Laramore, Judge,
delivered the opinion of the court:
The plaintiff corporation sues to recover $196,686.47, with interest, as Federal income taxes overpaid for the calendar years 1942, 1943, and 1944. The issue presented is whether the Commissioner of Internal Revenue properly disallowed a deduction of $464,861.93 for 1944, which was claimed by plaintiff to be a wholly or partially worthless bad debt, or a loss in that year. If the deduction is allowed, plaintiff is entitled to a refund for 1944, and for the two preceding years because of the resulting net operating loss carryback.
The plaintiff was engaged in the wholesale coal business, buying, selling, and transiting coal. It functioned princi pally as a sales agent for small coal producers and its income was derived from commissions on sales of coal. It arranged for the sale of the coal to a wholesaler, or other customer, collected the sales price, and remitted to the coal producer the sale price, less its commission, subject to accounting balances. In order to keep its customers, plaintiff had to have a ready supply of coal to satisfy their requirements.
It was the custom of plaintiff, in the ordinary course of its business, to advance money to coal operators against future coal deliveries to enable the mine operators to meet current mining costs and payrolls and produce the coal required for plaintiff's customers. Plaintiff borrowed and repaid many millions of dollars in conducting its business as factor and sales agent.
In 1936 George W. Anderson acquired at a public auction for $50,000 the plant, equipment, and lease known as the Margarette lease, from a defunct coal company. The purpose of acquiring the Margarette lease was to control the supply of coal for plaintiff's customers. These assets were transferred to the Margarette Coal Corporation which was formed in 1936.
The stock of plaintiff and the Margarette Coal Corporation was owned directly or indirectly by George W. Anderson and George P. Oswald. They were the directors and officers of both corporations, and the books and records of both companies were kept at the principal office of the plaintiff.
The Margarette Corporation immediately began mining operations in the underground workings of the Margarette lease and continued to mine coal on a profitable basis from 1936 to 1942, when the underground workings on that lease from a profitable and practical standpoint were exhausted. On January 1, 1942, the plaintiff was indebted to the Margarette Coal Corporation in the sum of $29,166.19 for coal shipped and sold from the Margarette lease.
On January 1,1942, Margarette Coal Corporation obtained a lease known as the Frances lease. The Frances lease was not as good as the Margarette lease because the coal thinned out and existed in fewer and more isolated blocks. No con sideration was paid for the Frances lease other than the royalties agreed to be paid on coal produced therefrom. Margarette Coal Corporation moved its tram road facilities and movable equipment from the Margarette lease over to the Frances lease and used the tipple on the Margarette lease to handle the Frances lease production. The operation on the Frances lease was primarily deep mining, with some limited amount of strip mining.
After the regular deep-mining operations on the Mar-garette lease had been completed in 1942, a study and examination of this property was made by Mr. Gerdetz and he advised Margarette Coal Corporation that it could recover substantial quantities of coal by strip mining the crop lines at the surface and the fringes of the underground workings, and presented a plan for such operations. Strip mining on this lease was started in 1942 and continued into 1944.
The officers of plaintiff and Margarette Coal Corporation were acquainted with the general success reported on strip-mining operations, and despite meeting with adverse conditions, continued to expect profitable stripping operations. With some variance in conditions from time to time, the cost of removing the overburden on the Margarette lease greatly exceeded the value of the coal removed and very substantial losses were sustained in the operations. The losses were due to the fact that coal was not found in many places where it was reasonably expected to be; the coal found was often not merchantable because of inferior quality, and the stripping operations were hindered by unexpected water difficulties and by running into underground workings.
In 1944 the Margarette Coal Corporation abandoned its strip-mining operations on the Margarette lease and sold and disposed of all of its stripping equipment and applied the proceeds to the account due plaintiff. Subsequently in 1944, the Bichmond Coal Company, which had no connection with plaintiff or its affiliates, entered into a royalty agreement and conducted stripping operations on the Margarette lease. The Bichmond Coal Company operations were not successful and it ceased operations in the latter part of 1944.
In 1942,1943, and 1944, as at other times, plaintiff was the exclusive sales agent for coal produced by Margarette Coal Corporation, and from time to time advanced funds on future deliveries of coal, as was done in the case of other coal producers The same commission was charged by plaintiff on sales of Margarette production as on coal from other operators, and the sales were handled in the customary manner.
The advances of cash to and credits for coal sold for Margarette Coal Corporation were carried on plaintiff's books and records as an open account. This account for the years 1942, 1943, and 1944 is summarized below. There were no notes or other written instruments of indebtedness and no mortgages or other form of security. Interest was not charged. Plaintiff and Margarette Coal Corporation treated their relationship as that of debtor and creditor on open account.
On December 31, 1944, the open account indebtedness of Margarette Coal Corporation to plaintiff was $601,339.18. During the years 1942 through 1944 the supply of coal was short and the advances made by plaintiff to Margarette Coal Corporation and other producers were to enable the production of a needed supply. The advances to Margarette Coal Corporation went into its overall operation on both the Margarette and the Frances leases. The net advances that plaintiff made to Margarette Coal Corporation exceeded by far the advances made to coal producers who had no stock affiliation with it. The two largest losses suffered by plaintiff in making advances to coal mining companies, other than the Margarette Coal Corporation, had occurred prior to 1936, when losses were sustained amounting to $100,000 on one account, and $150,000 on another.
The officers of plaintiff and Margarette Coal Corporation reasonably and in good faith expected that the stripping operations on the Margarette lease would result in production of a substantial tonnage of coal, which, together with production on the Frances lease, would result in sufficient coal deliveries to repay plaintiff's advances. The inability of Margarette Coal Corporation to produce sufficient coal to offset plaintiff's advances resulted almost entirely from the failure of the strip-mining operations on the Margarette lease.
In November or December 1944, plaintiff's chief accounting officer made a detailed investigation of the Margarette Coal Corporation's account and prepared a schedule showing the book value of Margarette's assets and liabilities, adjustments made by him from his investigation, and the actual values as determined from his investigation. Based on this investigation and schedule adjusted to December 31, 1944, he determined that the excess of adjusted values of Margarette's assets over liabilities was $136,417.25, exclusive of the $601,-339.18 indebtedness to plaintiff. At that time the Margarette lease was practically exhausted and the deep-mining operations on the Frances lease were costly, and it reasonably appeared that no substantial profits would be made on the Frances operations. The plaintiff determined that the maximum part of the Margarette Coal Corporation indebtedness of $601,339.18 that could be recovered was $136,477.25, and it wrote down the account in the amount of $464,861.93 as being worthless to that extent. The plaintiff continued to advance Margarette Coal Corporation money in connection with the operation of the Frances lease. Subsequent events show that the Frances lease operation was slightly better than a break-even operation and that the $464,861.93 write-down was not recovered. Throughout its operations Mar-garette Coal Corporation never paid dividends to its stockholders.
The plaintiff claimed a deduction of $464,861.93 for worthlessness of the Margarette open account indebtedness on its tax return for 1944, and attached the balance sheet and schedule prepared by its accountant.
Upon audit of plaintiff's 1944 return, the Commissioner disallowed the bad-debt deduction on the ground that an actual debtor-creditor relationship did not exist, and, if it did, it was not established that the debt became worthless within the year 1944. Additional assessment for 1944 was made by the Commissioner and paid by plaintiff. Timely claims for refunds were filed, rejected, and this suit followed.
The plaintiff contends that the evidence shows a bona -fide debtor-creditor relationship between itself and the Margar-ette Coal Corporation and that the $464,861.93 was deductible in 1944 either as a bad debt, wholly or partially worthless in that year, or as a loss sustained in that year. The defendant contends that a true debtor-creditor relationship did not exist, and, if it did, the plaintiff has not shown that the Commissioner of Internal Revenue was arbitrary in refusing to allow the $464,861.93 as a partial-bad-debt deduction in 1944.
The pertinent part of section 23 of the Internal Revenue Code of 1939, as amended, 26 U. S. C. 23, provides:
In computing net income there shall be allowed as deductions:
* % * Hi tfc
(k) Bad debts.. (1) General rule. Debts which become worthless within the taxable year; or (in the discretion of the Commissioner) a reasonable addition to a reserve for bad debts; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction.
The record amply supports the finding of the commissioner of this court that the plaintiff's advances to Margarette Coal Corporation were made with a reasonable expectation of repayment and represented a true indebtedness. The defendant, in its argument on the lack of genuineness of the debt, relies on the fact that two individuals owned, directly or indirectly, both the debtor and the creditor corporations, and the fact that plaintiff's net advances to Margarette Coal Corporation were far greater than those made to nonaffiliated companies.
The common ownership factor requires a close scrutiny of the transaction to see that it was one of substance and one that could have reasonably been made between parties dealing at arm's length. The record shows that plaintiff dealt with Margarette Coal Corporation in exactly the same maimer that it did with other coal producers, except for the greater net advances made to Margarette. The plaintiff has shown that the advances were made because of the need for coal and the reasonable belief that sufficient coal could be mined from the Margarette and Frances leases to warrant the expense of mining it. There is no evidence indicating that a person dealing at arm's length with Margarette Coal Corporation would have done anything different under the same conditions. Under the facts of this case there is no room for argument of tax avoidance because of the common ownership of two corporations.
The plaintiff's contention that the $464,861.93 is deductible under the totally worthless bad-debt provision is without merit. The debt was $601,339.18, and only part of that debt was worthless.
We turn now to the question of whether the Commissioner properly denied a deduction of the $464,861.93 as a partially worthless bad debt in 1944. It is seen from section 23 (k) (1), supra, that the Commissioner has a certain amount of discretion in determining whether a debt is partially worthless and the extent thereof within a particular taxable year. His determination is not to be lightly set aside. However, he cannot arbitrarily refuse a deduction when the facts clearly show that the debt is partially worthless and the extent thereof.
The determination of whether a debt is partially worthless within a taxable year is usually a pure question of fact and depends on the circumstances surrounding the debtor and his ability to pay the obligation. The facts of the instant case show that the Commissioner abused his discretion in refusing to allow the deduction of the $464,861.93 as a partially worthless bad debt in 1944.
The commissioner of this court has found that the facts facing the plaintiff in 1944 were these. A realistic appraisal of its debtor's assets over liabilities, exclusive of its obliga tions to the plaintiff, was $136,477.25. The only other potential source of repaying any of the $601,339.18 were two leases. One was the Margarette lease, which could no longer be mined at a profit. An independent coal producer attempted to mine coal under the Margarette lease and was unsuccessful and abandoned the operation in 1944. The other lease was the Frances lease, which was not wanted by anyone because it was known that the remaining coal under that lease was thinned out and existed only in isolated spots and that the cost of mining the coal would be extremely high. The fact that the lease laid idle for 7 years during a period in which there was a shortage of coal, and was obtained for nothing other than payment of royalties, indicates that it was not a very desirable lease. It was reasonable to expect that no more than the $136,477.25 could be recovered on the operations under the Frances lease.
If the plaintiff was going to allow its debtor to go out of business, most of the additional $136,477.25 would be lost because most of the equipment on the leases would revert to the lessor. Further, there was a great need for coal, and if plaintiff could have it mined, even if only on a break-even basis, it could retain its customers and make a profit on the sale and still recoup some of its $136,477.25. There is absolutely no evidence in the record to indicate that the debtor had any reasonable possibility of repaying the full advances. The fact that money was advanced from week to week to mine coal after 1944 on this lease does not in the slightest way affect the question of whether or not in 1944 there existed any reasonable expectation of repayment of the entire $601,339.18. The facts of this case clearly show that the $601,339.18 debt was partially worthless in 1944. The evidence on the extent of worthlessness sustains the $464,861.93 claimed by plaintiff.
The subsequent history of the operation of the Margarette Coal Corporation bears out the conclusion that none of the $464,861.93 was recoverable after 1944. The plaintiff is entitled to deduct under section 23 (k) (1) the $464,861.93 as a partially worthless bad debt in 1944.
The defendant argues that the question of whether the Commissioner of Internal Eevenue abused his discretion should be decided on the "record" made before him rather than on the record made before this court. The tax laws contemplate a trial de novo, and there is nothing in the partial-bad-debt provision that indicates the contrary. The taxpayer claiming a partially worthless bad debt should prove or attempt to prove that the debt was partially worthless, not come into court and show what he furnished the Commissioner of Internal Revenue to convince him that the debt was partially worthless. As a practical matter, the Commissioner of Internal Revenue generally has before him the same information that is before the court in partial-bad-debt cases since it behooves the taxpayer to convince the Commissioner. Contrary to defendant's statement, there was far more than just a balance sheet before the Commissioner of Internal Revenue when he made his decision in this case. The Commissioner conducted a complete field audit of the plaintiff and its related corporations' books and tax returns, had many conferences with the same individuals who testified in this case, and had the complete cooperation of plaintiff.
The plaintiff is entitled to recover, and judgment will be entered in the amount of $54,148.65 for 1942, with interest from June 12, 1945; $55,854.50 for 1943, with interest from June 12, 1945; and $86,683.32 for 1944, with interest from March 11,1953, as provided by law.
It is so ordered.
Littleton, Judge; and Jones, Chief Judge, concur.
1942:
Advances made--$437, 973.19
Credits--352, 563. 97
Excess of advances over credits--$85, 409. 22 1943:
Advances made--754, 943. 29
Credits--427, 050. 59
Excess of advances over credits--327, 892. 70 1944:
Advances made--421, 872. 66
Credits--233, 835. 40
Excess of advances over credits--188, 037. 26
Total excess advances over credits--601, 339.18