*2280 The petitioners, making income-tax returns upon a cash receipts and disbursements basis, are not entitled to deduct from gross income, under section 214(a)(7) of the Revenue Act of 1921, worthless debts charged off by a partnership of which they were members, such worthless debts not representing losses of capital of the partnership or of the petitioners, nor losses of income included in returns made on a cash receipts and disbursements basis.
*643 These proceedings which were duly consolidated for hearing and decision involve redeterminations of alleged deficiencies in income taxes for the calendar year 1922 as follows:
| Name | Docket No. | Amount |
| Charles K. Beekman | 22241 | $10,383.73 |
| S. Stanwood Menken | 22377 | 5,416.08 |
| Morton G. Bogue | 22378 | 2,232.68 |
| William M. Clark | 22379 | 1,770.44 |
| Trenholm H. Marshall | 22380 | 595.85 |
| Stephen P. Anderton | 22381 | 178.05 |
| A. Perry Osborn | 22382 | 79.62 |
The only issue raised by the pleadings is whether the respondent erred in disallowing deductions claimed on account of debts alleged *644 *2281 to have been ascertained to be worthless and charged off within the taxable year. The facts were stipulated.
FINDINGS OF FACT.
1. On or about the first day of May, 1913, Charles K. Beekman, S. Stanwood Menken, Lloyd C. Griscom and Morton G. Bogue, who at that time were and still are attorneys duly authorized many years before to practice law before the Courts of the State of New York and of the United States, formed a copartnership for the practice of law in the State of New York, with offices at 52 William Street, City, County, and State of New York, under the firm name of "Beekman, Menken & Griscom."
2. Thereafter, up to and including the calendar year 1922, the aforesaid attorneys and various other attorneys who became members of said firm after May 1, 1913, continued to practice law under the said copartnership name at the said address.
3. At all times between May 1, 1913, to and including December 31, 1922, the books of account of said partnership of "Beekman, Menken & Griscom" were kept in the manner agreed upon among the members of the said partnership.
4. At various times after the year 1913, and before December 31, 1922, the following additional persons (who*2282 had also been practicing attorneys for many years) became members of the said law partnership of Beekman, Menken & Griscom, namely, William M. Clark, Trenholm H. Marshall, Stephen P. Anderton, and A Perry Osborn.
All of the above-mentioned individuals were members of the said firm of Beekman, Menken & Griscom throughout the calendar year 1922, with the exception of A. Perry Osborn, who had withdrawn from the said partnership in the month of February, 1921, but who was nevertheless entitled to participate under the partnership agreement in that part of the income received by the said partnership in the year 1922, which was earned while the said A. Perry Osborn was still a member of the said partnership, and was liable for his proportion of losses during said period.
5. The methods of accounting regularly employed by the firm of Beekman, Menken & Griscom in keeping its books may be described as follows:
The practice of the firm was to require each of its members and assistant law clerks to make daily reports to the firm's bookkeeper, showing the amount of time given to each client's legal matters and the character of the services rendered. When any particular matter was closed, *2283 the senior members of the firm reviewed such record and determined the fee that should be charged for the services rendered *645 and a final bill for such fee, less prior payments on account, if any, together with a statement of the actual out-of-pocket disbursements of the partnership in the form of advances made on behalf of the client, was then sent to the client. The amount of the fee fixed was entered on the partnership books as a charge against the client in addition to the charges shown on the books for actual cash disbursements made by the partnership on behalf of the said client from time to time. The cash advances for clients were deducted from partnership's gross income in the year made, and when the client repaid said advances, the firm included said payments in gross income for the year in which they were received.
The accounts so carried on the books and the bills for fees and disbursements prepared from the said books of account in many instances covered a charge for services rendered and disbursements made in more than one calendar year preceding the date of the final fixing of the fee, and the closing of the case.
In some instances the amount of the*2284 fee to be charged when the work was completed had been agreed on in advance, between the law partnership and the client, before the rendition of the bill and, in other instances, it was agreed to after the rendition of the bill, or a reduced fee was then agreed to, and credit given the client on the books of the law partnership.
These bills were frequently not paid for many months or even years after they were sent out and the fee agreed to.
In making distribution of earnings to the firm's several members, however, such distribution in each calendar year was made only on the basis of net cash receipts in that calendar year.
In other words, the total amount of cash received for services rendered in that year and prior years and in repayment of cash disbursements, less the amount actually paid out in cash in that year for all bills rendered for rent, supplies, etc., salaries of assistant law clerks and others, plus the amount of cash advances for clients made in that year, was distributed to the firm's several members in accordance with their respective interests in the partnership profits and reported as their taxable income from the partnership.
Although the charges against*2285 clients hereinabove mentioned for the agreed compensation for services rendered, and for repayment of cash advances, were entered on the books of account of the partnership, the partnership at no time included in its distributable income any of these charges until the amounts thereof were actually paid. The consistent practice of the firm was to pay cash for bills rendered as soon as received or within a very short time thereafter.
The net income of the partnership was determined on the basis of cash receipts and disbursements and its income-tax return was prepared in that manner and it reported therein the proportionate *646 interest of each partner in the partnership net income, determined on a cash receipts and disbursements basis.
6. During the calendar year 1922 the said partnership of "Beekman, Menken & Griscom" ascertained that certain debts due it for legal services performed by the said law partnership prior to the calendar year 1922 (which said debts were in the form of agreements by its clients to pay certain sums of money for said legal services) in the sum of $57,099.88, as shown by its books of account, were ascertained to be worthless and the said partnership*2286 thereupon and within the said calendar year caused the said debts to be charged off on its books of account. A detailed statement of the said debts, the names of the debtors, the year or years in which the said services were performed and the reasons for determining that the said debts had become worthless in the calendar year 1922, is set forth as follows:
| Client | Amount of fee |
| H. M. Haverbeck & Co | $950.00 |
| Harrison M. Haverbeck | 2,500.00 |
| G. M. Allaire | 250.00 |
| Fayette Barnum | 15.00 |
| Confidence Gold Mines | 250.00 |
| Do | 200.00 |
| Cuban Colonna Co. & Cuban Sugar Mills Corporation | 15,000.00 |
| T. S. Coale | 50.00 |
| Wallace Downey | 400.00 |
| Wm. S. Fanshawe | 2,450.00 |
| Forman & Forman | 50.00 |
| N. Flaven | 50.00 |
| Van Dyke Hill | 2,400.00 |
| International Lettergraph Co | 1,000.00 |
| International Tungsten Co | 4,632.79 |
| State Bank of Leavenworth | 175.00 |
| Loft (Inc.) | 3,000.00 |
| Mexican New Era Corporation | 3,350.00 |
| Moreton Accessories Co | 300.00 |
| Memphis Street Ry. Co | 150.00 |
| H. R. McNamara | 275.00 |
| H. H. Moreton | 2,642.12 |
| N. Y. Bay D. D. Co | 150.00 |
| Onativia & Co | 625.00 |
| Cushing Petroleum Co | 1,000.00 |
| Rubber Insulated Metals Co | 1,825.00 |
| Sutton Ford Co | 700.00 |
| F. C. Weber | 250.00 |
| The Walker Co | 1,300.00 |
| Estate S. J. Dill | 72.50 |
| General Oil Burner Sales Corporation | 625.00 |
| Lavrov | 100.00 |
| Orleans Kencor Electric Co | 450.00 |
| Phenix Manufacturing Co | 50.00 |
| Estate M. L. Schroeder | 50.00 |
| Shannon Copper Co | 4,000.00 |
| Alaska Mines Co | 1,650.00 |
| Liberty Doll Co., judgment | 162.47 |
| R. Bingham | 2,300.00 |
| 43 East Fifty-ninth Street Co | 1,500.00 |
| 57,099.88 |
| Client | Date of bill | Reason for worthlessness |
| H. M. Haverbeck & Co | 12/31/21 | Bankrupt. |
| Harrison M. Haverbeck | 12/31/21 | Do. |
| G. M. Allaire | 11/20/16 | Uncollectible. |
| Fayette Barnum | 12/31/19 | Do. |
| Confidence Gold Mines | 6/30/21 | Do. |
| Do | 1/1/23 | Do. |
| Cuban Colonna Co. & Cuban | 1/1/20 | Do. |
| Sugar Mills Corporation | ||
| T. S. Coale | 3/31/14 | Do. |
| Wallace Downey | 6/30/21 | Do. |
| Wm. S. Fanshawe | 12/31/20 | Do. |
| Forman & Forman | 7/1/20 | Bankrupt. |
| N. Flaven | 10/9/19 | Uncollectible. |
| Van Dyke Hill | 10/15/19 | Do. |
| International Lettergraph Co | 12/1/20 | Do. |
| International Tungsten Co | 8/1/16 | Bankrupt. |
| State Bank of Leavenworth | 4/7/22 | Do. |
| Loft (Inc.) | 12/31/19 | Uncollectible. |
| Mexican New Era Corporation | 3/1/18 | Do. |
| 2/28/17 | Do. | |
| Moreton Accessories Co | 11/14/17 | Do. |
| Memphis Street Ry. Co | 5/1/18 | Bankrupt. |
| H. R. McNamara | 7/1/15 | Uncollectible. |
| H. H. Moreton | 6/30/21 | Do. |
| N. Y. Bay D. D. Co | 5/15/20 | Do. |
| Onativia & Co | 5/15/20 | Do. |
| Cushing Petroleum Co | 7/1/20 | Do. |
| Rubber Insulated Metals Co | 10/1/18 | Do. |
| Sutton Ford Co | 11/1/19 | Do. |
| 7/1/19 | Do. | |
| F. C. Weber | 12/31/20 | Do. |
| The Walker Co | 10/1/17 | Do. |
| 12/31/18 | Do. | |
| Estate S. J. Dill | 1/1/20 | Do. |
| General Oil Burner Sales Corporation | 4/24/20 | Do. |
| Lavrov | 1/12/21 | Do. |
| Orleans Kencor Electric Co | 2/27/17 | Do. |
| Phenix Manufacturing Co | 8/1/21 | Do. |
| Estate M. L. Schroeder | 5/12/22 | Do. |
| Shannon Copper Co | 4/1/21 | Do. |
| Alaska Mines Co | 7/1/19 | Do. |
| 2/22/19 | Do. | |
| 12/31/19 | Do. | |
| Liberty Doll Co., judgment | 4/5/20 | Do. |
| R. Bingham | 12/1/20 | Do. |
| 43 East Fifty-ninth Street Co | 7/1/19 | Do. |
*2288 7. No part of the said debts, amounting to $57,099.88, set forth in the foregoing statement has ever been included by the partnership *647 in the income distributable to its respective members, nor have any Federal income taxes upon the said $57,099.88 ever been paid to the United States by the partnership or by any member or members thereof.
8. The said partnership of "Beekman, Menken & Griscom" received no compensation by way of insurance or otherwise for said certain accounts receivable referred to and set forth in the foregoing statement and no part of said accounts has ever been paid.
9 Under date of December 3, 1926, the internal revenue agent in charge at New York City submitted a report to respondent increasing the net distributable income of the partnership of Redmond & Co., 33 Pine Street, New York, N.Y., for the calendar year 1922 in the amount of $120,276.28.
10. During the calendar year 1922, A. Perry Osborn was a member of the partnership of Redmond & Co. and he was entitled to receive 25.99 per cent of the remaining net distributable income of said partnership after the payment of certain specified amounts to certain special partners of the said*2289 partnership.
11. Due to the disallowance of certain deductions set forth in the partnership return of Redmond & Co. for the calendar year 1922, its net income for that year was increased by respondent in the amount of $120,276.28.
12. The interest of A. Perry Osborn in said additional net income of the said partnership of Redmond & Co. amounted to $31,259.82 for the calendar year 1922.
13. In determining the deficiency in tax set forth in the deficiency letter dated December 6, 1926, respondent erroneously failed to increase the net income therein set forth by the said sum of $31,259.82.
14. In settling the appeal of A. Perry Osborn under the decision of the Board his net income as set forth in the deficiency letter dated December 6, 1926, is to be increased by the said amount of $31,259.82.
OPINION.
SMITH: The petitioners, members of the partnership of Beekman, Menken & Griscom, seek to deduct in their individual tax returns for the calendar year 1922 certain alleged bad debt losses of the partnership, representing uncollectible accounts ascertained to be worthless and charged off in the partnership's books of account during the taxable year.
It is the respondent's*2290 contention that these uncollectible accounts were not bad debt losses within the meaning of section 214(a)(7) of the Revenue Act of 1921, and are not deductible in computing the amounts of the distributive income of the partnership taxable *648 to the petitioners in that year; that the statute contemplates the deduction, in computing net income, of only losses of capital or income and that since the bad debts charged off by the partnership represent neither capital contributed to the partnership nor amounts which have come to the partnership through the door of income, no deductible bad debts are present in the case.
The parties have stipulated that the accounts in question were ascertained to be worthless and charged off on the partnership's books during the taxable year and that the partnership, making its returns on the cash receipts and disbursements basis, had never reported any income in respect of the accounts. The respondent's sole reason for disallowing the deduction, we take it, is that the accounts have never been reported as income and subjected to taxation as such.
Thus stated, we think that the issue comes squarely within the rule laid down in *2291 , in which it was held that a taxpayer who keeps his accounts and makes his returns on a cash receipts and disbursements basis may not deduct from gross income, as for a bad debt, an item of accrued interest which he has not at any time previously treated as income or reported as taxable income. To the same effect, that is, that a taxpayer may not take as a deduction the loss of a gain that has never been reflected in income, see ; ; and ; .
The rule as above stated works no hardships upon the petitioners in this case. Whatever expenses were incurred by them in rendering the services for which the accounts receivable were entered on the books were properly deductible under other provisions of the statute. Under the accounting method employed by the partnership the accounts claimed as deductible losses represented not losses of capital or of accrued or actual income, but losses of anticipated earnings.
On the other hand, if the petitioners' contention is allowed, the*2292 result will be to permit them to reduce their actual taxable earnings for the year by certain amounts which, because of their noncollectibility, they failed to realize as income. We think that this would be contrary to the reason and the letter of the taxing law.
The stipulation of the parties here that the accounts were charged off on the partnership's books of account does not preclude our consideration of the question of whether the charge-off made was such a charge-off as the statute requires, that is, a charge-off of the debts in relation to their status as capital or income. The charge-off was not of an item that had entered into the system of bookkeeping *649 which afforded the basis for income-tax returns. It was only a memorandum transaction.
At the hearing it was stipulated with respect to the petitioner, A. Perry Osborn, that his net income as set forth in the deficiency letter of December 6, 1926, should be increased by the amount of $31,259.82. The deficiency should be recomputed accordingly.
Judgment will be entered for the respondent in all proceedings except Docket No. 22382, in which judgment will be entered under Rule 50.