DocketNumber: Docket Nos. 112212, 112213.
Citation Numbers: 2 T.C.M. 792, 1943 Tax Ct. Memo LEXIS 110
Filed Date: 9/20/1943
Status: Non-Precedential
Modified Date: 11/20/2020
*110 A partnership on an accrual basis
Memorandum Opinion
ARUNDELL, Judge: These consolidated proceedings were brought to challenge the determination of income tax deficiences for the fiscal year ended May 31, 1940, as follows:
Docket No. | Petitioner | Deficiency |
112212 | Frederick Godfrey | $1,821.26 |
112213 | Ellen Godfrey | 491.70 |
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Petitioners, husband and wife, were the only members of a partnership known as Frederick Godfrey Company, engaged in the manufacture, sale and distribution of a liquid preparation *111 and a pomade designed to stimulate the growth of hair on the scalp. The husband had a two-thirds interest and the wife a one-third interest in the partnership. The partnership and petitioners filed their respective returns on the basis of a fiscal year ending May 31, and the partnership kept its books and prepared its return on an accrual basis. The partnership ceased to do business on December 31, 1939.
On or about April 22, 1940, a Deputy Collector of Internal Revenue advised the partnership or its representative that he was submitting a report recommending the assessment against the partnership of manufacturer's excise tax, under section 603 of the Revenue Act of 1932 and
Period | Tax | Penalty | Interest | Total |
June 1, 1938 to Feb. 28, 1939 | $ 911.45 | $ 237.70 | $ 73.61 | $ 1,222.76 |
March 1, 1939 to Dec. 31, 1939 | 8,609.13 | 2,063.62 | 320.05 | 10,992.80 |
On June 17, 1940, the partnership filed with the Bureau of Internal Revenue*112 a protest against the proposed assessment. In the protest the proposed assessment was opposed upon the grounds that (1) the products distributed by the partnership were not cosmetics or toilet preparations within the meaning of the statute; (2) if they were cosmetics or toilet preparations, the partnership did not manufacture the major portion thereof but simply purchased it in bulk, bottled and labeled it; and (3) in any event the tax was computed upon an improper basis.
During July 1940 there was assessed against the partnership excise tax, with penalties and interest, as follows:
Period | Tax | Penalty | Interest | Total |
June 1, 1938 to Feb. 28, 1939 | $ 911.55 | $ 237.70 | $ 89.08 | $ 1,238.33 |
Mar 1, 1939 to Dec. 31, 1939 | 8,609.13 | 2,063.62 | 452.56 | 11,125.31 |
On August 7, 1940, a representative of the partnership requested a hearing before the Bureau of Internal Revenue with respect to the excise tax liability and from that date until March 1941 various conferences were held and correspondence *113 was had between representatives of the Bureau and the partnership. As a result of such conferences and correspondence the excise tax liability of the partnership for the calendar years 1938 and 1939 was settled for $3,276.34 of tax, $293.04 of interest and no penalty. The amounts previously assessed were abated and new assessments for the amounts agreed upon were made during March 1941. The agreed amounts were paid by or for the partnership on March 31, 1941. The portions of the amounts paid in accordance with the settlement which pertained to the period from June 1, 1939 to December 31, 1939 were tax of $1,813.89 and interest of $151.98, a total of $1,965.87.
On the partnership return for the fiscal year ending May 31, 1940, filed on or about September 14, 1940, there was deducted the sum of $12,360.08, with the explanation "Excise Tax, Penalty & Int. (As Assessed by Fed. Govt.) In Dispute." The respondent allowed a deduction of $1,965.87, the amount of the settlement actually paid which pertained to the taxable year, disallowed the balance of $10,394.21 and correspondingly increased petitioners' distributive shares of the partnership income by the respective amounts of $6,929.47*114 and $3,464.74.
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We have here the question of what course to pursue when an amount that has been accrued and deducted by one on the accrual basis turns out later to have been improperly accrued so that it is in fact never paid. The taxpayers insist that the deduction be allowed to stand, though the statute of limitations has not run against correcting the error, and that the subsequent reversal of the accrual be added to income at the later date. The Commissioner would go back and cancel so much of the accrual and deduction as was in fact never paid.
In the circumstances of this case the Commissioner is right and petitioners' arguments are answered by the following authorities:
The Commissioner's determination is affirmed.