Thomas Henry, Inc. v. Commissioner ( 1928 )

THOMAS HENRY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Thomas Henry, Inc. v. Commissioner

Docket No. 12327.

United States Board of Tax Appeals

13 B.T.A. 1234; 1928 BTA LEXIS 3090;

October 25, 1928, Promulgated

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Respondent was not in error in reducing the amount of bad debt reserve.

William Surosky, Esq., for the petitioner.

J. E. Marshall, Esq., for the respondent.

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GREEN

In this proceeding the petitioner seeks a redetermination of its income and profits taxes for the calendar year 1921, for which year the respondent has determined a deficiency in the amount of $3,385.09.

The petitioner alleges that the respondent erred in disallowing a reserve for bad debts in the amount of $7,411.42.

FINDINGS OF FACT.

The petitioner is a corporation organized under the laws of the State of New Jersey in 1920, with its principal office at Union Hill, N.J., where it is engaged in the sale of building material at retail.

The petitioner filed its return for the calendar year 1921, deducting therefrom for bad debts, the sum of $24,150, made up as follows:

Bad debts actually charged off	$16,738.58
Additions to reserve	7,411.42
	24,150.00

It appears from the evidence that the opening balance sheet for the year 1921 showed accounts receivable outstanding in the amount of $104,000.81, against which a reserve for bad debts of $2,000 was set up. It also appears that the petitioner was not aware of its right to set up an addition to reserve for bad debts, but followed the practice under the Act of 1918 and wrote off bad debts in the sum of $16,738.58, ascertained to be worthless, leaving a balance of accounts receivable outstanding at the close of the year in the sum of $249,459.04. The petitioner then set up a reserve of $9,411.42 to cover the probable loss on the outstanding accounts receivable at that date, an increase of $7,411.42 over the reserve at the beginning of the year. The respondent has disallowed this addition to the reserve for bad debts.

OPINION.

GREEN: Section 214(a)(7) of the Revenue Act of 1921, reads as follows:

SEC. 214. (a) That in computing net income there shall be allowed as deductions:

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(7) 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); * * *

Under this section a taxpayer may do one of two things, to wit, deduct the debts ascertained to be worthless and charged off within the taxable year, or, in the discretion of the Commissioner, he may deduct a reasonable addition to a reserve for bad debts.

The petitioner has deducted both the reserve set up for bad debts and also the bad debts. Obviously it is not entitled to deduct both the amount of debts ascertained to be worthless and charged off in the taxable year and an addition to a reserve for bad debts. The respondent has allowed the amount claimed for bad debts ascertained to be worthless and properly disallowed the addition to the reserve set up for bad debts. See , and .

Judgment will be entered for the respondent.