*3211 1. Deduction from gross income of certain alleged bad debts disallowed.
2. Amounts not included in reserves set up as required by law not deductible from gross income as reserves required by law.
3. Reserves required by law were properly computed by the respondent in each of the taxable years.
*647 The respondent has asserted deficiencies in income taxes for the years 1918, 1919, 1920, and 1921 in the respective amounts of $320.22, $1,673.92, $1,305.63, and $4,334.07. Three issues are presented for determination - (1) whether petitioner is entitled to deduct from gross income for the taxable year 1921 the amount of $9,199.93 as bad debts; (2) whether there should be added to the reserve "required by law" for the years 1918 and 1919 the amount of loss on a surety *648 bond ascertained prior to 1918 and paid in 1920; and (3) whether certain reserves set up by petitioner for all the years herein involved constituted "reserves required by law" and whether such reserves were properly computed.
By agreement of the parties, these proceedings*3212 were consolidated for hearing and decision.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of South Dakota, with its principal offices at Sioux Falls. It is engaged in the casualty insurance business, writing automobile liability, workmen's compensation, fidelity and surety bonds, bank burglary, and liability other than automobile.
Some time prior to the taxable year 1921 petitioner took two promissory notes from one Hooper, an attorney at Gregory, S. Dak., in the total amount of $9,199.88. Both notes were secured by a second mortgage on 640 acres of farm land. On January 18, 1922, the insurance examiner for South Dakota made an examination of petitioner's books for the year 1921. The two notes were rejected by the examiner and placed in "non-admitted assets." From that time on the amount was carried in "bills receivable," which under the insurance law of South Dakota is a nonadmitted asset. In its income and profits-tax return for 1921 the petitioner deducted the amount of such notes from its gross income as debts ascertained to be worthless and charged off in the taxable year. Upon audit the Commissioner disallowed such deduction.
In*3213 November, 1904, petitioner issued a bond of indemnity to one C. B. Collins, who was at that time treasurer for the State of South Dakota. Some time prior to 1920 petitioner became aware of a loss on this bond and in 1920 payment of the loss was made in the amount of $14,726. In 1922 the insurance examiner called attention of petitioner to the fact that a reserve should have been set up in prior years to cover this liability. No such reserve had actually been maintained.
For all the years herein involved petitioner maintained reserves for unpaid losses and for unearned premiums. Petitioner has computed the deduction on account of its reserve for unpaid losses by taking the reserve at the beginning of the year and deducting therefrom the amounts paid out during the year. The balance was then deducted from its reserve for unpaid losses at the end of the year. The following is a synopsis of petitioner's computation:
| 1918 | 1919 | 1920 | 1921 | |
| Reserve at Jan. 1 | $10,547.81 | $17,125.83 | $24,328.01 | $57,621.58 |
| Less: | ||||
| Losses paid during year | 1,311.75 | 16,750.01 | 30,766.68 | 35,970.69 |
| 9,236.06 | 375.82 | -6,438.67 | 21,650.89 | |
| Reserve at Dec. 31 | 17,125.83 | 24,328.01 | 57,621.58 | 76,558.65 |
| 7,889.77 | 23,952.51 | 64,060.25 | 54,907.76 | |
| Unearned premiums reserve | 5,538.22 | 20,227.07 | 17,365.65 | -5,733.42 |
| 13,427.99 | 44,179.26 | 81,435.90 | 49,176.34 |
*3214 *649 The respondent computed the net addition to reserve funds for unpaid losses by deducting from the reserve at the end of the year the reserve held at the beginning of the year. A synopsis of his computation follows:
| 1918 | 1919 | 1920 | 1921 | |
| Reserve at Dec. 31 | $17,125.83 | $24,328.01 | $57,621.58 | $76,558.65 |
| Reserve at Jan. 1 | 10,547.81 | 17,125.83 | 24,328.01 | 57,621.58 |
| Net addition | 6,570.02 | 7,202.18 | 33,293.57 | 18,937.07 |
| Unearned premium | 5,538.22 | 20,227.07 | 17,365.65 | -5,733.42 |
| 12,108.24 | 27,429.25 | 50,659.22 | 13,203.65 | |
| Error | 8.00 | |||
| 12,116.24 |
OPINION.
LANSDON: Petitioner seeks to deduct the amount of two notes from income for the year 1921 as a bad debt on a showing that on January 18, 1922, the insurance examiner for the State of South Dakota rejected them as admissible assets as of the close of the taxable year 1921. From that time forward the notes were carried on the books as "bills receivable," which was a nonadmissible item. Such evidence is insufficient to establish that the notes were ascertained to be worthless and charged off within the taxable year. The direction of a bank examiner to charge off an account is not*3215 proof of worthlessness. ; ; . The determination of the respondent with respect to the bad debt deduction is approved.
In 1922 the insurance examiner for the State of South Dakota informed petitioner that it should have held a reserve against the loss paid in 1920 on a bond of indemnity to the State of South Dakota. Petitioner had not held such a reserve but now seeks to deduct such an amount from gross income for the years 1918 and *650 1919 as a reserve required by law. The reserve was not actually held nor was it set up on the books during the taxable years. No deduction can be allowed as an addition made to a reserve unless such an addition has in fact been made. We are of the opinion that petitioner is not entitled to the deduction claimed as an addition to reserves required by law.
The third issue to be determined in this proceeding is whether certain reserves set up by petitioner for all the years herein involved constituted "reserves required by law" and whether such reserves were properly computed. Section*3216 234(a)(10)(a) of the Revenue Act of 1918 permits the petitioner to deduct from gross income "the net addition required by law to be made within the taxable year to reserve funds." The "reserves required by law" are those required by the statutes of the State or States in which the insurance company transacts business. . Petitioner has maintained a "loss claims" reserve and an "unearned premium" reserve pursuant to sections 9398, 9399, 9400, and 9401 of the Revised Code of South Dakota (1919), and we are of the opinion that such reserves are reserves required by law within the meaning of the Revenue Act.
It remains for use to determine the proper method of computing "the net addition" to reserve funds during the taxable year. Petitioner has deducted from the reserve at the beginning of the year losses paid during the year. The balance was then deducted from the reserve at the end of the year. Respondent has deducted from opening reserve from the closing reserve and allowed the difference as the net addition during the year. We have held in *3217 , that the deduction from gross income to which petitioner is entitled is the excess amount of the reserves at the end of the year over the reserves at the beginning of the year.
Petitioner's computation allows a deduction for losses paid during the year. There is a specific provision for deducting "all losses actually sustained within the year and not compensated by insurance or otherwise." Section 234(a)(4) of the Revenue Act of 1918. To allow a deduction in computing the net addition to reserve funds, as contended for by petitioner, would result in a double deduction. The respondent's computation is approved. .
Decision will be entered for the respondent.