
    GEORGETOWN GROCERY CO. v. THE UNITED STATES
    [No. E-541.
    Decided February 14, 1927]
    
      On the Proofs
    
    
      Income tax; dedMotions; debts ascertained to be worthless <Mid charged off witlmv the taxable year.- — -In order to obtain tbe benefit of tbe deduction from gross income on account of worthless debts tbe taxpayer must bring bimself witbin tbe statute, sec. 234 (a) (5), revenue act of 1918, and sbow (1) that, at tbe time of filing bis return, tbe debt bad been ascertained to be worthless, and (2) that it bad been charged oft witbin tbe taxable year.
    
      The Reporter’s statement of the case:
    
      Mr. L. L. Hamby for the plaintiff.
    
      Mr. Joseph H. Sheppard, with whom was Mr. Assistant Attorney General Herman J. Galloway, for the defendant.
    The court made special findings of fact, as follows:
    I. The plaintiff during the calendar year 1920 was a corporation existing under and by virtue of the laws of the State of South Carolina, with its place of business in the city of Georgetown in the said State.
    II. On or about March 15, 1921, plaintiff duly filed its corporation income and profits tax return for the calendar year 1920, showing thereon a net taxable income of $26,721.54 after taking a deduction of $1,010.72 for bad debts. On the net taxable income disclosed by its return, plaintiff paid a tax of $3,856.71 in various installments— $1,928.36 being paid in two installments up to and including June 15, 1921, and $1,985.76 being paid on September 25, 1924.
    III. On or about September 15, 1921, plaintiff filed an amended income and profits tax return for the calendar year 1920, claiming in said amended return a deduction of $22,112.91, alleging that this sum represented a bad debt due plaintiff by the Sampit Contracting Company as of May 1, 1920.
    
      IV. At tbe time of filing the said amended return the plaintiff had paid only two installments based upon its original return, namely, the installment of March 15, 1921, and that of June 15, 1921, in the amount of one thousand nine hundred and twenty-eight dollars and thirty-six cents ($1,928.36), and did thereafter, during the month of September, 1921,_ file a claim for refund thereof. As to the unpaid installments, the plaintiff filed a claim for abatement at or about the time of filing the amended return, which said claim was subsequently rejected by the Commissioner of Internal Revenue and demand made upon plaintiff by the collector of internal revenue for the district of South Carolina in the amount of one thousand nine hundred eighty-five dollars and seventy-six cents ($1,985.16), being the balance of taxes assessed against the plaintiff for the year 1920, which amount plaintiff duly paid on September 25,1924, making the aggregate amount of taxes paid for the said year 1920 three thousand nine hundred fourteen dollars and twelve cents ($3,914.12).
    V. On September 25, 1924, plaintiff made payment of one thousand nine hundred eighty-five dollars and seventy-six cents ($1,985.16), and on the same date duly filed its claim for refund of the aggregate amount of taxes paid for the year 1920, being three thousand nine hundred and fourteen dollars and twelve cents ($3,914.12), and although more than six months have elapsed since the filing of said claim for refund the commissioner has taken no action thereon.
    VI. In its original income and profits tax return for 1920 plaintiff included the entire account of the Sampit Contracting Company in its capital assets, but in its amended return plaintiff did not so include said account. The debt evidenced by this account was not charged off on the books and records of the plaintiff corporation during the year 1920, but was charged off in September, 1921, at the time the amended return was filed.
    VII. Plaintiff continued to extend credit to the Sampit Contracting Company until December 31, 1921, and received payments on account between May 1, 1920, and December 31, 1921.
    
      VIII. The manager of the plaintiff’s business had full and complete authority to conduct the affairs of the company and to extend credit to any purchaser. Furthermore, he had control of the books of account and had authority to adjust or charge off any losses occurring from bad debts ascertained to be worthless during the year 1920. The manager during the said year charged off on plaintiff’s books bad debts, ascertained to be worthless during that year, aggregating the sum of $1,010.72, and claimed this amount as a deduction from gross income in the original tax return of the plaintiff. No part of the debt of the Sampit Contracting Company was included in this amount.
    IX. No action whatever was taken by the board of directors of plaintiff company during the year 1920 in regard to the account of the Sampit Contracting Company, and no instructions or directions of any character were given by the said board to the manager relative to withholding further credit from the said company or charging off the amount of its debt.
    X. During the year 1920, plaintiff made no effort to ascertain the financial status of the Sampit Contracting Company or to collect the debt owed, by the said company to the plaintiff. The total amount of judgments outstanding against the Sampit Contracting Company in the year 1920 was $1,826.46, and no effort was made by any of the judgment creditors to reduce their judgments to execution. The record does not disclose that the plaintiff had knowledge of the existence of these judgments in 1920.
    XI. On May 1, 1920, the plaintiff opened on its books a new account with the Sampit Contracting Company styled “ Purchasing account,” and thereafter all purchases made by the said company and payments on account were credited or debited to this new account, with the exception of the payment of interest on one note on September 20, 1920, in the sum of $141.21, and the payment of two notes on March 22, 1921, which were credited to the old credit account. Further credit was extended to the Sampit Contracting Company subsequent to the opening of the so-called purchasing account and the said account was charged with the amount of such credit. This purchasing account was closed January 10, 1922, after plaintiff had sustained a loss therein to the extent of $3,590.14, which sum was charged off on plaintiff’s books, on December 31,1921, to the profit-and-loss account.
    XII. The Sampit Contracting Company continued to operate during the years 1920 and 1921, and subsequent thereto, and continued its business relations with the plaintiff during those years. The record does not disclose that the said company has ever ceased doing business. It is not proved that the debt due the plaintiff by the Sampit Contracting Company had been ascertained to be worthless pi’ior to the filing by plaintiff of its tax return, March 15, 1921, for the calendar year 1920, or that it had been charged off within that year.
    The court decided that plaintiff was not entitled to recover.
   Graham, Judge,

delivered the opinion of the court:

The plaintiff, a corporation doing business in the city of Georgetown, S. C., filed on March 15, 1921, its income and excess-profits tax return for the calendar year 1920, which showed a net taxable income of $26,721.54, after a deduction of $1,010.72 for bad debts. At the time the return was made there was on the books of plaintiff an account with the Sampit Contracting Co. which showed an indebtedness to plaintiff of $22,112.91. On September 15, 1921, plaintiff filed an amended income and excess-profits tax return for the calendar year 1920, claiming a deduction of $22,112.91 on account of the said debt of the Sampit Contracting Co. as a worthless debt. This return showed no taxable liability. At the same time plaintiff filed a claim for the abatement of remaining installments and the refund of $1,928.36 already paid as income tax. Both of these claims were rejected by the Commissioner of Internal Bevenue, and the balance of the tax for 1920 in the sum of $1,985.76 was paid on September 25, 1924, on which date plaintiff filed a claim for refund of the entire amount of these two payments, namely, $3,914.12. The Commissioner of Internal Bevenue having taken no action on the latter claim within six months, the plaintiff brought this action.

The applicable statute here is sec. 234 (a) (5) of the revenue act of 1918, 40 Stat. 1077, 1078, as follows:

Seo. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:

‡ ‡ $

*(5) Debts ascertained to be worthless and charged off within the taxable year.

Under this statute, to entitle plaintiff to the deduction claimed it is necessary that it should satisfactorily show that this debt, at the time of the filing of its tax return on March 15, 1921, had been “ ascertained to be worthless and charged off within the taxable year,” i. e., 1920.

The court has found that this debt had not been ascertained to be worthless at the time of the filing of plaintiff’s tax return, March 15, 1921, and had not been charged off during said taxable year.

The plaintiff has failed to bring itself within the requirements of the statute above cited, and is not entitled to recover.

The petition should be dismissed, and it is so ordered.

Moss, Judge; Hat, Judge; Booth, Judge; and Campbell, OMef Justice, concur.  