Wolff v. Commissioner of Internal Revenue

• Decision Date: 01 July 1932
• Docket Number: Docket No. 37783.
• Citation: 26 BTA 622
• Parties: HATTIE WOLFF, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

26 B.T.A. 622 (1932)

HATTIE WOLFF, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 37783.

Board of Tax Appeals.

Promulgated July 1, 1932.

Jacob H. Gilbert, Esq., for the petitioner.

William E. Davis, Esq., for the respondent.

The income-tax deficiency involved in this proceeding is in the amount of $2,439.81 for the year 1924. The petitioner assigns as error in the determination of such deficiency by the Commissioner, the disallowance of a deduction in the amount of $50,000 as a bad debt.

FINDINGS OF FACT.

For several years prior to May, 1924, Sidney E. Wolff and his cousin, Alvin A. Wolff, were engaged as copartners, under the firm name of A. L. Wolff and Company, as dealers and brokers in cotton, with offices at New York, New York, and Dallas, Texas. The business had been established in 1881 and carried on under that firm name until 1915 by the petitioner's husband, the father of Sidney E. Wolff, and that firm name was known in the cotton business in all parts of the world.

Early in 1924 the partnership became involved in financial difficulties, due to losses of approximately a quarter of a million dollars. Counsel for the partnership and also Sidney E. Wolff's father-in-law, who was called in on consultations for possible financial assistance, insisted that the partnership was insolvent. The petitioner, who took great pride in the firm name, and others interested in the partnership insisted upon the liquidation of the business, and the principal reason therefor was the preservation of the firm name of A. L. Wolff and Company unmarred by failure. In May, 1924, Sidney E. Wolff, active head of the business, agreed to the liquidation, although it was his opinion that the firm could be worked out of its financial difficulties. The trial balance sheets as of April 30, 1924, of the New York and Dallas offices showed the partnership's net assets to be $53,127.90. The books of the partnership were complicated, due to the involved operations of its cotton business, and required specially trained accountants to audit them because of the necessity of estimating profits on certain transactions covered by hedges and the fact that after deliveries had been made the firm never knew what claims would be made against it for loss of weight of cotton shipped, and other technicalities. At or about the time Sidney E. Wolff agreed to liquidate the business he determined that about $100,000 in cash would be needed, over and above the partnership's assets, to satisfy the firm's creditors.

For the specific purpose of rendering financial assistance to enable said partners to liquidate the business promptly, advantageously and expeditiously, an agreement was entered into on May 15, 1924, between Sidney E. Wolff and Alvin A. Wolff, parties of the first part, and Helen V. Wolff (Sidney's sister), Helen B. Wolff (Sidney's wife) and Hattie Wolff (Sidney's mother), parties of the second, third and fourth parts respectively, whereby, in consideration of one dollar and their mutual promises, Helen V. Wolff agreed to surrender Sidney E. Wolff's note for $50,000, representing the balance due under a contract executed prior to the firm's financial difficulties, for his purchase of the interest of his sister and her husband in the business; Helen B. Wolff agreed to release and surrender certain collateral belonging to the partnership and deposited as security for a loan of $50,000 which she had theretofore made to Sidney E. Wolff; and Hattie Wolff, the petitioner, agreed "to advance by way of loan to * * * such co-partners" the sum of $50,000 to be evidenced by the 6 per cent demand promissory note of Sidney E. and Alvin A. Wolff. All three of the said women agreed that their claims should be postponed and subordinated to the payment of all debts and liabilities of the partnership, after which the surplus remaining should be distributed, first, to Helen B. Wolff, $50,000, with 6 per cent interest; secondly, to Helen V. Wolff, $50,000, with 6 per cent interest; and, lastly, to Hattie Wolff, $50,000, with 6 per cent interest. It was further agreed that as additional security for the repayment of the amounts due Helen V., Helen B., and Hattie Wolff, the said parties would cause to be assigned to Benjamin F. Feiner, Esq., as trustee, the right, title and interest to and in a certain claim against the British Government for the seizure of cotton in 1915. Furthermore, the parties agreed that if Sidney E. and Alvin A. Wolff performed the covenants and conditions of the agreement and the proceeds of the liquidation of the business and also the claim against the British Government should prove insufficient wholly to pay and discharge the amounts due Helen V., Helen B., and Hattie Wolff, they each released and discharged Sidney E. and Alvin A. Wolff from any and all liability on account thereof and the said partners agreed not to engage in business under the firm name of A. L. Wolff or A. L. Wolff and Company without written consent from Hattie Wolff, which consent would be given to Sidney E. Wolff upon repayment of her loan of $50,000.

The petitioner's attorney in fact, Joseph Weissenbach, who was in New York at the time in connection with the affairs of A. L. Wolff and Company, wrote to her on May 7, 1924, concerning the $50,000 advance and the agreements to be executed. Joseph Weissenbach was familiar with all of the facts and circumstances surrounding the transaction and executed all the agreements for petitioner, who advanced the sum of $50,000 as agreed and received from Sidney E. and Alvin A. Wolff their 6 per cent promissory note for that amount. The claim against the British Government was duly assigned as agreed and a separate agreement was entered into on May 15, 1924, by all parties in interest as to the distribution of any amounts recovered thereon. Pursuant to that agreement Benjamin Feiner was to get 33 1/3 per cent of the proceeds recovered for his services and also expenses incurred and Alvin A. Wolff was to get 15 per cent for his interest in the claim and the balance was to be distributed, first, to Helen V. and Helen B. Wolff and, lastly, to Hattie Wolff. Also on May 15, 1924, Sidney E. and Alvin A. Wolff entered into a dissolution agreement, setting forth their respective rights in the...