*1922 METHOD OF ACCOUNTING FOR LOSSES FROM BAD DEBTS. - Where it appears that a change to the reserve method of accounting for bad debts was plainly evident upon the return filed by the petitioner for 1922 and such method, after field investigation, was accepted by the Commissioner, held, the same method should be followed in computing net income for 1923.
*118 This is an appeal for the redetermination of a deficiency in income tax for 1923, determined by the respondent in the amount of $1,391.89.
Petitioner alleges error in the refusal of the respondent to allow the deduction of an amount of reserve for bad debts as claimed in the return filed by the petitioner. All other issues raised in the appeal were waived by the petitioner.
FINDINGS OF FACT.
The petitioner is a Missouri corporation with principal office at St. Louis, and it is engaged in the retail lumber business. Its accounts are kept and its returns are filed on the accrual basis and upon an accounting period coinciding with the calendar year.
In determining net income for 1921*1923 the petitioner charged off to profit and loss an amount of $56.07 for bad debts. This deduction was allowed by the respondent.
In determining net profits for 1922 the petitioner changed its method of accounting, charging off to profit and loss a reserve for bad debts in the amount of $1,511.70. An amount of $516.23 was charged against the reserve and not against profit and loss; this amount represented the aggregate of accounts which definitely became worthless during 1922. The net remaining balance of the reserve account at the end of the year amounted to $995.47. In the return for 1922 filed by the petitioner a deduction for bad debts was claimed in the amount of $1,511.70 with this explanation set out in full in the return: "Reserve set up under Article 151(2) Regulations 62." The tax liability of the petitioner was investigated in the field by representatives of the Commissioner, and the deduction of *119 $1,511.70, reserve for bad debts, was allowed in full by the Commissioner.
The total sales of the petitioner for 1923 amounted to $826,413.94. The outstanding accounts receivable of the petitioner amounted as follows: At the beginning of 1923, $186,895.72; at*1924 the end of the same year, $198,778.04. In determining the net profits for 1923, the petitioner charged off to profit and loss a reserve amounting to $2,000 for bad debts. An amount of $1,215.30 of worthless accounts was charged against the reserve and not to profit and loss. An amount of $66.35 of collections upon accounts previously charged off as worthless was credited to the reserve account and not to profit and loss. The net balance of the reserve account at the end of the year amounted to $1,846.52. In the return for 1923 filed by the petitioner the addition ($2,000) to the reserve for bad debts was claimed as a deduction. In determining the deficiency the respondent has, among other things, increased the amount of net income reported in the return by the following items: Disallowance of increase in reserve for bad debts, $851.05; worthless accounts collected credited to the reserve for bad debts, $66.35.
The report for 1922 and 1923 of the examining revenue agent in the field included a detailed analysis of the account upon the books of the petitioner for the reserve for bad debts.
OPINION.
TRUSSELL: We are required in this case to decide upon the method of accounting*1925 with reference to losses from bad debts which is properly to be followed for income-tax purposes in computing the net income of the petitioner for the taxable year. Petitioner appears to be a fortunate and well managed concern in that the losses from bad debts are comparatively insignificant. Nevertheless, the parties are in disagreement relative thereto. The record contains no hint that either the actual losses or the amounts of the reserve for bad debts were inaccurate or unreasonable. We are concerned here merely with a question of method of accounting.
Section 234(a)(5) of the Revenue Act of 1921 provides for an allowance at the discretion of the Commissioner of the deduction of a reserve for bad debts. In administering this provision the Commissioner laid down, in articles 561, 151, and 155 of Regulations 62, rules which permitted for 1921 the use, without express permission and at the election of the taxpayer, of a reserve method of accounting for bad debts regardless of what method had previously been *120 followed with the stipulation, however, that thereafter the method adopted must be followed consistently unless the permission of the Commissioner was secured*1926 for a change of method. For 1921 the petitioner deducted an insignificant amount of actual losses from bad debts. For 1922 the petitioner changed to the reserve method of accounting for bad debts. The first return under this method, that for 1922, showed plainly and specifically on its face that the reserve method was followed. The deduction claimed was allowed by the Commissioner after a field investigation. For 1923 the same reserve method of accounting was consistently followed by the petitioner, but the respondent has adjusted the net income to exclude the increase in the reserve and therefore to allow as a deduction only the amount of accounts definitely determined to be worthless within the year. The reason given by the respondent for this action is that permission had not been obtained by the petitioner to change its method of accounting. We think this is clearly a misunderstanding of the true facts. The Commissioner was certainly fully advised in the return of the change of method of accounting adopted in 1922, and, while formal application for his approval does not appear to have been made prior to the filing of the return, that is now of no consequence where it is*1927 clearly shown that after a full exposition of the facts the Commissioner saw fit to accept the return and the proposed method of accounting. Cf. ; affd., ; ; , and the cases therein cited. The situation, as we find it, is that the change to the reserve method of accounting for bad debts was definitely effected in 1922, and there is no evidence of a subsequent change to some other method. It follows that under the regulations of the Commissioner, and also from the standpoint of clarity, through consistency, in determining net income, the same method should be followed in determining the tax liability of the petitioner for 1923.
The deficiency should be recomputed, allowing the claimed deduction of $2,000, being the increase in the reserve for bad debts, as actually charged off on the books of the petitioner. Due consideration should also be given to an overstatement of net income in the deficiency letter in that the item of $66.35, worthless accounts collected during the year, has been twice*1928 added back to income; once by inclusion in the adjustment $851.05, total increase of the bad-debt reserve, and again in the additional adjustment item of $66.35.
Judgment will be entered pursuant to Rule 50.