Redman v. Commissioner

        UNITED STATES CIRCUIT COURT OF APPEALS, FIRST CIRCUIT

In his income tax return for 1941, the taxpayer claimed a deduction of $ 3,500 of his advances to the corporation as a bad debt. His determination of that amount was arbitrary and was not based on any method of calculation. The Commissioner denied the deduction on the ground that the taxpayer failed to show that the debt had become worthless in 1941. The Tax Court upheld the Commissioner's decision. The taxpayer has filed a petition for review in this court.

This case is governed by Sec. 23(k) of the Internal Revenue Code, as amended by Sec. 124(a) of the Revenue Act of 1942, and Sec. 113 of the Revenue Act of 1943, 26 U.S.C.A. Int.Rev.Code, Section 23(k), which allows a deduction from gross income for 'debts which become worthless within the taxable year, ' ¹ Sec. 124(d) of the Revenue Act of 1942 and Sec. 113(b) of the Revenue Act of 1943. Before the 1942 amendment, Sec. 23(k) allowed a deduction for 'debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable (reservation) for bad debts).' The test of ascertainment of worthlessness under Sec. 23(k) before the 1942 amendment was deemed to be a subjective test rather than an objective one, that is, the taxpayer was entitled to charge off a bad debt in the year that he determined the obligation to him to be worthless. He was not compelled to take his deduction in the year that the debt actually had become worthless but in the year that the hypothetical 'reasonable man' would consider the debt to be worthless. Harris v. Commissioner, 2 Cir., 1944, 140 F.2d 809, 811. By its amendment to Sec. 23(k) Congress has changed the standard for the determination of worthlessness by substituting for the subjective test of ascertainment of worthlessness the objective test of actual wortheless. Mertens, Law of Federal Income Taxation, Sec. 30.27a, 1945 Supp. The taxpayer now has the burden of showing that the debt actually became worthless during the year for which the deduction is sought. Cittadini v. Commissioner, 4 Cir., 1943, 139 F.2d 29, 31.

In order for the taxpayer to gain his deduction for 1941, he must show that the debt became worthless in that year. Bonynge v. Helvering, 2 Cir., 1941, 117 F.2d 157. If it became worthless prior or subsequent to 1941 the taxpayer cannot be allowed a deduction for bad debt in that year. We agree that the attack on Pearl Harbor and the entry into the war by the United States did not wipe out any valuable rights the taxpayer might have had by virtue of his agreement with the bondholders. Nor does it seem that he possessed any valuable interest after 1938.

Moreover, we deem the question of the year in which the debt became worthless to be a question of fact, and the determination by The Tax Court on that issue must stand if there is any substantial basis in the evidence for it. Commissioner v. Scottish American Investment Co., 1944, 323 U.S. 119, 65 S.Ct. 169, 89 L.Ed. 113; San Joaquin Brick Co. v. Commissioner, 9 Cir., 1942, 130 F.2d 220. The evidence is quite sufficient to substantiate The Tax Court's finding.

The decision of the Tax Court is affirmed.