OPINION.
Phillips:
In this appeal we are called upon to determine whether an amount due the taxpayer from a corporation which became bankrupt in 1920 - was a proper deduction under section 234 of the Revenue Act of 1918 to be taken in computing its income for 1920. It appears that merchandise was purchased by the taxpayer from the bankrupt which proved to be unsatisfactory. In the latter part of 1918 and in January, 1919, a portion of such merchandise was returned to the bankrupt, with the understanding that taxpayer was to be reimbursed by the bankrupt for the cost of the goods. Repeated efforts were made to collect the account, but without success. The account was referred by taxpayer to its Chicago attorneys, who had no success in collecting. On August 3, 1920, the debtor was adjudicated a bankrupt and, upon learning of this, taxpayer, in accordance with its regular custom of reflecting only sound accounts upon its books, charged off the entire amount of the indebtedness.
In December, 1920, prior to closing' its books, it wrote its Chicago attorneys and was advised by them that its claim had not yet been allowed, that other creditors had evidenced an intention of contesting its allowance and that in all probability the creditors would not receive much more than 5 per cent of their claims.
The action of the taxpayer in charging off the debt on its books upon learning of the bankruptcy, knowing as it did that the merchandise sold by the debtor had proven unsatisfactory, and after having unsuccessfully attempted for several months to collect the account, was in accordance with sound business practice. The information received by the taxpayer in December, 1920, did not alter the situation, for it indicated that taxpayer might be called upon to prove its claim over objections to be filed by other creditors, with consequent further expense to it, and that with this difficulty overcome only a small dividend would ultimately result. The words " debts ascertained to be worthless," used in the statute, must be given a reasonable interpretation. The possibility that a small part of the debt may ultimately be recovered will not prohibit the writing off of the debt as worthless for income-tax purposes when every consideration of good business directs that it be charged off. As we have said in the Appeal of Egan & Hausman Co., Inc., 1 B. T. A. 556:
In adjusting their accounts and debts business men are called upon to use sound business judgment and prudence and are justified in eliminating from their assets such accounts and debts as are past due and which they are satisfied that they can not realize upon within some reasonably determinable period. They do not have to await uncertain and future events, nor are they called upon to wait until some turn of the wheel of fortune may bring their debtors into affluence, to enable the receivers of a bankrupt institution to eke out a liquidating dividend.
We do aot mean to say that in the case of every bankruptcy debts due may be charged off as worthless. Each account most stand upon its special circumstances. In the instant appeal the claim of the taxpayer against the bankrupt's estate had not yet been allowed, other creditors were considering the advisability of contesting it, and at best there was a prospect for the ultimate payment of only a small dividend. In such a situation we conclude that the debt had been ascertained to be worthless within the degree of certainty required by the statute.
We must also consider what effect, if any, followed from the action of the taxpayer in restoring a part of the account to its books. The testimony was that this was done, not because the debt was not considered worthless, but to avoid any possible claim by the taxing authorities that taxpayer was taking a greater deduction than it was entitled to receive. The amount restored was nothing more than an estimate of the amount which might be recovered at some time in the future. It did not affect in any way the actual worthlessness of the debt.
We believe that we should look to the actual situation, rather than to the book entries, and, doing so, we conclude that the debt of $50,637.23 was a proper deduction from 1920 income and that the tax should be recomputed accordingly. Appeal of Huning Mercantile Co., 1 B. T. A. 130.
Arundell not participating.