Fischer Indus., Inc. v. Comm'r of Internal Revenue, Docket No. 40305-84.
| Decision Date | 17 July 1986 |
| Docket Number | Docket No. 40305-84. |
| Citation | 87 T.C. No. 7,87 T.C. 116 |
| Parties | FISCHER INDUSTRIES, INC. AND SUBSIDIARIES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Prior to 1975, Mayfran, a member of P's consolidated group, calculated the value of its closing inventory under the first- in, first-out (FIFO) method of inventory accounting. For its taxable year 1975 and each subsequent taxable year, Mayfran correctly calculated the value of its closing inventory under the last-in, first-out (LIFO) method. P failed to file a Form 970, Application to Use LIFO Inventory Method, or the information requested by Form 970, on or with original, consolidated Federal income tax return for the taxable year 1975. The information requested by Form 970 was, however, fully set forth in the work papers of P's accountants that were provided to R during the course of its audit of P. P's 1975 financial statements noted Mayfran's change to the LIFO method. On April 16, 1986, shortly after trial, P filed an amended return for the taxable year 1975, attaching a properly completed Form 970. HELD: With the change in regulations P's failure to file Form 970 does not of itself prevent a valid LIFO election; the stricter rule of Textile Apron Co. v. Commissioner, 21 T.C. 147 (1953), is no longer followed. HELD FURTHER: Providing P's financial statements and its accountants' work papers for its taxable year 1975 to R during R's audit of P in 1979 does not constitute substantial compliance with R's regulations to elect LIFO for the taxable year 1975. HELD FURTHER: On its return P did not give R notice of Mayfran's intent to elect LIFO, and therefore, Mayfran failed to comply substantially with the requirements of R's regulations; P's filing of a completed Form 970 subsequent to trial did not constitute substantial compliance as soon as practicable with R's regulations. HELD FURTHER: P did not elect the LIFO method for the taxable year 1975. Harlan Pomeroy, for the petitioners.
Richard S. Bloom, for the respondent.
The Commissioner determined deficiencies in petitioners' Federal income tax for each of the taxable years 1975 through 1978 and for 1980 and additions to tax for fraud pursuant to section 6653(b)1 in the following amounts:
+--------------------------------------------+
¦ ¦ ¦Sec. 6653(b) ¦
+-------------+----------+-------------------¦
¦TYE Apr. 30--¦Deficiency¦additions to tax1 ¦
+-------------+----------+-------------------¦
¦1975 ¦$339,436 ¦$174,718 ¦
+-------------+----------+-------------------¦
¦1976 ¦174,699 ¦87,335 ¦
+-------------+----------+-------------------¦
¦1977 ¦246,311 ¦123,156 ¦
+-------------+----------+-------------------¦
¦1978 ¦22,698 ¦(not applicable) ¦
+-------------+----------+-------------------¦
¦19802 ¦177,311 ¦(not applicable) ¦
+--------------------------------------------+
1 Respondent, by Amendment to Answer, proposed increases in the additions to tax pursuant to section 6653(b); the proposed revised additions are as follows: for the taxable year 1975— $442,357.00; for the taxable year 1976 — $385,687.00; and, for the taxable year 1977 — $334,355.00. Petitioners concede the correctness of the revised additions to tax.
2 Adjustments were made but no deficiency was determined for the taxable year 1979 as petitioners incurred a consolidated net operating loss for that year; therefore petitioners' taxable year 1979 is not before us. Although we do not have jurisdiction over taxable year 1979, we may consider facts relating to any taxable year that are relevant to the issues to be decided in those taxable years before this Court. Martz v. Commissioner, 77 T.C. 749 (1981). Following concessions by the parties, the sole issue that the Court must decide now is whether Mayfran, Inc., a member of petitioners' consolidated group, elected for 1975 to value its inventory under the last-in, first-out (LIFO) method of inventory accounting.2
Some of the facts have been stipulated and are so found. Petitioners' principal place of business at the time the petition was filed was Mayfield Heights, Ohio.
Petitioners are corporations organized under the laws of the state of Ohio. Petitioner Fischer Industries, Inc. (Fischer) owned four subsidiaries during the period 1975 through 1980 — petitioners American Monorail, Inc., American Tool, Inc., M.G. Building Company, and Mayfran, Inc. (Mayfran). Mayfran, a manufacturer during the years at issue in this case, owned a foreign subsidiary, Mayfran GmbH. Mayfran was merged with Fischer, the surviving corporation, on January 3, 1979. Fischer filed consolidated Federal income tax returns (Form 1120) for each of the taxable years ended April 30, 1975 through 1980, on which the income of each of its domestic subsidiaries was included. As a foreign corporation, Mayfran GmbH could not be included in petitioners' consolidated returns. An information return for Mayfran GmbH was filed with petitioners' consolidated returns, however, for each of the years at issue in this case.
Prior to the taxable year 1975 the value of Mayfran's inventory was calculated on the first-in, first-out (FIFO) method of inventory accounting while Fischer and its other domestic subsidiaries calculated the value of their inventories under the LIFO method. For the taxable year 1975, however, the value of Mayfran's closing inventory was calculated on the LIFO method. Thereafter, Mayfran calculated the value of its inventories under the LIFO method. Mayfran GmbH continued to calculate the value of its inventory on the FIFO method during the years before this Court.
On their consolidated Federal income tax return for the taxable year 1975 (the ‘1975 return‘) petitioners reported that both the LIFO and the FIFO methods were used in their inventory accounting. Petitioners did not answer a question on the 1975 return which asked whether there was any substantial change in determining quantities, costs or valuations of inventories. No Form 970, Application to Use LIFO Inventory Method, was filed with the 1975 return or with the returns filed by petitioners for any of the remaining taxable years at issue in this case until April 16, 1986, shortly after trial, when petitioners filed an amended return for 1975 attaching a properly completed Form 970. Prior to April 16, 1986 the information requested by Form 970 was not provided on or with petitioners' income tax returns for any of the taxable years 1975 through 1980. Petitioners filed returns for each of the taxable years 1976 through 1980 on the indicated dates: 1976 — on January 28, 1977; 1977 — on January 18, 1978; 1978 — on October 16, 1978; 1979 — on October 18, 1979; and 1980 — on January 19, 1981. On each of these returns, petitioners reported that LIFO was the method of inventory valuation used and that there was no substantial change in determining the quantities, costs or valuations of inventories from the prior year.
Petitioners' accounting firm conducted an audit of petitioners' records for the taxable year 1975, and pursuant to its normal audit procedures prepared a certified financial statement for that year. The 1975 financial statement noted that Mayfran had changed from the FIFO to the LIFO method of inventory accounting that year. Petitioner provided a copy of the 1975 financial statement to respondent in 1979, in response to respondent's request during its own audit of petitioners for documentation to support an election by Mayfran to use the LIFO method for the taxable year 1975.3 The information requested by Form 970 and respondent's regulations was fully set forth in the work papers of petitioners' accountants that were provided to respondent during the course of its audit of Fischer.
OPINIONSection 472 permits a taxpayer to elect, in accordance with applicable regulations, the LIFO method of inventory accounting. The regulations provide in part that:
(a) The LIFO inventory method may be adopted and used only if the taxpayer files with his income tax return for the taxable year as of the close of which the method is first to be used a statement of his election to use such inventory method. The statement shall be made on Form 970 pursuant to the instructions printed with respect thereto and to the requirements of this section, or in such other manner as may be acceptable to the Commissioner. * * * Section 1.472-3(a), Income Tax Regs.
The regulation has been changed significantly since we decided Textile Apron Co. v. Commissioner, 21 T.C. 147 (1953), when we last considered the effect of a failure to file a Form 970 on making the LIFO election.4 In Textile Apron we held based on respondent's regulations that, despite the taxpayer's statement on the original return for its first taxable year that it had calculated its inventory by using LIFO valuation, failure to file a Form 970 was fatal to the LIFO election. After Textile Apron was decided, the regulation was amended to permit a taxpayer to elect the LIFO method (1) by filing a Form 970 or (2) in such other manner as may be acceptable to the Commissioner. Filing with the return the information that is required to be reported on Form 970 satisfies these regulations.5 We believe that this change in the regulations reflects, in part, the opinions of this Court and others decided since Textile Apron that if a taxpayer substantially complies with the procedures for making an election, the election will be effective. See, e.g., Columbia Iron & Metal Co. v. Commissioner, 61 T.C. 5 (1973). Consequently, a mere failure to file a Form 970 is not fatal to Mayfran's electing LIFO. We will no longer follow the stricter rule of Textile Apron Co. v. Commissioner.
Petitioners failed not only to file a Form 970, but also to provide the information required by Form 970 with their original 1975 return — the year for which...
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