loss for the fiscal year ended March 31, 1944, and, of course, the next fiscal year had not yet ended. The parties have now stipulated facts from which the deduction sought can be computed. The respondent argues, however, that no deduction may be allowed because this petitioner was "substantially liquidated and marking time" during 1944 and 1945 and "was no more the taxpayer it was in previous years, in substance and in fact, than if it had legally changed its existence." He says that Congress intended this deduction only where the same taxpayer was continuing to carry on substantially the same business in the loss years that it had carried on in the taxable year. He cites no authority to show that this petitioner is not entitled to whatever deduction the stipulated facts will show. The words of the statute are general in their application and something would have to be read into them which is not there to limit them so that they would not apply in this case.

The parties are to agree upon the effect of any change in California franchise tax liability. The petitioner raises other issues only in the alternative to an unfavorable decision on the first point decided herein. They need not be considered, since the main issue has been decided for the petitioner.

Decision will be entered under Rule 50.

DORA H. MOITORET, PETITIONER, v. COMMISSIONER OF INTERNAL
REVENUE, RESPONDENT.

Docket No. 9984. Promulgated August 26, 1946.

Petitioner received alimony from her former husband for her own care and support as well as for the care and support of their minor children. Held, the amount received is includible in the petitioner's gross income. Sec. 22 (k), Internal Revenue Code. Dora H. Moitoret pro se.

Bryant R. Burton, Esq., for the respondent.

This proceeding involves a deficiency in income tax for the calendar year 1943 in the amount of $640.79. The respondent concedes that petitioner is entitled to a credit of $116.44 against the deficiency asserted.

The sole question is whether the respondent erred in including in petitioner's taxable income certain alimony payments received by her in the taxable year.

FINDINGS OF FACT.

The petitioner is an individual, residing at Seattle, Washington. She filed her income tax return for 1943 with the collector of internal revenue for the district of Washington.

In 1939 the petitioner and her then husband, Anthony F. Moitoret, entered into a property settlement agreement in contemplation of separate maintenance. The couple were the parents of four children, all of whom were minors at that time. The separation agreement, among other things, provided that the petitioner should be paid by her husband "for her care and support and the care and support of said minor children, the sum of $250.00 each month, payable on the first day of each month, commencing July 1, 1939." Thereafter, Anthony F. Moitoret filed suit for divorce and on October 24, 1941, an interlocutory decree of divorce was entered by the Superior Court of the State of Washington for King County. In addition to awarding the petitioner the sole care, custody, and control of the then minor children, the interlocutory decree provided:

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the property settlement agreement heretofore entered into by and between the plaintiff and defendant be and the same is hereby confirmed in so far as the same has disposed of the community property of the plaintiff and defendant; and that further the same is hereby confirmed in so far as it pertains to the support and maintenance of the defendant and minor children, subject however to the right of either party hereto to make application for modification.

A final decree of divorce was entered by the same court on April 27, 1942.

Pursuant to the terms of the separation agreement, approved in the court's decree, the petitioner received $250 per month during 1943. The payments continued until November 18, 1945, at which date the youngest child attained majority and the payments were stopped as a result of a stipulation between the petitioner and her former husband which was approved by the court.

The petitioner filed an income tax return for 1942 in which she reported the alimony she had received as income. In 1943 the petitioner received as alimony the sum of $3,000, none of which was included in her gross income on her tax return for that year.

The respondent included the sum of $3,000 in petitioner's gross income. Other minor adjustments made by the respondent are not contested.

OPINION.

ARUNDELL, Judge: Although the separation agreement and the decree of the court refer to the alimony payments here in question as being for her own care and support as well as that of the minor children, the petitioner contends that she had not wanted any of the money; that she has not used any part of it for herself, and that it was paid over to her solely for the care and support of the children.

The respondent, relying upon his regulations, takes the view that where the payments are received by the wife for the support of herself and the minor children without a specific designation of the portion allocable to the support of the children, the entire amount is taxable to the wife under the terms of the statute, irrespective of how the money was actually used or expended.

We think the respondent's determination must be sustained. Section 22 (k), Internal Revenue Code 2 (added by section 120 (a) of the Revenue Act of 1942) taxes alimony payments to the wife except where the decree or other written instrument has fixed, in terms of an amount of money or a portion of a payment, a sum which is payable for the support of the minor children of the husband. In such case the amount so fixed is not included as income of the wife but is taxed to the husband. See Robert W. Budd, 7 T. C. 413. Here the alimony in question was payable to the petitioner for her own care and support and for the care and support of the minor children. Hence, it may not be said that the decree or written instrument fixed an amount payable by the husband for the support and care only of his minor children.

It is true that when the separation agreement was entered into by the parties the law taxed the alimony payments to the husband. It is to be noted, however, that the interlocutory decree of the court approving the arrangement set out in the separation agreement expressly provided that either party should have the right to make application for modification. Thus, the way was open through which the petitioner

(d) PAYMENTS for Support OF MINOR CHILDREN.-Section 22 (k) does not apply to that part of any periodic payment which, by the terms of the decree or the written instrument under section 22 (k), is specifically designated as a-sum payable for the support of minor children of the husband. The statute prescribes the treatment in cases where an amount

or portion is so fixed but the amount of any periodic payment is less than the amount of the periodic payment specified to be made. In such cases, to the extent of the amount which would be payable for the support of such children out of the originally specified periodic payment, such periodic payment is considered a payment for such support.

2 SEC. 22. GROSS INCOME.

(k) ALIMONY, ETC., INCOME.-In the case of a wife who is divorced or legally separated from her husband under a decree of divorce or of separate maintenance, periodic payments (whether or not made at regular intervals) received subsequent to such decree in discharge of, or attributable to property transferred (in trust or otherwise) in discharge of, a legal obligation which, because of the marital or family relationship, is imposed upon or incurred by such husband under such decree or under a written instrument incident to such divorce or separation shall be includible in the gross income of such wife, and such amounts received as are attributable to property so transferred shall not be includible in the gross income of such husband. This subsection shall not apply to that part of any such periodic payment which the terms of the decree or written instrument fix, in terms of an amount of money or a portion of the payment, as a sum which is payable for the support of minor children of such husband:

might have endeavored to have the decree changed if it did not embody the intentions of the parties, or by which she might have sought other adjustments to take care of the situation occasioned by the change in the law. The determination of the respondent is sustained.

Decision will be entered under Rule 50.

THE HECHT COMPANY, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 2599. Promulgated August 26, 1946.

Petitioner, having established its eligibility, elected under section 736 (a) of the Internal Revenue Code to compute, for excess profits tax purposes, its income from installment sales on the accrual basis in lieu of the installment basis provided by section 44 (a). During the taxable year ended January 31, 1941, certain installment accounts receivable arising out of sales made prior to February 1, 1940, became worthless and were charged off. In addition petitioner incurred collection expenses during the taxable year in connection with collections of installments arising out of pre-1940 sales. Held, respondent's regulation, in so far as it denies to installment basis taxpayers electing under section 736 (a) any deductions (including deductions for bad debts) on account of pre-1940 sales, is invalid; held, further, petitioner is entitled to a bad debt deduction in the amount of its unrecovered cost of goods represented in the pre-1940 installment accounts receivable charged off in the taxable year, Mackin Corporation, 7 T. C. 648; and petitioner is also entitled to deduct the collection expenses incurred during the taxable year in connection with installment accounts receivable arising out of pre-1940 sales.

1. Herman Sher, Esq., and R. A. Bartlett, Esq., for the petitioner. Paul E. Waring, Esq., for the respondent.

This proceeding involves petitioner's excess profits tax liability for the fiscal year ended January 31, 1941. Respondent originally determined a deficiency in the amount of $109,611.71. By amended answer he asked an additional deficiency in the amount of $163,162.33. All the issues raised with respect to the original deficiency have been settled by stipulation of the parties, and effect will be given thereto in a recomputation under Rule 50. The issues remaining for decision are whether, in the computation of excess profits net income under the provisions of section 736 (a) of the Internal Revenue Code, deductions should be allowed the petitioner for (1) bad debts of $55,392.45 on uncollectible installment accounts receivable arising from installment sales made prior to February 1, 1940, and (2) the amount of $33,211.22 representing moneys expended in collecting installment accounts receivable arising from installment sales made prior to February 1, 1940.

Substantially all the facts have been stipulated and are accordingly adopted. Only those material to an understanding of the issues will be set out in our findings.

FINDINGS OF FACT.

Petitioner is a Maryland corporation. It operates on the basis of a fiscal year ending January 31. For the year ended January 31, 1941, its income and excess profits tax returns were filed with the collector of internal revenue at Baltimore. Said returns were prepared with income from installment sales computed upon the installment basis of accounting in accordance with the provisions of section 44 (a) of the Internal Revenue Code.

At the close of its fiscal year ended January 31, 1943, petitioner became eligible to report its income from installment sales under section 736 (a) of the code, since its average outstanding installment accounts' receivable at the end of the four preceding years was more than 125 per cent of the amount of such accounts receivable at the end of that year. On June 12, 1943, it accordingly filed an amended excess profits tax return for the year ended January 31, 1941, electing therein to compute income from installment sales under section 736 (a). In the amended return petitioner increased its excess profits net income by the amount of unrealized profits, $193,310.18, which had been deferred in the original return computed on the installment basis. A statement attached to its amended return explained the computation as follows:

Excess Profits Net Income computed under income credit method,

as per items 13 and 20, page 1 of Form 1121 as originally filed-- $1, 768, 292. 00 Add Unrealized Profits on Installment Sales for year ended Janu

ary 31, 1941, which had been deferred when filing the original return. This addition is to place year on accrual basis in accordance with Sec. 736 (a):

Unrealized Profits End of Year_

Less Unrealized Profits Beginning of Year_

Additional Profits on Sales during Year which was deferred when filing the original return___

$1,379, 867. 46

1, 186, 557. 28

Excess Profits Net Income, as amended for year ended January

31, 1941, after giving effect to Sec. 736 (a).

Entered as Item 20, Page 1 of amended return.

1, 961, 602. 18

Petitioner's total gross sales during the taxable year on the accrual basis amounted to $32,889,490.91. After adjustments for unrealized profits on installment sales, in the net amount of $193,310.18, and for sales returns of $3,885,559.03, petitioner's net sales on the installment basis amounted to $28,810,621.70, which figure was reported in its

income tax return.