decided: March 14, 1951.
COMMISSIONER OF INTERNAL REVENUE.
Before L. HAND, Chief Judge, and SWAN and FRANK, Circuit Judges.
FRANK, Circuit Judge.
The Tax Court made this ruling: Where a taxpayer partially charges off a note and later in the same taxable year sells the note at a price equal to the reduced value remaining after the charge-off, the taxpayer may not deduct the amount of the chargeoff under 26 U.S.C.A. § 23(k) but is entitled solely to a capital loss deduction on the sale. We do not agree with this blanket generalization. The situation is not the equivalent of a sale followed in the same year by a partial charge-off.*fn1 For in such a case, after the sale, the taxpayer owns no debt which he can charge off, whereas, when the sale is the later event, there is no reason why the charge-off, if independent of the sale, should not be deductible.The fact that both transactions occur in the same year is irrelevant; the requirement of accounting for income tax purposes, on an annual basis is, we think, immaterial in this context.
But the result is different if the taxpayer has arranged for the sale before he makes the charge-off; for then, in reality, he is charging off a debt he no longer owns.Obviously that was the case here, if the seeming sales were actual sales, since the charge-offs and the sales occurred the same day and, patently, pursuant to previous negotiations. We would, therefore, sustain the Tax Court, were there no more to this case.
However, taxpayer urges that the apparent sales were not in fact sales but compositions with the debtors which resulted in deductible charge-offs. It seems most likely that such was the nature of the Whipple transaction, as the letter written on behalf of Lawrence Whipple, brother of the debtor John Whipple, speaks of the "full and complete redemption of the notes of John Whipple." The Sprague transaction is perhaps somewhat less clear, since taxpayer's letter to Irving Sprague, the brother of the debtor, C.O.M. Sprague, shows that the debtor's notes were endorsed, without recourse, and delivered to the brother; but taxpayer's testimony concerning the earlier Sprague negotiations supports the composition contention.
As the taxpayer did not make this contention in the Tax Court, the Commissioner should have an opportunity, if he desires, to present evidence bearing on that argument. We therefore reverse and remand&for a&further heazing, at which, of course, taxpayer may also present further evidence in support of his contention.*fn2
Reversed and remanded.