*2040 Evidence does not show that debts were ascertained to be worthless.
*436 The Commissioner determined deficiencies in the petitioner's income tax and assessed penalties thereon for the following years in the following amounts:
| Year | Deficiency | Penalty |
| 1922 | $317.42 | $79.36 |
| 1923 | 1,085.80 | 271. |
The petitioner's sole allegation of error is that the Commissioner disallowed certain deductions for bad debts.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the State of New York, having its principal place of business at Woodhaven, N.Y.
*437 During the year 1921 the petitioner's capital stock was owned by men named Einhorn and Levin, each holding 50 per cent thereof. Levin managed the business, while Einhorn was merely an investor, taking no active part in the petitioner's affairs. Levin sent reports of the business to Einhorn regularly, and the latter relied on these reports as indicating the true financial status of the corporation.
In the early part of the year 1922 a man named Fried*2041 acquired 10 per cent of the stock of the petitioner from Einhorn and Levin, 5 per cent coming from each of them.
During the year 1924 Einhorn and Fried began to suspect Levin of dishonesty in the management of the petitioner's business. They thereupon caused an examination of the corporate books to be made by a firm of public accountants. This examination was commenced in October, 1924, and it disclosed the fact that the books had been incorrectly kept and that no income-tax returns had been filed for either of the years 1922 or 1923. Levin was then forced to retire and Einhorn bought his stock, Fried retaining his 10 per cent interest.
At the direction of Einhorn, income-tax returns for the years in question were voluntarily filed in June, 1926.
The books of the petitioner showed a number of accounts receivable against which no amount had ever been charged off. Some of the accounts had been unchanged for three or four years. After an examination of these accounts and of the correspondence files, the accountant recommended to Einhorn that certain accounts be charged off as bad debts. Einhorn then instructed this accountant to charge off these accounts.
In the return*2042 filed for 1922, $3,220.99, designated as a bed debt reserve, was deducted; and in the 1923 return, $5,924.70, designated merely as bad debts, was deducted. The Commissioner disallowed these deductions.
OPINION.
MURDOCK: The Revenue Act of 1921, in section 234(a), provides that the following may be deducted:
(5) Debts ascertained to be worthless and charged off within the taxable year (or in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.
The petitioner does not claim the deductions in question under that part of the above provision which relates to a reserve. Although it admits that neither an ascertainment of worthlessness nor a charge-off was made in the taxable years, it nevertheless contends that the debts were eventually ascertained to be worthless and charged off, and its right to the deductions was not lost because of *438 the delay. We need not decide this question, since in any event the petitioner has failed to offer sufficient evidence from which we can determine that it ever ascertained these*2043 debts to be worthless within the meaning of the Act.
We are asked to hold that the petitioner ascertained certain debts to be worthless. The Commissioner has refused to so hold. In such a situation the petitioner does not make out its case by merely having witnesses testify in so many words that the debts were ascertained to be worthless. Such a statement of a witness is a conclusion based upon the judgment of the witness as to what is necessary to ascertain a debt to be worthless. This is a question upon which we are to exercise our judgment and the judgment of the witness may not be substituted for ours and forced upon us in this way. Facts, not conclusions alone, must be presented, the facts which moved the officers of the petitioner to reach their conclusion that the debts were worthless. ; ; , affd. ; ; *2044 .
Einhorn was asked, "Did you question the accounts and go into the question as to why they had not been paid?" He answered, "Yes. I remember I asked Mr. Levin why they were not paid." He further testified that he examined the accounts receivable ledger and discovered certain balances were being carried, some of which were three or four years old. He did not remember referring to any correspondence relating to these accounts which might have been in the files. And he did not tell us of anything further that he did other than that he consulted with the accountant. The accountant testified that he carefully scrutinized every account in the ledger and if there was any correspondence in the file he examined it, and from his investigation he prepared a schedule showing the name of the debtor, his address, the date of the last sale, the date of the last payment, and the amount charged off. This man knew nothing of the debts except what he learned from the files of the company. We have not been told what information as to particular debts was contained in the files. On the facts before us we can not say that a reasonably prudent business*2045 man would have concluded that these particular debts were worthless in the taxable years. Even if we were satisfied that the debts were worthless at the time the investigation was made, we could not approve the accountant's method of allocating part of the charge off to one year and part to the other without additional proof on this point.
Judgment will be entered for the respondent.