McAnelly Hardware Co. v. Commissioner

MCANELLY HARDWARE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. McAnelly Hardware Co. v. Commissioner Docket No. 11422. United States Board of Tax Appeals 9 B.T.A. 361; 1927 BTA LEXIS 2609; November 26, 1927, Promulgated *2609 Where both parties contend that petitioner's original return was incorrect and agree that petitioner's records are erroneous, the petitioner has the burden of satisfying the Board of the correct amount of net income. A. F. Britnell, Esq., for the petitioner. C. H. Curl, Esq., for the respondent. SIEFKIN *362 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the year 1920 in the amount of $1,953.98, which results from a determination by respondent that the statutory net income and invested capital are not determinable. The respondent computed the tax liability of petitioner under the special assessment provisions of the Revenue Act of 1918, using in such computation an amount as net income which he contended was based on the average earnings of business of a similar nature, designated by respondent as "the percentage method." FINDINGS OF FACT. On or about March 16, 1921, petitioner filed its income and profits-tax return for 1920. Such return stated a gross income of $66,735.66, a net income of $13,548.94, an invested capital of $121,227.94, and a tax of $1,117.27. The respondent, on November 30, 1925, determined*2610 a deficiency in tax for 1920 of $1,953.98 based upon a net income of $15,345.77, arrived at by the so-called percentage method derived from an application of rates of average earnings of business of a similar nature, stating in his deficiency letter that neither the net income or invested capital of petitioner were determinable. The deficiency asserted was, therefore, computed under sections 327 and 328 of the Revenue Act of 1918. The books and records of petitioner were incorrectly kept and contained many errors during the year in question. Errors were made in transcribing inventory figures from the original record of inventory to the merchandise record which resulted in increasing the closing inventory in 1920 by $942.08. An error was made in entering an item of $3,700 and petitioner's record of sales was erroneously increased by that amount. OPINION. SIEFKIN: We are confronted in this case with the necessity of determining which of two erroneous methods is most nearly correct. Although petitioner purported to show an invested capital and details of gross income and net income it now says that its income, determined upon a net worth theory is considerably less than that*2611 which its officers swore to in its return. Petitioner admits that the books were incorrectly kept but insists that it is possible to arrive at the true net income by comparing the net worth at the beginning and end of the taxable period, and insists that the figures making up such computations can be accurately ascertained from the books. The only witness for petitioner was the assistant secretary-treasurer of the company, who was not with the company during the year in question and who testified to what the records showed and pointed out certain errors, *363 but did not attempt to show, and could not show, whether the books as thus corrected reflected actual facts. On the other hand, we are asked to approve a deficiency asserted by respondent which he admits is based upon the so-called percentage method in arriving at a net income of $15,345.77 and special assessment applied to that figure. Although petitioner reported a net income of $13,548.94 and a tax thereon of $1,117.24, respondent's application of special assessment to a net income results in a deficiency of $1,953.98, a greater amount than his increase in net income. *2612 Under section 212(b) of the Revenue Act of 1918 it is the Commissioner's duty, if the petitioner's system of accounting does not clearly reflect income, to compute the tax "upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income." The burden of showing such action is incorrect is on the petitioner and we are of the opinion that the burden has not been met. The situation is similar to that considered in , where we said: In regard to the records which petitioner claimed to have, correctly reflecting its income, it was clearly incumbent upon it to disclose their contents to the Board in order that it might be in a position to judge of the correctness or otherwise of the Commissioner's determination. In the absence of such records or of any available evidence of the items entering into the computation of the petitioner's income and disbursements during the year, the Board is manifestly unable to conclude just what the income really was, and is therefore not in a position to say that the determination of the Commissioner was erroneous. *2613 See also . Judgment will be entered for the respondent. Considered by LITTLETON, TRAMMELL, MORRIS, and MURDOCK.