Court Opinion

ID: 4490930
Source: CourtListenerOpinion
Date Created: 2020-01-17 22:02:36.616126+00
Date Added: 2024-06-11T15:03:16.505947
License: Public Domain

*903OPINION.
Smith:
At the hearing of this appeal the taxpayer waived certain allegations of error shown in its petition. It contended that the determination of the tax contained in the deficiency letter, which had been sent it under date of February 24, 1923, was erroneous in the following particulars:
1. Disallowance of deductions for business expense for 1919 of $137.50, and for 1920, $100, paid, respectively, to the Louisville and Cincinnati highway fund and to the Ohio Eiver highway fund.
2. Setting up alleged “Supply memorandum accounts,” to wit, on December 31, 1918, of $1,478.50; on December 31, 1919, of $1,558.40; and on November 30, 1920, of $5,370.05, as assets on the respective balance sheets of said dates and crediting the difference of $79.90 and $3,811.65 to expense for the years 1919 and 1920 and disallowance thereby of said accounts as expense.
3. Disallowance for 1920 of $3,000 loss caused by fire and water and not compensated by insurance.
*9044. Disallowance of bad debts for 1920 in the amount of $10,184.34.
Relative to the first allegation of error the Board is of the opinion that the action of the Commissioner in disallowing the deduction of the contributions from the taxpayer’s gross income for the years 1919 and 1920 is entirely proper. The evidence before the Board does not clearly show that any benefit flowed directly to the taxpayer from the making of the contributions. It was not in our opinion an ordinary and necessary expense within the contemplation of the taxing statutes. Appeal of Poinsett Mills, 1 B. T. A. 6; Appeal of Holt-Granite Mills Co., 1 B. T. A. 1246; Appeal of the Thomas Shoe Co., 1 B. T. A. 124.
The taxpayer kept its books of account upon an accrual basis. It kept a memorandum account of its supplies on hand, and the Commissioner, for the purpose of accurately showing the taxpayer’s net income, has allowed the deduction from gross income of supplies actually consumed during the taxable periods tinder review instead of the supplies purchased. It appears from the taxpayer’s •books of account that for the taxable period ended November 30, 1920, it had invested $3,811.65 of its earnings for the fiscal period in supplies to be consumed during the succeeding year. We think that this treatment of the taxpayer’s accounts more accurately reflected its true net income than the system actually employed by the taxpayer and that such treatment is entirely consistent with an accrual system of accounting.
In October, 1920, the taxpayer suffered a loss to its stock of merchandise from smoke and water from a fire in an adjoining building. It claimed that its loss from this source was $6,640.37. Its merchandise was fully insured. The insurance companies, however, determined the loss to be only $3,640.37. The taxpayer accepted this amount and reduced its inventory in a like amount. In its incoine-"tax return for the fiscal period ended November 30, 1920, the taxpayer claimed the deduction of a loss of $3,000. The Commissioner has disallowed the deduction of this loss on the ground that any loss which might be sustained by the taxpayer in the liquidation of its inventory on and after November 30, 1920, would be reflected in the taxpayer’s accounts, and that there is no clear proof that the loss of $3,000 was actually sustained.
We are of the opinion that the proof does not show that the loss from the smoke and water was in excess of the amount found by the insurance companies.
The taxpayer charged off in the year 1921 bad debts amounting to $10,184.34. It is its contention that the credit man of the cospo-ration knew that these accounts were worthless during the fiscal period ended November 30, 1920, and that it was through his negligence that they were not charged off within the period. The presi*905dent of the corporation and the other officers were not aware of the alleged worthlessness of the accounts in 1920. Section 234 (a) (5) of the Revenue Act of 1918 allows the deduction from gross income of “ Debts ascertained to be worthless and charged off within the taxable year.” The evidence adduced before the Board in support of the taxpayer’s contention that the amount of these accounts should be allowed as a bad-debt deduction for the fiscal year ended November 30, 1920, is not sufficient to convince us that there was such an ascertainment of worthlessness of the accounts within the year in question as would warrant their deduction from gross income.