Appeal of Quadriga Manufacturing Co.

*1121OPINION.

We are unable to find any error in the Commissioner’s disallowance of the alleged bad debts upon the evidence submitted.

In the year 1919 the taxpayer claimed to have owned all of the assets of the Chicago Laundry Machinery Co., having a value of $17,839.16, which were offset by an account receivable amounting to $22,884.29. The fact that at the close of the year 1920 there were assets of $23,128.51, which reduced the liability of $27,726.18, suggests the conclusion that, after the 1919 charge-off, the taxpayer reconstructed on its books for 1920 both the 1919 assets and liabilities of the Chicago Laundry Machinery Co. and carried the same over into 1920, with a resulting increase in totals due to additional work which the taxpayer performed in connection with the parts for laundry machinery. The same conclusion would pertain to the year 1921.

If the foregoing is a statement of the true condition, then the taxpayer was not entitled to the deductions for bad debts as taken upon its returns. The evidence submitted supports no other conclusion, and accordingly the determination of the Commissioner in disallowing the bad debts deduction from income is approved.

*1122However, it appears that there are errors in the computation of the 1920 deficiency as disclosed by the deficiency letter. The Commissioner determined the taxpayer’s net income, for the purpose of arriving at the deficiency, by deducting from the book surplus at the end of the year the book surplus at the beginning of the year, and by adding to the result the various amounts disallowed as deductions from income. That procedure was followed in both 1919 and 1920. In using the surplus figure as of the beginning of 1920, the Commissioner erroneously applied the surplus at the end of 1919 as shown by the taxpayer’s books without increasing that amount to the extent of the deductions properly disallowed as against income of 1919. It therefore appears that the January 1, 1920, surplus should be increased by the amount of the $5,000 bad debt deduction disallowed for 1919 and by the $1,581.60 losses on Liberty bonds, if the latter deduction evidenced an attempt to deduct an unrealized loss due to mere diminution in market value as distinguished from loss actually realized upon a sale. If it was an actual loss sustained by sale, the taxpayer would be entitled to the deduction of $1,584.60 from its 1919 income. The necessary adjustments should be made as to those items, in order to ascertain the net income and invested capital and as the basis for the determination of the proper deficiencies.