*2629 1. The petitioner's books of account fairly reflect its income for the calendar years 1919, 1921, and 1923. Held, that the respondent erred in changing petitioner's returns from a calendar year to a fiscal year basis.
2. Salaries of the petitioner's officers which were authorized in 1918 for the years 1919 and 1921, but which were not paid until 1923, held to be proper deductions in computing the petitioner's income for 1919 and 1921, the petitioner's books of account being kept on the accrual basis.
3. Delinquency penalty for the fiscal year ended September 30, 1921, disallowed.
*162 These proceedings, which were duly consolidated for hearing and decision, are for the redetermination of deficiencies in income and profits taxes and penalties which the respondent has asserted as follows:
| Fiscal year ending | Tax | Penalty |
| Sept. 30, 1919 | $10,045.65 | |
| Sept. 30, 1921 | 12,696.76 | $3,174.20 |
| Sept. 30, 1923 | 1,211.11 |
The petitioner alleges (1) that the respondent*2630 erred in changing the petitioner from a calendar year to a fiscal year basis; (2) that collection of the taxes asserted for the fiscal years ending September 30, 1919, and September 30, 1921, is barred by the statute of limitations; (3) that the respondent erred in asserting the delinquency penalty for the fiscal year ended September 30, 1921; (4) that the petitioner is entitled to deduct from gross income for 1923 the amount of $25,400 paid as compensation to its editor and business manager in that year; and (5) that it is entitled to have its profits taxes for the years 1919 and 1921 computed under section 328 of the Revenue Act of 1918, and section 328 of the Revenue Act of 1921, respectively.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of Iowa about the year 1904, and it was from the date of its organization until about the year 1925, engaged in the business of publishing a daily newspaper known as the Mason CityGlobe-Gazette at Mason City, Iowa. Its capital stock, with the exception of qualifying shares, was owned and held by William F. Muse and D. M. Conroy in the proportions of 51 and 49 per cent, respectively. Muse was president of the*2631 company and editor of the newspaper, and Conroy was secretary and treasurer and business manager.
The petitioner filed returns of income for each of the years 1917 to 1923, inclusive. Each of the returns was made on the calendar year basis. The return for the year 1919 was filed on March 15, 1920, and the return for 1921 was filed on June 15, 1922. The petitioner paid the tax, $1,340.14, shown on the return for the year 1921, together with 25 per cent of the tax, to wit, $335.03, as a penalty for delinquency in filing the return.
*163 In the year 1918 the petitioner's officers decided that its bookkeeping methods were antiquated and that a modern system of books of account should be installed. Accordingly, about September, 1918, the petitioner employed Baker, Vahter & Co. to install such a system. Baker, Vahter & Co. thereupon prepared a new set of books for the petitioner and they were opened as of October 1, 1918. The books were kept in accordance with the customary newspaper practice. Foreign and domestic advertising was kept on the accrual basis. All other accounts, including salaries, pay rolls, classified advertising and subscriptions were kept on the cash*2632 basis. At the end of each month the accounts were balanced and a profit and loss statement prepared. In each of these accounts the totals at the end of one month were carried forward and added to the totals of the following month, so that the monthly totals were cumulative and included the items of the preceding months. On September 30 of each year these cumulative totals were not carried forward, but were ruled off, and the process started again. The books were never closed as of September 30, or any other date. No annual profit and loss statement was ever prepared. The totals appearing on the accounts of September 30 of each year were never drawn off and segregated or compiled in any other accounts or schedules, but on the contrary were left where they were ruled off, and no further attention was paid to them. Depreciation was deducted from month to month and was never taken off on an annual basis. Bad debts were never written off. There was no difficulty in determining from the petitioner's books of account the amount of its income for any calendar year. In fact, there was no difficulty in determining at the end of any month the income for the 12-month period ending on*2633 that day. The petitioner's books fairly reflected its receipts, disbursements, assets, liabilities, and income on the calendar year basis.
The petitioner never at any time made application to the respondent for leave to file its returns of income upon a fiscal year basis, and the respondent never granted the petitioner permission so to do.
On May 1, 1918, at a meeting of the stockholders of the petitioner, the following resolution was adopted:
At the regular annual meeting of the stockholders of the Globe-Gazette Printing Company, a corporation regularly organized and doing business under the laws of the State of Iowa, W. F. Muse, President, called the meeting to order, D. M. Conroy, Secretary, read the minutes of the last meeting. It was voted yearly salaries to W. F. Muse and D. M. Conroy should hereafter be $9,600 each annually. All stock was represented and as there was no other business the meeting adjourned.
The total compensation authorized by the resolution of May 1, 1918, was not paid in the years 1918 to 1922, inclusive. The compensation actually paid in those years was as follows:
| Year | W. F. Muse | D. M. Conroy | Total |
| 1918 | $4,800 | $4,800 | $9,600 |
| 1919 | 4,800 | 4,800 | 9,600 |
| 1920 | 4,800 | 4,800 | 9,600 |
| 1921 | 4,800 | 4,800 | 9,600 |
| 1922 | 9,600 | 9,600 | 19,200 |
*2634 *164 In computing its net income for the years 1918 to 1922, inclusive, the petitioner deducted in each year on account of salaries only the amount actually paid in that year.
In the year 1923 the petitioner paid to Muse and Conroy a regular salary of $9,600 each, and also paid to them additional salary for 1919, 1920, and 1921 in the amount of $25,600, as follows:
| Year | W. F. Muse | D. M. Conroy | Total |
| 1919 | $3,200 | $3,200 | $6,400 |
| 1920 | 4,800 | 4,800 | 9,600 |
| 1921 | 4,800 | 4,800 | 9,600 |
These amounts were deducted by the petitioner in computing its net income for 1923.
The respondent, upon audit of the petitioner's returns for the years 1919 to 1923, inclusive, determined that the petitioner should have made its returns upon the basis of fiscal years ending on September 30 in each year. He therefore determined the petitioner's income tax on that basis, and disallowed as a deduction from gross income for the fiscal year ending September 30, 1923, the additional salaries paid in that year to Muse and Conroy, and determined that there are deficiencies in tax as above set forth, and an overassessment for the fiscal year ending September 30, 1922 in*2635 the amount of $1,297.85. He also denied the petitioner special assessment for the fiscal years ended September 30, 1919, and September 30, 1921, and asserted the delinquency penalty of 25 per cent of the tax for the latter year. The deficiency letter covering the fiscal year ended September 30, 1919, was mailed to the petitioner on March 5, 1925. The deficiency letter covering the fiscal year ended September 30, 1921, was mailed to the petitioner on June 15, 1926.
OPINION.
MARQUETTE: The first question presented by the record herein is whether the respondent erred in changing the petitioner's returns of income for the years 1919, 1921, and 1923 from a calendar year to a fiscal year basis. The parties agree that if we resolve this issue in favor of the petioner, the question relative to the running of the statute of limitations will be obviated.
*165 We are not advised of the reason that moved the respondent in his determination that the petitioner's returns should have been made on the basis of a fiscal year. The only fact that has been brought to our attention that might be construed as a ground for that act is that the petitioner's books which were kept during*2636 the years for which the returns in question were made had been opened as of October 1, 1918, and that they were "ruled off" on September 30 of each year. However, they were not closed on September 30 of any year on an annual basis, and the evidence clearly and convincingly negatives any action or intent on the part of the petitioner's officers to keep them or to report its income on other than the basis of a calendar year. It was the consistent practice of the petitioner in the year 1918 and prior years to report its income on the calendar year basis, and it followed that practice during the years 1919 to 1923, inclusive. The petitioner's books clearly reflect its income for the calendar years and under the circumstances we see no reason, either in fact or in law, warranting the respondent in requiring the petitioner to change to a fiscal years basis. In the case of , sustaining the taxpayer's return of income on a calendar year basis, the court said:
While the books of the corporation were ruled off as if closed on a yearly period ending May 31st, of each year, the witness testified that he considered*2637 that the books of the company were on a monthly basis, because an accurate profit and loss statement, as well as a balance sheet, were taken off each month and these statements were preserved as original records of the company. * * *.
The method adopted by the plaintiff must be regarded with favor because it was the method continuously adopted for the period of ten years or more, and exhibiting to the Board of Directors, who were vitally interested in knowing the exact financial condition of the company, the profit and loss from month to month. It is entirely clear that the return for 1917, was a calendar year return. I am by no means satisfied that the method adopted by the Commissioner of taking two full fiscal years and then obtaining a calendar year return by taking 5/12ths of 1917, and 7/12ths of 1918, reflects with as much accuracy, the true net income for the year 1917, as that shown by the plaintiff's return. As no evidence was offered on the part of the defendant, there was no effort to justify the arbitrary allocation of income.
See, also, *2638 ; , and . We are of opinion that the petitioner was justified in making its return of income for calendar years, and we so hold.
The next question is whether the petitioner is entitled to deduct in 1923 the additional compensation paid in that year to its editor and manager for the years 1919 and 1921. The evidence relative to this issue shows that the petitioner's board of directors in 1918 authorized for its editor and general manager an annual salary of $9,600 *166 each. Such salaries were, however, not paid in the years for which they were authorized and they were not accrued on the petitioner's books, and it claimed as deductions from income in those years only the amounts actually paid therein. Further payments of salaries for the years in question were made in 1923, but the amount paid in 1923 added to the amounts already paid did not in any year exceed the yearly compensation theretofore authorized by the board of directors. It further appears that it was the practice of the petitioner*2639 to keep accounts covering salaries, pay rolls, classified advertising, and subscriptions, on the cash basis, and that foreign and domestic advertising was kept on the accrual basis. The petitioner's witnesses appear to be in doubt as to whether its books were kept on the cash or the accrual basis. Regardless, however, of the opinion of the petitioner's officers, it is clear that the books must be considered as kept on the accrual basis. . This being the case the petitioner should have accrued on its books, for the years 1919 and 1921, the salaries authorized for its editor and manager for those years, even though they were not paid until a subsequent year.
It is clear that for the year 1919 and 1921 the petitioner's officers voted salaries of $9,600 each to its editor and manager. There appears to be no question as to the reasonableness of the amount, and, since the petitioner's books were kept on the accrual basis, we are of opinion that such salaries were proper deductions from gross income for the years 1919 and 1921, but that no part thereof is deductible from income in the year 1923. It appears that part of the*2640 additional salary paid in 1923 was for the year 1920. That year, however, is not before us.
The record herein discloses that the petitioner was delinquent in filing its return of income for the calendar year 1921, and that it paid a delinquency penalty of 25 per cent of the tax shown due of the return. The additional delinquency penalty asserted by the respondent is for the fiscal year September 30, 1921. Since we have held that the petitioner was on a calendar year basis, it follows that no return was required for the fiscal year ended September 30, 1921, and that no penalty can legally be imposed for failure to make a return for such fiscal year.
The hearing in this case was limited to the issues raised other than the question of special assessment under sections 327 and 328 of the Revenue Acts of 1918 and 1921.
Reviewed by the Board.
Further proceeding will be had under Rule 62(b).
LITTLETON, LANSDON, PHILLIPS, MILLIKEN, and MURDOCK dissent.