*2434 1. Inventory adjustments allowed where valuations of lumber made on the basis of average cost of different grades were excessive due to higher than average percentages of lumber in the lower grades.
2. Bad debts ascertained to be worthless by officers of the company during the taxable year and charged off soon thereafter upon formal approval of the board of directors, held deductible.
*277 This proceeding involves a deficiency in income tax for the fiscal year ended June 30, 1924, in the amount of $1,521.51. The petitioner is contending for (1) an adjustment of its opening and closing inventory valuations; (2) a deduction on account of bad debts disallowed by the respondent; and (3) an increase in the deduction allowed by the respondent for taxes paid or accrued during the taxable year.
FINDINGS OF FACT.
The petitioner is a corporation engaged in the lumber business at Camden, Ark. For the years under consideration it closed its books and made its income-tax returns upon the basis of a fiscal year ended June 30. It made inventories of lumber*2435 on hand at the beginning and at the close of the fiscal years which it valued by using the average purchase price and manufactured cost of all grades rather than the actual cost of each separate grade. The opening inventory for the taxable year ended June 30, 1924, contained 769,736 board feet valued at $16,410.77. The closing inventory for that year contained 2,276.361 board feet valued at $55,884.66. These inventories were used by the petitioner in its income-tax return for the year in question and were not disturbed by the respondent. There were included in the inventory four different grades of lumber known as B & Better, No. 1 common, No. 2 common, and No. 3 common. These different grades varied in cost as much as $30 per thousand feet. Both at the opening and at the close of the year the lumber on hand contained a greater per cent of the lower grades than of the higher ones, so that its actual cost was overstated in each of the inventories. The correct amount of the inventories, valuing each separate grade of lumber at cost, was $12,199.44 for the opening inventory and *278 $52,894.52 for the closing inventory. The petitioner filed an amended return showing these*2436 changes in the original inventory in connection with a request to the Commissioner for an adjustment of its tax liability for the year involved.
In its return the petitioner claimed bad debt deductions aggregating $15,121.38, which the respondent has disallowed. There are three separate items, involving accounts with O. S. Earle in the amount of $12,557.35, the Chisca Lumber Co. in the amount of $1,654.47, and C. C. Henley in the amount of $909.56. All of these accounts were ascertained to be worthless during the taxable year ended June 30, 1924, by duly authorized officers of the company, who directed that they be charged off as of that year. The book entries showing the charge off of the accounts to profit and loss account were made September 1, 1924, with the notation "As per resolution of board of directors meeting August 2, 1924." The resolution referred to reads as follows:
A motion carried to charge to profit and loss the following accounts on the books of the Company, which were ascertained to be uncollectible:
| O. S. Earle | $12,557.35 |
| Chisca Lumber Co | 1,654.47 |
| C. C. Henley | 909.56 |
The directors themselves made no ascertainment as to the worthlessness*2437 of the debts, but merely approved the previous action of the officers. It was the intention of the officers that the accounts should be charged off as of the taxable year ended June 30, 1924, and deducted from the income of that year. The petitioner filed its return on October 15, 1924, having been granted an extension by the Commissioner.
The petitioner also claimed a deduction in its return for the taxable year of $2,202.61 on account of taxes other than Federal taxes paid or accrued during the year. In his audit of the return the respondent allowed the deduction of only $415.50. The respondent now concedes that the entire amount of $2,202.61 is deductible.
OPINION.
SMITH: The petitioner contends that the inventory valuations shown in its original return and used by the respondent in his computation are erroneous in that both the opening and the closing inventories were overvalued in the manner above described. The evidence before us fairly supports this contention, but the result obtained is a net increase of trading profit on lumber of $1,288.17 over that determined by the respondent.
*279 In *2438 , where almost the identical inventory question was raised, we held that the valuation of the inventories made on an average cost basis, which method had been used in both prior and subsequent taxable years, should not be disturbed in the absence of clear proof that the income was not accurately reflected thereby. In the instant case, however, the correct inventory figures have been put in evidence showing the number of board feet and the cost of each separate grade of lumber. The total number of board feet in all grades was correctly shown in the original inventories, but the percentages of the different grades were unequal, resulting in the excessive valuations. The inventory valuation made upon the basis of valuing each grade separately is obviously more nearly accurate under these circumstances and therefore more clearly reflects income than the valuation made upon the basis of the average cost of all grades.
We think that the petitioner is entitled to the deduction of the bad debts disallowed by the respondent. The debts were all reasonably ascertained to be worthless during the taxable year by officers of the company*2439 acting with full authority in the matter and in performance of their ordinary duties. This action of the officers was approved by the directors at their next meeting held on August 2, 1924, and the book entries showing the charge to profit and loss account were made on September 1, prior to the date on which the petitioner filed its income-tax return. It was intended by the petitioner's officers that the accounts should be charged off as of the taxable year ended June 30, 1924, and deducted from income of that year. We said in , that:
* * * We have consistently held that the ascertainment of worthlessness, by those with authority to act for the taxpayer, within the taxable year is the essential requirement of the statute and that the charge-off must occur substantially as of the date of the ascertainment of worthlessness. See ; ; ; *2440 .
Under this rule of construction we think that the petitioner has complied substantially with the requirements of the statute in respect to the debts in question.
The respondent has conceded the petitioner's remaining contention that it is entitled to a deduction of $2,202.61 on account of taxes paid or accrued during the taxable year.
Judgment will be entered under Rule 50.