Ginn-Coleman Co. v. Commissioner

GINN-COLEMAN CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Ginn-Coleman Co. v. Commissioner Docket No. 7728. United States Board of Tax Appeals 12 B.T.A. 550; 1928 BTA LEXIS 3503; June 13, 1928, Promulgated *3503 1. Respondent's determination of amounts of merchandise purchased approved. 2. Deficiency held not barred. Charles F. Swindler, Esq., for the petitioner. Bruce A. Low, Esq., and George S. Herr, Esq., for the respondent. SIEFKIN *550 This proceeding is for the redetermination of a deficiency in income and profits taxes asserted by respondent, in the amount of $1,517.46, for 1917. Petitioner alleges that respondent has understated its merchandise purchases; and that the assessment and collection of the contested deficiency is barred by the statute of limitations. FINDINGS OF FACT. Petitioner is an Oregon corporation with its principal office at Moro. During 1917, the accrual method of accounting was regularly employed by the petitioner in keeping its books of account; though the *551 books were poorly kept and incomplete in many respects. In its income-tax return, petitioner reported, and claimed a deduction for, merchandise purchases in the amount of $36,266.42. In 1923, petitioner's books were examined by a revenue agent, whose report is the basis of respondent's deficiency determination. The report shows*3504 that the revenue agent determined the total merchandise purchases for the year by the following method: Accounts payable, Dec. 31, 1917 $2,457.42 Accounts paid during the year 31,873.75 Notes given for merchandise purchases 1,817.73 Total 36,148.90 Deduct: Accounts payable, Jan. 1, 1917 6,400.41 Merchandise purchases for the year 29,748.49 Subsequent to the revenue agent's examination, the petitioner's officers made an investigation of the accounts. This resulted in locating, in the files, several invoices to petitioner which were received during 1917 and had not been recorded on the books. Entry of these invoices was then effected by debiting the amount thereof to merchandise purchases of 1917 and crediting accounts payable. After making these entries, the books reflected total merchandise purchases, for 1917, of $38,229.76. Under date of February 13, 1923, petitioner filed with respondent two instruments in writing designated "Income and Profits Tax Waiver," covering the year 1917. One of these instruments is as follows: FEBRUARY 13, 1923. IT:CA:T 2213-9 INCOME AND PROFITS TAX WAIVER In pursuance of the provisions of subdivision (d)*3505 of Section 250 of the Revenue Act of 1921, Ginn Coleman Company of Moro, Oregon, and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said Gun [Ginn] Coleman Company for the year 1917 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes", approved August 5, 1909, irrespective of any period of limitations. GINN-COLEMAN & CO. (Taxpayer). By R. J. GINN, Sect. D. H. BLAIR, Commissioner C.A.D. The second instrument bearing the same date is in terms the same as the one above quoted, except that it contained the following further *552 provision: "This waiver will be effective for only one year from date of signing." Under date of February 18, 1924, petitioner filed with the respondent a further instrument in writing, as follows: FEBRUARY 18, 1924. INCOME AND PROFITS TAX WAIVER In pursuance of the*3506 provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, Ginn, Coleman and Company, a corporation, of Moro, Sherman Co., Oregon, and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said Ginn, Coleman and Company for the years 1917 & 1918, under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes," approved August 5, 1909. This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation, or the statutory period of limitations as extended by any waivers already on file with the Bureau, within which assessments of taxes may be made for the year or years mentioned. GINN, COLEMAN & CO., Taxpayer. [SEAL.] By J. E. COLEMAN, Pres. D. H. BLAIR, Commissioner. Again, on February 25, 1924, the*3507 petitioner filed another instrument in writing with the respondent, which, except for the signature of the officer who executed it in petitioner's behalf, is identical in all its terms and provisions with that of February 18, 1924. Under date of August 1, 1924, petitioner filed with the respondent a further instrument in writing, as follows: WAIVER OF LIMITATIONS AS TO ASSESSMENTS INCOME AND PROFITS TAXES In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921 and of subdivision (c) of Section 278 of the Revenue Act of 1924, Ginn Coleman & Company, a corporation, of Moro, Oregon, and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits or war profits taxes due under any return made by or on behalf of the said Corporation, for the taxable years 1917, 1918, and 1919 under the Revenue Act of 1924, or under prior income, excess profits, or war profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes," approved August 5, 1909, irrespective*3508 of any period of limitations provided by law. This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation, or the statutory period of limitation as extended by any waivers already on file with the Internal Revenue Bureau, within which assessments of taxes may be made for the year or years mentioned. If the limitations provided *553 or as heretofore extended have already expired, this waiver will be effective for a period of one year from date of signing. It is understood that in signing this waiver, the taxpayer does not concede in advance the correctness of any adjustments, which may be made in the returns, but that all rights of protest and appeal are reserved. Date: August 1, 1924. GINN COLEMAN & CO., [SEAL.] By R. J. GINN, Sect. D. H. BLAIR, Commissioner. Again, under date of May 5, 1925, the petitioner filed a further instrument in writing with the respondent, as follows: INCOME AND PROFITS TAX WAIVER FOR TAXABLE YEARS ENDED PRIOR TO MARCH 1, 1921. MORO, OREGON, May 5, 1925. In pursuance of the provisions of existing*3509 Internal Revenue Laws Ginn-Coleman and Company, a taxpayer of Moro, Oregon, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits or war-profits taxes due under any return made by or on behalf of said taxpayer for the year 1917 under existing revenue acts, or under prior revenue acts. This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1925, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by the Board. GINN-COLEMAN & COMPANY, [SEAL.] By J. E. COLEMAN, President. D. H. BLAIR, Commissioner. The income-tax return filed on April 1, 1918, by the petitioner for 1917, shows a net income of $1,223.58. The petitioner did not file an excess-profits*3510 tax return for 1917. The net income determined by respondent in the deficiency notice is $7,958.37. Said deficiency notice bears date of August 4, 1925. OPINION. SIEFKIN: Petitioner complains that respondent, in his determination of net income, has allowed a deduction for merchandise purchases of only $29,748.49, as against actual total purchases of $38,229.76. The sum and substance of all the evidence had in this case is that an investigation of accounts, after the revenue agent's examination in 1923, led to the discovery of numerous invoices received in 1917, for merchandise purchases, which had not been recorded on the books, whereupon, an entry was made charging *554 merchandise purchases of 1917 with the amount thereof and crediting accounts payable with a corresponding amount. This is the character of the evidence upon which we are asked to base a conclusion of error by respondent, and to find that the actual merchandise purchases amounted to $38,229.76. It is not sufficient to overcome the prima facie correctness of respondent's determination. In his investigation of petitioner's books of account for 1917, the revenue agent ascertained that no authentic*3511 record of merchandise purchases had been maintained by petitioner. He, therefore, resorted to the method set out in the findings of fact to determine what the purchases were for that year. Assuming that the figures used in his computation are correct, and we have no reason to believe they are not, the revenue agent has arrived at the correct amount of purchases, for the method is sound from an accounting standpoint and the result could not be otherwise. The figures relating to accounts payable at the beginning and end of the year, and to disbursements during the year in liquidation of purchase obligations are all taken from the books of account, and the only figure which is contested by the petitioner is the amount of accounts payable at December 31, 1917. The revenue agent shows $2,457.42, while petitioner contends that the correct amount is $10,531.07, a difference of $8,073.65. The petitioner's figure is that reflected by the books, after the adjustment entries were made following the revenue agent's examination in 1923. There is no satisfactory explanation of the failure to record these invoices, if bona fide obligations, on the books in 1917. There is no evidence that*3512 the merchandise covered by these invoices was received in 1917, or, for that matter, at any subsequent time, and, if received in 1917, that they have been accounted for either in the sales or the closing inventory returned for that year. Mere receipt of an invoice is not proof of the receipt of the merchandise, or of the existence of an obligation. No one testified that the credits made in 1923 to accounts payable, purporting to cover these invoices, have been paid, while the evidence strongly, though not conclusively, indicates the contrary to be true. We do not know what these invoices amounted to in the aggregate. We can only surmise that they approximate the amount of the difference between the parties as to the accounts payable at December 31, 1917; they may amount to much less or much more than that difference. However, it seems inconceivable that trade obligations approximating this amount could entirely escape attention until six years after they were incurred, if indeed they were incurred, only to be discovered by the debtor upon investigation of its own accounts. In that period of time it would appear that they should have been paid or otherwise disposed of. *555 *3513 The evidence does not warrant a finding of error in respondent's determination. Pointing to the reduction of income by the revenue agent, by an arbitrary amount of $421.69, in order to arrive at a net income which would fit in with a reconciliation of surplus disclosed in the balance sheet, the petitioner, relying upon the decision of this Board in the , asks the Board to set aside respondent's determination, on the ground that the revenue agent's report shows error on its face. It is true that the agent made the arbitrary reduction of income to which the petitioner refers. His explanation of that action, however, is that all deductions he has allowed, in determining net income, are based upon expenditures by checks; but that there were cash expenditures (as distinguished from expenditures made by check) of which petitioner kept no record. There is no analogy between the instant case and that cited by the petitioner. In the cited case, the method adopted by the revenue agent was a haphazard, hit or miss proposition, without any attempt to verify the entire income; and there were no logical reasons, at least they did*3514 not appear in the report, for the arbitrary adjustments of the revenue agent. Further, all facts considered in that case, the Board was irresistably led to the conclusion that there was no sound basis for the agent's adjustments. In the instant case, all details of the revenue agent's computation of net income clearly appear in the report. Each item of income and each specific deduction are clearly set forth, nothing being hid from view should the petitioner desire to make any contest in respect thereof. The correctness of none of the details of the agent's computation, other than that of purchases, has been challenged by the petitioner; and the evidence does not prove the agent's determination of purchases to be wrong. Furthermore, the testimony of the auditor who was engaged by the petitioner in 1923 to investigate its accounts clearly shows that he found it necessary to make an arbitrary adjustment of the same amount to arrive at what he regarded the correct net income. On the question of the statute of limitations, it is apparent that the assessment and collection are not barred. The various consents in writing set out in our findings of fact extended the time for assessment*3515 to a time beyond the date the deficiency letter was mailed. Two of such consents were executed by the petitioner after the passage of the Revenue Act of 1924 and must be read with the provisions of that Act in mind. See . Cf. , and . It should also be noted that no excess-profits-tax return was filed by the petitioner and for that reason the deficiency, at least so far as it relates to those taxes, is not barred. See . *556 It is not necessary, however, to rest our decision upon that point, since the record shows that the deficiencies were not barred when the deficiency letter was mailed or this proceeding begun. Judgment will be entered for the respondent.