*1653 1. BAD DEBTS. Where the petitioner claimed deductions for bad debts for 1921 by the charge-off method, it may not change to the reserve method for subsequent years without the consent of the Commissioner. Kay Manufacturing Co.,18 B.T.A. 753">18 B.T.A. 753, followed.
2. Id. ELECTION. The fact that petitioner had no actual knowledge of its right to make an election does not excuse it from the consequences of its act. Gustave Rader Co.,19 B.T.A. 12">19 B.T.A. 12, followed.
*365 This case involves deficiencies for the years 1923, 1924 and 1925 in the amounts of $1,602.90, $94.54 and $719.01, respectively. Respondent made several adjustments in petitioner's income for each of the taxable years, but the only one which petitioner contests is that relative to bad debts. It is alleged by the petitioner that the respondent erred in not allowing it deductions for a reasonable addition to its reserve for bad debts. It is the position of the respondent that petitioner adopted the charge-off method for 1921 and that under section 234(a)(5) of the*1654 Revenue Acts of 1921 and 1924, and under article 151, Regulations 62 and 65, this constituted an election and petitioner could not change to the reserve method without consent of respondent, which admittedly it did not obtain.
FINDINGS OF FACT.
Facts were stipulated by the parties as follows:
During all of the years 1916 to 1925, inclusive, petitioner used the reserve for bad debts method in keeping its books. During the years 1916 to 1920, *366 inclusive, petitioner, in filing its income tax returns, deducted bad debts on the basis of actual charge-offs for bad debts against such reserves. Regulations 62 was published in Washington February 15, 1922.
At the time of filing its 1921 income tax return none of the officers of the petitioner, or those connected with the petitioner, who had charge of preparing its tax return for the year 1921, had read or had called to their attention the provisions of Regulations 62.
In its income tax return for the year 1921 the taxpayer deducted therein the actual charge-off of bad debts as a deduction. The amount of the charge-off of bad debts deducted for the year 1921 was less than the amount shown on the books of the petitioner*1655 as a reasonable addition to the reserve for that year.
In the income tax returns of the petitioner for the years 1922 to 1925, inclusive, bad debts were claimed as a deduction from income on the basis of the addition to the bad debt reserve for those years in reasonable amounts.
At the time of filing its income tax returns for the years 1922 to 1925, inclusive, the petitioner, or any of its officers had not requested permission, or had not been granted permission by the Commissioner of Internal Revenue to charge the basis of deducting bad debts from the actual charge-off method claimed and deducted in its 1921 income tax return, to the reasonable addition to the reserve for bad debts, as claimed and deducted in its returns for the years 1922 to 1925, inclusive.
The reserve for bad debts account per petitioner's books during the years here involved is analyzed as follows:
| Balance 12-31-20 | $6,029.84 |
| Credited to Reserve in 1921 | 12,049.35 |
| 18,079.19 | |
| Actual Bad Debts charged to Reserve | 8,671.27 |
| Balance 12-31-21 | 9,407.92 |
| Credited to Reserve and claimed during 1922 | 35,009.48 |
| 44,417.40 | |
| Actual Bad Debts charged to Reserve | 36,030.58 |
| Balance 12-31-22 | 8,386.82 |
| Credited to Reserve and claimed during 1923 | 40,284.65 |
| 48,671.47 | |
| Actual Bad Debts charged to Reserve | 28,192.97 |
| Balance 12-31-23 | 20,478.50 |
| Credited to Reserve and claimed during 1924 | 16,879.94 |
| 37,358.44 | |
| Actual Bad Debts charged to Reserve | 16,700.27 |
| Balance 12-31-24 | 20,658.17 |
| Credited to Reserve and claimed during 1925 | 28,599.53 |
| 49,257.70 | |
| Actual Bad Debts charged to Reserve | 23,866.01 |
| Balance 12-31-25 | 25,391.69 |
*1656 *367 During the ten-year period 1916-1925, the reasonableness of the additions to reserves is evidenced as follows:
| Aggregate gross charge sales | $18,554,844.00 |
| Aggregate actual charge-offs | 160,601.92 |
| Aggregate credits to reserves | 171,302.76 |
| Percentage of actual charge-offs to sales | .0086 |
| Percentage of reserve credits to sales | .0092 |
| Difference | .0006 |
The difference between the reserve method and the actual charge-off method of treatment amounts to approximately $10,000 compared with aggregate gross charge sales of $18,554,844 during that period.
Petitioner's income-tax returns for 1923, 1924, and 1925 were put in evidence. The return for 1923 shows that petitioner took a deduction for bad debts of $40,284.65 and of this, the Commissioner has disallowed $12,091.68, which represented petitioner's addition to reserve for bad debts at the end of the year 1923. The return for 1924 shows that petitioner took a deduction for bad debts of $16,879.94 and of this amount the Commissioner has disallowed $179.67, which represents petitioner's addition to reserve for bad debts at the end of the year 1924. The return for 1925 shows that petitioner took*1657 a deduction for bad debts of $28,599.53, and of this amount the Commissioner has disallowed $4,733.52, which represents petitioner's addition to reserve for bad debts at the end of the year 1925.
OPINION.
BLACK: It appears from the stipulation of facts in this case that for several years prior to 1921 the petitioner had always set up on its books of account a reserve for bad debts, but in making its returns for taxation had claimed deduction for bad debts by the charge-off method, because that was the only method recognized by the revenue acts prior to 1921.
In the Revenue Acts of 1921 and 1924, it is provided that deductions may be taken for "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); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part."
Regulations 62 and 65, article 151, provide in substance that bad debts may be treated in either of two ways - (1) by the charge-off method; and (2) by a deduction from income for a reserve for bad debts. It was further provided that for the year*1658 1921 taxpayers were given an option as to which method they would pursue, regardless of their previous practice, but that whichever method was elected for 1921 must be continued for subsequent years unless permission *368 to change to the other method was granted by the Commissioner.
For the year 1922 and subsequent years, petitioner used the reserve for bad debts method on its returns (a system which it had long been using in its books of accounting), which was disallowed by respondent on the ground that petitioner had taken deductions by the charge-off method in 1921 and had not obtained his permission to change to the reserve method.
The question is sharply presented whether or not the petitioner, who deducted bad debts in its return for the year 1921 by the charge-off method, may deduct bad debts for the years 1923, 1924 and 1925, the taxable years before us, by the reserve method when permission to make the change had not been asked or granted by the respondent.
The Revenue Act for 1921 became effective November 23, 1921, and Regulations 62, containing article 151, was published February 15, 1922. Petitioner filed its return for 1921 on March 2, 1922, and at the*1659 time of filing said return none of its officers or those connected with petitioner in preparing its tax returns had read or had called to their attention the provisions of Regulations 62 granting taxpayers the right of election between the charge-off method and a reserve for bad debts.
It is insisted by the petitioner that it is not bound by its action, in making its return for 1921 by the charge-off method, because it was not advised of its right of election before filing its return, and because it had kept its books on the reserve for bad debts method, and had filed its income-tax returns in previous years on the actual charge-off method only because the law required it to be done; that, when the law was changed by the enactment of the 1921 Act, petitioner should have automatically filed its return on the reserve for bad debts method; and that its return for 1921, filed on the charge-off method, was erroneously prepared in that manner.
One of the Board's leading cases on the question involved in this proceeding is . Most of the contentions made by the petitioner in the instant case were made by the taxpayer in that case and*1660 were ruled upon adversely to the contentions now made by petitioner. In , the contention was made by the taxpayer that at the time of filing his 1921 return he had no information of the Commissioner's regulations permitting him an election as to the method of filing his return and hence he should not be bound by the method used in his 1921 return. The Board there said:
The petitioner contends in its brief that its action in claiming a bad debt deduction for 1921 by the charge-off method did not constitute an election of that method under the regulation above quoted, for the reason that at the *369 time of making its return for 1921 it had no actual knowledge of the regulation or of its right thereunder. This regulation was made under authority of the statute, and it is not contended that it is arbitrary or unreasonable. Upon consideration of the regulation, we have held that it constitutes a valid exercise of discretion by the respondent. .
The fact that the petitioner had no actual knowledge of its right under the above statute and regulation at the time of making its*1661 return for 1921, if such be the fact, can not excuse it from the consequences of its act. That act constituted an election of the method pursued in claiming its bad debt deduction, and that method so elected could not thereafter be changed without first obtaining permission of the Commissioner. One who purports to act under a law, and claims the benefits conferred, can not plead ignorance of the law to avoid a burden imposed, and the same rule applies to regulations promulgated pursuant to and having the force and effect of law.
See also ; ; ; ; .
On the authority of the above cited cases, we hold the respondent did not err in disallowing so much of petitioner's deduction for bad debts in each of the taxable years as represented an addition to petitioner's reserve for bad debts. Inasmuch as that seems to be the only point in controversy,
Decision will be entered for the respondent.