*1405 Held, that the evidence does not show that the petitioner had elected to use the reserve method of charging off bad debts and fails to show permission of the Commissioner to change to that method. The action of the respondent in refusing to allow a deduction of an addition to a reserve in 1925 is approved.
*1235 This proceeding is for the redetermination of a deficiency in income tax of $748.90 for 1925. The only matter in controversy is the correctness of the respondent's action in disallowing a deduction of $4,000 taken by the petitioner as an addition to a reserve for bad debts. The petitioner in the proceeding also put in issue the tax liability of the petitioner for 1926. Since the respondent has not determined a deficiency for 1926, the proceeding in so far as it related to that year was, upon motion of the respondent granted at the hearing, dismissed for lack of jurisdiction.
*1236 FINDINGS OF FACT.
The petitioner is a New York corporation organized in 1909 and having its principal office in New York City. Its business is*1406 that of real estate and insurance brokers.
Since 1917 the petitioner has carried on its books an account designated "Reserve for Bad Debts." On January 1, 1921, the petitioner's reserve for bad debts account had a credit balance of $1,884.22 and on December 31, 1921, a credit balance of $265.48. During 1921 two charges were made to the account, one for $619.74 and the other for $999. The parties have agreed that these amounts, totaling $1,618.74, were not proper charges against the reserve for bad debts, since they did not represent bad debts. The amount of $999 represented a loss sustained on corporate stock owned by the petitioner and which became worthless in 1921. The amount of $619.74 represented attorney's fee and expenses incurred in the collection of a claim. In its income and profits-tax return for 1921 the petitioner took as a deduction for bad debts only the amount of $619.74, which it explained in its return as follows:
| We had a claim against F. W. Parsons of Binghampton, N.Y. for Commissions and Expenses with reference to Auction Sale held for him, standing on our books at | $1,405.53 | |
| We settled this claim in 1921 for | $1,500.00 | |
| Our attorney's fee and Expenses amounted to | 714.21 | |
| Net cash realized | 785.79 | |
| Loss | 619.74 |
*1407 The amount of $999 was deducted by petitioner in its return as a loss on capital assets and miscellaneous investments. No additions were made to the reserve account during 1921. In balance sheets filed as a part of the return the petitioner showed the amount of the reserve for bad debts at the beginning of 1921 as $1,884.22 and at the end of the year as $265.48.
On January 1, 1922, the balance in the reserve for bad debts account as shown by petitioner's books was $265.48. During 1922 no charges were made to the reserve for bad debts account on the books, nor was any addition made thereto. The petitioner in its return for that year took a deduction of $2,571.25 for bad debts. In Schedule G of its 1922 return the petitioner showed bad debts for the year of $619.74, while in balance sheets filed as part of the return the petitioner indicated in one place that it had no reserve for bad debts either at the beginning or the end of the year, while in another place it showed a reserve for bad debts of $265.48 at the beginning of the year, but no reserve at the end of the year.
*1237 Under date of December 31, 1923, two charges totaling $265.48 were made in the reserve*1408 for bad debts account on the petitioner's books. No additions were made to the reserve in 1923 as shown by the account on the books and at the end of the year the account was exactly in balance. In its return for 1923 the petitioner took a deduction of $2,313.31 for bad debts. In Schedule G of the return no amount was shown for bad debts. In a balance sheet filed as a part of the return the petitioner indicated that it had no reserve for bad debts at the beginning of the year, but had a reserve of $2,313.31 at the end of the year.
In its 1924 return the petitioner did not take any deduction for bad debts. In Schedule G of the return it indicated that it had no bad debts. In a balance sheet filed as a part of the return the petitioner indicated that its reserve for bad debts at the beginning of the year was $2,313.31 and at the end of the year was $278.99.
In its return for 1925 the petitioner took a deduction of $4,000 for bad debts, explaining the deduction as "Provision for Bad Debts." In Schedule G of the return no amount was shown for bad debts. In a balance sheet filed as a part of the return the petitioner showed that the amount of the reserve for bad debts at the*1409 beginning of the year was $278.99 and at the end of the year was $4,039.80.
At the end of 1925 the petitioner had outstanding accounts receivable of $13,193.25, representing commissions earned on the sale of real estate in Florida. The petitioner's vice president being of the opinion that all of these commissions would not be collected, recommended that the petitioner set up a reserve of $4,000 to cover the uncollectible portion. The recommendation was accepted by the other officials of the petitioner. Of these commissions outstanding at the end of 1925, $8,118.25 was never collected.
During the years 1921 through 1925 the petitioner's books were kept and its returns filed on an accrual basis.
In determining the deficiency here involved the respondent disallowed the deduction of $4,000 taken by the petitioner as an addition to a reserve for bad debts and allowed instead the amount of $239.19 representing debts determined to be worthless and charged off during the taxable year.
OPINION.
TRAMMELL: The issue presented for our determination is whether the petitioner is entitled to a deduction from gross income in 1925 of $4,000 as a reasonable addition to a reserve for*1410 bad debts.
The petitioner contends that in its return for 1921 it elected to use the reserve for bad debts method in making deductions for bad debts and as it has never changed its method in that respect it is *1238 entitled to use the same method for the taxable year. With respect to its failure to make an addition to its reserve for bad debts in 1921, the petitioner urges that it had no bad debts in that year and there was no occasion to create a larger reserve. The respondent contends that the 1921 return shows an intention on the part of the petitioner to write off specific bad debts. He further contends that, if it be held that the petitioner made no election for 1921 as to the method it would follow with respect to bad debts, it made an election to charge off specific bad debts for 1922, and that having made this election, it may not change to the reserve basis without permission, which the evidence does not show was obtained.
The evidence does not disclose what a reasonable addition to the reserve for bad debts for the taxable year would be. This being true, we could not find that the petitioner is entitled to the deduction claimed, even if it were entitled*1411 to use the reserve method in 1925 in charging off bad debts.
The basis elected for 1921, that is, either the specific charge-off method or the reserve method, must be followed in subsequent years unless the respondent's permission to change is first obtained. . But if the petitioner made no election in 1921 because it had no occasion to take a deduction upon either method, it might adopt one method or another in 1922.
We think, however, that for both 1921 and 1922 the petitioner in its returns has indicated an intention to use the specific had debt charge-off method of deductions. While a certain amount of reserve was carried on the books for bad debts in 1921, and there appeared on the books at the beginning of 1922 such a reserve, there was no reserve at the end of that year, but a specific charge-off of debts ascertained to be worthless. In so far as the deduction claimed is concerned, however, no use was made of any reserve. For 1921 a charge-off was made for a specific bad debt in its return, although it was found that the debt was not bad. In 1922 another charge-off was made for a bad debt and the reserve method*1412 was not used in the return. No addition to reserve for bad debts was claimed as a deduction in either of these years. We are of the opinion, therefore, that the action of the respondent in disallowing as a deduction in the taxable year an amount set up as a reserve for bad debts is correct.
At the hearing the petitioner moved to amend its petition so as to set up a claim for the elimination of certain items from income. The presiding member ruled that the motion would be granted upon the petitioner complying with certain specified requirements as to the form in which the motion and the amendments should be made and the time within which they should be presented. As the petitioner did not comply with such requirements, the amendment is not *1239 properly before us; but, if it were, the issue presented thereby would have to be denied, since the petitioner offered no admissible evidence in support thereof.
Judgment will be entered for the respondent.