Davidson Grocery Co. v. Lucas

• Decision Date: 06 January 1930
• Docket Number: No. 4927.,4927.
• Citation: 59 App. DC 176,37 F.2d 806
• Parties: DAVIDSON GROCERY CO. v. LUCAS, Commissioner of Internal Revenue.
• Court: U.S. Court of Appeals — District of Columbia Circuit

59 App. DC 176, 37 F.2d 806 (1930)

DAVIDSON GROCERY CO. v. LUCAS, Commissioner of Internal Revenue.

No. 4927.

Court of Appeals of District of Columbia.

Argued November 15, 1929.

Decided January 6, 1930.

George E. H. Goodner, of Washington, D. C., for appellant.

Mabel W. Willebrandt, Asst. Atty. Gen., and C. M. Charest, Sewall Key, and F. E. Mitchell, all of Washington, D. C., for appellee.

Before MARTIN, Chief Justice, and ROBB and VAN ORSDEL, Associate Justices.

ROBB, Associate Justice.

Appeal from a decision of the Board of Tax Appeals affirming the Commissioner's determination of a deficiency in income and profits taxes for the year 1920 in the amount of $6,063.03.

Appellant taxpayer is an Idaho corporation engaged in the wholesale grocery business, with its principal offices at Boise.

The findings of fact, which are not disputed, are as follows: At the close of the year 1920 appellant had outstanding the following accounts:

                  W.C. Martin .................... $7,477.45
                  Silver Creek Mercantile Co. ....  4,953.88
                  E.M. Small .....................  8,068.50
                  J.T. Foster ....................  2,584.08
                  Byrne Brothers .................  7,048.15
                  D.H. Clare & Son ...............  1,635.00
                

On November 1, 1920, Martin was adjudged a bankrupt, and the first meeting of creditors was held on November 18th following. On final settlement in 1921, his creditors were paid a little over 48 per cent. of their claims; appellant's claim, as proven, being $7,423.58. Upon learning the amount of Martin's assets and the claims which had been proven against him, the president of appellant company determined that at least $3,000 of its claim would never be paid, and authorized the bookkeeper to charge off this amount to profit and loss on December 31, 1920. The ultimate loss was greater than the amount charged off.

The Silver Creek Mercantile Company made an assignment on November 27, 1920. Appellant's claim was $4,953.05, of which it ultimately recovered $2,211.52. Upon examining the assets and liabilities of this customer, the president of appellant company authorized the bookkeeper to charge off at the end of 1920 $2,500 as a determined loss, no part of which has ever been received.

Small made an assignment on November 17, 1920. Appellant's claim was $8,068.50, of which he has received less than $6,000. After ascertaining the assets and liabilities of Small, appellant, on December 31, 1920, charged off $1,000 of this account as being uncollectible.

In the same manner appellant determined, on or prior to December 31, 1920, that only a portion of the accounts of Foster, Byrne Brothers, and Clare & Son could be collected, and authorized the bookkeeper to charge off to profit and loss $1,000, $3,000, and $500, respectively.

The losses actually sustained on all of these accounts proved to be greater than the amounts charged off in 1920. According to the Board, "the determination of petitioner (appellant) as to the amount of the losses which would be sustained upon all of these accounts was made by the president of the petitioner corporation upon the basis of the assets and liabilities of the several debtors."

Appellant, before the Commissioner and the Board, unsuccessfully claimed as a deduction from gross income for the year 1920 the foregoing amounts charged off as losses or bad debts.

Section 234(a) of the Revenue Act of 1918 (40 Stat. 1057, 1078) declared that in computing the net income of a corporation there shall be allowed as deductions from gross income "(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise; (5) Debts ascertained to be worthless and charged off within the taxable year."

The Internal Revenue Commissioner and the Board construed these clauses as mutually exclusive, and that "debts ascertained to be worthless" relates to debts that are wholly worthless, so that no deduction may be taken in the year when a debt is ascertained to be partially worthless; and that assuming the two clauses to be mutually exclusive, clause (4) must cover losses not arising under clause (5).

The question here involved was carefully considered by the Circuit Court of Appeals for the Second Circuit in Sherman & Bryan v. Blair, 35 F.(2d) 713, 716. The court there first suggested that the words, "debts ascertained to be worthless" (clause (5) of section 234(a), reasonably may be construed to mean "indebtedness ascertained to be worthless" and to permit a charge-off of such part of a claim as was proven to be uncollectible by so...