous.
In 1922 the city of Reading, Pa., appeared to offer a good field for the publication of a newspaper. *2197 The petitioner had had much experience in newspaper work and in the purchase and sale of newspapers and believed that he could make a success of the publication of the Reading Times. He, with his associate, was willing to assume, *19 and did assume, an indebtedness of the Reading Times Publishing Company of $160,000 for the assets which that company had, the principal one of which was the good will that attached to the name of the Reading Times. As soon as he took hold of the enterprise a rival newspaper was established in Reading which succeeded in getting most of the advertising in Reading. The assets of the Reading Times Publishing Company aside from the good will which attached to the name of the Reading Times, had but little value at the close of 1923 or 1924. The real estate owned by it was acquired for $38,000 of its bonds, and competent witnesses testified that the machinery was not worth more than about $5,000. The petitioner saw that he had a losing proposition on his hands soon after the rival newspaper was started. In a vain hope that he might eventually be able to dispose of the newspaper by finding a responsible purchaser who would assume the bonds of that*2198 company, he continued to advance money to the Publishing Company to enable it to carry on. The evidence establishes beyond a shadow of a doubt that the petitioner's claims against the Publishing Company were worthless at the close of both 1923 and 1924.
The statute permits the deduction of debts ascertained to be worthless and charged off within the year. The question before us is whether there was a charge-off which complies with the statute. The petitioner instructed his secretary to claim the amounts as debts ascertained to be worthless and charged off within the year. The secretary assumed that he was doing all that was necessary to comply with the statute. No books of account as such were kept by the petitioner. In , we said:
It was manifestly the intention of Congress to permit an individual making income-tax returns under the Revenue Act of 1921 to deduct from gross income the losses sustained in the return year and also to permit him to deduct debts ascertained to be worthless during the year, provided, of course, the amount was charged off during the year. Since the petitioners kept no books of account the requirement*2199 that the bad debts be charged off before they can be claimed as a deduction does not apply to them. * * *
To the same effect see ; . In , we stated:
* * * The statute is silent as to how or where or in what manner they [the debts] are to be charged off. If no books are kept, where is the charge-off to be made? If books are kept, must it be done by an entry on the books? Here it is conceded that books were kept and that no charge-off was made thereon until 1924 when the entry was made as of 1919. * * *
* * * The statute must be given a reasonable interpretation, if possible. Clearly it was the intent that a deduction should be allowed for worthless debts in the year in which worthlessness was ascertained and that the charging off of the debt might take other forms than entries on the books of the taxpayer. * * *
In *20 , the Court stated:
The remaining question is whether or not decedent complied with that part of the statute which*2200 requires the debt to be charged off within the taxable year. It is undisputed that decedent kept no books of account except his bank book, and for this reason no formal book entry of charge off was necessary. ; ; ; . "The mechanical process of keeping accounts is not prescribed by statute. Such accounts may be recorded in an elaborate set of books, or in mere memoranda, or be recorded only in the brain of the taxpayer. It can make no difference as to the form of such operation." This language was used by the Board in the , and we commend its reasonableness and fairness.
The evidence indicates very clearly that it was the intention of the petitioner through instructions to his secretary that the amounts in question be claimed upon the return as bad debt deductions. They were claimed as deductions and we think it is immaterial in the circumstances of the case that they were shown as losses rather than as*2201 bad debt deductions. The manner of the charge-off is not of the essence.
It is to be noted that the petitioner claims bad debt deductions for 1923 and 1924 of $59,975 and $123,511, respectively. The only charge-off, however, that could possibly be recognized is the charge-off made on the tax returns and the amounts shown on the tax returns were $54,738.15 for 1923, and $96,374.19 for 1924. We are of the opinion that the latter amounts are the debts ascertained to be worthless and charged off during the years within the meaning of the statute and are the amounts deductible from gross income for the years 1923 and 1924.
2. The petitioner's contention that the profits from the sale of shares of stock in 1921 attributable to the years 1923 and 1924, computed upon the installment sales basis, are taxable at the lower rates as capital gains is denied. Sections 206(a)(1) of the 1921 Act and 208(a)(1) of the 1924 Act provide:
(a) That for the purposes of this title:
(1) The term "capital gain" means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921.
The respondent interprets this section of the Act as requiring the sale to have*2202 been consummated after December 31, 1921, and has found that the sale of the shares of stock in the instant case was consummated prior to December 31, 1921. The petitioner contends (1) that the words "consummated after December 31, 1921" modify "taxable gain" rather than the word "sale," and (2) that the sale here was not consummated until delivery of the shares of stock to the purchaser, which occurred subsequent to December 31, 1921. *21 Neither of these arguments, we think, merits lengthy discussion. The respondent's construction of the statute, we think, not only preserves the syntax, but gives to the words of the statute their natural and reasonable meaning. As defined in Webster's New International Dictionary, to "consummate" means "To bring to completion; to raise to the highest point or degree; to complete; finish; perfect; achieve." Certainly, these words more naturally and more appropriately relate to the event of the "sale," which can be given a definite date, than to the "taxable gain," which in point of time might extend, as in the instant case, over a period of years. "Earned" and "accrued" are the words usually employed in the taxing statutes to denote the*2203 occurrence of gains and profits. The sale here unquestionably was consummated on September 8, 1921, when the contract of sale was definitely closed and the shares of stock delivered over to the trustee or escrow agent. The petitioner was then divested of both equitable and legal title to the property. As for his part, there was nothing more to be done in performance of the contract and the sale was complete and final. We think that the sale was "consummated" within the meaning of the statute prior to December 31, 1921, and that the profits therefrom are not taxable as capital gains.
3. Upon the remaining issue the respondent is sustained. The petitioner and his wife having elected to file a joint return for each of the years 1923 and 1924 are now precluded from having their tax liability for those years computed upon the basis of separate returns. ; ; affirmed in ; *2204 . The fact that the joint returns under consideration here showed no taxable income or that the petitioner filed joint returns under a mistaken conception of his rights does not alter the rule.
Judgment will be entered under Rule 50.