Cullinan v. Commissioner , 19 B.T.A. 930 ( 1930 )

J. S. CULLINAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Cullinan v. Commissioner

Docket No. 29506.

United States Board of Tax Appeals

19 B.T.A. 930; 1930 BTA LEXIS 2303;

May 12, 1930, Promulgated

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1. In determining the profit on the sale of a certain lot the method of allocating cost used in J. S. Cullinan,5 B.T.A. 996">5 B.T.A. 996, followed.

2. From the evidence held that an advancement made to a certain political campaign fund was not a debt and hence not deductible as a bad debt loss.

John Walsh, Esq., and L. A. Spiess, Esq., for the petitioner.

J. E. Marshall, Esq., and C. A. Ray, Esq., for the respondent.

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BLACK

In this proceeding the petitioner seeks a redetermination of his income-tax liability for the calendar year 1922, for which the respondent has determined a deficiency in the amount of $23,629.79. The petitioner alleges that the respondent committed the following errors in his determination: (1) In adding to petitioner's taxable income $12,000 received from the American Republics Corporation and the Galena-Signal Oil Co. as reimbursement for certain business expenses incurred and paid while engaged in business matters for the said corporation; (2) in refusing to permit the petitioner to take a deduction of $29,224.59 as a debt determined to be worthless and uncollectible in the year 1922; and (3) in adding to petitioner's taxable income for the year 1922 the sum of $8,888.30 alleged to represent a profit on the sale of real estate. At the hearing the respondent abandoned his contention as to the inclusion of $12,000 in petitioner's taxable income.

FINDINGS OF FACT.

It has been stipulated that the findings of fact made by the Board in , being an appeal of the same taxpayer for the years 1919 to 1921, inclusive, may be adopted as the facts in this proceeding. In the former proceeding it was found that the petitioner acquired and improved Shadyside addition to the city of Houston at a total cost of $228,383.84, and that in 1922 he sold lot X in this subdivision to E. H. Buckner for $15,340. The findings of fact in , in so far as they are pertinent and relevant to any issue involved in this proceeding, are hereby adopted and made a part hereof. The petitioner's books of account were kept on the cash receipts and disbursements basis.

In 1922 the campaign committee for George E. B. Peddy, candidate for United States Senator from Texas, sought to get thirty men to contribute $5,000 each for such purpose. The petitioner agreed to and made such $5,000 contribution. The whole number of subscribers could not be immediately procured, and the committee was in great need of funds to carry on its campaign. The petitioner agreed to advance and lend the committee $30,000, he and the committee, through its chairman, agreeing and believing that such was to be repaid to the petitioner out of the receipts of the committee from expected contributions. As the campaign closed it was found that the receipts from contributions fell greatly below what was expected. Post-campaign efforts were extensively made by the chairman to procure contributions to pay off the deficit, and out of the final balance on hand after payment of campaign expenses the petitioner's loan was reduced $775.41, leaving a balance unpaid of $29,224.59.

OPINION.

BLACK: At the hearing the respondent withdrew his contention in regard to the $12,000 received from American Republics Corporation and the Galena-Signal Oil Co., the same issue having been decided adversely to him in the case of this taxpayer for prior years, reported in . Therefore, on this issue decision is for the petitioner. In the prior case also was at issue the method of computing profits on the sale of lots in a subdivision. The facts were stipulated to be same and the lot in question in this proceeding was found to have been sold for $15,340. No new evidence was introduced and, in the final determination of the tax against petitioner under Rule 50, respondent should use the same method of computing the profit on the lot in Shadyside addition to the city of Houston sold to E. H. Buckner in 1922, as we decided in , should be used for similar lots sold during the years involved in that proceeding.

The only remaining issue is that in regard to the $29,224.59 advanced by the petitioner to the Peddy senatorial campaign in Texas. He contends that this was in the nature of a loan which he ascertained to be worthless in 1922 and that he is entitled to a deduction of the full amount as a bad debt.

Section 214(7), Revenue Act of 1921, permits a deduction from gross income of debts ascertained to be worthless and charged off within the taxable year. The word debts as used in the statute is to be taken in its usual and accepted meaning. A debt, according to Webster, is that which is due from one person to another whether money, goods or services; that which one person is bound to pay to another or to perform for his benefit; that of which payment is liable to be exacted; due, obligation, liability. Words and Phrases, First Series, vol. 2, 1864, and cases there cited. A debt is defined to be in its general sense a specific sum of money, which is due or owing from one person to another, and denotes not only the obligation of the debtor to pay, but the right of the creditor to receive and enforce payment. ; .

Before a deduction can be allowed on account of a worthless debt it is essential that the existence of a valid debt be established. . In the case of , we said:

If the debtor was not legally liable to the taxpayer, then there was no debt to become worthless. It can not become worthless because of inability to establish legally the liability for the debt, for in such a case there is not an ascertainment of worthlessness of an existing debt, but an ascertainment of the nonexistence of such a debt.

In the instant case the petitioner made a contribution of $5,000 to the Peddy Senatorial Committee and at or about the same time made an advancement of $30,000 more to the campaign committee to meet obligations of the campaign which were then pressing. It was understood and agreed that petitioner was to be reimbursed for this $30,000 out of collections which the committee expected to make from certain individuals which the committee had listed as prospective contributors. It was not contended by the petitioner that the committee agreed to be personally liable to him for the $30,000 or any part thereof, but only to reimburse him out of the proceeds of collections to be made. All that petitioner ever received in repayment was $775.41, and the balance, amounting to $29,224.59, it seems he will have to charge up to experience. If he had sued the members of the committee for the balance due, they would have doubtless entered the plea that they were not personally responsible for the debt and had only agreed to pay out of moneys collected and that after diligent effort they had been able to return petitioner only $775.41. The debts which the statute permits to be charged off when ascertained to be worthless are debts where there is an obligation of the debtor to pay and a right of the creditor to receive and enforce payment.

We hold that petitioner's claim against the Peddy Committee fails to meet this test and that respondent did not err in refusing to allow petitioner to take same as a bad debt deduction from gross income in 1922.

Judgment will be entered under rule 50.