*2013 On the record, held that the evidence fails to establish the contention of the petitioner that his taxable net income for the calendar years 1922 and 1923 should be computed by a method other than that employed by the respondent. Held, further, that the evidence shows the amount of commissions which are allowable as deductions for the years 1922 and 1923.
*565 This proceeding is for the redetermination of alleged deficiencies in income tax for the calendar years 1922 and 1923 amounting to $5,510.11 and $8,352.53, respectively. The petitioner alleges that the respondent erred (1) in refusing to allow as deductions the amounts of $3,643.25 and $4,410 for the years 1922 and 1923, respectively; and (2) in including in income interest represented by notes, the face of which included both principal and interest, as well as interest received in cash.
FINDINGS OF FACT.
The petitioner is a resident of Washington, D.C., and is engaged in the small loan business. His principal place of business also is located in Washington, *2014 but he operates eleven branch offices located at Richmond and Lynchburg, Va., Charlotte, Raleigh, Durham, and *566 Winston-Salem, N.C., Atlanta, Ga., Knoxville and Chattanooga, Tenn., and Paducah and Lexington, Ky. All loans are made by the branch offices, in each of which there is a manager and staff. The petitioner's business was of a very hazardous nature, as it involved the making of small loans to the poorer classes of people at usurious rates of interest without collateral security, except in the State of Virginia, where it was possible to secure chattel mortgages as collateral. The rate of interest charged varied from 3 1/2 per cent to 10 per cent per month, the latter rate being charged in the majority of loans.
Separate books of account were kept in each branch office. Daily reports of the business conducted in each branch office were sent to the petitioner by the manager thereof. Each report covered the day's business in that particular office and showed the name of the customer, the amount of money he borrowed, and the amount of money paid, all also showed the total amount of money loaned, the total collected, the total amount paid out for expenses and cash*2015 on hand at the beginning and end of the day. The petitioner kept a separate record for each branch office for each year in which he entered daily the total of new notes, the total of notes canceled, expenses, and the cash on hand at the close of the day's business. In each of those records daily entries were made in a column known as the "interest collected column." During the years 1922 and 1923 the records of the branch offices kept by the petitioner were compiled in the same manner as they had been since the petitioner first went into business in 1901.
The interest collected column did not represent actual interest received and was, strictly speaking, a column in which the figures necessary to balance new notes, notes canceled, and cash was entered. The petitioner never considered that the interest collected column represented actual interest received, because he felt that he had not made any money in a particular transaction until the transaction was closed and any profits thereon reduced to possession. The petitioner withdrew funds from the branch offices from time to time and the total of such amounts withdrawn during the years 1922 and 1923 was reported in his income-tax*2016 returns for the respective years. Throughout the course of his business he has never devised any scheme of accounting for interest received in cash other than the one used in the years 1922 and 1923.
The manager of each branch received a salary and a commission. The salaries were included in the operating expenses of the branch offices and are reflected in the records kept by the petitioner in the home office, but the commissions were paid by the petitioner from the home office and are not reflected in the records of the branch offices which were kept by the petitioner. The commission received by *567 each manager was based upon the net amount which the petitioner was able to withdraw from the branch office during the year. The percentage paid to the managers of nine of the branch offices was 5 per cent, to the manager of one of the offices 10 per cent, and to the manager of the other branch office 20 per cent. In petitioner's income-tax return for the year 1922 there was reported as income from business $36,997.81 and for the year 1923 there was reported $35,990.85, which amounts represented withdrawals from the branch offices during those years, less expenses of the*2017 home office. No deductions were taken in those returns on account of commissions paid to branch managers which for the years 1922 and 1923 amounted to $3,373.64 and $4,385.25, respectively.
The petitioner's business was examined at two separate times by two different revenue agents. The report of the first revenue agent was protested by the petitioner and as a result his affairs were again examined by a second revenue agent, whose report was adopted by the respondent and made the basis of the deficiency letter mailed to the petitioner. The matter of computing income employed by the second revenue agent and adopted by the respondent consisted of taking the total of each interest collected column in the records of the branch offices which were kept by the petitioner in the home office, and deducting therefrom expense accounts, depreciation, and bad debts. The figures employed by the respondent in arriving at net income for each of the years 1922 and 1923 are as follows:
Computation of income from business, 1922-Gross interest received
| Office | Office | Office | Office | Office | Office | Office | |
| No.1 | No. 2 | No.3 | No. 4 | No. 5 | No. 6 | No. 7 | |
| January | $2,917.64 | $1,497.99 | $393.15 | $470.45 | $369.90 | $449.10 | $633.65 |
| February | 2,724.35 | 1,463.79 | 367.25 | 445.35 | 397.85 | 472.75 | 613.80 |
| March | 2,979.68 | 1,607.65 | 319,90 | 454.55 | 352.65 | 509.15 | 613.65 |
| April | 2,933.43 | 1,605.84 | 338.35 | 470.60 | 404.60 | 531.60 | 566.65 |
| May | 2,586.18 | 1,660.87 | 374.13 | 497.55 | 376.15 | 522.90 | 533.65 |
| June | 2,554.55 | 1,668.10 | 366.05 | 397.15 | 368.35 | 518.05 | 581.95 |
| July | 2,721.85 | 1,868.20 | 452.30 | 471.15 | 437.40 | 551.25 | 530.75 |
| August | 2,570.40 | 1,951.83 | 396.65 | 424.60 | 343.00 | 514.45 | 509.75 |
| September | 2,561.19 | 1,937.25 | 482.80 | 389.60 | 368.55 | 547.20 | 509.35 |
| October | 2,680.53 | 2,007.99 | 427.30 | 484.10 | 363.20 | 507.60 | 507.20 |
| November | 2,334.19 | 2,007.19 | 466.70 | 449.20 | 358.15 | 434.60 | 509.45 |
| December | 2,508.29 | 2,126.67 | 404.35 | 477.31 | 337.85 | 439.10 | 517.70 |
| Total gross | |||||||
| interest | 32,072.28 | 21,423.37 | 4,788.93 | 5,431.61 | 4,477.10 | 5,997.75 | 6,627.55 |
| Office No. 8 | Office No. 9 | Office No. 10 | Office No. 11 | |
| January | $3,004.32 | $1,588.93 | $853.65 | $2,452.56 |
| February | 2,805.16 | 1,649.12 | 843.10 | 2,436.08 |
| March | 3,179.00 | 1,713.90 | 1,046.80 | 2,649.35 |
| April | 3,029.96 | 1,624.53 | 832.75 | 2,404.83 |
| May | 3,234.75 | 1,736.92 | 921.85 | 2,712.18 |
| June | 2,661.41 | 1,636.99 | 858.55 | 2,404.04 |
| July | 3,087.71 | 1,791.18 | 856.05 | 2,915.81 |
| August | 2,863.98 | 1,650.43 | 945.65 | 2,677.59 |
| September | 2,851.59 | 1,751.51 | 939.50 | 3,777.07 |
| October | 2,872.85 | 1,777.41 | 818.45 | 2,852.16 |
| November | 2,652.54 | 1,553.86 | 1,014.65 | 2,616.26 |
| December | 3,023.16 | 1,852.63 | 1,042.05 | 2,866.66 |
| Total gross interest | 35,268.43 | 20,327.41 | 10,873.05 | 31,764.59 |
| Total gross interest | $179,052.07 | |
| Deduct - | ||
| Pay roll | $48,015.24 | |
| Rent | 6,017.08 | |
| Repairs | 1,143.29 | |
| Advertising | 4,490.49 | |
| Telephone and telegraph | 734.48 | |
| Postage | 1,481.37 | |
| Stationery and supplies | 2,557.90 | |
| Taxes | 3,393.54 | |
| General expense | 4,737.99 | |
| Legal | 1,773.90 | |
| Auto expense | 2,737.83 | |
| Insurance | 292.65 | |
| Heat and light | 227.72 | |
| Bad debts | 40,585.53 | |
| Depreciation | 486.35 | |
| 118,675.36 | ||
| Net income from business | 60,376.71 | |
| Reported original return | 36,997.81 | |
| Net adjustment | 23,378.90 |
*2019 *568 For the year 1922 corrections to the figures appearing in the above table in order to properly represent the figures appearing upon the records kept by the petitioner were agreed to as follows:
Under Office No. 2 for the month of June change $1,668.10 to read $1,688.10.
Under Office No. 5 for the month of April change $404.60 to read $404.05.
Under Office No. 8 for the month of July change $3,087.71 to read $3,089.71.
Under Office No. 10 for the month of April change $832.75 to read $732.75.
Under Office No. 11 for the month of September change $3,777.07 to read $2,777.07.
Computation of income from business, 1923
| Office | Office | Office | Office | Office | Office | Office | |
| No. 1 | No. 2 | No. 3 | No. 4 | No. 5 | No. 6 | No. 6 | |
| January | $2,738.93 | $2,322.10 | $532.40 | $463.60 | $378.05 | $479.25 | $558.45 |
| February | 2,538.80 | 2,164.55 | 465.20 | 422.65 | 396.10 | 439.90 | 523.60 |
| March | 2,842.02 | 2,296.63 | 590.80 | 515.17 | 387.30 | 506.40 | 537.25 |
| April | 2,682.31 | 2,091.14 | 538.15 | 415.85 | 412.65 | 443.05 | 552.95 |
| May | 2,756.09 | 2,158.91 | 506.05 | 405.05 | 398.15 | 456.55 | 497.10 |
| June | 2,911.02 | 2,202.82 | 583.50 | 401.35 | 375.85 | 449.55 | 555.85 |
| July | 3,014.68 | 2,289.80 | 499.50 | 409.65 | 398.00 | 418.35 | 565.90 |
| August | 2,810.36 | 2,277.59 | 588.70 | 513.60 | 369.90 | 413.50 | 553.25 |
| September | 2,893.99 | 2,331.87 | 589.40 | 607.65 | 411.90 | 440.50 | 564.00 |
| October | 3,176.96 | 2,492.71 | 544.90 | 624.30 | 376.00 | 461.60 | 584.45 |
| November | 2,931.00 | 2,409.82 | 569.25 | 546.70 | 366.85 | 406.60 | 582.05 |
| December | 3,100.96 | 2,353.34 | 558.00 | 627.05 | 368.15 | 510.30 | 577.45 |
| Total | 34,397.12 | 27,391.28 | 6,565.85 | 5,952.62 | 4,648.90 | 5,425.55 | 6,652.30 |
| Office No. 8 | Office No. 9 | Office No. 10 | Office No. 11 | |
| January | $3,007.83 | $1,858.58 | $915.40 | $3,147.69 |
| February | 2,596.16 | 1,708.46 | 806.45 | 2,652.36 |
| March | 3,313.00 | 1,913.37 | 958.75 | 3,102.15 |
| April | 2,969.83 | 1,752.16 | 902.55 | 2,629.38 |
| May | 3,051.30 | 1,774.49 | 1,137.50 | 3,009.87 |
| June | 3,172.58 | 1,807.54 | 1,055.55 | 2,930.24 |
| July | 3,230.20 | 1,849.30 | 969.75 | 3,181.15 |
| August | 3,008.99 | 1,834.91 | 856.10 | 3,055.94 |
| September | 3,170.02 | 1,755.59 | 1,062.70 | 3,222.34 |
| October | 3,307.36 | 1,964.40 | 1,031.25 | 3,340.25 |
| November | 2,954.97 | 1,756.54 | 874.10 | 3,109.59 |
| December | 3,441.89 | 2,016.03 | 999.40 | 3,114.90 |
| Total | 37,224.13 | 22,011.37 | 11,569.50 | 36,495.86 |
| Gross interest received | $198,334.48 | |
| Less expenses - | ||
| Pay roll | $48,782.90 | |
| Rent | 6,378.08 | |
| Repairs | 1,080.63 | |
| Advertising | 5,800.91 | |
| Tel. and Tel | 771.08 | |
| Postage | 1,811.92 | |
| Stationery and supplies | 3,379.46 | |
| Taxes | 4,049.32 | |
| General expense | 6,988.26 | |
| Legal | 1,719.93 | |
| Auto | 2,790.10 | |
| Insurance | 272.45 | |
| Heat and light | 479.64 | |
| Bad debts | 40,521.43 | |
| Depreciation | 486.35 | |
| 125,312.46 | ||
| Net income from business | 73.022.02 | |
| Reported original return | 35,708.25 | |
| Net adjustment | 37,313.77 |
*2021 *569 For the year 1923 corrections to the figures appearing in the above table in order to properly represent the figures appearing upon the records kept by the petitioner were agreed to as follows: "Under Office No. 5 for the month of March change $387.30 to read $397.30."
OPINION.
SMITH: The issues before us are (1) the deductibility of commissions paid to branch managers; and (2) the method to be employed in computing taxable net income. With respect to the first issue a great deal of testimony was introduced at the hearing to show that the manager of each branch office was paid a commission upon the net amount of money the petitioner withdrew from that branch office *570 during the year; that the percentages paid to the managers of each of nine offices were 5 per cent, to one office 10 per cent, and to another office 20 per cent; that the records kept by the petitioner in the home office, which were introduced in evidence, reflected the withdrawals during the year, and that the managers were paid commissions.
A certified public accountant, appearing as a witness on behalf of the petitioner, testified as to withdrawals made by the petitioner from each of*2022 the branch offices. The petitioner testified that no commission was paid upon a withdrawal which represented the return of additional capital temporarily furnished by him to a branch office and that, therefore, the testimony of the accountant might be inaccurate as to the amount of withdrawals. However, an examination of the records which were introduced in evidence, coupled with the uncontradicted testimony of the petitioner relative to the payment of the commissions, convinces us that the petitioner is entitled to deductions for the years 1922 and 1923 on account of commissions paid to branch managers amounting to $3,373.64 and $4,385.25, respectively.
With respect to the second issue we are confronted with a record which, to say the least, is very perplexing and confusing. The petitioner himself testified that he did not know what his income was from interest paid in cash. That the records of the branch offices kept by the petitioner, which were introduced in evidence, are susceptible of almost any interpretation is witnessed by the fact that the record in this proceeding presents for our consideration four possible methods of computing the income of the petitioner's business, *2023 with no guarantee that any of those methods or any other method would properly differentiate between items of principal and interest.
In his return the petitioner considered as income only the amount of cash which he was able to withdraw from the branch offices. The Commissioner has taken the totals of the interest received columns as shown by the records of the petitioner and has deducted therefrom expense items, depreciation, and bad debts. The petitioner claims, and the evidence shows, that the interest received columns in the petitioner's records can not definitely be said to reflect either interest, principal, or a combination of interest and principal. For this reason petitioner claims that his net income can not be arrived at by the method employed by the respondent. On the other hand, the respondent claims that any error on account of uncollected interest represented by a portion of notes for both principal and interest is taken care of by an allowance for bad debts, which it is noted he has allowed in the sum of $40,585.53 on a gross business of $179,052.07 for the year 1922, the corresponding figures for the year 1923 being $40,521.43 and $198.334.48, respectively.
*2024 *571 The third method presented for our consideration was that advanced by the petitioner, who now claims that his income consisted of cash withdrawn from the business, plus excess of cash at the end of the year over cash at the beginning of the year minus amounts sent to the branch offices from the home office. This method suggests an alternative method, namely, to consider as income withdrawals during the year plus the difference between the opening and closing cash. With respect to the method now claimed by the petitioner as being the correct one, it should be pointed out that such method does not take care of nor reflect interest received in cash during the year which is put back in the business by the branch manager. To illustrate, the difference between opening and closing cash on hand for any office for any year might be $100, whereas had the balance been struck the day previously it might have been $1,000, or any other amount.
With respect to the books in their entirety the evidence presented on behalf of the petitioner is uncontradicted to the effect that it is impossible to analyze his records so as to disclose the actual cash interest received by him. Furthermore, *2025 the petitioner testified that he did not know what his income was for either of the years in question. Since the petitioner has failed to show affirmatively either the amount of his net income for the years in question or the incorrectness of the respondent's computation of such income, the computation of the respondent will not be disturbed, except in so far as it may be modified (1) by reason of the corrections to the figures employed in that computation which were agreed to at the hearing and which are set out in the findings of fact, and (2) by the deductions on account of commissions paid to branch managers which have been allowed.
Judgment will be entered under Rule 50.