*2342 Reserves for worthless debts should be excluded in computing pre-war income.
*584 Before MARQUETTE and MORRIS.
This appeal is from the determination by the Commissioner of deficiencies in income and profits taxes for the fiscal years ended July 31, 1918, and July 31, 1919, in the aggregate amount of $8,532.48. The deficiency letter also discloses deficiencies for the fiscal years 1912, 1913, and 1915 to 1917, inclusive.
The question relates to the average net income for the pre-war period in determining the war-profits credit of the taxpayer.
FINDINGS OF FACT.
The taxpayer is a corporation organized under the laws of Georgia in 1910, and started business in 1911, manufacturing fruit and vegetable packages and crates.
The total sales for 1911 were about $40,000 and for 1912 about $60,000. In 1913 the sales were $100,000 and the profits for that year were for the first time sufficient, in the judgment of the taxpayer, to justify setting up a reserve for doubtful accounts as a matter of conservative accounting. *2343 The taxpayer went over its list of accounts receivable and determined which were doubtful, as distinguished *585 from worthless, and set up the total of $3,067.78 as a reserve for the fiscal year ended July 31, 1913, deducting that amount from its income in arriving at the tax due under the Revenue Act of 1909. A similar deduction for the fiscal year 1914 was taken in the amount of $3,048.03.
The accounts, so set up in reserves, were collected in part during years subsequent to 1913 and 1914. For all the fiscal years from 1913 to 1918, inclusive, the taxpayer deducted from its income the respective amounts set up as reserves for doubtful accounts in each of said years.
The Commissioner disallowed the deduction of the reserves for the fiscal years 1915 to 1918, inclusive, from the taxpayer's income for those years, with corresponding increases in surplus and invested capital.
The Commissioner determined an aggregate deficiency for the years 1912, 1913, 1915, to 1919, inclusive, in the amount of $8,850.71, the aggregate deficiencies for 1918 and 1919 being $8,532.48. The taxpayer duly appealed from the determinations for 1918 and 1919.
DECISION.
The deficiency*2344 should be computed in accordance with the following opinion. Final determination of the Board will be settled on 7 days' notice, under Rule 50.
OPINION.
MARQUETTE: The single question before us relates to the computation of the taxpayer's average net income for the pre-war period, as defined in sections 310 and 311 of the Revenue Act of 1918.
The taxpayer admits that the action of the Commissioner in disallowing the deduction of the reserves for doubtful accounts during the years 1915 to 1919 was correct, but contends that the same position should be maintained consistently for the years 1913 and 1914 in order properly to determine the pre-war net income.
We agree with the taxpayer in that contention. The deduction of reserves for bad debts was first permitted by the Revenue Act of 1921. The items in question were not even bad debts. They only represented an estimate as to doubtful accounts with no evidence of worthlessness.
The taxpayer's average net income for the pre-war period should, accordingly, be increased and, with proper adjustment in invested capital, the taxes should be recomputed.
ARUNDELL not participating.