Jemison v. Commissioner , 18 B.T.A. 399 ( 1929 )

J. B. JEMISON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Jemison v. Commissioner

Docket No. 15622.

United States Board of Tax Appeals

18 B.T.A. 399; 1929 BTA LEXIS 2055;

November 30, 1929, Promulgated

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1. DEDUCTIONS FROM INCOME. - Outstanding liabilities for freight charges on shipments of lumber were accrued upon the books at the end of each year with substantial accuracy and are held to be deductible.

2. ID. - Liability for interest on outstanding indebtedness accrued upon the books at the end of the year held to be deductible.

Gordon Saussy, Esq., and C. W. Saussy, C.P.A., for the petitioner.

A. S. Lisenby, Esq., for the respondent.

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TRUSSELL

This is a proceeding for the redetermination of deficiencies in income taxes amounting as follows: for 1920, $1,457.18; for 1922, $79.75.

The petitioner alleges error in computing the amounts of the petitioner's shares of profits and of losses of a partnership of which the petitioner was a member, in that:

(1) Amounts of freight liabilities accrued upon the books of the partnership at the end of each year have not been allowed as deductions from income in the years in which accrued.

(2) Amounts of accrued liabilities for interest upon borrowed money have not been allowed as deductions from income.

(3) The Commissioner has erroneously included, in the amount of taxable income for the years 1920, 1921, and 1922, income received from the partnership representing dividends received from domestic corporations and interest received from investments in Liberty Loan bonds - the former being taxable at the surtax rates, while the latter are nontaxable.

At the hearing, upon motion duly made and granted, the respondent was permitted to amend his answer to allege that the income of the partnership should be increased in the following amounts: for 1920, $10,096.80; for 1921, $8,163; for 1922, $1,362.84, and, in consequence, the income of the petitioner should be increased by his share of 60 per cent thereof.

FINDINGS OF FACT.

The petitioner is a resident of Thomasville, Ga. During 1920 and 1921 and a part of 1922 he was a member of the partnership of J. B. Jemison & Co., hearinafter referred to as the partnership, sharing profits or losses on a basis of 60 per cent thereof. This partnership was engaged in a business of buying and selling lumber. The partnership books were kept on the accrual basis. The partnership was dissolved on July 31, 1922. Thereafter, the business was continued by the petitioner in his individual capacity.

It was customary for the partnership to make sales of lumber at agreed prices, with the understanding that the partnership would pay the freight charges to the destinations of the shipments. It was not customary, however, to prepay the freight charges. A procedure was preferred whereby the consignee paid the transportation company for the freight charges when the goods reached the destination and later the customer received credit on the books of the partnership for the amount paid. When the shipment was made the sale was entered on the books of the partnership at the agreed prices, but it was understood that the aggregate entered was in excess of the net amount which would presently be collected from the customer. At the end of each year it was customary to accrue upon the books the outstanding liabilities for the freight charges, the exact amount of which had not yet been communicated to the partnership by the customers. The probable amounts of the freight charges were computed from the known weights of the shipments and the published freight tariffs. The customers' accounts receivable were directly credited with the accrued freight and the freight expense account was debited. The freight expense account was charged to profit and loss at the end of the year. In the following year adjustments were made, if necessary, to bring the accruals previously entered into agreement with the exact amounts actually paid by the consignee. These adjustment items found their way into the freight expense account of the subsequent year.

At the end of 1919 the amount accrued on the books and charged to profit and loss for the outstanding freight liabilities aggregated $10,096.80.

At the end of 1920 the amount of the outstanding liabilities for freight charges related to 39 shipments to 6 customers and were entered on the books in an amount of $8,163. Subsequently, the actual corresponding liabilities were found to amount to $7,892.66 The freight charges on all of the shipments except two were billed by the transportation companies to the consignees prior to the end of 1920; the two exceptions were billed on January 6 and January 17, 1921.

At the end of 1921 the outstanding liabilities for freight charges accrued upon the books related to 14 shipments to 4 customers and amounted to $1,362.80; subsequently the actual amount paid aggregated $1,376.46. All of the shipments except two were billed by the transportation companies to the consignees prior to the end of 1921; the two exceptions were billed on January 2 and January 5, 1922.

At the end of 1922 the amount of the outstanding freight liabilities accrued upon the books of the petitioner, then acting in his individual capacity, was $2,605; it related to two customers, and involved an aggregate of 36 shipments. The actual liabilities subsequently ascertained aggregated $2,719.35. All of the shipments excepting six were billed by the transportation companies to the customers prior to the end of 1922. Of the exceptions four were billed in the period from January 1 to January 4, 1922, inclusive. The date at which the remaining two exceptions were billed is not in evidence.

The partnership regularly followed a procedure of accruing upon the books at the end of each year the amount of liability incurred during the year and remaining unpaid at the end of the year for interest on borrowed money. This accrual was computed upon the actual liabilities at the rates of interest agreed upon and for the definite time to the end of the year. The amount of the accrued interest at the end of 1920 was $1,659.05 and it was charged off on the books of the petitioner to profit and loss.

In determining the tax liabilities of the petitioner the respondent has adjusted the net income of the partnership as follows:

	1920	1921	1922
Current freight liability at the end of the year, disallowed	$8,163.00	$1,362.80	Nil.
Prior year freight liability allowed	Nil.	8,163.00	$1,362.80

In determining the tax liability of the petitioner for 1922 the respondent has allowed as a deduction from net income an amount of $994.46 net loss of the petitioner for 1921.

The petitioner's distributable share of the income from interest on Liberty bonds received by the partnership amounted as follows: for 1920, $370.17; for 1921, $375.75.

OPINION.

TRUSSELL: The issues relate to the computation of the net income for 1920, 1921, and 1922 of a partnership in which the petitioner was interested and with respect to which he is required to include in his return his distributive share. The year 1921 is involved through a net loss of the petitioner which was carried forward to 1922.

The first question is a matter of the deduction of expenses for transportation charges on shipments from the partnership to its customers. The ultimate liability of the partnership is unquestioned; the deductibility of the expense is undisputed; we are required to decide in what years the various items of expense may be deducted. In lieu of prepaying the freight charges on shipments on which "delivered" prices had been agreed upon, the partnership elected to ship the lumber "collect." The sales, nevertheless, were entered upon the books at the time of shipment at what may be termed the "gross" prices although it was perfectly well understood that the net amount presently to be collected from the customers would be less. The books were kept on the accrual basis and in order to avoid an overstatement at the end of each year of the amount of the accounts receivable and a corresponding understatement of the amount of freight expense for the year it was necessary and customary to credit the customers' accounts and debit the freight expense account with the outstanding liabilities for freight charges. At the time of closing the books the petitioner was not advised in some instances of the actual amounts paid by the consignees, and the amounts of the liabilities were computed by the partnership. The number of shipments, the aggregates accrued and the aggregates subsequently paid are all in evidence for comparison. We are satisfied, and we think the findings show, that these accruals were accomplished from satisfactory bases and for all practical purposes with substantial correctness. Later, when the customers advised the partnership of the exact amounts paid, minor adjustments were made, if necessary. This was the customary procedure, year after year, and no necessity was attached at the time to immediate investigations of the exact amounts, although it is evident that with a little trouble and effort the information was nearly all definitely ascertainable within a few days after the end of each year.

Apparently the present regulations of the Bureau of Internal Revenue permit of the allowance of the deductions claimed by the petitioner. See G.C.M. 5265, Cumulative Bulletin VII-2, p. 55, published subsequent to the hearing in this case.

The respondent cites Thatcher Medicine Co.,3 B.T.A. 154">3 B.T.A. 154, in which there was a failure to prove a liability for the deduction claimed, and Jackson Casket & Manufacturing Co.,7 B.T.A. 1190">7 B.T.A. 1190, in which were involved no more than contingencies. Suffice it to say that we do not consider either of these cases in point.

The respondent also cites J. S. Hoskins Lumber Co.,3 B.T.A. 846">3 B.T.A. 846, a case in which the taxpayer had in process of shipment a considerable quantity of its product which it had sold but for which it had not received freight bills. The taxpayer followed a procedure by which it credited the accounts of its customers with estimated amounts of the freight charges, immediately, however, reversing the entries at the beginning of the following year. Subsequently, the accounts of the customers would be again credited this time with the actual amounts. There was a failure in this case to prove any satisfactory degree of accuracy in the reserves set up and we were furthermore not satisfied that the expenses claimed were anything more than indefinite liabilities which could not be determined to be incurred until the subsequent year. This situation is clearly distinguishable from the instant case, where we are convinced of the propriety and practical accuracy of the accruals.

The procedure of the partnership in computing and entering the accruals has been consistently followed every year; we have repeatedly given weight to consistency, see Higginbotham-Bailey-Logan Co.,8 B.T.A. 566">8 B.T.A. 566; Leedom & Worrell Co.,10 B.T.A. 825">10 B.T.A. 825; Holeproof Hosiery Co.,11 B.T.A. 547">11 B.T.A. 547; Blumberg Brothers Co.,12 B.T.A. 1021">12 B.T.A. 1021; National Straw Works,16 B.T.A. 463">16 B.T.A. 463, and many other decisions too numerous to cite here. We know of no good reason for revising that procedure. The liabilities were definitely incurred within the years at the end of which they were accrued upon the books. The accruals were proper, even though lacking exactitude, United States v. Anderson,269 U.S. 422">269 U.S. 422. If they occasioned minor overlappings through the practice of entering the slight corrections in the subsequent year, that would appear to be authorized by article 111 of Regulations 62, which provides, among other things:

It is recognized, however, that particularly in a going business of any magnitude there are certain overlapping items both of income and deduction, and so long as these overlapping items do not materially distort the income they may be included in the year in which the taxpayer, pursuant to a consistent policy takes them into his accounts. (Italics ours.)

There is another good reason for approving the accruals in the instant case. We think it is obvious that the charging off to profit and loss of the accrued freight expense within the same year in which the gross income was inclusive of the gross sales prices of the relevant shipments results in a clarity and accuracy which is totally lacking in the revision proposed by the respondent.

We conclude that the accrued liabilities for freight charges should be allowed as deductions in the years when incurred and accrued upon the books. As to the amounts of the deductions to be allowed for the purposes of this redetermination, we think they should be the actual amounts shown by the evidence to have been paid subsequently. Cf. Producers Fuel Co.,1 B.T.A. 202">1 B.T.A. 202; Monarch Cooperage Co.,13 B.T.A. 929">13 B.T.A. 929.

The respondent was permitted to amend his answer to affirm that the income of the partnership for each year was understated by certain amounts of freight liabilities which, if we understand his theory, were probably deducted by the petitioner twice. No evidence was introduced by the respondent. After a careful consideration of the record we do not think that there was a double deduction.

In the second issue the petitioner claims the right to deduct from the income of the partnership items of liability for interest on borrowed money which the evidence shows were definitely incurred but were unpaid at the end of the year. We do not see that there can be any question in this regard. The interest incurred is clearly deductible. To a taxpayer on the accrual basis interest accrues ratably and the date of payment is immaterial. Cf. Tel-Electric Co.,1 B.T.A. 434">1 B.T.A. 434; Overland Knight Co.,15 B.T.A. 870">15 B.T.A. 870.

No satisfactory evidence was adduced relative to the third issue and we are unable to make any redetermination of that point.

Judgment will be entered pursuant to Rule 50.