*2595 1. A taxpayer used a calendar year, contrary to his natural business cycle. The business expenses were all actually incurred before the end of the year, the receipts usually came in soon after, and taxpayer held open his books until all receipts came in and in prior years included all receipts on his calendar year tax return. In 1919 an unusually large crop delayed receipts and he included an estimate which was substantially less than actual receipts. Held, respondent correctly included actual receipts in gross income of the calendar year 1919.
2. There is no absolute test of accrued income, and regularity of accounting practice not inconsistent with a clear reflection of what the law recognizes as income may be important.
3. By section 212, Revenue Act of 1918, a taxpayer is only entitled to have his income determined by the method of actual receipts and disbursements if he has regularly employed such an accounting method or such method is necessary to reflect income.
*386 The Commissioner determined*2596 a deficiency of $5,764.77 for 1919 and an overassessment of $992.91 for 1920 in the petitioner's income and profits tax. The petitioner attacks the deficiency for 1919 in its entirety. This deficiency results from the application by the Commissioner of the special assessment method provided by sections 327 and 328, Revenue Act 1918, and takes the place of an earlier deficiency of $9,601.76 determined under the normal provisions of section 301 without special assessment.
The petitioner contends that in computing its net income for 1919 the respondent has erroneously included $25,310.24 actually received in 1920 instead of petitioner's estimate of $11,969.25 to be received in 1920 from sales of 1919. In the alternative, the petitioner contends that its income should be computed by treating its accounts as if upon the basis of actual cash receipts and disbursements.
FINDINGS OF FACT.
Petitioner owned and operated a cranberry bog in Massachusetts. With some two hundred other cranberry producers, petitioner was a member of the New England Cranberry Sales Co., to which all sales *387 were made under prescribed rules and regulations. The Sales Company pooled all the produce*2597 in established grades, sold the produce directly from the producer, gave bills of lading and shipping instructions to the producer, who delivered directly to the carrier, whereupon title passed from the producer. The Sales Company at time of delivery to the carrier paid to the producer 75 per cent of the Sales Company's estimate of the probable approximate price, making later adjustment to the average price actually received for the grade, less 7 per cent of the net price.
Cranberries are not planted each year, and only require cultivation from March to December. No cultivation expense is incurred between January and the middle of March. The crop is harvested in the fall and all sold and shipped before the end of the calendar year. The amount to be received therefor is not known until after the end of the calendar year. It can not be known before all the produce in the pool has been disposed of and the average price determined.
The 1919 crop of petitioner was a bumper crop of 10,847 barrels in comparison with:
| Barrels | |
| 1918 | 349 |
| 1917 | 429 |
| 1916 | 2,818 |
| 1915 | 8,027 |
| 1914 | 4,585 |
At the end of 1919 there were 10,402 1/2 barrels not entirely paid for. Before*2598 the end of the calendar year, the only entries made by petitioner in its accounts in respect of the fall crop were the entries in its cash book of the amounts actually received by way of advance from the Sales Company. No account was, or could practically be, made for the possible additional amounts which would later be received.
In January, 1920, petitioner prepared an estimate of the remaining amount to be expected for the 1919 crop, which took into consideration the variety, quality, and date of each shipment, its effect on the market price and the number of consignee refusals. The amount of this estimate was $11,969.25, and in January, 1920, it was entered in the cash book. The actual amount received was $25,310.24, which came in from time to time after January 1, until the last payment on March 29.
The tax return for 1919 was filed March 15, 1920, and on it gross income included the estimate of $11,969.25. Not all the shipments had been paid for at that time. The unusual size of the crop and market conditions delayed final settlement.
*388 The only prior time an estimate had been prepared was in 1915, when an estimate of $1,225.81 was made of the 1914 crop. *2599 The amount actually received was $1,490.55. In other years the actual figures were on hand in January before the income-tax return was prepared. The accounts were not closed on December 31, and were only closed as of that date for income-tax purposes. For petitioner's own purposes the accounts were not closed until the crop was entirely paid for. This was not on a uniform fixed date. For the years 1915, 1916, 1917 and 1918, the books were closed on the following January 31, respectively. For 1919, the year in question, the books were closed March 31, 1920. After January 1, 1920, items of rent received $40, and expenditures $243.17, January and February pay roll, are shown by the books and were treated by petitioner as applying to 1920. The expenses of the 1919 crop were all incurred in and charged against 1919.
The respondent's audit of petitioner's returns as shown by his letter of Janury 10, 1925, in evidence, covered the years 1917, 1918, 1919 and 1920. For 1917 the petitioner's net loss as disclosed by its return was increased after conference with petitioner's representatives "by including in sales the entire selling price in the year in which the goods were shipped. *2600 " For 1918 petitioner's net loss was likewise increased. For 1919 the same method was followed by respondent, whereby the sales price received during 1919 of $53,007.31 was augmented by the sales price received in 1920 of $25,310.24, with a consequent increase in tax of $9,601.76. For 1920 the respondent computed a net loss of $4,032.67 in substitution for the net income disclosed by petitioner's return of $11,920.14, and thus determined an overassessment of the amount of $992.91 shown by the original return.
Thereafter, on March 22, 1926, the respondent notified the petitioner that by the application of the special assessment provisions of sections 327 and 328, its profits tax was reduced, so that the deficiency became $5,764.77. This was based upon the Bureau ruling "that the sales occurred at the time the merchandise was delivered to the railroad, and the profit thereon accrued at the date of sale," and that petitioner's invested capital had not been established.
OPINION.
STERNHAGEN: The issue in this proceeding grows largely out of the fact that petitioner's accounts are not kept or its income computed in accordance with the natural cycle of its business. Its active*2601 commercial season begins at harvest in September and ends with payment in the spring. Obviously, if it had established an accounting *389 period ending sometime between March and September, as it might properly have done (R.A. 1918 § 212), the principal financial facts as to each annual crop would have been accounted for in the same period and the closing of the accounts would have fairly reflected its annual net income and determined its proper tax. By the use of a calendar year its fiscal affairs were artificially segregated. How long this primitive accounting had been used does not appear, but as early as 1915 its inadequacy to reflect the financial results of the business was vaguely recognized and petitioner sought to integrate the accounting for its 1914 crop by the entry nunc pro tunc in January, 1915, of an "estimate" of amounts to be received from its sale. The crop then was not so large as the 1919 crop and the divergence between the approximation and the actual receipts was unimportant. In later years it seems to have held its books open for a month during which its crop prices were received, and its tax liability apparently was computed by treating the*2602 actual receipts as if they had come in during the year of harvest. The facts were certain and known by the time the tax return was required to be prepared and filed and they were used as the basis of the computation of income.
Under such circumstances it is obviously fair and reasonable that the same method should be carried into the year before us, as the Commissioner has required, unless this is contrary to the statute.
The method of ascertaining this petitioner's income is not that of actual cash receipts and disbursements, as petitioner in the alternative demands. By section 212, such a method could only be used if, either petitioner had regularly employed it, or the substitution of such a method were necessary to clearly reflect the income. We can not say that either of these is true. Hence, the issue is whether petitioner's method of including an estimate and excluding receipts in excess more clearly reflects the income than that officially applied by respondent of including receipts until the closing of the books.
If this crop were separately considered and this taxable period were not related to other periods, it would be more questionable whether an accrual method*2603 which theoretically closes with the year could consistently hold the year open for actual subsequent receipts, although in some cases the Board has approved such a method. ; ; . But when the method applied by respondent is a consistent use of that regularly adopted by petitioner and arises from the difficulties of a crude and incongruous system of accounting, there is little *390 ground for reasoning strictly as to whether the amount "accrued" in the taxable year. There is no absolute test of accrued income, and regularity of accounting practice not inconsistent with a clear reflection of what the law recognizes as income may be important. Here the expenses incurred in the production of the income have been accounted for in 1919 and we find no error in treating the income as derived in the same period. See ; *2604 ; .
Judgment will be entered for the respondent.