Court Opinion

ID: 4607958
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:41:45.222551+00
Date Added: 2024-06-11T07:53:37.441572
License: Public Domain

J. P. BASS PUBLISHING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.J. P. Bass Publishing Co. v. CommissionerDocket No. 11742.United States Board of Tax Appeals12 B.T.A. 728; 1928 BTA LEXIS 3466; June 21, 1928, Promulgated *3466  1.  The Commissioner erroneously added to income amounts representing bad debts which have never been deducted from income.  2.  The Commissioner denied the right of the petitioner to use inventories and the include certain accrued items in the computation of its invested capital and for lack of evidence his determination is approved.  William S. Cole, Esq., for the petitioner.  Albert S. Lisenby Esq., for the respondent.  MURDOCK *728  This proceeding is for the redetermination of deficiencies in income and profits taxes for the calendar years 1920 and 1921, in the amounts of $2,616.33 and $6,914.19, respectively.  Three issues were raised: (1) Whether the Commissioner added certain amounts to income for each year representing bad debts never deducted from income; (2) whether the petitioner is entitled to use inventories in reporting its income; and (3) whether the petitioner is entitled to have certain accrued items included in the computation of its invested capital.  FINDINGS OF FACT.  The petitioner is a Maine corporation with its principal office at Bangor.  The gross income as reported on the return was not understated by the deduction*3467  of any worthless debts.  No deduction for worthless debts was claimed on the return.  The Commissioner notified the petitioner in part as follows: 1920Adjustments to incomeNet income reported on return$22,600.42Additions:(1) Excessive depreciation$394.47(2) Prepaid subscription3,783.83(3) Profit on automobiles980.00(4) Accounts receivable charged to reserve2,629.34Total Additions7,787.64Total30,388.06Deductions:(5) Increase in opening inventory$596.94(6) Prepaid subscriptions4,214.85(7) Repairs allowed as expense2,594.40Total deductions7,406.19Net income as adjusted22,981.87* * * *729  (4) Bad debts are disallowed, inasmuch as the return is made on a cash receipts and disbursement basis.  See Article 22 and 23, Regulations 45.  (5) Increase in inventory is disallowed as the return is made on a cash receipts and disbursements basis.  See Article 22 and 23, Regulations 45.  Invested capitalCapital stock$200,000.00Deductions:(1) Preceding year's tax, $2,295.09 (prorated)$967.15(2) Nonoperative deficit156,885.09Total deductions157,852.24Balance42,147.76*3468  * * * (2) The deficit caused by the payment of stock dividend and the disallowance of accounts receivable and inventory to be included in invested capital is computed as follows: Deficit as shown on books$31,873.68Add:Accounts receivable$78,351.36Inventory7,976.05Taxes for prior years5,779,75Prepaid subscription3,783.83Reserve for depreciation29,320.42125,011.41Deficit adjusted156,885.09The above adjustment has been made in accordance with O.D. 1007; C.B. 5, page 285, and Article 869, Regulations 45.  1921Net income reported on return$24,905.54Additions:(1) Accounts charged off$3,573.45(2) Decrease in Inventories2,944.55(3) Prepaid subscriptions6,214.85Total additions10,732.85Total32,630.39Deductions:(4) Furniture and fixtures$2,376.46(5) Loss on automobiles150.00(6) Additional depreciation510.22Total deductions3,036.68Net income as adjusted32,601.71*730  (1) Bad debts charged off are disallowed as the return is made on the cash receipts and disbursements basis.  See Article 22 and 23, Regulations 62.  (2) Inventories are disallowed*3469  for the same reason.  (3) Prepaid subscriptions are disallowed for the same reason.  Invested capitalCapital stock$200,000.00(1) Less deficit156,198.31Total43,801.69Deductions:(2) Preceding years tax, $6,231.66 prorated2,533.50Balance41,166.19(1) The deficit as shown on the original balance sheet is adjusted as follows: Deficit$9,216.00Accounts receivable100,658.65Inventory8,572.99Reserve for depreciation28,045.95Prepaid subscription4,214.85Additional tax for prior years5,589.87156,298.31Error in crediting automobile account100.00Deficit adjusted156,198.31Excess-profits taxes for each year were computed under section302, as for each year the amount was less than that computed undersection 301. OPINION. MURDOCK: The Commissioner added $2,629.34 to the petitioner's reported income for 1920, and $3,573.45 to its reported income for1921, on the theory that the petitioner had deducted these amounts from its gross income.  Apparently, he reached this conclusion from the fact that in the return for each year the petitioner in "Schedule *731  L. - Reconciliation of Net Income and analysis of*3470  changes in surplus" showed these amounts as "Accounts receivable charged off." However, counsel for the respondent stated that "the gross income reported by the petitioner for these years was the gross amount of cash receipts for those years." The returns show that gross income as reported for each year in Schedule A was not reduced by any deduction for bad debts.  Consequently, the Commissioner erred in adding these amounts to income. Evidence to support the other contentions of the petitioner is lacking.  Inventories are only proper where by their use income is clearly reflected.  The Revenue Acts of 1918 and 1921 provide that "the net income shall be computed upon the basis of the taxpayer's annual accounting period * * * in accordance with the method of accounting regularly employed in keeping the books of such taxpayer* * *." Without knowing anything about the method of accounting regularly employed in keeping the taxpayer's books we can not say that it was entitled to use inventories or that the Commissioner committed any error in making adjustments on account of inventories. The returns seem to have been made upon some improper basis using a cash receipts and disbursements*3471  method for some items and an accrual method for others.  The Commissioner has determined the deficiencies and computed invested capital on a cash receipts and disbursements basis.  The evidence does not indicate that he has done this erroneously.  A taxpayer keeping its books on a cash receipts and disbursements basis is not entitled to accrue items and thus increase its invested capital.  On each of the two issues last discussed we have pointed out one fundamental reason why the petitioner failed to sustain its contention. Its proof failed to establish other important facts which we do not feel called upon to discuss.  Judgment will be entered under Rule 50.