*2141 Reserves set up by a taxpayer at the close of the taxable years 1922 and 1923, in amounts equal to a certain percentage of its then outstanding accounts receivable, for discounts anticipated in connection with the settlement of such accounts, are not deductible in determining net income, nor is a deduction allowable in the year for which the reserves were set up on account of the actual discount which it was later determined was availed of in the subsequent year.
*388 This proceeding involves deficiencies in income tax as determined by the Commissioner for 1922 and 1923 in the respective amounts of $179.90 and $3,185.02, and the issue involved is the deduction to which petitioner is entitled on account of discounts on sales made in one year which were not taken by the customer until the bills were paid by the customer in the following year.
FINDINGS OF FACT.
The petitioner is a Virginia corporation with its principal office at Marion, where it is engaged in the manufacture and sale of furniture.
Sales made by the petitioner are subject to*2142 discount of from 2 to 15 per cent, depending upon the time of payment. In some instances upon large orders the discount is allowed regardless of the time of payment, but in other cases the discount is allowed only if *389 payment is made within the time specified in the invoice or bill of sale. The average discount allowable was approximately 10 per cent.
When a sale is made, the customer is charged with the full list price of the article sold and sales are credited in the same amount. No entry is made on the books with respect to discount until payment, at which time appropriate credit is given for whatever discount is allowable.
In its returns for 1922 and 1923, petitioner reported gross sales in the respective amounts of $746,745.81 and $1,483,725.44. It had accounts receivable outstanding at December 31, 1922, and December 31, 1923, in the respective amounts of $188,854.92 and $258,137.91. Sales which gave rise to the foregoing accounts receivable had been included in gross income for the preceding year or years, and these accounts receivable were subject to the discounts referred to above. In 1923 customers whose accounts were outstanding at December 31, 1922, and*2143 were included in the amount of $188,854.92, referred to above, were allowed deductions as discount in the payment of their bills to the extent of $14,639.01. Likewise, in 1924 customers whose accounts were outstanding at December 31, 1923, and were included in the amount of $258,137.91 referred to above were allowed deductions as discount in the payment of their bills to the extent of $22,112.90.
Reserves for future discounts on accounts receivable outstanding at the end of the year were computed by the petitioner for the years ending December 31, 1922, and December 31, 1923, in the respective amounts of $13,219.84 and $22,141. In the returns as filed for 1922 and 1923, no deduction was claimed for 1922 on account of charges to the reserve for that year, but for 1923 a deduction was claimed in the amount of $22,141. In the final determination as made by the Commissioner, no allowance was made in 1922 on account of the reserve set up for that year and in 1923 the deduction claimed in the amount of $22,141 on account of the reserve set up was disallowed in its entirety.
OPINION.
SEAWELL: In the original petition as filed the petitioner claimed deductions in determining net*2144 income to the extent of the reserves for future discount computed for the years here in question, namely, $13,219.84 for 1922 and $22,141 for 1923. Later, petitioner abandoned the foregoing contention and, upon motion duly granted, was permitted to file an amended petition. The basis of the claim in the amended petition is that deductions should be allowed in 1922 *390 and 1923 for the discount which was actually taken by customers in the subsequent years on accounts receivable outstanding at the end of the respective years now in question. That is, there were outstanding at December 31, 1922, accounts receivable in the amount of $188,854.92 and in 1923 discounts were taken in the payment of these accounts to the extent of $14,639.01. And the petitioner, accordingly, contends that the deduction to be allowed in 1922 is $14,629.01 instead of $13,219.84, the amount set up in the reserve for 1922, since the amount now determined is no longer an estimate, but definite and certain. A similar argument is made with respect to 1923.
We, however, are of the opinion that this later determination of the actual discounts which were finally availed of by the petitioner's customers*2145 is not sufficient to warrant the allowance of the deductions sought. One of the cardinal principles of the taxing statutes with which we are concerned is that taxable income is to be determined on an annual basis. So far as this petitioner was concerned, it had made certain sales during each of the years before us, which sales, under the system of accounting employed by it, were properly includable in its gross income for the respective years in which the sales were made. Whether less than the sales price of the various articles sold would be ultimately collected when the payments were made was a fact not known at the end of the years here in question, and, therefore, no deduction could be allowed until it was known that the discount privilege would be availed of, which was the following year. We have heretofore held that reserves set up by a taxpayer at the close of the taxable year, in amounts equal to a certain percentage of its then outstanding accounts, for discounts anticipated in connection with the settlement of such accounts are not deductible in determining net income. *2146 , and . The case at bar comes squarely within the foregoing principle in so far as a reserve for cash discount is concerned, and we have no evidence as to the extent to which the deduction claimed may include some allowance for trade discount. The argument advanced by the petitioner with respect to a determination after the close of the year on account of a contingency which existed at the end of the year might well apply to any case where a deduction is sought in a given year under a contingency. The record does not show other than that deductions have been allowed in each of the years before us to the full extent of discount availed of in those years. Cf. .
Judgment will be entered for the respondent.