Carver v. Comm'r of Internal Revenue, Docket No. 12393.
| Decision Date | 29 January 1948 |
| Docket Number | Docket No. 12393. |
| Citation | 10 T.C. 171 |
| Parties | C. L. CARVER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Taxpayer, on July 1, 1925, changed his method of keeping books of his printing business from the cash to the accrual basis. He continued, however, to compute his net income for income tax purposes on the cash basis. Upon audit of the 1941 return the Commissioner recomputed business net income on the accrual basis and made certain adjustments to effect the transition in reporting income from the cash to the accrual basis, increasing reported income of $43,826.89 to $83,211.18. His action in so doing is approved. Meyer A. Cook, Esq., for the petitioner.
Howard M. Kohn, Esq., for the respondent.
The Commissioner determined a deficiency of $25,410.82 in income tax for the calendar year 1941. The only question to be determined is whether the Commissioner erred in computing net income of petitioner's printing business for 1941 on the accrual basis and in making certain adjustments thereto necessary to effect the change in reporting income from the cash basis to the accrual basis, the taxpayer having changed his method of accounting in keeping his books to the accrual basis in 1925, but having continued to use the cash basis in making his returns.
Most of the facts were stipulated. They are as follows:
The petitioner's residence and place of business are in Canton, Ohio. He has continuously owned and operated, as a sole proprietor, a printing business under the name and style of the ‘Caxton Press‘ since 1909.
Commencing in 1909, and continuing for many years thereafter, petitioner kept the records of his business on the cash receipts and disbursements basis. The books and records of the business were kept on an accrual basis throughout the year 1941, including such accounts as accounts receivable, reserve for doubtful accounts, paper inventory, work in process, prepaid insurance, and other prepaid items, accounts payable, accrued wages, and accrued taxes and unemployment insurance. Petitioner's business in 1941, and for many prior years, was such as to require that its books and records be kept on the accrual basis.
Petitioner filed income tax returns for 1941, and for all prior years, in which he stated that such returns were prepared on the cash basis. Such returns at no time reflected any change from the cash to the accrual basis either of accounting or of preparing returns. On such returns all items were reported on the cash receipts and disbursements basis, with the exception that, in 1941 and for several prior years, the opening paper inventory was included, and the closing paper inventory was deducted, in computing ‘cost of goods sold.‘ The inventory of work in process (an item separate and distinct from paper inventory) was not so reported.
In the deficiency notice respondent made an adjustment increasing petitioner's taxable net income from his printing business, as reported for 1941, by the amount of $39,384.29, with the following explanation:
(c) In your income tax return for the taxable year ended December 31, 1941, you reported items of gross income and deductions on the cash receipts and disbursements basis, thereby resulting in a taxable net income from your printing business in the amount of $43,826.89. The books relating to the printing business are kept on the accrual method of accounting. It is held that the taxable net income from the printing business should be computed in accordance with the method of accounting regularly employed in keeping the books in compliance with the provisions of Section 41 of the Internal Revenue Code and Section 19.41-1, Regulations 103. Accordingly, the taxable net income for the year 1941 has been computed on the accrual basis, including the adjustments necessary to change from the cash receipts and disbursements basis to the accrual basis, with the result that the taxable net income from the printing business amounts to $83,211.18.
The amount of the above adjustment was determined by the respondent as follows:
+-----------------------------------------------------------------------------+
¦Net income on accrual basis (as arrived at from petitioner's ¦ ¦
¦books, ¦ ¦
+------------------------------------------------------------------+----------¦
¦before the adjustments referred to in the deficiency notice) ¦$41,219.88¦
+------------------------------------------------------------------+----------¦
¦Adjustments: ¦ ¦ ¦
+-------------------------------------------------+----------------+----------¦
¦Add: ¦ ¦ ¦
+-------------------------------------------------+----------------+----------¦
¦Accounts receivable 1-1-41 ¦$29,546.52 ¦ ¦
+-------------------------------------------------+----------------+----------¦
¦Work in process 1-1-41 ¦14,960.99 ¦ ¦
+-------------------------------------------------+----------------+----------¦
¦Prepaid insurance ¦239.82 ¦ ¦
+-------------------------------------------------+----------------+----------¦
¦ ¦ ¦44,747.33 ¦
+-------------------------------------------------+----------------+----------¦
¦ ¦ ¦85,967.21 ¦
+-------------------------------------------------+----------------+----------¦
¦Deduct: ¦ ¦ ¦
+-------------------------------------------------+----------------+----------¦
¦Accounts payable 1-1-41 ¦$263.66 ¦ ¦
+-------------------------------------------------+----------------+----------¦
¦Accrued taxes ¦1,380.70 ¦ ¦
+-------------------------------------------------+----------------+----------¦
¦Accrued wages ¦298.73 ¦ ¦
+-------------------------------------------------+----------------+----------¦
¦Accrued industrial insurance ¦373.99 ¦ ¦
+-------------------------------------------------+----------------+----------¦
¦Accrued unemployment insurance ¦350.72 ¦ ¦
+-------------------------------------------------+----------------+----------¦
¦Accrued Social Security tax ¦88.23 ¦ ¦
+-------------------------------------------------+----------------+----------¦
¦ ¦ ¦$2,756.03 ¦
+-------------------------------------------------+----------------+----------¦
¦Corrected income from business...To continue reading
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