The opinion
LEDBETTER MANUFACTURING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Ledbetter Mfg. Co. v. Commissioner
Docket Nos. 9194, 10621.
United States Board of Tax Appeals
12 B.T.A. 145 ; 1928 BTA LEXIS 3601 ;
May 25, 1928 , Promulgated
*3601 DEDUCTION. - Petitioner sustained a loss by canceling a contract. It accrued the liability on its books for 1918 and paid the loss in 1919. Held, that respondent's disallowance of deduction for 1918 be approved, for record does not establish if the loss was incurred and properly accrued on the books during 1918.
P. D. Hutchinson, Esq., for the petitioner.
Maxwell E. McDowell, Esq., for the respondent.
TRUSSELL
*145 These two proceedings which have been consolidated for purposes of hearing and redetermination, involve the correctness of the respondent's assertion of deficiencies in the amounts of $33,195.94 and $6,526.48, in petitioner's income and profits taxes for the calendar years 1918 and 1920, respectively.
At the hearing counsel for both parties agreed and stipulated that respondent's determination of petitioner's tax liability for the year 1920, is correct, except in so far as the Board's decision herein involving the year 1918 may affect petitioner's invested capital for 1920 and accordingly require an adjustment of its excess-profits tax for that year.
Counsel for both parties further agreed and stipulated that for the *3602 year 1918, respondent used the cost figure of 34.56 cents per pound in his computation of petitioner's closing inventory of cotton in process; that petitioner's inventories were made upon the basis of cost or market whichever was lower; that the market was 28.31 cents per pound at the close of 1918; and that 28.31 cents per pound is the correct figure to be used in computing petitioner's closing inventory of goods in process for the year 1918.
The single remaining issue is whether petitioner is entitled to a deduction from gross income for the year 1918 of a loss in the amount of $38,081.88 paid to J. H. Cutter & Co. in 1919 for petitioner's release from its contract to purchase cotton. The fact that the loss in the said amount was sustained by petitioner is not in dispute.
*146 FINDINGS OF FACT.
The Ledbetter Manufacturing Co. is a North Carolina corporation with its principal office at Rockingham.
Petitioner kept its books of account on the accrual basis during the year 1918 and also during the years prior and subsequent thereto. As of December 31, 1918, there was entered upon petitioner's books a charge of $38,081.88 to loss on cotton contracts and a credit *3603 in the same amount to the account of J. H. Cutter & Co., cotton brokers located in Charlotte, N.C. Petitioner's books further show that on February 27, 1919, the amount of $38,081.88 was paid to J. H. Cutter & Co. by check.
In its return for the year 1918, petitioner deducted $38,081.88 from its gross income as a loss incurred and accrued on its books as a liability during the year 1918. The respondent disallowed the said deduction for the year 1918 and allowed it for 1919.
OPINION.
TRUSSELL: Petitioner has alleged that it contracted to purchase cotton from J. H. Cutter & Co.; that it was released from its contract by paying $38,081.88 to J. H. Cutter & Co.; and that it accrued its liability for that amount on its books at the close of the year 1918, but petitioner has limited its proof to the facts that the said liability was accrued on its books in 1918 and paid in February, 1919. Petitioner has failed to adduce evidence as to the nature and terms of the contract, when and under what conditions the contract was canceled, or the time when petitioner's obligation to pay $38,081.88 arose. It is true that petitioner was on the accrual basis of accounting and that it accrued *3604 the loss on its books during 1918, but that fact alone does not establish the deductibility of the loss from 1918 gross income, for mere bookkeeping records do not establish the existence of the facts represented by the book entries. . The record contains insufficient facts to enable the Board to determine that the loss was incurred and properly accrued on petitioner's books during 1918. The respondent's determination with respect to this issue is approved.
Adjustments should be made with respect to petitioner's tax liability for the years 1918 and 1920, in accordance with the stipulation of the parties hereto.
Order of final determination will be entered pursuant to Rule 50.