*4034 Commissioner's disallowance of a deduction under section 234(a)(5) of the Revenue Act of 1921, approved.
*796 This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1921. The Commissioner has asserted a deficiency for that year in the amount of $4,849.99 of which sum the petitioner alleges that the amount of $4,683.42 is in error, due to the act of the Commissioner in disallowing a deduction claimed by the petitioner as a reserve for bad debts in the amount of $46,834.20.
FINDINGS OF FACT.
The petitioner is a corporation organized about April, 1920, under the law of the State of North Carolina. It is engaged in the general commercial banking and trust business at Greenboro, N.C.
On its 1921 return the petitioner claimed a deduction which it explained as follows:
| SCHEDULE A 17 - BAD DEBTS. | ||||
| Certificate of Deposit, Bank of Coats (Charged off.) | $5,000.00 | |||
| Probable losses on notes | ||||
| One half of each being set up as a reserve as follows: | ||||
| Notes - Maker | Dated | Due | Amt. | |
| Trent Cotton Oil Co | 1-23-21 | 2-27-21 | $12,500.00 | |
| Bank of Lumber Bridge | 3,- 8-20 | 1- 7-21 | 4,685.00 | |
| Farmers Bank & Trust Co., La Grange | 11- 1-20 | 12-15-20 | 10,690.00 | |
| Jarret & Kearns | 3-10-21 | 5- 9-21 | 1,219.20 | |
| L. E. Covington | 7-12-21 | 2- 1-22 | 600.00 | |
| B. L. Covington | 4-16-20 | 11-12-20 | 640.00 | |
| E-Ject-O-File Co | 9-24-20 | 3-24-21 | 16,500.00 | |
| $46,834.20 | 46,834.20 | |||
| Total | $51,834.20 |
*4035 The note of Trent Cotton Oil Co. had been endorsed by several people. At some time not disclosed by the evidence these endorsers negotiated a sale of the company's property. The purchaser gave his note for the purchase price to the petitioner as additional security for the note. This purchaser later went into bankruptcy and in 1924 *797 the petitioner purchased the former Trent Cotton Oil Co. property from the bankrupt estate for $21,000. The petitioner received from this estate $2,040.85 as a dividend on its note. It sold some machinery for $525. The petitioner thereafter operated the plant but not at a profit. No offer has been received for it which would equal the price paid plus any amount of the original debt. Some amount may be recovered from the estate of one of the endorsers of the note now dead. Nothing has been recovered from any other endorser.
The Bank of Lumber Bridge failed and went out of business at some undisclosed date. The petitioner has been unable to collect anything on the note. An effort was made at some undisclosed time to collect on "paper and receivables" held as security on this note.
An unpaid balance in excess of $10,690 on the*4036 note of Farmers Bank & Trust Co. was carried on the petitioner's books in February, 1927. At some undisclosed date this bank failed and went into the hands of a receiver. The petitioner may receive a dividend from the estate. There were endorsers on this note but efforts to recover from them made at some undisclosed time have not been successful. The note also had some sort of collateral security, but nothing has been realized from it.
The Jarret & Kearns note was placed in the hands of an attorney at some undisclosed time. No additional security has been gotten on this note nor has any amount been recovered on it since 1921.
No amount has been recovered on either of the two Covington notes.
The amount due from E-Ject-O File Co. was also secured by a mortgage. At some undisclosed date or dates the plant of this company burned, the company failed, the manager disappeared, and the petitioner took the property, sold it, took it back, and now owns a mortgage on the property and stock in a reorganized company which is operating the plant.
The petitioner's total notes and bills receivable as of December 1, 1920, amounted to $3,906,300.03, and as of December 31, 1921, amounted*4037 to $3,765,287.98.
In order to keep its books as nearly as possible in conformity with a form of report required by the State Bank Examining Department, no reserve was set up on the books until February 6, 1923, when a reserve of $50,000 was set up.
The amount of $46,834.20 was not eliminated from the petitioner's assets in its statement of December 31, 1921. The sum of $5,000 set forth as a bad debt in Schedule A 17 was charged off April 1, 1921, and represented a certificate of deposit by the Bank of Coats, Coats, N.C., which became worthless when the bank failed.
*798 The Commissioner allowed the deduction of the item of $5,000 as a bad debt and disallowed the deduction of the amount of $46,834.20.
OPINION.
MURDOCK: The pertinent part of the Revenue Act of 1921, reads as follows:
SEC. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
* * *
(5) Debts ascertained to be worthless and charged off within the taxable year (or in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, *4038 the Commissioner may allow such debt to be charge off in part.
A deduction under this section may represent a reasonable addition to a reserve for bad debts or it may represent debts ascertained to be worthless and charged off within the taxable year. It may not represent both. .
If the question before this Board is to determine the reasonableness of an addition to a reserve, or if it is to determine whether a debt is recoverable only in part, we are not to be bound in our decision by the conclusions and opinions of others on the very question before us. Facts, not conclusions alone, must be presented to us so that we can form an independent opinion on the question. See , and .
The facts proven in this case, relating to the reasonableness of an addition to a reserve, give such meagre information or are so vague as to time and as to likelihood or certainty of ultimate loss, that we can form from them no intelligent opinion of what would be a reasonable addition to a*4039 reserve for bad debts.
The man who was president and cashier of the petitioner testified that in arriving at the amounts making up the total of $46,834.20, the items were considered separately and the amount was determined which probably would be lost on each. In this way the conclusion was reached that the amount set up would be impossible of collection.
We have found all of the facts which, in our opinion, were proven by the evidence. We are unable to find what information the officers of the petitioner had at the end of the year 1921 as to the assets of these debtors or as to whether the notes would or would not be paid. The facts then in existence to justify the opinion of these officers are not before us. We can not even say that their opinion was justified by the subsequent events because as to those events our information is *799 so vague and uncertain that we can not tell whether loss has resulted or ever will result. From the consideration of all of the evidence we can not say that the petitioner was entitled to any deduction under section 234(a)(5) in excess of that allowed by the Commissioner.
Judgment will be entered for the respondent.