1925 BTA LEXIS 2758 | B.T.A. | 1925
Lead Opinion
We held in Appeal of Chatham & Phenix National Bank, 1 B. T. A. 460, that, where the books of account of a taxpayer are kept on the basis of cash receipts and disbursements, discount on time loans not received within the taxable year does not constitute income for that year. If the Commissioner was correct in holding that this taxpayer kept its books of account on a cash basis, the determination of the deficiency is incorrect.
The first question is, What basis did the taxpayer use in keeping its books of account during the years involved herein? The facts show that the only income account which could be accrued was that of discount which the taxpayer accrued as it was earned. The only item of expense accruable was interest payable, and this latter account it accrued by crediting interest payable to savings deposits quarterly but, through error, neglected to accrue interest payable on time certificates of deposit, which error it later corrected and called to the Commissioner’s attention. We think there was a bona fide attempt to accomplish the accrual method and that there was shown a substantial compliance with the rules of accounting in so doing, with the exception now to be noted. The difficulty arises through the change from the cash to the accrual basis, for there is a gap or hiatus between the two methods arising from the change where items of income or deductions are left out. The law requires that the method of accounting used shall clearly reflect the income, and it does not contemplate that a taxpayer shall keep its books of account partly on one basis and partly on another, for the very reason that income is not thereby correctly reflected. Appeal of B. B. Todd, Inc., 1 B. T. A. 762.
In the Chatham & Phenix National Bank Appeal, supra, it was said:
The statute contemplates an accounting method which will correctly reflect income, and we do not doubt the reasonableness of the above regulation when the change is from a method of accounting which reflects income to another*922 approved method, and the Commissioner may be justified in refusing to permit a change without adjustment of prior returns. Here we have a change from a method of accounting which includes items not properly income and we do not think a change to a method which will clearly reflect income can be prevented, and the taxpayer compelled to report amounts not properly taxable as income. Whenever the bar of the statute of limitations does not prevent such action, the prior returns should be adjusted so as to show the correct income. The statute appears to have barred any adjustments herein in prior returns, but the situation is a practical one and we think the taxpayer must be permitted to place its books upon a basis which clearly reflects its income. It has adopted the accrual method for this purpose and we believe that method will accomplish the desired result when properly applied.
In th- instant appeal, when the taxpayer changed its method of accounting from a cash to an accrual basis, there was left out of income on the latter basis for the year 1919 discount accrued or earned in that year upon bills discounted in 1918 which, to clearly reflect the income of the taxpayer on the accrual basis, should have been included as income in that year, and which had been erroneously returned as income for 1918, when the taxpayer was operating on a cash basis. This does not relieve it of the duty of returning as income upon an accrual basis such part thereof as accrued in 1919.
We hold that the books of account of the taxpayer during the years 1919, 1920, and 1921 were kept substantially on the accrual basis, and that the taxpayer is entitled to file its returns for income-tax purposes and to have its taxes computed on that basis.