8. (a) During the war years the prices at which the products of plaintiff's predecessor could be sold were controlled by the OPA. The price of type 35 dark air-cured tobacco, used in twist, was not controlled. The prices of burley and flue-cured tobaccos were controlled. Burley and flue-cured tobaccos were used in the manufacture of cigarettes and in certain other tobacco products. Certain grades of dark aircured tobacco could be used in lieu of burley. The relative demand for dark air-cured tobacco was thereby increased, resulting in a proportionately larger wartime demand for the raw tobacco used in the manufacture of twist than in some other types of tobacco.27

(b) During the war years the price squeeze on manufacturers of twist tobacco was greater than it was on the manufacturers of cigarettes and snuff. The Owen partnership's earnings during the war years were lower, because of the price squeeze, than were the partnership earnings during a comparable period before the war or the corporation's earnings during a comparable period after the war.

9. (a) The earnings of the business during the years immediately preceding and immediately following World War II reflect its potential more accurately than do the earnings of the business during the war years.

(b) The earnings and financial statements of the partnership during the years immediately preceding the war and the earnings and financial statements of the corporation during the years immediately following the war reflect relative stability of the business over a period of years.

For example, dark fired tobacco, used in the manufacture of snuff, was in relatively greater supply than other types of tobacco. The war had caused the loss of part of the European export market.

Findings of Fact

149 C. Cls.

(c) Such stability made possible the operation of the business with a relatively small amount of equity capital." 10. (a) Table 2, showing the average rates of return on net tangible assets during the war years (plus 1 year before and 1 year after the war) for the Owen partnership and 38 other tobacco companies, is incorporated in this finding.

(b) The evidence fails to establish comparability, other than in the manufacture of tobacco products, between the R. C. Owen partnership 29 and any of the groups or companies listed in the tabulation.30

11. Plaintiff acquired from the partnership intangible assets unlisted by the partnership or the corporation of the value of approximately $186,625.31

The purchase of raw tobacco was usually financed through banks on warehouse receipts.

Plaintiff challenges the accuracy of defendant's figures, shown in the table, for the rates of return of the R. C. Owen partnership, because of the inclusion by defendant within the partnership's net tangible assets of substantial sums which, although carried on the books as part of the capital account, were so used as not to contribute to partnership income. Details are not in evidence to support the position of either party.

20 No data were available from companies (other than Owen) engaged primarily in the manufacture of twist tobacco.

The good will of the business, as a going concern, and including the brand names, had a value of approximately $200,000.

96

Syllabus

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes, as a matter of law, that the Commissioner of Internal Revenue was correct in his determination that the alleged interest paid on the alleged debentures by the plaintiff in the sum of $14,560.00 for each of the fiscal years ending April 30, 1953, 1954 and 1955, was not deductible as interest, and that the plaintiff is not entitled to recover anything in this action, and therefore its petition is dismissed.

JOSEPHINE W. D. HENRY v. THE UNITED
STATES

[No. 581-57. Decided February 3, 1960]

ON THE PROOFS

Taxes, income; deductions; losses; bad debts-nonbusiness.-In an action to recover taxes alleged to have been erroneously assessed and collected on an amount which plaintiff reported as a fully deductible ordinary loss, which deduction was disallowed in part by the Commissioner of Internal Revenue who ruled that it was a short-term capital loss arising from a nonbusiness bad debt under section 23 (k) (4) of the Internal Revenue Code of 1939, 26 U.S.C. § 23 (k) (4) (1952), and therefore subject to the $1,000 limitation on deductions for capital losses (section 117 (d)(2) of the Internal Revenue Code of 1939, 26 U.S.C. § 117 (d)(2) (1952), it is held that where the plaintiff had advanced money on mortgages and it was later agreed that the borrower was financially unable to pay the amount owed and the borrower then transferred the mortgaged property to the taxpayer who accepted it in full satisfaction of the debt and the taxpayer thereafter sold the property for less than the amount of the debt, the loss resulted from a nonbusiness bad debt, and where the parties had agreed in 1948 that the borrower was financially unable to repay the amount owed, the taxpayer's nonbusiness debt became worthless during that taxable year and was properly treated as a short-term capital loss. Petition is dismissed.

Internal Revenue 612.7, 674

Opinion of the Court

149 C. Cls.

Taxes, income; revenue laws-construction and operation; construction with reference to other statutes.-A statute providing for deductions from gross income for losses by an individual taxpayer incurred in transactions entered into for profit but not connected with the taxpayer's trade or business, and a statute providing for the deduction of nonbusiness bad debts, are mutually exclusive. An amount deductible under one statute is not deductible under the other, and a loss attributable to the worthlessness of a debt must be regarded as a bad debt loss deductible as such or not at all. 26 U.S.C. § 23 (e) (2) and (k) (4) (1952).

Internal Revenue 605

Taxes, income; deductions; losses-bad debt-nonbusiness.-Where the taxpayer advances money to a borrower on the security of mortgages on the borrower's property and later the parties agree that the borrower cannot pay the sums owed and the mortgaged property is transferred to the taxpayer in full satisfaction of the borrower's indebtedness although a sale of the property later brings less than the debt, the loss to the taxpayer is a nonbusiness bad debt subject to the $1,000 limitation on deductions for capital losses and was deductible for the year in which the debt became worthless, i.e., when the parties agreed that the debtor was unable to repay the debt. Bowles Lunch, Inc. v. United States, 91 C. Cls. 292, overruled. 26 U.S.C. § 23 (k) (4) (1952).

Mr. Elden McFarland for plaintiff.

Mr. Robert Livingston, with whom was Mr. Assistant Attorney General Charles K. Rice, for defendant. Messrs. James P. Garland and Lyle M. Turner were on the brief.

LITTLETON, Judge (Ret.), delivered the opinion of the

court:

Plaintiff sues for a refund of income tax for the year 1948. The tax was paid pursuant to a determination by the Commissioner of Internal Revenue that a loss of $27,873.50, claimed by plaintiff as an ordinary loss, fully deductible as such under section 23 (e) (2) of the Internal Revenue Code of 1939, 26 U.S.C. (1952 ed.), § 23 (e) (2), was a short-term capital loss arising from a non-business bad debt, under section 23(k) (4) of the 1939 Code, 26 U.S.C. (1952 ed.), § 23 (k) (4), and therefore subject to the $1,000 limitation on deductions for capital losses (§ 117 (d) (2), Int. Rev.

13

Opinion of the Court

Code of 1939, as amended, 26 U.S.C. (1952 ed.), § 117 (d) (2)). We are of the opinion that the Commissioner was correct in his determination that plaintiff's loss resulted from a non-business bad debt.

On April 9, 1948, plaintiff was owed a total amount of $40,768.11 by one Irene Specht. This amount included sums which plaintiff paid for and advanced upon certain mortgages on property owned by Irene Specht, real estate taxes on the property which had been paid by plaintiff, and unpaid interest on the mortgage indebtedness. On that date, Irene Specht was financially unable to pay the amount she owed to plaintiff, and the parties entered into an agreement whereby Irene Specht transferred the mortgaged property to plaintiff and plaintiff accepted it in full satisfaction of the indebtedness. On June 25, 1948, plaintiff sold the property for $15,000, but incurred expenses of $2,105.39, realizing a net amount of $12,894.61. Plaintiff claimed $27,873.50, the difference between the amount of the debt and the net amount realized from the sale of the property, as a fully deductible loss for the taxable year 1948. The Commissioner disallowed that amount as a fully deductible loss, determined that plaintiff was entitled to treat it as a short-term capital loss, limited plaintiff's deduction to $1,000, and assessed a deficiency tax on the additional $26,873.50. Plaintiff paid the assessed deficiency and interest thereon and filed a claim for refund. No part of the tax paid has been refunded, and plaintiff instituted this action to recover the amounts paid, plus interest according to law.

Plaintiff claims that the loss she incurred as a result of the transaction described above was a loss incurred in a transaction entered into for profit. Such a loss would be fully deductible under section 23 (e) (2) of the Internal Revenue Code of 1939, supra, which provides:

SEC. 23. Deductions from gross income. In computing net income there shall be allowed as deductions:

*

(e) Losses by individuals. In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise