Olympia Harbor Lumber Co. v. Commissioner of Int. Rev.

• Decision Date: 12 August 1935
• Docket Number: No. 7682.,7682.
• Citation: 79 F.2d 394
• Parties: OLYMPIA HARBOR LUMBER CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

79 F.2d 394 (1935)

OLYMPIA HARBOR LUMBER CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 7682.

Circuit Court of Appeals, Ninth Circuit.

August 12, 1935.

Thomas N. Fowler, of Seattle, Wash., for petitioner.

Frank J. Wideman, Asst. Atty. Gen., and Sewall Key and F. E. Youngman, Sp. Assts. to the Atty. Gen., for respondent.

Before WILBUR, DENMAN, and MATHEWS, Circuit Judges.

WILBUR, Circuit Judge.

This is a petition to review a decision of the Board of Tax Appeals affirming a decision of the Commissioner fixing a deficiency in the federal income tax of petitioner for the calendar year 1929. During that year the petitioner claimed a deduction of $33,594.65 on account of a debt of $84,722 due to petitioner by the Tumwater Lumber & Mill Company (hereinafter called Tumwater Company). Petitioner claimed that it had ascertained such indebtedness to be worthless to the extent of $33,594.65. The Board of Tax Appeals sustained the conclusion of the Commissioner holding that the debt due to the petitioner by the Tumwater Company was not ascertained to be worthless to the amount of $33,594.65 during the year 1929. The deduction is claimed by the petitioner under section 23, subd. (j) of the Revenue Act of 1928, c. 852, 45 Stat. 791, 799, 26 USCA § 2023, which allows deductions from gross income for bad debts as follows: "(j) Bad Debts. 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."

Where the whole debt was not claimed to be worthless under the revenue laws prior to the Revenue Act of 1921, the taxpayer was not permitted to deduct the portion of the debt ascertained or claimed to be worthless, but could do so only when the entire debt was ascertained to be worthless. Spring City Foundry Co. v. Commissioner, 292 U. S. 182, 54 S. Ct. 644, 78 L. Ed. 1200. Since the enactment of legislation permitting the deduction of a debt which is partly but not wholly bad, it has been held that the allowance of a deduction of the part claimed to be worthless was in the sound discretion of the Commissioner, and that his decision as to such allowance could not be reviewed except for an abuse of discretion. Ross v. Commissioner (C. C. A.) 72 F.(2d) 122; Stranahan v. Commissioner (C. C. A.) 42 F.(2d) 729; Commissioner v. Liberty Bank & Trust Co. (C. C. A.) 59 F.(2d) 320, 322. The Board of Tax Appeals in its findings of fact states that all of the capital stock of petitioner and of the Tumwater Company was owned by five brothers, named Anderson, in equal proportions; that the Anderson brothers desired to install a Swedish gang sawmill and for that purpose the Tumwater Company borrowed from the petitioner the sum of $55,000, which was estimated to be sufficient to establish this mill; that subsequently it was found necessary to advance additional amounts up to the sum of $84,722 in all. The mill was experimental and met with some mechanical and economic difficulties, such that on December 27, 1929, the Anderson brothers, as trustees of the petitioner, concluded that due to the high cost of installing the new mill, the drop in prices of lumber and the curtailed business due to the depression, and the depreciation in the value of the assets of the Tumwater Company, that company would not be able to pay the petitioner the sum advanced to it, and it was accordingly decided to charge off approximately 40 per cent. advanced to the Tumwater Company as a bad debt. No resolution of the board of trustees to that effect was passed or entered on the minutes. No actual charge-off was made on the petitioner's books in 1929 nor until February or March, 1930, when there was a retraction charge-off in the amount of $33,594.65 as of December 31, 1929. No notes had been given by the Tumwater Company to petitioner, and there is no understanding between the two corporations as to how long the account would run. Some time after the book entries were made the assets of the Tumwater Company were valued as of December 31, 1929, based on their liquidation value and the result of that valuation placed the assets as worth $142,523.92. The current assets as of December 31, 1929, were $57,316.38 and the current liabilities $126,995.62. The Anderson brothers did not intend that the outside creditors of the Tumwater Company should lose any money, and intended that they should be paid through petitioner.

It appears from the evidence that the value of the assets of the Tumwater Company as carried on its books as of December 31, 1929, was $220,428.30 and its liabilities $186,894.92. It also appears therefrom that the petitioner's claim for 40 per cent. deduction upon the indebtedness due it as an allowance for a partially bad debt was based upon the realizable value of the assets of the corporation estimated at $142,523.50 instead of book value of $220,428.30. In dealing with this subject, the Board of Tax Appeals stated its conclusion in its opinion as follows:

"The evidence does not convince us that the advances...