Easterwood v. Commissioner

W. E. EASTERWOOD, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. MRS. W. E. EASTERWOOD, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Easterwood v. Commissioner Docket Nos. 40181, 40182, 63416, 63417. United States Board of Tax Appeals 28 B.T.A. 1284; 1933 BTA LEXIS 1026; August 29, 1933, Promulgated *1026 The petitioners' books of account were kept on the calendar year basis for the years from 1924 to 1930, inclusive, and their income tax returns were duly filed in accordance therewith. Held, that deficiencies for the fiscal years ended at July 31, 1926 and 1927, were erroneously determined. L. A. Luce, Esq., for the petitioners. J. M. Leinenkugel, Esq., and R. B. Cannon, Esq., for the respondent. LANSDON *1284 At Docket Nos. 40181 and 63416 the respondent has determined deficiencies against W. E. Easterwood, Jr., for the fiscal years ended at July 31, 1926, 1927, and 1929, in the respective amounts of $8,463.65, $2,669.40 and $620.54, to which have been added negligence penalties for the first two fiscal years in the amounts of $425.18 and $133.47, and at Docket Nos. 40182 and 63417, he has determined deficiencies against Mrs. W. E. Easterwood, Jr., for the same fiscal years in the respective amounts of $8,463.65, $2,679.97 and $261.34, which negligence penalties for the first two years in the amounts of $427.62 and $133.99. The only issue pleaded in the amended petition filed at the hearing and duly answered by the respondent is*1027 that the Commissioner erroneously determined that petitioners' books were kept on the basis of a fiscal year ended at July 31, and that their returns should have been made on the same basis. The several proceedings were consolidated for hearing and report. FINDINGS OF FACT. The petitioners are husband and wife. During all the time material here they resided in Dallas, Texas. All the income for the several years under review was community income which belonged to them in equal parts and was so reported for taxation on separate returns. Prior to August 1925, W. E. Easterwood was engaged in the business of selling the products of the Listerated Gum Corporation of Chicago on a commission basis. On August 7, 1920, he entered into a contract with that company under which he became sole distributor of its products in Texas and five other states. Under this contract he purchased his merchandise and sold it to jobbers and retailers on his own account. *1285 For each of the years from 1924 to 1930, inclusive, petitioner W. E. Easterwood made and filed his income tax returns on a calendar year basis and for the same years, except 1924, when the marital community had no*1028 taxable income, Mrs. W. E. Easterwood made and filed her income tax returns on the same basis. Neither petitioner ever requested permission to change to a fiscal year basis. Petitioners' books of account for the years from 1924 to 1930 were kept on a calendar year basis and were regularly closed as of December 31 of each of those years. Inventories as of December 31 were made in each year, beginning with 1925, and proper certificates in evidence thereof were attached to the several income tax returns made as above set forth. When W. E. Easterwood became an independent merchant of chewing gum under the contract of August 7, 1925, an inventory of his business was made as of July 31 of that year and a good system of accounting was installed as of that date. Easterwood ordered such books to be kept on the calendar year basis. They were so kept and truly reflected his income from all sources. In addition to his income from the chewing gum business, petitioner received interest on bank deposits in the years 1926 and 1927, in the amounts of $2,595.31 and $1,829.20. In 1926, 1927, and 1929 he received corporate dividends on a yearly basis in the respective amounts of $800, $1,000, *1029 and $3,249.14. In 1927 and 1929 he received his pro rata share of the income from his mother's estate in the respective amounts of $3,000 and $3,249.14. Each of these amounts represented one half the aggregate of income from the source indicated for the entire calendar year in which it was received and each was included in gross income returned for taxation in the several years. Upon an examination the Commissioner determined that the books of the chewing gum business were kept on a fiscal year basis and for the years from 1925 to 1930, inclusive, held that the income reported on the calendar year basis was income for a corresponding fiscal year ended at July 31 of each of the years so reported, determined the deficiencies, and imposed the penalties here in controversy. OPINION. LANSDON: Since it is admitted that each of the petitioners filed income tax returns during the whole period under review on the calendar year basis, the only question here is whether their books were kept on the same basis and truly reflected income. W. E. Easterwood filed his first return in 1924 on the calendar year basis and, in the circumstances set out in our findings, he then established his*1030 right to file all subsequent returns on the same basis except upon *1286 the Commissioner's permission to change or upon the determination by that officer that such returns were not based upon his regular accounting system, or if so based, that such system failed to reflect true income. The evidence adduced by petitioners convinces us that their books were kept on the calendar year basis. Easterwood testified that he had so ordered. Expert accountants who are familiar with the books testified that they were so kept. Inventories and closing entries as of December 31 of each year were duly made. A substantial part of the income reported was of a nature that indicates its accrual as of December 31 of each year. It is our opinion, therefore, that petitioners' books were kept on a calendar year basis and that the several income tax returns were properly made and filed on the same basis. The Commissioner erroneously determined the deficiencies in controversy. ; Cf. ; *1031 ; affd., . Decision will be entered under Rule 50.