amount then owing by Moreno was $36,033.81, none of which has ever been received. Petitioner charged off the entire account on his books as a bad debt. Being on the reserve system, he charged the amount of this account against his reserve for bad debts, and, at the end of the year, made additions to this reserve.

Petitioner, having deducted this item as indicated above, now contends that the transaction was a consignment. Respondent takes the position that petitioner has not established any loss or bad debt arising out of the Moreno account; it is his view that the amount due petitioner, about which there is no dispute, is a debt, but he does not believe it became worthless during the tax year.

It is admitted that the transactions were treated on petitioner's books as completed sales, and that the balance due was charged off as a bad debt and charged against petitioner's reserve for bad debts. No agreement between petitioner and Moreno was ever reduced to writing. Petitioner referred to the agreement as a consignment in his testimony, but we are of the opinion that he used the term to describe transactions that were essentially completed sales, with provision for deferred payment of the purchase price. The fact that they were recorded as completed sales in petitioner's books and that promissory notes were executed by Moreno and delivered to petitioner on each occasion when new shipments were made indicates that both parties to the agreement considered the sales to be complete at the time. It is doubtful if petitioner would have placed merchandise of such value in Moreno's possession without some written agreement evidencing the retention of title in him if he had intended to retain such title, and it seems doubtful also that Moreno would have been willing to execute promissory notes in regular form if he had not regarded himself as presently indebted to petitioner. Petitioner's reference to his arrangement with the Regal Typewriter Co. as consignment transactions when he quoted the price at which he would buy the machines, and when he was eventually billed for all the machines so purchased regardless of whether they were sold, indicates a conception of the term "consignment" different from the legal import of the term. Considering all the evidence, we are of the opinion that the sales were completed sales, giving rise to a debt.

We are also of the opinion that the debt became worthless during the tax year.

The institution of litigation where such action is not justified by any hope of collection is not a prerequisite to the allowance of a deduction of a debt for worthlessness. This is recognized both by respondent's own regulations (Regulation 111, sec. 29.23 (k) (b)) and by the decisions of this Court. Edward K. Johnstone, 17 B. T. A. 366; Cornelia Ann Cunningham, 16 B. T. A. 244.

The second reason which led respondent to doubt the worthlessness of the debt was petitioner's later dealings with Moreno. These have been satisfactorily explained, and do not cast any doubt upon the worthlessness of the account. In the year following the tax year petitioner consummated another sale to Moreno of some specially built Spanish-keyboard typewriters which Moreno had ordered before petitioner's discovery of his irresponsibility. In the light of his experience petitioner insisted that the freight be paid in advance and cash paid on delivery for the machines. Both demands were met. These facts not only do not evidence any further extension of credit by petitioner to Moreno, but, on the contrary, a request for the credit was unequivocally refused by petitioner. See Anderson-Harrington Coal Co., 6 B. T. A. 759; Hupfel Co., 9 B. T. A. 944.

Also, the evidence is uncontradicted that in 1942 petitioner paid two of Moreno's notes out of his own funds. His purpose was to postpone the necessity of substituting other collateral or of paying off in full the loan for which the notes were pledged. This action on his part can certainly not be interpreted as evidence that the account was not worthless, although the payment of the notes, which had previously been charged off as bad debts, was reflected on petitioner's books as "Bad debts realized."

The third subsequent event upon which respondent rested his determination that the debt did not become worthless in the taxable year was the advancement by petitioner to Moreno, or, more accurately, to Moreno's brother, of relatively small sums of money over a period of several weeks to enable the brothers Moreno to remain in New York in an attempt to market an invention which they claimed to own. They proposed that they would pay Moreno's old debt to petitioner out of the proceeds of the sale if they were successful. It later developed that the Morenos did not own any part of the invention, and petitioner's hopes of recouping his loss proved groundless. But the fact that he made advancements in connection with a wholly different venture in a later year in the vain hope of realizing something on the earlier account is immaterial, and it does not disprove the worthlessness of the debt. See Thomas J. Avery, 11 B. T. A. 958; Ennis-Brown Co., 10 B. T. A. 1248; Krueger-Broughton Lumber Co., 18 B. T. A. 1270. We conclude, then, in the light of all the evidence, that the debt became worthless in 1941.

Since petitioner uses the reserve method, the bad debt was properly charged to that account. There seems to be no dispute that petitioner's reserves should be in an amount equal to 10 percent of the outstanding accounts and notes receivable. The following statement from respond

ent's brief indicates the manner in which the disputed item affects the petitioner's tax accounting:

The facts are that petitioner had a bad debt reserve at the opening of the taxable year of $27,501.83. After giving effect to certain specific charges against said reserve, respondent allowed the addition of $10,083.91 to bring the reserve up to $32,152.44, which would represent 10% of the outstanding accounts and notes receivable totaling $285,490.59 [petitioner's books show this amount to be $285,490.49], plus the $36,033.81 represented in the Moreno accounts and notes receivable. Such a 10% reserve was consistent with petitioner's prior accounting practice. Respondent therefore disallowed the balance of the bad debt deduction, in the amount of $32,430.43, either as a reasonable addition to petitioner's reserve to bad debts or as a debt becoming worthless during the taxable year.

It is apparent that our decision' on this issue will justify the addition to petitioner's reserve for bad debts in 1941 of a total amount of $42,514.33, since, after giving what we consider to be the proper treatment to the Moreno account, petitioner's accounts and notes receivable will amount to $285,490.49 and his reserve for bad debts will show a deficit of $13,965.28.

Petitioner has consented to decision in respondent's favor on the issues relating to the taxable years 1938 and 1939.

Reviewed by the Court.

Decision will be entered under Rule 50.

ARNOLD, TYSON, and HILL, JJ., dissent.

EDWARD M. AND FRED E. HIECKE TRUST, UNDER WILL OF JENNIE M. WAINWRIGHT, ERNEST L. MILLER AND CITY NATIONAL BANk of CLINTON, TRUSTEES, PETITIONERS, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 6214. Promulgated January 10, 1946.

TRUST-ONE TRUST OR TWO CREATED BY WILL.-Held, will created only one trust for two beneficiaries and Commissioner did not err in taxing it as such, despite fact that the trustees had administered fund as if there were two trusts.

Harry Thom, Esq., and Joseph W. North, C. P. A., for the petitioners.

Gene W. Reardon, Esq., for the respondent.

The Commissioner determined deficiencies of $14,443.40 and $17,616.28 for the calendar years 1940 and 1941 in the income tax of a single trust. The only issue for decision is whether the tax should be computed for a single trust or upon the basis of a separate trust for each of the two beneficiaries.

FINDINGS OF FACT.

Jennie M. Wainwright died testate on April 30, 1939, while residing in Clinton, Iowa. Her will provided in part as follows:

I give, devise and bequeath all the rest, residue and remainder of the property and estate, real and personal, which at the time of my death shall belong to me, unto Ernest L. Miller and The City National Bank of Clinton, of the City of Clinton, Iowa, as trustees, upon the trust following, that is to say, to hold, invest, reinvest and keep the same invested, to collect the rents, income and profits therefrom, and after paying from such income the taxes and other disbursements and charges incidental to such trust and trust estate properly charged against the income from time to time:

(a) During the minority of my grandnephews, Edward M. Hiecke and Fred E. Hiecke, to apply to their support, maintenance, and education so much of said income as in the judgment of said trustees may be necessary, providing for my said grandnephews the best education possible, and to pay to my said grandnephews such further sums from said income as such trustees in their absolute discretions shall deem advisable, not to exceed, however, the sum of one hundred dollars, accumulating during the minority of my said grandnephews the surplus income for their benefit; and,

(b) Upon my said grandnephew, Edward M. Hiecke, attaining the age of twenty-one (21) years, to transfer, and pay over to him one eighth (%) of the corpus of said trust estate and all accumulations of income, and to set aside for my said grandnephew, Fred E. Hiecke, one eighth (%) of the corpus of said trust estate and all accumulations thereof, and upon the said Fred E. Hiecke's attaining the age of twenty-one (21) years to transfer and pay over to the said Fred E. Hiecke the said one eighth (%) of said trust estate and accumulations; and,

(c) Upon and after my said grandnephews attaining the age of twenty-one (21) years respectively, to make such further provisions from the income of said trust estate for the education of my said grandnephews as shall be consistent with their respective desires and abilities, it being my intention as hereinbefore stated that said grandnephews shall have the best education possible, and to pay to my said grandnephews such further sums from said income as said trustees in their absolute discretion shall deem advisable, not to exceed, however, the sum of two hundred ($200.) dollars per month to each grandnephew, until they shall have attained the age of twenty-five (25) years, respectively, but so, nevertheless, that each grandnephew shall receive equal benefits from my said estate, and in the event one grandnephew shall continue his education for a longer period or require a larger allowance than his brother, then I direct that the share of the income of said trust estate which would have been appropriated for the education or otherwise for the benefit of such grandnephew not receiving the same, be permitted to accumulate for his benefit and be transferred and paid over to him upon his arriving at the age of twenty-five (25) years; and,

(d) Upon my said grandnephew, Edward M. Hiecke's attaining the age of twenty-five (25) years, to transfer and pay over to him one sixth (%) of the remaining principal of said trust fund and all accumulations of income, and to set aside for my grandnephew, Fred E. Hiecke, one sixth (%) of said remaining principal of said trust fund and all accumulations of income, and upon the said Fred E. Hiecke's attaining the age, of twenty-five (25) years, to transfer and pay over to the said Fred E. Hiecke said one sixth (%) of said trust estate and accumulations; and,

(e) Upon and after my said grandnephews arriving at the age of twentyfive (25) years respectively, to pay over to my said grandnephews such further sums from the income of my said trust as such trustees in their absolute discretion shall deem advisable, not to exceed, however, the sum of two hundred fifty (250) dollars Per month to each grandnephew until each shall attain the age of thirty-five (35) years; and upon each grandnephew's attaining the age of thirty-five (35) years to transfer and pay over to him one half of the remaining principal of said trust fund and all accumulations of income.

(f) If at the time of my death either of my said grandnephews shall have alienated, charged or disposed of, or if at any time or times thereafter during the continuance of said trust either of my said grandnephews shall alienate, charge or dispose of the said trust or income or any part thereof or interest therein, or if, by reason of his bankruptcy or other event happening, either before or after my death, the said income shall wholly or in part fail or cease to be personally enjoyed by my said grandnephews or either of them, but the same or any part thereof shall, or but for this present provision would belong to or be vested in some other person or persons, then the trust hereinbefore expressed concerning the said income or trust estate to be paid to such grandnephew shall thereupon cease and determine and the said income shall be held by the said trustees during all the residue of the life of such grandnephew in the manner following, that is to say, upon trust during the residue of the life of my said grandnephew, to pay and apply the said income or any part thereof to and for the personal support and maintenance or otherwise for the benefit of my said grandnephew, and in such manner as the trustees shall, in their absolute discretion, think fit, and upon the death of my said grandnephew to pay and transfer the said trust estate, as the same shall then be, to the surviving child or children, if any, of my said grandnephew and to the issue of any deceased child or children, if any, per stirpes and not per capita, and if there be no issue, then said trust fund shall be held by my said trustees for the use and benefit of my surviving grandnephew subject to the same trust and for the same use and purposes that it would have been held by my said trustees had it passed to them under the provisions contained herein for the use and benefit of my surviving grandnephew.

(g) If either of my said grandnephews shall die before the termination of said trust, leaving issue surviving, then I direct my said trustees to immediately transfer and pay over to such issue, per stirpes and not per capita, the share of said trust estate to which such deceased grandnephew would have been entitled, if living. If either of my said grandnephews shall die before the termination of said trust without leaving issue surviving, then and in that event from and after the death of said grandnephew the share of said trust fund to which said deceased grandnephew would have been entitled had he lived shall be held by my said trustees for the use and benefit of my surviving grandnephew subject to the same trust and for the same use and purposes that it would have been held by my said trustees had it passed to them under the provisions contained herein for the use and benefit of my surviving grandnephew.

(h) I direct that all stocks, bonds, and other securities belonging to me at my decease which have not been otherwise disposed of by the executor of my estate shall form part of the trust created by this second codicil to my will, but I authorize my trustees or their successors to sell or dispose of the same or any of them whenever such trustees shall think proper. I expressly direct that my trustees are not to be held responsible or liable for or charged with any loss or