*639 Executors shortly after the decedent's death decided to adopt, as the annual accounting period for the estate, a fiscal year ending on the last day of the eleventh month following that in which the decedent died. Before the close of that fiscal year regular books of account were prepared and thereafter were regularly kept upon the basis of the fiscal year selected. A return for the fiscal year was timely filed by the executors. Through error one of the executors filed a return for the period from the date of the decedent's death to the end of the calendar year. The Commissioner prepared a return for the next calendar year and determined a deficiency for that period. Held, that the calendar year for which the Commissioner determined the deficiency was not a taxable year of this taxpayer and the Commissioner erred in determining a deficiency for that period.
*899 The Commissioner determined a deficiency of $2,040,411.91 in the income tax of the estate for the calendar*640 year 1934. An issue relating to gain from the sale of stock has been settled by stipulation, leaving as the only issue to be decided by the Board whether the Commissioner erred in making his determination on the basis of the calendar year 1934 instead of upon the basis of a fiscal year which began on the date of the decedent's death and ended May 31, 1934. If the calendar year 1934 was the proper basis, then the Revenue Act of 1934 applies and allows no deduction for Federal estate and *900 state inheritance taxes. But if the fiscal year was the proper basis, the Revenue Act of 1932 applies, the estate is entitled to the deduction in question, and the Commissioner determined the deficiency for an incorrect period.
FINDINGS OF FACT.
John C. Martin and Mary Louise Curtis Bok are the executors of the estate of Cyrus H. K. Curtis, who died on June 7, 1933. The executors, following the death of the decedent, held meetings from time to time to consider the affairs of the estate. These meetings were attended also by the trustees of a trust to which the decedent had devised most of his property. All of the property of the estate was in process of administration and in the*641 hands of the executors up to the time of the hearing and none of it had been transferred to the trustees. The executors at a meeting on June 30, 1933, decided to adopt, as the accounting period for the estate, a fiscal year ending May 31, so that the first fiscal year would begin on the date of the decedent's death and end on May 31, 1934. They never thereafter changed their decision.
Martin had been a business associate of the decedent and had managed his personal and business affairs for some time just prior to the death of the decedent. Anne P. Vaughan has been a secretary to John C. Martin since some time long prior to 1933. This secretary had kept a record of the decedent's receipts and expenditures prior to his death and, following his death, she continued to keep informal records of receipts and disbursements of the estate for the executors. She prepared checks for the signatures of the executors. She had prepared income tax returns annually from her records for Martin, the decedent, and their wives. Martin had signed and filed a number of the returns for the decedent as the latter's agent. This secretary had not been notified until some time after March 15, 1934, that*642 the estate had adopted a fiscal year accounting period, nor had she been directed to open or close books of any kind for the estate. She prepared, on or about March 12, 1934, an income tax return reporting the income of the decedent for the period from January 1, 1933, to the date of his death, showing net income of $183,604.41 and tax due of $65,336.82, and an income tax return for the estate covering the period from June 7, 1933, the date of the decedent's death, to December 31, 1933, showing net income of $4,855.35 and tax due of $135.88. No one ever instructed her to prepare these returns, but she prepared them on her own initiative from records kept by her pursuant to the routine of prior years. An accountant of one of the Curtis companies checked the mathematics on these returns in accordance with the routine of prior years. The secretary at the same time drew a *901 check for $16,334.21 in payment of one-fourth of the tax shown on the decedent's return and a check for $135.88 in payment of the entire tax shown on the return for the estate. These returns and checks, together with two income tax returns which the secretary had prepared for Martin and his wife, were*643 placed on Martin's desk. Martin executed all four returns. He signed the return for the decedent as agent and the return for the estate as executor. He also signed the two checks as executor. The two checks were then sent to Mary Louise Curtis Bok, who also signed them as executor. The secretary then filed the returns with and paid the taxes to the collector of internal revenue at Philadelphia on March 15, 1934.
Martin, at the time he executed the return for the estate covering the period from the date of the decedent's death to December 31, 1933, failed to think of the fact that he and his coexecutor had previously decided to place the accounts of the estate upon a fiscal year basis and, as a consequence, no return would be due for the period covered by the return which he was executing.
Martin was advised by one of the attorneys for the estate, in April 1934, that the executors should open and maintain formal books for the estate on the basis of the fiscal year which the executors had agreed upon. He thereupon directed his secretary and an accountant to prepare a set of books. They began to prepare a set of books consisting of a cash book, a journal, and a ledger. The*644 entries in these books were made from the informal records previously kept by the secretary. The entries were prepared in pencil. The work was completed on May 20, 1934, and presented to one of the attorneys for the estate. The latter then directed the comptroller of the Curtis Publishing Co. to write up the records in permanent form for the period June 7, 1933, to May 31, 1934. A permanent cash book, a journal, and a ledger were prepared under the latter's direction. The work was actually performed on May 30 and 31, 1934, and the books were ruled down and closed on the latter date. The books were thereafter regularly kept under the supervision of the comptroller of the Curtis Publishing Co. on the basis of a fiscal year ending May 31 and were regularly audited by public accountants.
One of the attorneys for the estate, while going over the records in connection with the preparation of the estate tax return, discovered, on May 19, 1934, the check for $135.88 paid to the collector of internal revenue on March 15, 1934. He asked Martin's secretary why the check had been issued and learned of the filing of the return for the period June 7, 1933, to December 31, 1933. The executors*645 were promptly advised of this discovery. Mary Louise Curtis Bok wrote to Martin on May 23, 1934, expressing surprise that he had filed the return for the period ended December 31, 1933, and directing *902 his attention to the agreement to keep the accounts and make the returns upon a fiscal year basis. A meeting of the executors and trustees was held on May 25, 1934, at which Martin presented a prepared statement to the effect that the return for the period ended December 31, 1933, had been filed by him inadvertently and without authority, and in which he further stated:
I neglected to instruct Miss Vaughan not to prepare a return for the Estate until the end of its fiscal year, and she followed her usual practice of making all returns on a calendar year basis.
I should not have signed the report when it was presented for signature, and the only way I can account for signing it was that I was both physically and mentally below par at the time as I was still suffering from the effects of the operation I had had a few weeks before; Mrs. Martin was in the hospital at the time and had been for three weeks, and we were just in the midst of our negotiations with Mr. Patenotre*646 for an extension of our Notes due at that time. Just at that time, also, Mrs. Martin received word that Miss Cutter had had a slight stroke, and she left the hospital before she should have to go to Pasadena, California.
Because of this combination of illness and worry I was in a state of mental aberration and when Miss Vaughan presented Mr. Curtis' Income Tax return to June 7th, the Estate's from June 7th to December 31st, Mrs. Martin's and my own, I just signed them without thought.
The executors and trustees then affirmed their decision to remain upon a fiscal year basis. Their attorney advised them to send and they sent a letter to the collector dated May 25, 1934, explaining that the return for the period ended December 31, 1933, had been filed inadvertently, requesting that no further recognition be accorded it, and informing the collector that a proper return would be filed for the established accounting period, a fiscal year ending May 31, 1934.
The executors filed for the estate on July 24, 1934, an income tax return for the period June 7, 1933, to May 31, 1934. They reported in that return a profit of $3,244,885 from the sale of 78,814 shares of preferred and*647 130,000 shares of common stock of the Curtis Publishing Co. and deducted taxes paid in the amount of $3,401,233.47. The return showed no net income and no tax due. Thereafter, the executors filed income tax returns for the fiscal years ended May 31, 1935, and 1936. The executors paid inheritance tax to the State of Pennsylvania on May 28, 1934, in the amount of $1,150,000 and on the same date paid Federal estate tax in the sum of $2,250,000 to the collector of internal revenue.
The Commissioner, under the provisions of section 3176 of the Revised Statutes, as amended, prepared an income tax return for the estate covering the calendar year 1934. The net income shown on this return was $3,330,636.57 and the tax due was $2,040,411.91. No deduction was allowed for Federal estate or for state inheritance taxes. He determined a deficiency for the calendar year 1934 of the entire amount of the tax shown on the return.
*903 OPINION.
MURDOCK: Section 23(c) of the Revenue Act of 1932 allowed the estate of a deceased person, in computing its income tax liability, to deduct estate, inheritance, legacy, and succession taxes. The Revenue Act of 1934 changed this provision*648 and allowed no such deduction. See section 23(c)(3) of the Revenue Act of 1934. The Revenue Act of 1934 applies "only to taxable years beginning after December 31, 1933" and does not affect taxes "for taxable years beginning prior to January 1, 1934", except as it amends prior acts. See section 1 of the Revenue Act of 1934. The estate, which is the petitioner before the Board, paid Federal estate taxes and state inheritance taxes in large amounts on May 28, 1934. If the estate was entitled to use the fiscal year basis for reporting its income, these payments were made within the first fiscal year following the death of the decedent, and the estate is entitled to a deduction of the total amount of the taxes paid. But if the estate is required to report its income on the calendar year basis, then it is not entitled to the deduction because the payment was made during a taxable year beginning after December 31, 1933, which makes applicable the Revenue Act of 1934. Thus the question for decision is, Is this taxpayer entitled to report its income on the basis of a taxable year beginning at the date of the decedent's death and ending approximately twelve months thereafter? If it*649 is, then the calendar year 1934 was not a taxable year of this taxpayer and the Commissioner erred in determining a deficiency for that period. The Commissioner has not determined a deficiency for a fiscal year. There is no question before the Board of the petitioner's tax liability for a fiscal year and the Board has no jurisdiction to determine any such question in this proceeding. If the Board decides in the petitioner's favor, it can express its decision only by holding that there is no deficiency for the calendar year 1934.
An estate is, of course, a taxpayer under both acts. It could properly select as its first taxable year, the period beginning at the date of death of the decedent and ending on the last day of the eleventh succeeding month. In order to do that it would have to place its accounts on the basis of such a fiscal year. Both statutes provide that "the net income 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." Sec. 41. Both acts also provide that the income shall be computed*650 on the basis of a calendar year in cases where no books were kept, in case where the taxpayer had no annual accounting period, and in cases where the taxpayer's annual accounting period was other than *904 a fiscal year. Sec. 41. A fiscal year is defined as an accounting period of 12 months ending on the last day of any month other than December. A taxable year means a calendar year or a fiscal year, upon the basis of which the net income is computed and includes, in the case of a return properly made for a fractional part of a year, the period for which the return was made. Sec. 48. A taxpayer may choose whether or not it will keep books, and, may further choose whether it will keep them on a calendar year basis or on a fiscal year basis. It has no choice in filing its returns, but must file in accordance with the method used in keeping its books.
The essential facts have been set forth above in findings, but a discussion of some of the evidence may be appropriate. The executors met shortly after the decedent's death and agreed unconditionally to adopt as the accounting period for the estate a fiscal year ending May 31. The record leaves no doubt about that. This*651 action was taken upon the advice of counsel. The executors knew that they would have to pay the Federal estate tax and the state inheritance tax within one year of the decedent's death, securities of the estate would have to be sold for that purpose, the sales would probably be made at a considerable profit, and the market at that time was uncertain. They wanted as long a period as possible within which to make the sales. Counsel explained to the executors that, all things considered, and in order that the deduction for the taxes could be used to offset the profit from the sales in reporting the income of the estate, it would be desirable to select a fiscal year ending May 31, 1934. The executors and also the trustees who met with them, understood all of these considerations at the time in June 1933 when the fiscal year was agreed upon. Before December 31, 1933, the attorneys for the estate realized that there might be further justification for the period which had been selected; that is, they knew that there were proposals before Congress to eliminate the deduction for Federal estate and state inheritance taxes which, under the Revenue Act of 1932, had been allowed an estate*652 in computing its income tax. Neither the executors nor any others connected with the estate ever had any reason to want to change the decision reached in June adopting the fiscal year basis. This was true despite fluctuations in the market value of the securities of the estate. The circumstances of the filing of the return for the period ended December 31, 1933, have been set forth in the findings. That return was presented to Martin by one unfamiliar with the decision of the executors to place the accounts upon a fiscal year basis. Just because it was placed before him, Martin thoughtlessly executed it. He did not consider whether or not it would be a proper return for the estate nor did he consider its possible effect upon the fiscal year basis. Had he been thinking of these things, he would not have filed the return, for he had no intention *905 to abandon the earlier decision to place the accounts of the estate upon a fiscal year basis. His coexecutor had never authorized him to file such a return. The execution and filing of the return was a mistake upon his part. In the latter part of May one of the attorneys, in going over the expenditures of the estate, discovered*653 the check used to pay taxes on the return for the period ended December 31, 1933, and his inquiry disclosed the filing of the return for that period. All persons connected with the estate, when they heard about the filing, recognized that a mistake had been made. The Commissioner was notified to disregard it. Books of account upon the fiscal year basis were already in the process of preparation. The books were completed and closed before the end of the fiscal year. Those books were proper and adequate books and placed the accounts of the estate definitely upon a fiscal year beasis. Thereafter, they were regularly kept on that basis and returns for that first fiscal year, as well as for subsequent fiscal years, were prepared and filed in accordance with those books of account.
The respondent contends that the acts of the executors up to and including March 15, 1934, were insufficient to establish a fiscal year ending May 31, 1934, as the accounting period of the estate; the executors merely expressed an intention to adopt a fiscal year; they did not adhere to or carry out that intention; they had no books of account at December 31, 1933, or on March 15, 1934, and this failure*654 was tantamount to an adoption of the calendar basis or, at least, required the filing of a return upon a calendar year basis; the return filed for the period ended December 31, 1933, was a proper return and, thereafter, binding upon the executors; and the ruling down of the books on May 31, 1934, was not a keeping of books under a recognized method of accounting regularly employed.
The informal records kept by the secretary prior to April 24, 1934, were not regular books of account and did not establish a fiscal year basis. H. L. Scales,10 B.T.A. 1024">10 B.T.A. 1024; Max H. Stryker,36 B.T.A. 326">36 B.T.A. 326. Although the executors definitely and unconditionally decided to keep their accounts upon a fiscal year basis and never thereafter considered any different basis, mere intention is not enough. Iron Mountain Oil Co. v. Alexander, 37 Fed.(2d) 231. Failure to currently record daily transactions in formal books is not necessarily inconsistent with the petitioner's contention in this case. The words "regularly employed" used in section 41 do not require that the book-keeping method be uniform throughout every day of the taxable year. The action of*655 these executors in waiting as long as they did to open their formal books was not unreasonable under the circumstances. The informal records which they kept from the beginning were not inconsistent with the establishment of a fiscal year basis, as is shown by the fact that regular books of account were later drawn up from those very records. The executors did adhere to and finally carry *906 out their original intention to place their accounts upon the fiscal year basis. This taxpayer, before the end of the fiscal year, was regularly keeping its books upon the basis of a fiscal year ended May 31, 1934, within the meaning of section 41.
The respondent cites no authority for his contention that the failure to have regular books on December 31, 1933, or on March 15, 1934, precludes a taxpayer from using a fiscal year basis. His rulings are to the contrary and require only that the books be kept upon the selected basis before the close of the first fiscal year. O.D. 404, 2 C.B. 67, published in 1920 and still in effect, is in part as follows:
A newly organized corporation may file its * * * returns on a fiscal year basis without applying to the Commissioner*656 for permission to do so, provided such basis is definitely established and the books are kept in accordance there with prior to the close of the first fiscal year.
The essentials mentioned in the regulations promulgated under the Revenue Acts of 1932 and 1934 are that before the close of the fiscal year the accounting period must be established and the books must be kept in accordance therewith. Regulations 77, article 324 and Regulations 86, article 41-4, provide:
No fiscal year will, however, be recognized unless before its close it was definitely established as an accounting period by the taxpayer and the books of such taxpayer were kept in accordance therewith.
The present petitioner has met the requirements of these rulings and regulations.
Taxpayers are required to make a number of elections under the revenue acts. For example, a husband and wife must elect whether they will file a joint return or separate returns; affiliated corporations must elect between a consolidated return and separate returns; and installment sellers may elect to take the benefit of reporting their profits on the installment basis. *657 The statutes do not expressly provide that an election, once made, is binding. But the Board and the courts have held under some circumstances that once a taxpayer has made an election, he may not thereafter change to the other position. Rose v. Grant, 39 Fed.(2d) 340; certiorari dismissed, 283 U.S. 867">283 U.S. 867; Lucas v. St. Louis Baseball Club, 42 Fed.(2d) 984; certiorari denied, 282 U.S. 883">282 U.S. 883; Levi Strauss Realty Co. v. United States, 41 Fed.(2d) 55; certiorari denied, 282 U.S. 868">282 U.S. 868; Alameda Investment Co. v. McLaughlin, 33 Fed.(2d) 120; Commissioner v. Moore, 48 Fed.(2d) 526; certiorari denied, 284 U.S. 620">284 U.S. 620; Sylvia S. Strauss,33 B.T.A. 855">33 B.T.A. 855, affirmed without opinion; Liberty Realty Corporation, B.T.A. 1119; Radiant Glass Co.,16 B.T.A. 610">16 B.T.A. 610; affd., 54 Fed.(2d) 718; Kay Manufacturing Co.,18 B.T.A. 753">18 B.T.A. 753; affd., 53 Fed.(2d) 1083. Those decisions were justified on the ground of administrative necessity, that is, that changing back and forth by taxpayers would*658 unduly *907 inconvenience the Commissioner in the orderly administration of the revenue acts. There have been cases in which the original election was not held binding. See the excellent discussion in McIntosh v. Wilkinson, 36 Fed.(2d) 807. See also Lucas v. Sterling Oil & Gas Co., 62 Fed.(2d) 951. Hobson's Choice in Federal Taxation, vol. 48, Harvard Law Review, p. 1281, is also interesting.
The present taxpayer had an election, but the election was not between two returns, calendar or fiscal year returns. The election which the petitioner had under the statute was whether its annual accounting period and its method of accounting would be upon the basis of a fiscal year or upon the basis of a calendar year. It made that election in June 1933, and never departed from it. Not only does it not seek to avoid the effect of its election, but, on the contrary, argues that it was a binding election. In accordance with its election and before the end of the fiscal year, it completed its books of account upon that basis and forever after regularly employed the same basis and method of accounting in keeping its books. *659 The filing of a return for the period ended December 31, 1933, by a taxpayer which kept only informal records, would ordinarily indicate that it had no intention of placing its books upon a fiscal year basis and that any earlier decision to place its accounts upon a fiscal year basis had been abandoned. But in this case the filing of that return has been explained and the evidence is clear that by filing that return the taxpayer had no intention of abandoning its earlier decision to place its accounts upon a fiscal year basis. In Great West Printing Co. v. Commissioner, 60 Fed.(2d) 749, the court said:
The test is the year (fiscal or calendar) actually used in the business and shown by the books, and not the possibility of the use of some other annual period. Nor has the filing of a tax return any significance because the statute leaves no option as to that to the taxpayer if his books are kept on a particular annual basis. The taxpayer might have based his accounting period upon any annual period, closing withu the end of any month, but it is upon this method actually so selected by the taxpayer that the statute automatically operates.
*660 See also Helvering v. Brooklyn City Railroad Co., 72 Fed.(2d) 274.
Thus the filing of the return for the period ended December 31, 1933, did not constitute an election permitted or required by the statute. That return, as later events conclusively demonstrated, was not in accordance with the method of accounting regularly employed in keeping the books of the taxpayer. The fiscal year return was in accordance with the method of accounting regularly employed in keeping the books of the taxpayer. The statute requires that the net income shall be computed upon the basis of the taxpayer's annual accounting period. In this case that period was a fiscal year ended May 31, 1934. The return filed for the short period was a mistake. It does not appear that the Commissioner was in any way inconvenienced *908 by that mistake, however, and there is no good reason to hold the taxpayer to a calendar year basis. There is no indication that the orderly administration of the revenue acts would be at all affected by permitting this taxpayer to wait until near the close of the first 12 months of its existence before actually preparing a formal set of books upon a fiscal*661 year basis. The Commissioner does not contend that the method employed does not clearly reflect the income of the taxpayer. Since the books were prepared upon the fiscal year basis prior to the close of the fiscal year and within a time which seems reasonable under the circumstances, the filing of a return for the fiscal year was required under the law.
Reviewed by the Board.
Decision will be entered for the petitioner.