*2047 1. Amounts expended for traveling and entertainment determined and allowed as ordinary and necessary business expenses.
2. Where a taxpayer at the close of the first year of its existence charges off its books debts ascertained to be worthless, and, in addition, sets up a reserve for bad debts, and the Commissioner allows the former and disallows the latter, the amount of the reserve account is deductible from gross income when proof is made that the aggregate of the two deductions taken is not in excess of a reasonable reserve for bad debts.
*889 These proceedings were brought to redetermine deficiencies in income taxes for 1926 in the amount of $101.12 in the cases of Abraham Sultan and Judah Sultan, and $524.37 in the case of Joseph Sultan. *890 The issues common to all of the proceedings are whether there should be allowed as deductions from gross income of a partnership the sum of $5,000 for labor, the sum of $5,500 for traveling and entertainment expenses, and the sum of $2,381.42 set up as a reserve for*2048 bad debts. Joseph Sultan raised the additional question of whether the sum of $1,500 expended by him on a trip to Europe is deductible as a business expense of the partnership. The cases were consolidated for hearing and decision.
FINDINGS OF FACT.
The partnership of Joseph Sultan & Sons was organized January 1, 1926, to take over the business of manufacturing and selling fancy linens then being conducted by Joseph Sultan. Throughout 1926 Joseph Sultan owned a 50 per cent interest in the partnership, and his two sons, Abraham and Judah Sultan, each owned a 25 per cent interest. It had its principal office and sales department in New York, N.Y., and operated a factory at Mayaguez, Porto Rico. Its books were kept on the accrual basis.
During December, 1926, the partnership incurred a liability of $5,000 to its employees in Porto Rico for wages and salaries. In order to acquire funds to pay the obligations, in December, 1926, the manager of the factory drew five drafts, each in the sum of $1,000, on the partnership in New York, to the order of the Banco Commercial de Puerto Rico, Mayaguez, Porto Rico. All of the drafts were honored in December, 1926, and paid in January, *2049 1927. The net proceeds of the drafts, amounting to $4,956.25, were credited to the account of the partnership with the Banco Commercial de Puerto Rico promptly upon the deposit of the drafts for collection. Practically all, if not all, of the liability of $5,000 to its employees for wages and salaries was paid by the partnership in 1926.
In 1926 Abraham Sultan made two trips to Porto Rico to transact affairs of the partnership. He spent ninety-eight days in Porto Rico on the trips. In the conduct of partnership business he expended $1,500 for transportation, hotel accommodations, meals, and miscellaneous ordinary and necessary business expenses.
In 1926 Judah Sultan made three trips, lasting one hundred and forty-eight days, to various cities to solicit orders for the partnership. In connection with such trips he expended $2,318 for transportation, hotel accommodations, meals, entertaining prospective buyers, and incidentals. During the taxable year the partnership also expended not less than $1,000 in New York City entertaining buyers and prospective buyers of its goods.
Joseph Sultan spent the last three months of 1925 and the first six months of 1926 on a combined*2050 business and pleasure trip to *891 Europe. While there he spent about three weeks attending business activities of the partnership. In his individual tax return for 1926 Joseph Sultan claimed the sum of $1,500 as a business deduction for the trip. The deduction was disallowed by the respondent on the ground that it was a personal expense. Of the cost of the trip $750 was incurred in connection with the transaction of partnership business.
In 1926 the partnership charged off its books as worthless, two accounts amounting to $1,263.98. In January, 1927, it set up on its books as of December 31, 1926, a reserve for bad debts in the amount of $2,381.42. This sum is equal to 5 per cent of the partnership's accounts receivable at the close of 1926. The gross sales of the partnership in 1926 were $281,127.91. In his audit of the partnership return the respondent allowed the bad debt deduction and disallowed the reserve for bad debts.
OPINION.
ARUNDELL: We are not aware of the respondent's reason for reducing the deduction claimed by the partnership for labor by $5,000. The evidence here is that liability for this sum was not only incurred in 1926, but that practically*2051 all, if not the entire sum, was actually paid out in the taxable year. This item is deductible in determining the net income of the partnership.
In its return for 1926 the partnership claimed the sum of $7,725.05 as a deduction for traveling and entertainment expenses. The respondent disallowed $5,500 of the amount on the ground that the claim was not supported by detailed information. Of the amount disallowed $1,500 was for expenses incurred by Abraham Sultan on the two trips he made to Porto Rico, $3,000 represented expenses of Judah Sultan on the three trips he made to solicit business, and the balance of $1,000 covered entertainment expenses in New York City.
From time to time during the year the partnership advanced to the individual members various sums estimated to cover their expenses. Adjustments were then made as of the close of the year by crediting the drawing accounts of the petitioners and charging traveling and entertainment expense accounts with the sum expended by the petitioners in connection with partnership business. In our opinion the evidence before us establishes that the $1,500 and $1,000 items should be allowed in full, and that $2,318 of the remaining*2052 $3,000 item should be allowed as a deduction.
We are also of opinion that one-half of the sum claimed as a deduction for the expenses of Joseph Sultan on the European trip should be allowed as a deduction in determining the partnership's income.
*892 During the taxable year, which was the first year of its existence, the partnership charged off accounts it regarded as worthless, and, in addition, set up a reserve for doubtful accounts, under the belief that the taxing act authorized such a course of procedure. The respondent allowed the amount charged off and disallowed the reserve account.
The regulations promulgated under section 214(a)(7) of the 1926 Act provides that "A taxpayer filing a first return of income may elect either of the two methods [Charge off debts ascertained to be worthless and set up a reasonable addition to a reserve for bad debts] subject to approval by the Commissioner upon examination of the return." It does not appear that the respondent ever declined to approve the setting up of a reasonable reserve for bad debts. A taxpayer is not entitled to the two classes of deductions, but where the amount ascertained to be worthless and charged*2053 off, plus the amount set up as a reserve for bad debts, is not in excess of a reasonable reserve for bad debts, the taxpayer is not be denied the aggregate of the former sums on the technical ground that he failed to follow the letter of the law. . The uncontradicted testimony here is that one and one-half per cent of gross sales in 1926, which is about $600 in excess of the amount charged off and set up as a reserve for bad debts, would not be an unreasonable amount as a reserve for bad debts. The sum of $2,381.42, representing the amount set up as a reserve for bad debts, is deductible from gross income of the partnership.
We find no basis for the assertion of the 5 per cent negligence penalties in these three cases.
Decision will be entered under Rule 50.