Petition for Review of Decision of United States Board of Tax Appeals.
Before BIGGS, MARIS, and CLARK, Circuit Judges.
This petition by the Imperial Type Metal Company to review a decision of the Board of Tax Appeals determining its income tax liability for the years 1933 and 1934, raises three issues. They will be separately considered.
1. Bad Debt Reserve Deduction.
In its income tax return for the year 1933 the petitioner claimed a bad debt deduction in the amount of $11,100, this amount having been added to its reserve for bad debts in that year. The petitioner's accounts receivable at the beginning of 1933 were $100,010.62 and at the end of the year $142,786.65. The reserve at the beginning of the year was $7,863.52 and at the end of the year $15,244.33. The amount credited to the reserve was not fixed by taking an established percentage of accounts receivable. On the contrary the president and treasurer of the petitioner examined each account and determined upon an addition to the reserve which they, from their personal knowledge of prevailing business and economic conditions and of the debtor's financial status, considered necessary to cover possible losses.
In 1933 business conditions in the entire industry served by the petitioner were bad. Standard McCarthy, Inc., a customer, which owed the petitioner $16,000 was in very severe financial straits and did in fact become a bankrupt in 1934. The petitioner recovered less than $500 from it. For these reasons the petitioner's officers increased its bad debt reserve. The Commissioner disallowed the addition to the reserve to the extent of $3,554.61. The Board of Tax Appeals found as a fact that a reasonable addition to the petitioner's reserve for bad debts for the year 1933 was not in excess of the amount determined and allowed by the Commissioner and sustained his determination.
The petitioner relies upon section 23(j) of the Revenue Act of 1932, 47 Stat. 169, 180, 26 U.S.C.A. § 23(k), for the right to make a deduction from gross income of a reserve for bad debts. That section provides:
"Sec. 23. Deductions' from gross income
"In computing net income there shall be allowed as deductions:
"(j) Bad Debts. 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) * * * ."
It will be seen that the statute requires that the additions credited by a taxpayer to a reserve for bad debts must be reasonable in order to be deductible from gross income. Whether the $11,100 addition to the reserve for 1933 was reasonable is a question of fact. The Commissioner in the exercise of his discretion found that it was excessive. His determination is entitled to a presumption of correctness. Welch v. Helvering, 290 U.S. 111, 54 S. Ct. 8, 78 L. Ed. 212. The Board was not persuaded by the testimony presented by the petitioner that the Commissioner erred and found as a fact that the amount as reduced by the Commissioner was reasonable. The finding by the Board if supported by substantial evidence will not be disturbed on appeal. Helvering v. Rankin, 295 U.S. 123, 55 S. Ct. 732, 79 L. Ed. 1343; Elmhurst Cemetery Co. v. Com'r, 300 U.S. 37, 57 S. Ct. 324, 81 L. Ed. 491; Helvering v. Nat. Grocery Co., 304 U.S. 282, 58 S. Ct. 932, 82 L. Ed. 1346.
A search of the record of this case for evidence justifying the amount added to the 1933 reserve by the petitioner discloses only generalizations as to the prevailing economic conditions and the opinions of the petitioner's officers. Except for the Standard McCarthy account there is no identification of the accounts for which the reserve was set up and even as to that account the possibility that it had already been reflected in the reserve is not precluded. The petitioner did not meet the burden which rested upon it to prove its ...