Brodnax v. Commissioner

*223 The respondent, by deficiency letters dated June 16, 1927, asserted deficiencies against the petitioners as follows:

In the original petitions filed herein it is alleged that in each case the taxes for both years are in controversy. At the hearing counsel for the petitioners amended the petitions and withdrew the assignments of error as to the year 1923. The proceedings were consolidated for hearing and decision.

FINDINGS OF FACT.

The petitioners are and were during the years 1921 and 1922, husband and wife residing at Dallas, Tex. They filed income-tax returns for the year 1922 on the community property basis, each reporting one-half the total income.

During the years 1921 and 1922 the petitioner, W. Brodnax, was a member of a partnership known as the*2448 Healey Construction Co., *224 owning a one-fourth interest herein. In the early part of the year 1921 the Healey Construction Co. began paving the streets of Beggs, Okla., under a contract by which it was to be paid for such construction in bonds of the city of Beggs. Some time in 1921 bonds of said city were issued to the Healey Construction Co. in the amount of $158,000. The paving contract was completed about April or May, 1922.

In the latter part of the year 1921, but after the bonds of the city of Beggs had been issued to the Healey Construction Co. in payment for said paving, a temporary injunction was issued by the District Court of Okmulgee County, Oklahoma, restraining the officials of the city of Beggs from passing the ordinance levying the paving assessments on the property in front of which said paving was being laid, which ordinance was necessary to assess and collect money to pay the principal and interest on said bonds. The temporary injunction was made permanent by the District Court of Okmulgee County in the year 1923. On appeal to the Supreme Court of Oklahoma said injunction was dissolved in the year 1925 and said bonds were held to be valid. Subsequently*2449 the necessary ordinance levying assessments for the payment of the principal and interest of said bonds was passed by the city council of Beggs. The persons owning the property against which the assessments were made have refused to pay the assessments and the officials of the city of Beggs have refused to take any steps to enforce collection. No part of the principal of, or interest on said bonds has ever been paid. The bonds mature about the year 1931.

In the early part of 1922 the Healey Construction Co. was dissolved and said bonds of the city of Beggs in the amount of $158,000 were distributed among the partners. The petitioner W. Brodnax received $39,500 par value of said bonds, but on account of certain adjustments they were charged out to him on the books of the partnership at $37,016.29. The petitioners, in their income-tax returns for the year 1922, each deducted from gross income, as a loss sustained in that, year, one-half of said amount of $37,016.29. The respondent disallowed the deductions.

OPINION.

MARQUETTE: The petitioners claim that the bonds of the city of Beggs which were issued to the Healey Construction Co. and subsequently distributed among the*2450 members of that partnership were worthless at the close of the year 1922, and that they are entitled to deduct the cost to them of their share of the bonds, either as a loss or as a debt ascertained to be worthless and charged off in the taxable year.

*225 The petitioners' position is untenable. The record does not show that the bonds in question were worthless in 1922. It is true that prior to that time a temporary injunction was issued by the District Court of Okmulgee County, Oklahoma, restraining the officials of the city of Beggs from levying and collecting assessments for the payment of the principal and interest of the bonds, but that fact did not render them worthless. The partnership was still carrying on litigation to establish the validity of the bonds, and they were subsequently, in 1925, held to be valid by the Supreme Court of Oklahoma. The injunction theretofore issued was dissolved and the ordinance for the levying and collection of the necessary amounts was passed by the city council of Beggs. Whether the bonds have since proved to be uncollectible is beside the point and has no bearing on their status in 1922. In our opinion no loss in connection with*2451 the bonds was sustained in that year, nor is there any basis for saying that they were worthless at that time.

Judgment will be entered for the respondent.