McMinnville Mfg. Co. v. Commissioner

MCMINNVILLE MANUFACTURING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. McMinnville Mfg. Co. v. Commissioner Docket No. 38833. United States Board of Tax Appeals 19 B.T.A. 486; 1930 BTA LEXIS 2384; April 7, 1930, Promulgated *2384 The petitioner is entitled to deduct from gross income for 1926 as debts ascertained to be worthless and charged off in that year, the amount of $5,741.27. Frank J. Albus, Esq., for the petitioner. Ralph S. Scott, Esq., and E. M. Niess, Esq., for the respondent. MARQUETTE *486 This proceeding is for the redetermination of a deficiency in income tax asserted by the respondent in the amount of $1,267.46 for the year 1926. The deficiency is in controversy to the extent that it arises from the disallowance of a deduction of $8,372.03 taken by the petitioner on account of debts claimed to have been ascertained to be worthless and charged off in the taxable year. *487 FINDINGS OF FACT. The petitioner is a Tennessee corporation with its principal office and place of business at McMinnville, Tenn. Prior to the year 1926 the petitioner consistently followed the direct method of charging off specific worthless debts. There was no reserve account on its books against which worthless debts could have been charged. At the close of the year 1926 there were on the petitioner's books accounts of debtors in the amount of $8,372.03 which*2385 the petitioner determined had become worthless. At that time an entry was made on the petitioner's cash book as follows: Profit and Loss: Debit Credit Reserve for Bad Debts $8,372.03 $8,372.03 To charge off as worthless the following doubtful accounts: Jap Bain $85.82 The Collins Corporation 2,243.55 R. B. & R. D. Davenport 29.32 H. T. Dodson 212.17 Enterprise Lumber Co. 50.00 Falls Lumber Co 281.27 Grounds Bros. Mfg. Co. 250.26 Jim Hale 2.50 Hansel Hall, Builder & Contractor 1,755.00 Manufacturer's Lumber Agency 622.78 Marbury Lumber Co. 598.37 Lewis Rucker Lumber Co. 620.02 R. L. Rutzler 211.59 O. K. Stafford 176.88 Winnsboro Bank 257.50 S. Shilonski (note) 975.00 Total 8,372.03 The debit of $8,372.03 was carried directly to the profit and loss account of the petitioner and the credit of the same amount was carried to a suspense account called "Accounts Charged Off," or "Bad Debts Charged Off." The individual accounts of the debtors were not reduced or closed out for the reason that the petitioner intended to bring suit on some of the accounts and did not desire it to be known that they had been charged off as worthless. *2386 Said debts had become worthless in 1926 to the extent of $5,741.27. It was not the intention of the petitioner's officers to handle its bad debts for 1926 by other than the direct charge-off of specific bad debts method. The petitioner, in its income-tax return for 1926, deducted the amount of $8,372.03 on account of the debts set forth above. The respondent disallowed the deduction. *488 OPINION. MARQUETTE: The parties hereto have stipulated that $5,741.27 of the debts listed in the findings of fact became worthless in 1926. The respondent takes the position, however, that the petitioner in that year attempted to change from the direct method of charging off specific bad debts that it had theretofore employed, to the reserve method, without obtaining the respondent's approval of the change, and that the petitioner is not, therefore, entitled to any deduction on account of bad debts. The petitioner contends that there was a charge-off of specific bad debts. The evidence, as we view it, sustains the contention of the petitioner. The petitioner prior to 1926 had consistently followed the practice of charging off specific bad debts, and there was no intention*2387 on the part of its officers or those in charge of its books to adopt any other method in 1926. There was no reserve for worthless debts on its books against which the debts in question could have been charged. The total amount of the debts that it claimed as a deduction in 1926 was debited to profit and loss and credited on the cash book to reserve for bad debts. The debit was carried directly to profit and loss, while the corresponding credit to "Reserve for Bad Debts" was carried to a suspense account known as "Accounts Charged Off," or "Bad Debts Charged Off." The individual accounts of the debtors were not reduced or closed out for the reason that the petitioner intended to bring suit on some of the accounts and did not wish it to be known that they had been charged off as worthless. We are satisfied that the "Reserve for Bad Debts" on the cash books is a misnomer and that no such account existed. The statute does not provide any particular manner for charging off a bad debt. ; *2388 ; ; ; . The situation here is specifically the same as that found in In that case we said: It is urged, however, by the respondent, that the debt was not charged off on the petitioner's books in December, 1920. It is true that the entries in regard to the debt were made in a rather unusual manner, but nevertheless they had the effect of reducing the petitioner's net income for 1920, and its net worth as shown by its balance sheet. The debt was still carried on the customer's ledger, but that procedure is explained by the fact that although the petitioner considered the debt worthless and had effectually eliminated it from its balance sheet, it did not desire that Schwalge should be informed of these facts. We are satisfied that the petitioner in closing its books for 1926 intended to adopt the method of charging off specific bad debts rather *489 than the reserve method; that the debts in question were charged off within the*2389 meaning of the statute, and that the petitioner is entitled to a deduction on account of bad debts in the amount of $5,741.27. Judgment will be entered under Rule 50.