which he sold them, and his opinion of the price at which the machine, so repaired, could be sold by him.

Bulk invoices were rendered on these lots.

Toward the end of 1941 petitioner had applied to his bank for a substantial loan, which was vital to his business, under conditions which will be more clearly apparent in our discussion of the second issue herein. He was requested by the bank to furnish a statement of his inventory and accounts receivable for consideration by the bank in connection with his application for the loan. Petitioner prepared a complete physical inventory as of December 31, 1941, using as the value of the machines on hand his estimated selling price less the cost of the necessary repairs. The total inventory, so computed, was $98,613.83.

In the preparation of the closing inventory for his income tax return for 1941 petitioner used the same list of machines which he had so recently prepared for use in compiling the statement for the bank. Since the inventory figure required for his income tax return was cost, he entered in another column on the same work sheets the cost of each machine listed thereon. This figure he determined for himself by allocating to each machine that portion of the bulk cost which he had attributed to that machine when he computed the price at which he bought the lot of which that machine was a part, but it did not in every case correspond to the comparable allocation made by Regal on its records. The total cost, so calculated, of the inventory, including parts, was $75,460.37. This amount was used in petitioner's income tax return for 1941 as his closing inventory figure, and properly so. In closing the books for 1941, however, the accountant in charge entered a closing inventory figure of $98,613.83. The same accountant prepared petitioner's income tax return for 1942 early in 1943 and entered thereon an opening inventory figure of $98,613.83. Later in 1943 petitioner employed a new accountant, who first discovered the discrepancy between the closing inventory item on the 1941 income tax return of $75,460.37 and the 1941 closing and 1942 opening inventory figures on the books of $98,613.83. He called petitioner's attention to the error, and a correcting item was entered in the books adjusting the 1941 closing and 1942 opening inventory items to $75,460.37, the actual cost figure which had been properly used in the 1941 tax return. The fact that the 1942 income tax return carried the $98,613.83 as the opening inventory figure was then discovered, and an amended return for 1942 was prepared and filed and additional tax paid. With that, petitioner's records were consistent, and his books and income tax returns for the entire period carried $75,460.37 as the

amount of inventory for the end of 1941 and the opening of 1942. The closing inventory for 1941, based on cost, was the amount of $75,460.37.

In July 1940 Hilario Moreno, a resident of Mexico City, Mexico, visited petitioner's place of business in New York, with some associates, for the purpose of arranging to buy broken typewriters which he could repair and sell in Mexico. Arrangements were completed whereby petitioner was to ship the machines to a point outside of Mexico City, where an associate of Moreno's was to do the repair work. Remittances were to be made of at least $500 per month. In October of that year Moreno called on petitioner again and explained that his associate had proved to be dishonest, having sold some of the typewriters without making provision for paying for them. Moreno wished to modify the agreement to the extent of having future shipments made to himself in Mexico City at his own place of business. He paid petitioner $3,000 in cash at that time and executed a series of promissory notes, the sum of which was equal to the price at which the machines were sold to Moreno. The notes became due at times in the future, when, it was thought, the proceeds of the sales made by Moreno would be sufficient to pay the notes. Additional series of notes were executed and delivered by Moreno in December 1940 and May 1941, when further shipments were made. It was petitioner's practice to attach a draft to one of the notes and present it for payment through a bank in Mexico City. Petitioner put the notes up as collateral for his loan from the bank, and also assigned the Moreno account to the Regal Typewriter Co., his principal creditor. The last shipment of typewriters to Moreno under this arrangement was made in November 1941. At that time Moreno owed him a total of $36,033.81, which has not been paid.

In March of 1941, when Moreno owed approximately $20,000, petitioner went to Mexico City personally for the purpose of satisfying himself of the soundness of the account. He inspected Moreno's place of business and saw the typewriters in process of repair, and he was shown a number of invoices indicating that Moreno was conducting the business profitably. Petitioner's uneasiness over the size of the account was allayed, and he accepted Moreno's explanation that the delays which had occurred in the collection of the notes and drafts had been the fault of inefficiency in the bank which presented them for payment. Petitioner returned to New York convinced of the soundness of the arrangement. Moreno continued to make payments, after increasing periods of delay. Subsequent to this trip, petitioner's bank which held the Moreno notes as collateral complained to petitioner about them and asked petitioner to substitute other security. The Regal Typewriter Co., to whom petitioner had assigned the

account along with others, also advised petitioner that they were dissatisfied with the condition of the account. Petitioner protested that he was convinced, as a result of his personal inspection, that the account and notes were good. Regal, however, had secured a credit report on Moreno which convinced them that Moreno was morally and financially irresponsible, and they indicated their continued dissatisfaction. Since petitioner had guaranteed the accounts assigned to Regal, he was under an obligation to pay up the entire account, which amounted to around $36,000 at that time, if it became uncollectible. Petitioner therefore made another trip to Mexico City in the latter part of 1941. On his arrival he found Moreno's shop almost entirely empty except for a few broken parts. Moreno insisted he had sold the typewriters but had been unable to collect for them. At petitioner's insistence Moreno took him to confer with his alleged debtors, who informed petitioner that their accounts had been paid in full to Moreno. Petitioner went to the bank and found Moreno had never had a bank account. He then consulted the American Consul in Mexico City to see if there were any recourse or protection to which he could resort through those channels, but he was advised that they could only suggest legal action. Petitioner therefore consulted two attorneys, only one of whom could speak English. This attorney, whom petitioner consulted at length, advised him that he would charge a fee of $1,000, and that the law required the posting of a bond in double the amount of the claim, to be forfeited if the case could not be wholly proved. After a long conference, the attorney advised him that, due to Moreno's financial irresponsibility, the likelihood of petitioner's realizing anything if he were successful in securing judgment was so slight as not to justify the expense of legal action, and he advised against it. Petitioner returned home, secured a loan from his bank with which to discharge his obligations to Regal, and, at the end of 1941 charged off, as a bad debt, the entire balance of the Moreno account, none of which has ever been paid.

Early in 1942, while he was engaged in an effort to straighten out his difficulties, petitioner paid out of his own funds two of Moreno's notes in order to avoid the necessity of immediately paying up his loan to the bank which held the notes as collateral. Petitioner has never been reimbursed for the total amount so paid by him. These notes having been charged off as bad debts in the prior years, payment thereof was reflected in petitioner's books as "Bad debts realized" although they had in fact been paid by petitioner himself.

In September of 1941, before petitioner's second trip to Mexico, Moreno ordered some specially built Spanish-language typewriters. Petitioner ordered the machines before he learned of Moreno's worthlessness. Afterward, early in 1942, they were delivered. Since they

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were special machines, and could not be readily disposed of elsewhere, petitioner notified Moreno that he had the machines, but that he would only ship them c. o. d. and after transportation costs were prepaid by Moreno. Moreno made counter proposals, involving the extension of some credit, but these were flatly refused by petitioner. Moreno then agreed to pay cash upon delivery, and to prepay transportation costs, and petitioner therefore received payment for these typewriters when they were delivered to Moreno.

In March of 1942 Moreno and his brother came to New York and called on petitioner and advised him that they had come to New York for the purpose of selling an invention which the Fairchild Aviation Co. seemed interested in buying. Moreno told petitioner if they succeeded in selling the invention he would pay his debt to petitioner. In April Moreno's brother called on petitioner and stated that they had the invention practically sold, but that they were without sufficient funds to pay their living expenses in New York long enough to close the deal. He proposed that petitioner lend him $200 for that purpose. Petitioner agreed to do so, in the hope that he might recover his losses, and continued for several weeks thereafter to lend small sums from time to time, relying on Moreno's brother rather than Moreno himself. However, he later discovered that Moreno and his brother had assigned their interests in the invention before they left Mexico. Petitioner was never reimbursed for these loans.

The Moreno account represented debts which became worthless during 1941.

From 1938 to 1941 petitioner used the reserve method of accounting for bad debts, with the approval of the respondent. His practice had been to maintain a reserve equal to 10 percent of his outstanding accounts and notes receivable. At the beginning of 1941 this reserve was in the amount of $27,501.83. At the end of 1941 the reserve was in the amount of $22,068.53. The accounts and notes receivable, exclusive of the Moreno account, amounted to $285,490.49. When petitioner charged off the Moreno account as of the end of 1941, he charged the amount of $36,033.81 representing this account against the reserve for bad debts in the amount of $22,068.53, which resulted in a deficit in the reserve of $13,965.28. In order that this reserve should equal 10 percent of the outstanding accounts and notes receivable, or $28,549.05, he made an addition to the reserve of $42,514.33, which is the amount he deducted on his return as "bad debts." The respondent having determined that the Moreno account was not properly charged off in the taxable year, restored it to petitioner's accounts and notes receivable, which brought their total to $321,524.30. Since no charge against petitioner's reserve was recognized by respondent because of the Moreno account, this reserve, according to respondent's computa

tions, required only an addition of $10,083.91 to increase it from $22,068.53 to $32,152.44, which latter amount was 10 percent of what respondent considered to be the total of petitioner's accounts and notes receivable as of the end of 1941. Accordingly respondent disallowed $32,430.43 out of the $42,514.33 which was deducted by petitioner as "bad debts" and represented the addition to his reserve for bad debts. Issues originally raised with respect to the tax years 1938 and 1939 have been removed from the area of dispute by petitioner's concession on brief that the respondent's position in regard thereto is correct and his consent that decision be entered for respondent for those years.

. OPINION.

KERN, Judge: The two issues remaining before us, both affecting the tax year 1941, are, first, whether respondent erred in determining petitioner's closing inventory, including parts, for 1941 to be $100,113.83; and, second, whether respondent erred in disallowing $32,430.43 of the $42,514.33 added by petitioner in 1941 to his bad debt reserve and claimed in his return as a deduction for bad debts.

The first issue is entirely factual, and we have made a finding that the petitioner's correct closing inventory figure for 1941 was $75,460.37. We are convinced from the evidence that this figure represents cost to petitioner of the items included therein, and the circumstances which led respondent to adopt the higher figure have been reasonably and adequately explained. We therefore conclude that respondent erred in his determination on that issue.

The legal aspects of the question concerning the disallowance of the deduction claimed by petitioner for loss growing out of the Moreno transaction are less easily resolved, though the facts which are in the record are substantially undisputed.

The agreements with Moreno were made in 1940, and shipments were made periodically thereafter until November of 1941, resulting in the balance due petitioner. In March of 1941, the tax year involved here, although the amount due was by then substantial, petitioner assured himself, after investigation, that the business was being conducted in a profitable manner. At that time a substantial part of the typewriters previously shipped were still on hand in Moreno's shop, and those which had been sold were sold at a profit. In November of the same year, after he had become worried by the attitude of his creditors toward the Moreno account, petitioner made a second trip to Mexico. It was then that he discovered all the salable machines had been sold, and Moreno had no money, no assets, and no credit with which to pay him. Though petitioner did not sue, he did secure legal advice in anticipation of resorting to that remedy. This advice convinced him that legal action would be fruitless and expensive. The