Huntington Securities Corporation v. Busey
| Decision Date | 27 June 1940 |
| Docket Number | No. 8288.,8288. |
| Citation | 112 F.2d 368 |
| Parties | HUNTINGTON SECURITIES CORPORATION v. BUSEY, Collector of Internal Revenue. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Earl F. Morris, of Columbus, Ohio (Arnold, Wright, Purpus & Harlor, Earl F. Morris, and H. B. Arnold, Jr., all of Columbus, Ohio, on the brief), for appellant.
Joseph M. Jones, of Washington, D. C. (James W. Morris, Sewall Key, J. L. Monarch, and Mills Kitchin, all of Washington, D. C., Calvin Crawford, of Dayton, Ohio, and R. J. O'Donnell and Loren G. Windom, both of Columbus, Ohio, on the brief), for appellee.
Before HICKS, ALLEN, and HAMILTON, Circuit Judges.
Appellant, The Huntington Securities Corporation, appeals from a judgment dismissing its suit for the recovery of income and excess profits taxes of $14,919.40 and interest thereon of $1,354.38, claimed to have been overpaid for the calendar years 1933 and 1934.
Appellant was incorporated September 24, 1929, under the laws of Ohio for the purpose of acquiring securities owned by the Huntington National Bank, a corporation existing under the National Banking Act, and also to engage generally in the business of buying and selling securities. In 1929, it had a paid-in capital of $400,000, substantially all of which was invested immediately in securities. It was an affiliate of the Huntington National Bank and was compelled to go into liquidation in 1933, due to changes of the National Banking Laws.
Prior to the closing of its books for the calendar year 1929, its Board of Directors adopted a resolution providing that its securities were to be adjusted on the books as of December 31, 1929, to their then current value and any profit credited to organization expense; such expense being carried on its books as an asset. Similar resolutions were adopted for each subsequent year. For the years beginning with the year 1929, to and including 1934, appellant duly filed income tax returns in accordance with its book method of accounting, using inventories in arriving at income, which it stated in its return for 1929 were valued at cost. No representation as to the basis was made in the 1930 return. It was stated in the 1931 return that the inventories were valued at book cost and, in returns for subsequent years, at cost, no taxable income being shown for any of the years.
On audit and review the Commissioner of Internal Revenue accepted the returns as filed for the years 1929 to and including 1932. For the years 1933 and 1934, he changed the taxpayer's method of valuing inventories to market, which resulted in a deficiency of income taxes for the calendar year 1933 of $6,967.62, and excess profits taxes of $1,112 and for the calendar year 1934 of $5,598 income taxes and $849.91 excess profits taxes.
Appellant paid to the appellee the taxes with interest and duly filed claim for refund which was rejected and thereafter instituted this action. The cause was submitted on an agreed statement of facts and the court found for appellee, from which judgment it appeals.
A single issue is presented, i. e., the right of the Commissioner to change the taxpayer's method of valuing inventories. The value at which the securities comprising appellant's inventory were carried on its books of account, their actual cost, market value and the values used in determining income for each of the years 1929 to 1934, both inclusive, were as follows:
Value of
Inventory Actual
Date of as Shown Cost of Market Used in
Inventory by Books Inventory Value Returns
12-31-1929 $448,560.45 $448,361.97 $425,771.06 $446,690.45
12-31-1930 530,711.60 538,318.55 522,617.96 530,711.60
12-31-1931 557,224.74 572,806.04 456,639.66 557,224.74
12-31-1932 546,529.94 541,097.65 338,868.64 522,690.20
12-31-1933 335,117.43 307,310.11 194,673.00 335,117.43
12-31-1934 122,317.73 114,137.91 72,113.75 122,317.73
The discrepancies between the book and actual cost as shown on the income tax returns, excluding some slight errors in posting, were caused by the appellant using the profit realized from the sale of blocks of securities of the identical kind to reduce the cost of the remainder or, where losses were realized on the sale of such securities, adding such losses to the cost of the remaining shares and in a few instances partially writing down book below actual cost. The method of keeping the accounts as used by the taxpayer clearly indicated the cost and sale price of all securities for each annual accounting period. The market value of the securities for none of the annual periods was shown on the books and, in order to determine it, extraneous evidence was necessary. It is a well-settled rule that the taxpayer may make his returns upon either a cost or accrual basis "in accordance with the method of accounting regularly employed in keeping the books of such taxpayer"...
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