Duriron Co. v. Commissioner

THE DURIRON CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Duriron Co. v. Commissioner Docket No. 23930. United States Board of Tax Appeals 18 B.T.A. 554; 1929 BTA LEXIS 2020; December 20, 1929, Promulgated *2020 Petitioner reported its income on the basis of a calendar year. Commissioner erred in computing its tax liability on another basis. Warren W. Cummingham, Esq., Chester M. Patterson, Esq., and Fred A. Woodis, Esq., for the petitioner. Maxwell E. McDowell, Esq., and Frank B. Schlosser, Esq., for the respondent. MURDOCK *554 The Commissioner determined a deficiency of $93,994.27 in the petitioner's income and profits taxes for an alleged fiscal year ended *555 April 30, 1919. He also determined an overassessment for the period January 1 to April 30, 1918. The hearing in this case was limited under paragraph (a) of Rule 62 of the Board's rules of practice to issues other than those involving sections 327 and 328 of the Revenue Act of 1918. The error alleged by the petitioner for our present consideration is: The computation of the tax liability of the petitioner for the period from January 1, 1918, through December 31, 1919, upon the basis of alleged fiscal periods ending April 30, 1918, April 30, 1919, and December 31, 1919, respectively, rather than on the basis of the calendar years 1918 and 1919. FINDINGS OF FACT. *2021 The petitioner was incorporated in New York in 1912 under the name of Duriron Castings Co. In 1920 its name was changed to the Duriron Company, Inc. It is engaged in the manufacture of an acid, alkali and rust-resisting metal known as duriron. At first it had a sales organization in New York City and contracted with a firm in Dayton, Ohio, for the manufacture of its product. In 1915 it leased a plant at Dayton, Ohio, and since then it has manufactured its own product. Its books were kept at the New York office until early in 1917, from which date they have been kept in Dayton, Ohio. Its by-laws adopted in 1912 provide that its fiscal year shall commence with the first day of January and end with the last day of December in each year. This provision of the by-laws has never been modified or changed. The original by-laws also provide for an annual stockholders' meeting to be held in May of each year and such meetings were held in May up to and including the year 1919. At these meetings officers were elected and salaries were fixed. At a special meeting of the stockholders in September, 1919, the by-laws were amended to provide for an annual meeting in February of each*2022 year. The petitioner divided its inventory into two groups, one group consisting of goods in process and finished goods and the other of raw materials. Someone inspected the raw materials at the end of each month and estimated the quantity of each on hand. A current inventory of goods in process and finished goods was maintained on a card system, but an actual account of these goods was made only on December 31 of each year. Generally the current inventory at the end of the year did not differ a great deal from the physical inventory taken at the end of the year. Financial statements were prepared from the books monthly and submitted to the officers. The books of the petitioner were ruled down on the 30th of April of each year. They were also *556 ruled down on December 31, 1919, but were not ruled down on December 31, 1918. Adjustments for bad debts were made on the books as of April 30 and as of December 31 in each year. The petitioner employed a firm of accountants to audit its books and prepare its income-tax returns for each of the calendar years 1918 and 1919. This firm for each of these years, in the early part of the following year, prepared a memorandum*2023 from the books. Each memorandum showed certain balancing or closing entries for the various accounts which were not shown on the books at the time the memorandum was prepared. The firm for each year furnished the petitioner with a copy of the memorandum which it thereafter retained as part of its records. On each memorandum there were entered an item representing depreciation, an item representing amortization, and an item representing bad debts. Each memorandum purported to show the correct income for the preceding calendar year and the financial condition of the company as of the close of that year. After the memorandum was prepared adjusting entries were made on the books as of December 31 for bad debts, depreciation and amortization. At all times since its organization the petitioner had made its annual Federal income-tax returns on the calendar year basis. The method regularly used by the petitioner in keeping its books was such as would correctly and accurately reflect its true income on the basis of a calendar year. The Commissioner has computed the petitioner's income-tax liability from January 1, 1918, through December 31, 1919, on the basis of the following accounting*2024 periods: 1. From January 1, 1918, through April 30, 1918. 2. From April 30, 1918, through April 30, 1919. 3. From April 30, 1919, through December 31, 1919. Certain documents have been offered in evidence, from which the parties have agreed that under Rule 50 they can compute the petitioner's income and profits-tax liability for the calendar year 1918 and for the calendar year 1919. The petitioner's annual accounting period was the calendar year. OPINION. MURDOCK: Counsel indicated at the hearing that from documents offered in evidence they can, under Rule 50, agree upon the correct tax liability if the Board will only say what is the correct taxable period. Each party has a contention which requires consideration only in the event our decision sustains the period used by Commissioner. The real question in this case appears to be a question of fact, "What was the petitioner's annual accounting period?" This is *557 important under section 212(b) of the Revenue Act of 1918, which is as follows: 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*2025 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 upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer's annual accounting period is other than a fiscal year as defined in section 200 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year. If a taxpayer changes his accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, subject to the provisions of section 226. If the petitioner had no annual accounting period, the Act provides that the calendar year must be used. The petitioner had a method of accounting which it regularly employed in keeping its books and its method clearly reflected its income. Thus under the Act the Commissioner had no authority to use*2026 an accounting period other than the calendar year unless the petitioner had adopted such another accounting period, and his contention must be that the petitioner has adopted the period from May 1, 1918, to April 30, 1919, and has erroneously concluded that it has adopted the calendar year as its accounting period. All of the facts which moved the petitioner to make its returns on the basis of a calendar year and which moved the Commissioner to change the basis are before us and we need not be particularly concerned with questions of presumptions or burden of proof. The respondent in support of his action points to the fact that the books were ruled down on April 30 each year; annual meetings were held in May of each year; and income can be accurately computed as of April 30. The petitioner on the other hand bases its argument on the fact that the by-laws provided that the calendar year should be the fiscal year; officers did not know of or authorize a ruling down of the books on April 30; concededly its income has been determined accurately from the books on the basis of a calendar year; a physical inventory was taken only on December 31; and its returns have always been made*2027 on the basis of a calendar year. The decision of the issue must depend upon the weighing of certain conflicting circumstances of this particular case. The fact that the bookkeeper ruled down the books on April 30 is the only fact inconsistent with the use of a calendar year accounting period. *558 But this fact is not of controlling significance and its importance is more than offset by a consideration of other facts inconsistent with the adoption of the accounting period used by the Commissioner. It is our opinion that this petitioner's accounting period was the calendar year and it follows that the Commissioner erred in computing the deficiency on another basis. Further proceedings will be had under Rule 62(a), or, in the absence of such proceedings, judgment will be entered Under Rule 50.