Barber v. Comm'r of Internal Revenue

• Decision Date: 29 May 1975
• Docket Number: Docket No. 8890-73.
• Citation: 64 T.C. 314
• Parties: RONNIE L. BARBER, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

64 T.C. 314

RONNIE L. BARBER, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 8890-73.

United States Tax Court

Filed May 29, 1975.

James Arogeti, for the petitioner.

Dudley W. Taylor, for the respondent.

Held, under the facts of this case the respondent has the authority to allow a retroactive change of accounting method.

OPINION

STERRETT, Judge:

The respondent determined a deficiency of $4,152 in the petitioner's Federal income tax for the calendar year 1971. Certain issues not having been raised in the petition, the sole issue presented requires our determination of the amount of income petitioner must report in 1971 as a result of his being a stockholder of Sure Quality Framing Contractors, Inc., an electing small business corporation.¹ Resolution of this issue ultimately, and solely, depends upon whether the respondent has the authority to permit Sure Quality Framing Contractors, Inc., to change from one method of accounting, adopted on its original return for its 1971 fiscal year (ended April 30, 1971), to another method through the filing of an amended return for that year on June 4, 1972.

All of the facts have been stipulated or deemed admitted and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.

At the time of filing the petitioner herein, petitioner maintained his legal residence in Atlanta, Ga. He filed his Federal income tax return for the calendar year 1971 with the Southeast Service Center at Chamblee, Ga.

Sure Quality Framing Contractors, Inc. (hereinafter Contractors), was incorporated on April 29, 1970, as the continuation of a business formerly carried on by a general partnership. Contractors is in the construction business and primarily contracts to do framing work on various types of buildings.

Contractors adopted a taxable year ending April 30 and it timely elected, beginning with its first taxable year, to be taxed as a small business corporation under subchapter S of the Internal Revenue Code of 1954. ²

On January 1, 1971, petitioner owned 250 of the 1,750 outstanding shares of stock of Contractors. Petitioner was a stockholder in Contractors on the last day of its taxable year ended April 30, 1971. In August 1971, petitioner terminated his association with Contractors when it redeemed all of his stock.

On September 9, 1971, Contractors filed its tax return for is taxable year ended April 30, 1971, employing the completed-contract method of accounting and reporting a loss of $76,239.09 (the reported loss exclusive of reported capital gains was $77,229.74). On June 14, 1972, Contractors filed an amended return for its taxable year ended April 30, 1971, in which it utilized the percentage-of-completion method of accounting (in addition to several other changes) and reported taxable income of $15,865.53.

The changes reflected in Contractors' amended return for its taxable year ended April 30, 1971, were accepted by respondent after audit, except that Contractors was not allowed to defer the inclusion of gross receipts and the deduction for cost of goods sold on projects less than 15 percent completed as of the end of the taxable year. Because of this above-mentioned adjustment, respondent determined that Contractors' taxable income for its taxable year ended April 30, 1971, was $38,759.10 rather than the $15,865.53 reported on the amended return.

On his 1971 Federal income tax return, petitioner reported a loss of $11,033 as his share of Contractor's loss for its taxable year ended April 30, 1971. In his notice of deficiency, respondent determined that, pursuant to Contractors' amended return and the above-mentioned adjustment made thereto by respondent, petitioner's share of Contractors' ordinary taxable income for its taxable year 1971 was $5,537.02³ (1/7 of $38,759.10) and that consequently petitioner's taxable income was understated by $16,570.02 (the $11,033 claimed loss plus $5,537.02). In the notice of deficiency, respondent stated his determination that the percentage-of-completion method of accounting more clearly reflected Contractors' income than did the completed-contract method.

The sole issue for consideration is the determination of the amount of income petitioner must report in 1971 as a result of his being a stockholder of Contractors, an electing small business corporation. The resolution of this issue requires our determination of the correct amount of taxable income of Contractors for its taxable year ended April 30, 1971, which in turn depends solely upon our decision with respect to the question of whether that corporation must employ the percentage-of-completion or the completed-contract method of accounting. To decide this question, we need only determine whether the respondent has the authority to permit Contractors retroactively to change its method of accounting.

Contractors adopted the completed-contract accounting method on its original return for its taxable year ended April 30, 1971 (its first taxable year of existence). Then, in an amended return for said year filed on June 30, 1972, it reported its income for its 1971 taxable year on the basis of the percentage-of- completion method. After audit and an adjustment to Contractors' income not herein relevant, the respondent allowed the change in accounting method because it was his opinion that the percentage-of-completion method more clearly reflected income.

Before turning to the issue at hand, we note initially that this is not a case where respondent has expressly or impliedly exercised his power under section 446(b)⁴ to require Contractors to report its income on the percentage-of-completion method of accounting. Respondent only determined that the percentage-of-completion method more clearly reflected income than did the completed-contract method.⁵ Such a determination is not a proper basis upon which the respondent may invoke his section 446(b) power. Auburn Packing Co., 60 T.C. 794, 798-800 (1973); W. P. Garth, 56 T.C. 610, 623 (1971). We note also that this is not a case where a timely (i.e., filed by due date of the first return) amended return for Contractor's first taxable year was filed, which return might then be treated as part of the original return and might unilaterally change the accounting method first elected. Cf. Haggar Co. v. Helvering, 308 U.S. 389 (1940); Ira Goldring, 20 T.C. 79, 82 (1953).

It is petitioner's position that respondent did not have the authority to allow Contractors to change retroactively its election of a permissible accounting method for the year of election after expiration of time within which a return was to be filed. Petitioner bases his argument upon the fact that there is no Code provision specifically granting the respondent such power and upon the purpose behind the doctrine of election. Petitioner also relies upon certain language in Pacific National Co. v. Welch, 304 U.S. 191 (1938), which he asserts lays down the principle that once an election of a permissible accounting method has been made that election is binding upon the taxpayer and the Commissioner.⁶

Respondent, on the other hand, contends that he has the authority to permit a retroactive change in accounting method and that his decision in such matters will not be overturned unless an abuse of discretion is shown. Under the facts of this case we agree with respondent.

We have not been directed by petitioner to any case which holds on facts similar to those here that the respondent does not have the power to allow a retroactive change in accounting method.⁷ Nor in our own research have we located any case with a holding directly on point. This stems no doubt from the fact that the parties' usual roles in this area are somewhat reversed. However, the overwhelming weight of cases found by us either state or strongly imply that, where the respondent is not prohibited by statute, he may in his discretion either accept or reject a request for a retroactive change in choice between two permissible accounting methods. See, e.g., United States v. Catto 384 U.S. 102 (196-); Bookwalter v. Mayer, 345 F.2d 476, 480 (8th Cir. 1965); Lord v. United States, 296 F.2d 333, 335 (9th Cir. 1961); Commissioner v. O. Liquidating Corp., 292 F.2d 225, 231 (3d Cir. 1961), cert. denied 368 U.S. 898 (1961); Trans-america Ins. Co. v. Womack, Inc., an unreported case (E.D. Va. 1972, 31 AFTR 2d 73-471, 73-1 USTC par. 9146), affd. per curiam 492 F.2d 1240 (4th Cir. 1974).

We think it significant that in our research of the question at hand we have found that, in discussing other cases involving a taxpayer's attempt retroactively to change an accounting method through an amended return or on a claim for refund, the courts generally speak in terms of the respondent's not improperly refusing to permit the requested change rather than his being powerless to allow such changes. In fact, in several cases respondent has been held to have given what in effect is retroactive implied consent to a change in accounting method. See Fowler Bros. & Cox v. Commissioner, 138 F.2d 774, 775-776 (6th Cir. 1943), affg. 47 B.T.A. 103 (1942); S. Rossin & Sons v. Commissioner, 113 F.2d 652, 653-654 (2d Cir. 1940), revg. on another point 40 B.T.A. 1274 (1939); Geometric Stamping Co., 26 T.C. 301, 304-305 (1956); Ganahl Lumber Co., 21 B.T.A. 118 (1930). Cf. Daniels Jewelers, Inc. v....