*1892 DEDUCTION - BAD DEBTS. - The petitioner set up a reserve for bad debts. The respondent allowed actual bad debts as a deduction. Held, that the respondent's determination will not be disturbed where petitioner fails to establish the reasonableness of the reserve claimed.
*294 The petitioner seeks a redetermination of the income-tax deficiencies asserted by the respondent in the following amounts:
| Fiscal year ended - | |
| June 30, 1924 | $1,116.58 |
| June 30, 1925 | 2,691.83 |
| June 30, 1926 | 1,726.83 |
| 5,535.24 |
At the hearing counsel for the petitioner agreed to the adjustments made by respondent as to each of said years on account of deductions claimed by petitioner but disallowed by respondent as excessive depreciation. At the same time counsel for both parties agreed and stipulated that the adjusted net income of $22,171.79, as disclosed by the deficiency notice for the fiscal year ended June 30, 1924, should be decreased by the amount of $784.70 representing State, county and city taxes, which disposed of the issue relating to petitioner's*1893 claimed deduction of $1,404.89 as a reserve for taxes.
The only remaining issue in this proceeding is whether respondent erred in allowing petitioner a deduction for the actual bad debts for each of said years instead of the deductions claimed as a reserve for bad debts.
FINDINGS OF FACT.
The petitioner was incorporated by two brothers in July, 1919, under the laws of the State of Georgia and its principal office and place of business is located in the city of Sylvania, Screven County.
During its fiscal years ending June 30, 1920, 1921, and 1922, the petitioner engaged in the business of operating a cotton-oil mill and an ice plant. Its products were sold for cash except in a few instances when credit was extended usually for only a few days. Petitioner's books were not submitted in evidence, but they were installed and kept by the two brothers who were not familiar with accounting principles. The balance sheets for the fiscal years ending June 30, 1920, and 1921, and attached to the petitioner's return for the year ended June 30, 1921, contain accounts receivable, accounts payable, accrued interest, accrued insurance liability, and accrued taxes. For the years ending*1894 June 30, 1920 and 1921, no bad debts were charged off and no reserve for bad debts was set up, but for the fiscal year ended June 30, 1922, petitioner charged off $355.47 as bad debts and took a deduction therefor in its tax return for that year. The said amount represented an accumulation of about nine accounts due for ice sold in 1920 and 1921, and a small amount advanced to a couple of employees who were discharged.
In the early part of 1923, the petitioner extended its operations to include the fertilizer business. During the spring of 1923 it sold *295 about 600 tons of fertilizer, mostly on credit to farmers. At or about the close of the fiscal year ended June 30, 1923, and upon advice of an accountant, petitioner set up a reserve for bad debts because at least 80 per cent of its fertilizer sales was to farmers who purchased in the spring and paid after their crops were harvested. The reserve so set up amounted to $546.39 and the actual bad debts were approximately the same amount.
For each of the years in question the reserve for bad debts and the bad debts charged to the reserve as shown by the deficiency notice, which amounts petitioner has admitted to be*1895 correct, are as follows:
| Year ending June 30 - | |||
| 1924 | 1925 | 1926 | |
| Reserve for bad debts | $4,360.00 | $14,245.46 | $20,000.00 |
| Bad debts charged to reserve | 546.35 | 1,870.15 | 1,004.63 |
For each of the said years the petitioner determined the amount set aside as a reserve for bad debts by sending its gin man, who was idle during the summer, to inspect the growing crops of farmers who had purchased fertilizer on credit and then on the basis of that man's report on crop conditions, by making an estimate as to which farmers might fail to pay up because of the failure of crops.
Petitioner has never applied to the respondent for permission to establish a reserve for bad debts.
The respondent determined that for the fiscal year ended June 30, 1922, the petitioner elected to charge off actual bad debts and that it has never sought nor been granted permission to change to the reserve method. For each of the years in question the respondent has disallowed the deduction taken for such reserve and has allowed as a deduction the amount of bad debts charged to the reserve.
OPINION.
TRUSSELL: The petitioner contends that under the peculiar circumstances surrounding*1896 its method of accounting, it did not actually make an election as to how it would treat bad debts until it set up a reserve therefor during its fiscal year ended June 30, 1923, and that it is entitled to a deduction in the amount of the reserve set up for each of the years in controversy.
Section 234(a)(5) of the Revenue Acts of 1924 and 1926 provides that there shall be allowed as a deduction from gross income:
(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 *296 reserve for bad debts); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.
The said revenue acts require that a reserve or an addition thereto for bad debts must be reasonable and the reasonableness of the reserves claimed by petitioner must be considered. The record in this proceeding does not establish that the reserves claimed were reasonable nor do the facts of record enable us to determine what would constitute a reasonable reserve and reasonable additions thereto for this petitioner's business. Accordingly, it is not necessary*1897 for us to pass upon the issue as to whether petitioner in 1922 made an election to charge off actual bad debts. The respondent's determination as to this issue will not be disturbed.
Judgment will be entered pursuant to Rule 50.