Saltstein v. Commissioner , 46 B.T.A. 774 ( 1942 )

ESTATE OF MAURICE S. SALTSTEIN, DECEASED, TRANSFEREE, SOPHIE L. SALTSTEIN, ADMINISTRATRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Saltstein v. Commissioner

Docket No. 105060.

United States Board of Tax Appeals

46 B.T.A. 774; 1942 BTA LEXIS 818;

March 27, 1942, Promulgated

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">*818 Petitioner's transferor was a small loan company which kept its books on the cash basis. In its returns for the years 1936 and 1937 the loan company sought to deduct a reserve for bad debts which was a reserve against loss of capital only. Respondent disallowed the deduction claimed and allowed a deduction in the amount of debts actually ascertained to be worthless and charged off by the loan company. Held, the loan company was entitled to use the reserve method of deductions for bad debts.

Frank L. Wiemer, C.P.A., for the petitioner.

Robert S. Garnett, Esq., for the respondent.

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VAN FOSSAN

">*775 The respondent determined transferee liability against petitioner as transferee of the Eveready Loan Co. The taxes involved are income taxes and personal holding company surtaxes for the calendar year 1936 in the amounts of $233.48 and $104.70, respectively, and income and excess-profits taxes for the calendar year 1937 in the amounts of $115.26 and $75.88, respectively. The entire amount of $529.32, which is exclusive of statutory interest, is in dispute.

FINDINGS OF FACT.

The facts are stipulated and we hereby adopt them as our findings">*819 of fact. They may be summarized as follows:

Petitioner is the duly appointed administratrix of the estate of Maurice S. Saltstein. Petitioner resides at 400 West End Avenue, New York, New York. Returns for the period in question were filed on the cash basis with the collector of internal revenue for the fifth district of New Jersey.

During September 1932 Maurice S. Saltstein acquired the franchise of the Eveready Loan Co., a New Jersey corporation, for the purpose of conducting a small loan business. A license was obtained from the State of New Jersey Banking Department which permitted it to make loans up to $300 and charge interest thereon at the rate of 2 1/2 percent per month. The reorganized Eveready Loan Co. kept its books on the cash receipts and disbursements basis. As moneys were loaned to customers the amounts were charged to a "Loans Receivable" account. Payments representing repayments of principal were credited to that account and payments of interest were credited to "Interest Received" income account. The interest received on loans was the company's only source of income and was not recorded until actually paid in cash. The loans receivable account never">*820 included any items of accrued or unpaid interest.

In its income tax return for 1936 the Eveready Loan Co. deducted from gross income the sum of $3,818.53 representing the additional charge it made in that year to its reserve for bad debts. During that year the loan company actually ascertained to be worthless and charged off against its reserve for bad debts the sum of $2,236.03. In its return for 1937 the Eveready Loan Co. deducted from gross income the sum of $3,998.53, representing the additional charge it made in that year to its reserve for bad debts. During that year it actually ascertained to be worthless and charged off against its reserve for ">*776 bad debts the sum of $3,175.40. The reserves against bad debts as provided above were reserves against loss of capital only and the loans charged off as worthless represented loss of capital only.

The Commissioner disallowed the amounts deducted for those years representing additions to the reserve for bad debts account in excess of the actual amount of debts which were ascertained to be worthless and charged off during the respective years.

On or about December 31, 1937, the Eveready Loan Co. was dissolved and">*821 its property was transferred to Maurice S. Saltstein without consideration. The property transferred had a value at the time of transfer in excess of the deficiency, plus interest thereon as provided by law. By reason of the transfer the Eveready Loan Co. was rendered insolvent and unable to satisfy its liability for the proposed assessment in taxes with the statutory interest due thereon. The collector of internal revenue has been unable to find assets from which a collection could be made except those assets transferred to Maurice S. Saltstein without consideration. By reason of the transfer of property and the receipt thereof by the petitioner's decedent, petitioner became liable as transferee of the assets of the Eveready Loan Co. in so far as it is determined that any tax is due.

OPINION.

VAN FOSSAN: Respondent raises no question as to the reasonableness of the additions to the reserve for bad debts made by the Eveready Loan Co. during the years 1936 and 1937 nor as to the permission to use the reserve method. The only question presented is whether or not the Loan Co. was prevented from deducting a reserve for bad debts by reason of the fact that it kept its books on">*822 the cash basis.

Section 23(k) of the Revenue Act of 1936 ¹ which permits the deduction of a reserve for bad debts, draws no distinction between taxpayers on the accrual basis and those on the cash basis. Nor has the Commissioner issued any regulations denying taxpayers on the cash basis the right to use the reserve method. Thus, the problem is whether the use of the reserve for bad debts in the case at bar was inconsistent with the Loan Co.'s method of accounting so that the return did not clearly reflect income.

">*777 The use of the reserve for bad debts is not inherently inconsistent with a cash basis where, as here, the reserve is against loss of capital only (cf. ">*823 ; affd., ) and contains no element of income which has never been reported. Cf. . Such a reserve for loss of capital does not differ materially from a reserve for depreciation which is set up on a percentage basis rather than on the basis of actual depreciation suffered.

In ; modified, , we said: "If the petitioner is entitled to deduct from gross income under its system of bookkeeping and reporting bad debts charged off, it is entitled to the benefits of section 234(a)(5) of the Revenue Act of 1921 with respect to the setting up of a reserve for bad debts and deducting from income the addition made thereto each year." We see no reason for departing from the view expressed in that case.

Reviewed by the Board.

Decision of no transferee liability will be entered.

MELLOTT dissents.

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Footnotes

• 1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.

  In computing net income there shall be allowed as deductions:

  * * *

  (k) Bad Debts.↩ - Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction.