*2129 Held that the petitioner changed its method of reporting income to the installment basis by an original return for 1920, and that respondent correctly included in income for 1922 payments received in that year on account of installment sales made in 1920 and 1921.
*398 This is a proceeding for the redetermination of a deficiency in income tax asserted by the respondent for 1922, in the amount of $2,741.07. While the pleadings set forth eight assignments of error, seven of them relate to the single question of whether the respondent correctly included in income the sum of $26,476.25, representing profits realized through collections made during the year on installment sales of 1920 and 1921. The other assignment of error charges the respondent with having erroneously included in income the sum of $4,060.92, representing "profit realized from forfeited sales made in 1921." As to this latter assignment, the respondent, in amended answer, admits error.
FINDINGS OF FACT.
Petitioner, a Missouri corporation with its principal office at Kansas*2130 City, is engaged in the development, building and sale of residential and business property in Kansas City.
The petitioner's books of account have always been kept on the accrual basis, and the net incomes reported in its income-tax returns for all years to and including 1919 have been computed on the same basis.
In computing net income in its returns for 1920, 1921, and 1922 the petitioner deducted the sums of $7,555.66, $23,446.53, and $22,666.36, respectively, representing unrealized profits on installment sales. It included in income for 1921 the sum of $1,225.52, representing profits collected in that year on 1920 installment sales, and in income for 1922 the sum of $9,427.32, representing profits collected in that year on installment sales of 1920 and 1921. Using figures applicable to 1920, the following statement shows the manner in which the petitioner computed the unrealized profits on installment sales of each year:
| (a) Net income computed without deduction of | |
| unrealized profits on installment sales | $ 15,536.36 |
| (b) Gross sales in which initial payments | |
| exceeded 25% of the contract prices | 83,997.51 |
| (c) Income from interest, rent, etc | 16,602.75 |
| (d) Total | 100,600.26 |
| (e) Gross sales in which initial payments | |
| were less than 25% of the contract prices | 144,253.22 |
| (f) Gross income from all sources | 244,853.48 |
| (g) Percentage of gross income represented | |
| by net income, (a) divided by (f) | 6.34% |
| (h) Payments received during the year on | |
| installment sales shown in (e) | $25,329.93 |
| (i) Percentage of installment sales paid | |
| during the year, (h) divided by (e) | 17.5% |
| (j) Net income from sources other than | |
| installment sales, (d) multiplied by (g) | $6,380.22 |
| (k) Net income from installment sales, (e) | |
| multiplied by (i) multiplied by (g) | 1,600.48 |
| (l) Taxable net income, (j) plus (k) | 7,980.70 |
| (m) Unrealized profits on installment sales, | |
| (a) minus (l) | $7,555.66 |
*2131 *399 After an examination of the petitioner's books of account for 1920 and 1921 by a revenue agent, the respondent approved the returns as filed by the petitioner for those years.
The respondent redetermined the income from installment sales for 1922 in the following manner:
| 1920 | 1921 | 1922 | |
| Total installment sales | $183,503.22 | $200,935.94 | $97,583.65 |
| Cost of installment sales | 140,948.64 | 149,270.94 | 75,283.95 |
| Total profit to be realized | 42,554.58 | 51,655.00 | 22,299.70 |
| Total contract prices | 144,253.22 | 165,135.94 | 73,155.31 |
| Ratio of total | |||
| Payments received | profit to total | Profit realized | |
| in 1922 | contract price | in 1922 | |
| On 1920 installment sales | $16,984.37 | 42,554.58/ | $5,010.38 |
| 144,253.22 | |||
| On 1921 installment sales | 55,631.13 | 51,665.00/ | 17,404.95 |
| 165,135.94 | |||
| On 1922 installment sales | 8,014.00 | 22,299.70 | 2,442.88 |
| 73,155.31 | 24,858.21 | ||
| Add: Forfeitures in 1922 of | |||
| payments made in 1921 on | |||
| installment sales of the | |||
| latter year | 4,060.92 | ||
| Total profits realized in | |||
| 1922 from installment sales | 28,919.13 |
*400 In his amended answer the respondent concedes that he erred*2132 in including in income for 1922 the sum of $4,060.92 shown above, representing forfeitures in that year of payments made in 1921 on installment sales of the latter year.
OPINION.
LANSDON: The petitioner computed net income in all returns to and including 1919 upon the strict accrual basis. For 1920, 1921, and 1922 it filed original returns which, confessedly, purported to show net income for those years on the installment basis. It concedes now that the income from installment sales reported in those returns was incorrectly computed. The parties have stipulated that the respondent accepted and closed the returns for 1920 and 1921 without any corrections. The petitioner further concedes that, except for the inclusion of the item of $4,060.92 as to which the respondent admits error, the latter has correctly computed the net income for 1922 on the installment basis, if it was proper for the respondent to include in the income for that year, under section 705 of the Revenue Act of 1928, amounts received in such year on account of installment sales of 1920 and 1921. The provisions of the statute to which the petitioner refers read as follows:
(a) If any taxpayer by an original*2133 return made prior to February 26, 1926, changed the method of reporting his net income for the taxable year 1924 or any prior taxable year to the installment basis, then, if his income for such year is properly to be computed on the installment basis -
* * *
(2) No deficiency shall be determined or found in respect of any such taxes unless the taxpayer has underpaid his taxes for such year, computed by excluding, in computing income, amounts received during such year on account of sales or other dispositions of property made in any year prior to the year in respect of which the change was made.
The petitioner contends that it changed its method of reporting income to the installment basis by an original return for 1922, and that under the above-quoted provisions of the 1928 act the respondent improperly included in income the sum of $26,476.25 received in that year on account of installment sales made in 1920 and 1921. The petitioner argues that since the net income was incorrectly computed on the installment basis, in the returns for 1920 and 1921, and the respondent failed to redetermine the correct net income for those years on the installment basis, such returns can not*2134 be regarded as having been prepared on the installment basis or as reflecting any change in the method of reporting income; and that the respondent having corrected the return for 1922 so as to correctly *401 reflect the income for that year upon the installment basis, the change to the installment basis of reporting income must be considered as having been made in that year.
We disagree entirely with the petitioner's contention. The fact that the respondent failed to correct the returns of either 1920 or 1921 so that they would correctly reflect the income of those years upon the installment basis is of little or no consequence in deciding by what return the change to the installment basis of reporting income was made. The important thing is that the petitioner first filed a return purporting to show the net income computed upon the installment basis for 1920, and that return was accepted and approved by the respondent. With the acceptance and approval of that return by the respondent, the change in the method of reporting income became an accomplished fact, and was just as effective as though the net income had been computed therein on the installment basis with the*2135 utmost degree of accuracy. Indeed, we think that the change would have been just as effective had not the petitioner undertaken to compute the net income at all, so long as the desire to change to the installment basis was expressly indicated and the return contained sufficient data upon which to base a computation of net income on that basis; but, having made the computation in the return on the installment basis according to its own best judgment as to what was proper, it will not be heard to say now, in an attempt to gain an undue advantage, that the return was not prepared on the installment basis, simply because its computations were erroneous and net income was not correctly stated. It would be unconscionable if the petitioner could by any such scheme as it has evolved escape its fair burden of tax upon that part of the profits derived from installment sales of 1920 and 1921, the accounting for which was deferred for the purposes of the tax to the periods in which reduced to possession.
We hold that the petitioner changed its method of reporting income to the installment basis by an original return for 1920; that the provisions of section 705(a)(2) of the Revenue Act of*2136 1928 are not applicable under the facts of this case; and that the respondent very properly included in income for 1922 the payments received in that year on account of installment sales of 1920 and 1921. Section 212(d), Revenue Act of 1926.
In accordance with the respondent's confession of error as to the other issue, the net income shown by the deficiency notice should be reduced by the sum of $4,060.92.
Judgment will be entered under Rule 50.