Colvin v. Commissioner

*1321 This is a proceeding for the redetermination of a deficiency in income tax of $11,678.54 for the year 1922, which deficiency resulted from the Commissioner's increasing income derived from a partnership of which petitioner was a member. The issues involved are whether the Commissioner erred in reducing the depreciation claimed by the partnership and in disallowing deductions for bad debts and cost of office equipment. A third issue involving the inclusion in the petitioner's income for 1922 of an alleged profit of $15,348.33 on a bond trading account was abandoned by the petitioner at the hearing.

FINDINGS*1961 OF FACT.

Petitioner is an individual who resides at Evanston, Ill. During the year 1922 and for many years prior thereto he was a member of a partnership engaged in the brokerage business, with offices at Monroe and La Salle Streets in the city of Chicago. The business was conducted under the name of Wm H. Colvin & Company, of which petitioner owned a 95 per cent interest.

The partnership held notes of A. C. Guernsey and H. H. Kohlsaat, who were customers of the firm, which notes were in the respective amounts of $6,686.62 and $5,860 and were given to cover debts due the partnership on account of transactions conducted on behalf of Guernsey and Kohlsaat. The indebtedness secured by each of these notes arose several years prior to 1914.

Guernsey had been a prominent man in Wyoming and owned property in the West which was believed to be of considerable value. The Guernsey indebtedness was taken out of the balance sheet of the partnership in 1913 or 1914 and thereafter appeared on the books as a memorandum of money due the partnership. The note *1322 was turned over to a collection agency and suit was instituted, but no part thereof was ever collected. In the partnership*1962 return for 1922 this item was deducted as a bad debt.

Kohlsaat was a well known newspaper man who was believed to be financially responsible. In 1914 Kohlsaat left Chicago without having made any payment on his note, which was executed in 1909, and the partnership charged off his indebtedness in the sum of $5,860. This sum was deducted from income in 1914 as a bad debt. The deduction was disallowed by the Commissioner on the ground that the debt was not worthless and uncollectible in that year. At that time Kohlsaat was known to carry a large amount of insurance. Thereafter this item was shown on the books as a memorandum of money due the partnership, but was not restored to the assets shown in the balance sheet. Kohlsaat died in 1922 and it was found that his insurance had lapsed. The amount of $5,860 was deducted from the gross income of the partnership in 1922 as a bad debt.

In 1922 the offices of the partnership were located in the Woman's Temple Building in Chicago, which has since been torn down. A very elaborate system of telephone communication with various bond houses and banks was installed in order that transactions in unlisted securities could be handled with*1963 speed and accuracy. The equipment was built to order and was very expensive. At the time it was installed the partnership lease had two more years to run. In the partnership return for 1922 there was deducted $4,268.75 for the cost of the equipment, and depreciation on fixtures and equipment was claimed in the sum of $3,514.62. The partnership continued to occupy the premises until April, 1926. The fixtures were abandoned when the partnership moved out and there was no salvage.

Upon audit the net income of the partnership for 1922 was increased from $15,673.74 to $57,726, due in part to the above disallowances, and the petitioner's income from the partnership was increased from $14,890.06 to $54,839.70.

OPINION.

MATTHEWS: The deficiency in income tax for 1922 which has been determined against the petitioner is based upon the increase in income derived from the partnership of Wm. H. Colvin & Company. The Commissioner disallowed in full the deductions taken by the partnership on account of the alleged bad debts of Guernsey and Kohlsaat in the respective amounts of $6,686.62 and $5,860, for the reason that they had been previously charged to profit and loss. There was*1964 added to income the item of $4,268.75, representing expense incurred for office fixtures. The deduction for depreciation *1323 in the sum of $3,541.62 was reduced by the Commissioner to $1,031.47.

With respect to the two items last mentioned, it is alleged in the petition as follows:

The deduction of $3,514.62 as depreciation on office equipment and the further sum of $4,268.75 for fixtures and equipment were proper deductions as they constituted the actual depreciation and loss sustained by Wm. H. Colvin & Company, the amount being arrived at by charging off the pro rata value thereof based on the term of the lease for the premises occupied by Wm. H. Colvin & Company.

No evidence was offered with respect to the cost, date of acquisition, useful life, or nature of the office equipment on which depreciation of $3,514.62 was claimed. The record does not disclose the amount which was expended in connection with the installation of the equipment and office fixtures which were abandoned when the partnership moved its offices from the Woman's Temple Building. Neither does the evidence show the date in 1922 when the installation was made. The petitioner testified that the*1965 lease for the premises had two more years to run when the equipment was installed and that one-half of the total amount of the expenditure for rearranging the offices and putting in this equipment was charged off in 1922, but the lease was not introduced in evidence and we do not know the date of its expiration or its provisions with respect to cancellation and renewal. The offices were vacated in April, 1926.

The respondent allowed depreciation for 1922 in the sum of $1,031.47. No part of the deduction claimed in the amount of $4,268.75 as expense incurred for office fixtures was allowed. The evidence offered by the petitioner has failed to establish that the partnership is entitled to any greater deduction on account of depreciation or to any deduction on account of cost of equipment and fixtures.

With respect to the alleged bad debts represented by notes payable to the partnership, we have found that the Guernsey indebtedness was taken out of the balance sheet of the partnership in 1913 or 1914. We do not know that it was deducted in either year, but there is nothing to indicate that the right to deduct this item was denied at the time it was charged to profit and loss. *1966 The statute provides that there shall be allowed as deductions, debts ascertained to be worthless and charged off within the taxable year. Under the circumstances set out herein it can not be said that the Guernsey note was ascertained to be worthless and charged off in 1922.

The Kohlsaat indebtedness was charged off as uncollectible in 1914, but the deduction was disallowed by the Commissioner on the ground that it was not shown to be worthless in that year. This *1324 note was executed in 1909 and it does not appear that Kohlsaat ever made any payment thereon or executed any new promise to pay. Actions on promisory notes must be commenced in Illinois within ten years after the cause of action accrues, unless there is a payment or a new promise in writing. See paragraph 17, chapter 83, Cahill's Revised Illinois Statutes (1929 Ed.). It will be seen that the period of limitation on collection of the Kohlsaat note by suit must have expired prior to 1922 so that Kohlsaat's death in that year could have had no relation to the worthlessness of the note. It is not necessary to determine when this debt became worthless. It suffices to say that the item is not deductible*1967 in 1922.

The deductions taken in 1922 by the partnership on account of the indebtedness of Guernsey and of Kohlsaat were properly disallowed by the respondent.

Judgment will be entered for the respondent.