APPEAL OF PAN-AMERICAN HIDE CO., Docket No. 1970.

• Decision Date: 26 May 1925
• Docket Number: Docket No. 1970.
• Citation: 1 BTA 1249
• Parties: Appeal of PAN-AMERICAN HIDE CO.
• Court: U.S. Board of Tax Appeals

1 B.T.A. 1249 (1925)

Appeal of PAN-AMERICAN HIDE CO.

Docket No. 1970.

Board of Tax Appeals.

Submitted April 30, 1925.

Decided May 26, 1925.

Louis Immerman, C. P. A., for the taxpayer.

Arthur H. Murray, Esq., for the Commissioner.

Before STERNHAGEN and MARQUETTE.

The taxpayer and the Commissioner have stipulated the facts as follows:

FINDINGS OF FACT.

Taxpayer deducted in its tax return filed for the calendar year 1918 the sum of $3,300, consisting of $275 set aside monthly to cover premiums on fidelity insurance which it would have to pay to insurance companies.

In January, 1918, the officers of the taxpayer decided upon a policy of securing fidelity insurance to cover by bond the employees in its South American branches.

During the year 1918 this policy was carried out by the taxpayer and the total amount of premiums set aside by the taxpayer during the year amounted to $3,300.

Taxpayer assumed this fidelity insurance risk itself and charged against the profits every month an amount equal to the premiums that would be paid to the insurance companies on the basis of the rates they quoted to taxpayer for this risk.

The following is an exact copy of the entry made in taxpayer's Journal (Folio 14) on February 28, 1918:

                73 LOSS & GAIN                                 $550.00
                   141 To: BONDING RESERVE                               $550.00
                       Rio de Janeiro            $50,000.00
                       Bahia                      50,000.00
                       Colombia                   50,000.00
                                                ___________
                                     2%         $150,000.00  $3,000.00
                       $3.00 pr. $1,000.00
                         United States           100,000.00     300.00
                                                ___________  _________
                                                             $3,300.00
                             January 1918                      $275.00
                             February 1918                      275.00
                

Similar charges were made regularly at the end of each month during the calendar years 1918, 1919, and 1920.

This monthly charge was considered in the same light as if it were actually paid to the insurance company.

There were no defalcation losses incurred during 1918, 1919, or 1920, but in January, 1921, this company received notice of a defalcation of $11,226 (13,000 Colombian CY at 1.158) by one of its trusted employees in Colombia. This loss was charged against the bonding reserve which wiped out the entire reserve created during the years 1918, 1919, and 1920, in the amount of $3,300 each year, or a total of $9,900 for the three years, and, in addition, taxpayer sustained a loss of $1,326, which was taken care of out of the profits of 1921 as it was not previously provided for.

The Pan-American Hide Company, the taxpayer, was incorporated January 20, 1915, and during the year 1918 was engaged in the business of importing and exporting hides and skins.

The only issue in this case is whether the above item is an ordinary and necessary expense incurred by the taxpayer during the year 1918, and whether it is an allowable deduction within the meaning of the Revenue Act of 1918....