Both corporations assign as error the action of the Commissioner in adding to income $48,942.88 representing a reserve for bad debts. Geyer, Cornell & Newell, Inc. (hereinafter referred to as G. C. N.) also contends that it received a "class" of income from advertising Nash automobiles, this income was abnormal, and a part was attributable to other years under section 721 of the Internal Revenue Code. These are the only questions presented for decision. The petitioners also contest the penalty, but, since the Commissioner does not list it among the questions presented, we assume that he concedes error to the extent of the penalty."

FINDINGS OF FACT.

Geyer is an Ohio corporation, organized in 1912. It conducted an advertising agency business until June 30, 1935. G. C. N. is a New York corporation, organized in 1926. It has conducted an advertising agency business from the date of its incorporation until the present time. Geyer or its stockholders owned all of the outstanding voting stock of G. C. N. Both corporations have kept their books and filed their tax returns for calendar years upon an accrual method of accounting.

Geyer filed its return for the calendar year 1940 with the collector of internal revenue for the first district of Ohio. G. C. N. filed its return for 1940 with the collector of internal revenue for the third district of New York.

Geyer sold its business to G. C. N. for cash on July 1, 1935, but retained some assets including securities, cash, notes, and accounts receivable. Geyer did not operate as an advertising agency after July 1, 1935. Geyer contracted with publishers for advertising space in advance of the date of publication. Amounts involved were large and the space was not transferable. Payment for this advertising was due from Geyer on a fixed date. Geyer sent a bill to its client, which bill was due prior to the date upon which Geyer had to pay the publisher. The bill which Geyer sent to its client was for an amount equal to the gross charge of the publisher for the advertising space. Geyer, however, paid the publisher a lesser amount after deducting a discount of 15 percent, and this discount represented Geyer's profit. Delinquency or default occurred on the part of a few clients. G. C. N. used the same method.

Geyer adopted a reserve method of treating bad debts of clients on its books and its income tax returns. Additions to this reserve were claimed as deductions on its income tax returns for years prior to 1934. These additions represented a small percentage of sales to or of amounts due from clients. They bore no relation to other receivables,

if any. Deductions of additions to the reserve were allowed by the Commissioner. They offset income otherwise taxable. The reserve amounted to $49,093.52 at the close of 1933. No further additions to the reserve were made and deducted thereafter. Accounts then due from clients amounted to $52,819.75. Small amounts were charged to the reserve up to the end of June 1935, at which time the balance amounted to $48,961.64. All accounts receivable from clients had been paid by the close of 1935 except for an account in the amount of $61.58. This latter account was closed on December 19, 1938, by the receipt of $11.49 in cash, cancellation of a claim of a publisher in the amount of $31.33, and a charge against the reserve of the balance of $18.76. This reduced the balance in the account to $48,942.88 at which it remained until December 1940, when Geyer transferred all of its assets to G. C. N. and dissolved.

G. C. N., after acquiring all of the advertising agency business on July 1, 1935, had insufficient assets to provide the necessary credit with publishers and Geyer therefore guaranteed its accounts payable to publishers. Geyer also on at least two occasions advanced money to G. C. N.

Representatives of the Bureau of Internal Revenue were acquainted at all times material hereto with the true situation in regard to the various accounts of Geyer and its guarantee of certain accounts payable of G. C. N. Representatives of Geyer, in discussions with agents of the Bureau of Internal Revenue up to 1940, stated that Geyer needed the reserve of about $48,000 because it might be compelled to make payments on its guarantee of the obligations of G. C. N. to publishers.

Geyer and G. C. N. entered into an agreement on December 18, 1940, whereby Geyer agreed to transfer all of its assets to G. C. N. in exchange for 400 shares of the voting common stock of G. C. N. and the assumption by G. C. N. of all of the liabilities of Geyer. One of the purposes of this agreement was to provide G. C. N. with sufficient capital of its own to carry on its business. This agreement was carried out and, pursuant to the plan, Geyer immediately distributed the 400 shares of G. C. N. stock pro rata to its stockholders in complete liquidation and in redemption of their shares of Geyer stock. Geyer was dissolved on December 23, 1940. Among the assets of Geyer at the time of the above transfer was an account receivable due from G. C. N. in the amount of $152,024.84. G. C. N., after the transfer, charged this amount to its account payable to Geyer, closing that account. The amount of the balance in Geyer's reserve account for bad debt due from clients, $48,942.88, was entered on the books of G. C. N. at the date of the transfer and has remained there without change material hereto. G. C. N. was not permitted to use, and did not use, a reserve method for bad debts, but used the direct charge-off method. The closing balances

of G. C. N.'s accounts receivable from clients for the years 1935 through 1940 ranged from about $57,000 to $264,000. Geyer never had to make good on its guarantee of the accounts of G. C. N. to publishers.

The Commissioner, in determining the deficiencies, included the amount of $48,942.88 in the income of Geyer, upon the ground that the need for the reserve ceased in 1940, and also included it in the income of G. C. N. upon the ground that it was realized in the extinguishment of G. C. N.'s debt to Geyer.

G. C. N., like most advertising agencies, accepted only one client for each type of product to be advertised. It had about 15 clients during 1940. Nash-Kelvinator Corporation (hereafter called Nash), was one of its principal clients in 1940. It has furnished advertising for Kelvinator refrigerators since 1935 and for Nash automobiles since 1937. It keeps a separate account for each client and, in the case of Nash and another client, a separate account for each of the two products advertised. Advertising different products for different clients requires the use of different skills and experience to solve the different problems presented. Specialists in advertising a particular product or group of products are employed. A group doing certain parts of the work on Nash automobile advertising was separate from groups doing similar special work on other products. G. C. N. had never advertised automobiles before it obtained the Nash automobile account and it had to bring in some new employees experienced in advertising automobiles.

Nash employed a fiscal year ending September 30, and shortly after that date brought out the new model automobiles for the next year. For example, the 1941 models were brought out in the fall of 1940. The advertising work for each new model was performed during a twelve-month period beginning on April 1 preceding the date on which the new model appeared. Income from advertising this model was realized in the twelve months beginning in October, about the time that the new model appeared.

The following table shows the income and expense of the Nash automobile account for certain twelve-month periods:

G. C. N. has paid excess profits tax for 1940 and has filed a timely claim for refund of $7,644.48 thereof.

The Commissioner, in determining the deficiency against G. C. N., allowed no deduction for abnormal income attributable to other years. The stipulation of facts is incorporated herein by this reference.

OPINION.

MURDOCK, Judge: The only issue for decision in the case of Geyer is whether it realized income in 1940 of $48,942.88, an amount which appeared on its books as a reserve for bad debts. The Commissioner has held and contends that this amount, having been deducted from income in prior years, must be restored to income for 1940 because the need for the reserve ceased in that year. The amount in question was built up through additions to the reserve which were deducted from income in years prior to 1934. A reserve consists of entries upon books of account. It is neither an asset nor a liability. It has no existence except upon the books, and, unlike an asset or a liability, it can not be transferred to any other entity. Reserves are set up for various business purposes. They offset assets, either specifically or generally. Not all reserves are recognized for income tax purposes. The only one mentioned in section 23 of the Internal Revenue Code is one for bad debts. A reserve for bad debts is in recognition of the fact that an asset, accounts receivable, may not be collected in full. Any balance in such a reserve has no further purpose after all of the accounts, against which it was set up, have been collected. The account then has no meaning and should be closed. Since it served to offset assets, it is closed by carrying the balance to some other account, such as profit and loss or surplus, which likewise offsets assets. Such a balance, when no longer needed, is "treated as" income where it was built up by additions which were allowed as deductions from income of prior years. It has been held, as both sides agree, that any balance in a reserve for bad debts is properly to be restored to income of the year in which the need for maintaining the reserve ceases. North American Coal Corporation, 32 B. T. A. 535; affd., 97 Fed. (2d) 325; Peabody Coal Co., 18 B. T. A. 1081; affd., 55 Fed. (2d) 7; certiorari denied, 287 U. S. 605; Rossin & Sons, Inc. v. Commissioner, 113 Fed. (2d) 652, reversing 40 B. T. A. 1274; G. M. Standifer Construction Corporation, 30 B. T. A. 184.

The Commissioner argues that the need for this reserve ceased in 1940, while the petitioners contend that it ceased prior to that year. The evidence shows that the petitioners are right. The reserve was set up prior to 1934 solely for the purpose of covering accounts receivable due from the clients of Geyer while it was engaged in the advertising business. Geyer, in 1935, permanently discontinued its

advertising business and collected all of its accounts receivable from clients except for $61.58. The account for $61.58 was closed in 1938. Thus, the balance in the reserve should have been restored to income long prior to 1940.

The president of Geyer and G. C. N. were debtors of Geyer after 1935. The respondent concedes that the amount owed by its president can not be regarded as justification for continuing the reserve, but he seems to think that the amount due from G. C. N. might justify the reserve after 1935. The reserve was almost as large as this debt in 1935. The evidence is clear that the reserve never related to any amount due from G. C. N. and can not be supported upon that basis any more than on the basis of the loan to the president. Neither could its restoration to income be deferred upon the theory that it was a reserve for Geyer's contingent liability upon its guarantee of the liability of G. C. N. to publishers in connection with the advertising business conducted by G. C. N. Such a reserve, no matter how prudent, is not recognized for Federal income tax purposes and does not prevent immediate restoration of a reserve to income. El Dorado Oil Works, 46 B. T. A. 994; Brown v. Helvering, 291 U. S. 193, affirming 22 B. T. A. 678, and 63 Fed. (2d) 66; Peabody Coal Co., supra. The respondent infers that Geyer should be estopped in some way from resisting the addition of this amount to income for 1940. No such issue has been pleaded. Helvering v. Brooklyn City R. Co., 72 Fed. (2d) 274, affirming 27 B. T. A. 77. The evidence shows that the respondent has been adequately informed at all times of the circumstances and it fails to show a proper basis for estoppel or anything akin to estoppel. Tide Water Oil Co., 29 B. T. A. 1208; El Dorado Oil Works, supra. The Commissioner erred in adding the $48,942.88 to Geyer's income for 1940. This makes unnecessary discussion of other arguments advanced as to this issue by the petitioners and a concession by the respondent.

The Commissioner argues briefly that, if the amount is not income in 1940 to Geyer, it was income of G. C. N. for that same year. This argument seems to be that income of G. C. N. resulted from the fact that one of the assets of Geyer transferred in 1940 to G. C. N. was a debt due to Geyer from G. C. N. offset by this reserve. He frankly states that he does not think the argument is sound, and we agree. The reserve was not related to the G. C. N. debt and did not affect it in the transfer. It did not benefit G. C. N. in any way. The Commissioner erred as to this item.

The principal question in the case of G. C. N. is whether it is entitled to a deduction of $65,742.57, representing abnormal income of 1940 attributable to other years, in computing its excess profits tax. It contends that its income from advertising Nash automobiles is a "class"