1934 BTA LEXIS 1394 | B.T.A. | 1934
Lead Opinion
OPINION.
These proceedings were consolidated for hearing. The following deficiencies in income tax were asserted by the respondent for the year 1923: Benjamin Siegel, $9,669.36; Sophie Siegel, $16,537.22.
The one error asserted in both proceedings is that the respondent, n determining the earnings and profits available for dividends of the Benjamin Siegel Co. (hereinafter referred to as the Company) accumulated since February 28, 1913, failed to deduct therefrom the sum of $63,952, representing net additions to the bad debt reserve shown on the books of that company.
Part of the facts were stipulated and the stipulation is made part of this report. The material facts disclosed by the record are set forth.
On January 31,1923, the last day of the fiscal year of the Company, it declared and paid a dividend of $300,000. Of this amount the sum of $52,200 was paid to the petitioner, Benjamin Siegel, and the sum of $138,000 to the petitioner, Sophie Siegel, both of whom were stockholders in the Company.
Prior to 1913 and since, the Company has maintained on its books a reserve for bad debts, which was computed on various percentages of charge sales. Subsequent to the enactment of the Revenue Act of 1921, the Company failed to exercise the option granted it by
The following are the amounts of cash sales, charge sales, bad debts charged to the reserve and allowed as deductions, and additions to the reserve, at the end of the following fiscal years ended January 31:
[[Image here]]
The following are the percentages of bad debts charged off to total sales, to charge sales, and to the percentage of annual additions to the reserve:
[[Image here]]
The following are accounts receivable balances at close of year, percentage of bad debts charged off, and percentage of additions to reserve to accounts receivable:
[[Image here]]
[[Image here]]
The accumulated balance on January 31, 1923, of earnings available for dividends after the deduction of all worthless debts and the restoration to surplus of the excess of the additions to the reserve made after February 28, 1913, over the worthless debts charged to reserve, and after the deduction of prior dividends and after certain adjustments, was $178,934.61.
This sum represents the earnings available for dividends on January 31, 1923, as computed by the respondent. If the additions to the reserve be a proper deduction, then the amount of available earnings on that date is $116,789.87. The Company followed a liberal credit policy. There were carried in accounts receivable accounts which were not charged off until they were about six years old, or the debtor was dead or had absconded. This account also contained accounts against persons who had become bankrupt. The following are condensed balance sheets of the Company as shown by its boobs as of March 1, 1913, and January 31, 1923:
[[Image here]]
[[Image here]]
The following past due accounts incurred in the years shown were included in accounts receivable on January 31, 1923:
[[Image here]]
The amounts realized on these accounts in the succeeding years have also been ascertained as follows:
[[Image here]]
The sole issue is what part of the dividend of $300,000, declared and paid by the Company on January 31, 1923, was composed of
The reserve sought to be deducted is composed of additions made since February 28, 1913, without any reduction except on account of worthless debts charged to it. It is reasonably clear that practically all charge accounts for the first years subsequent to that date have been absorbed either into surplus or charged off. That this assumption is reasonable is demonstrated by the fact that for the six years ended January 31, 1919, the total charge sales amounted to over $7,500,000, and that of this sum there remained on the Company’s books on January 31,1923, only $6,160.44, and yet we find no transfer from the reserve to surplus. The result of this method was that the total net additions made to the reserve for the period March 1,1913, to January 31, 1923, both inclusive, are over ten times the amount of the debts actually charged off in the fiscal year ended January 31, 1923. This does not take into consideration the net amount of the whole reserve if we add thereto the credit balance on March 1, 1913, of $23,275.95. The method by which this reserve was built up is thus stated by one of the petitioners’ witnesses:
The company, on its books and records, as far back as 1915, had adopted a plan of charging in its accounts a provision based on two per cent, of the charge sales of the period. That may, from time to time, have varied depending on the profits, probably, of the company. They may have continued that for six or eight months, and they might have dropped off a month or two; for example, in the course of the year, the charge for the year was based on the percentage for a particular period. '
Even this irregular method was not always followed; thus, on January 31,1923, the net additions to reserve since February 28, 1913, amounted to $63,952, against an accounts receivable balance of $476,937.39. In the fiscal year 1924, the net addition to reserve was $5,282.23. Although the amounts of charge sales in 1925 and 1926 were larger than those in 1913, and although the accounts receivable balances were at the end of 1925, $468,941.65, and at the end of 1926, $489,971.45, we find that no addition was made to the reserve in either of these years, with the result that net additions to reserve since January 31, 1923, were over $24,000 less than at the end of the fiscal year 1923. We are not convinced that a reserve computed in this peculiar way reflected the true condition of the Company with respect to its worthless debts, and it is probable that these are the reasons the Company did not use its reserve in computing its taxable income.
This leaves the question of what worthless debts or debts recoverable only in part, if any, were included in the Company’s accounts
From the statement of the witness as to the policy of the Company, we conclude that no accounts were carried on the books which were barred by limitation or where the debtors were dead or had absconded. With reference to the bankrupts, we can only say that the petitioners have furnished us no evidence as to who were bankrupt, nor the amount of such bankrupts’ debts. Nor are we impressed with the statement that the accounts were not charged off until the debtor was dead or had absconded. In the first case the debtor may have been solvent, and in the second place there is nothing to indicate that prior to a debtor’s absconding he was not able to pay. We do not think that lapse of time, nothing else being shown, will convert an otherwise good debt into a worthless one. W. C. Mitchell Co., 27 B.T.A. 645. A debtor may be good, but slow. We are given no facts as to the financial condition of such debtors. It may be that the Company was liberal in the matter of charge-offs, but we can give no relief in the absence of testimony showing what accounts in addition to those already charged off were worthless. Neither are we impressed with the fact that on June 30,1930, $42,335.69 of the total $127,531.46 remained uncollected. All these accounts may have been collectible on January 31, 1923. We do not know what may have occurred in later years which affected the collectibility of these particular accounts, nor do we think that what occurred subsequent to January 31, 1923, is material except to the extent that it is corroborative. Eli J. Taylor, 9 B.T.A. 442.
Judgment will be entered for the respondent.