*3608 1. Held that on the evidence submitted the taxable income of a partnership of which the petitioners were members was properly computed on the accrual basis.
2. When timely returns were filed for the years 1920, 1921, and 1922 with waivers for the years 1920 and 1921 filed by certain of the petitioners on March 4, 1926, deficiency letters having been mailed to the petitioners by the Commissioner on December 17, 1925, and the appeals filed with the Board on February 2, 1926, held that the statute of limitations was suspended during the period in which the appeals were pending before the Board and that the assessment of additional taxes is not barred.
*56 In these proceedings, which have been consolidated for hearing and opinion, the petitioners seek a redetermination of their income taxes for the calendar years 1920, 1921, 1922, and the first two months of 1923, for which periods the respondent has determined the following deficiencies:
| 1920 | 1921 | 1922 | 1923 | |
| Stuart A. Russell | $2,739.47 | |||
| Robert H. Russell | 2,749.31 | |||
| Henry L. Russell | 34,156.59 | $1,134.69 | $718.29 | |
| Newton H. Russell | 2,714.32 | $68.45 |
*3609 All of the petitioners were partners in the partnership of J. Russell & Co., which was engaged in the wholesale and retail hardware business. The original returns were made on the cash receipts and disbursements basis. The Commissioner, believing that the method employed did not clearly reflect the net income, computed the income of the partnership on an accrual basis, resulting in the deficiencies as above stated.
The contentions alleged in the original petition were abandoned and an amended petition filed which raised four issues:
*57 (1) The statute of limitations.
(2) Whether income should be computed on the cash receipts and disbursements basis.
(3) Inventory adjustments.
(4) Partners' distributive share of income.
No proof was offered except as to year 1920, all issues to other years being abandoned except as to the statute of limitations.
FINDINGS OF FACT.
The petitioners are indiiduals residing at Holyoke, Mass. During the calendar years 1920, 1921, 1922, and up to March 1, 1923, they were partners in the firm of J. Russell & Co., which, during the period under consideration, was engaged in the wholesale and retail hardware business at Holyoke. *3610 About 75 per cent of the business of this partnership was wholesale and 90 per cent of the wholesale sales were made on credit.
The petitioners confined their proof to the year 1920 for which a timely partnership and personal service corporation return of income was filed showing:
| Gross sales - less cost of goods | $202,750.21 | |
| Taxable interest | 500,31 | |
| Total | $203,250.52 | |
| Less ordinary and necessary expenses | 128,073.52 | |
| Depletion | 10,813.96 | |
| Total | 138,887.48 | |
| Net income to be accounted for by members | 64,363.04 |
On balance sheets were attached to this return.
The partnership returns for the years 1921 and 1922, which were introduced in evidence, show as of December 31, 1921, accounts receivable of $96,186.01 and inventories of $309,010.42, and at December 31, 1922, accounts receivable of $132,287.86 and inventories of $303,773.78. The record also shows that the partnership ledger contained accounts receivable as follows:
| January 31, 1920 | $125,789.46 |
| December 31, 1920 | 127,465.85 |
The partnership for purposes of bookkeeping divided its business into 26 departments. A perpetual sales record was kept for each of these departments. *3611 These records were from time to time adjusted by actual inventories taken of the various departments. The partnership was in existence prio to the year 1920. No complete inventories were taken either in the year 1920 or in any of the other years under consideration. Partial inventories were taken on December 31, 1918, February 1, 1919, and March 1, 1919, and the first complete *58 inventory after the year 1920 was taken on December 31, 1923. Various departmental inventories were taken at intermediate times. Its books for the year 1920 carried without change, a merchandise inventory of $228,609.22. The respondent set up an adjusted opening merchandise inventory as of January 1, 1920, of $213,125.57, and a closing inventory as of December 31, 1920, of $292,272.96. These figures were reached by adjusting the perpetual sales record with the partial inventories. The figure used for the opening inventory was the same as the adjusted closing inventory for the calendar year 1919, which inventory was accepted by the petitioners as approximately correct and the resulting deficiencies paid.
The petitioners' cases were presented on the theory that the cash receipts and disbursements*3612 method was the proper method of computing the partnership net income, and that the original return properly reflected the net income computed on this basis. No evidence was submitted to show the Commissioner had not properly computed the net income on the accrual theory.
The original returns of the petitioners are not in evidence. The deficiency letters were mailed to each of the petitioners on December 17, 1925. On January 25, 1926, Newton H. Russell and Henry L. Russell executed written consents for the year 1920, which were filed with the Commissioner on March 4, 1926, and at the same time Henry L. Russell also filed a written consent for the year 1921. The consent signed by Newton H. Russell extended the time for making the assessment until six months after the date of the final decision of the United States Board of Tax Appeals. The consents signed by Henry L. Russell for 1920 and 1921 extended the time for making assessments to December 31, 1926. These consents are on the usual Treasury blanks, and that of Henry L. Russell for the year 1920 reads as follows:
INCOME AND PROFITS TAX WAIVER
For Taxable Years ended prior to January 1, 1922
Received in Mar. 4, 1926.
*3613 Solicitor's Office
Bureau of Internal Revenue
JANUARY 25, 1926.
In pursuance of the provisions of existing Internal Revenue Laws Henry L. Russell, a taxpayer of 244 Oak Street, Holyoke, Massachusetts, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year (or years) 1920 under existing revenue acts, or under prior revenue acts.
This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a notice of deficiency in tax is sent to said taxpayer by registered mail before said date *59 and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.
(Signed) HENRY L. RUSSELL
Taxpayer.
(Signed) D. H. BLAIR
Commissioner*3614 W. B.
Appeals were filed the Board of Tax Appeals on February 2, 1926.
No deficiency letters were mailed to the petitioners after the passage of the Revenue Act of 1926. The first hearing before the Board was had May 9, 1927.
The Commissioner concluded that the returns made on a cash receipts and disbursements basis did not correctly reflect the income received from the partnership and computed the income of this partnership on an accrual basis resulting in the deficiencies set out above.
The petitioners have offered no proof except for the year 1920, for which year they contend that the Commissioner erred in computing the net income on an accrual basis, and they further allege that the time within which an assessment of the proposed deficiencies or any part of them may be made has elapsed.
OPINION.
GREEN: The petitioners, in each proceeding, abandoned all issues raised by their petitions and the proof in support of those raised in the amended petitions permits us to consider them only to a limited extent.
The petitioners contend that the statute of limitations has run. To say that it has not, is sufficient. *3615 .
The petitioners insist that they were correct in computing the income of the partnership on the cash receipts and disbursements basis and that consequently the Commissioner erred when he made inventory adjustments and computed the income of the partnership on the accrual basis and computed the partners' distributive share of the income as thus determined.
Under the provisions of section 212(b) of the Revenue Acts of 1918 and 1921, the petitioners were required to compute their net income in accordance with the methods employed in keeping their books; but if the methods employed did not clearly reflect the net income, the computation must be upon such basis and in such manner *60 as in the opinion of the Commissioner will clearly reflect the net income. It is obvious from the record that the books of account were kept partly on the cash receipts and disbursements basis and partly on the accrual basis. In reporting their income they reported only the cash receipts and disbursements. The Commissioner has exercised the discretionary power conferred upon him by statute and has made the computation of net*3616 income upon the accrual basis.
It is apparent that in setting up the opening and closing inventories the Commissioner endeavored to properly adjust the petitioners' perpetual inventories. At the trial considerable evidence was offered to show that the original partnership return for the year 1920 as made was correct but no effort was made to show wherein the Commissioner erred in computing the income upon an accrual basis.
The Real point at issue is the method to be used in computing the net income. We are of the opinion that this partnership, engaged as it was in a wholesale and retail hardware business, buying principally on credit and making the major portion of its sales on credit, can not properly reflect its income on a cash receipts and disbursements basis and that the Commissioner was correct in computing the net income by the accrual method.
The burden of proof was upon the petitioners to show any errors in the Commissioner's computation under the accrual method. Since no evidence has been introduced showing any errors, the Commissioner is sustained.
Judgment will be entered for the respondent.