M. H. Levy Co. v. Commissioner

M. H. LEVY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

M. H. Levy Co. v. Commissioner

Docket No. 6181.

United States Board of Tax Appeals

10 B.T.A. 908; 1928 BTA LEXIS 4011;

February 20, 1928, Promulgated

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">*4011 Commissioner's determination approved where it appears to have been based upon the best available records of the petitioner's transactions as disclosed in poorly kept books and accounts.

A. O. Stanley, Esq., and W. E. Barton, Esq., for the petitioner.

W. F. Wattles, Esq., for the respondent.

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MURDOCK

">*908 This is a proceeding for the redetermination of deficiencies determined by the Commissioner for 1918 and 1919, in the amounts of $893.52 and $1,516.28, respectively. It is alleged that the Commissioner has overstated the net income for 1918 and 1919 by the amounts of $3,852.64 and $15,735.95, respectively, due to arbitrary and erroneous increases in the accounts receivable of those years, of like amounts.

FINDINGS OF FACT.

The petitioner has its principal office at Dresden, Tenn., and is incorporated under the laws of that State. Its books of account for the years in controversy are imcomplete and have been poorly kept. These included a National Cash Register cash and credit statement book in which it recorded the daily cash receipts and sales; a customers' ledger containing the individual accounts of customers; and a memorandum">*4012 book containing the merchandise inventories and lists of accounts and notes receivable at the close of each year. The accounts receivable at January 1, 1918, amounted to $17,726.99. The memorandum book, which is not a book of ">*909 original entry, but purports to be a transcript of customers' accounts, shows accounts and notes receivable at the close of 1918 and 1919 as follows:

Year	Accounts receivable	Notes receivable
1918	$15,631.56	$3,845.88
1919	26,718.07	284.22

The National Cash Register cash and credit statement book shows the following summary of business for the year in controversy:

Year	Total cash	Received	Refund	Cash	Charge	Charge	Total cash
	received	on account	on cash	Sales	sales	sales	and charge
			sales		returned		sales
1918	$59,046.41	$29,047.76	$594.47	$30,009.99	$1,312.01	$33,625.80	$63,471.35
1919	54,230.63	24,571.82	449.57	29,089.05	1,508.04	50,997.12	81,678.35

In many instances promissory notes were accepted from customers in settlement of their accounts, and the only record made thereof was by a credit entry to the account of the customer">*4013 concerned.

Three examinations of the petitioner's books were made by revenue agents, as a result of which net income for the years in controversy was computed as follows:

	1918		1919
Net sales		$61,670.33		$78,989.12
Opening inventory	$32,373.05		$41,525.98
Purchases	47,492.18		57,650.34
Total	79,865.23		99,176.32
Closing inventory	41,525.98		32,702.54
Cost of goods sold		38,339.25		66,473.78
Gross profit		23,331.08		12,515.34
Ordinary expense	4,473.42		4,922.77
Salaries	3,672.50		3,661.63
Taxes	279.02		343.53
Cash stolen	105.00
Depreciation	525.95		525.95
Total deductions		9,055.89		9,453.88
Balance		14,275.19		3,061.46
Adjustment for accounts payable		7,050.83		7,050.83
Net income		7,224.36		10,112.29

Included in the revenue agent's report of May 27, 1925, which forms the basis of the Commissioner's determination, are balance sheets prepared by the examining officer, as of December 31, 1917, 1918, and 1919, in which accounts receivable are shown, as of the dates stated, in the amounts of $17,726.99, $19,484.20, and $42,452.02, respectively.

">*910 OPINION.

MURDOCK: ">*4014 The petitioner complains that the Commissioner has computed his income for each of the years in controversy by comparison of net worths, as of the beginning and ending of each year, as reflected by balance sheets prepared by the revenue agents in which accounts receivable for both years have been overstated, thereby overstating the net income for 1918 by $3,852.64, and that for 1919 by $15,735.95. The revenue agents' reports, which are in evidence, and the deficiency notice which is based on those reports clearly show that the Commissioner did not compute the net income in the manner asserted by the petitioner, but that he arrived at net income by deducting from net sales the cost of goods sold and the ordinary and necessary expenses of the business. These reports further show that he relied upon the National Cash Register cash and credit statement book, which is a combination cash and sales record, as a source of information as to the total net sales; and while there are some differences in the amounts of the sales shown in this book and those contained in his computations of net income, this is not to be wondered at since in our own examination of the record referred to we discovered">*4015 therein no less than sixty-five mathematical errors and errors of omission of which no explanation had been offered.

No evidence was introduced by the petitioner to show that the net sales and the items of expense contained in the Commissioner's computations are incorrect; in fact, no issue was raised in the pleadings as to the correctness of a single one of these items. The petitioner's position plainly is that since the accounts receivable are overstated in the balance sheets prepared by the revenue agents, as of December 31, 1918, and 1919, the net income as computed by the Commissioner for each of those years must be wrong. While it might suffice to say that the evidence is insufficient to sustain the contention that accounts receivable have been overstated in the balance sheets prepared by the revenue agents, it may be added that assuming the contention to be well founded, it would not follow of necessity that the Commissioner's computations of net income are erroneous. The parties agree that the books are very imcomplete, and that a large part of the assets and liabilities appearing in the balance sheets prepared by the revenue agents are not based upon authentic records. ">*4016 Since these balance sheets are not the basis of the Commissioner's determination of net income, we may not assume that errors appearing therein, if any, are reflected in that determination.

Judgment will be entered for the respondent.