*1992 The Commissioner's determination of a deficiency in income-tax liability of $18,666.65, plus a 5 per cent penalty, for the years 1922 to 1925, inclusive, approved, there being no sufficient evidence adduced to overcome the correctness of such determination.
*999 The Commissioner determined a deficiency in income tax, plus penalty, as follows:
| Year | Deficiency in tax | Penalty |
| 1922 | $3,516.95 | $175,85 |
| 1923 | 4,475.89 | 223.79 |
| 1924 | 5,058.39 | 252.92 |
| 1925 | 5,615.42 | 280.77 |
| Total | 18,666.65 | 933.33 |
The petitioner filed two amended petitions, the first of which, assigning two alleged errors - (a) the failure of the Commissioner to allow as a deduction for each of the years in question a "Reserve for Unearned Discount," and (b) the assertion of a negligence penalty for each of said years, states there is in dispute $3,615.92 of the alleged deficiency in tax and the $933.33 penalty. The second amended petition assigns an additional alleged error, that "the deficiency assessment made by the Commissioner was not based upon an income tax*1993 return as contemplated and required by law."
The case is submitted on the pleadings, testimony of one witness and exhibits.
FINDINGS OF FACT.
The petitioner is a Delaware corporation, incorporated in July, 1920, with its principal office in San Diego, Calif.
In each of the eyars in question petitioner purchased various notes receivable and automobile contracts at a discount, some of which notes and contracts provided for their payment in installments over periods of time beyond the end of the calendar year in which purchased and covering an approximate period of eighteen months. In each of the years in issue the discount on each of such notes and contracts was entered on the financial books of petitioner as having been earned at the time of the purchase of the respective note or contract. *1000 The "Reserve for Unearned Discount" computed each year was not shown on the books of the petitioner as a credit representing deferred income. On petitioner's tax returns deductions were taken opposite the following captions or notations:
| 1922 "Contingent losses 5% on $406,449.46" | $20,322.47 |
| 1923 "5% on Notes Receivable - Contingent Cases" | 29,636.53 |
| 1924 "5% of Notes Receivable for Bad Debts" | 28,741.67 |
| 1925 "5% of Notes Receivable for Bad Accounts (contingent)" | 29,817.81 |
*1994 In none of the returns was any provision made for restoring to income at a later time any part of the above sums as earned discount. The Commissioner disallowed the deductions for all of said years.
In the income-tax returns for each of the years in question the petitioner claimed as deductions certain items which were disallowed and restored to income by the Commissioner, who dealt with petitioner's accounts on the accrual basis. This action was acquiesced in by the petitioner, the disallowance of a deduction for "unearned discounts" being the only deficiency tax item in the return for each year which is now contested by the petitioner.
The petitioner for each of the years in question filed a corporation income-tax return on Form 1120, U.S. Internal Revenue.
The Commissioner asserted penalties aggregating $933.33, under section 250(b) of the Revenue Act of 1921 and section 275(a) of the Revenue Acts of 1924 and 1926.
The petitioner kept its books on the accrual basis. The first tax return involved, that for the year 1922, was filed March 15, 1923, and the deficiency notice was mailed March 10, 1927, within four years of the filing of the return.
OPINION.
SEAWELL: *1995 It is argued in behalf of the petitioner that its books were kept on the cash receipts and disbursements basis, though no one so testified and the books were not introduced in evidence. The first tax return made and filed by petitioner for the latter part of the year 1920 (which year is not in issue) indicated its return of income was on the accrual basis. Subsequent returns indicated on their face that they were made on the cash receipts and disbursements basis, but we reached the conclusion, in the light of all the facts and circumstances disclosed, that the books were kept on the accrual basis as indicated in our findings of fact.
In filing its income-tax returns petitioner apparently attempted to use the cash receipts and disbursements basis by reporting its gross income as reflected in its books and deducting therefrom the *1001 items of accrued income and an estimated amount to represent unearned discount. After eliminating these amounts from the income of one year, no method was pursued to restore them to income in another year and as a result of this practice income which would have been taxable in any event in some year, whether petitioner's books were kept on*1996 the accrual or receipts and disbursement basis, was not included in any return for any year.
The deficiency in tax determined by the Commissioner, if erroneous in any particular, is not shown by the evidence to what extent it is so in any of the years involved.
The petitioner has failed to show what part, if any, of its income determined by the Commissioner was unearned discount. The returns of petitioner in evidence show, for the years in issue, cash dividends and taxable income reported, as follows:
| Year | Cash dividends | Texabel income |
| 1922 | $15,432.00 | $10,118.34 |
| 1923 | 32,560.00 | 22,270.81 |
| 1924 | 58,040.00 | 21,395.91 |
| 1925 | 59,694.00 | 8,795.44 |
It is thus made evident from the tax returns of the petitioner that its earnings for the four years in issue, as shown by cash dividends declared, exceeded by over one hundred thousand dollars its taxable income reported. The fact that this practice of returning income was continued for so long a time without apparently discovering or realizing that income was escaping taxation indicates - putting the most favorable aspect possible on such action - negligence on the part of responsible officers of the petitioner.
*1997 The evidence does not show that the petitioner had any income from sources that would make it nontaxable. It started this four-year period with a nominal surplus. In 1924 the cash dividends were almost three times the reported taxable income and it paid out in cash dividends each year more than the amount of taxable income reported. Under such conditions, continued from year to year, negligence on the part of the petitioner is evident.
In regard to respondent's determination of the petitioner's net income, only one item out of several is disputed and that only in part. The prima facie presumption of the correctness of the respondent's determination of a deficiency in tax in the amount of $18,666.65 must prevail, no sufficient evidence being adduced to overcome it.
No reasonable excuse or satisfactory explanation for the understatement of taxable income in its returns being shown by the evidence, *1002 we are of the opinion that the assertion of the 5 per cent penalty for negligence should be approved. ; *1998 ; ; and .
Judgment will be entered for the respondent.