Court Opinion

ID: 9639848
Source: CourtListenerOpinion
Date Created: 2023-08-22 16:50:02.940794+00
Date Added: 2024-06-11T18:10:22.378886
License: Public Domain

WOODROUGH, Circuit Judge,
(dissenting) .
Incident to its cement business this taxpayer carried on the buying and selling of cement sacks over a long period of years on a large scale, and it recorded that part of its business by bookkeeping entries. The entries purported to inform the company and the government of the varying results in dollars and cents accruing to the company from its operations in cement sacks. There has been no attempt to contradict the bookkeeping disclosure by resort to any kind of physical checking or otherwise. Therefore if it was a fair inference from the book entries (as illuminated by the witnesses) that the taxpayer’s asserted deficiency for 1932, as determined by the Commissioner, then existed, the judgment appealed from should be sustained. If such an inference could not be fairly drawn from the company’s books, the judgment should be reversed.
As the taxpayer aimed to sell its cement sacks at cost and to buy old sacks back at the cost price of new sacks, it figured its sack business as a whole must result in expense or loss to it, and it set its books up on that theory. Perhaps it could not in the nature of things, and at least it did not, make a bookkeeping set up that would show the extent of the expense or loss attributable to sack operations exactly at any particular time, or even in every tax year. It merely adopted a schedule for estimating its probable loss, and over a long period it carried the amounts resulting from the estimates in a separate account called a reserve account, as one of the liabilities of the company.
In certain years an increasing of the sums shown in the account during those years effected a substantial reduction of the company’s income tax. But in the tax year here involved there was a determination by the company on consideration of the actual working out of the cement sack operations that the amount shown in the account as a company liability attributed to the sack business had become too large by $75,000. It recorded its determination by entering the $75,000 as a reduction of the company liability shown in the account. There is no hint of bad faith. So far as appears, the company honestly believed that it had become $75,000 richer at that time because the operations in the cement sack part of its business had washed out or extinguished that much of the company’s liabilities. I think the trial court rightly decided that such increase in the company’s wealth gained from its business was properly added to gross income for taxation.
It is true there was no single cement sack transaction which enriched the company to the extent of $75,000 at the time of the entry, and, of course, income must be taxed strictly in respect to the year when it accrues. But many incomes result from imperceptible accretions and the time of the accrual is fixed as of the time when acts are done or determinations are made in respect to them. Here the changes of conditions in the cement sack business which would occasion gain or loss to the taxpayer were always intangible, and during considerable periods inappreciable. No one ever pretended to know of his own knowledge how many old sacks were in existence or how many would be brought *202in for redemption at the price of new sacks at any particular time. It was on that account that the company chose to record its cement sack business in its books on the basis of estimated data. The bookkeeping plan contemplated that from time to time determination would be made to reduce the estimates to greater certainty. The bookkeeping set up was no less valid on that account, but it necessarily resulted that the date of accrual of loss or gain was the date when there was a determination and entry of increased or diminished liability attributable to the business in cement sacks. In some years that bookkeeping set up showed no tax incidents at all. Probably none were clearly discernible in those periods. In some years there was-tax advantage to the company on account of increased burdens from the cement sack business. In the year in question here the company determination on the operations of the cement sack business results, in a tax. But the bookkeeping method appears to have been honestly adopted and carried out, and there is nothing to show that in the long run either the taxpayer or the government would be wronged by it. I see no reason whatever to doubt that the company’s gain of $75,000, which it disclosed by the reduction of its liability ascertained and recorded in its bookkeeping in 1932, was honest and actual.
What is there against táie book showing? It is not asserted that the company had merely a capital investment in cement sacks instead of an active continuing business in that commodity, and there is no claim that the company could or did carry on its buying and selling of sacks from day , to day over the years, running up into the millions, without any income tax effect upon the company. Appellant’s point seems to be related entirely to the naming or characterizing of the account that shows the $75,000 entry in respect to the cement sack business in 1932, and the argument leads up to calling that account a “non taxable reserve”. Appellant’s thought appears to be that with that name on it the entries in it cannot be considered to arrive at the company’s income for tax in 1932. Necessarily, by the same reasoning it could not be considered in other years. And so, as there is and apparently need be no other account to show the fluctuations of the cement sack business, that business may go on to great extent without ever causing any income tax effect upon the taxpayer.
No doubt many producers like this taxpayer carry on large businesses in the containers of their products. Probably many also make it their policy to minimize differences between their costs and receipts in respect to such containers. But it is not credible that absolute parity is attained. Such activities are bound to result, as they have in this case, in fluctuating monetary advantage and disadvantage affecting income tax.
The thing that is really important about the account in question here is not the name of it, but the fact that it was the account and the only account kept by the company which was intended and which was adapted to show the fluctuations in the company’s cement sack business and to indicate in figures, as near as may be, the extent of the advantage or disadvantage accruing to the company from the sack operations, the increase or decrease of the company’s liabilities — in tax parlance, the gain or loss. It appears'to have informed the company sufficiently for all its business purposes, and as it was honest, I think that no matter what it may be called it ought also to measure’ taxation.
It does not seem to me that the decision here should be controlled by action or inaction of the tax authorities in respect to the account in the distant past. The-extensive business in cement sacks was continuously carried on by the taxpayer and it necessarily had tax consequences. Those for the year 1932 being shown by plain book entry not contradicted or impeached by other evidence, taxation should follow accordingly. I would affirm.