Memorandum Opinion
MELLOTT, Judge: This proceeding involves a deficiency in income tax for the year 1939 in the amount of $4,730.42. Some of the adjustments made by the respondent to petitioner's net income are conceded to have been proper.
[The Facts]
The facts are found to be as stipulated. For present purposes they are summarized and depicted in the following schedule:
| Gross income for year 1934 | $144,620.21 |
| Deduction claimed and allowed | |
| for bad debts (sec. 23 (k), Rev. | |
| Act of 1934) | 697,893.16 |
| Other deduction allowed by law | |
| (salaries, losses, interest, etc.) | 272,080.17 |
| Net income as shown by return | |
| (loss) | 825,353.12 |
| Recoveries in years 1935 to 1938, | |
| incl., upon bad debts charged | |
| off in 1934 | 235,948.14 |
| Recovery in taxable year 1939 | |
| upon bad debts charged off in | |
| 1934 | 42,511.23 |
The last amount shown in the above schedule was included by respondent in petitioner's net income for 1939 and the correctness of that action presents the only issue.
Section 116 of the Revenue Act of 1942 is as follows:
SEC. 116. RECOVERY OF BAD DEBTS, PRIOR TAXES, AND DELINQUENCY AMOUNTS.
*222 (a) Exclusion from Income. - Section 22 (b) (relating to exclusions from gross income) is amended by adding at the end thereof the following new paragraph:
"(12) Recovery of Bad Debts, Prior Taxes, and Delinquency Amounts. - Income attributable to the recovery during the taxable year of a bad debt, prior tax, or delinquency amount, to the extent of the amount of the recovery exclusion with respect to such debt, tax, or amount. For the purposes of this paragraph:
"(A) Definition of Bad Debt. - The term 'bad debt' means a debt on account of worthlessness or partial worthlessness of which a deduction was allowed for a prior taxable year.
"(B) Definition of Prior Tax. - The term 'prior tax' means a tax on account of which a deduction or credit was allowed for a prior taxable year.
"(C) Definition of Delinquency Amount. - The term 'delinquency amount' means an amount paid or accrued on account of which a deduction or credit was allowed for a prior taxable year and which is attributable to failure to file return with respect to a tax, or pay a tax, within the time required by the law under which the tax is imposed, or to failure to file return with respect to a tax or pay a tax.
"(D) *223 Definition of Recovery Exclusion. - The term 'recovery exclusion,' with respect to a bad debt, prior tax, or delinquency amount, means the amount, determined in accordance with regulations prescribed by the Commissioner with the approval of the Secretary, of the deductions or credits allowed, on account of such bad debt, prior tax, or delinquency amount, which did not result in a reduction of the taxpayer's tax under this chapter (not including the tax under section 102) or corresponding provisions of prior revenue laws, reduced by the amount excludible in previous taxable years with respect to such debt, tax, or amount under this paragraph.
"(E) Special Rules in Case of Section 102 Tax and Personal Holding Company Tax. - In the application of subparagraphs (A), (B), (C), and (D) in determining the tax under section 102 or Subchapter A of Chapter 2, a recovery exclusion allowed for the purposes of Chapter 1 shall be allowed for the purpose of such section or subchapter whether or not the bad debt, prior tax, or delinquency amount resulted in a reduction of the section 102 tax or Subchapter A tax for the prior taxable year; and in the case of abad debt, prior tax, or delinquency amount*224 not allowable as a deduction or credit for the prior taxable year under Chapter 1 (except section 102) but allowable for the same taxable year under such section or subchapter a recovery exclusion shall be allowable for the purposes of such section or subchapter if such bad debt, prior tax, or delinquency amount did not result in a reduction of the tax under such section 102 or such Subchapter A. As used in this subparagraph references to Chapter 1, section 102, and Subchapter A in the case of taxable years not subject to the Internal Revenue Code, shall be held to be made to corresponding provisions of prior revenue Acts."
(b) Effective Date of Amendments under the Internal Revenue Code. - The amendments made by this section shall be applicable with respect to taxable years beginning after December 31, 1938.
(c) Under Prior Revenue Acts. - For the purposes of the Revenue Act of 1938 or any prior revenue Act, the amendments made to the Internal Revenue Code by subsection (a) of this section shall be effective as if they were a part of each such revenue Act on the date of its enactment.
[Opinion]
The following excerpt from the Report of the Finance Committee of the United *225 States Senate (Report No. 1631, 77th Congress, 2nd Session) indicates the answer to the present question:
In determining whether and to what extent the deductions * * * on account of bad debts * * * allowed in a given year did not result in a tax benefit, such deductions * * * are to be regarded as having been the last ones taken and this as having offset only such gross income or tax as was not offset by the other deductions and credits. * * *
Once it is determined what portion of a given deduction * * * resulted in a prior benefit and what portion did not, the taxpayer may excluded from gross income amounts recovered in a given year or years on account of the debt * * * for which the deduction * * * was allowed until the amount of such recoveries exceeds an amount equal to the portion of the deduction which did not result in tax benefit.
Since petitioner's return for 1934 would have shown a net loss for income tax purposes even if the bad debts charged off in that year had not been deducted, no part of the amount collected by it in 1939 as a recovery upon such bad debts may be included in gross income. Cf. First National Bank in ,*226 .
Decision will be entered under Rule 50.