Gaukler & Stewart v. Commissioner ( 1925 )

Appeal of GAUKLER & STEWART.

Gaukler & Stewart v. Commissioner

Docket No. 62.

United States Board of Tax Appeals

1 B.T.A. 578; 1925 BTA LEXIS 2880;

February 10, 1925, decided Submitted January 14, 1925.

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The allegations of a petition must be supported by competent evidence.

J. Marvin Haynes, Esq., for the taxpayer.

Willis D. Nance, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner.

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JAMES

Before JAMES, STERNHAGEN, TRAMMELL, and TRUSSELL.

This is an appeal from an excess-profits tax for the year 1917, determined by the Commissioner to be due from the partnership of Gaukler & Stewart, in the sum of $10,842.08, and a penalty for failure to file a return in the sum of $5,421.04.

FINDINGS OF FACT.

The taxpayer, during the year 1917, was a partnership located in the city of Pontiac, Mich., composed of two members, Henry P. Gaukler and Elisha Stewart.

The balance sheet set up by the Commissioner as of the beginning of the taxable year and used by him in determining the invested capital of the partnership is as follows:

Assets.	January 1, 1917.
Cash	$12,759.33
Accounts receivable	15,642.69
Inventory	13,166.94
Fixed assets	25,571.33
Deferred charges
	67,140.29
Liabilities.
Accounts payable	5,983.11
Reserve for depreciation	7,168.63
	13,151.74
Net worth.
Excess of assets over liabilities	53,988.55
	67,140.29

The closing balance sheet of the partnership for 1917, as set up by the examining revenue agent and agreed to by the taxpayer, is as follows:

Assets.	December 31, 1917.
Cash	$10,734.49
Accounts receivable	13,301.19
Inventory	16,458.68
Fixed assets	52,872.25
Deferred charges	1,540.86
	94,907.47
Liabilities.
Accounts payable	10,461.40
Reserve for depreciation	10,430.83
	20,892.23
Net worth.
Excess of assets over liabilities	74,015.24
	94,907.47

The Commissioner computed the net income of the taxpayer at $30,872.94, as follows:

Sales		$202,146.47
Deductions -
Labor	$23,925.78
Merchandise purchased	88,384.84
Freight	32,140.06
Salaries	2,210.00
Rent	300.00
Interest	64.67
Taxes	913.18
Other expenses	10,582.80
		158,521.33
Net income		43,625.14
Income as disclosed by books (agent's figures)		43,625.14
Deduction -
Depreciation allowed	$3,262.20
Addition -
Repair charges disallowed	300.00
		2,962.20
Income as corrected		40,662.94
Less -
Additional salary allowance		9,790.00
Net income as shown in Department letter dated March 29, 1922		30,872.94

The examining revenue agent reconciled the net worth of the partnership between the two foregoing balance sheets as follows:

RECONCILIATION OF NEW WORTH.
1916. Dec. 31, Gaukler & Stewart, net worth	$53,988.55
1917. Gaukler & Stewart, profits	40,662.94
Total	94,651.49
Gaukler & Stewart, withdrawals	20,636.25
Dec. 31 (E. Stewart & Sons), net worth	74,015.24

The taxpayer introduced photostat copies of ledger sheets of the personal accounts of the partners during the year in question.

DECISION.

The Board determines that there is a deficiency in the sum of $16,263.12, and the determination of the Commissioner is approved.

OPINION.

JAMES: The question here presented turns upon the correctness of the balance sheets set up by the revenue agent, primarily to ascertain invested capital, and admittedly estimated, the correctness of his computation of net income, and the correctness of the accountants' theory of computing the net income in the following manner:

COMPUTATION OF NET INCOME.
Net worth December, 31, 1917	$74,015.24
Less net worth December 31, 1916	53,988.55
	20,026.69
Add withdrawals of partners during 1917	10,359.53
Net profit	30,386.22
Less additional salaries allowed by Treasury Department letter dated March 29, 1922	9,790.00
Net income as corrected	20,596.22

Manifestly the above computation rests upon comparisons of surplus between two balance sheets, both admittedly inaccurate, and upon the correctness of an alleged sum of partners' withdrawals, computed from evidence which is clearly inadequate. The ledger sheets introduced in evidence are incapable of analysis without reference to journal entries or the knowledge of persons familiar with the accounts. The books of original entry were not introduced in evidence. The persons familiar with the accounts were not produced as witnesses. In lieu of such testimony, taxpayer's counsel has undertaken to analyze the ledger sheets and to show the amounts of withdrawals, setting forth such analysis in his brief. The Board is unable to determine whether this analysis is correct by comparison with any of the testimony and evidence in the case.

The taxpayer claims special relief under section 210 of the Revenue Act of 1917. No evidence was introduced in support of this claim and the Commissioner moved for the dismissal of this portion of taxpayer's petition. This motion was at that time taken under advisement. It must now be granted upon the ground and for the reason alleged by the Commissioner.