CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE THIRD CIRCUIT.
Taft, Holmes, Van Devanter, McReynolds, Brandeis, Sutherland, Butler, Sanford, Stone
MR. JUSTICE STONE delivered the opinion of the Court.
This case is here on writ of certiorari to the Circuit Court of Appeals for the third circuit, to review its judgment, 11 Fed. 2d 493, reversing the judgment of the district court for western Pennsylvania, 8 Fed. 2d 91, and awarding a new trial. The action was brought by respondent to recover income taxes paid by it for the year 1918. By written stipulation a jury was waived and the case was tried to the court, which made special findings and on them gave judgment for defendant. The principal question to be determined is the right of the respondent, upheld below, to deduct an admitted business loss from its gross income for 1918 in determining its tax for that year, rather than from gross income for a later year.
In July, 1918, respondent contracted with one Jouravleff for the sale and delivery to it in monthly installments of a quantity of tungsten ore. The contract required the buyer immediately to accept a bill of exchange drawn on
it by the seller in the sum of $30,000, which was to be applied against the purchase price of the first carload of ore shipped. Respondent accepted the draft and the seller negotiated it through bankers associated with him in the transaction. Respondent paid it at maturity, in advance of any actual shipment of ore, having received from the broker who had negotiated the sale, a telegram saying: "Shipment one car will be made today." Only a small quantity of ore was ever shipped. This was received in the following December and after being credited upon the amount of the draft left a balance of more than $27,000. In March of the following year respondent began three separate suits to recover the $27,000 -- one against the seller, the second against the broker as an alleged surety or guarantor of the seller, and the third against the bankers. Judgment secured against the seller in 1919 remains unsatisfied. The suit against the broker resulted in a judgment for the defendant in November, 1922. The suit against the bankers was discontinued in 1921 as useless after they had been adjudged bankrupt. Respondent did not charge off the $27,000 on its books in 1918, but continued to carry it as an item in its "bills receivable" account. It claimed no loss on account of the payment in its tax return for that year. Upon the termination of the litigation in 1922 it filed an amended tax return for 1918, deducting the uncollected balance as a loss, and brought the present suit to recover the alleged overpayment of tax.
Section 234 of the Revenue Act of 1918, c. 18, 40 Stat. 1057, 1078, provides that in arriving at taxable income there may be deducted:
"(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise;
"(5) Debts ascertained to be worthless and charged off within the taxable year."
The district court held that the loss was upon a worthless debt deductible under subdivision (5) and not deductible for 1918 because not charged off in that year.
The respondent contends and the court below held that the loss was not one upon a worthless debt, deductible under sub-section (5), but was deductible when "sustained" under sub-section (4), and concludes that the loss was rightly deducted as of 1918 since the loss was ...