TAXATION-DEDUCTIONS FOR PARTIAL WORTHLESSNESS OF A DEBT

Taxpayer was accustomed to loan money to a related corporation on open accounts. The debtor consistently lost money and became bankrupt in 1938. Thereupon taxpayer wrote off the whole debt using it as a deduction from 1938 income. The commissioner assessed a deficiency on the theory that the taxpayer, by a subordination agreement made with another creditor in 1931, had recognized the then balance to be worthless.

Hence, he argued, advances made after that date were a separate debt; therefore taxpayer had lost the right to deduct the debt due in 1931 for failure to take it in the year in which it became worthless. Taxpayer argued that the account represented but one debt, so that he need not deduct the partial worthlessness occurring in 1931, but might await the year of complete worthlessness before seeking any deduction. Held: for the taxpayer. The E. Richard Meinig Co. v. Commissioner, 9 T.C. 976 (1947).