*3091 Held that certain accounts claimed as deductions for bad debts have been included in income for prior years and certain other accounts were ascertained to be worthless and charged off in the taxable year.
*1236 In this proceeding the petitioner seeks a redetermination of his income taxes for the calendar year 1922, for which year the respondent has determined a deficiency in the amount of $14,073.07. The proposed deficiency arises by reason of the refusal of the respondent to allow $63,580.72 as a deduction for bad debts. It has been stipulated that of this amount $30,000 became worthless prior to the year under consideration and that accounts in the amount of $33,580.72 were ascertained to be worthless during the taxable year 1922.
The stipulation leaves only two questions to be decided.
1. Whether the items comprising the $30,000 were included in the petitioner's income during the prior taxable year, and
2. Whether the remaining debts, totaling $33,580.72, were properly charged off during the taxable year 1922.
FINDINGS OF FACT.
*3092 The petitioner is an individual residing at Laurinburg, N.C., with his principal office at Laurel Hill, N.C. The petitioner, during the year 1922 and for more than 20 years prior thereto, was engaged in business as a "time merchant." He conducted three stores - one at Laurel Hill, which was under the personal management of the petitioner prior to 1922, one at Gibson, N.C., managed by Vester Adams, and one at Osborne, N.C., managed by one Coggins. Each store, prior to 1922, kept separate sets of books, all of which were imperfect single-entry systems. Each week the managers at Gibson and Osborne sent to the petitioner a report of all merchandise *1237 sales, both cash and credit. These weekly reports were preserved by the petitioner and used at the end of the year, together with the original records of the business at the Laurel Hill store, in preparing his income-tax returns and in arriving at the amount of merchandise sales as reported in his returns for 1919 to 1921, inclusive.
The return for 1922 was made up by a certified public accountant who obtained the data directly from the books of the three stores. The total of the merchandise sales from the three stores*3093 for each of the years was included in his income-tax return for the years 1919 to 1921, inclusive.
The following stipulation was entered into at the hearing:
It is hereby stipulated and agreed by and between the parties hereto that the petitioner herein has alleged that debts in the amount of $63,580.72 became worthless during the taxable year 1922; it is further agreed by and between the parties hereto that debts in the amount of $30,000.00 became worthless prior to the taxable year 1922, and are not properly taxable items for that year; It is further stipulated and agreed that debts in the amount of $33,580.72 were ascertained to be worthless during the taxable year 1922.
The petitioner instructed his managers to charge off bad debts. During the latter part of December, 1922, the store managers took the accounts which they ascertained to be worthless from the active loose-leaf binders and placed them in separate binders, where they were afterwards kept separate and apart from the other accounts. They were regarded and treated as bad debts charged off. The entries upon the books of the Gibson and Osborne stores, showing the accounts charged off and eliminated from the assets*3094 of the taxpayer, appeared as a ledger entry only, as a charge to the profit and loss accounts as of December 31, 1922, and as a journal entry on the books of the Laurel Hill store, which journal entry was posted to the profit and loss account as of December 31, 1922. The entries in the profit and loss accounts and the entry in the journal were made by a certified public accountant who audited the books for 1922. The exact date on which the charge-off entries were made in the profit and loss accounts and the journal is not given.
The proposed deficiency arises from the disallowance by the respondent of $63,580.72 claimed as a deduction from bad debts ascertained to be worthless and charged off within the taxable year.
OPINION.
GREEN: It has been stipulated by the parties hereto that of the $63,580.72 alleged as bad debts, $30,000 became worthless prior to the taxable year 1922.
*1238 Two questions are at issue: (1) As to whether or not the debts ascertained to be worthless during the taxable year had been previously reported as income, and (2) as to whether or not the debts ascertained to be worthless during the taxable year 1922 were charged off within the meaning*3095 of section 214(a)(7) of the Revenue Act of 1921. It is apparent from the record that the accounts sought to be charged off had been included as income in the petitioner's prior tax returns.
Section 214(a)(7) of the Revenue Act of 1921 reads as follows:
That in computing net income there shall be allowed as deductions:
* * *
(7) Debts ascertained to be worthless and charged off within the taxable year * * *.
The petitioner, a time merchant operating three stores in rural communities, had for years prior to 1922 kept his accounts by means of a single-entry system. At the suggestion of a revenue agent, in order to properly reflect his income, he installed a doube-entry system. Prior to December 31, 1922, accounts ascertained to be worthless were segregated from the active ledgers and thereafter kept separate and apart from the other accounts. Subsequent to December 31, 1922, a certified public accountant was employed to make the proper closing entries and in so doing used the total previously ascertained to be worthless as charges to the profit and loss account.
The statute requires that the debts shall not only be ascertained to be worthless but that they shall be*3096 "charged off within the taxable year." The statute is silent as to how or where or in what manner they are to be charged off. The purpose of the statute is to require that some record be made of the ascertainment of worthlessness. While it is true that no entries were made on the individual accounts, the store managers examined the accounts and prior to the end of the year withdrew from the active ledgers all of the accounts ascertained to be worthless. The total of the accounts so withdrawn was charged to profit and loss in making the closing entry as of December 31, 1922.
We are of the opinion that the petitioner has complied with the intent of the statute and that the $33,580.72 should be allowed as a deduction for bad debts ascertained to be worthless and charged off within the taxable year.
Judgment will be entered under Rule 50.