*1680 Held, the evidence is insufficient to overcome the presumption of the correctness of the Commissioner's determination of deficiency in income tax.
*183 The Commissioner determined a deficiency in income tax for 1922 in the amount of $2,515.42. The petitioner alleges said determination is based on the following errors: The failure of the Commissioner (a) to find that profits accrued during the calendar year 1921 and recorded as 1921 earnings on the books of the petitioner can not affect the income for the calendar year 1922; (b) to consider that the *184 income-tax return for the calendar year 1922 agrees in every particular with the books and records kept by the petitioner; and (c) to find that the petitioner made its income-tax return for the year 1921 on a basis different from the basis of accounting used on its books.
The case is submitted on the pleadings, testimony of one witness and exhibits.
FINDINGS OF FACT.
The petitioner is a corporation organized and existing under and by virtue of the laws of the State of Washington, *1681 with its principal office in Chicago, Ill.
It was the owner of a patent for improvements in ice cream freezing processes and of certain formulae, etc., designated "Service," relating to the manufacture of ice cream. Under date of May 26, 1921, it made a contract with the Heathmade Carbonated Products Company, a sales agency, for the sale of licenses for the use of said patent and "Service" from which petitioner was to receive royalties, a certain percentage of collections thereof to be paid monthly, and the minimum yearly royalties to be paid to be not less than $25,000. A supplemental agreement dated August 1, 1922, provided that the deficit for the year ending May 26, 1922, should be paid the petitioner on or before September 15, 1922.
The general ledger of the petitioner and the closing entry of the Heathmade Carbonated Products Company therein show there was on December 31, 1921, owing to the petitioner from the Heathmade Carbonated Products Company a balance of $19,342.95. On what date said entry was actually made in the ledger or when said amount first became due or owing petitioner, the evidence does not disclose. Its payment was not made until 1922. The amount was*1682 not, however, included in the gross income of the petitioner in its returns for either 1921 or 1922.
The petitioner's business in 1918, 1919, and 1920, was, as indicated by the evidence, on a cash basis, so recorded and reported. Petitioner's return for 1921 was also made on the basis of actual receipts and disbursements. Its 1922 return was made on the accrual basis.
Such books as petitioner had were not kept up to date and about June, 1922, petitioner employed, on a part-time basis, one Hirsch as an accountant - though not a certified public accountant, and the books were brought up to date by him, using, for such purpose, data handed him from time to time and in doing so necessarily making entries in the books antedating his employment, which acts by him were after the petitioners tax return for 1921 had been filed on the basis of cash receipts and disbursements, Hirsch posting entries and acting on the assumption that petitioner's business was conducted, *185 and its books kept, on the accrual basis. He did not make the $19,342.95 item entry, it being made prior to his taking charge in June, 1922.
Hirsch was the only witness who testified in the case, the*1683 accountants or persons having charge of petitioner's books prior to Hirsch's employment not being called to testify in regard to petitioner's books or any entries made therein.
There is no evidence indicating that the petitioner at any time asked or obtained the consent of the Commissioner to change its method of accounting or making its returns.
The Commissioner made his determination of deficiency in tax on the theory that the petitioner's books were kept on the cash basis and the 1922 return should have been so made and he has included in gross income the item of $19,342.95.
OPINION.
SEAWELL: The taxable year involved in the instant case is 1922 and the applicable law is found in the Revenue Act of 1921, section 212(b), which reads as follows:
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; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner*1684 as in the opinion of the Commissioner does clearly reflect the income. * * *
Paragraph 3 of article 23 of Regulations 62, promulgated under the authority of the Secretary of the Treasury, provides:
A taxpayer who changes the method of accounting employed in keeping his books for the taxable year 1921 or thereafter should, before computing his income upon such new basis for purposes of taxation, secure the consent of the Commissioner. Application for permission to change the basis of the return shall be made at least 30 days before the close of the period to be covered by the return and shall be accompanied by a statement specifying the classes of items differently treated under the two systems and specifying all amounts which would be duplicated or entirely omitted as a result of the proposed change.
This Board held in , that a taxpayer may not change the basis of reporting income without complying with the regulations prescribed by the Commissioner pursuant to statutory authority.
Petitioner's 1921 tax return was made on the cash receipts and disbursements basis, but petitioner insists it was so made by inadvertence and that*1685 it should have been made on the accrual basis *186 and that the item $19,342.95 was accrued in 1921, and should have been included in the return for that year and, not being so reported, the statute of limitations operated as an effective bar to any tax thereon, the deficiency notice being mailed February 25, 1927. In our opinion, however, the statute of limitations is not involved, because the Commissioner is not attempting to assert any tax for the year 1921, but for the year 1922, and as to that year it is shown the deficiency notice was mailed in due time.
The question for our determination is simply whether in the circumstances of this case the item $19,342.95 should be included in the gross income of the petitioner for the year 1922 and as such subject to tax as held by the Commissioner. The petitioner admits no tax has been paid on same for either year and argues that none should be paid thereon for the year 1922, in which petitioner's return was made on the accrual basis, for the reason that the item was accrued in 1921, that its books have always been kept on the accrual basis, and that the item, therefore, has no place in the 1922 return of petitioner. Accepting*1686 the premise as stated, the conclusion would naturally follow, but, in our opinion, the evidence, as indicated in our findings of fact, does not justify such premise.
In a statement by the president of petitioner, contained in a letter in evidence and duly sworn to, he stated that the income the petitioner had for 1918, 1919 and 1920 "was always on a strictly cash basis and recorded and reported that way." The petitioner admits that its 1921 tax return is made on the cash receipts and disbursements basis, but contends it should have been on the accrual basis and then included the item $19,342.95, its books having been kept on the accrual basis as the witness, Hirsch, who made the 1922 return for petitioner on the accrual basis, testified, he never having seen the 1921 return which had been made on the cash receipts and disbursements basis.
The evidence shows the item $19,342.95 was paid to, or received by, petitioner in 1922. The Commissioner found the petitioner had kept its books and made its returns in years prior to 1922 on the cash receipts and disbursements basis and, in our opinion, the evidence sustains such finding - certainly it is insufficient to overcome such finding, *1687 and as there was never any consent shown to have been given by the Commissioner for the petitioner to change its method of accounting and making its tax returns, the Commissioner's determination is approved.
Judgment will be entered for the respondent.