*822 This proceeding arises upon a determination by the respondent of a deficiency of $19,848.08 in petitioner's income and profits taxes for the calendar year 1920. The petitioner assigns two errors: (1) respondent's refusal to allow the deduction of a certain debt amounting to $39,983.27, which petitioner alleges it ascertained to be worthless and charged off in the taxable year under section 234(a) of the Revenue Act of 1918; and (2) the denial of petitioner's application to have its excess-profits taxes for that year assessed under sections 327 and 328 on the ground of abnormality.
FINDINGS OF FACT.
The petitioner, a corporation with its principal office at Waukesha, Wisconsin, was engaged in the manufacture of gray iron automobile castings. It sold castings to the Cotta Transmission Company, a manufacturer of automobile truck transmissions, of Rockford, Illinois, during the period from March, 1920, to September, 1920, inclusive, for which the latter company agreed to pay $40,302.07. Of this amount, $318.80 was paid or canceled by cash remittances*1468 or credit memoranda, leaving a balance of $39,983.27. The petitioner was accustomed to accept from the debtor, the Cotta Company, its promissory notes and to discount them at the bank. Five notes were given by the Cotta Company to the petitioner in 1920 as follows:
1. Dated April 1, 1920, 90 days, 6 per cent, $5,600.
2. Dated May 18, 1920, 90 days, $5,300.
3. Dated June 19, 1920, 90 days, 7 per cent, $5,100.
4. Dated July, 1920, 90 days, $9,300; discounted. When this note came due on October 13, 1920, and was not paid by the debtor, the petitioner gave its own note as maker on November 23, 1920, for 6 months, due May 21, 1921.
5. Dated August 16, 1920, 4 months, $6,990; discounted by petitioner with bank and paid by petitioner on December 21, 1920.
Three of these notes, for $5,600, $5,300, and $5,100, which had been renewed by the debtor from time to time, and had been discounted by petitioner with the bank, when falling due in December, 1920, were taken up by the petitioner, which gave the bank a new note for *823 $16,000 for 6 months, dated December 28, 1920. This note and the note for $9,300 given by the petitioner to the bank were ultimately paid*1469 by the petitioner. The total sum of the principal of the notes unpaid by the debtor and paid to the bank in cash by petitioner or by its note in 1920 was $32,390. The notes were unsecured.
The balance due on the petitioner's open account with the debtor at the close of December, 1920, was $7,693.27. This amount was unsecured. Neither the notes claim nor the open account was protected by insurance.
The amount of the Cotta Company's indebtedness to the petitioner, on notes and open account, $39,983.27, was charged on the petitioner's books on December 28, 1920, to "Profit and Loss," in compliance with the directions of the petitioner's president, Blair, to charge off the debt as bad, after Blair had conferred with the secretary and manager of petitioner, reichl, on the matter and after examination of debtor's plant and assets, as will be more fully shown later.
The Cotta Company, finding itself in financial straits in the latter part of 1920, requested of its principal creditors at a meeting on October 6, 1920, at Chicago, a five-year extension on all its accounts. This was refused. The creditors then appointed a creditors' committee to investigate the debtor's condition. *1470 The Eastern creditors met in Buffalo on the same day and the Rockford creditors met in Rockford on October 8. The petitioner was on the creditors' committee, which was to take charge of the debtor's business until December 15, 1920, a moratorium being declared in the interval. Shortly after the creditors' meeting of October 6, 1920, Blair, president and treasurer of petitioner, together with Reichl, its secretary and manager, went to Rockford to look into the debtor's condition. With them were representatives of other creditors. They looked over the debtor's plant, conferred with various persons, and decided to have an audit of the debtor's affairs made. The committee employed Arthur Young & Company, C.P.A.'s, to examine the debtor's condition and report. The report was made on October 25 as of October 15, 1920.
The Young audit showed the debtor's cash and cash investments at $1,639.73; its accounts receivable at $126,107.92, of which, accounts in the amount of $63,108.02 were hypothecated to secure bank loans and overdrafts; inventories at $509,680.36, $446,849 thereof being finished or partly finished transmission parts; promotion and development expense, patent rights, *1471 etc., at $195,724.90; plant assets at $425,714.91; additional real estate at $14,947.16; the last three items constituting total fixed assets at $636,386.97; and total assets at $1,275,397.18. On the liability side the audit showed due to creditors, on open account, acceptances and notes, $593,513.81; due to *824 banks on unsecured notes, $122,000, and on secured loans, $32,208.06; and due to officers and miscellaneous, $64,681.70 and $4,617.20, respectively, making total current liabilities, $817,020.77. There was a mortgage on land adjoining factory of $1,200.
The following comment was made on the balance sheet of the audit under the heading "inventories":
From its cost records the Company had arrived at an estimate of inventory at August 31, 1920, but no later figure was available, owing to the abandonment of cost keeping after that date. The manner of handling the cost records makes it impossible at the present time to arrive at an accurate statement of inventory values without a physical inventory. In order, however, to present a complete statement for Balance Sheet purposes we made an estimate based on results of operations for the first eight months of 1920, *1472 taking into consideration actual purchases of material, productive labor and overhead expense, the physical inventory valuation of January 1 and the book inventory of August 31. These figures indicated a cost of sales for the eight months of approximately 108 per cent; assuming a similar cost for the remaining 45 days to October 15, we arrived at an amount of $507,080.36 as the probable value of finished goods, work in process, raw materials and scrap at the latter date. A physical inventory of the bar steel and scrap iron on hand (priced and extended by the company staff) indicated their value to be $54,456.14 and $5,775, respectively, the balance of $446,849.22 being set up as finished parts and work in process.
PROMOTION AND DEVELOPMENT EXPENSES, ETC. (Schedules II and III):
The items of engineering and advertising expenses prepaid are stated as they appear on the Company's books. Details of the manner in which these amounts were arrived at by the Company officials are shown in Schedules II and III. The valuation of patent rights is also the one shown by the books. We verified the amount of insurance premiums unexpired. The total value of fire insurance policies in effect*1473 at October 15, 1920 is $750,000, with additional amounts of $200,000 covering sprinkler leakage, use and occupancy, etc.
PLANT ASSETS AND NON-OPERATING PROPERTY (Schedule IV):
These items are stated at the values appearing in the books. We understand that these represent cost prices but have made no verification of this.
The audit took cost prices, but made no attempt to verify them, relying entirely on book values. No allowance was made for obsolete parts. On the whole it was a hasty examination, designed to show fully the liabilities and obligations of the company, but to report the assets at their face or going-concern value, which was easily ascertainable and might be qualified as the individual creditors should see fit. The ordinary accounting method as to inventory, to take cost or market value, whichever is lower; and as to fixed assets, cost less depreciation, was not applied in the Young audit because of the assumption made as to a constant relation of value to sale price regardless of possible decrease in value or obsolescence.
On November 4, 1920, certain Rockford citizens made offer to the creditors' committee to purchase the debtor's plant and other assets*1474 *825 at an amount equal to 33 1/3 per cent of the creditors' claims, provided all the creditors should accept. On the creditors' declination of the offer, it was raised to 40 per cent, payable on or before December 15, 1920. Practically all the important creditors accepted, but the offerors found themselves unable to make the offer good by the agreed date, or within the week's extension allowed thereafter.
Three creditors, including the petitioner, then filed with the United States District Court for the Northern District of Illinois a petition in bankruptcy against the debtor, on December 23, 1920. On the following day the Central Trust Company of Illinois was appointed by the court receiver of the debtor in bankruptcy. On the 26th of December, Hummel, the manager of the receivership department of the receiver, went to Rockford and took possession of the bankrupt's property. He made his preliminary investigation in the first week of the receivership, but continued to work on the debtor's affairs for over a year. He discussed its affairs with its creditors.
The schedule of the debtor's assets and debts filed with the court showed debts in the total amount of $815,278.65*1475 and assets of $1,078,427.55. Listed under assets were bills, promissory notes and securities in the amount of $39,995.88, and debts due on open accounts totaling $100,290.80. These two amounts represent quick assets.
The debtor's inventories, as revealed by the receiver's investigation, consisted of parts for the manufacture of transmissions, castings, and some steel, and, although set up on debtor's books at $446,849 (as shown also in the Young audit made for the creditors' committee), had little more than scrap value except for the specific purpose for which they were made. Efforts made before the receivership to sell them to the suppliers of materials were unsuccessful, and subsequent efforts by the receiver to sell by advertisement also met with no success. The particular type of transmission made by the debtor was not perfect, and the company was constantly having to repair and make good the articles sold.
Of the debtor's accounts receivable, as shown in the balance sheet of the Young audit, about half were pledged to banks. A large part of the remaining half was owed the debtor by firms which were also bankrupt; and on this account in December, 1920, the total unassigned*1476 accounts receivable of the debtor were then worth only about $2,000.
On January 20, 1921, the debtor was adjudged a bankrupt, and the Central Trust Company became the trustee in bankruptcy.
No attempt was made by the receiver to sell the plant by advertising immediately after the adjudication in bankruptcy, owing to the market conditions, but a sale was advertised for March 8, 1921. No *826 bids were received. Nothing further was done until September, 1921, when it was again advertised for sale. It was not sold, however, until some time in 1922, when it went to one Swartz, representing a Rockford syndicate, with all other assets except cash and accounts receivable, for about $175,000.
An attempt was made to collect the accounts receivable immediately after the receiver's appointment and was continued throughout the trusteeship.
The receiver operated the debtor's plant until November, 1921, filling repair orders for customers, in order to collect upon the accounts receivable. The plant during this period was never closed more than 2 weeks at a time. Only about 20 per cent of the old employees, exclusive of the salesmen, who were all dismissed, were retained for*1477 the first 6 months, when the employed personnel was increased somewhat. The plant was kept open by the receiver in order to obtain a better price for it and, by filling repair orders, to collect ultimately on old accounts receivable.
The motor-truck market in the fall of 1920 was very much depressed, owing to various causes, but in part to the release at low prices of Government trucks made during the war. At this time the country was suffering from a general depression and its results were evident in Rockford. The debtor's plant was situated on the outskirts of Rockford. A number of other plants in Rockford, including a large pump plant, had been closed down before the debtor's receivership began, and the largest industry in the town was then operating on a very small scale.
In the spring of 1922 the receiver paid to creditors, including the petitioner, a dividend of 15 per cent of their claims. The petitioner received this payment on March 24, 1922, in the amount of $6,145.91. A second and final dividend of 12 1/2 per cent was paid in 1923, the petitioner's share, received on January 9, 1923, amounting to $5,121.60. These two dividends resulted from the sale of the debtor's*1478 plant and assets and the amount collected on its accounts receivable.
The debt owed by the Cotta Company to petitioner became partially worthless in 1920 and was ascertained to be so by the petitioner in that year.
The petitioner kept its books during the year 1920 and filed its income-tax returns for that year on the accrual basis.
The petitioner claimed the full amount of the debt charged off on its books on December 28, 1920, as a deduction in its income-tax return for 1920 and included as income in its returns for 1922 and 1923 the dividends received in the respective years from the trustee in bankruptcy. The respondent disallowed the full amount claimed as a deduction in 1920, but allowed petitioner a deduction from *827 gross income in 1923 of $28,715.76, the difference between the full amount of the Cotta debt and the two dividends received by the petitioner.
For the year in controversy, 1920, the statutory net income of the petitioner as determined by the respondent is $119,017.36, and its statutory invested capital, $157,438.13. For the same year petitioner's profits tax is computed at $38,190.41 and its combined income and profits taxes at $46,073.11.
*1479 The average amount, based on monthly balances, which petitioner had borrowed on its own notes from stockholders and various banks and the amount which petitioner had obtained by discounting, under its own endorsement, of debtor's papers, were as follows: Own promissory notes to stockholders, $2,500; to banks, $21,661.54; by endorsement and discount, $89,934.23; grand total average a month, $114,095.77. The notes discounted included those of the Cotta Company. None of the notes was endorsed by petitioner "without recourse." The expedient of discounting its debtor's paper was resorted to by petitioner in order to obtain the necessary cash to carry on its business.
Blair, president and treasurer of petitioner, received as salary in 1920, $6,000, and then owned 400 shares of petitioner's stock; Reichl, as secretary and manager, received $6,000, and owned 180 shares. Blair's wife held 30 shares and other shareholders 390. Blair had charge of credits and collections. Reichl's duties had to do with purchase of supplies and sales. He was also superintendent of the foundry and practical foundryman, in the absence of any general foreman.
The petitioner was never a party to a cost-plus*1480 contract with the Government.
OPINION.
MATTHEWS: 1. The first issue before us is whether the petitioner is entitled to any deduction for the year 1920 on account of the debt owed by the Cotta Transmission Company on its notes and open account in the total amount of $39,983.27. The respondent has allowed $28,715.76, the amount of the debt less the amount received by the petitioner as dividends from the debtor's trustee in bankruptcy, as a deduction in 1923.
The debt was charged off in its entirety on December 28, 1920, by the petitioner in good faith and in the belief that little, if anything, would be paid by the receiver on its claim, and having charged off the entire amount in 1920, it returned as income in 1922 and 1923 the amounts received in those years as trustee's dividends.
*828 The evidence in this case convinces us that the debt was not entirely worthless at the time of the charge-off on December 28, 1920. The citizens of Rockford had, on November 4, offered to purchase the plant and assets at 33 1/3 per cent of the creditors' claims. This offer was declined and the citizens raised it to 40 per cent, payable on or before December 15, the time for payment*1481 being extended a week. They were not able, however, to raise the 40 per cent. The creditors then filed a petition in bankruptcy. The inability of the citizens of Rockford to raise the 40 per cent offer, which was accepted, raises doubt as to whether the same persons could have raised even the 33 1/3 per cent offer which was rejected. The fact that the creditors filed a petition in bankruptcy at the expiration of the time, as extended, in which the 40 per cent was to be raised indicates that the creditors shared this doubt. It also indicates that they hoped to realize more through bankruptcy proceedings than the citizens of Rockford could pay. However, assuming that the creditors' claims were worth 33 1/3 per cent of their face value at the time of the first offer, the effect of the taking over of the property of the debtor by the receiver was to reduce the amount which the creditors would ultimately receive, at least to the extent of the receivership costs. The amount ultimately received - 27 1/2 per cent - is strongly confirmatory of this conclusion. Therefore, taking all facts into consideration as they existed at the time of the charge-off of the entire indebtedness, we*1482 think that a reasonable estimate of the cost of the receivership would have been at the least an amount equal to the difference between the 33 1/3 per cent and the 27 1/2 per cent of the creditors' claims ultimately received. We conclude, therefore, that the debt was worthless to the extent of $28,715.76 at the time of the charge-off on December 28, 1920. As the debt was not wholly worthless when charged off, the question in controversy is whether the petitioner is entitled to any deduction within the taxable year.
Section 234(a) of the Revenue Act of 1918 provides that in computing the net income of a corporation
* * * there shall be allowed as deductions:
* * *
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise;
(5) Debts ascertained to be worthless and charged off within the taxable year;
* * *
The petitioner contends that if the whole debt is not deductible as such in 1920, it is still deductible as a loss under the doctrine of , and *1483 ; that, while *829 the cases cited allowed a deduction as a loss of that part of the debt which was never collected, they did not so limit the rule; and that petitioner's loss was established by the turning over of the Cotta Company's business to the creditors in October, 1920, or, in any event, by the filing of the petition in bankruptcy and the appointment of the receiver in December, 1920.
As the debt was not wholly worthless in 1920, petitioner did not sustain a loss in that year equal to the total amount of the debt, and the Sherman & Bryan decision is not authority for the deduction of the full amount of the debt under such circumstances.
Petitioner further contends that the item of $39,983.27 never was income and should be eliminated from its gross income for 1920; that what is taxed is real and not supposed income. In support of this contention, petitioner quotes extensively from the opinion in , a case in which the question involved was whether interest accrued to December 31, 1918, on loans made by the Corn Exchange*1484 Bank to a company which went into receivership on December 31, 1918, and of which the taxpayer was advised on December 31, 1918, was required to be included in the return for 1918 as an item of accrued income. The court held that the item should not be treated as accrued income. Petitioner argues that, regardless of question of deductibility, the deficiency assessed must be set aside upon the ground that it is levied upon an item which never was income.
The item here in question represents the amount due petitioner for goods purchased by its debtor in 1920, and such amount includes the cost to petitioner of the goods sold as well as the expected profit on the sale. We think the cases are distinguishable on their facts.
Finally, petitioner submits that should the Board decide that the full amount of the debt is not deductible either as a bad debt or as a loss, and that the amount in question should not be excluded from gross income, it is entitled, under the decisions in , and *1485 , to a deduction from 1920 income of at least $28,715.76, the difference between the principal amount of the claim and the dividends received from the trustee in bankruptcy.
The Treasury interpretation of section 234 of the 1918 Revenue Act is that no deduction is allowable under that act for a debt worthless only in part. Article 151, Regulations 45. This Board adopted the same construction in its earlier decisions, and it is urged upon us by the respondent's counsel that the matter is concluded by those decisions, citing ; ; ; ; and .
*830 All of the decisions cited by respondent were prior to the Sherman & Bryan decision and on their facts are distinguishable from Sherman & Bryan. In *1486 , notes either made or endorsed by an individual were written down because the bank officers believed they could not collect the entire amount of the notes. The individual was not in bankruptcy.
In the Sherman case the taxpayer, a corporation, was creditor of a motor truck company on an open account. The year involved was the petitioner's fiscal year ending September 20, 1920. In November, 1919, an equity receiver was appointed for the debtor company and the taxpayer filed its claim as a general creditor. No dividend was paid in the taxpayer's fiscal year 1920; and in that year the taxpayer, after investigation, charged off the debt as worthless. The Commissioner disallowed the deduction on the ground that the debt was worthless only in part. A dividend, the amount of which was not shown in evidence, was paid in 1921. The instant case, therefore, appears to be on all fours with the Sherman case, so far as all material facts are concerned.
The Circuit Court held that the taxpayer's determination that the debt was wholly worthless in 1920 was not a reasonable conclusion of the taxpayer after an adequate*1487 investigation, on this point sustaining this Board's decision in the same case, . With respect to the ascertainment of worthlessness, the court said:
* * *
* * * While we have no doubt of the bona fides of Mr. Sherman's belief that the debt was worthless, we are not convinced that he had ascertained it to be worthless, within the meaning of the statute. The ascertain is to make sure by investigation, and it is conceded that to justify charging off a debt for tax purposes the taxpayer must make a reasonable investigation of the facts and draw a reasonable inference from the information thus obtainable. * * * While creditors are not required to be "incorrigible optimists", they may not be unduly pessimistic when claiming deductions for worthless debts. We are not satisfied that the petitioning taxpayer's determination that its debt was wholly worthless was a reasonable conclusion after adequate investigation. * * *
The other issue of law considered by the court in the Sherman case was the deductibility under the 1918 Act of so much of the debt as was proved worthless. The Government had contended that a debt worthless in part was not deductible*1488 under that act and that such construction was supported by the fact that Congress, in the 1921 Act, permitted a deduction for a partial charge-off. The court pointed out that subsequent legislation was not conclusive that the construction claimed for the earlier act must be accepted, and said that "debts ascertained to be worthless" might reasonably be construed to mean "indebtedness ascertained to be worthless" and to *831 permit a charge-off of such part of a claim as was proven to be uncollectible by so definite an event as seizure of the debtor's property by a receiver. The court held, however, that it was unnecessary to decide this point because "if clause (5) does not permit a deduction, we think it may be made under clause (4)." The Government urged that clauses (4) and (5) were mutually exclusive and that since clause (5) covered losses arising from worthless debts, clause (4) must cover only losses otherwise arising. As to this contention, the court held that since the argument assumes that clause (5) does not permit the charge-off of a debt partially bad, there would seem to be no inconsistency in allowing the partial loss under clause (4), even if the two clauses*1489 were deemed mutually exclusive, pointing to the fact that it had not been authoritatively determined that they were mutually exclusive. After quoting from , to the effect that the statute contemplated the deduction of losses "fixed by identifiable events," and "in the case of debts, by the occurrence of such events as prevent their collection," the court said:
The seizure of the debtor's property by a receiver prevents collection, and definitely fixes the loss to be the difference between the face of the debt and whatever dividend the receivership may pay. The Commissioner's position leads to the conclusion that, if any dividend is likely, no loss can be deducted until the receivership is wound up, which may be many years later. Business men do not carry on their books at face value claims against a debtor in receivership, and it cannot be supposed that the Revenue Act of 1918 was intended to require them to do so. When a creditor's debtor goes into receivership, and the creditor believes the debt to be worthless and charges it off, he recognizes that he has sustained a loss at least to the extent that the receivership*1490 dividend which may thereafter be declared leaves the debt unpaid. Presumptively the taxpayer's decision that a debt is worthless, and so charged off, measures his loss. If the Commissioner surcharges his return because of a mistake as to the amount of the loss, we think he should not surcharge for so much of the loss as he admits has been suffered. No judicial decision has been found which contradicts this view.
The Sherman case was followed by the District of Columbia Court of Appeals in the Davidson case, that case presenting somewhat similar facts, the principal difference being the partial charge-off made by the taxpayer in the latter.
Although in terms the court allowed the deduction of so much of the debt as was determined to be worthless, as a loss, it made the basis of such allowance the ascertainment of worthlessness and the charging off which the statute requires in the case of bad debts, and made it clear that in its opinion the statute respecting the deduction of debts "ascertained to be worthless" did not prohibit the deduction of so much of the claim as was definitely determined to be worthless and charged off. The effect of the court's decision is *1491 *832 to hold that the Revenue Act of 1918 permits a taxpayer to charge off that part of a claim against a debtor in receivership which has been ascertained to be worthless. We agree with this construction and, further, think that the amount thus ascertained to be worthless and charged off in the taxable year is a loss deductible under (5) as a debt ascertained to be worthless and charged off.
A debt which becomes worthless in whole or in part is a loss to the extent of the worthlessness. Such a loss is deductible in the taxable year in which the debt is ascertained to be worthless and charged off. There is no provision in the statute under which such a loss may be deducted in any other year than the one in which the ascertainment of worthlessness and charge-off occur. The statute makes the allowance of a deduction for worthless debts mandatory: "* * * there shall be allowed as deductions, * * * debts ascertained to be worthless and charged off within the taxable year." To hold that the language used applies only to those debts ascertained to be totally worthless and charged off and not to debts ascertained to be worthless in part and charged off, would result in a discrimination*1492 between creditors with wholly worthless debts and those with debts worthless only in part. As was said by the court in the Sherman case, business men do not carry on their books at face value claims against a debtor in receivership, when it is definitely known that the claims can not be paid in full, and it can not be supposed that the Revenue Act of 1918 was intended to require them to do so until final liquidation of such claims in order to claim any deduction on account of such loss. The change in the Revenue Act of 1921 which allows the deduction of that part of a debt ascertained to be worthless and charged off may well indicate the unexpressed intention of the Revenue Act of 1918; that is to say, the new provision may well be regarded as declaratory of the meaning of the same provision of the 1918 Act. In this view of the matter, that part of a debt which the creditor upon a reasonable investigation of all the facts determines to be worthless and charges off is a "debt ascertained to be worthless and charged off" within the meaning of the statute, and is deductible as such.
In the instant case, as in the Sherman case, the petitioner was unduly pessimistic in determining*1493 that the debt was totally worthless. A reasonable inference from the facts available at the time of the charge-off justifies the inference that the debt was worthless at least to the extent of $28,715.76, and we think that this amount is deductible in the year 1920.
2. With respect to the second issue, we find, after a careful review of the facts and petitioner's arguments predicated upon *833 them, no abnormality and therefore no proper basis for special assessment. The petitioner has not established that any ground for special relief exists by reason of its officers' salaries. The application rests, therefore, principally upon the petitioner's allegation that so large a part of the capital employed in its business was borrowed and its statutory invested capital consequently so low as to be disproportionate to the volume of its sales and statutory net income. It was shown that petitioner had an average borrowed capital, based on monthly balances, in 1920, of $114,095.77, and of this amount $89,934.23 constituted "two-name (discounted) paper." Blair, president and treasurer of the petitioner, testified that the figures under this heading represented promissory notes*1494 made payable to the petitioner and given to it by its various debtors, which were discounted after indorsement by the petitioner at the bank.
This Board has held that the discounting of negotiable promissory notes does not constitute borrowing capital and is not a pledge of the notes for the amount so borrowed, but is in effect the sale of the notes to the indorsee. . The Board stated its conclusion therein:
From the cases and texts above cited, it seems to be well settled that to discount negotiable paper is to sell it. We have found no provision in the Reserve Banking Act which changes such generally accepted principle as to transactions between Federal Reserve Banks and member banks. It follows that petitioner sold its rediscounted paper to the Federal Reserve Bank and that such bank thereby became owner in exactly the same sense that petitioner owns the notes it discounts for its customers. The respondent's determination is approved.
If we deduct, then, the amount of discounted paper, we find that the petitioner's average borrowed capital in 1920 was approximately $24,000, or about 15 per cent of the*1495 statutory invested capital of $157,000, certainly not a sufficient amount to create an abnormal condition. In , it was shown that 40 per cent of the petitioner's operating capital was borrowed, but the Board said:
* * * In many businesses this would not be regarded as unusual or abnormal and in the absence of any evidence that it is abnormal in the wholesale dry goods business, there is nothing on which we may base an opinion as to normality or abnormality.
We do not find in the petitioner's situation any abnormality to justify the allowance of special assessment under section 327.
Reviewed by the Board.
Judgment will be entered under Rule 50.
STERNHAGEN dissents.
*834 MURDOCK, dissenting: The prevailing opinion allows the petitioner to deduct in the year 1920 a portion of a debt owed to it by the Cotta Transmission Company. The Board has consistently held in at least twenty-three cases that under the Revenue Act of 1918 no deduction may be taken where a taxpayer ascertains that a debt is recoverable only in part. It has held that under that act there may be no deduction for*1496 a bad debt prior to the time that the taxpayer ascertains that the debt is wholly worthless. The regulations of the Commissioner promulgated under revenue acts prior to the Revenue Act of 1921 have provided to the same effect. Decisions of the Board in which it has made such a ruling have been affirmed on appeal in at least three instances. See also Selden v. Heiner, 12 Fed.(2d) 474. In two instances such decisions of the Board have been reversed. One of the two cases in which the Board has been reversed on this question is Sherman & Bryan, Inc. v. Blair, 35 Fed.(2d) 713. There the court did not decide the question whether partial worthlessness could be deducted under the Revenue Act of 1918, but held that in any event the amount could be deducted as a loss. I believe that the bad debt and loss provisions of the revenue acts are mutually exclusive, even though I concede that in ordinary parlance a bad debt would be considered a loss. Cf. Lafayette Lumber Co.,20 B.T.A. 993">20 B.T.A. 993. The other reversal was in Davidson Grocery Co. v. Lucas, 37 Fed.(2d) 806, where the court approved the reasoning in the Sherman*1497 & Bryan case. With all due respect to these courts, I find myself unable to agree with their reasoning and feel that until some more compelling reason appears, the Board should be consistent and follow its former decisions. Minnehaha National Bank v. Commissioner, 28 Fed.(2d) 763. Cf. Collin County National Bank v. Commissioner, 48 Fed.(2d) 207.
VAN FOSSAN, MCMAHON, GOODRICH, and LEECH agree with this dissent.