*743 1. Proof of the fact that the collection of accounts was delayed beyond the close of the taxable year by an embargo in the country to which the goods were shipped does not, standing alone, establish worthlessness.
2. Deductions for entertainment expenditures allowed.
*1417 These proceedings were brought to redetermine deficiencies in the income taxes of Joseph Kahn and Harry Kahn for the year 1933 in the sums of $2,009.04 and $2,571.31, respectively.
The petitions present a number of issues. All were waived or stipulated except the following errors alleged to have been committed by the respondent:
(1) The disallowance of bad debts amounting to $8,521.52, claimed by the partnership of "Jacob S. Bernheimer and Bro.", composed of the two petitioners.
(2) The disallowance of ordinary and necessary business expenses of each petitioner.
FINDINGS OF FACT.
The petitioners are equal partners in the firm of "Jacob S. Bernheimer and Bro.", New York, New York, engaged in the business of converting cotton goods, which it buys as grey*744 goods, unfinished and unbleached, into yard goods for sale to manufacturers of shirts, pajamas, dresses, etc. The total volume of its business during 1933 was $1,372,733.57, of which amount $103,000 represented foreign sales, made chiefly to customers in South America.
Whenever the firm received an order from a South American customer the financial standing of that customer was always investigated *1418 before the goods were shipped. Most of the goods shipped to South America were on sight draft and the firm received its money on return steamer. In November 1933 an embargo against the shipment of money out of the respective countries was declared by Brazil, Argentina, Nicaragua, and possibly other neighboring nations. That action affected the export situation in the South American area. It was the first embargo which had affected the firm's business. It was lifted in March 1934. Similar embargoes existed in most of those countries at the time of the hearing. For that reason and because of the general conditions in South America the firm has ceased to do business there.
For years prior to 1933 it was the established policy and custom of the firm to charge off at*745 the end of each year all foreign accounts which were several months overdue, which had been shipped on a cash basis, and which the firm had attempted to collect. If and when such accounts were collected later, they were included in the firm's income. In all years from 1930 to the date of the hearing (May 27, 1938), except the year 1933, the amount of recovery had exceeded the amount of accounts so charged off and the respondent had accepted that method of accounting. In 1933 he disallowed the charge-off of $8,521.52, but allowed recoveries amounting to $4,374.06 to remain in the firm's income. The following are the foreign accounts charged off on December 31, 1933:
| Abel Atuan | $147.11 |
| Casa Argentina Cherrer | 223.62 |
| J. Dreyfus & Co. Ltd. | 1,563.19 |
| Felipe Fiatt | 246.30 |
| Garcia Hnosycia | 139.98 |
| Haber & Dweck | 709.99 |
| Moulao Hijo | 521.17 |
| Hrand Nikotian | 3,768.81 |
| Augusta Vazycia | 1,201.35 |
| 8,521.52 |
Almost all of the above accounts were paid during 1934. With the exception of Hnosycia and Haber & Dweck (with whom the firm had dealt in 1930), the debtors were new customers.
The firm received reports from its agents in the countries in which the debtors were*746 located that due to the embargoes it was impossible to get any money out of those countries and that it was uncertain when, if ever, the accounts would be paid. The members of the firm, with its manager and auditor, determined that the accounts were worthless and charged them off on its books within the taxable year.
In his income tax return for 1933 Joseph Kahn deducted $2,114 under the head of "Other Deductions Authorized by Law", with no explanation therefor in schedule E. Harry Kahn deducted $2,486 *1419 under the same head, with the notation "Auto Expenses" but with no further explanation in schedule E. In the notice of deficiency sent to Joseph Kahn appears this statement: "Allowable business expenses have been determined to be $1,057 instead of $2,114, as originally claimed." And in the notice of deficiency sent to Harry Kahn is this statement: "Auto and business expenses in the amount of $1,243 have been allowed instead of $2,486 as claimed." At the hearing it was stipulated that only one-half of such deductions claimed by the respective petitioners was in controversy.
The business of the firm is highly competitive. It employs seven or eight city salesmen and*747 has sales representatives in Chicago, St. Louis, Los Angeles, and Baltimore. In order to protect business and retain customers it was necessary to entertain buyers at theaters, golf courses, prize fights, dinners, etc. Neither partner kept an accurate account or record of such expenses, but each testified that he had spent far more than the amount claimed. Both petitioners were required to meet the trade and to provide the entertainment mentioned. No deduction for such expenditures was claimed on the partners' return.
It was stipulated that Joseph Kahn is entitled to an additional capital loss of $2,774.75 for the year 1933 (Docket No. 82860).
OPINION.
VAN FOSSAN: The first issue involves the familiar problem of deductions for worthless debts. There is no controversy as to their actual charge-off or as to the fact that a determination was made by the petitioners that the debts were worthless.
The facts, however, present an unusual situation. There is no proof or suggestion that the debtors were insolvent, that they were unwilling to pay their obligation or that they were in financial difficulty. The unusual factor is the undisputed fact that circumstances wholly*748 beyond the debtors' control delayed the payment of the accounts beyond the end of the taxable year.
The statute allows a deduction of debts ascertained to be worthless and charged off in the taxable year. But such an ascertainment and charge-off does not close the matter to review. When the question arises before the Board the taxpayer must prove the fact of worthlessness. The evidence must be such as reasonably to convince the Board that the accounts were in fact worthless. Worthlessness is not established by a showing that payment has been delayed a few months and may suffer further postponement. It matters not that the delay is due to conditions beyond the control of the debtor. Nor is it established generally without proof, direct or implied, of a distressed financial status on the part of the debtor. Here the *1420 proof establishes nothing as to the financial condition of the debtors. For aught that appears, they were ready and willing to pay. Likewise, there appears no reason why payment could not have been made to petitioner's agents in the several countries. The difficulty was solely one of transmission of currency out of the countries. *749 In this situation we can not hold that the debts were worthless. Their collection was delayed by the embargoes but the accounts were not worthless. See . Corroboration of this conclusion is seen in the fact that soon after the embargoes were lifted the accounts were paid. The Commissioner's action is approved.
Under the second issue, the petitioners claim additional deductions for entertainment expenses. We note that the respondent has allowed one-half of the amounts claimed by each petitioner, thus recognizing the basis of the deduction but not approving the amount. There appears to be no question as to the fact that the amounts were actually spent. The amounts claimed do not seem unreasonable when compared with gross sales of over $1,300,000.
The only factor in the situation that would possibly prevent the allowance is the failure of the petitioners to keep an accurate account of the money so spent. Both petitioners and respondent rely on (C.C.A., 2d Cir.). In that case the court said:
In the production of his plays Cohan was obliged to be free-handed*750 in entertaining actors, employees, and, as he naively adds, dramatic critics. He had also to travel much, at times with his attorney. These expenses amounted to substantial sums, but he kept no account and probably could not have done so. At the trial before the Board he estimated that he had spent eleven thousand dollars in this fashion during the first six months of 1921, twenty-two thousand dollars, between July first, 1921, and June thirtieth, 1922, and as much for his following fiscal year, fifty-five thousand dollars in all. The Board refused to allow him any part of this, on the ground that it was impossible to tell how much he had in fact spent, in the absence of any items or details. The question is how far this refusal is justified, in view of the finding that he had spent much and that the sums were allowable expenses. Absolute certainty in such matters is usually impossible and is not necessary; the Board should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making. But to allow nothing at all appears to us inconsistent with saying that something was spent. True, we do not know how many*751 trips Cohan made, nor how large his entertainments were; yet there was obviously some basis for computation, if necessary by drawing upon the Board's personal estimates of the minimum of such expenses. The amount may be trivial and unsatisfactory, but there was basis for some allowance, and it was wrong to refuse any, even though it were the traveling expenses of a single trip. It is not fatal that the result will inevitably be speculative; many important decisions must be such. We think that the Board was in error as to this and must reconsider the evidence.
*1421 We have adopted the above principles and have applied them in many cases. ; ; ; . The record convinces us that the amounts claimed were actually spent for the purpose stated. Under the authority of the foregoing cases the deductions are allowed.
Pursuant to the stipulation, petitioner Joseph Kahn is allowed an additional capital loss of $2,774.75.
Decisions will be entered under Rule 50.