Ayer v. Blair
| Citation | 26 F.2d 547 |
| Decision Date | 07 May 1928 |
| Docket Number | No. 4675.,4675. |
| Parties | AYER v. BLAIR, Com'r of Internal Revenue. |
| Court | United States Courts of Appeals. United States Court of Appeals (District of Columbia) |
J. C. Peacock and J. W. Townsend, both of Washington, D. C., for appellant.
L. L. Hight, of Washington, D. C., and Morton P. Fisher, of Baltimore, Md., for appellee.
Before MARTIN, Chief Justice, and ROBB and VAN ORSDEL, Associate Justices.
This appeal relates to a deficiency in the income tax returns of appellant for the year 1920, as determined by the Commissioner of Internal Revenue and approved by the Board of Tax Appeals.
It appears that the Atlantic & Birmingham Construction Company, a corporation, was organized in the year 1905, and that the appellant acquired a large amount of its stock. By 1908 the corporation was heavily involved, and appellant, together with other stockholders, advanced funds to it in order to avoid foreclosure. By May 1, 1912, appellant's advance amounted to $26,338.22, and on that day he received from the company its so-called funding notes in that sum, secured by pledge of certain of its assets. Appellant afterwards made other advances to the corporation, and on May 1, 1915, he received from it other funding notes in the sum of $7,955.37, secured by a second lien upon the assets held as security for the former notes. No payment was made upon any of the notes until in the year 1920, when the securities were finally liquidated, and the sum of $1,310.33 was paid to appellant as the first and final dividend upon his notes. Thereupon appellant on December 31, 1920, charged off the sum remaining unpaid upon the notes according to their face value, to wit, the sum of $32,683.24, as a bad debt, and deducted the same from his income tax returns for 1920.
The Commissioner of Internal Revenue disallowed in part the deduction claimed for the notes taken prior to March 1, 1913, and held that the deduction for these should be measured by the difference between the fair value thereof on March 1, 1913, and the amount realized thereon in the 1920 liquidation. The Commissioner found the fair value of these notes on March 1, 1913, to be $5,267.64, and found that the allowable deduction, after subtracting the liquidating dividend, amounted to $3,957.31. The Commissioner allowed this sum as a valid deduction and declared a deficiency accordingly.
This action of the Commissioner was sustained by a majority decision of the Board of Tax Appeals, upon the ground that the funding notes in question represented an investment of the taxpayer and not a debt, and that the deduction for them as such should be only the fair value thereof on March 1, 1913, less the liquidating dividend. The dissenting members held that the funding notes constituted a debt, and that the taxpayer was entitled to a deduction of the face value thereof, less the dividend, without reference to the fair value of the notes on March 1, 1913. In this court the Commissioner does not contend that the funding notes were not a debt, but insists that the board's decision nevertheless was correct.
The question involved herein calls for a construction of the following parts of the Revenue Act of 1918 (40 Stat. 1057), which was in force in the year 1920.
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