The opinion
WINDER NATIONAL BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Winder Nat'l Bank v. Commissioner
Docket No. 25199.
United States Board of Tax Appeals
16 B.T.A. 12 ; 1929 BTA LEXIS 2663 ;
April 15, 1929 , Promulgated
*2663 Amount of bad debts deductible from gross income of 1922 determined.
F. O. Graves, Esq., for the petitioner.
T. M. Mather, Esq., for the respondent.
SMITH
*12 This proceeding involves a deficiency in income tax for the year 1922 in the amount of $1,172.63. The only issue is the amount of bad debts deductible from gross income for that year. A stipulation of the parties was filed in this proceeding from which the Board makes the following findings of fact.
FINDINGS OF FACT.
During the year 1921 the petitioner set up on its books and records reserves for bad debts for notes carried as doubtful. The original return for 1921 claimed a deduction for specific bad debts in the amount of $8,330.52, and carried an attached schedule which contained the following:
On account of the losses and small earnings for the years 1921 the following described notes were not charged off and are hereby reported as a loss and a record made of the same so as to be handled properly in our 1922 report. Whatever amounts may be recovered on these notes will be clearly reflected in our 1922 report, but are considered worthless by our finance committee at this *2664 time.
*13 This statement was followed by an itemized statement of debts in the total amount of $5,470.63. No reserve for bad debts was then claimed by the petitioner.
The original return for 1922 claimed a deduction of $11,314.03 stated to represent 43 notes and checks charged off. A further deduction was claimed for worthless notes not charged off and listed for items in a total amount of $9,500. The return carried also an income item described as worthless, "Worthless notes reported in 1921 not charged until 1922." Under this item there were listed five of the same notes which were on the schedule attached to the 1921 return.
In August, 1924, amended returns were filed by the petitioner for both 1921 and 1922. These returns computed income on the basis of comparative net worth at the beginning and end of each year. Reserves for bad debts were indicated in the amounts of $5,316.58 and $11,345.50 at December 31, 1921, and December 31, 1922, with an addition of $9,500 to the reserve for 1922 and charges of $3,471.08 against that reserve for said year. The amount shown as a reserve as of December 31, 1921, represented a relisting of the items originally returned *2665 as worthless at the end of that year but not charged off. The amount of $9,500 shown as added to the reserve for 1922 represents the four items originally returned as worthless for said year but not charged off. The charge against the reserve of $3,471.08 is made up of a part of the amounts originally returned as worthless at the end of 1921 which were not charged off until 1922.
The amended return for 1922 claimed as a deduction for specific bad debts the amount of $7,850.59 and an additional amount of $9,500 claimed as an addition to reserve, making a total deduction of $17,350.59. The 1921 case was made the subject of a field investigation. Numerous adjustments were made in book income, including the allowance by the respondent of $5,316.58 as additional bad debts. This is the same amount which was set up as a reserve in the amended return filed by the petitioner for the year 1921 but not charged off until 1922.
In determining the deficiency in tax for the year 1922 the respondent allowed as a deduction from income specific bad debts in the amount of $7,850.59 and disallowed as a deduction the amount of $9,500 claimed as an addition to reserve. No claim was made by the *2666 petitioner at that time for a deduction of the item of $3,471.08, charges against reserve during that year. The petitioner claims that it should be allowed as a deduction from income for the year 1922 the item of $9,500 disallowed as a deduction by the respondent, or a deduction from income for said year in the amount of $3,471.08, representing charges against reserve for bad debts for said year. *14 The said $3,471.08 is a part of the total amount of $5,470.63, which amount was allowed by the respondent as a deduction for had debts in the year 1921 and treated by the petitioner in its amended return for the year 1922 as a charge against reserve for bad debts. The notes representing the item of $3,471.08 were reported by the petitioner in its 1921 return as worthless, but were not, in fact, charged off by the petitioner until 1922.
OPINION.
SMITH: The petitioner contends that it is entitled to deduct from gross income in its income-tax return for 1922, $7,850.59 for debts ascertained to be worthless and charged off in 1922, plus $9,500 added to a reserve for bad debts on the petitioner's books of account at the close of the year; or, in the alternative, $7,850.59 above *2667 referred to plus $3,471.08 for debts apparently ascertained to be worthless in 1921 but not charged off until 1922.
Section 234 of the Revenue Act of 1921 provides in part:
(a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
* * *
(5) Debts ascertained to be worthless and charged off within the taxable year (or in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, * * *
The respondent determined the petitioner's tax liability for 1921 upon the basis that it was entitled to deduct from gross income of 1921 an addition to a reserve fund for bad debts. He therefore allowed the deduction of the amount of debts ascertained to be worthless and charged off in 1921, plus $5,316.58 for debts ascertained to be worthless in 1921 but not charged off until 1922. The petitioner's amended income-tax return for 1921 reflects this adjustment. Included in the $5,316.58 above referred to is $3,471.08 which the petitioner claims as a deduction for 1922 in its alternative contention.
Under the statute the petitioner *2668 is entitled to deduct from gross income of 1922 a "reasonable addition to a reserve for bad debts." The stipulation filed in this proceeding does not show what a reasonable addition to a reserve for bad debts for 1922 is. The respondent has allowed the deduction of $7,850.59. The petitioner claims that to this amount should be added $9,500 which was added to its reserve for bad debts on its books of account at the close of 1921. All that the stipulation shows is that the petitioner "claimed" this amount for worthless debts not charged off. For lack of evidence we can not determine that a reasonable addition to a reserve for bad debts was any amount greater than the respondent has allowed, namely, *15 $7,850.59. The burden of proving error on the part of the respondent is on the petitioner and it has not carried this burden.
If the petitioner is to be limited to debts ascertained to be worthless and charged off within the year 1922, the evidence shows that the only amount ascertained to be worthless and charged off within the year was $7,850.59. The petitioner contends that an additional amount of $3,471.08 was charged off in 1922 and should be allowed as a deduction *2669 from gross income. The stipulation indicates, however, that the bad debts represented by this amount were determined to be worthless in 1921. The mere charging off of these accounts in 1922 is not a basis for the deduction of them in the 1922 return, since the statute requires both a determination and a charging off within the year. . The respondent allowed the deduction of the $3,471.08 in the audit of the return for 1921, and we see no reason for modifying that determination, and permitting the deduction in the return for 1922. We therefore sustain the respondent's contention that the petitioner is entitled under the statute to deduct from gross income of 1922 only $7,850.59 for bad debts.
Reviewed by the Board.
Judgment will be entered for the respondent.