One who, being liable as endorser of the note of an insolvent
maker, takes up the note by substituting one of his own and marks
the old note paid is not thereby entitled, under Revenue Act of
1924, § 214(a)(7), in returning his income on a cash basis for the
tax year in which the transaction occurred, to deduct the amount of
the old note as a debt "ascertained to be worthless and charged off
within the taxable year." P. 283 U. S.
42 F.2d 158 affirmed.
Certiorari, 282 U.S. 826, to review a judgment which affirmed a
decision of the Board of Tax Appeals, 17 B.T.A. 263, sustaining the
disallowance of a deduction from income.
MR. JUSTICE HOLMES delivered the opinion of the Court.
The Commissioner of Internal Revenue determined that there was a
deficit of $3,378.89 in the petitioner's income tax for the year
1925 under the Revenue Act of 1924. The petitioner claimed a
deduction from income of $22,400 as a bad debt. The deduction was
disallowed by the Commissioner, by the Board of Tax Appeals and,
Page 283 U. S. 141
review, by the Circuit Court of Appeals for the Second Circuit.
42 F.2d 158. A writ of certiorari was allowed by this Court.
The petitioner's tax return was on the cash basis. The facts of
the transaction concerned were that the petitioner and his partner
were joint endorsers of notes issued by a corporation that they had
formed. There remained due upon these notes $44,800 that the
corporation was unable to pay. In 1925, the petitioner and his
partner, in settlement of their liability, made a joint note for
that sum to the bank that held the corporation's paper, received
the old notes, marked paid, and destroyed them. The petitioner
claims the right to deduct half that sum as a debt "ascertained to
be worthless and charged off within the taxable year" under the
Revenue Act of 1926, c. 27, § 214(a)(7), 44 Stat. 9, 27.
It seems to us that the Circuit Court of Appeals sufficiently
answered this contention by remarking that the debt was worthless
when acquired. There was nothing to charge off. The petitioner
treats the case as one of an investment that later turns out to be
bad. But in fact it was the satisfaction of an existing obligation
of the petitioners, having, it may be, the consequence of a
momentary transfer of the old notes to the petitioner in order that
they might be destroyed. It is very plain, we think, that the words
of the statute cannot be taken to include a case of that kind. We
do not perceive that the case is bettered by the fact that some of
the original notes years before were given for property turned over
to the corporation by the partnership that formed it. For the
purpose of a return upon a cash basis, there was no loss in 1925.
As happily stated by the Board of Tax Appeals, the petitioner
"merely exchanged his note under which he was primarily liable
for the corporation's notes under which he was secondarily liable,
without any outlay of cash or property having a cash value."
A deduction may be permissible
Page 283 U. S. 142
in the taxable year in which the petitioner pays cash. The
petitioner says that it was definitely ascertained in 1925 that the
petitioner would sustain the losses in question. So it was, if the
petitioner ultimately pays his note. So was the tax considered in
United States v. Mitchell, 271 U. S.
, 271 U. S. 12
it could not be deducted until it was paid.