17 T.C. 973">*974 The Commissioner determined deficiencies of $ 9,309.24 in the income tax of the petitioner for the calendar year 1944. By appropriate assignments of error petitioner contests the following adjustments to net income:

EXPLANATION OF ADJUSTMENTS

(a) This represents amounts deducted as general expense for which substantiation was not submitted.

(b) This represents the amount of profit on sales omitted from taxable income.

The other adjustments are not contested. There are three issues raised in this proceeding: (1) Was petitioner entitled to deductions of $ 22,780.30 which were paid and accrued in prior years, and if answered in the affirmative, did petitioner omit from its gross income1951 U.S. Tax Ct. LEXIS 17">*20 $ 22,780.30? (2) Was petitioner entitled to deductions of $ 1,900 for buyers' traveling expenses?

Petitioner raises the third issue in an amendment to its amended petition by claiming a deduction in 1944, not raised on its return, by reason of an alleged net operating loss of $ 14,783.18 sustained in 1942. Respondent contends that because of erroneous deductions on the 1942 return, there was no net operating loss. (3) Was petitioner's net operating loss of $ 14,783.18 claimed in 1942 eliminated by the improper deduction of $ 106,462.12 for bad debts or decreased by reducing the depreciation deduction from $ 21,231.29 to $ 9,533.44?

FINDINGS OF FACT.

A. Finkenberg's Sons, Inc., hereinafter referred to as the petitioner, is a corporation organized in 1914 under the laws of the State of New York. Petitioner's income and declared value excess-profits tax returns for the years 1944 and 1942 were filed with the collector of internal revenue for the third district of New York. The 1944 return was filed on the accrual basis and reported income on the installment plan as a dealer under section 44 (a), I. R. C. Petitioner's business is selling furniture, household materials and like merchandise1951 U.S. Tax Ct. LEXIS 17">*21 on the installment basis. The facts will be grouped under the three issues involved.

17 T.C. 973">*975 Issue 1.

In 1938 the petitioner began a special thrift club plan, hereinafter referred to as the thrift plan, for the purpose of obtaining new installment account customers. Under this plan certain household articles such as lamps, dishes, cutlery, etc., were sold for $ 10 under a contract. A down payment of $ 1 was required, the additional $ 9 to be paid at the rate of $ 1 per week. The contract further provided the following:

Finkenberg's [the petitioner] will give me a "Kingsley Gift Club" Membership Book. In that book, Finkenberg's will credit me for each payment made by me, consisting of at least     dollars each week. Finkenberg's will then apply the amount received by the Club on any purchase of articles bought by me from Finkenberg's any time within one year from the above date, provided the amount of the purchase is at least $ 35. The "Kingsley Gift Club" Membership Book and the payments made by me in said Club can be used only for the above purpose. The gift is to remain the property of Finkenberg's until I have paid in the Ten Dollars. [Emphasis added.]

1951 U.S. Tax Ct. LEXIS 17">*22 When a thrift plan customer paid the full $ 10 and subsequently purchased goods selling for $ 35 or more, the thrift customer's purchase would be converted to a regular account receivable and receive a credit for the $ 10 paid under the original contract. H. Shangold, head bookkeeper, office manager, and comptroller of the petitioner from 1938 to 1941, estimated that subsequent purchases by thrift plan customers averaged about $ 140.

Petitioner paid about $ 1,800 to a Chicago promoter for the thrift plan. Customers were solicited by crew managers and canvassers supervised by a sales manager, all of whom were engaged by petitioner solely to promote the thrift plan. Costs for each thrift plan account included $ 3.50 for the canvasser, $ 1 for the crew manager, $ 1 plus a percentage of the subsequent purchase for the sales manager, and about $ 4 to $ 5 for the cost of the merchandise.

Although the contract signed by the customer required that the customer make the subsequent purchase within 1 year from the date the contract was signed, petitioner did not enforce the provision since the purpose of the plan was to develop new business. In fact petitioner would communicate with any thrift1951 U.S. Tax Ct. LEXIS 17">*23 customer who had paid up the $ 10 to advise him to take advantage of the $ 10 credit by making the required subsequent purchase. Petitioner also solicited customers failing to pay the full amount of $ 10 urging them to make payments and convert to a regular account receivable.

When a thrift plan customer paid in less than $ 10 on the original contract and indicated no further interest in the plan, the petitioner's practice was to take the merchandise back if less than $ 2 was paid and to refund the payments, or to let the customer keep the merchandise 17 T.C. 973">*976 if more than $ 2 was paid. Under the contract title to the property remained in petitioner until the entire $ 10 was paid.

The thrift plan, begun in 1938, was actively promoted until the end of 1941. From 1942 to 1944 petitioner's expenses in promoting the thrift plan became negligible. In 1942 payments on the original $ 10 contracts were small, and in 1943 and 1944 no payments whatsoever were received. Conversions by thrift plan customers to regular accounts receivable were negligible in 1942 and 1943. The last vestiges of thrift plan disappeared from petitioner's books in 1944, the income tax year in question.

The petitioner1951 U.S. Tax Ct. LEXIS 17">*24 accounted for the details of the above described transactions on its books and tax returns from 1938 to 1944 in the following manner:

A. The Income:

1. All receipts of cash on the original $ 10 contract including the down payment and subsequent installments, were debited to cash and credited to the special account "Thrift Accounts Receivable." Petitioner treated this cash received as a liability, since it expected these customers to convert to regular accounts receivable and receive credits for the $ 10 payments. Under the contract petitioner had no obligation to return any of the payments. The credit balance of Thrift Accounts Receivable was never closed into profit and loss and reported as income in the years the cash was received nor at any subsequent time.

2. When a thrift customer completed the total payments of $ 10 and subsequently made a purchase of $ 35 or more, the subsequent purchase was debited to a regular account receivable at the full retail price and credited to sales. Then $ 10 would be transferred from Thrift Accounts Receivable as a credit to the converted regular account receivable. Therefore when the $ 10 credit was actually used by the customer on a1951 U.S. Tax Ct. LEXIS 17">*25 subsequent purchase, the original $ 10 purchase was accounted for as income and carried into profit and loss for that year, since the total sale price recognized included the $ 10 credit.

3. When a thrift customer paid in less than $ 10 and indicated no further interest in the plan, the amounts of his payments would be transferred out of the Thrift Accounts Receivable account, the contra credit being income if the payments were retained, or cash if the money was refunded.

4. At the end of 1944 the accumulated credit balance in Thrift Accounts Receivable amounted to $ 22,780.30. Petitioner debited Thrift Accounts Receivable and credited surplus for $ 22,780.30, without recognizing these amounts as income in 1944.

17 T.C. 973">*977 5. Below is an analysis of the Thrift Accounts Receivable account:

1951 U.S. Tax Ct. LEXIS 17">*26 B. The Expenses:

1. When the thrift plan was inaugurated in 1938, all cost items totalling $ 7,389.01 were debited to a special cost account called Cost of Thrift Sales, which was charged to profit and loss as a normal expense item.

2. At the end of 1939, a new account "Prepaid Cost of Thrift Sales" was set up as a deferred charge. The debit balances in this account were considered assets and not charged as expenses to profit and loss at the end of the year. The initial entry for Prepaid Cost of Thrift Sales was an estimate based on the number of thrift plan customers who had not converted yet to regular accounts receivable. In 1939 part of Cost of Thrift Sales was debited to the asset account Prepaid Cost of Thrift Sales and the balance was debited as an expense to profit and loss.

3. Commencing in January 1940, all costs were initially placed in the Prepaid Cost of Thrift Sales account instead of Cost of Thrift Sales. When a thrift plan customer would convert to a regular account receivable by a subsequent purchase of $ 35 or more, an estimate of expenses of $ 12 per account was credited to Prepaid Cost of Thrift Sales and debited to Cost of Thrift Sales, which would then1951 U.S. Tax Ct. LEXIS 17">*27 be charged as an expense to profit and loss each year. The debit balance of the Prepaid Cost of Thrift Sales was always carried as a deferred expense.

4. In 1942, the petitioner began writing off the Prepaid Cost of Thrift Sales account pursuant to a different theory. Instead of charging expenses to profit and loss when the thrift plan customer opened a regular account receivable, the charges were deferred until the converted accounts receivable were actually collected. At the end of 1941, petitioner still had outstanding approximately $ 500,000 on regular accounts receivable that had developed through the thrift plan.

17 T.C. 973">*978 5. In 1944 the entire debit balance of $ 22,920.30 in the Prepaid Cost of Thrift Sales account was transferred to Cost of Thrift Sales account and deducted from profit and loss. Of this amount $ 22,860.30 was the debit balance in Prepaid Cost of Thrift Sales at the end of 1943.

6. The petitioner's treatment of expenses incurred in connection with the thrift plan is summarized below:

1951 U.S. Tax Ct. LEXIS 17">*28 Petitioner paid no income taxes from 1938 through 1943, since it reported no net income in those years. On the 1944 return it reported net income of $ 11,129.67. The following chart compares thrift plan expenditures incurred and the income received on the original $ 10 contracts:

Petitioner in its income tax return for 1944 in Schedule K took as a deduction "Other deductions authorized by law $ 154,385.95." Included in this $ 154,385.95 was "Cost of thrift sales $ 22,920.30." Of this deduction for cost of thrift sales, the Commissioner in his determination of the deficiency has disallowed $ 22,780.30.

Issue 2.

For a long time past, it had been the practice of the furniture industry to hold furniture shows annually in Chicago and in High Point, North Carolina. The Chicago shows were held in January and June, and the High Point shows were held in May and September.

In common with the other members of the industry, petitioner had always arranged to send its buyers to these shows to take1951 U.S. Tax Ct. LEXIS 17">*29 care of its merchandise requirements for the ensuing period, and this practice was adhered to in 1944.

17 T.C. 973">*979 In 1944 petitioner sent its three buyers, Abe Brown, Alfred Finkenberg, and Margoles to each of these four furniture shows. It drew four checks to the order of cash, one check being drawn in each of the show months, and furnished the cash proceeds to Abe Brown, who was the head buyer or merchandise manager and was in charge of the disposition of the funds. The latter bought the railroad tickets and made all necessary disbursements for the group. The total amount drawn and paid over to the buyers by means of these four checks was $ 2,000 but $ 100 was unexpended and refunded from the May trip, making a net disbursement of $ 1,900.

None of the buyers were stockholders of petitioner, but A. Finkenberg was the son of a stockholder.

On petitioner's books of account, the disbursement was charged as a "buyers' expense" but the names of the buyers were not set forth thereon. The witness Schoolman, now president of petitioner, testified: "This money was given to the head buyer, or merchandise manager, and he was in charge of the disposition of the funds. He paid hotel bills, 1951 U.S. Tax Ct. LEXIS 17">*30 bought railroad tickets, made disbursements for hotels, taxis, meals, whatever was necessary to be dispensed."

Upon audit of petitioner's return, respondent eliminated this sum of $ 1,900 from deductions on the ground that it had not been substantiated. We find that the evidence does substantiate the expenditure by petitioner in 1944 of $ 1,900 as traveling expenses incurred and paid by reason of its employees attending these furniture marts held in Chicago and High Point, North Carolina.

Issue 3.

Petitioner claimed no deduction on its 1944 return by reason of the net operating loss of $ 14,783.18 reported on its 1942 return. In 1942, petitioner claims as bad debts $ 106,462.12 representing advances to the Finkenbergs over a period of years. The Finkenbergs were officers and shareholders. The 1942 return was signed by Israel Finkenberg, president, and Edward Finkenberg, treasurer.

Petitioner has not proved that its indebtedness against the Finkenbergs became worthless in 1942. Petitioner had no net operating loss in 1942.

OPINION.

Three issues are presented in this proceeding.

Issue 1.

On the principal issue the respondent contests the petitioner's tax treatment of the1951 U.S. Tax Ct. LEXIS 17">*31 thrift club plan on the following two alternative 17 T.C. 973">*980 grounds: The deduction of $ 22,780.30 "Cost of Thrift Sales" as an ordinary and necessary business expense of 1944 was improper since it should have been deducted in prior years, or the transfer during taxable year of the $ 22,780.30 credit balance of "Thrift Accounts Receivable" directly to surplus should have been included as taxable income. Petitioner argues that the expenses were properly deferred until 1944 and that the income from the thrift plan was income in prior years, not in 1944.

Petitioner's initial contention is that the error of respondent in the deficiency notice precludes the Court from considering the deductibility of the Cost of Thrift Sales as an expense, the sole question as described in the deficiency notice being the omission of income in 1944. In the deficiency notice as an adjustment to net income under the caption of "Unallowable deductions and additional income" is "(b) Cost of Thrift Sales $ 22,780.30." The item referred to is clearly a deduction since petitioner in its accounting systems always collected thrift club expenses in the account called Cost of Thrift Sales. In addition to this fact, 1951 U.S. Tax Ct. LEXIS 17">*32 petitioner's income tax return for 1944 is in evidence and it shows that petitioner in computing the amount of its net income, took as a deduction: "Cost of thrift sales, $ 22,920.30." The effect of the adjustment which respondent has made in his deficiency notice is to disallow $ 22,780.30 of this $ 22,920.30 claimed deduction.

However, the Commissioner explained the $ 22,780.30 adjustment as follows: "(b) This represents the amount of profit on sales omitted from taxable income." An additional ambiguous fact is that the figure $ 22,780.30 in the deficiency notice is the exact amount transferred to surplus without being accounted for as income. The exact amount of prepaid expenses which were paid and accrued in prior years but written off in 1944 is $ 22,860.30.

The form of the notice informed the taxpayer that the expense deduction would be challenged. It was challenged by the Commissioner at the hearing of this proceeding. Except for the explanation advanced and the discrepancy in the figures, the disallowance of a Cost of Thrift Sales item clearly involves a deduction. The Commissioner's determination of a deficiency must not be disapproved because it is predicated upon erroneous1951 U.S. Tax Ct. LEXIS 17">*33 grounds stated in the deficiency notice if it otherwise appears to be correct. Standard Oil Co., 43 B. T. A. 973, 978, affd. 129 F.2d 363, certiorari denied 317 U.S. 688">317 U.S. 688, rehearing denied 319 U.S. 784">319 U.S. 784; Houston Lighting & Power Co., 34 B. T. A. 745, 750; John I. Chipley, 25 B. T. A. 1103, 1106.

Both the questions of omitted income and improper deduction arise out of the same facts of the thrift plan. Petitioner's original petition 17 T.C. 973">*981 clearly recognized the deduction issue as raised, ¹1951 U.S. Tax Ct. LEXIS 17">*34 but the amended petition is framed on the theory that the deduction issue has not been raised. ² In his opening statement counsel for the respondent disputed without any ambiguity the deduction which petitioner had taken on its return for 1944. ³

The following factors present here are relevant to the determination of this question. The expense deduction was discussed fully in the briefs and the taxpayer had full opportunity and did produce evidence. Hay v. Commissioner (C. A. 4), 145 F.2d 1001, 1007,1951 U.S. Tax Ct. LEXIS 17">*35 affirming 2 T.C. 460, certiorari denied 324 U.S. 863">324 U.S. 863, rehearing denied 324 U.S. 891">324 U.S. 891. Petitioner has not been prejudiced or harmed in any way. Commissioner v. Stewart (C. A. 6), 186 F.2d 239; Helvering v. Continental Oil Co. (C. A. D. C.), 68 F.2d 750, certiorari denied 292 U.S. 627">292 U.S. 627.

Notwithstanding petitioner's contention that the deduction issue is not involved in the case, we conclude that the deduction of $ 22,780.30 of the Cost of Thrift Sales account was properly presented as an issue here.

Petitioner calls the items sold for $ 10 under the original thrift plan contracts "gifts." Its theory is that the expenditures incurred were properly deferred in prior years and deductible in 1944 on the theory that the benefits were realized then because of subsequent purchases. When income was received in prior years from the original $ 10 contracts, petitioner accounted for that income as a liability on the hypothesis that the $ 10 would be used as a credit on a subsequent purchase. However, in 1944 the accumulated1951 U.S. Tax Ct. LEXIS 17">*36 liabilities were transferred directly to surplus on the theory that the income was properly attributable to years prior to 1944.

17 T.C. 973">*982 As a matter of fact there was a direct relation between amounts expended and income on the $ 10 original contracts each year the thrift plan was in operation. A substantial part of the thrift club expense produced immediate results which are impossible to segregate from prospective results. Petitioner's own evidence shows that there was an insignificant number of new subsequent purchases by thrift customers in 1944, and the 1944 cash collections on all subsequent installment purchases by thrift customers has not been put in evidence. Furthermore the expenses written off in 1944 were incurred in prior years in which petitioner had no taxable income. Even when customers indicated no further interest in the thrift plan and there was no reasonable belief that a subsequent purchase would be made, the expenses incident to those accounts were still deferred. The expenditures in the promotion of the thrift plan campaign were reduced very much after 1941, being negligible in 1944.

To call such a transaction a "gift" is a misnomer. It is our opinion1951 U.S. Tax Ct. LEXIS 17">*37 that the transaction was a routine installment sale. To the extent that costs exceeded receipts on initial $ 10 thrift contracts, the expense was promotional, very similar in form to advertising costs or the acquisition of good will.

Section 23 (a), I. R. C., provides for the deduction of "all the ordinary and necessary expenses paid or incurred during the taxable year. * * *" More specifically section 43, I. R. C., provides:

SEC. 43. PERIOD FOR WHICH DEDUCTIONS AND CREDITS TAKEN.

The deductions and credits * * * provided for in this chapter shall be taken for the taxable year in which "paid or accrued" or "paid or incurred," dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions or credits should be taken as of a different period. * * *

Even though petitioner, an installment dealer, was permitted to account for installment income in the years realized under section 44(a), I. R. C., the expenses in connection with that income still must be deducted in the year in which the items are "paid or accrued." Blum's, Inc., 7 B. T. A. 737, 763-765; Franc Furniture, 1 B. T. A. 420.1951 U.S. Tax Ct. LEXIS 17">*38 Regulations 111, section 29.44-1 provides:

* * * Deductible items are not to be allocated to the years in which the profits from the sales of a particular year are to be returned as income, but must be deducted for the taxable year in which the items are "paid or incurred" or "paid or accrued," as provided by sections 43 and 48. * * *

The fact that deductions exceed gross income on the installment basis cannot be treated as a deferred expense. J. B. Bradford Piano Co., 15 B. T. A. 1045.

Advertising and promotional expenses cannot be charged to future years as deferred charges nor by amortization of a capital investment 17 T.C. 973">*983 where the taxpayer fails to show that the future benefits can be determined precisely and are not of indefinite duration. X-Pando Corporation, 7 T.C. 48; F. E. Booth Co., 21 B. T. A. 148; Colonial Ice Cream Co., 7 B. T. A. 154. Cases cited by petitioner involve insurance premiums, mortgage renewal fees, and bond discounts in which the benefits in future years are definite and ascertainable mathematically. Expenses incurred and 1951 U.S. Tax Ct. LEXIS 17">*39 paid in prior years are not deductible in later years though incidental to earnings in later years. J. Noble Hayes, 7 B. T. A. 936.

We sustain the respondent's disallowance of the Cost of Thrift Sales deduction. It is unnecessary to discuss respondent's alternative argument about the omission of income.

Issue 2.

The Commissioner disallowed a General Expenses deduction of $ 1,900, which petitioner claims for buyers' traveling expenses. The grounds stated by the Commissioner in his deficiency notice as reasons for his disallowance of this $ 1,900 were: "(a) This represents amounts deducted as general expense for which substantiation was not submitted."

We think the evidence which petitioner submitted at the hearing substantiates to a reasonable degree that it expended $ 1,900 as traveling expenses in 1944 incurred in having three of its employees attend furniture marts held in Chicago and High Point, North Carolina. The facts with reference to these expenditures are detailed in our findings of fact and need not be repeated here. The Commissioner's action in disallowing deduction of this $ 1,900 is reversed. See Sommerfeld Machine Co., 15 T.C. 453;1951 U.S. Tax Ct. LEXIS 17">*40 Arthur N. Blum, 11 T.C. 101.

Issue 3.

Petitioner contends that it is entitled to a deduction in 1944 under section 122 (b) (2), I. R. C., by reason of a net operating loss of $ 14,783.18 sustained in 1942. We find that petitioner sustained no net operating loss in 1942 because it was not entitled to a deduction claimed on the 1942 return of $ 106,462.12 for bad debts. While it is true that petitioner's return for 1942 showed a loss of $ 14,783.18, it in reality had no loss for this year.

The only evidence submitted by petitioner with reference to its bad debt loss was the witness Schoolman, an independent accountant in 1944 and later petitioner's president, who testified that the loans represented advances over a period of years to the Finkenbergs who were officers and shareholders. There was no amplification of this general and vague statement.

17 T.C. 973">*984 Petitioner has not shown the presence here of the following three factors all of which must be complied with before a taxpayer is entitled to a deduction for bad debts under section 23 (k) (1). (1) Initially the shareholder officers must have made "an unconditional obligation to pay" the corporation, 1951 U.S. Tax Ct. LEXIS 17">*41 Allen-Bradley Co. v. Commissioner (C. A. 7) 112 F.2d 333; John Feist & Sons Co., 11 B. T. A. 138. (2) When a valid debt exists the corporation must exhaust all reasonable means of collecting that debt. Allen-Bradley Co. v. Commissioner, supra, p. 335; Nathan H. Gordon Corporation, 2 T.C. 571, 583. (3) Since section 23 (k) (1) allows deductions for debts "which become worthless within the taxable year," the debt must have had some value at the beginning of the taxable year. Grant B. Shipley, 17 T.C. 740.

Petitioner's contention that it is entitled to a net loss carry-over from 1942 is not sustained.

Decision will be entered under Rule 50.