*2062 Held, that petitioner's return should have been made on the basis of a fiscal year.
*790 This proceeding was brought to redetermine the deficiency in income taxes for the year 1924 in the amount of $8,050.81.
The sole issue is whether the return made by the petitioner on the basis of a calendar year for the year 1924 is correct or whether its *791 income should be computed on the basis of a fiscal year ended May 31, 1924.
FINDINGS OF FACT.
The following facts are stipulated:
The petitioner is a corporation organized under the laws of the State of Missouri with principal office and place of business in St. Louis, Mo.
The deficiency here involved is the respondent's determination of a corporation income tax on the basis of five-twelfths of the fiscal year ended May 31, 1924.
The petitioner made and filed a corporation income tax return on Form 1120 on the basis of a calendar year for the year 1924 on March 15, 1925, which showed the results of the operations of petitioner's business for the twelve-month period ended December 31, 1924.
*2063 The petitioner closed its books and records of account on the basis of a fiscal year ending May 31 and again on December 31, in each year, that is, all its accounts were totaled and drawn off into a profit and loss account on and as of each of said dates. Physical inventories were taken on May 31 and November 30 of each year, the latter inventory being adjusted the December 31 by adding the purchase price and deducting the cost of goods sold during December in each of said years.
For the years prior to and including the fiscal year ended May 31, 1920, the petitioner made and filed its corporation income and profits-tax returns on the basis of a fiscal year ended May 31.
During the year 1920 the respondent, or other authorized officers of the Bureau of Internal Revenue, audited the books of the petitioner for the years 1917 to 1920 and consolidated the income and invested capital of the petitioner with a group of companies headed by the Carleton-Ferguson Dry Goods Company, as parent company, whose books were kept and whose return was made on a calendar year basis, and the income, invested capital, and tax liability of the affiliated group were computed by the respondent on*2064 a calendar year basis for all of said years.
For the periods or years beginning June 1, 1920, and ending December 31, 1923, inclusive, the petitioner made and filed its returns as a member of the affiliated group, the income of the petitioner being computed on a calendar year basis; but upon audit by the respondent in each of the aforesaid years, the income of [on] the fiscal basis was adjusted to a calendar year basis by taking five-twelfths of the preceding and seven-twelfths of the current years. The parent company signed a waiver of its right to appeal to the *792 United States Board of Tax Appeals from a deficiency determination on this basis for the calendar year 1922.
During the calendar year 1924 the condition of affiliation previously existing between petitioner and other members of the affiliated group ceased and discontinued.
The petitioner made its return for 1924 on the calendar year basis.
During the first five months of the calendar year 1924 the petitioner received the net income determined by the respondent of $64,406.46, the said amount being computed on a fiscal year basis and five-twelfths of $154,575.51, the profits based on a fiscal year*2065 ending May 31, 1924. For the last seven months of the calendar year the petitioner suffered a net loss of $98,100.45 as determined by the respondent on a fiscal year basis, the said amount being seven-twelfths of a loss of $168,172.22, based on a fiscal year ended May 31, 1925.
During the calendar year 1925 petitioner ceased to conduct a business and since that date has been in process of liquidation.
We find the following additional facts:
Specimen pages of the petitioner's books show that in 1916 the petitioner closed its books on December 31; that in 1917 it closed its books on May 31 and November 30; that in 1918 and 1919 it closed its books only on May 31; that in 1920 it closed its books on May 31 and December 30; and that in each year thereafter until the petitioner was liquidated it continued to close its books on May 31 and December 31 and only on those dates.
OPINION.
VAN FOSSAN: In our opinion the preponderance of the evidence shows that the petitioner had adopted as his basis of accounting a fiscal year ending May 31. In the preaffiliation period ended May 31, 1920, the petitioner filed its returns on the basis of a fiscal year ending May 31. It closed*2066 its books on that date and again on December 31 of each year. During affiliation, though the return for the affiliated group was on a calendar year basis, the petitioner continued to keep and close its books as formerly. In computing the income of the affiliated group, respondent adjusted the petitioner's income to a calendar year basis by a proration of income of the last part of one and the first part of another fiscal year. This action by the respondent was fully authorized and necessary to compute the total group income. But such action was not a consent to petitioner to change its basis of reporting income.
*793 When the affiliation ceased during 1924, petitioner resumed its independent status and should have reported its income on the fiscal year basis.
Judgment will be entered for the respondent.