dissenting: By some mysterious process the action which in our self-assessing tax system is paramount, namely, that of reporting income, appears to have become subordinated to the purely ancillary and mechanical operation of keeping records. The crucial fact here is that petitioner has regularly and consistently computed and reported his income by a wholly improper method; and the issue is whether the Commissioner can require a change to a proper method only by permitting a distortion of income in the taxpayer’s favor1 during the year of change so that items of income will forever escape taxation. It appears to be undisputed that the Commissioner could require proper adjustments if either the request for a change originated with the taxpayer or if it were his accounting, rather than his reporting, which was incorrect. But it is apparently possible to announce the principle as in the present case that the Commissioner’s demand that the taxpayer observe the law as to reporting income cannot be accompanied by the necessary adjustments to reflect the true income of the current year and assure that the change-over will not result in the complete escape from taxation of some part of that income which has actually been received.2
If there is justification for so confining the operative sections of the Revenue Code, it is difficult to discover. Section 41 lays down the “general rule” that “The net income shall be computed upon the basis of the taxpayer’s annual accounting period * * * in accordance with the method of accounting regularly employed in keeping the books of such taxpayer * * Section 42 requires all gross income to be included for the year “in which received” (emphasis added) unless “under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period,” and section 43 calls for deductions and credits to be taken as paid or accrued upon the same basis as the net income “is computed, unless in order to clearly reflect the income the deductions or credits should be taken as of a different period.”3 There is no more statutory authority for the Commissioner to adjust existing accounts where the accounting system is at fault than where there is a failure of proper reporting. Yet the former seems to be taken for granted.
The closest precedent on the facts is C. L. Carver, 10 T. C. 171, affd. (CA-6), 173 Fed. (2d) 29. Other cases similar in principle are William Hardy, Inc. v. Commissioner (CCA-2), 82 Fed. (2d) 249; Z. W. Koby, 14 T. C. 1103; Schuman Carriage Co., Ltd., 43 B. T. A. 880; Alameda Steam Laundry Association, 4 B. T. A. 1080; Appeal of John G. Barbas, 1 B. T. A. 589. Cf. Estate of Samuel Mnookin, 12 T. C. 744, affd. (CA-8), 184 Fed. (2d) 89. The latter is relied on for the result presently being reached 4 but it concededly differs from the present proceeding and it is precisely in those respects that C. L. Carver, supra, and this case are identical. This is entirely apart from the fact that the doctrine announced in William Hardy, Inc. v. Commissioner, supra,5 incorporates the principle applicable to all these situations.
What we said in C. L. Carver, supra, 174, applies exactly here:
We do not know, nor are we concerned with, why the respondent did not make a change in petitioner’s method of reporting income in some previous year. It may have been due to error or oversight or lack of information. * * * Section 41 of the Internal Revenue Code provides that the net income for income tax purposes shall be computed in accordance with the method of accounting regularly employed * * *. It was within the power of the petitioner to have effected the change in the method of reporting his income by requesting permission of the Commissioner so to do. This, petitioner knew. Why he did not do so is not shown by the record, nor is it material to the issue. The fact is respondent, in 1941, determined that the change from the cash to the accrual method of computing income should be employed. This was within his jurisdiction and authority. * * * As stated in Schuman Carriage Co., Ltd., 43 B. T. A. 880: “The failure of the petitioner to make its returns consistently upon the accrual basis may place it in an unfortunate position. But for this situation the petitioner is alone to blame.” [Emphasis added.]
Since I view this as the correct treatment of the precise question we are now facing and think it should be adhered to, I respectfully dissent.
Raum, agrees with this dissent.Incidentally, respondent’s action apparently treats both income and deduction items •consistently. The facts show that the revenue agent’s report took into consideration “accounts payable and accrued expense as of the beginning of the year which are not reflected in the return for the prior year.” These items are stipulated to have amounted* to $21,362.29. This disposition is confirmed as proper in respondent’s brief.
The following statement in the present opinion cannot but be fallacious:
* * * The accounts receivable here involved, as of the end of the year 1944 were not income in 1945, the taxable year, either upon the cash basis or the accrual basis, and on an annual tax basis should not be included in income of that year. [Emphasis added.]
Some part of the items included in the opening balance of accounts receivable and probably all, was collected in cash during the year we have before us. Certainly petitioner has not proven otherwise. Such items would clearly be includible as income of the current year un a cash basis; and the fact that this is the year of change-over makes it appropriate to include them because it is in this year that the two systems must be combined in ■order clearly to reflect income.
"* * * an individual or corporation may make return of income on either the cash or accrued basis, if the basis selected clearly reflects the income” [Emphasis added.] H. Rept. No. 922, 64th Cong., 1st Sess., 1939-1 (Part 2) C. B. 24.
The cases cited by the majority fall into several categories: (1) cases whete taxpayers have filed their returns and also kept books on an improper basis, Hardy, Koby (see also Barbas and Alameda). all of which sustain the Commissioner, not merely in requiring a change of method, but in including in taxable income, during the year of change, items which would otherwise have escaped taxation ; (2) cases where taxpayers have filed their returns and also kept books on a hybrid basis, partly cash and partly accrual. Schuman and Mnookin. Schuman stands for the principle that the Commissioner may similarly make adjustments in the year of change to reflect income correctly; Mnookin seems to oppose such a principle, but is distinguishable on its facts; (3) cases where a taxpayer has regularly computed and reported his income upon an entirely improper basis, but kept books and records by a proper method of accounting. The instant proceeding is such a case and so too in all essentials is Carver, where this Court held that the Commissioner could insist upon a change in the method of reporting and make necessary adjustments in the year of change; (4) the remaining cases cited, including Greene Motor Co., 5 T. C. 314, did rot involve a change of method at all. but merely the question of proper accrual for taxpayers who were and remained on the accrual basis.
“The accounts receivable as of December 81, 1924. were correctly included also. They were not taxable on the cash basis, and if strict accrual principles are to prevail beginning with January 1, 1925. they never would be taxable since they represent previous transactions which could not be accrued in 1925 or thereafter nor would payments made upon them after the beginning of 1925 figure in the computation of income, since the cash basis no longer was to be used. Yet to the, extent that they were thereafter paid they were in fact the income of the petitioner. There is no provision in the law which permits their escape from taxation if received. * * *” [Emphasis added.] (William Hardy, Inc. v. Commissioner, supra, 251).