Court Opinion

ID: 4606334
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:38:19.453539+00
Date Added: 2024-06-11T07:53:21.561106
License: Public Domain

Appeal of GAUKLER & STEWART.Gaukler & Stewart v. CommissionerDocket No. 62.United States Board of Tax Appeals1 B.T.A. 578; 1925 BTA LEXIS 2880; February 10, 1925, decided Submitted January 14, 1925.  *2880  The allegations of a petition must be supported by competent evidence.  J. Marvin Haynes, Esq., for the taxpayer.  Willis D. Nance, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner.  JAMES*579  Before JAMES, STERNHAGEN, TRAMMELL, and TRUSSELL.  This is an appeal from an excess-profits tax for the year 1917, determined by the Commissioner to be due from the partnership of Gaukler & Stewart, in the sum of $10,842.08, and a penalty for failure to file a return in the sum of $5,421.04.  FINDINGS OF FACT.  The taxpayer, during the year 1917, was a partnership located in the city of Pontiac, Mich., composed of two members, Henry P. Gaukler and Elisha Stewart.  The balance sheet set up by the Commissioner as of the beginning of the taxable year and used by him in determining the invested capital of the partnership is as follows: Assets.January 1, 1917.Cash$12,759.33Accounts receivable15,642.69Inventory13,166.94Fixed assets25,571.33Deferred charges67,140.29Liabilities.Accounts payable5,983.11Reserve for depreciation7,168.6313,151.74Net worth.Excess of assets over liabilities53,988.5567,140.29*2881  The closing balance sheet of the partnership for 1917, as set up by the examining revenue agent and agreed to by the taxpayer, is as follows: Assets.December 31, 1917.Cash$10,734.49Accounts receivable13,301.19Inventory16,458.68Fixed assets52,872.25Deferred charges1,540.8694,907.47Liabilities.Accounts payable10,461.40Reserve for depreciation10,430.8320,892.23Net worth.Excess of assets over liabilities74,015.2494,907.47*580  The Commissioner computed the net income of the taxpayer at $30,872.94, as follows: Sales$202,146.47Deductions - Labor$23,925.78Merchandise purchased88,384.84Freight32,140.06Salaries2,210.00Rent300.00Interest64.67Taxes913.18Other expenses10,582.80158,521.33Net income43,625.14Income as disclosed by books (agent's figures)43,625.14Deduction - Depreciation allowed$3,262.20Addition - Repair charges disallowed300.002,962.20Income as corrected40,662.94Less - Additional salary allowance9,790.00Net income as shown in Department letter dated March 29, 192230,872.94The examining revenue*2882  agent reconciled the net worth of the partnership between the two foregoing balance sheets as follows: RECONCILIATION OF NEW WORTH.1916.  Dec. 31, Gaukler & Stewart, net worth$53,988.551917. Gaukler & Stewart, profits40,662.94Total94,651.49Gaukler & Stewart, withdrawals20,636.25Dec. 31 (E. Stewart & Sons), net worth74,015.24The taxpayer introduced photostat copies of ledger sheets of the personal accounts of the partners during the year in question.  DECISION.  The Board determines that there is a deficiency in the sum of $16,263.12, and the determination of the Commissioner is approved.  OPINION.  JAMES: The question here presented turns upon the correctness of the balance sheets set up by the revenue agent, primarily to ascertain invested capital, and admittedly estimated, the correctness of his computation of net income, and the correctness of the accountants' theory of computing the net income in the following manner: COMPUTATION OF NET INCOME.Net worth December, 31, 1917$74,015.24Less net worth December 31, 191653,988.5520,026.69Add withdrawals of partners during 191710,359.53Net profit30,386.22Less additional salaries allowed by Treasury Department letter dated March 29, 19229,790.00Net income as corrected20,596.22*2883 *581  Manifestly the above computation rests upon comparisons of surplus between two balance sheets, both admittedly inaccurate, and upon the correctness of an alleged sum of partners' withdrawals, computed from evidence which is clearly inadequate.  The ledger sheets introduced in evidence are incapable of analysis without reference to journal entries or the knowledge of persons familiar with the accounts.  The books of original entry were not introduced in evidence.  The persons familiar with the accounts were not produced as witnesses.  In lieu of such testimony, taxpayer's counsel has undertaken to analyze the ledger sheets and to show the amounts of withdrawals, setting forth such analysis in his brief.  The Board is unable to determine whether this analysis is correct by comparison with any of the testimony and evidence in the case.  The taxpayer claims special relief under section 210 of the Revenue Act of 1917.  No evidence was introduced in support of this claim and the Commissioner moved for the dismissal of this portion of taxpayer's petition.  This motion was at that time taken under advisement.  It must now be granted upon the ground and for the reason alleged*2884  by the Commissioner.