*2343 On December 28, 1920, the petitioner was carrying certain bonds on its books at an amount considerably in excess of their then market value. As a result of an examination by a state bank examiner, and in accordance with the direction of the secretary of banking, the petitioner, on February 3, 1921, added $15,000 to its reserve for depreciation on these investments. The Commissioner's determination that the petitioner may not deduct this amount in 1921 as a reasonable addition to a reserve for bad debts approved.
*674 The Commissioner determined a deficiency of $2,125 in the petitioner's income tax for the calendar year 1922, and one of $3.75 for the calendar year 1923. The petition alleged no error as to the year 1923 and the Commissioner's determination for that year is approved. The only error alleged as to the year 1922 is as follows: "The Commissioner of Internal Revenue erroneously reduced the loss suffered by the petitioner for the calendar year 1921 in the amount of $15,000, thereby reducing the amount to be applied*2344 against the income for the year 1922 by said amount."
FINDINGS OF FACT.
The petitioner is a Pennsylvania corporation engaged in the general banking business, with its principal office at Pittsburgh, Pa.
In December, 1920, a state bank examiner examined the petitioner and reported that as of December 28, 1920, the market value of its *675 investments was $120,995.30 less than the amount at which these investments were carried on the books of the bank. These investments were then carried on the books at $975,555.30 and consisted entirely of bonds of about eighty different companies, including some companies which operated street railways in and near the city of Pittsburgh. It still had these investments in the early part of 1921.
On January 28, 1921, the secretary of banking of the Commonwealth of Pennsylvania wrote the petitioner a letter which was in part as follows:
The only matter to which we deem it necessary to call your attention is the depreciation in investment securities which, at date of examination, amounted to $120,995.30, to partially provide for which $18,750 has been set aside as a reserve. The Department is requiring all institutions under its*2345 supervision, the securities of which show depreciation, to provide at this time for not less than twenty-five per cent of the same. This may be done either by the setting aside of a reserve equal to that percentage or by reducing the carrying values of securities to that extent. It will therefore be necessary for your company to either increase the reserve fund to $30,000, or charge off $11,250. We should, however, be pleased to have you care for a larger percentage of the depreciation in view of the fact that your securities include a number of local street railway bonds which show a present depreciation of nearly $50,000 and the intrinsic values of which are somewhat doubtful.
The following appraisement is submitted for your consideration:
| Undivided profits | $51,004.76 | |
| Surplus fund | 50,000.00 | |
| Reserve for depreciation | 18,750.00 | |
| $119,754.76 | ||
| Less - | ||
| Depreciation in invest | 120,955.30 | |
| Impairment of capital | 1,240.54 [sic] |
In view of the fact that the condition of your company, has [sic] revealed by the foregoing appraisement, is chargeable to depreciation in investments, and the Department is hopeful that there may soon be an appreciable*2346 advance in security values, we shall, for the time being, defer the service of formal notice of impairment required by Section 20 of the Act of May 21st, 1919.
Please see that this matter has the careful consideration of your board of directors, after which a reply to this letter is requested.
On February 2, 1921, at a meeting of the board of directors of the petitioner, the above letter was read, whereupon a motion was carried authorizing the treasurer "to set aside $15,000.00 to the depreciation of Bond Account (reserve acct. depreciation on investments) making this total depreciation on Bond Account amt. to $33,750.00." On the same day the petitioner's undivided profits account was debited $15,000 as a result of this resolution and an account entitled "Reserve *676 for depreciation on investments" was credited with $15,000. This latter account shows the following:
| Reserve for Depreciation on Investments | |||||
| Nov. 23/1917 Charge to P. & L. | Depreciation reserve account | ||||
| Date | a/c $3,400.00 amt. deducted from | Folio | Debits | Credits | Cr. Balance |
| carrying cost of investments | |||||
| 1920 | |||||
| Dec. 31 | (Aug. 31-1918.) By order | 265 | $13,750 | $13,750 | |
| Commissioner of Banking 8/23/18 | |||||
| (Dec. 24-19.) By order | 265 | 5,000 | 18,750 | ||
| Commissioner of Banking 12/20/19 | |||||
| 1921 | |||||
| Feb. 3 | Resolution to charge Profit & | 15,000 | 33,750 | ||
| Loss a/c Com. of Banking 11250.00 | |||||
| 1922 | |||||
| Sept. 7 | Per resolution 9/6/22 to chg. | 3,400 | 37,150 | ||
| back to Invest. Bonds | |||||
| 7 | Resolution 9/6/22 to Cr. Und. | $22,150 | 15,000 | ||
| Profits |
*2347 The petitioner, after deducting $15,000 on account of the above mentioned addition to its reserve, reported a net loss for the year 1921 of $24,939.11, and in 1922 deducted this amount from its net income. The Commissioner disallowed the deduction of $15,000 for 1921 and deducted a net loss of $9,939.11 from the petitioner's net income for 1922.
OPINION.
MURDOCK: The petitioner first contends, and we agree, that bonds represent debts. It next contends that it is entitled to set up a reserve for bad debts on account of a decrease in the value of bonds held by it as investments, and, further, that $15,000 was a reasonable amount to be added to this reserve account in 1921. Section 214(a)(7) of the Revenue Act of 1921, allows the deduction of
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 contend that it ascertained any particular debts to be worthless and charged them off within the taxable year, nor does*2348 it contend that it determined that certain debts were recoverable only in part and were charged off in part. In any event, the petitioner has not shown that it ascertained the entire or partial worthlessness of any particular debts, or that it charged off those debts within the taxable year, and, thus, the sole question in the case is to determine whether the $15,000 was a reasonable addition to a reserve for bad debts which the petitioner was entitled to deduct in the year 1921.
*677 This Board has held that a deduction may not be taken under section 214(a)(7) on account of alleged bad debts represented by bonds. First National Bank of St. Paul,10 B.T.A. 32">10 B.T.A. 32; West Lafayette Bank,12 B.T.A. 1356">12 B.T.A. 1356; First National Bank of Parkers Landing, Pa.,12 B.T.A. 1387">12 B.T.A. 1387. Contra, see T.D. 3262, Cumulative Bulletin I-1, p. 152; GCM 1887, Cumulative Bulletin VI-2, p. 61. Cf. Rhode Island Hospital Trust Co. v. Commissioner, 29 Fed.(2d) 339. However, it is not necessary to base the present decision on the above cited cases of this Board, for even if we were wrong in those decisions, there*2349 are other reasons why the petitioner here is not entitled to judgment.
Under the Revenue Acts, income is ordinarily reported on the basis of recurring 12-month periods. Any deduction for bad debts, whether by way of an addition to a reserve or otherwise, should properly reflect, and be a consequence of the condition of a taxpayer's debts at the end of the period which is being reported. Where an addition to a reserve for bad debts is sought to be deducted, it must appear that the addition is reasonable and this must mean reasonable in the light of the situation at the end of the taxable period.
The evidence in the present case certainly tends to show no more than that the addition in question was a reasonable addition on December 28, 1920, or perhaps up to the first part of February, 1921, as the situation then existed. It does not tend or even purport to show that the addition in question was, at the end of the year, a reasonable amount to have added for the year. So far as we know, even if the amount were reasonable in view of all that had happened up to February 3, 1921, subsequent events in the year 1921 might have rendered the amount wholly unreasonable as a deduction*2350 for the year. Thus, the petitioner has failed in his proof.
In taking a deduction for specific bad debt items, a taxpayer may deduct only those that he ascertains to be worthless in the taxable year, and if items were worthless and were known to be worthless in previous years, they may not be carried along to a later year and then deducted in one lump sum. To deduct such debts in a lump would distort income in that particular year. Avery v. Commissioner, 22 Fed.(2d) 6. The section of the Act in question mentions the discretion of the Commissioner in connection with a reasonable addition to a reserve for bad debts. The published decisions, instructions, and rulings of the Commissioner and the Treasury Department disclose an intention to limit the deduction for an addition to a reserve for bad debts to an amount which will bear a close relation to the 12-month period for which it is *678 deducted, so that income for that year may not be distorted. The addition to the reserve in the present case bears little or no relation to the year 1921, but, on the contrary, was set up to take care of conditions as they were on December 28, 1920.
*2351 To establish that the addition to the reserve was reasonable in amount, the petitioner relied almost entirely upon the opinion of the bank examiner, supported as it was by the action of the secretary of banking and the directors of the bank. The action of these officials should not be disregarded, but in deciding what weight should be given to evidence of what they did, we should consider what impelled them to do what they did, to see what relation their acts may bear to the question of the reasonableness of an addition to a reserve for bad debts within the meaning of section214(a)(7) of the Revenue Act of 1921. Broadway Savings Trust Co. v. United States,66 Ct.Cls. 429. This Board has held in a number of cases that the order of a bank examiner does not, per se, establish reasonableness in this connection. Murchinson National Bank,1 B.T.A. 617">1 B.T.A. 617, which has been cited and followed in a number of later cases. Cf. Rhode Island Hospital Trust Co. v. Commissioner, supra.We do not doubt the wisdom of making the addition of $15,000 to the reserve in question for the purpose for which it was made. But we think that that purpose*2352 was almost entirely unrelated to the question of whether or not, as a deduction in reporting income, the addition was reasonable. The primary purpose of the state banking officials was to require the bank to have a total credit balance in its reserve of 25 per cent of the depreciation in the market value of its reserve of 25 per cent of the depreciation in the market value of its investments. They were not particularly concerned as to the time if the reserve in December, 1920, had equaled 25 per cent of the depreciation, or had then been added to until it equaled this 25 per cent, the state banking officials would have been satisfied. Thus, it appears that these officials, as well as the directors of the bank, were not concerned with the question of what amount would represent a reasonable addition to a reserve for bad debts applicable to the year 1921, which is the question with which we are concerned. Cf. Barde Steel Products Corporation v. Commissioner, 40 Fed.(2d) 412. Furthermore, the addition in question was made almost entirely on account of the fluctuation in the price at which the securities in question were quoted on the market. Many factors besides*2353 safety affect market fluctuations. It is a well known fact that the market for securities which are recognized as absolutely safe fluctuates. Market fluctuation, therefore, is an unsafe criterion for determining the reasonableness of an addition to a reserve for bad debts which may be deducted under the section in question, for the reserve for bad debts is set up and *679 added to in anticipation of ultimate actual losses and not current changes in market value. Weiss v. Wiener,279 U.S. 333">279 U.S. 333. United States v. White Dental Co.,274 U.S. 398">274 U.S. 398. Note the debit to the reserve in question on September 7, 1922. The evidence does not show that any of the bonds were worthless, but shows the contrary. Cf. New York Life Insurance Co. v. Edwards,271 U.S. 109">271 U.S. 109.
Judgment will be entered for the respondent.