Court Opinion

ID: 4497640
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:15:32.098345+00
Date Added: 2024-06-11T14:54:15.002436
License: Public Domain

Murdock,
dissenting: The Commissioner advances only two arguments in support of his determination in this case. The first is that he never consented to any change and no change was ever made. The prevailing opinion properly rejects that argument, since the facts show that the petitioner changed in 1929 from the reserve method to one whereby specific debts were ascertained to be worthless and charged off, the Commissioner knew of the change and he gave his permission by approving of the returns in which specific debts were deducted.
The Commissioner recognizes that if a change was made and if permission to change is to be inferred, then the item in question was income for a prior year and the only other argument he makes is estoppel. I agree that the Board is right in rejecting that argument as a basis for its decision. The Commissioner raised that point at the hearing and has the burden of proof. He has not shown that the statute of limitations bars him from collecting the taxes due for the earlier year or that he did not know all of the facts in time to make *1279assessment for that year. The retention of the reserve on the books, while specific bad debts were being charged off, not only did not mislead him but should have been a constant reminder that he was making a mistake in not including it in income for the year of the change. Thus the petitioner wins on the only two arguments advanced by the Commissioner and should receive judgment. But the prevailing opinion holds the other way on reasoning injected by the author, which reasoning is not only unsound but contrary to the practice of the Treasury and the decisions of the Board.
The Commissioner recognizes that if a change was permitted he should have applied I. T. 2348, which was designed for the express purpose of taking care of such a change. It completely and permanently disposes of the reserve by including it in income for the year of the change and requires that all subsequent deductions be by way of ascertainment of worthlessness and charge-off of specific debts. The reserve is not recognized thereafter for any tax purpose and the reserve method must be discontinued. A. J. Marks, 9 B. T. A. 1047; Atlantia Bank & Trust Co., 10 B. T. A. 796; affd., 59 Fed. (2d) 363; Rogers Peet Co., 21 B. T. A. 577; Manistigue Lumber & Supply Co., 29 B. T. A. 26. It is error to assume, as is done in the prevailing opinion, that the Commissioner would allow a reserve to be continued after a change from the reserve method. The contrary inference drawn from a sentence of the Manistigue Lumber case quoted in the fifth footnote is obviously a non seguitur. The Commissioner does not make any such contention. If the reasoning of the opinion is correct, either the taxpayer or the Commissioner could have chosen the year in which to include this reserve in income. Cf. Avery v. Commissioner, 22 Fed. (2d) 6. Actually the petitioner never took the amount into income. See findings of fact.
The reserve should have been included in computing the income and tax of this petitioner for 1929, when the change was made and when the collection of the outstanding accounts removed the reason for the creation and retention of the reserve and made the fund available for other purposes. I. T. 2348, supra; Peabody Coal Co., 18 B. T. A. 1081; affd., 55 Fed. (2d) 7; certiorari denied, 287 U. S. 605; G. M. Standifer Construction Co., 30 B. T. A. 184; Creamette Co., 37 B. T. A. 216. The reserve was not increased after April 30, 1927, and all accounts and notes receivable then on the books, to which alone the reserve could and did relate, were collected in full prior to February 1, 1929. The retention of the reserve balance on the books during and after 1929 and the failure to take it into income was erroneous accounting. The retention of the balance was meaningless for income tax purposes. “Bookkeeping entries do not make income, but neither does a failure to record an item as income permit *1280it to escape taxation when the time arrives that it represents income.” G. M. Standifer Construction Co., supra. If the fiscal year ended April 30, 1929, were before us, neither party could successfully resist the effort of the other to include the item in income for that year. The Commissioner does not argue to the contrary. But the year 1929 is not before the Board and the Board may not arbitrarily correct an error of a prior year by an improper adjustment for the year in litigation. Tide Water Oil Co., 29 B. T. A. 1208.
No authority is cited and I find none in decided cases, statutes, regulations or published rulings of the Treasury for including the reserve or any part of it in income for 1936. The respondent does not argue any ground save estoppel, if permission to change is found in the facts. There is reason to believe that he would not want to win this case on the reasoning advanced in the prevailing opinion. When the Commissioner approves of a change in method, whether expressly or by acceptance of a return, his approval is all inclusive and he must be presumed to have satisfied himself in regard to any necessary adjustments to make the change complete. Such is the effect of the decisions in Home Ice Cream & Ice Co., 19 B. T. A. 762, and Ganahl Lumber Co., 21 B. T. A. 118. Cf. Norwich Woolen Mills Corporation, 18 B. T. A. 303, and Clark Brown Grain Co., 18 B. T. A. 937. There is no sound reason or authority for holding that a corporation effecting a change of method without receiving express permission must report the unused reserve balance as income in the year it dissolves. The decision of the Board in the Standifer case, supra, holding that unclaimed wages were income in the year of dissolution, is not such authority. It is in line with the other cases cited with it above, since there the year of dissolution was the first time when that fund was released and became available for other purposes. See also Dallas Title & Guaranty Co., 40 B. T. A. 1022. Some adjustment would have been proper in the Home Ice Cream and Ganahl cases, supra, yet the change was permitted in each case in the absence of any adjustment. Here, likewise, it was permitted without any adjustment and no correction of the 1929 error may be made in 1936.
Arundeul, Van Fossan, Black, and TüeneR agree with this dissent.