McCauley-Ward Motor Supply Co. v. Commissioner

MCCAULEY-WARD MOTOR SUPPLY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. McCauley-Ward Motor Supply Co. v. Commissioner Docket No. 7466. United States Board of Tax Appeals 10 B.T.A. 394; 1928 BTA LEXIS 4120; January 30, 1928, Promulgated *4120 Amounts of reserves (1) to meet contingent bonuses for employees which might accrue in a subsequent year, and (2) to meet expenses of an audit of petitioner's books arranged for but not performed until the following year; disallowed as deductions from income. C. O. McCauley for the petitioner. Bruce A. Low, Esq., for the respondent. LOVE *394 This proceeding is to redetermine a deficiency in income and profits taxes for a fiscal year ended October 31, 1920, amounting to $1,545.62, a part of which is in controversy. The petitioner alleges the Commissioner erred in restoring to income a reserve of $2,000 for an employees' bonus, and a reserve of $800 to meet the expense of an audit of petitioner's books. FINDINGS OF FACT. The petitioner is a Texas corporation with its principal office in Waco. In June, 1919, petitioner inaugurated the practice of paying to each of its traveling salesmen as extra compensation or bonus a *395 percentage of the amount of sales made by him above a fixed annual quota amount. The amount of the bonus could not be ascertained until after the end of the annual period. The annual period upon which the*4121 bonus was computed ended with the month of June because the practice of giving the bonus was started in that month. The petitioner's books were kept and its tax return for the year here in question was made on the basis of a fiscal year ending October 31. On October 31, 1920, a reserve of $2,000 was set up to provide for a pro rata part of the bonus which might be paid for the annual period ending in June, 1921. In the middle of October, 1920, petitioner engaged a firm of accountants to audit its books up to October 31, 1920. They did not start the audit until after the completion of an inventory sometime during January, 1921, when the books were closed by the accountants. They were employed by the day, and it was estimated at the time they were engaged that the cost would be $800. A reserve of this amount to meet the estimated cost was entered on petitioner's books as of October 31, 1920. The work was completed in January and the accountants were paid $650.80. The cost of new books and other items amounted to more than the balance of the $800 reserve. The Commissioner restored the amount of both reserves to income. Petitioner's books were kept on an accrual basis. *4122 OPINION. LOVE: In arriving at net income, only such deductions from gross income may be made as are allowed by the statute. In the Revenue Act of 1918, which is applicable to the taxable year here under consideration, reserves are not permitted to be deducted (with certain exceptions in the case of insurance companies). ; ; ; ; . The items in question are not deductible as business expenses because such expenses, to be deductible, must have been paid or incurred in the taxable year. We apprehend that no liability for the auditing of petitioner's books accrued until the work was performed the following year. . Also, no liability for bonuses could have accrued until after the end of the annual period upon which was based the computation to determine the amounts of bonuses, if any. See *4123 . Judgment will be entered on 15 days' notice, under Rule 50.