21 B.T.A. 281">*281 This proceeding was brought for the redetermination of deficiencies in income tax for the years 1923, 1924, and 1925, amounting to $2,157.38, $76.12, and $57.58, respectively.
The petitioner alleges that respondent erred in disallowing as deductions certain additions to petitioner's reserve for bad debts.
FINDINGS OF FACT.
Petitioner is a corporation incorporated under the laws of the State of Ohio in August, 1920, and began active business in that year. It is engaged in the business of making loans on the security of real estate and automobiles.
In the year 1921 petitioner set up in its books a reserve for bad debts to which it made additions in the years in question. The sum 21 B.T.A. 281">*282 credited to the reserve for bad debts each year was an estimated amount. It included the total sum of listed items which were portions of certain specific delinquent accounts and it was determined by estimating the possible loss which might be sustained from each of such accounts. The reserve was increased in each succeeding year by the addition thereto1930 BTA LEXIS 1883">*1884 of specific listed items and was reduced by the amount of items embraced therein which had been collected during the year or which had been determined to be collectible. The reserve was segregated into a reserve for bad debts arising from loans on automobiles and a reserve to cover losses from loans on the security of real estate.
From 1920 to 1926 the amounts of the reserves were as follows:
| Date | Reserve for | Reserve for |
| auto loans | real estate | |
| 1920 | ||
| 1921 | $6,465.15 | |
| 1922 | 8,527.78 | $2,300.00 |
| 1923 | 5,367.21 | 22,604.34 |
| 1924 | $5,773.15 | $22,712.09 |
| 1925 | 6,570.60 | 22,220.64 |
| 1926 | 3,115.22 | 14,250.00 |
The specific items included in the reserve were parts of secured loans with respect to which no foreclosure proceedings had been instituted and which had not been liquidated at the date of such inclusion. With the exception of a debt in the sum of $3.70 which was ascertained to be worthless in 1925, no amount owed to petitioner on the security of real estate was ascertained to be worthless during the years 1920, 1921, 1922, 1923, 1924, and 1925. In 1926 loans on real estate amounting to $8,455.89 were ascertained by petitioner to be worthless and were1930 BTA LEXIS 1883">*1885 charged off.
In 1920 and 1921 no loans made on the security of automobiles were ascertained to be worthless. In 1922 such loans amounting to $1,400.74 were determined to be worthless. In 1923 loans on automobiles amounting to the sum of $6,838.98 and in 1925 loans amounting to the sum of $171.52 were ascertained to be worthless.
In the years 1920 to 1926, inclusive, the amounts of loans outstanding at the end of the year and the amounts of loans made during the year on each kind of security were as follows:
| Real estate loans | Automobile loans | |||
| Year | Loans made | Loans outstanding | Loans made | Loans outstanding |
| during year | at end of year | during year | at end of year | |
| 1920 | $3,251.85 | $2,196.97 | $38,336.71 | $30,457.38 |
| 1921 | 49,357.21 | 34,704.40 | 209,572.79 | 110,531.26 |
| 1922 | 201,576.07 | 152,938.68 | 352,026.89 | 167,650.50 |
| 1923 | 189,674.56 | 194,940.06 | 303,686.20 | 134,600.55 |
| 1924 | 66,998.50 | 138,894.68 | 171,198.05 | 62,912.90 |
| 1925 | 90,333.49 | 194,068.30 | 142,615.60 | 59,083.25 |
| 1926 | 159,093.75 | 248,423.66 | 57,138.30 | 35,676.78 |
21 B.T.A. 281">*283 In its income tax returns for 1923, 1924, and 1925 the petitioner claimed deductions for bad debts1930 BTA LEXIS 1883">*1886 amounting to $23,982.75, $493.69, and $618.14, respectively. The amounts of these deductions were computed as follows:
| 1923 | ||
| Credit to reserve for bad debts on real estate loans | $20,304.34 | |
| Credit to reserve for bad debts on automobile loans | 5,367.21 | |
| Automobile loans determined to be worthless 12/31/23 | 6,838.98 | |
| Total | 32,510.53 | |
| Deduct: | ||
| Bad debts recovered | $750.33 | |
| Cancellation of portion of bad debt reserve set up | ||
| 12/31/22 on automobile loans | 7,777.45 | |
| 8,527.78 | ||
| Amount deducted on return | 23,982.75 | |
| 1924 | ||
| Credit to reserve for bad debts on real estate loans | 10,809.58 | |
| Credit to reserve for bad debts on automobile loans | 405.94 | |
| 11,215.52 | ||
| Deduct: | ||
| Cancellation of portion of bad debt reserve set up | ||
| 12/31/23 on real estate loans | $10,701.83 | |
| Reduction of bad debt account | 20.00 | |
| 10,721.83 | ||
| Amount deducted on return | 493.69 | |
| 1925 | ||
| Credit to reserve for bad debts on real estate loans | 2,900.00 | |
| Credit to reserve for bad debts on automobile loans | 4,260.77 | |
| Real estate loans determined to be worthless | 3.70 | |
| Automobile loans determined to be worthless | 171.52 | |
| 7,335.99 | ||
| Deduct: | ||
| Bad debts on real estate loans recovered | $3,391.45 | |
| Bad debts on automobile loans recovered | 3,326.40 | |
| 6,717.85 | ||
| Amount deducted on return | 618.14 |
1930 BTA LEXIS 1883">*1887 The Commissioner disallowed that portion of the deductions representing additions to a bad debt reserve, but allowed the deduction of the amount of bad debts actually ascertained to be worthless during each of the respective years. Amounts allowed by the Commissioner were $6,838.98 for 1923, nothing for 1924, and $175.22 for 1925.
21 B.T.A. 281">*284 OPINION.
VAN FOSSAN: Section 234(a)(5) of the Revenue Acts of 1921 and 1924 is applicable to the issue in this proceeding. The section provides as follows:
SEC. 234. (a) In computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
* * *
(5) 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 statute provides for reasonable additions to a reserve for bad debts as an alternative to the deduction of the amount of debts ascertained to be worthless and charged off during the taxable year. In our opinion the evidence fails to show1930 BTA LEXIS 1883">*1888 that the additions to the reserve for bad debts in each year were "reasonable" as required by statute.
From the evidence it is clear that the amounts credited into the reserve for bad debts were not so credited as the result of the experience of petitioner and it does not appear that the method used for determining the sum to be credited to the reserve was based on the experience of persons or corporations engaged in business similar to that of petitioner. The amount was the sum of specific items which were portions of secured loans made by the petitioner. The reserve was segregated into a reserve for losses on real estate and a reserve for losses on automobile loans.
In 1923, $20,304.34 was credited to the reserve to cover losses from loans on real estate, making the total amount then in the real estate reserve $22,604.34. That there was no certainty or likelihood of loss of some of the items embraced in this sum is shown by the fact that such items amounting to $10,701.63 were canceled from this reserve in 1924 because they had been collected during that year, or were deemed collectible. Notwithstanding this cancellation in 1924 in the same year the sum of $10,000 was added1930 BTA LEXIS 1883">*1889 to the reserve to cover estimated future losses from real estate loans.
In 1925 items amounting to $3,391.45, loans on real estate, and $3,326.40, loans on automobiles, which had been credited to the reserve for bad debts were recovered. Moreover, although loans made on automobiles were ascertained to be worthless during the years in question, no considerable losses from real estate loans were actually sustained until 1926, when the sum of $8,455.69 of such loans was ascertained to be worthless.
It appears from the evidence that the sums added to the reserve were not determined by their relationship to the amount of business 21 B.T.A. 281">*285 done by petitioner during each year. The amount of business done varied from year to year to a considerable degree, but the amount kept in the reserve during 1923, 1924, and 1925, the taxable years in question, was practically constant.
In our opinion the amounts carried in the reserve from year to year were excessive and no sufficient reason for this excess is found in the evidence.
The respondent disallowed the deductions claimed on account of additions to the reserve for bad debts made in the years in question, but allowed deduction1930 BTA LEXIS 1883">*1890 of the amount of debts actually ascertained to be worthless and charged off during the respective taxable years. In accordance with our decisions in ; ; ; and , we are of the opinion that respondent did not err in so exercising the discretion vested in him by the statute.
Decision will be entered for the respondent.