Case Name: Appeal of TEL-ELECTRIC CO.
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1925-01-29
Citations: 1 B.T.A. 434
Docket Number: Docket No. 315
Parties: Appeal of TEL-ELECTRIC CO.
Judges: Before LittletoN, Trammell, and Trussell.
Reporter: Reports of the United States Board of Tax Appeals
Volume: 1
Pages: 434–436

Head Matter:
Appeal of TEL-ELECTRIC CO.
Docket No. 315.
Submitted December 6, 1924;
decided January 29, 1925.
O. B. McAtee, Esq., for the taxpayer.
A. H. Fast, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner.
Before LittletoN, Trammell, and Trussell.

Opinion:
OPINION.
Littleton: The points in issue in this case are: (1) Whether the Board has jurisdiction to review the disallowance of a claimed deduction from gross income of the year 1917 of interest paid in that year, if such a disallowance does not result in the proposal of the assessment of an additional tax for 1917, but does affect the deficiency in tax for 1918 and 1919; and (2) whether taxpayer is entitled to deduct from gross income of 1917 interest paid in that year which accrued and became a liability in the years 1914 to 1916, inclusive, when it kept its books and rendered its returns upon the accrual basis. With respect to the first point it is contended by the Commissioner that the Board has jurisdiction under the lievenue Act of 1924 to review only deficiencies in tax relating to a given year and that inasmuch as in this case no deficiency in tax has been found for any other years than 1918 and 1919 the Board has no authority to consider whether the deduction from gross income of 1917, which has been disallowed by the Commissioner, was properly disallowed.
We are of the opinion that this position is not well taken. In this case the Board clearly has jurisdiction to consider the deficiency in tax found by the Commissioner for the years 1918 and 1919. That deficiency arose in part from a failure on the part of the Commissioner to allow as a deduction from gross income of 1917 interest paid in that year. Since the tax for 1917 affects the invested capital for 1918 and the resultant tax for 1918 affects invested capital for 1919, and since the Board clearly has the right to review the deficiency in tax found by the Commissioner for 1918 and 1919, it necessarily follows that the Board has the right to consider as a defense by the taxpayer to the proposed deficiency, the correct ness of the claimed deduction in 1917. See Appeals of Bruin Coal Co., 1 B. T. A. 83; E. J. Barry, 1 B. T. A. 156; and Hickory Spinning Co., 1 B. T. A. 409.
Section 13(d) of the Revenue Act of 1916 provides:
A corporation, joint-stock company or association, or insurance company, keeping accounts upon any basis other than that of actual receipts and disbursements, unless such other basis does not clearly reflect its income, may, subject to regulations made by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, make its return upon the basis upon which its accounts are kept, in which case the tax shall be computed upon its income as so returned.
This section permits the taxpayer to keep its books and render its returns upon an accrual basis, and this taxpayer followed that method in keeping its books of account and in reporting its income for 1917 and prior years. The Board is of the opinion that the interest on the indebtedness of the taxpayer accrued and became a liability in each of the years 1914 to 1917, inclusive, and constituted proper accrual items, and were allowable deductions in those years; therefore, interest which accrued and became a liability in years prior to 1917 can not be deducted from the gross income of 1917. The fact that the interest was not accrued on its books or deducted in its returns for each of the years when liability therefor was incurred can not justify the deduction in the return for the year 1917. When a taxpayer elects to report his income on either the cash receipts and disbursements or the accrual basis he must consistently report his income and deductions on that basis. Otherwise his return would not reflect his true net income. We can find no justification in the law for the deduction in the return for 1917 of the interest which accrued in the years 1914 to 1916, inclusive, when the taxpayer has adopted the accrual method of reporting income.
Taxpayer relies upon the decision of the Court of Claims in the case of the Brilliant Coal Company v. United States, 59 Ct. Cls. 481, in support of its contention that interest on its indebtedness which accrued in years prior to 1917 is an allowable deduction in the year in which paid. There is nothing in that decision to indicate whether the taxpayer was on a cash receipts or an accrual basis. We are of the opinion that the conclusion reached by the court in that case is not applicable to the case of a corporation taxpayer which keeps its books and reports its income on the accrual basis.