[574]*574OPINION.
Phillips:
(1) The facts with respect to the first issue are found as pleaded in the petition and admitted in the answer, with some additional facts established by testimony. It appears that prior to the close of the taxable year petitioner had been notified that goods which it had sold for $50,226.44 and had shipped to customers would be returned. None of the goods were in fact returned prior to the dose of the taxable year. The petitioner’s officers estimated that the average gross profit on such goods was 21 or 22 per cent out of the sales price, that the market value was less than 80 per cent of the [575]*575cost, and that, with freight and handling charges added, there would be a loss of 50 per cent of the sales price and sought to charge this off as a deduction from gross income for the year. No such deduction is allowed by the law, but it is urged by counsel that the practical effect is to reduce gross sales by the amount which petitioner was notified would be returned and to include the goods in the inventory at their market value. Even so, the deduction sought included expenses for freight, handling and overhead which were neither paid nor incurred in the taxable year and which would be properly considered in computing income of the following year.
But we can not agree with the contention that because petitioner had been notified that certain goods would be returned it could treat those goods as its own, in the same manner as if they had been returned and their return accepted. The goods had been sold and title had passed from the petitioner. It was entitled to the purchase price and was not required to accept the return of the goods. Certainly until it agreed to accept their return, there had been no reduction in the amount of goods sold, no decrease in the amount which it was entitled to demand from the purchasers and no re-vesting of title to the goods sold so that it was justified in including such goods in its inventory as its property. Mere notice that the goods would be returned would have no effect on either the liability of the purchaser to pay or title to the goods. A different situation might result if the petitioner had agreed to accept the return of the goods and the necessary steps to revest title to the goods in it had been taken. As to this we express no opinion. Here there is no proof that petitioner agreed to accept the return of the goods or that such goods had again become the property of the petitioner. The substance of the situation is that at the close of the year the petitioner anticipated that it would be forced to accept the return of certain goods, from which it would suffer a loss. It estimated the anticipated loss and claimed a deduction of the estimated amount. The tax law provides for the deduction of losses when sustained and makes no provision for the deduction of such an anticipated loss. Any loss occurred at the time when the petitioner no longer had a legal right to recover the purchase price and in place of such right, was revested with the property. The action of the Commissioner with respect to this item is approved.
(2) Petitioner, m making out its income-tax returns, consistently followed the practice of taking inventory on the basis of cost or market value, whichever was lower, without regard to cash discounts, and deducting therefrom the average discount allowed by manufacturers for cash. It had followed this method consistently since 1914 and contends that great consideration should be given to the consist[576]*576ency of its practice. Section 203 of the Revenue Act of 1918 provides that inventories shall be taken on such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming to the best accounting practice in the trade or business.
Article 1583 of Regulations 45, relating to taxes under the Revenue Act of 1918, provides:
Cost means: (1) In the case of merchandise purchased, the invoice price less trade or other discounts, except strictly cash discounts, approximating a fair interest rate, which may be deducted or not at the option of the taxpayer, provided a consistent course is followed. (Italics ours.)
The effect of the petitioner’s method of inventory is to take the cash discount as a deduction in the year in which the goods are sold. The adjustment made by the respondent allows the deduction in the year in which the payment is made. From a purely legalistic point of view it might be pertinent to determine whether such a cash discount is income arising from the use of money or is a reduction in the cost of the goods purchased. It seems to us, however, unnecessary to delve into such a refinement. Under either computation there is no double deduction and over a period of years the effect of either basis on net income wrould be the same. The regulations promulgated by the Commissioner pursuant to statutory authority permit either basis, if consistently followed. In the Appeal of Thomas Shoe Co., 1 B. T. A. 124, the Board pointed out the desirable features of a consistent basis for inventories. It appears that the petitioner has followed this basis since its organization and we are, therefore, of the opinion that the Commissioner erred in this adjustment.
(3) During the taxable year the petitioner paid $15,000 for the cancellation of a lease which it had previously executed upon property which it owned, which lease still had several years before expiration. It claimed this amount as a deduction. The Commissioner held that the amount paid should be amortized over the period of the lease which remained unexpired at the time the cancellation took place and allowed $2,368.32 as a deduction. In this we believe the Commissioner erred.
We have no doubt that such an expenditure made for the purpose of securing possession of the property for use in the business is an ordinary and necessary expense, nor do we understand that respondent contends the contrary. Such expenses are to be deducted when paid or incurred. Here the expense was both paid and incurred in the taxable year. Unless the petitioner acquired a capital asset with a life extending beyond the taxable year (in which event the cost of the asset is to be exhausted over its life), the expenditure is deductible.
[577]*577The petitioner owned the fee of the building. It had given the lease and wished to terminate it. The cancellation of the lease did no more than give to the petitioner the possession of the property which it had leased. It created no greater title than it had previously owned. It created no new estate and no asset value which is exhaustible. This situation is to be distinguished from those where a fee is purchased subject to a lease and the lease subsequently purchased, or where payment is made to secure a lease of property owned by another. Here the payment served only to secure to petitioner what it previously had, namely, possession of its property.
(4) With respect to the adjustment made for insurance, it is our opinion that the action of the Commissioner was correct. The payment in advance of premiums for insurance results in the creation of an asset, since the policy has a surrender value. The asset value is exhausted ratably over the term for which the premium is paid. In the balance sheet such items are often carried as assets under such terms as prepaid insurance, or prepaid expense. It appears that such was the basis on which the petitioner kept its accounts.
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[574]*574OPINION.
Phillips:
(1) The facts with respect to the first issue are found as pleaded in the petition and admitted in the answer, with some additional facts established by testimony. It appears that prior to the close of the taxable year petitioner had been notified that goods which it had sold for $50,226.44 and had shipped to customers would be returned. None of the goods were in fact returned prior to the dose of the taxable year. The petitioner’s officers estimated that the average gross profit on such goods was 21 or 22 per cent out of the sales price, that the market value was less than 80 per cent of the [575]*575cost, and that, with freight and handling charges added, there would be a loss of 50 per cent of the sales price and sought to charge this off as a deduction from gross income for the year. No such deduction is allowed by the law, but it is urged by counsel that the practical effect is to reduce gross sales by the amount which petitioner was notified would be returned and to include the goods in the inventory at their market value. Even so, the deduction sought included expenses for freight, handling and overhead which were neither paid nor incurred in the taxable year and which would be properly considered in computing income of the following year.
But we can not agree with the contention that because petitioner had been notified that certain goods would be returned it could treat those goods as its own, in the same manner as if they had been returned and their return accepted. The goods had been sold and title had passed from the petitioner. It was entitled to the purchase price and was not required to accept the return of the goods. Certainly until it agreed to accept their return, there had been no reduction in the amount of goods sold, no decrease in the amount which it was entitled to demand from the purchasers and no re-vesting of title to the goods sold so that it was justified in including such goods in its inventory as its property. Mere notice that the goods would be returned would have no effect on either the liability of the purchaser to pay or title to the goods. A different situation might result if the petitioner had agreed to accept the return of the goods and the necessary steps to revest title to the goods in it had been taken. As to this we express no opinion. Here there is no proof that petitioner agreed to accept the return of the goods or that such goods had again become the property of the petitioner. The substance of the situation is that at the close of the year the petitioner anticipated that it would be forced to accept the return of certain goods, from which it would suffer a loss. It estimated the anticipated loss and claimed a deduction of the estimated amount. The tax law provides for the deduction of losses when sustained and makes no provision for the deduction of such an anticipated loss. Any loss occurred at the time when the petitioner no longer had a legal right to recover the purchase price and in place of such right, was revested with the property. The action of the Commissioner with respect to this item is approved.
(2) Petitioner, m making out its income-tax returns, consistently followed the practice of taking inventory on the basis of cost or market value, whichever was lower, without regard to cash discounts, and deducting therefrom the average discount allowed by manufacturers for cash. It had followed this method consistently since 1914 and contends that great consideration should be given to the consist[576]*576ency of its practice. Section 203 of the Revenue Act of 1918 provides that inventories shall be taken on such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming to the best accounting practice in the trade or business.
Article 1583 of Regulations 45, relating to taxes under the Revenue Act of 1918, provides:
Cost means: (1) In the case of merchandise purchased, the invoice price less trade or other discounts, except strictly cash discounts, approximating a fair interest rate, which may be deducted or not at the option of the taxpayer, provided a consistent course is followed. (Italics ours.)
The effect of the petitioner’s method of inventory is to take the cash discount as a deduction in the year in which the goods are sold. The adjustment made by the respondent allows the deduction in the year in which the payment is made. From a purely legalistic point of view it might be pertinent to determine whether such a cash discount is income arising from the use of money or is a reduction in the cost of the goods purchased. It seems to us, however, unnecessary to delve into such a refinement. Under either computation there is no double deduction and over a period of years the effect of either basis on net income wrould be the same. The regulations promulgated by the Commissioner pursuant to statutory authority permit either basis, if consistently followed. In the Appeal of Thomas Shoe Co., 1 B. T. A. 124, the Board pointed out the desirable features of a consistent basis for inventories. It appears that the petitioner has followed this basis since its organization and we are, therefore, of the opinion that the Commissioner erred in this adjustment.
(3) During the taxable year the petitioner paid $15,000 for the cancellation of a lease which it had previously executed upon property which it owned, which lease still had several years before expiration. It claimed this amount as a deduction. The Commissioner held that the amount paid should be amortized over the period of the lease which remained unexpired at the time the cancellation took place and allowed $2,368.32 as a deduction. In this we believe the Commissioner erred.
We have no doubt that such an expenditure made for the purpose of securing possession of the property for use in the business is an ordinary and necessary expense, nor do we understand that respondent contends the contrary. Such expenses are to be deducted when paid or incurred. Here the expense was both paid and incurred in the taxable year. Unless the petitioner acquired a capital asset with a life extending beyond the taxable year (in which event the cost of the asset is to be exhausted over its life), the expenditure is deductible.
[577]*577The petitioner owned the fee of the building. It had given the lease and wished to terminate it. The cancellation of the lease did no more than give to the petitioner the possession of the property which it had leased. It created no greater title than it had previously owned. It created no new estate and no asset value which is exhaustible. This situation is to be distinguished from those where a fee is purchased subject to a lease and the lease subsequently purchased, or where payment is made to secure a lease of property owned by another. Here the payment served only to secure to petitioner what it previously had, namely, possession of its property.
(4) With respect to the adjustment made for insurance, it is our opinion that the action of the Commissioner was correct. The payment in advance of premiums for insurance results in the creation of an asset, since the policy has a surrender value. The asset value is exhausted ratably over the term for which the premium is paid. In the balance sheet such items are often carried as assets under such terms as prepaid insurance, or prepaid expense. It appears that such was the basis on which the petitioner kept its accounts. The adjustment made by the Commissioner appears to be in accordance with the method of accounting employed by the petitioner and appears further to be such that petitioner’s net income is more nearly correctly reflected than on the basis used in the return. The adjustment made by the Commissioner with respect to this item is approved.
(5) Our sole information with respect to the interest deduction is that $165,867.96 was paid during the taxable year, that $175,195.95 was deducted on the return, and that the Commissioner disallowed $9,755.73 of this amount. It is the contention of the petitioner that $175,195.95 was paid during the taxable year, that the amount allowed by the Commissioner was the amount which accrued, that its accounts were kept in such a manner that it consistently deducted interest paid and not interest accrued. None of these allegations are supported by proof.
Interest accrues ratably over the period of the loan and where, as here, the books of the petitioner are kept on a basis other than cash received and disbursed, the law provides that interest is allowable as a deduction as it accrues. The petitioner can not be sustained in its contention that it may deduct interest as it pays it. The action of the Commissioner must be approved.
In passing, it may be noted that while the petitioner claimed that interest paid amounted to $175,195.95, and deducted this amount on its return, the only evidence submitted is that the interest paid was $165,867.96, which is approximately the amount allowed by the Commissioner. The difference between the amount claimed on the return and the testimony as to the amount paid is unexplained.
[578]*578(6) In its return the petitioner claimed deductions for a number of debts alleged to have been ascertained to be worthless and charged off within the taxable year. The Commissioner allowed some and disallowed others. The petitioner alleges error as to some 23 of those disallowed and issue was joined between the parties by the answer of the Commissioner denying that the amount of debt disallowed was ascertained to be worthless and charged off within the taxable year.
We are satisfied that such debts existed and that prior to the close of the taxable year the credit manager of the petitioner directed that they be charged off in whole or in part, as found in our findings of fact.
Whether the entry was made on the books of account on November 80, 1920, is not clear. It does appear that the entries were made in the usual course with the other closing entries as of November 30, 1920, and before the books were finally closed. These circumstances are, in our opinion, sufficient to meet the requirements of the statute with respect to the charge-off.
We come then to the principal question involved. The statute provides specifically for the deduction of “ debts ascertained to be worthless and charged off within the taxable year.” As previous decisions have pointed out, it is not worthlessness which controls, but ascertainment of worthlessness. Since a debt may become worthless in one year, but may be ascertained to be worthless in a different year, and since it seems certain that Congress had no intention that the deduction of the same debt should be twice allowed, it becomes incumbent upon the taxpayer whose claimed deduction is disallowed by the Commissioner, to establish that he did ascertain the debt to be worthless in the taxable year in which he claims it to be deductible.
The word “ ascertain ” is defined in Bouvier’s Law Dictionary as:
To make certain by examination; to find out. The word ascertain is held to have two meanings; (1) known; (2) made certain.
Substantially the same definition is given in Webster’s New International Dictionary. The word “ worthless ” is defined in the latter work as;
Destitute of worth; having no value; valueless; useless.
The burden then is upon the petitioner to establish that it did make certain during the taxable year that the debts claimed as deductions were without value. We take it for granted that when Congress authorizes this Board to decide the issues arising between a taxpayer and the Commissioner in such a case as this, such taxpayer has not established the correctness of his contention by his bald statement that he believed it to be worthless, or that he ascertained [579]*579it .to be worthless or that, on undisclosed information he came to the conclusion that it was worthless. To so hold would be to put the Government in the hands of the taxpayer and substitute his judgment as to the conclusion to be drawn from the facts for that of the body created to decide the issue.
Nor is it a question whether the taxpayer believed the debt to be worthless. To so hold would be to grant an undue advantage to the pessimist or to the taxpayer who made no investigation. In our opinion the burden upon the petitioner is to show what steps he took to collect the debt, what information came to his knowledge and what other circumstances existed which led him to his conclusion. It then becomes the duty of the Board to determine whether the debt was in fact ascertained to be worthless within the meaning of the law. Appeal of Alemite Die Casting & Manufacturing Co.,1 B. T. A. 548.
Aside from the testimony as to general financial conditions in the latter part of 1920, the sole testimony in the instant case with respect to the ascertainment of worthlessness is that of the credit manager of the petitioner. As to most of such debts, he testified that he believed them to be bad and that petitioner was justified in charging them off. As to some of them he testified that he acted on the basis of credit reports, but could not either produce such reports or state what facts they disclosed. When asked the basis on which he directed debts charged off, he testified:
It was our policy to write off immediately what we would consider to be a loss, but it was always merely an estimate.
It was always our policy not to carry on our books any assets we did not think were worth the amount that they were carried at.
While the Revenue Act of 1921 and subsequent Acts allow part of a bad debt to be charged off and permit reserves to be set up for bad debts, the Board has held that this was not true under the Revenue Act of 1918 and prior Acts. Appeal of Steele Cotton Mill Co., 1 B. T. A. 299. However advisable it may be from a business standpoint to charge off portions of debts regarded as collectible only in part, or to set up a reserve for the amount estimated to be uncollecti-ble, Congress permitted the deduction under the 1918 Act only when the debt was ascertained to be worthless; not when it was of doubtful value, but when it was of no value.
The petitioner has shown the deplorable conditions in which business found itself in the latter part of 1920 in the States in which petitioner sold its goods. In such circumstances as are shown to have existed, it may be conceded that less specific information with reference to the financial condition of each of its debtors might be required in determining worthlessness than might seem necessary under normal conditions. In the light of these general principles [580]*580we consider that the following debts were ascertained to be worthless in the taxable year:
Bames & Hambuck Co_$7, 578.82
W. A. Nash & Co_ 12, 339.97
E. F. Grissom_ 971.42
Sanders, Endsley Co- 4,144 15
T. C. Owens_ 2,268.96
Economy Store_$2,353.12
A. J. Pass_ 420.82
C. E. Gray_ 2,254.59
Yarborough Co., Inc- 200. 00
In the case of Hancock & Co. the report was that the company was insolvent. This means no more than that the account was probably uncollectible in part. Even an insolvent debtor may pay a substantial part of his indebtedness, as was done here.
The payments on account by Key & Co. on October 28, November 30, and December 15, all negative the conclusion that this account was worthless as does the shipment of goods on November 27, although small in amount. With no further testimony as to the information in the possession of the petitioner regarding this indebtedness, the deduction can not be allowed.
It does not appear what information, if any, petitioner had which justified it in charging off the account of Matthews & Searles. Events within the next month developed that the information was not accurate if it reported the account as uncollectible. The deduction claimed can not be allowed on the record as made before us.
Likewise we have no basis for determining whether the petitioner did in fact ascertain the account of Anderson, ITays & Gray to be worthless on November 30, 1920. A substantial payment was received on that day and without some showing of further facts, the charge-off has not been justified. Furthermore, there was thereafter a credit sale, small in amount it is true, but one does not ordinarily sell goods to another on credit if it is certain that payment never will be received. A subsequent sale on credit is consistent with the thought that collection may be doubtful but surely in the business world in the absence of some unusual situation, can not be consistent with the statement that collection never will be made.
The observations which we have made in the two preceding paragraphs apply with equal force to the account of Pecos Dry Goods Co.
The deduction claimed on the account of James & Reighard must be disallowed for lack of evidence. The same is true of the accounts of Cunningham, Westbrook Co., McDavid Brothers, Wagoner & Co.. J. H. Thompson, and M. Vasquez.
The Board has held that where the debtor is in bankruptcy, and it is apparent that the amount ultimately recovered will be comparatively small, the creditor is justified in charging off the debt, without waiting until the affairs of the bankrupt are settled. Appeals of Egan & Hausman Co., Inc., 1 B. T. A. 556, and Pacific Pipe & [581]*581Supply Co., 2 B. T. A. 870. While there is no testimony directly to the point, it would appear from the amounts charged off and from subsequent collections where partial write-offs were made, that the petitioner had fairly accurate information as to the condition of the bankrupt estates. We believe' the evidence sufficient to allow the deduction of the amounts written off the accounts of the bankrupt debtors, except in the cases of Strong & Strong, and W. C. Powell & Son, where the amounts not charged off were substantial, indicating that petitioner expected to receive substantial dividends.
It appears that as to some of the debts a portion only was charged off. While this may have a bearing upon the question whether there had been an ascertainment of worthlessness, it has been held that where there was such ascertainment, but only a partial charge-off, the amount charged off may be allowed as a deduction without doing violence to the statute. Appeal of Mason Machine Works Co., 3 B. T. A. 745. W4 follow the principle laid down in that decision. It is further to be noted that the petitioner claims only the amounts charged off in the taxable year.
There remains the amount credited to Gardner & Coggins in 1920 for goods shipped to them in 1918, which they claimed never to have received. So far as the evidence before us is concerned, no more reason existed for claiming the item as a deduction in 1920, than existed in 1918 or 1919. So far as we are informed, nothing happened in 1920 except a credit on the books and no reason has been shown why the amount should be allowed either as a debt ascertained to be worthless or a loss sustained in the year before us.
To summarize, we are of the opinion that the proof is insufficient to establish that the following debts were ascertained to be worthless :
Hancock & Co_$10, 019. 53
Key & Co___ 7, 350.26
Matthews & Searls- 7, 444. 26
Anderson, Hay & Gray- 8, 809.84
Pecos Dry Goods Co_ 13, 990. 80
James & Beighard_ 2,582.95
Cunningham, Westbrook Co_ 13,057.91
McDavid Bros_ $5,859.59
Wagoner & Co_ 414. 05
J. H. Thompson_ 897.04
M. Vasquez_ 439.69
Strong & Strong- 1, 556. 76
W. C. Powell & Sons_ 3,183.00
Gardner & Coggins- 269.44
(7) Petitioner' claims that it falls within section 327 of the Revenue ’Act of 1918 and is entitled to have its tax computed by a comparison with the tax paid by representative concerns, as provided in section 328. Its argument is based primarily upon the amount of borrowed money used. It appears that during the year its invested capital was $2,656,613.61 and its average borrowed capital $2,189,-025.25; in other words, 40 per' cent of its operating capital was borrowed. In many businesses this would not be regarded as unusual [582]*582or abnormal and in the absence of any evidence that it is abnormal in the wholesale dry goods business, there is nothing on which we may base an opinion as to normality or abnormality.
(8) A revenue agent who audited the return of the petitioner for the taxable year and examined its books, increased the net income by $6,260 as automobile expense disallowed. In the deficiency notice it was conceded that this adjustment was erroneous. At the hearing the answer of the respondent was amended to allege that net income as determined by the Commissioner should be increased by this item of $6,260. As to such issue, the burden of proof is upon the respondent. It was the contention of his counsel that three new automobile trucks were purchased during the taxable year, that two were traded in exchange and that the net amount paid was deducted in computing the net income. The evidence is most indefinite and unsatisfactory ; so much so that we have not felt warranted in making any findings of fact upon this issue. Should it be that the evidence is sufficient to show the purchase of such trucks, there is nothing from which we may know whether the amount was deducted in computing the net taxable income shown on the petitioner’s return. To add this item to net taxable income may be to restore an item which was not allowed as a deduction. In view of the action of the office of the Commissioner in reversing the action taken by the revenue agent, without stating the ground therefor, we should hesitate to again add this amount to net income without the clearest evidence that such action is proper and will not result in a duplication of the same item. The Commissioner has failed to show that such addition to net income should be made.
Reviewed by the Board.
Decision will he entered on %0 days’ notice, under Rule 50.