OPINION.
Phillips :
In 1920 petitioner was the holder of obligations to pay money in the principal sum of $5,550. These obligations represented loans which he had made to his brother at various times from May 24, 1909, to March 3, 1913.
In 1920 petitioner learned that his brother had met with reverses in the ranch business; that he had disposed of his stock and was working for wages; that he had lost money in a bank failure and could not meet his obligations. He also learned that the chattel mortgages on the stock had not been renewed as he had supposed These debts were then ascertained to be worthless and charged off his books of account.
There is no question that these loans were bona fide business transactions. In 1909 the brother had undertaken the business of stock raising on a ranch in South Dakota, and the loans in question were made to assist him in establishing that business. For many years prior to 1909 petitioner had loaned him from time to time sums of money aggregating many thousands of dollars. These loans had all been repaid. When making the loans here in question due business precautions were taken to secure payment, to the extent of investigating the brother's situation and the requirement of chattel mortgages. They were not charged off his books of account until 1920, when they were first ascertained to be worthless. The disposition of the notes thereafter can not affect the character of the debts ascertained to be worthless and so charged off.
On his income-tax return in 1920 plaintiff claimed a deduction of $8,307.21 for bad debts. This sum included the principal of $5,550, and accrued interest. The petitioner kept his accounts on a cash receipts and disbursements basis and had never included in income any part of this accrued interest. The accrued interest, therefore, was not a proper deduction from gross income in 1920. Appeal of Charles A. Collin, 1 B. T. A. 305.
The principal sum of $5,550, representing debts ascertained to be worthless in 1920, was deductible from gross income of that year.
Decision will he entered, on 15 days' notice, under Rule 50.
Considered by Marquette, MillikeN, and VaN Fossan.