*3551 The evidence does not support the claims of petitioner for deductions from income of allowances for bad debts and depreciation in excess of the deductions allowed by respondent.
*393 This proceeding is for the redetermination of a deficiency in income and profits taxes for the calendar year 1921, in the amount of $4,130.12. The entire deficiency is not in dispute but only so much thereof as results from the Commissioner's action: (1) In disallowing the amount of $1,985.77, representing an alleged addition to a reserve for bad debts, and (3) in disallowing the amount of $11,792.44 as adeduction for depreciation.
FINDINGS OF FACT.
The petitioner is an Ohio corporation with its principal office and place of business at Cleveland, Ohio. It also maintains an office and place of business in Brooklyn, N.Y. It is and was, during the year 1921 and prior thereto, a commercial dyer and processor of yarns and textiles.
In 1921, petitioner planned to extend its business, bought land in Brooklyn, N.Y., and contracted for the erection of a plant similar*3552 to the one in Cleveland. The Brooklyn plant was in process of construction during the summer of 1921, and the contract provided for its completion on or about September 1, 1921.
A large amount of dyeing business was obtained in contemplation of starting operations at the Brooklyn plant. However, that plant was not finished until February, 1922, and in order to satisfy the *394 new customers and to do the work theretofore obtained, petitioner was compelled to do the work at its Cleveland plant. By reason of the increased work, the Cleveland plant was, during a part of the taxable year, operated day and night with two shifts instead of the normal 10-hour day.
In its business petitioner used various vats and machines in which were used solutions of soap, soda, salts, dye-stuffs, acids, etc., and which were operated at temperatures varying from 100 degrees to the boiling point. The plant, in course of operation, was constantly filled with steam and the fumes of acid, and under normal operating conditions it was customary to clearn all machines and vats and to dry out the building by means of blowers. The building was of brick construction with a roof supported by wooden*3553 rafters.
Ordinarily it took from two to four hours to remove the steam and fumes from the building. During the latter part of 1921, being unable to shut down the plant, the vats and machinery were not cleaned as usual nor was the building dried out.
At the end of 1920 values on the ledger were revised as follows:
| Book values | ||
| Prior to | After adjustment | |
| adjustment | ||
| Machinery and equipment | $76,634.40 | $148,725.46 |
| Buildings | 233,806.90 | 140,898.64 |
| Land | 20,000.00 | |
| 310,441.30 | 309,624.10 | |
| Reserve for depreciation (charged off in 1919) | 817.20 | |
| Total | 309,624.10 | 309,624.10 |
For the taxable year 1921, allowances for depreciation charged off on the books included the following: for buildings, basis - book value at beginning and end of year, $140,898.64, rate 8 per cent per annum, amount, $11,271.89; for machinery, fixtures, equipment, tools, etc., basis - book value at end of year prior to several adjustments by way of decrease for assets retired, transferred or junked, $155,324.86; rate, 20 per cent per annum; amount, $31,064.97.
For the taxable year 1921, under date of December 31, 1921, a reserve was charged off by the following journal*3554 entry:
| Ledger Pg. | Dr. | Cr | |
| Dec. 31, 1921, provision for bad debts, discounts, | |||
| allowances, freight, etc | 151 | $4,000 | |
| Reserve for bad debts, allowances, etc | 32 | $4,000 | |
| Additional provision based upon increase in total | |||
| unpaid balances and freight, discounts, allowances | |||
| of prior periods. |
*395 At this time there was one account receivable due petitioner, amounting to about $4,000, believed by petitioner to be doubtful and subsequently only 25 per cent thereof was realized.
The accounting system of petitioner was on the accrual basis.
OPINION.
LOVE: The sole question before us in the first issue is what amount of a reserve for bad debts is allowable as a deduction from income under the provisions of section 234(a)(5) of the Revenue Act of 1921, reading as follows:
SEC. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
* * *
(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*3555 in part, the Commissioner may allow such debt to be charged off in part; * * *
The commissioner has allowed the deduction of a reserve amounting to $2,014.23, and has disallowed the amount of $1,985.77 which is the remainder of the reserve of $4,000 charged off on the books by petitioner. A witness for petitioner testified of an account of $4,000 on which was subsequently realized but 25 per cent of its amount. The same witness admitted that respondent has computed the amount of the reserve which has been allowed as a deduction by the use of a rate per centum applied to the total accounts receivable, the rate being derived from the relation of the previous losses from bad debts. In comparison the method of petitioner appears arbitrary, and rather in the nature of a partial write-off of a single bad debt. From all of the evidence before us we are not satisfied that the entire amount of $4,000 in the reserve was attributable to bad debts rather than to various contingencies described in the journal of petitioner as "freight," "discounts," "allowances of prior periods," etc. We are not satisfied that any amount in excess of that allowed by respondent would be reasonable. Respondent*3556 is sustained on that issue.
The remaining issue requires for determination what amount is reasonable by way of allowance for exhaustion, wear, and tear of assets of petitioner, deductible from income under section 234(a)(7) of the Revenue Act of 1921. The parties are not in agreement as to any of the factors in the computation of the amount. The record supports the contention of petitioner that the plant was operated during a portion of the year on an overtime basis. There is no evidence of the cost of the depreciable assets, save that they appear upon the books at certain values. Part of the assets were acquired in 1919, *396 when petitioner took over the business of a predecessor. At the end of the year immediately preceding the taxable year, the book values of the assets were completely revised with reference to their classifications under "building" or "machinery, fixtures, equipment, tools, etc." The distinctions are important when consideration is given to the annual rates of depreciation claimed for the two classes, the rate for machinery being nearly three times the rate for buildings. There is not sufficient evidence in the record to justify us in disturbing*3557 the determination of the Commissioner and fix any other definite amount of allowance for depreciation. Respondent is sustained.
Judgment will be entered for the respondent.