*2519 Reasonable addition to a reserve for bad debts determined and allowed as a deduction.
*740 The Commissioner determined a deficiency in income and profits tax for the calendar year 1921 in the amount of $10,513.67, resulting from certain adjustments which increased the income reported in the amount of $23,247.53. Only so much of the deficiency is in controversy as arises from the refusal of the Commissioner to permit the petitioner to deduct the amount of $12,468.83 under the provisions of section 234(a)(5) of the Revenue Act of 1921, which it claims was a reasonable addition for a reserve for bad debts.
FINDINGS OF FACT.
Petitioner is a New York corporation with principal office at New York. It was organized in 1914, since which time it has been engaged almost exclusively in manufacturing sugar machinery and in exporting and selling the same in Cuba, San Domingo, Porto Rico, and other islands of the West Indies.
At December 31, 1920, notes and accounts receivable were carried by petitioner upon its books in the amount of $36,487.74. Petitioner's*2520 debtors were dependent entirely upon the sugar market for the payment *741 of their bills. In the early part of 1921 petitioner made shipments of sugar machinery into tropical countries upon contracts made for the most part early in the year 1920 amounting to $590,650.37, of which $365,774 represented sales of machinery in the island of San Domingo.
At December 31, 1921, petitioner carried upon its books notes and accounts receivable amounting to $86,363.09. In 1920 persons engaged in the operation of sugar plantations and sugar mills entered into contracts with petitioner for large quantities of sugar machinery and equipment to be shipped and paid for during the year 1921. Petitioner investigated and was familiar with the financial standing of purchasers of machinery at the time the contracts were made. The sales price of the machinery became due and payable in the year 1921.
Throughout the year 1920 the wholesale price of refined sugar purchased on the New York stock market was as follows:
| Month | High | Low | Average |
| Cents | Cents | Cents | |
| January | 16.00 | 15.00 | 15.53 |
| February | 16.00 | 14.75 | 15.47 |
| March | 16.00 | 14.00 | 14.52 |
| April | 23.00 | 14.00 | 16.94 |
| May | 16.50 | 17.50 | 21.39 |
| June | 26.50 | 21.50 | 22.87 |
| January to June | 26.50 | 14.00 | 17.79 |
| July | 24.00 | 21.00 | 22.44 |
| August | 22.00 | 17.00 | 20.02 |
| September | 17.10 | 13.50 | 15.18 |
| October | 14.00 | 11.00 | 12.24 |
| November | 12.00 | 8.75 | 10.16 |
| December | 9.00 | 7.90 | 8.44 |
| July to December | 24.00 | 7.90 | 14.75 |
*2521 During 1921 the price in cents per pound of refined sugar was, high, 8.08; low, 4.704; average, 6.207.
At the end of 1921 many of the petitioner's debtors were unable to pay any amounts upon their accounts and there was little, if any, prospect that they would be in any better financial condition for a long time to come. One concern was indebted to petitioner in the amount of $73,750. This concern was indebted to another firm in the amount of approximately $475,000. In addition thereto it was indebted in large amounts to others. Late in the year 1921 a meeting of the creditors of this debtor corporation was called at which petitioner was represented. It was found that enforced collection on the part of its creditors would result in the recovery of less than 50 cents on the dollar. The creditors concluded to postpone action to collect in the hope that conditions might improve. Petitioner was given notes falling due over a period of years for its debts. Had petitioner *742 attempted to enforce payment of its accounts receivable past due on December 31, 1921, less than 50 per cent thereof could have been recovered. This fact was known to petitioner at the time.
*2522 With a knowledge of the foregoing facts and circumstances petitioner entered upon its books at the end of 1921 a reserve for bad debts in the amount of $21,590.77, representing 25 per cent of its notes and accounts receivable, and deducted that amount from gross income in its income-tax return for the year 1921. The Commissioner denied this deduction in full for the reason that "taxpayer has not complied with section 234(a)(5) or Treasury Decision 3262 in that no reserve was set up at December 31, 1920, nor were any particular debts proved to be recoverable only in part." At December 31, 1920, petitioner had notes and accounts receivable amounting to $36,487.74 after deducting $1,662.50 representing debts wholly worthless and charged off. In its petition and at the hearing petitioner claimed that it should be permitted to set up a reserve of $9,121.93, representing 25 per cent of the outstanding notes and accounts receivable at the beginning of the year 1921, and to deduct from gross income for the year the amount of $12,468.83 representing a reasonable addition to this reserve entered upon the books at December 31, 1921.
OPINION.
LITTLETON: Petitioner's debtors were persons*2523 engaged exclusively in the sugar industry. During the year 1921, as a result of the decline in the price of sugar during 1920 and 1921, petitioner's debtors found themselves in the year 1921 without funds with which to make payment on their accounts. Many of these accounts represented bills for machinery contracted for early in 1920 when the price of sugar was high and payable in the year 1921. During and at the end of 1921 petitioner knew that a considerable amount of its accounts receivable could never be collected. The Revenue Act of 1918 did not permit the setting up of a reserve for bad debts, and the Revenue Act of 1921 was not enacted until November 23, 1921. By that time petitioner was in such a dilemma concerning the matter, whether it would ever be able to collect the debts due it, that at the end of the year, instead of setting up a reserve as of January 1, 1921, and crediting thereto a reasonable addition at December 31, 1921, the directors, who were thoroughly familiar with the facts and circumstances surrounding the notes and accounts receivable, concluded that less than 50 cents on the dollar could be recovered thereon and determined that 25 per cent of the accounts*2524 receivable represented a conservative charge-off at December 31, 1921. This percentage amounted to $21,590.77. This amount was claimed as a deduction *743 from gross income for 1921. Petitioner now claims that it was justified from the facts known to it in setting up a reserve of $9,121.94 at January 1, 1921; that it should now be permitted to set up this reserve and to deduct from gross income of 1921 the amount of $12,468.83 representing a reasonable addition to such reserve at the end of the year. We think from the evidence that it should be permitted to do this. From the facts known the petitioner would have been justified at the end of 1921 in charging off in part the debts due it in an amount at least equal to the amount which it now claims. The amount of $12,468.83 claimed as a deduction as an addition to its reserve for bad debts is in the opinion of the Board reasonable and should be allowed.
Reviewed by the Board.
Judgment will be entered on 15 days' notice, under Rule 50.