Houck Co. v. Commissioner

OPINION.

Love:

We will consider first the petitioner’s contention that the amount of $1,883.12 represented debts ascertained to be worthless and charged off within the taxable year 1919, and that for that reason the amount so charged is a proper deduction from gross income for that year.

The evidence presented in this proceeding clearly establishes the fact that the petitioner, in arriving at the amount of $1,883.12 taken as a deduction for bad debts, did not charge off particular accounts. The petitioner, however, estimated that 50 per cent of the accounts carried on the loose-leaf ledger were bad and accordingly deducted one-half of the total amount of those accounts.

Under the provisions of the Revenue Act of 1918, a so-called bad debt is an allowable deduction from gross income only when ascertained to be worthless and charged off within the taxable period. Appeal of Ed C. Lasater, 1 B. T. A. 956. The first prerequisite, then, in order that a debt may be charged off is that it be ascertained to- be worthless in fact. The petitioner, the evidence shows, did not ascertain any particular debt to be in fact worthless in the year 1919. The petitioner’s secretary, treasurer and general manager testified that he was familiar with all the circumstances surrounding the debtors; that he considered the debts worthless; that every effort had been made to collect the debts.

However, the petitioner faces another difficulty. Particular and specific debts were not charged off in 1919 but, on the contrary, 50 per cent of the total of certain accounts. In order to come within the provisions of the Revenue Act of 1918 authorizing the deduction on account of bad debts, a particular debt must be ascertained to be worthless and the entire amount thereof charged off. The Revenue Act of 1918 does not permit a taxpayer to charge off a debt in part. Appeal of Steele Cotton Mill Co., 1 B. T. A. 299. The petitioner, therefore, has not complied with the terms of the statute and for that reason the determination of the respondent in disallowing as a deduction from gross income for the year 1919 the amount of $1,883.12 on account of bad debts, is approved.

With respect to the contention advanced by the petitioner to the effect that the respondent has erroneously increased its taxable income for 1919 in the amount of $577.56, which it alleges represents recoveries in the year 1920 on account of bad debts charged off in 1919, we must hold that the respondent has erred.

The petitioner strongly urges that under no circumstances could the recoveries made in 1920 constitute income for the year 1919. That contention, of course, would not be sound if the propriety in charging off in 1919 the amounts in question on account of bad debts Avere in dispute. However, that is not the case.

The debts oAving to the petitioner by Richardson and Harrell >vere charged off in 1919 and it is not suggested anyAvhere that such action Avas not justified because the debts were not worthless. The issue squarely presented is whether the amount of $577.56 was recovered in the year 1919 or in 1920.

The evidence clearly shows, and we find it to be a fact, that the amount of $577.56 represented by the debts owing to the petitioner by Richardson and Harrell was charged off in 1919, and that in January, 1920, the petitioner received from Richardson and Harrell notes in the amount of $702.56, of which the amount of $577.56 had been charged off in 1919 as bad debts. The petitioner kept its books on an accrual basis and in the year 1920 set up the amount represented by the notes as income for the year. The respondent erred, therefore, in increasing the petitioner’s income for the year 1919 in the amount of $577.56 recovered in 1920.

Judgment will be entered on 15 days' notice, under Rule 50.

Considered by Littleton and Tkussell.