Ward v. Commissioner

7 T.C.M. 505, 1948 Tax Ct. Memo LEXIS 137

• Court: United States Tax Court
• Decided: July 14, 1948
• Docket: Docket No. 14709.
• Status: Unpublished

Opinion

Arthur Ward v. Commissioner.

Ward v. Commissioner

Docket No. 14709.

United States Tax Court

1948 Tax Ct. Memo LEXIS 137; 7 T.C.M. (CCH) 505; T.C.M. (RIA) 48132;

July 14, 1948

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Petitioner operated retail liquor stores in South Carolina. Respondent held that petitioner's records were inadequate to verify his returns and determined the income by assuming a profit of 25 per cent for 1942 and 33 1/3 per cent for 1943 and 1944 on cost of goods sold. Held, respondent's determination was erroneous.

Thomas A. Wofford, Esq., for the petitioner. Homer F. Benson, Esq., for the respondent.

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ARNOLD

Memorandum Findings of Fact and Opinion

ARNOLD, Judge: The respondent determined deficiencies in petitioners' income and victory tax for 1943 in the amount of $25,125, and in his income tax for 1944 in the amount of $8,623.09. Finding the petitioner's books inadequate to verify his returns, the respondent determined petitioner's income by arbitrarily assuming that he realized a gross profit of 25 per cent for 1942 and 33 1/3 per cent for 1943 and 1944 on the cost of goods sold, which percentage represented the mark-up permitted by state law. The petitioner alleges that respondent erred in this determination.

Findings of Fact

Petitioner during 1942, 1943 and 1944 was a resident of Greenville County, South Carolina. He filed income tax returns for such years with the collector of internal revenue at Columbia, South Carolina.

During the taxable years petitioner owned and operated a cut-rate retail liquor business in South Carolina, with one store in Anderson and another in Greenville. The Greenville store was located very close to the Negro section of the town and approximately 50 per cent of the trade was with colored people. The stores carried stocks of whiskey, gin, rum, brandy, wine and other alcoholic beverages. Petitioner had no connection with a wholesale liquor dealer. In order to obtain nationally advertised brands from the wholesalers he had to buy four or five cases of off-brand merchandise for each case of merchandise that he wanted. Petitioner did not take the full mark-up on his better grade merchandise, and was unable to secure the mark-up allowed by the State for off-brand merchandise. Petitioner's mark-up on his cheap wines was 15 per cent. The mark-up was computed after deducting the Federal excise tax.

Petitioner's business records consisted of invoices, bank statements, canceled checks, check stubs and a small black pocket-sized notebook. In this notebook petitioner had entered weekly amounts representing the daily sales totals from the cash registers and the weekly purchases and expenses. The sales of the Greenville store and the Anderson store were entered separately and then totaled. Petitioner inventoried his merchandise on the last day of each year for purpose of the State floor stocks tax, but retained no copies thereof as a part of his permanent records.

At the end of each taxable year petitioner totaled his weekly sales, expenses and purchases and submitted the resulting figures to his attorney for use in preparing his income tax return. The returns were based upon these figures. Petitioner used this method of accounting and reporting income since the inception of the business in 1935.

In June 1945 a revenue agent called upon petitioner to verify the income reported on his returns for 1942, 1943 and 1944. The agent asked petitioner for all his books and records pertaining to his income tax returns for such years. All available books and records were furnished the agent, among which was the book in which the cost of liquor purchased and amounts received from sales of liquor, taken from the cash register tickets, were entered. Upon examining these books and records the agent concluded that they were inadequate. He informed the petitioner that he was going to set up his business on a percentage basis. The agent did not try to set up petitioner's business on a net worth basis.

Petitioner began working for the Office of Price Administration as a textile inspector in 1944. His son then took over the operation of the stores for his father. The son put some of the records in pasteboard boxes in the back room of the store building and a man, to whom the son had given permission to store some furniture, in cleaning out the room for such purpose, threw some of the boxes away.

In the deficiency letter respondent computed petitioner's taxable net income for the years 1942, 1943 and 1944 in the respective amounts of $41,466.68, $51,637.68 and $29,605.49. The several computations in the deficiency notice determining the taxable net income are set forth in the following table: