Opinion
Docket No. 12393.
1948-01-29
C. L. CARVER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Meyer A. Cook, Esq., for the petitioner. Howard M. Kohn, Esq., for the respondent.
Taxpayer, on July 1, 1925, changed his method of keeping books of his printing business from the cash to the accrual basis. He continued, however, to compute his net income for income tax purposes on the cash basis. Upon audit of the 1941 return the Commissioner recomputed business net income on the accrual basis and made certain adjustments to effect the transition in reporting income from the cash to the accrual basis, increasing reported income of $43,826.89 to $83,211.18. His action in so doing is approved. Meyer A. Cook, Esq., for the petitioner. Howard M. Kohn, Esq., for the respondent.
The Commissioner determined a deficiency of $25,410.82 in income tax for the calendar year 1941. The only question to be determined is whether the Commissioner erred in computing net income of petitioner's printing business for 1941 on the accrual basis and in making certain adjustments thereto necessary to effect the change in reporting income from the cash basis to the accrual basis, the taxpayer having changed his method of accounting in keeping his books to the accrual basis in 1925, but having continued to use the cash basis in making his returns.
FINDINGS OF FACT.
Most of the facts were stipulated. They are as follows:
The petitioner's residence and place of business are in Canton, Ohio. He has continuously owned and operated, as a sole proprietor, a printing business under the name and style of the ‘Caxton Press‘ since 1909.
Commencing in 1909, and continuing for many years thereafter, petitioner kept the records of his business on the cash receipts and disbursements basis. The books and records of the business were kept on an accrual basis throughout the year 1941, including such accounts as accounts receivable, reserve for doubtful accounts, paper inventory, work in process, prepaid insurance, and other prepaid items, accounts payable, accrued wages, and accrued taxes and unemployment insurance. Petitioner's business in 1941, and for many prior years, was such as to require that its books and records be kept on the accrual basis.
Petitioner filed income tax returns for 1941, and for all prior years, in which he stated that such returns were prepared on the cash basis. Such returns at no time reflected any change from the cash to the accrual basis either of accounting or of preparing returns. On such returns all items were reported on the cash receipts and disbursements basis, with the exception that, in 1941 and for several prior years, the opening paper inventory was included, and the closing paper inventory was deducted, in computing ‘cost of goods sold.‘ The inventory of work in process (an item separate and distinct from paper inventory) was not so reported.
In the deficiency notice respondent made an adjustment increasing petitioner's taxable net income from his printing business, as reported for 1941, by the amount of $39,384.29, with the following explanation:
(c) In your income tax return for the taxable year ended December 31, 1941, you reported items of gross income and deductions on the cash receipts and disbursements basis, thereby resulting in a taxable net income from your printing business in the amount of $43,826.89. The books relating to the printing business are kept on the accrual method of accounting. It is held that the taxable net income from the printing business should be computed in accordance with the method of accounting regularly employed in keeping the books in compliance with the provisions of Section 41 of the Internal Revenue Code and Section 19.41-1, Regulations 103. Accordingly, the taxable net income for the year 1941 has been computed on the accrual basis, including the adjustments necessary to change from the cash receipts and disbursements basis to the accrual basis, with the result that the taxable net income from the printing business amounts to $83,211.18.
The amount of the above adjustment was determined by the respondent as follows:
+-----------------------------------------------------------------------------+ ¦Net income on accrual basis (as arrived at from petitioner's ¦ ¦ ¦books, ¦ ¦ +------------------------------------------------------------------+----------¦ ¦before the adjustments referred to in the deficiency notice) ¦$41,219.88¦ +------------------------------------------------------------------+----------¦ ¦Adjustments: ¦ ¦ ¦ +-------------------------------------------------+----------------+----------¦ ¦Add: ¦ ¦ ¦ +-------------------------------------------------+----------------+----------¦ ¦Accounts receivable 1-1-41 ¦$29,546.52 ¦ ¦ +-------------------------------------------------+----------------+----------¦ ¦Work in process 1-1-41 ¦14,960.99 ¦ ¦ +-------------------------------------------------+----------------+----------¦ ¦Prepaid insurance ¦239.82 ¦ ¦ +-------------------------------------------------+----------------+----------¦ ¦ ¦ ¦44,747.33 ¦ +-------------------------------------------------+----------------+----------¦ ¦ ¦ ¦85,967.21 ¦ +-------------------------------------------------+----------------+----------¦ ¦Deduct: ¦ ¦ ¦ +-------------------------------------------------+----------------+----------¦ ¦Accounts payable 1-1-41 ¦$263.66 ¦ ¦ +-------------------------------------------------+----------------+----------¦ ¦Accrued taxes ¦1,380.70 ¦ ¦ +-------------------------------------------------+----------------+----------¦ ¦Accrued wages ¦298.73 ¦ ¦ +-------------------------------------------------+----------------+----------¦ ¦Accrued industrial insurance ¦373.99 ¦ ¦ +-------------------------------------------------+----------------+----------¦ ¦Accrued unemployment insurance ¦350.72 ¦ ¦ +-------------------------------------------------+----------------+----------¦ ¦Accrued Social Security tax ¦88.23 ¦ ¦ +-------------------------------------------------+----------------+----------¦ ¦ ¦ ¦$2,756.03 ¦ +-------------------------------------------------+----------------+----------¦ ¦Corrected income from business ¦ ¦83,211.18 ¦ +-------------------------------------------------+----------------+----------¦ ¦Reported ¦ ¦43,826.89 ¦ +-------------------------------------------------+----------------+----------¦ ¦Net adjustment ¦ ¦39,384.29 ¦ +-----------------------------------------------------------------------------+
The figures in the above schedule are accurate for the respective items.
The record discloses additional facts, as follows:
Petitioner's return for the calendar year 1941 was filed with the collector for the eighteenth district of Ohio, at Cleveland, Ohio.
As of July 1, 1925, petitioner changed his method of accounting employed in keeping his books of account from the cash to the accrual basis. The method of accounting installed in 1925 was developed by the printing industry.
A revenue agent, in 1928, made an examination for the years 1925 and 1926. Subsequently examinations were made by revenue agents for the years 1931, 1932, 1938, 1939, and 1940.
The opening and closing paper inventories shown on the 1940 and 1941 returns in computing cost of goods sold were comparatively small amounts.
In addition to the adjustment of $39,384.29 pertaining to business net income, the Commissioner made three adjustments increasing taxable income in the total amount of $921.22. These three adjustments are not in controversy.
OPINION.
VAN FOSSAN, Judge:
The difficulty in which petitioner finds himself and of which he complains is of his own making. He changed the method of keeping his books and accounts from the cash to the accrual method in 1925, but for 16 years thereafter continued to prepare and make his tax returns on the cash basis. He never asked permission of the Commissioner to change the method of reporting income to the accrual basis. He admits that the cash method of reporting did not conform to his books and that the Commissioner was within his rights in insisting on the accrual basis in making returns. He complains that the adjustments made by the Commissioner do not clearly reflect income. He concedes that the adjustments made by the Commissioner in 1941 would have been proper in the year he changed his method of keeping his accounts, but contends that now such adjustments work a hardship and result in a greater tax.
The facts were largely stipulated. One witness was called, a certified public accountant, whose testimony added few facts to the stipulation. Much of his testimony was given in answer to hypothetical questions. Some of the opinions expressed support respondent's positions. Certain it is that they did not establish that respondent erred in making the adjustments complained of. In William Hardy, Inc. v. Commissioner, 82 Fed.(2d) 249, the court observed, ‘In deciding what method is necessary clearly to reflect a taxpayer's income, the commissioner is given a breadth of discretion which, though not unlimited, will be reviewed here only when abuse of it is clearly shown, ‘ citing Brown v. Helvering, 291 U.S. 193; Lucas v. American Code Co., 280 U.S. 445. On the record before us it certainly can not be said that the proof clearly shows that respondent has abused his discretion.
The respondent held that, accurately to reflect petitioner's income, accounts receivable, work in process, and prepaid insurance should be added to the net income reflected by the books. From the total so arrived at he deducts accounts payable, accrued taxes, accrued wages, accrued industrial insurance, accrued unemployment insurance, and accrued social security tax, giving a figure of corrected income in the amount of $83,211.18, or a net adjustment of $39,384.29. The correctness of the amounts of these adjustments is not disputed. The only question is the propriety in making such adjustments in 1941. This contention is answered by the holding of the Circuit Court of Appeals in Hardy v. Commissioner, supra, where it said: ‘That he (Commissioner) has in previous years accepted returns upon a basis other than that of the change he requires will not preclude insisting upon a method that will clearly reflect the income for the period being audited, ‘ citing Niles Bement Pond Co. v. United States, 281 U.S. 357; Mt. Vernon Trust Co. v. Commissioner, 75 Fed.(2d) 938.
We do not know, nor are we concerned with, why the respondent did not make a change in petitioner's method of reporting income in some previous year. It may have been due to error or oversight or lack of information. One assumption is as good as another. See Niles Bement Pond Co. v. United States, supra. We deem this immaterial. Section 41 of the Internal Revenue Code provides that the net income for income tax purposes shall be computed in accordance with the method of accounting regularly employed by the taxpayer in keeping his books, unless such method does not clearly reflect income, in which case such method as, in the opinion of the Commissioner, does clearly reflect income, shall be used. It was within the power of the petitioner to have effected the change in the method of reporting his income by requesting permission of the Commissioner so to do. This, petitioner knew. Why he did not do so is not shown by the record, nor is it material to the issue. The fact is respondent, in 1941, determined that the change from the cash to the accrual method of computing income should be employed. This was within his jurisdiction and authority. Petitioner does not contest the accuracy of the amounts of adjustments made. As above observed, the record does not establish that in so doing respondent acted without authority or erroneously. As stated in Schuman Carriage Co., Ltd., 43 B.T.A. 880: ‘The failure of the petitioner to make its returns consistently upon the accrual basis may place it in an unfortunate position. But for this situation the petitioner is alone to blame.‘
We hold that petitioner, who had the burden of proof, has failed to demonstrate error in respondent's action. The errors complained of are not apparent on the mere recital of the computation. Allegations of error are not self-proving. On the facts we can not hold that respondent has acted erroneously.
Decision will be entered for the respondent.