*3677 1. March 1, 1913, value of petitioner's printing machinery and equipment held to be $35,000, which is the proper basis upon which depreciation should be computed.
2. Bonuses paid to petitioner's employees in the years 1919, 1920, and 1921 held to be a proper deduction as an ordinary and necessary expense.
3. Reserve for Bad Debts. Held, that the amount of reserve allowed by the Commissioner is fair and reasonable for the year 1921, such reserve as allowed being above petitioner's average for several years of the percentage of bad debts to accounts receivable and also bad debts to gross income.
4. Additional compensation for officers in the form of automobiles purchased by petitioner in 1917, disallowed as a deduction in the year 1919 for lack of evidence showing in what year and for what year the additional compensation was paid.
5. Deduction for automobile expense as allowed by Commissioner held to be reasonable in amount for a part of the total expense was for personal use of the cars and the evidence makes no segregation.
6. Ordinary and necessary business expense, held to include the expense to petitioner of maintaining telephones in the*3678 homes of two of its officers for night calls relative to petitioner's business.
7. Reduction of petitioner's invested capital by proration of prior years' taxes held to be correct under section 1207 of the Revenue Act of 1926.
8. Refund in the amount of $1,798.31 determined by Commissioner to be due petitioner for year 1917, should be included in its invested capital for 1919, 1920, and 1921.
9. Bad debts in the amount of $5,772.77 claimed to have been disallowed as deductions in years prior to 1921 but not written off until 1921, held said amount should not be added to invested capital as determined by Commissioner for the reason that the evidence does not disclose just what the facts are.
10. Invested Capital. Petitioner purchased two Cadillac cars in 1920 at a cost of $9,700 for the use of its officers in the business. Held, that said amount should be included in petitioner's invested capital for 1920 and 1921.
11. (a) Invested Capital. Upon incorporation petitioner acquired for its capital stock the assets of a partnership including two accounts receivable aggregating $7,380 as due from the two partners who became the sole stockholders of petitioner. *3679 The evidence establishes that the so-called accounts were not, in fact, accounts receivable, but that the said amount was distributed in 1911 as a cash dividend and that entry on the books was erroneous. Held, that said amount should not be included in invested capital for the years 1919, 1920, and 1921.
(b) Claim for inclusion in invested capital of value over cost of "Other Assets Acquired," at incorporation, disallowed for lack of evidence.
12. Petitioner's alternative claim that if items 4 and 5 above be disallowed, the amount should be included in invested capital, disallowed as no basis therefor has been shown.
*935 Respondent in computing this petitioner's income and profits tax liability for the calendar years 1918 to 1921 has determined, as set forth in his letter dated September 23, 1925, an overassessment of $1,723.67 for 1918; and deficiencies in the amounts of $5,370.20 for 1919; $482.83 for 1920; and $7,821.46 for 1921.
Petitioner herein appeals from respondent's*3680 determination for the years 1919, 1920, and 1921, and alleges that respondent erred as follows:
(1) By disallowing in each of the said years a deduction claimed by petitioner as depreciation on an alleged increase in the value of certain assets from the date of purchase to March 1, 1913;
(2) By disallowing in each of said years a deduction claimed as an expense for alleged bonuses paid to petitioner's employees;
(3) By disallowing for 1921 deductions as expenses claimed by petitioner, (a) for bad debts aggregating $5,772.77, and (b) a reserve of $4,500 set up for bad debts (at the close of the hearing petitioner was allowed to amend its petition so as to claim a deduction for 1921 of an aggregate of $20,500 set up on its books as a reserve for bad debts);
(4) By disallowing as an expense deduction in 1919, $3,556.74 claimed as additional compensation voted to officers in that year;
(5) By disallowing in each of the years a deduction as an expense the alleged cost of operation of cars purchased by petitioner for the use of its editor and publisher in petitioner's business;
(6) By disallowing in each of the years a deduction as an expense the amount of $112, paid by petitioner*3681 for telephone connections to the homes of its editor and publisher;
*936 (7) By reducing petitioner's invested capital in each of the years by its income and profits taxes;
(8) By not including in petitioner's invested capital for each of the years the amount of a refund of $1,798.31 alleged to be due for the year 1917 as determined by the Commissioner in his letter of October 28, 1925;
(9) By excluding from petitioner's invested capital for each of the years the sum of $5,772.77 as bad debts disallowed in prior years;
(10) By excluding from invested capital for the year 1920 the sum of $9,700 alleged to be the cost of two automobiles used by petitioner's editor and publisher in the conduct of petitioner's business;
(11) By excluding from petitioner's invested capital for each of the years (a) the sum of $7,380, representing certain accounts receivable acquired by petitioner upon incorporation and for which alleged assets it issued stock and (b) the value over cost of "other assets acquired" at the time of incorporation; and
(12) By excluding from invested capital for 1920 the sum of $3,668.78 and for 1921 the sum of $4,210.40, the said amounts representing items*3682 Nos. 4, 5, and 6 above and alleged to be due petitioner by its officers if items 4, 5, and 6 should be disallowed as deductions for expense.
Subsequent to a brief sketch of the history of petitioner and its business the findings of fact will be set forth in paragraphs numbered in relation to the above allegations of error.
FINDINGS OF FACT.
The Moline Dispatch Publishing Co. is an Illinois corporation and is engaged in the publication of The Moline Daily Dispatch, a newspaper, at the City of Moline.
The Moline Daily Dispatch has been published at Moline, Ill., as a daily paper since 1878. Prior to 1891, it was owned and published by a partnership and subsequent to that year by The Moline Dispatch Publishing Co., an Illinois corporation, which ceased to exist in January, 1911, by limitation of its charter. The said corporation was duly dissolved and its assets divided equally between its two equal shareholders, P. S. McGlynn and Mrs. Myra C. Eastman. The business was continued without any change, first by P. S. McGlynn and Myra C. Eastman and later by McGlynn and John Sundine who acquired Mrs. Eastman's interest in the paper.
On April 17, 1911, this petitioner was*3683 incorporated under the laws of Illinois for a term of 99 years, for the purpose of taking over the business of publishing the Moline Daily Dispatch newspaper. The authorized capital stock of petitioner was 800 shares of $100 par value each, aggregating $80,000. On or about April 20, 1911, petitioner duly acquired all the assets of the business of the Moline *937 Daily Dispatch from McGlynn and Sundine to each of whom it issued 400 shares of its capital stock. Pursuant to the Illinois law, P. S. McGlynn, John Sundine, and Harry A. Sward were issued a "license" as commissioners to open the books for subscriptions to the petitioner's capital stock and they filed a written report with the Secretary of the State of Illinois, that the said stock was fully subscribed and that the amount actually paid in was $80,000. The said report also contained a description and an appraisal of the value of all the assets of the business at $10,000 for real estate and an aggregate of $70,000 for personal property. The assets thus acquired by petitioner were set up as the opening entry on its books, as follows:
| Real estate and buildings | $10,000.00 | |
| Cash on hand and in bank | 3,332.38 | |
| Accounts receivable: | ||
| Regular display | $10,449.64 | |
| Miscellaneous | 992.67 | |
| Legals | 1,154.01 | |
| 12,596.32 | ||
| Accounts receivable - Suspense | 842.12 | |
| Circulation accounts | 2,735.50 | |
| P. S. McGlynn | 3,640.00 | |
| John Sundine | 3,740.00 | |
| Inventories (premiums, supplies, paper) | 1,926.77 | |
| Machinery and equipment | 22,352.70 | |
| Furniture and fixtures | 2,829.75 | |
| Unexpired insurance | 277.33 | |
| Goodwill, trade-marks, trade names, etc | 17,646.29 | |
| 81,919.16 | ||
| Less: Accounts payable | 1,919.16 | |
| Balance | 80,000.00 |
*3684 (1) Petitioner's machinery and equipment used in the mechanical work of producing the newspaper was set up on its books at an aggregate value of $22,352.70 at or about May 1, 1911, which was the value placed upon the machinery and equipment when it was paid in for stock. The said machinery and equipment was of standard make in use all over the country, and it was kept in a highly efficient condition at all times, which was necessary because the newspaper had to be printed at a certain time every day except Sundays. Petitioner could produce a twenty-page newspaper on March 1, 1913, which required the use of certain machinery and equipment. The machinery and equipment, consisting of a large press, five linotype machines, motors, trimmers, a shaver, a saw, cabinets, chases, turtles, galleys, composing sticks, melting pots, several tons of stereotype metal and linotype metal, proof presses, etc., installed in the composing and press rooms on March 1, 1913, had a total value of $35,000 on that date. The machinery and equipment in question which was *938 acquired prior to March 1, 1913, was in use daily during the years 1919, 1920, and 1921, for producing petitioner's newspaper.
*3685 (2) Since about the year 1914 petitioner has followed a policy of paying to each of its employees a small bonus at the end of each year. For the years in question the aggregate amounts of the bonuses paid to petitioner's employees were $658 for 1920 and $395 for 1921. The bonuses were paid as additional compensation and for the purpose of securing the good will of petitioner's personnel who were referred to by the people of Moline as the Dispatch family.
(3) On January 1, 1921, petitioner set up on its books an account "Reserve for Bad Accounts" in the sum of $6,500. During 1920 and 1921, due to the general deflation in business conditions, the main sources of employment for the people of Moline, a city of 30,000 population, the John Deere Plow Co., the Moline Plow Co., the Velie Motor Co., and the Rock Island Arsenal, laid off a great many of their employees and many small establishments went out of business. At the close of the year 1921 the petitioner's officers carefully went over its accounts receivable and after efforts to collect the accounts and after due consideration of the attending circumstances relative to each account, made up a list, too voluminous to set forth*3686 herein, totaling $20,262.77 of accounts which they believed to be probably worthless. As a result, on December 31, 1921, there was added to the reserve for bad accounts the amount of $14,000, making a total reserve of $20,500 for the year 1921, against which there was charged for that year $7,697.50, of which $1,469.84 represented items accruing in 1921 and $6,227.66 represented items accruing in 1920 and prior years.
The accounts totaling $20,262.77 and considered by petitioner to be bad accounts, numbered approximately 200, of which about half were paid in full or in part during 1922 and 1923 and subsequent years. The following schedule shows the amounts deducted in years prior to 1921 for bad debts, the amount added to reserve for bad debts in 1921 and thereafter, and other relative accounts:
| Year. | Accounts receivable on Dec. | Amount actually | Amount added | Gross in come. |
| 31, after deducting amount | charged off for | to reserve. | ||
| written off for bad debts. | bad debts. | |||
| 1919 | $35,215.21 | $2,470.70 | $267,529.69 | |
| 1920 | 41,718.05 | 4,515.47 | 328,347.81 | |
| 1921 | 40,583.15 | 7,697.50 | $20,500.00 | 302,027.33 |
| 1922 | 55,589.48 | 5,333.74 | 15,996.24 | 302,140.14 |
| 1923 | 41,447.25 | 6,933.39 | 6,246.84 | 326,193.39 |
| 1924 | 51,095.98 | 14,337.82 | 6,826.86 | (1) |
| 1925 | 61,116.33 | 4,671.07 | 4,626.03 | (1) |
| 1926 | 57,347.74 | 2,348.57 | 1,406.43 | (1) |
| Total | 384,113.19 | 48,309.26 | ||
| Average | 48,014.15 | 6,038.63 |
*3687 *939 Petitioner's reserve for bad debt accounts was terminated on December 31, 1926, with a balance of $14,336.94. For the year 1921 the Commissioner has allowed petitioner a deduction of $7,770.15 for bad debt reserve.
(4) In 1914 petitioner purchased a Midland automobile for $1,500 for the use of John Sundine in his work as business manager of petitioner. In 1917 that car was traded in and a cash payment of $1,490.84 was made by petitioner for a Velie car for Sundine. At the same time petitioner purchased for $1,120 a Velie car for McGlynn. The cars were used by Sundine and McGlynn to ride between their homes and the office, but were parked in front of the office and were used each day by reporters or other employees. Sundine used the car purchased for him to make collections; to make exchanges of advertising copy, plates, and mats between other newspapers and some times for the delivery of newspapers to outlying districts. McGlynn did not get out of the office during the day as much as Sundine did, but his car was used by employees most every day and in the evenings McGlynn drove his car to various places to cover the reporting of social events, lectures, concerts, *3688 receptions, etc. On October 29, 1919, the following resolution was adopted by the board of directors of petitioner:
A resolution was adopted declaring that the charge of $1,120 dated March 24, 1917, against P. S. McGlynn, Managing Editor of the Moline Daily Dispatch for Velie automobile and that the charge of $945.50 dated January 23, 1914, for Midland automobile, and $1,490.84 dated March 16, 1917, for Velie automobile against John Sundine, Advertising Manager of the Moline Dispatch be charged on the books of the Publishing Company as expense for services to the editorial and advertising departments, respectively, of the Moline Dispatch Publishing Company. This will make both Mr. McGlynn and Mr. Sundine square on the books of the Moline Dispatch Publishing Company.
Both Sundine and McGlynn used their respective cars for their personal pleasure whenever they so desired. At times they took trips in their cars on which occasions they purchased the gasoline and oil used. Petitioner claims as a deduction for 1919 the sum of $3,556.34 as additional compensation voted to Sundine and McGlynn. For the vears 1919 to 1922, inclusive, salaries for petitioner's officers totaled $20,800*3689 per annum. The Commissioner disallowed the claimed deduction.
(5) Petitioner paid the cost of operatiton of the cars purchased for McGlynn and Sundine except the expenses of any pleasure trips taken by them. Such expenses amounted to $1,389.08 for the year 1920 and $2,211.34 for the year 1921. Petitioner deducted those amounts on its returns for the respective years as ordinary and necessary business expenses and the Commissioner disallowed $429.66 and $728.75 for the respective years on the ground that the two cars *940 were used for a portion of the time for the personal use of McGlynn and Sundine.
(6) Prior to the years here in question petitioner had a telephone installed in McGlynn's home and Sundine's home and petitioner paid the total cost of $112 for both phones for each of the years 1919, 1920, and 1921. The telephones were listed in the telephone book as follows:
| Moline Dispatch Publishing Co | (number) |
| Night calls: | |
| P. S. McGlynn, editor | (number) |
| John Sundine, business manager | (number) |
The Dispatch office closed at 8 o'clock, p.m., and it was necessary for McGlynn and Sundine to have telephones over which they could transact petitioner's*3690 business after the office was closed. Both McGlynn and Sundine made and received many night calls as to advertising matters and also as to news items. Petitioner deducted $112 on its return for each of the years in question as an ordinary and necessary business expense and the Commissioner disallowed the deduction in each of the years on the ground that it was a personal item of expense for McGlynn and Sundine.
(7) Petitioner alleged in its petition that the Commissioner erred in reducing its invested capital by income and profits taxes, but no evidence nor argument has been submitted upon this issue.
(8) As evidenced by his letter of October 28, 1925, the Commissioner determined that a refund in the amount of $1,798.31 was due petitioner for the year 1917, but he excluded said amount from petitioner's invested capital for the years here in question. The Commissioner now admits that such amount should properly be included in petitioner's invested capital for the years 1919, 1920, and 1921.
(9) Petitioner has alleged that the Commissioner erred in excluding from its invested capital for the years 1919, 1920, and 1921, the sum of $5,772.77, being bad debts disallowed in prior*3691 years. The Commissioner determined that certain accounts receivable totaling $5,772.77 became worthless prior to 1919, but that inasmuch as such debts had not been written off in those prior years he refused to allow deductions therefor as claimed by petitioner in amended returns for the years 1911 to 1918. The debts in question were actually charged off in 1921.
(10) In March, 1920, the two Velie cars purchased for McGlynn and Sundine were traded in on two Cadillac cars for which petitioner paid $9,700. The two Cadillac cars were used during 1920 and 1921 in the same manner as the Velie cars had been used and the cost was set up on petitioner's automobile account as a capital item. Petitioner included the said $9,700 in its invested capital for the year 1920 and the Commissioner excluded the said amount.
*941 (11a) At the time petitioner was incorporated it acquired all of the assets of the partnership business of McGlynn and Sundine as set forth hereinbefore and issued its capital stock in the amount of $80,000 therefor. Among the assets so acquired were two accounts receivable, namely, P. S. McGlynn, $3,640, and John Sundine, $3,740. In 1911 McGlynn and Sundine*3692 drew those respective amounts from the partnership's surplus cash against which there was no outstanding obligations and at the time considered them to be cash dividends or a distribution of profits, but they were erroneously entered upon the books of the Moline Dispatch as accounts receivable. The said accounts were included at their face value among the assets totaling $80,000 transferred to the petitioner corporation in 1911. The opening entry on the petitioner's books included the said accounts receivable as assets and included them in its invested capital until 1918 when they were written off. In 1919 petitioner restored said accounts receivable to invested capital. McGlynn and Sundine were at all times solvent and able to pay the said amounts but they had always considered that those amounts were received by them as cash dividends.
(11b) The Commissioner excluded the two accounts totaling $7,380 from petitioner's invested capital for the years 1919, 1920, and 1921, on the ground that the said accounts having been written off could not be restored to surplus for invested capital purposes.
OPINION.
TRUSSELL: Due to the number of separate issues each one will be decided*3693 separately.
(1) The first issue relates to the proper basis for depreciation on petitioner's composing room and press room machinery and equipment acquired prior to March 1, 1913, and in constant use during the years 1919, 1920, and 1921. Respondent claimed that the March 1, 1913, value has not been proven and he allowed depreciation on the basis of cost. At the hearing petitioner produced two witnesses who had been for many years in the business of selling machinery and equipment such as used by petitioner and who were familiar with the machinery and equipment owned and used by petitioner. Those two witnesses had sold petitioner machinery and equipment, had visited the plant, knew the condition of it and valued it, by separate items, at an aggregate March 1, 1913, value slightly in excess of $35,000. Petitioner also produced a witness, the chief mechanic of the composing room of the Washington Evening Star, who during the past 34 years has sold, bought, and inspected all kinds and sizes of printing equipment. The said witness stated what machinery and equipment was necessary to produce a twenty-page newspaper, that the machinery and equipment was all standard *942 *3694 make and used throughout the country, that he knew the March 1, 1913, fair market values of the various items of equipment required for the production of a twenty-page paper even though he had not inspected it because the machinery would have to be kept in good condition to maintain its production and he valued petitioner's machinery and equipment at an aggregate of $35,000 on March 1, 1913. Without setting forth the values of the numerous items of equipment we have found as a fact that the March 1, 1913, value of petitioner's machinery and equipment was $35,000 which should be used as the basis for computing depreciation on said assets for the years 1919, 1920, and 1921. There is no dispute as to the rates of depreciation as used by respondent.
(2) Petitioner had a policy of paying its employees a bonus as additional compensation at the end of each year. For the years in question the bonuses aggregated $658 for 1919, $678 for 1920, and $395 for 1921. The said amounts should be allowed as deductions in the respective years as ordinary and necessary business expenses under section 234(a)(1) of the Revenue Acts of 1918 and 1921.
(3) Petitioner claims by its amended petition*3695 that it is entitled to a deduction for 1921, in the amount of $20,500, as a reserve for bad debts. The evidence shows that at the close of the year 1921 petitioner went over its accounts receivable and made up a list of about 200 accounts which were considered to be probably bad at that time. Because of the general depression in business conditions many of petitioner's debtors could not pay their debts during 1921 and petitioner considered the debts bad. However, a large percentage of those same debts were running accounts for advertisements, and during 1922 and 1923 petitioner collected a fair percentage of the debts contracted during 1921. Although a reserve of $20,500 was set up only $7,697.50 was actually charged against it. For the years 1919 to 1926, inclusive, petitioner's accounts receivable averaged $48,013.15 and its bad debts actually charged off during the same years averaged $6,038.63, which amounts to 12.5 per cent. The percentage of bad debts to accounts receivable as allowed by the Commissioner for 1921 is about 18 per cent. For the years 1919 to 1923, inclusive, the petitioner's gross income averaged $305,247.67 and its bad debts charged off during the same*3696 years averaged $5,390.16, which amounts to 1.7 per cent. The percentage of bad debts to gross income as allowed by the Commissioner for 1921 is about 2.5 per cent. The amounts of bad debts charged against petitioner's reserve for the years 1922 to 1926, inclusive, indicate that the large reserve set up in 1921 was not warranted. On December 31, 1926, the reserve account as set up on petitioner's books was terminated with a balance of over $14,000. The deduction of $7,770.15 *943 as allowed by the Commissioner for bad debts for 1921 is reasonable and should be sustained.
(4) Petitioner claims that it is entitled to a deduction for the year 1919 of $3,556.34 as additional compensation voted to Sundine and McGlynn. The said sum represents the cost of cars purchased by petitioner for the use of its two officers. The resolution dated October 29, 1919, is the basis for petitioner's claim, but that resolution does not indicate when the services were rendered, nor does it indicate the period of time, one or more years, for which the additional compensation was voted paid in the form of cars purchased by petitioner in 1917. The testimony sheds no light upon the matter and in*3697 the absence of evidence showing in what year and for what year the additional compensation was paid, it may not be allowed as a deduction for 1919.
(5) The facts show that during the years in question McGlynn and Sundine used their cars for personal use as well as for the conduct of petitioner's business. There is no evidence as to what portion of the total operating expenses paid by petitioner were expended for such personal expenses which may not be allowed as an ordinary and necessary business expense and we are of the opinion that the amounts allowed by the Commissioner as petitioner's business expense for operation of officers' cars are reasonable and proper.
(6) We are satisfied from the testimony that it was necessary for petitioner to install the two telephones in question. The Moline Daily Dispatch was not a large newspaper and it was quite necessary for petitioner's customers and reporters to have a direct means of communication with the two men, McGlynn and Sundine, who directed all the affairs of petitioner. The two phones were used regularly for business night calls and the expense of maintaining such means of communication was an ordinary and necessary business*3698 expense for this petitioner. Petitioner should be allowed a deduction of $112 from gross income for each of the years 1919, 1920, and 1921.
(7) Apparently petitioner has waived the issue relative to the reduction of its invested capital by income and profits taxes. It appears from the deficiency letter appealed from that the Commissioner has prorated petitioner's prior years' taxes in accordance with his regulations, which action must be considered as correct under the provisions of section 1207 of the Revenue Act of 1926.
(8) The amount of $1,798.31 refund determined by the Commissioner to be due this petitioner for the year 1917, should be included in petitioner's invested capital for each of the years 1919, 1920, and 1921.
(9) The evidence is not all clear as to the ninth issue and we are unable to determine exactly what the facts are as to the inclusion or *944 exclusion of an amount of $5,772.77 accounts receivable in petitioner's invested capital. This issue seems to have become merged into petitioner's claim for a reserve of $20,500 for bad debts for the year 1921. The claim for the inclusion of $5,772.77 in invested capital for 1919, 1920, and 1921, must*3699 be disallowed for lack of proof.
(10) In March, 1920, petitioner purchased two Cadillac cars at a cost to it of $9,700 which cars were used by the officers and employees of petitioner in the conduct of its business. The cost of the cars was set up on the books in petitioner's automobile account and carried as a capital item for 1920 and also 1921. The purchase of the cars certainly entailed a capital expenditure and the amount of $9,700 should be included in petitioner's invested capital for the years 1920 and 1921.
(11a) The two accounts receivable, totaling $7,380, may not be included in petitioner's invested capital for the years 1919, 1920, and 1921, for the facts establish that the two so-called accounts receivable from McGlynn and Sundine were not in fact accounts receivable having any actual cash value. In 1911 the amounts in question were distributed as cash dividends and neither McGlynn nor Sundine ever intended to repay those amounts to the petitioner. They did not give petitioner their notes nor any other evidence of an indebtedness. McGlynn testified that the cash which represented accumulated profits, was distributed as dividends and that he did not understand*3700 how it got on the books as accounts receivable. The Commissioner properly excluded the said amount of $7,380 from petitioner's invested capital.
(11b) No evidence has been submitted as to the value, if any, over cost of "Other Assets Acquired" by petitioner at the time of its incorporation which alleged value petitioner claims should be included in its invested capital. This claim by petitioner must be denied.
(12) The claim made by the twelfth issue must be denied as no basis has been shown for the inclusion of any of those amounts in petitioner's invested capital.
Judgment will be entered upon 15 days' notice, pursuant to Rule 50.