Jack v. Commissioner

¶3*726 These proceedings are for the redetermination of deficiencies in income taxes for the following years in the amounts stated:

¶4FINDINGS OF FACT.

¶5Petitioner resides at 451 W. Macon Street, Decatur, Ill., in which city he is engaged in the practice of medicine.

¶6He expended during the years 1920, 1921, 1922, and 1923, the respective sums, $16, $230, $375, and $384.46 for railroad fare, hotel accommodations and meals in connection with attending meetings and conventions of various medical associations. He deducted from gross income and the Commissioner disallowed as deductions for said*3197 years the respective sums, $16, $230, $375, and $15.

¶7On July 1, 1906, petitioner and Dr. Everett J. Brown entered into a partnership agreement, whereunder petitioner acquired a 25 per cent interest and Dr. Brown a 75 per cent interest in the partnership. Dr. Brown contributed to the partnership his office equipment and other tangible property. He assigned to it the lease on his offices and contributed the good will of his practice. Petitioner contributed to the partnership the good will of his practice. The said partnership agreement contained the following:

¶8For reason of the limited nature of the good will, so contributed by him, he the said Jack, further agrees to and with the said Brown as further consideration for the organization of said co-partnership and the continuation of the same, to pay to said Brown, the sum of $7,500.00.

¶9Only July 1, 1916, petitioner and Dr. Brown entered into a new partnership agreement which was to expire on December 31, 1927. Under this agreement, petitioner acquired a 29 per cent interest in *727 the partnership, which interest was to increase at the rate of 2 per cent per year. Dr. Brown's interest was to decrease proportionately.

¶10*3198 On November 1, 1919, petitioner and Dr. Brown entered into a new partnership agreement which terminated and superseded the old agreements. Under this agreement, petitioner agreed to purchase certain real estate interests from Dr. Brown at an agreed price. It was also agreed that beginning November 1, 1919, each partner should have a one-half interest in the partnership until such time as Dr. Brown should not be able to render professional services in the practice of medicine, at which time the partnership should automatically terminate. Dr. Brown agreed to sell to petitioner at such time as Dr. Brown should be unable to practice medicine all his interest in the partnership book accounts, office equipment, medical and surgical instruments and appliances, office fixtures and furnishings, the good will and the continuance of the right to use and occupy the offices for the period of at least five years thereafter. Petitioner agreed to pay as rental for the office rooms an amount to be mutually agreed upon from year to year and to pay for Dr. Brown's interest in all the partnership assets a certain percentage of the net income from the earnings of the medical practice to be continued*3199 by him. The percentages were 40 per cent for the first year, 30 per cent for the second year, 20 per cent for the third year, 10 per cent for the fourth year, and 5 per cent for the fifth year.

¶11The partnership terminated due to Dr. Brown's physical disability on June 10, 1920. Dr. Brown died on August 30, 1920.

¶12A balance sheet from the partnership books as of June 10, 1920, showed the following:

¶13The "accounts receivable" consisted of a large number of accounts contracted over a period of years subsequent to 1906.

¶14During the years 1920 to 1923 petitioner, in pursuance of the agreement dated November 1, 1919, paid to Dr. Brown and/or Dr. Brown's estate the following sums:

¶15*728 A final settlement*3200 agreement was effected between petitioner and the trustees for the estate of Dr. Brown under date of August 30, 1923. Under said agreement, petitioner paid the said trustees $2,875 for a transfer and assignment of all their right, title and interest in the income and profits specified in the agreement dated November 1, 1919. The said amount of $2,875 is included in the amount of $5,224.31 for the year 1923 set forth above.

¶16During the years 1920 to 1923, petitioner made partial collections of the accounts of the partnership outstanding on June 10, 1920; and collections to the extent of 50 per cent representing accounts purchased from Dr. Brown under the agreement of November 1, 1919, were eliminated from income by Commissioner.

¶17The amounts collected and the amounts so eliminated from income are as follows:

¶18Petitioner kept his books of account and rendered his income-tax returns on a cash basis.

¶19Commissioner has denied petitioner a deduction for 1923 for the difference between*3201 one-half of the amount of accounts receivable shown on the books of the partnership on June 10, 1920, and purchased from Dr. Brown, and collections on same as above ($9,550.47).

¶20OPINION.

¶21PHILLIPS: The facts follow the stipulation of the parties except that the substance of certain contracts attached as exhibits have been set out rather than the whole thereof. We are of the opinion that the Commissioner was in error in refusing to allow as a deduction the expenses of attending meetings and conventions of medical societies. ; . In , on which the respondent relies, it was necessary to affirm the action of the Commissioner for lack of proof of the amounts expended in attending professional conventions.

¶22Petitioner contends that he is entitled to deduct from gross income for 1923 the amount of $15,374.34, representing one-half of the difference between the amounts of accounts receivable as shown on the books of the partnership on June 10, 1920, the date of the termination *729 of the partnership, and the amount collected on said*3202 accounts between June 11, 1920, and December 31, 1923.

¶23It is petitioner's contention that his associate, Dr. Brown, owned one-half of the accounts receivable of the partnership and that on dissolution petitioner purchased his interest therein, paying therefor their face value. It is the difference between this alleged cost of purchase and the amount realized to the close of 1923 that is sought as a deduction. We have difficulty in arriving at the conclusion that the petitioner paid Dr. Brown or his estate one-half of the face value of the accounts for his interest, but even if this difficulty is considered as overcome, we are of the opinion that petitioner has failed to establish that he is entitled to the deduction claimed either as a loss sustained in that year or as debts ascertained to be worthless and charged off. The expression "losses sustained" means actual losses. No final disposition of the accounts took place in 1923. There is no evidence that they were lost in that year or that petitioner sustained a loss on account of them in that year. We can not assume that all accounts uncollected at the end of 1923 had become valueless. Neither is the sum contended for deductible*3203 as a worthless debt in that year, for there is no evidence that any of the accounts were worthless in 1923 or that petitioner ascertained any part of them to be worthless in that year and charged them off.

¶24Reviewed by the Board.

¶25Decision will be entered under Rule 50.