Southeast Equip. Corp. v. Comm'r of Internal Revenue

• Decision Date: 22 January 1960
• Docket Number: Docket No. 71130.
• Parties: SOUTHEAST EQUIPMENT CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

33 T.C. 702

SOUTHEAST EQUIPMENT CORPORATION, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 71130.

Tax Court of the United States.

Filed January 22, 1960.

R. T. Boehm, Esq., for the petitioner.

William O. Allen, Esq., for the respondent.

SEC. 481, I.R.C. 1954 AS AMENDED BY TECHNICAL AMENDMENTS ACT OF 1958—ADJUSTMENTS REQUIRED BY CHANGE IN METHOD OF ACCOUNTING.— Beginning with taxable year 1954 petitioner voluntarily, and without seeking the Commissioner's approval, changed its method of accounting from cash to accrual. Incident to the change petitioner in its 1954 return made certain adjustments relative to inventories and accounts receivable pertaining to pre-1954 years. Increased income resulted to petitioner solely by reason of the adjustments necessary to prevent amounts from being duplicated or omitted. The Commissioner determined a deficiency for reasons unconnected with the change in accounting methods. In its petition petitioner claimed the right to eliminate the adjustments relating to pre-1954 years. Held, petitioner cannot unmake the adjustments.

TIETJENS, Judge:

The Commissioner determined a deficiency in income tax for the year 1954 in the amount of $6,243.32.

This determination was based on adjustments for unallowable claimed deductions totaling $12,006.38 for officers' expenses, rent, and depreciation. In the petition filed herein these adjustments were attacked as erroneous and petitioner alleged further error in including in gross income for 1954 certain items of inventory and accounts receivable incident to a change in 1954 from a cash method of accounting to an accrual method. The expense, rent, and depreciation issues have been settled by stipulation and the only issue for decision is the proper treatment of the inventory and accounts items in connection with the change in accounting methods.

FINDINGS OF FACT.

The stipulated facts are included herein.

Petitioner is a corporation organized under the laws of Ohio. It is engaged in the business of sewer and excavation contracting with its principal office in Columbus, Ohio.

Petitioner timely filed its income tax returns for the years 1954, 1955, and 1956 with the district director of internal revenue at Columbus, Ohio.

All income tax returns of the petitioner from the date of its organization through December 31, 1953, were prepared on a cash basis of accounting.

The income tax return of petitioner for the year 1953 was examined by respondent and accepted without change with respect to the taxpayer's method of accounting.

As of January 1, 1954, the petitioner had accrued accounts receivable in the amount of $12,558.61, which amount had not been included in taxable income for any prior taxable years.

As of January 1, 1954, the petitioner had on hand an inventory of construction supplies in the amount of $3,600, which inventory had not been taken into account in computing petitioner's taxable income for years prior to 1954.

During the year 1954 petitioner included in its taxable income the amount of $12,558.61, representing accounts receivable at the beginning of the year which were collected in cash during the year.

Effective at the beginning of 1954, petitioner changed its method of accounting from the cash to an accrual basis. In computing its taxable income for 1954 petitioner included in taxable income an amount equal to its accounts receivable and inventory as of December 31, 1954, and it deducted from taxable income an amount equal to its accounts payable as of the same date.

In its return for the year 1954 petitioner made no adjustments to exclude from taxable income for the year 1954 the accounts receivable and inventories as of January 1, 1954.

Petitioner did not submit to respondent a request for permission to change its method of accounting for the year 1954 and respondent did not grant such permission.

In its petition filed herein on December 12, 1957, petitioner asserted a claim that an amount equal to its opening inventory and receivables for the year 1954 should be excluded from its 1954 taxable income.

For the taxable years 1955 and 1956 petitioner continued to report its taxable income on an accrual method of accounting.

The increase in petitioner's taxable income for the year 1954, resulting from the change in accounting method, exceeded $3,000. The increase resulted solely by reason of adjustments necessary to prevent amounts from being duplicated or omitted.

OPINION.

Much of the argument on brief is preoccupied with whether a taxpayer who used inventories in its business and whose books were kept on a cash basis, could be or was required, under the Internal Revenue Code of 1939, to change to an accrual method of accounting and, if so, what adjustments were necessary in order to prevent duplication of deductions and the escape of income from taxation.

In connection with this argument the parties cite numerous cases, which we have considered, but which, except for historical background, are not helpful. The year before us is governed by section 481 of the 1954 Code and we think the question is primarily one of statutory construction. As originally enacted, section 481¹ provided that where taxable income for any year is computed under a method of accounting different from the method under which income was computed for the preceding year, there shall be taken into account those adjustments determined to be necessary solely by reason of the change in order to prevent amounts from being duplicated or omitted. However, the section excepted from being taken into account any adjustment in respect of any taxable year to which section 481 did not apply, i.e., pre-1954 tax years.

If section 481 had remained unchanged, petitioner might have a valid argument that the adjustments which it now seeks to make are proper since they would eliminate from 1954, items affecting income which pertained to 1953. But we need not decide that question. The Technical Amendments Act of 1958 retroactively amended section 481(a)(2)² so that it is now clear ‘that pre-1954 Code year adjustments should be made where taxpayers of their own accord changed their method of accounting.’ S. Rept. No. 1983, 85th Cong., 2d Sess. (1958), p. 45.

Petitioner, however, argues, first, that section 481 as amended does not apply to its case and second, if it does, its retroactive effect makes it unconstitutional.

We think section 481 is here applicable. Prior to 1954 petitioner computed its income on a cash basis. Effective at the beginning of 1954 it changed its accounting to an accrual method and thereafter computed and reported its income accordingly. This change was initiated by petitioner and was not required by the Commissioner. It is stipulated by the parties that the increased income resulting from the change in accounting method ‘resulted solely by reason of the adjustments necessary solely to prevent amounts from being duplicated or omitted.’

The factual situation, as we see it, brings the case squarely within the statute. In effect, petitioner now seeks to unmake adjustments which it initiated and made itself in its 1954 return, adjustments which were not determined to be...