*2926 Taxpayer had in 1923, an open account with a debtor of $29,489.08. Being satisfied on reasonable grounds that the account was not collectible to the extent of more than 50% of its face amount, it wrote off half of it as a bad debt in closing its books for 1923. In 1924 it received notes from the debtor for the full amount of the debt, payable in 1, 2, and 3 years, but did not enter them on its books, continuing to carry the reduced debt as an open account receivable. It claimed a deduction in its 1923 income-tax return of $14,744.54 for the bad debt. Held that the deduction should be allowed, under the provisions of the Revenue Act of 1921
*452 Before IVINS, KORNER, and MARQUETTE.
From documentary evidence and oral testimony adduced at the hearing, the Board makes the following.
FINDINGS OF FACT.
The taxpayer is a New York corporation, engaged in the business of selling tin-plate and sheet iron. Among its customers was William *453 Vogel & Bros., Inc., a manufacturer of cans, etc. The latter was indebted*2927 to the taxpayer, in open account, for goods sold and delivered, to the extent of $29,489.08 in the year 1923. The debtor was in financial difficulties and settled with some of its creditors on a basis of fifty cents on the dollar. The taxpayer was willing to make a similar settlement, but the debtor did not have sufficient funds to permit it to do so.
In closing its books for the year 1923, on or as of December 31, 1923, the taxpayer wrote off 50 per cent of this debt as bad, reducing the amount on its books to the debit of the debtor to $14,744.54 and charging a similar amount to bad debts. At this time it believed the debt to be uncollectible to the extent of more than half of its face, and was justified in such belief by the financial condition of the debtor.
A balance sheet, prepared at the instance of the debtor for the purpose of making a good showing, did not truly reflect its financial condition for the reason that its machinery and stock inventories were carried at figures far above their true value. The debt could not be regarded at December 31, 1923, as reasonably worth more than 50 per cent of its face amount.
In 1924 the debtor gave the taxpayer notes, payable*2928 at the end of 1924, 1925, and 1926, for the face amount of the debt. The note due December 31, 1924, was not paid at maturity. The taxpayer made no book entry of the notes but retained them as collateral evidence of the indebtedness, continuing to carry the open account on its books at $14,744.54.
In its income-tax return for 1923 the paxpayer claimed a deduction on account of this item as a bad debt, lumping it with other bad debts. It carried no reserve for bad debts. A revenue agent, examining the books, disallowed as an addition to reserve for bad debts the sum of $14,744.54 and the Commissioner increased the taxpayer's net income in that amount, finding accordingly a deficiency in tax in the sum of $1,806.97. From his determination the taxpayer took this appeal.
DECISION.
The deficiency determined by the Commissioner is disallowed.