
    Weil-McLain Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3413.
    Decided November 23, 1926.
    
      P. J. O'Connor, C. P. A., for the petitioner.
    
      Arthur H. Murray, Esq., for the respondent.
   Littleton:

The petitioner claims that the Commissioner’s determination of a deficiency of $11,533.48 for the period commencing February 1, 1918, and ending December 31, 1918, was erroneous in so far as the same resulted from the disallowance of a deduction of $23,423.94, an account of the Seltzer Heating Co. alleged to have been determined to be worthless and charged off prior to December 31, 1918.

FINDINGS OF FACT.

In 1907 the Seltzer Pleating Co., of Washington, D. C., was indebted to the petitioner, then known as the J. H. McLain Co., of Indiana, in the amount of $4,875, for heating material purchased. Urish D. Seltzer of the Seltzer Heating Co. owned, as trustee for Hess & Booth of Lebanon, Pa., certain real property located at Washington, D. C., known as Alta Park. Under the terms of his trusteeship he was to have for his services one-third of whatever profit might be realized upon the sale of this property. P. L. McLain was treasurer of the J. H. McLain Co., now Weil-McLain Co., and was its principal stockholder. It was arranged between McLain and Seltzer that, if Seltzer would assist McLain in purchasing the real property held by Seltzer, as trustee, at as low a price as possible, he, McLain, would assume the debt of the Seltzer Heating Co. to the J. H. McLain Co. Seltzer assisted McLain in the acquisition of the property for $60,000 and McLain assumed the debt of the Seltzer Heating Co. to the J. H. McLain Co. The debt of the Seltzer Heating Co. was continued upon the books of the J. H. McLain Co., and subsequently upon the books of the Weil-McLain Co., in the amount of $4,875, and, after McLain had purchased the Alta Heights property, he continued to charge to the Seltzer Heating Co.'s account upon the corporation’s books interest paid by him upon the unpaid purchase price of the Alta Heights property, together with taxes upon the property, revenue stamps, etc. As a result of these charges, the account of the Seltzer Heating Co. standing upon the books of the corporation at the beginning and end ' of the taxable period here in question amounted to $23,423.94.

After McLain had acquired the Alta Heights property, he organized a corporation and received certain of its stock. He then borrowed on his personal note from the Canton National Bank, of Canton, Ohio, $22,000, and placed the stock with the bank as collateral. The interest paid upon this indebtedness was charged to the Seltzer Heating Co.’s account from the books of the McLain Co. On June 23, 1910, there was executed the following written instrument:

I hereby assign to the J. H. McLain Company, all my right, title and interest in the equity to be derived from the sale of the Alta Heights Realty Company, located at Washington, T>. C., until amount of the Seltzer Heating Company’s claim, as it stands on the books of the J. H. McLain Company, is satisfied.
[Signed] P. L. McLain.

About September, 1918, Isadore Weil acquired the stock of the McLain Company owned by P. L. McLain and thereby became the owner of the majority of the stock of the company, and McLain thereafter had no connection with the company. Previous to the purchase of the stock in September, Weil was not connected with the company and knew nothing about its affairs or accounts, and McLain did not explain the account of the Seltzer Heating Co. to him. Some time after Weil had purchased the stock of the company he inquired of McLain concerning the Seltzer Heating Co.’s account, and McLain informed him that, if he would take up his, McLain’s, note for $22,000 at the Canton National Bank and get the stock of the Alta Heights Realty Co. that he had put up as collateral for the loan, he, 'Weil, could probably recover the amount shown in the Seltzer Heating Co.’s account on the books of the company. Weil did not desire to do this and charged off the amount of $23,-423.94 charged upon the books to the Seltzer Heating Co., of Washington, D. C.

In filing the return for the period February 1 to December 31, 1918, the amount of $23,423.94 was claimed as a deduction from gross income as a debt ascertained to be worthless and charged off. The Commissioner disallowed the deduction.

No one for the petitioner made any investigation, at or prior to the time that this account was charged off as worthless, to determine whether it was in fact without value. No inquiry was made to determine whether the Seltzer Heating Co. or P. L. McLain was liable to the company for the amount, nor was any investigation made to ascertain whether the amount, or any portion thereof, could be collected from either of these persons.

Judgment will be entered redetermining a deficiency of $11,533.18 for the period February 1 to December 31, 1918.  