National Airlines, Inc. v. Commissioner

National Airlines, Incorporated, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent National Airlines, Inc. v. Commissioner Docket No. 12408 United States Tax Court 9 T.C. 159; 1947 U.S. Tax Ct. LEXIS 138; July 31, 1947, Promulgated *138 Decision will be entered for the respondent. Prior to the fiscal year ended June 30, 1944, petitioner kept its books and reported its income for income tax purposes on a basis which reflected receipts from ticket sales whether or not the transportation represented by the tickets had been furnished. In January 1944 the Civil Aeronautics Board directed petitioner to keep its books in such a way as to defer receipts from tickets for which transportation had not actually been furnished. Petitioner requested permission from respondent to change its method of accounting for income tax purposes to the method prescribed by CAB. Respondent refused. Held, respondent's refusal did not constitute an abuse of his discretion. John H. Wahl, Jr., Esq., for the petitioner. Bernard D. Hathcock, Esq., for the respondent. Hill, Judge. HILL *160 *139 The respondent determined deficiencies and an overassessment as follows: Year ended -- Tax Deficiency Overassessment June 30, 1943 Income tax $ 37,486.05 June 30, 1944 Income tax $ 19,806.53 June 30, 1945 Income tax 27,491.80 Declared value excess profits tax 10,371.03 The question is whether respondent properly disallowed the deferment by petitioner of certain transportation revenues. The returns were filed with the collector of internal revenue for the district of Florida. FINDINGS OF FACT. Petitioner, a Florida corporation, was organized in 1937, with principal offices in Miami. Petitioner's business is air transportation and it is subject to the jurisdiction of the Civil Aeronautics Board, hereinafter referred to as CAB. Petitioner's books were kept on the accrual basis. Petitioner sells passenger tickets to the public and is required by CAB regulations to refund fares to ticket purchasers in the event of voluntary or involuntary cancellation of flights. Petitioner maintains a special bank account to meet refunds. Withdrawals from this account are limited to this purpose. Prior to the fiscal year ended June 30, 1944, petitioner kept its books and reported*140 its income for Federal tax purposes on a basis which reflected in income receipts from ticket sales whether or not the transportation represented by the tickets had been furnished. In January 1944 petitioner was directed by CAB to keep its books differently. CAB required petitioner in effect to segregate receipts from ticket sales in such a way as to show in one account earned passenger revenue, i. e., income derived from transportation actually furnished, and to show in another account receipts from ticket sales for which petitioner was still obliged to furnish transportation. Petitioner complied with this directive. Petitioner, by letter dated September 27, 1944, requested respondent for permission to change its method of accounting for income tax purposes from its former method, which was based on ticket sales, to the method prescribed by CAB, based on the segregation of earned and unearned transportation revenue, the unearned revenue being set up as a deferred credit. Respondent, by letter dated October 6, 1944, refused this request. By letter dated May 18, 1945, petitioner *161 again requested permission to change its accounting method, which was refused by respondent. *141 Petitioner nevertheless filed its returns for the taxable years here in question and reported its income according to the accounting method prescribed by CAB, i. e., on an earned income basis, and it deferred unearned income. Respondent, in his notice of deficiency, refused to allow the deferment of unearned income and consequently restored to petitioner's income for the taxable years ended June 30, 1944 and 1945, the respective amounts of $ 21,207.13 and $ 67,357.05. OPINION. The question for decision is essentially whether respondent abused his discretion in refusing petitioner's request to change its accounting method for tax purposes. Section 41 of the Internal Revenue Code1 vests respondent with discretion in prescribing or approving accounting methods for tax purposes. Prior to the fiscal year ended June 30, 1944, petitioner had reported on a receipts basis in so far as ticket sales were concerned. After being directed by CAB to keep its books differently, petitioner requested respondent to permit it to report its income according to the method prescribed by CAB. Respondent refused. Was this an abuse of his discretion? We think not. *142 Petitioner, in effect, claims that, because the income reported under the accounting method required by respondent embraces unearned income and also embraces receipts which may subsequently be subject to refund, respondent's method fails properly to reflect income. Without the necessity for elaborate discussion, we think these contentions have been answered previously by such cases as Brown v. Helvering, 291 U.S. 193; South Tacoma Motor Co., 3 T. C. 411; and Your Health Club, Inc., 4 T. C. 385. Since, on the basis of the cited cases, the system of accounting on which respondent insists does not fail properly to reflect income, we can find no grounds on which to base a charge of abused discretion in his refusal to permit the adoption of some different method. Petitioner, in effect, is requesting us to substitute our judgment for respondent's in selecting one of two methods of accounting. This we refuse to do in the absence of any abuse. As was said in Brown v. Helvering, supra, "It is not the province of the court to weigh and determine the relative*143 merits of systems of accounting." *162 That a taxpayer may be required to account one way for one government agency and another way for a different government agency may well be a hardship, and we have no doubt it is, but we are certain that the remedy does not lie with us as a judicial byproduct of a tax determination. We are here concerned only with whether respondent abused his discretion. For the reasons stated in the cases cited, we are satisfied there is no justification for our interference with respondent's exercise of his administrative discretion. We hold, therefore, that respondent's refusal to allow a deferment of the income here in question must be sustained. Decision will be entered for the respondent. Footnotes 1. SEC. 41. GENERAL RULE. The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. * * *↩