1930 BTA LEXIS 2389">*2389 Debts neither ascertained to be worthless nor charged off within the taxable year are not legal deductions from gross income.
19 B.T.A. 484">*485 This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1926 in the amount of $1,461.60. The petitioner alleges that the respondent erred in the determination of the deficiency by failing to allow as a deduction from income for 1926 the amount of bad debts actually determined to be worthless and charged off the books. The facts were stipulated.
FINDINGS OF FACT.
The petitioner is an Idaho corporation with principal office at Boise.
In 1925 the petitioner determined certain debts to be worthless and charged off on its books in 1925 the amount of $7,439.22 for debts ascertained to be worthless, which amount was allowed by the Commissioner as a proper deduction from gross income of that year. In 1926 the petitioner determined certain debts to be worthless in the amont of $5,971.76 and charged those off on its books of account. This amount was allowed by the Commissioner as a proper1930 BTA LEXIS 2389">*2390 deduction from the gross income of 1926.
The stockholders sold their stock in the petitioner corporation to outside interests February 28, 1927. The old stockholders agreed to take over all the accounts receivable on the petitioner's books and to assume all the petitioner's liabilities. The retiring stockholders appointed trustees to take over the accounts receivable, collect them, and pay off the assumed liabilities. These accounts receivable were entered on the books of the trustees in 1927, and thereafter, but prior to the filing of the petitioner's amended return for 1925, and the original return for 1926 (April 15, 1927), there were charged off on the trustees' books in 1927 bad debts in the amount of $9,745.88 for 1925, and there were also charged off on the trustees' books in 1927 bad debts in the amount of $17,225.59 for 1926. These entries were made on the books of the trustees as of December 31, 1925, and as of December 31, 1926, respectively.
The respondent refused to allow as a deduction from the gross income of 1926, $17,225.59 for bad debts charged off on the books of the trustees in 1927 as of December 31, 1926, and computed the deficiency accordingly.
1930 BTA LEXIS 2389">*2391 OPINION.
SMITH: The sole question presented is whether the petitioner may be allowed a bad debt deduction for 1926 in the amount of $17,225.59. Section 234(a)(5) of the Revenue Act of 1926 provides:
In computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
* * *
(5) 19 B.T.A. 484">*486 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)f and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.
In , we said, in referring to the Revenue Act of 1918:
* * * It will be noted from the foregoing that the statute prescribes two conditions before debts claimed to be worthless may be deducted from gross income in an individual tax return - first, that they must be ascertained to be worthless, and, secondly, that they must be charged off within the taxable year. * * *
The same holds true to the Revenue Act of 1926, except where the deduction for bad debts is based upon a reasonable addition to1930 BTA LEXIS 2389">*2392 a reserve for bad debts, which is not the case here.
The pleadings in this case show that the respondent denies that the $17,225.59 claimed as a deduction for bad debts for 1926 was either ascertained to be worthless in 1926 or charged off within the year. All that the evidence shows is that certain trustees for the stockholders entered upon certain books of account kept by them the accounts receivable as shown by the petitioner's books of account at February 28, 1927, and at some time prior to the date when the return of the petitioner was filed for 1926 charged off on the trustees' books the $17,225.59 in question. This does not show an ascertainment of worthlessness in 1926, nor does it show a charge-off on the petitioner's books as of that date. The disallowance of the deduction by the respondent is sustained.
Judgment will be entered for the respondent.