*3068 The debts claimed as deductions in 1920 and 1921, respectively, held neither to have been ascertained to be worthless nor charged off in the taxable year for which claimed.
*1274 This proceeding is for a redetermination of deficiencies in income taxes as follows:
| For the year 1920 | $4,721.92 |
| For the year 1921 | 206.82 |
| 4,928.74 |
There is only one assignment of error, and that is that the Commissioner erred in disallowing a deduction in 1920 of $9,490.60, as bad debts. Petitioner alleges that equity requires that it be allowed, as a deduction for bad debts in 1921, the amount of $7,255.23, which it knew at the close of 1921 was uncollectible.
FINDINGS OF FACT.
Petitioner is a corporation with its principal office at Johnstown, Pa., and has stores at Altoona and Harrisburg, Pa., Newark and Trenton, N.J., and Cumberland, Md.
Its business is that of retailing jewelry, which it sells on credit, under a contract somewhat in the nature of a lease, and in which the lessee agrees to make periodical payments until the full amount*3069 is paid, and pending the full payment of the account, the title to the article of jewelry leased remains in lessor.
It has a business manager at each of its branch stores, who makes daily, monthly, and annual reports to the main office. In those reports, among other items, the manager lists certain accounts which he deems bad or worthless. His decision on the matter of worthlessness is based on various kinds of evidence. The general custom is to mail letter "No. 1" when payment on an account becomes delinquent. Failing to get a satisfactory response, letters "No. 2," "No. 3," and "No. 4" are mailed. Sometimes collectors are sent for personal interviews. When all those efforts fail to get results, the account is listed as bad, and report to that effect is made to the home office. The home office accepts such reports, and makes no further investigation.
*1275 During the year 1920 there were charged to profit and loss certain accounts so determined as worthless, in a total amount of $1,146.53, as follows:
| Debit profit and loss | $1,146.53 | |
| Credit accounts receivable - | ||
| Altoona | $788.25 | |
| Harrisburg | 261.28 | |
| Newark | 97.00 |
To charge off accounts*3070 uncollectible throughout the year 1920 as reflected in sales and collection book.
At the close of the year the annual report from three of the stores showed that certain accounts had been so determined as worthless, aggregating the amount of $9,490.60. The entry made on petitioner's books on December 31, 1920, was as follows:
| Debit profit and loss | $9,490.60 | |
| Credit reserve for bad debts - | ||
| Altoona | $6,502.25 | |
| Harrisburg | 2,524.35 | |
| Newark | 464.00 |
To charge off debts uncollectible at 12/31/20 as per Stores' report.
The total amount was credited to an account designated "Reserve for Bad Debts."
During subsequent years a part of that amount was collected, the exact amount, or how such collections were treated is not shown.
On December 31, 1924, the unpaid balance in that account was charged off. Petitioner claims the right to deduct the full amount in 1920.
With reference to 1921, petitioner held a number of accounts in 1920 which it had not then determined as worthless, and those accounts, aggregating $7,253.23, it alleges were determined in 1921 to be worthless.
There was no evidence offered with respect to those accounts, except a list*3071 of same was filed in the record and testimony received to the effect that the ascertainment of worthlessness was obtained in the same way as with reference to those debts aggregating $9,490.60 for 1920. There is no evidence of their being charged to a reserve. The amount was charged off December 31, 1924.
OPINION.
LOVE: The question in this case is whether or not the debts alleged to have been ascertained as worthless in 1920 and 1921, respectively, are deductible from gross income under section 214(a)(7) of the Revenue Act of 1918, and the corresponding section in the 1921 Act.
The 1918 Act prescribes as deductible "Debts ascertained to be worthless and charged off within the taxable year."
*1276 The evidence in this case is far from convincing that petitioner determined in 1920 that the contracts, aggregating $9,490.60, were worthless. Those accounts were credited to a reserve account, which retained them in its asset accounts.
The accounts aggregating $7,255.23, which petitioner claims now should be allowed as a deduction in 1921, seem never to have been treated by it as worthless until December, 1924 - not even carried to the reserve account, and hence, *3072 under section 234(a)(5) of the 1921 Act, they are not deductible.
However, should the question of ascertainment of worthlessness be waived, the debts were not charged off in the taxable years, not until December, 1924. The statute is clear and specific on this point, and must be followed.
Judgment will be entered for the respondent.