*2341 Evidence considered insufficient to establish that a loss had been sustained on account of the endorsement of certain notes.
*714 This proceeding involves a deficiency in income tax as determined by the Commissioner for 1926 in the amount of $1,566.21, and has for its only issue the question of whether the petitioner sustained a deductible loss in 1926 on account of the endorsement of certain notes.
FINDINGS OF FACT.
The petitioner is an Indiana corporation with its principal office at Indianapolis.
Prior to and during the year 1926 the petitioner sold materials to R. H. Shelhorn, a contractor and builder, who operated as an individual under the trade name of R. H. Shelhorn & Co. On account of the foregoing sales promissory notes were executed by Shelhorn in favor of petitioner as follows:
*715
| Date of execution | Due date | Amount |
| August 9, 1926 | November 17, 1926 | $2,706.41 |
| September 7, 1926 | November 24, 1926 | 4,207.59 |
| September 7, 1926 | December 1, 1926 | 4,207.59 |
| September 7, 1926 | December 8, 1926 | 4,207.58 |
| September 7, 1926 | December 15, 1926 | 4,207.58 |
| October 11, 1926 | December 22, 1926 | 5,875.23 |
| October 11, 1926 | December 29, 1926 | 5,875.23 |
| October 11, 1926 | January 4, 1927 | 5,875.24 |
| October 11, 1926 | January 11, 1927 | 5,875.24 |
| November 19, 1926 | January 19, 1927 | 3,314.31 |
| November 1, 1926 | January 31, 1927 | 2,706.40 |
| November 3, 1926 | February 1, 1927 | 2,706.40 |
| November 10, 1926 | February 8, 1927 | 2,706.40 |
| November 19, 1926 | February 17, 1927 | 3,314.31 |
| November 19, 1926 | February 24, 1927 | 3,314.31 |
| November 19, 1926 | March 1, 1927 | 3,314.30 |
| Total | 64,414.12 |
*2342 The petitioner and Shelhorn each had an account with the Fletcher American National Bank of Indianapolis (hereinafter referred to as the bank). When the foregoing notes were executed by Shelhorn, O. D. Haskett, president of the petitioner, took the notes to the bank, where, after appropriate endorsement by the petitioner, they were discounted by the bank. Under the policy pursued by the bank, notice was given to Shelhorn ten days before each of the notes came due, and since the notes were not paid at maturity, a second notice was sent him at those times, as well as a notice to the petitioner as endorser. Not only was no amount paid by Shelhorn on any of the notes at maturity, but also no amount has ever been paid thereon.
The policy of the bank was to charge the account of the maker of a note, who was in default, with the amount thereof (where such maker kept an account at the bank), but such action was not taken in these instances because Shelhorn did not have sufficient funds in the bank with which to satisfy these notes. While the petitioner was advised of its liability to the bank on account of its endorsement on the notes in question as they came due, it did not satisfy*2343 such liability at such times, nor did the bank make any change in its charge on its books on account of Shelhorn's failure to pay (in so far as petitioner was concerned) until March 14, 1927. On March 14, 1927, petitioner gave to the bank its note for $66,071.79, which represented the total of the Shelhorn notes plus accrued interest, and the bank at the same time changed its charge on its books as against the petitioner on account of the notes in question from that of "Endorser" to that of "Promisor." At the time the note of $66,071.79 was executed by petitioner the bank took the aforementioned Shelhorn notes as collateral. Subsequently, petitioner made substantial payments on account of the note of $66,071.79, but the entire amount has not yet been paid.
During the last three months of 1926 it became known that Shelhorn was becoming financially involved. On October 29, 1926, the *716 bank, because of the Shelhorn notes which it had discounted, discussed with O. D. Haskett, petitioner's president, the advisability of reducing the amount of materials to be supplied to Shelhorn, which action was agreed upon. On November 22, 1926, a further discussion was had between the*2344 same parties as to Shelhorn's financial condition, at which time Haskett reported that Shelhorn's creditors had decided to place his affairs in the hands of a trustee for the benefit of creditors and that Shelhorn had stopped all business operations. He also reported that Shelhorn's creditors were of the opinion that his assets were 4 per cent in excess of his liabilities. The bank agreed to co-operate with petitioner in working out Shelhorn's affairs, which Haskett thought could be accomplished in five or six months. On January 14, 1927, a further discussion was had between the bank and Haskett, at which time Haskett expressed the opinion that his loss on account of Shelhorn would be about $50,000.
The bank was a subscriber to the financial service of R. G. Dun & Co. and received the following reports from such company with respect to Shelhorn's affairs: (1) November 29, 1926, a report to the effect that on account of Shelhorn's financial condition the creditors had decided to place a trustee in charge of his affairs, and that the figures submitted by his bookkeeper showed assets of $413,495.01 and liabilities in the amount of $370,739.12; (2) December 1, 1926, a report that*2345 liens were being filed against Shelhorn by various creditors and that a creditors' committee had been appointed; (3) December 4, 1926, a report that an application for a receiver which had been filed on account of Shelhorn by one creditor had been withdrawn and arrangements had been completed for the appointment of a trustee; (4) December 22, 1926, a further report concerning the precarious financial condition of Shelhorn. The bank advised the petitioner from time to time as to the financial condition of Shelhorn.
On or about December 6, 1926, Chester L. Robinson, an officer of the bank, was appointed a receiver for the benefit of Shelhorn's creditors, and he is still acting in that capacity as Shelhorn's affairs have not yet been completely liquidated.
The petitioner kept its books and rendered its returns on the accrual basis. Deductions for bad debts were taken on the basis of a charge-off of specific bad debts rather than by the reserve method. In closing its books as of December 31, 1926, the petitioner made the following journal entry:
| Loss on Discounted Notes | $15,000 | |
| Reserve for Loss on Discounted Notes | $15,000 | |
| Per instructions from Mr. O. D. Haskett and due authorization by the Board of Directors, it was deemed necessary to charge off this portion of discounted notes at the Fletcher American Bank from the R. H. Shelhorn Company, which Company being at this time insolvent. |
*2346 *717 The foregoing amount of $15,000 was claimed by the petitioner as a deduction from gross income in its income-tax return for 1926, but was disallowed by the Commissioner.
OPINION.
SEAWELL: The contention advanced by the petitioner is that in 1926 it sustained a loss, as provided in section 234(a)(4) of the Revenue Act of 1926, of at least $15,000 on account of its endorsement of the Shelhorn notes as set out in our findings. The question presented is entirely one of fact, namely, had events occurred on or prior to December 31, 1926, which definitely determined that an actual loss had been sustained. To use the language of the court in , "Generally speaking, the income-tax law is concerned only with realized losses, as with realized gains," citing as authority , wherein it was stated that "the loss must be actual and present, not merely contemplated as more or less sure to occur in the future." And we have the further rule laid down in *2347 :
* * * The statute obviously does not contemplate and the regulations (article 144) forbid the deduction of losses resulting from the mere fluctuation in value of property owned by the taxpayer. , cf. . But with equal certainty they do contemplate the deduction from gross income of losses, which are fixed by identifiable events, such as the sale of property (article 141, 144), or caused by its destruction or physical injury (article 141, 142, 143), or, in the case of debts, by the occurrence of such events as prevent their collection (article 151).
When tested by the foregoing standards, we fail to see that the evidence establishes a fixed and determinable loss to the petitioner in 1926. It is true that before the end of 1926 it was definitely known that Shelhorn was in financial difficulties; he had failed to pay seven of the notes, totaling $31,287.21, which had become due, liens were being filed against him, a trustee for*2348 the benefit of creditors had been appointed, and the bank had notified petitioner of its liability as endorser to pay the notes in question. But these facts do not, in our opinion, establish that an actual loss had been sustained. Whether petitioner or any of Shelhorn's creditors would sustain a loss on account of Shelhorn's financial difficulties was, at the end of 1926, little more than a speculation. There is insufficient evidence to support petitioner's statement that Shelhorn was at that time necessarily insolvent. "Insolvency," as the term is ordinarily used, is not a mere failure to pay debts, but means an insufficient amount of property to pay. Bouvier's Law Dictionary, vol. 2, p. 1602, and Words & Phrases, vol. 4, p. 325. And even if we should say that the evidence *718 establishes a condition of insolvency, there is certainly nothing before us from which we can say the extent to which it could reasonably be expected that the petitioner would realize on his obligation from Shelhorn. The reported book value of Shelhorn's assets was in excess of his liabilities and the opinion of the creditors was to the same effect. The one witness who testified as to the loss*2349 did not known what assets were taken over by the trustee other than they were "considerable" and gave no information as to the extent of the liabilities. Under such circumstances we are unwilling to accept as conclusive his statement that all of the notes were worthless or that $15,000 measured the loss, if any, which had been sustained. It may well be that he (the witness), as a banker, would have considered it good business to have set up a reserve against the probability of some loss in this instance, but probable losses and actual realized losses are not one and the same thing. As the court said in :
The income tax laws do not profess to embody perfect economic theory. They ignore some things that either a theorist or a business man would take into account in determining the pecuniary condition of the taxpayer. They do not charge for appreciation of property or allow a loss from a fall in market value unless realized in money by a sale. * * *
On the evidence we can not say that the petitioner has established more than that it was possible or even probable at the close of 1926 a loss would be sustained on account of the Shelhorn*2350 transaction, but we do not think this sufficient to justify the deduction claimed.
Judgment will be entered for the respondent.