Appeal of Dearborn

2 B.T.A. 59

• Court: United States Board of Tax Appeals
• Decided: June 12, 1925
• Docket: Docket No. 2196
• Status: Published

Opinion

OPINION.

Sternhagen:

The parties rely upon different applications of section 212(b) of the Eevenue Act of 1918 — the taxpayer contending that his net income is properly reflected upon the accrual basis because that is the method of accounting regularly employed in keeping the partnership books, while the Commissioner contends that the method of accounting employed by the partnership as shown by the evidence does not clearly reflect the. taxpayer’s income and that the cash basis should be used. There is no dispute between the parties that upon the cash basis the Commissioner’s deficiency has been correctly computed.

We need not undertake to define the accrual basis. It is sufficient that in this appeal we agree with the Commissioner’s view that the taxpayer’s net income is more clearly reflected upon the cash basis than upon that which he urges. There is here no clear or well-established method of accounting. An elaborate system is apparently not necessary. There are, however, several sources of the partnership’s income, and necessarily some expenses. The principal income of the partnership is from commissions and the only book of account brought to our attention is a book of original entry called a commission book, in which there is made at the time of the signing of a charter an entry in red ink of the estimated earnings. This entry does not purport to be more than an estimate and almost always varies to some extent from the amount finally received. Sometimes it is less and sometimes more. The expenses are not kept in this book but they are apparently always accounted for at the time of payment. So far as appears from the record there is no substantial reason for adopting an accrual method rather than a cash method, and for no other purpose than the individual tax liability of this taxpayer would the method of accounting be important. Indeed, from the standpoint of measuring income it would seem more reasonable to tax the partners upon what they actually receive than upon what they think they will receive as the charter parties are from time to time negotiated.

This is not a situation where the estimates are merely exceptional or incidental items in a larger consistent system of accounts. The entire earnings of the business are here involved and the alleged accrual basis is sought to be evolved from this crude practice of tentative estimates. If for any reason the estimates should prove to be excessive they would not measufe the taxpayer’s tax liability. Conversely, he should not be permitted to substitute his own estimates for the income which he actually receives.