Geometric Stamping Co. v. Comm'r of Internal Revenue
| Decision Date | 22 May 1956 |
| Docket Number | Docket No. 50645. |
| Citation | 26 T.C. 301 |
| Parties | THE GEOMETRIC STAMPING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Fred R. Tansill, Esq., and Louis Hoppe, Esq., for the petitioner.
Theodore E. Davis, Esq., for the respondent.
Petitioner having changed to a ‘direct costing’ method of reporting its income and having consistently filed reports on that basis and respondent having accepted such reporting as correct for the year 1948, held, petitioner's use of such method of reporting for the tax year 1950 was proper, notwithstanding that it continued to keep its books on an ‘absorption method’ of accounting.
Respondent determined a deficiency of $14,844.71 in income tax for the calendar year 1950. The question presented is the propriety of petitioner's practice, when reporting income, of eliminating certain items from book inventories and deducting those items directly on its returns.
Some of the facts have been stipulated and are hereby found.
Petitioner is an Ohio corporation with its principal office and place of business in Cleveland, Ohio. It was, during the years affecting this proceeding, in the business of fabricating metal stampings for use in the automotive, household appliance, and office equipment industries. It maintained its books and records and filed its Federal income tax returns on an accrual and calendar year basis. Its return for 1950 was filed with the collector of internal revenue for the eighteenth district of Ohio.
The deficiency in dispute was determined in a statutory notice of deficiency which contains an inventory adjustment to the years 1949 and 1950 and is explained as follows:
(a) It is held that cost of goods sold is understated in the taxable year ended December 31, 1949 by the amount of $783.94, and overstated in the taxable year ended December 31, 1950 by the amount of $35,728.59, by reason of your failure to include in beginning and ending inventories in each year Supplies Inventory, and indirect expenses applicable to inventories of Work in Process and Finished Goods. (Section 22(c) of the Internal Revenue Code.)
The amounts of the adjustments referred to in the statutory notice were computed by respondent by including in opening and closing inventories the following amounts of supplies and indirect expenses (both variable and nonvariable items):
+------------------------------------------------+
¦ ¦ ¦ ¦Indirect ¦Net income¦
+----+---------+-----------+----------+----------¦
¦Year¦Inventory¦Supplies ¦expenses ¦inventory ¦
+----+---------+-----------+----------+----------¦
¦ ¦ ¦ ¦ ¦ ¦
+----+---------+-----------+----------+----------¦
¦ ¦(Opening ¦$53,660.89 ¦$22,389.21¦ ¦
+----+---------+-----------+----------+----------¦
¦1949¦(Closing ¦40,646.37 ¦34,619.79 ¦ ¦
+----+---------+-----------+----------+----------¦
¦ ¦ ¦(13,014.52)¦$12,230.58¦(783.94) ¦
+----+---------+-----------+----------+----------¦
¦ ¦(Opening ¦$40,646.37 ¦$34,619.79¦ ¦
+----+---------+-----------+----------+----------¦
¦1950¦(Closing ¦57,237.46 ¦53,757.29 ¦ ¦
+----+---------+-----------+----------+----------¦
¦ ¦ ¦$16,591.09 ¦$19,137.50¦$35,728.59¦
+----+---------+-----------+----------+----------¦
¦ ¦ ¦ ¦ ¦ ¦
+------------------------------------------------+
Petitioner's books for 1949 and 1950 were kept on the ‘absorption basis,‘ that is, they reflected these valuations for supplies1 and indirect expenses 2 in the opening and closing inventories for those years. These amounts, however, were not included in the opening and closing inventories on petitioner's 1950 income tax return, which is in accordance with the ‘direct costing’ method. This latter method of accounting used by petitioner in its 1950 return is not the same as the absorption method. On its 1950 return, supplies were charged to other costs and indirect expenses taken from the books were charged to cost of goods sold through adjustments to the beginning and ending inventories. This was explained by a schedule attached to the return relating to Schedule M. ‘Adjustments for Tax Purposes Not Recorded on Books.’ The effect of applying supplies and indirect expenses against the income of 1950 was to increase the cost of goods sold. As these amounts were not incorporated in inventory they were not carried over and deferred to later years.
This practice of eliminating supplies and indirect expenses from book inventories for tax reporting was begun by petitioner on its 1946 amended return and continued to the time this proceeding was heard. Petitioner's treatment of these expenses is related to a comparable problem of the Barium Steel Corporation group. Barium had acquired subsidiary companies, each with its own facilities and bookkeeping system, and Barium's effort to achieve uniformity of bookkeeping throughout the group raised problems with respect to the different companies. While petitioner and another company filed separate returns in 1946, Barium's other subsidiaries were on a consolidated return basis. In order to obtain some measure of consistency throughout the group, Barium decided to adopt the method of letting each subsidiary continue to maintain its established bookkeeping methods but at the same time to let them all report for tax purposes on a uniform and consistent basis. The particular method chosen was that used by petitioner. It was believed that that method would not, if used consistently over a period of years, distort net income. In the 10 years during which petitioner used this method, taxable income was greater on the returns than on the books in 5 years and was less in the other 5 years.
Petitioner's returns for 1946, 1947, and 1948 were adjusted as a result of audits by respondent's agents. Among the adjustments made to petitioner's 1946 and 1947 returns were adjustments to inventory as in this proceeding, disallowance of deductions claimed as repairs, and adjustments to amortization of leasehold improvements, depreciation on machinery, and payments claimed as expense deductions. Culminating prior negotiations, settlement of the 1946 and 1947 taxes was effected at a conference on October 31, 1951, at the offices of the Technical Staff in Cleveland and between representatives of petitioner and respondent. Both petitioner and respondent conceded certain issues in reaching the settlement, respondent allowing petitioner's treatment of the inventory issue for those years. The adjustments to the 1948 return also included an inventory adjustment similar to the one in this proceeding. The revenue agent's report relating to 1948, received by petitioner on October 9, 1950, while the issues with respect to 1946 and 1947 were pending before the Technical Staff, reflected an overassessment of $11,757.38. By letter dated May 26, 1952, respondent's agent advised petitioner that the overassessment for 1948 was $349.27 and that a check for that amount, together with interest, would be sent to petitioner. The recomputation accompanying this letter reflected an inventory adjustment which was tantamount to reversing the treatment of inventories in the revenue agent's report and restoring the inventories as originally reported by petitioner on the 1948 return. The reduced amount of overassessment was due to this change in the inventory adjustment. On June 19, 1952, petitioner received a refund check of $401.46 consisting of the overpayment for 1948 of $349.27 plus interest of $52.19. No other refunds were ever received by petitioner with respect to 1948. Petitioner, on the advice of counsel, accepted this reduced amount to be consistent with the returns as previously filed and with the settlement of the inventory issue.
Petitioner's main reliance is upon a supposed estoppel directed against respondent by the conduct of his representatives. While in the view that we take it is unnecessary to pass directly upon this contention it may not be amiss to point out that in addition to the general difficulty of creating an estoppel against respondent as a representative of the sovereign, James Couzens, 11 B.T.A. 1040, 1151, there is in this case reasonably clear evidence that petitioner did not rely upon the conduct of which...
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