OPINION.
Murdoch :
The Commissioner determined a deficiency of $595.94 in the income tax of the petitioner for the calendar year 1938. One of the adjustments which he made was to include in income $1,763.29 representing recoveries in 1938 on debts charged off in previous years. The propriety of that adjustment is the only issue for decision. The Commissioner explained in the notice of deficiency that the recoveries constituted taxable income in accordance with the provisions of article 23 (k) — 1 (5) of Regulations 101. That article contains the following provision:
* * * Any amount subsequently received on account of a bad debt or on account of a part of such debt previously charged off and allowed as a deduction for income tax purposes, must be included in gross income for the taxable year in which received.
However, the Board has held that recoveries of debts previously charged off and allowed as deductions are income only if, and to the extent that, the deduction had effected an offset of taxable income so that any excess deductions are tax-free when recovered. Central Loan & Investment Co., 39 B. T. A. 981; National Bank of Commerce of Seattle, 40 B. T. A. 72; affd., 115 Fed. (2d) 875; State-Planters Bank & Trust Co., 45 B. T. A. 630. See also Philadelphia National Bank v. Rothensies, 43 Fed. Supp. 923. Cf. Amsco-Wire Products Corporation, 44 B. T. A. 717; Kennedy Laundry Co., 46 B. T. A. 70. Those cases disapprove of the regulation, and the argument of the Commissioner that the question of benefit at the time of charge-off is immaterial. They point out that the recoveries would be of capital only and would not represent income except for the fact that they had offset income when previously deducted. They also hold that the recoveries are tax-free until their amount would produce taxable income in the year of the charge-off.
[965]*965Counsel for the petitioner, in stating his contention at the hearing, said that the recoveries in this case were not income since they had not resulted in any tax benefits at the time the original deductions were taken. He said also: “The facts have all been stipulated.” Counsel for the respondent, in replying, did not challenge this latter statement and did not intimate in any way that there were any material facts in addition to those stipulated. He said the issues had been stated substantially correctly by counsel for the petitioner except that the respondent did not admit that the petitioner had received no benefit from the charge-offs. He recognized that the Board had theretofore decided a similar issue adversely to the respondent and he inquired whether, under the circumstances, a memorandum brief would be sufficient. He was told that it would be.
The stipulation of facts is hereby adopted as the findings of fact. The debts recovered in 1938 were a part of larger amounts charged off in the four years immediately preceding and in 1931. The following table shows for those five years the net loss sustained by the petitioner in each year, the amount of bad debts charged off and allowed as a deduction in each year, the total subsequent recoveries on those debts up to 1938, and the recoveries during 1938:
[[Image here]]
The recoveries made in 1938 were reported by the petitioner as nontaxable income on its return for that year.
The petitioner relies upon the decisions of the Board above referred to and claims that it has made out a prima facie case under those decisions which entitles it to judgment. The respondent, instead of filing a memorandum brief, filed an original brief of 23 pages and then filed a reply brief. His briefs for the most part are devoted to an argument that the regulations state the correct rule and the Board has been in error. This contention is rejected for reasons already stated in the cases cited.
The respondent also contends in his brief that the petitioner has failed in its proof, first, because the net loss for 1931 could have been carried over to offset gross income for 1932 under section 117 of the Revenue Acts of 1928 and 1932, and, second, because no proof has been [966]*966offered to negative the possibility that the petitioner claimed losses or other deductions in each of the years for which the bad debt deductions were claimed and to negative the further possibility that subsequently there were recoveries on those losses and deductions which, if related back to those years, might wipe out the net losses for those years. These contentions were advanced for the first time in the respondent’s brief. The petitioner contends in this connection that it was the intention of the parties to stipulate all of the material facts known to either party; the stipulation was prepared after counsel for the respondent had benefited from a full examination of the petitioner’s records; the petitioner is not called upon to prove all of these negatives, particularly under the circumstances of this case; if it is called upon to prove the negatives, then, in fairness to it, it ought to have a further opportunity to do so, since the facts are that there was no benefit from a carry-over of the 1931 loss and there were no recoveries of other items which would support the respondent’s contention.
The Board entered a memorandum opinion in this proceeding holding that the amount recovered in 1938 was all taxable income to the petitioner because of a failure of proof to show that the petitioner had not received tax benefits from the charge-offs in the prior years. The Board there said:
* * * If during- the years 1935-37, petitioner recovered and did not report as income amounts charged off and deducted for expenses, taxes or other items, the deduction of the bad debts charged off in 1934 may have resulted in direct tax benefit, so that the recovery in 1938 would be taxable.
A decision for the respondent was entered pursuant to the memorandum opinion.
Counsel for the petitioner then filed a motion to vacate the decision and for reconsideration, and, in the alternative, for a rehearing to permit the submission of additional evidence and, in the further alternative, for a reference of the report of the division to the full Board. It is stated in the motion that additional evidence is available to show that the petitioner sustained a net loss for 1932 of $10,133.03 without deducting any part of the net loss for 1931 and that it did not recover or fail to report as income for any of the years 1931 to 1931, inclusive, any amounts previously deducted for expenses, taxes, or other items. After the Member who had originally heard and decided the case had denied the motion in all other respects, the Chairman of the Board granted the motion in so far as it asked that the report be reviewed by the full Board. The Board, after reviewing that report, rejected it.
The petitioner has made a prima facie case in so far as the amounts recovered in 1938 were of debts charged off in the years 1934 to 1937, inclusive. Where, as here, the respondent had never intimated in [967]*967any way prior to the filing of his brief that recoveries had been made on other items previously deducted and had determined the deficiency on another ground, the petitioner was under no duty to negative the possibilities now referred to by the respondent.
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OPINION.
Murdoch :
The Commissioner determined a deficiency of $595.94 in the income tax of the petitioner for the calendar year 1938. One of the adjustments which he made was to include in income $1,763.29 representing recoveries in 1938 on debts charged off in previous years. The propriety of that adjustment is the only issue for decision. The Commissioner explained in the notice of deficiency that the recoveries constituted taxable income in accordance with the provisions of article 23 (k) — 1 (5) of Regulations 101. That article contains the following provision:
* * * Any amount subsequently received on account of a bad debt or on account of a part of such debt previously charged off and allowed as a deduction for income tax purposes, must be included in gross income for the taxable year in which received.
However, the Board has held that recoveries of debts previously charged off and allowed as deductions are income only if, and to the extent that, the deduction had effected an offset of taxable income so that any excess deductions are tax-free when recovered. Central Loan & Investment Co., 39 B. T. A. 981; National Bank of Commerce of Seattle, 40 B. T. A. 72; affd., 115 Fed. (2d) 875; State-Planters Bank & Trust Co., 45 B. T. A. 630. See also Philadelphia National Bank v. Rothensies, 43 Fed. Supp. 923. Cf. Amsco-Wire Products Corporation, 44 B. T. A. 717; Kennedy Laundry Co., 46 B. T. A. 70. Those cases disapprove of the regulation, and the argument of the Commissioner that the question of benefit at the time of charge-off is immaterial. They point out that the recoveries would be of capital only and would not represent income except for the fact that they had offset income when previously deducted. They also hold that the recoveries are tax-free until their amount would produce taxable income in the year of the charge-off.
[965]*965Counsel for the petitioner, in stating his contention at the hearing, said that the recoveries in this case were not income since they had not resulted in any tax benefits at the time the original deductions were taken. He said also: “The facts have all been stipulated.” Counsel for the respondent, in replying, did not challenge this latter statement and did not intimate in any way that there were any material facts in addition to those stipulated. He said the issues had been stated substantially correctly by counsel for the petitioner except that the respondent did not admit that the petitioner had received no benefit from the charge-offs. He recognized that the Board had theretofore decided a similar issue adversely to the respondent and he inquired whether, under the circumstances, a memorandum brief would be sufficient. He was told that it would be.
The stipulation of facts is hereby adopted as the findings of fact. The debts recovered in 1938 were a part of larger amounts charged off in the four years immediately preceding and in 1931. The following table shows for those five years the net loss sustained by the petitioner in each year, the amount of bad debts charged off and allowed as a deduction in each year, the total subsequent recoveries on those debts up to 1938, and the recoveries during 1938:
[[Image here]]
The recoveries made in 1938 were reported by the petitioner as nontaxable income on its return for that year.
The petitioner relies upon the decisions of the Board above referred to and claims that it has made out a prima facie case under those decisions which entitles it to judgment. The respondent, instead of filing a memorandum brief, filed an original brief of 23 pages and then filed a reply brief. His briefs for the most part are devoted to an argument that the regulations state the correct rule and the Board has been in error. This contention is rejected for reasons already stated in the cases cited.
The respondent also contends in his brief that the petitioner has failed in its proof, first, because the net loss for 1931 could have been carried over to offset gross income for 1932 under section 117 of the Revenue Acts of 1928 and 1932, and, second, because no proof has been [966]*966offered to negative the possibility that the petitioner claimed losses or other deductions in each of the years for which the bad debt deductions were claimed and to negative the further possibility that subsequently there were recoveries on those losses and deductions which, if related back to those years, might wipe out the net losses for those years. These contentions were advanced for the first time in the respondent’s brief. The petitioner contends in this connection that it was the intention of the parties to stipulate all of the material facts known to either party; the stipulation was prepared after counsel for the respondent had benefited from a full examination of the petitioner’s records; the petitioner is not called upon to prove all of these negatives, particularly under the circumstances of this case; if it is called upon to prove the negatives, then, in fairness to it, it ought to have a further opportunity to do so, since the facts are that there was no benefit from a carry-over of the 1931 loss and there were no recoveries of other items which would support the respondent’s contention.
The Board entered a memorandum opinion in this proceeding holding that the amount recovered in 1938 was all taxable income to the petitioner because of a failure of proof to show that the petitioner had not received tax benefits from the charge-offs in the prior years. The Board there said:
* * * If during- the years 1935-37, petitioner recovered and did not report as income amounts charged off and deducted for expenses, taxes or other items, the deduction of the bad debts charged off in 1934 may have resulted in direct tax benefit, so that the recovery in 1938 would be taxable.
A decision for the respondent was entered pursuant to the memorandum opinion.
Counsel for the petitioner then filed a motion to vacate the decision and for reconsideration, and, in the alternative, for a rehearing to permit the submission of additional evidence and, in the further alternative, for a reference of the report of the division to the full Board. It is stated in the motion that additional evidence is available to show that the petitioner sustained a net loss for 1932 of $10,133.03 without deducting any part of the net loss for 1931 and that it did not recover or fail to report as income for any of the years 1931 to 1931, inclusive, any amounts previously deducted for expenses, taxes, or other items. After the Member who had originally heard and decided the case had denied the motion in all other respects, the Chairman of the Board granted the motion in so far as it asked that the report be reviewed by the full Board. The Board, after reviewing that report, rejected it.
The petitioner has made a prima facie case in so far as the amounts recovered in 1938 were of debts charged off in the years 1934 to 1937, inclusive. Where, as here, the respondent had never intimated in [967]*967any way prior to the filing of his brief that recoveries had been made on other items previously deducted and had determined the deficiency on another ground, the petitioner was under no duty to negative the possibilities now referred to by the respondent. The notice of deficiency shows that the petitioner voluntarily reported the recoveries on the bad debts made in 1938, and there is no suggestion in the stipulation, in the determination of the Commissioner, in the statements of counsel, or in the respondent’s briefs, that recoveries were actually made of amounts previously deducted except in the case of the bad debts. Furthermore, it seems fair to assume in this case that the parties intended to stipulate and actually stipulated all of the facts bearing upon this question. The stipulation contains all of the facts required in the Board cases above cited. We may safely leave to another case the question of just how great a burden of proof the Commissioner could place upon the taxpayer. Suffice to say that here the taxpayer has sustained the burden that was fairly cast upon him. He had no reason to believe that his burden was any greater than that which he has sustained by the stipulation.
The net loss for 1931 could have been carried over and deducted from income of 1932 under section 117 (d) of the Revenue Act of 1932. The petitioner had the burden of proof to show whether or not and to what extent the net loss for 1931 offset income for 1932. The point should have been expressly covered in the stipulation. The stipulation makes no reference to it and, as a result, several alternatives are presented. Should it be held that the petitioner realized income of $300.88 in 1938 because it recovered that amount of the debts charged off in 1931 and there has been a failure of proof to show that the charge-off did not result in a tax benefit in 1932 ? The petitioner has run the risk of such a holding. Another alternative would be to give the petitioner an opportunity to prove the fact alleged in its motion for further hearing, that is, that there was a net loss of $10,133.03 for 1932 without deducting any part of the net loss for 1931. Or should judgment be given for the petitioner on the present record ?
The respondent has never contended and does not now contend that the net loss for 1931 actually offset any taxable income for 1932. The deficiency was not determined on that ground. Counsel for the petitioner knew that such a thing did not happen and may have been led to omit any reference to the point in the stipulation by the fact that the Commissioner never raised the point until after the stipulation was filed and the briefs were in. Although evidence was also available to the petitioner, nevertheless, the best evidence of whether or not the 1931 net loss actually was allowed as a deduction to offset income for 1932 is in the possession of the respondent. It would be an unnecessary safeguard to reopen this proceeding for further evi[968]*968dence on this point. If by any possibility the facts are contrary to the contention of the petitioner, the respondent may be counted upon to take proper steps to correct the record. In view of the special circumstances present in this case, we think the stipulation admits of the interpretation that the net loss for 1931 did not offset any taxable income for 1932. This should not be taken as a precedent in another case for omitting any relevant facts from a stipulation.
The respondent erred in including the $1,163.29 in the income of the petitioner for 1938.
Reviewed by the Board.
Decision will be entered wnder Rule 50.