dissenting: Petitioner’s principal source of income was derived from the production and sale of livestock. Since 1906, it has used the unit-livestock-price method to inventory its livestock, and such inventories have always been used in computing its income in its Federal income tax returns. Petitioner, as I see it, was entitled to use inventories in computing its income and to account for all other items of income and expenses on a cash basis.
Section 22 (c) of the Code provides for the use of inventories in computing gross income. Section 29.22 (a)-7, Treasury Regulations 111, relates to the gross income of farmers, including livestock raisers, and distinguishes between “a farmer reporting on the basis of receipts and disbursements (in which no inventory to determine profits is used)” and “a farmer reporting on the accrual basis (in which an inventory is used to determine profits).” Section 29.22 (c)-6, Treasury Regulations 111, in effect during the taxable years, provided that a livestock raiser or other farmer could change the basis upon which he filed his tax returns from a cash receipts and disbursements method to an inventory method provided certain adjustments were made. This regulation was amended by T. D. 5683, approved December 30, 1948, 1949-1 C. B. 52, and provides that a livestock raiser or other farmer has the option of making his return .upon an inventory basis instead of the cash receipts and disbursements basis and, once the option is elected, it is binding upon the taxpayer for subsequent years unless another method is authorized by the Commissioner. T. D. 5423, 1945 C. B. 70, recognized the “unit-livestock-price method” as a method by which livestock raisers could value their inventories, and amended section 29.22 (c)-6 to read in part as follows:
Because of the difficulty of ascertaining actual cost of livestock and other farm products, farmers who render their returns upon an inventory basis may value their inventories according to the “farm-price method,” and farmers raising livestock may value their inventories of animals according to either the “farm-price method” or the “unit-livestock-price method.”
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The “unit-livestock-price method” provides for the valuation of the different classes of animals in the inventory at a standard unit price for each animal within a class. A livestock raiser electing this method of valuing his animals must adopt a reasonable classification of the animals in his inventory with respect to the age and kind included so that the unit prices assigned to the several classes will reasonably account for the normal costs incurred in producing the animals within such classes. Thus, if a cattle raiser determines that it costs approximately $15 to produce a calf, and $7.50 each year to raise the calf to maturity, his classifications and unit prices would be as follows: calves, $15; yearlings, $22.50 ; 2-year olds, $30; mature animals, $37.50. The classification selected by the livestock raiser, and the unit prices assigned to the several classes, are subject to approval by the Commissioner upon examination of the taxpayer’s return.
A taxpayer who elects to use the “unit-livestock-price method” must apply it to all livestock raised, whether for sale or for breeding, draft, or dairy purposes. Once established, the unit prices and classifications selected by the taxpayer must be consistently applied in all subsequent years in the valuation of livestock inventories. No changes in the classification of animals or unit prices will be made without the approval of the Commissioner.
Section 41 of the Internal Bevenue Code1 provides that income shall be computed in accordance with a method of accounting regularly employed in keeping records of the taxpayer. If such method, however, does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income.
Section 29.41-3, Treasury Begulations 111, relating to methods of accounting, states in part as follows:
Methods of Accounting. — It is recognized that no uniform method of accounting can be prescribed for all taxpayers, and the law contemplates that each taxpayer shall adopt such forms and systems of accounting as are in his judgment best suited to his purpose. * * »
Respondent argued that, under the Code and regulations, petitioner’s method of reporting income did not clearly reflect its income, and that since it used livestock inventories, it was on an accrual basis. The theory of accrual accounting is that it more accurately offsets items of expense and items of income, but cash-basis accounting is not denied a taxpayer on this ground alone; and, in the case of a livestock raiser or other farmer, an option to use a cash receipts and disbursements method is afforded. The words, “clearly reflect income” appearing in section 41 of the Code, do not mean “accurately” reflect income. Huntington Securities Corporation v. Busey, 112 F. 2d 368 (C. A. 6, 1940). Respondent’s argument in the instant case is more that petitioner’s method was “not accurate” than that “it was not clear.” Where the use of inventories is mandatory, the regulations provide a party must be on an accrual basis. Regs. Ill, sec. 29.41-2. However, because of the option afforded under the regulations, petitioner was not in a business where it “must” use inventories. T. D. 5683, supra. It could, but it was not required to do so.
The unit-livestock-price inventory is different from the usual types of inventory. It does not purport to represent cost or to represent market value. By its very definition it is a constant-pricing method, and once the prices for each class are established, such prices cannot be changed without permission of the Commissioner. Such a method of inventorying is obviously different from the usual inventory used by an accrual-basis taxpayer.
While it is true that as a usual rule this Court does not generally recognize a hybrid system of accounting, Estate of Julius I. Byrne, 16 T. C. 1234 (1951), it must be remembered that this is because a hybrid method generally does not clearly reflect income. In that case, the Commissioner determined that the corporation, which was before this Court (in consolidated proceedings), was on an accrual basis and adjusted its accounts accordingly. The corporation was a manufacturing corporation, and we held that it had failed to prove that it was predominantly on a cash receipts and disbursements basis, or even that the system which it was using more nearly resembled a cash method and we, therefore, sustained the Commissioner in his determination that petitioner should properly be on an accrual basis and sustained the adjustments which he had made in respect thereto. However, because of the difficulties connected with farm accounting, a number of farmers and livestock raisers use the system employed by petitioner consistently throughout the years. These very accounting difficulties, such as ascertainment of actual costs and the keeping of complete records necessary for an accrual method of reporting income, are the reasons for the optional treatment allowed under the regulations. See 2 Mertens, Law of Federal Income Taxation, sec. 16.33, p. 560.
■ Such difficulties were recognized by respondent in- his deficiency notice and in his brief. No attempt was made to include certain items, such as feed on hand, and other items which properly should be included either as supplies or inventories, in using an accrual method. Respondent stated in his brief that:
no adjustments were necessary since the evidence disclosed that such items remained relatively constant from year to year and the net income during the taxable years in question would be substantially the same whether such items were reported upon a cash basis or upon the accrual basis. [Page 47.]
In effect, the respondent has, therefore, put petitioner upon a hybrid basis of accounting for income tax purposes. If petitioner’s method is a hybrid one, a question arises whether respondent can change petitioner from one hybrid basis of accounting to another, on the ground that his method more clearly reflects petitioner’s income than the method which petitioner has been using since 1906. The only major adjustment with respect to this issue which respondent has made is with respect to the interest items paid out by petitioner during the taxable years which, had it been on an accrual basis, would have been deducted in years prior to the years in question. Respondent maintained that to allow such deductions would distort petitioner’s income for each of the taxable years involved. Such an argument is true as applied to any taxpayer using a cash basis of accounting.
In Reynolds Cattle Co., 31 B. T. A. 206 (1934), the taxpayer had used a constant-price inventory which the respondent had objected to for the years 1926,1927, and 1928, and ordered the returns prepared on a cash receipts and disbursements basis. The taxpayer protested the proposed deficiency and the matter was determined, in Washington, by the Commissioner using the inventory basis in closing the case. While the controversy was pending, the taxpayer prepared its 1929 and 1930 returns on the cash receipts and disbursements method. The respondent issued a deficiency notice with respect to those years on the ground that the returns should have been made on the inventory basis because no permission to change the method of accounting had been granted. On appeal to this tribunal, we held that the constant-price method formerly used by the taxpayer and determined by the Commissioner to be applicable to those years did not clearly reflect its income and, therefore, the cash receipts and disbursements method should be used. However, since that case, the respondent, in 1944, recognized the use of the constant-pricing method for valuing livestock, and provided that a taxpayer who, for taxable years beginning prior to January 1, 1944, had used a constant-unit-price method of valuing livestock inventories would be considered as having elected to use the unit-livestock method of valuing inventories.
Respondent’s argument that items of accrual appeared on petitioner’s books and that, therefore, it was really on an accrual basis has not convinced me that such was actually the case. Most of the items so cited by respondent were minor in nature and, in my opinion, were adequately explained by petitioner. Some accounts on its books carried. titles which normally are used for accrual accounting, such as accounts receivable, inventories, of livestock, deferred charges, accounts payable, and notes payable. The record shows that in some instances they were erroneously named and in others were balance sheet, not income, accounts. Petitioner’s returns stated that they were made on a cash receipts and disbursements basis. This tribunal, in M. D. Rowe, et al., 7 B. T. A. 903 (1927), stated: -
The respondent attaches great weight to the presence on the books, of a few accounts, amounting in the aggregate to relatively minor totals, as of the end of each year, which are classified on the balance sheets as “accounts receivable” and relies upon the mere existence of these accounts to show that the method of accounting of the partnership, was on the accrual basis. He points out that these asset accounts were determinative of net worth and apparently is thus influenced to believe that they entered through the door of income, and being unpaid, the income must have been an accrual. We think the fact has been overlooked that , an account receivable may come into existence and be recorded on books of account, including those kept op a cash basis, without the slightest effect on income. The petitioners have endeavored to show the nature of every such account and have satisfied us that some of them covered transactions classifiable as loans or accommodation purchases chargeable at cost, and it is obvious that such are not indicative of an accrual of income. As to other accounts included in the classification, the evidence is not so clear as to enable a satisfactory determination of their relation to income. In the determination of so comprehensive a question as the method of accounting used, we are averse to drawing a presumption from the general nature of a very few accounts receivable, even where it is unfortunately true that we are left to conjecture how two debits described as “charges in error’” and “disputed charges” were originally entered on the books. It is in evidence that the partnership never intentionally departed from a cash basis in determining its net income, and we conclude the record as a whole in this particular, supports the contention of the petitioners. [Pages 908-909.]
Such a statement adequately meets the argument presented in the instant case. Under such circumstances, I would hold that the method used by petitioner in keeping its books and reporting its income for Federal tax purposes over the years most clearly reflected its income, and respondent erred in changing petitioner’s method from one hybrid system to another.
' Nor can I subscribe to that portion of the majority opinion which holds that the petitioner is not entitled to carry back to 1943 a net operating loss of 1945 and an unused excess profits credit for 1945. The language of the applicable sections of the Code are clear, and I would not impute to Congress an intent to exclude this petitioner from the statute merely because it liquidated before selling its income-producing assets. The majority opinion disregards the unambiguous language of the statute and attempts to justify this by a quotation from United States v. Amer. Trucking Ass'ns., 310 U. S. 534 (1940). It is true that the language used by the Supreme Court is very sweeping, but it is followed by the statement that “Obviously there is danger that the courts’ conclusion as to legislative purpose will be unconsciously influenced by the judges’ own views or by factors not considered by the enacting body.” It should be noted that in that case the statutory language the Court was called on to interpret conflicted with the language in another act of Congress; judicial construction was, therefore, required to resolve the conflict; and the Court was justified in looking at the over-all purpose of Congress in enacting the statute in order to give proper effect to the intent of the legislators. That is not true in this case. In a recent opinion of this Court, Fred MacMurray, 21 T. C. 15, in construing the application of section 130 of the Code to losses suffered by a husband and wife in a community-property state, we said:
The statute speaks of the losses ‘allowable to an individuar, and we are not at liberty to re-write it for citizens of community property states. It may well be that if the attention of Congress had beén drawn to the discriminatory operation of the statute in such states, it might have treated the problem differently. The question, however, is a legislative one, and we must apply the statute as we find it. On this issue, our decision must be in favor of the petitioners.
That language, it seems to me, is applicable to the situation here.
We have held that the fact that a corporation is in the process of liquidating during the taxable year does not prevent it from carrying back a net operating loss for such year, since the language of section 122 is not limited to an operating corporation. Gorman Lumber Sales Co., 12 T. C. 1184 (1949).
The record in this case would justify a finding that there were valid business reasons for the dissolution of the petitioner. There is nothing in the Internal Eevenue Code which permits the Commissioner to force a taxpayer to dissolve at such a time as would most benefit the Federal Government taxwise. What the end result of the majority holding on these issues will be is difficult to foresee. If the petitioner had dissolved on November 15 or December 15 showing a loss as of either date, would the result be different?
This question is somewhat similar to the question involved in the case of United States v. Kingman, 170 F. 2d 408 (C. A. 5, 1948), in which it was held that where a corporation was not formally dissolved, it was taxable for income and excess profits tax purposes on a 12-month basis rather than on a short taxable year. Under the latter treatment, it would have been required to annualize its profits under 711 (a) (3) of the Code. Such result was reached on the theory that the taxpayer there retained, among other assets, a claim under section 722 for excess profits tax relief. Such result was held to be the proper one despite the fact that the stockholders’ resolution prevented the directors of the corporation from carrying on any business of the corporation other than those activities necessary for liquidating. Much the same facts exist in the instant case. Here, petitioner has not dissolved to daté because of the pendency of this case. It had a 722 claim for relief from excess profits tax which it did not abandon until shortly before the hearing of this case. Here, as in the Kingmam, case, petitioner carried on activities until the date of liquidation. The Kingman case has been followed by this Court in Roeser & Pendleton, Inc., 15 T. C. 966 (1950), affd. 196 F. 2d 221 (C. A. 10, 1952). See also the discussion of the Kingmam, case in Winter & Co., (Indiana), 13 T. C. 108 (1949). Under such circumstances, I would hold that petitioner was entitled to carry back its net operating loss , and its unused excess profits tax credit from the year 1945 to 1943.
SEC. 41. GENERAL RULE.
The net ineome shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer’s annual accounting period is other than a fiscal year as defined in section 48 or if the taxpayer has no annual accounting period or does not beep books, the net income shall be computed on the basis of the calendar year.