2. STATUTE OF LIMITATIONS.-The statute of limitations contained in section 277(a) (2) of the Revenue Act of 1924 and section 277 (a)(3) of the Revenue Act of 1926, in respect to income-tax returns for the calendar year 1917, began to run on the day following the filing of the original return, and its running can not in any way be affected or suspended by the later making of an amended return.

Leslie J. Aker, Esq., for the petitioner.

Thos. M. Wilkins, Esq., for the Commissioner.

Before ARUNDELL and LANSDON.

The Commissioner has determined a deficiency in income taxes for the year 1917 in the amount of $205.57, all of which is in dispute.

FINDINGS OF FACT.

The petitioner is a resident of the State of Idaho.

On March 8, 1918, D. Sydney Smith, husband of the petitioner, filed a joint income-tax return for the calendar year 1917, purporting to show the gross income and deductions of himself and wife. On May 2, 1921, separate amended returns were filed by petitioner and her husband in which the income for the year 1917 was reported on the community property basis.

The Commissioner reaudited the returns of the partnership of Fred W. Gooding & Son, Shoshone, Idaho, for the year 1917, and increased the inventory value of certain sheep and live stock owned by said partnership on December 31, 1917, which increased the income of said partnership. By reason of such increase in the income of the partnership, the distributive shares of the partners were correspondingly increased. The proposed additional tax results from this adjustment.

Under date of March 6, 1925, the Commissioner mailed to petitioner a deficiency letter, dated on that day, in which he determined a deficiency against petitioner in the sum of $205.57.

OPINION.

ARUNDELL: This case was submitted on petition and answer, with the exception of the joint return filed by D. Sydney Smith on March 8, 1918, which return was offered as an exhibit by the Commissioner. The Commissioner contends that the statute of limitations fixing the time within which the tax may be assessed against petitioner began

to run from the date she filed her separate amended return, viz, May 2, 1921, and not from the date the joint return was filed by her husband.

It appears to have become the settled practice in the Treasury Department to accept separate individual income-tax returns by husband and wife in which the so-called community income may be equally divided between the two and the income tax computed upon such basis. This course was followed by the Treasury Department after the rendition by the Attorney General of an opinion holding, in effect, that community income could be separately reported by the husband and wife. It was by reason of the opinion of the Attorney General and the regulations of the Department that petitioner and her husband filed separate amended returns on May 2, 1921, in which they sought to report on the community property basis. It is not necessary in this opinion to determine whether the income in question is community income or, if it is community income, the right of petitioner and her husband to report the same in the manner attempted by them. The question for our determination is whether or not the statute of limitations began to run from the date of filing the original joint return or from the date petitioner filed her so-called separate amended return. A similar question was before the Board in the case of the Appeal of Belle R. Weaver, 4 B. T. A. 15, wherein it was held that the separate returns filed by husband and wife were merely amendments of the original joint return and related back to and became a part of the original joint return. The Board in that opinion stated that amended returns, not being returns required by law, do not furnish a starting point for the running of the statute of limitations, and "we are, therefore, brought to the conclusion that in each of the present cases the five-year statute of limitations provided for in section 277 (a) (2) of the Revenue Act of 1924 began to run on the 16th day of March, 1919, and that on the 12th day of March, 1925, the Commissioner was without authority of law to make assessments of any income tax for the year 1918 against either of the petitioners herein."

Section 277 (a) (3) of the Revenue Act of 1926, in so far as is here material, uses the identical language found in section 277 (a) (2) of the Revenue Act of 1924.

We are satisfied, both on the plain wording of the statute and on the authority of the Appeal of Belle R. Weaver, supra, that the statute of limitations has run in this case and that the Commissioner is without authority to assess the proposed deficiency.

Judgment for the petitioner.

accounts receivable and an accounts payable account to which there was charged and credited, respectively, usually at the beginning of each year, the aggregate of customers' unpaid accounts and unpaid accounts with creditors. At the close of each year these two general ledger accounts were balanced by credit and debit entries, respectively, in amounts equal to the total sums respectively charged and credited thereto during the year.

Though petitioner's accounting records were otherwise maintained according to the double entry system of bookkeeping, when debit or credit entries were made to the accounts receivable and accounts payable accounts they were made in single entry form; and, since the petitioner computed its net income according to the manner in which it kept its books, and without regard for any outstanding accounts receivable and accounts payable, the increase or decrease during the year in those accounts was not included in the taxable net income reported by the petitioner in its several returns.

On January 1, 1919, the accounts receivable account in the general ledger was charged with the sum of $6,000, representing the total of outstanding accounts receivable at that date, less the aggregate of accounts deemed to have been uncollectible. On December 31, 1919, the account was credited with a similar amount, thereby balancing the account. On January 1, 1920, the account was charged with the sum of $9,979.02, representing the total outstanding accounts receivable at that date without deduction for any uncollectible accounts, and with a further sum of $100.19 on December 31, 1920.

On December 31, 1918, and December 31, 1920, profit and loss account was charged with the respective amounts of $1,110.95 and $2,530, on account of bad debts. Deductions for bad debts were taken by the petitioner in its income and profits-tax returns as follows: 1918-$1,110.95, 1919-$1,979.02, 1920-$2,530.

Inventories were carried on petitioner's books of account as fol

lows:

January 1, 1919
January 1, 1920

January 1, 1921.

$180.36

276. 80

510.00

Inventories were used by the petitioner in computing the taxable net income reported in the return for the year 1919.

Insurance premiums were paid in advance and were charged to expense on the books of account in equal annual installments over the period of years for which the payments were made. Other expenses were charged to profit and loss at the time of payment without regard to the fact that they may have been incurred in a year other than that in which payment was actually made.

The net income reported by the petitioner in its return for the year 1919 was computed on the basis of a gross income which included only actual cash receipts. To the net income as thus shown in the return the Commissioner has added the sum of $3,979.02, representing the increase in the accounts receivable during the year as indicated by the entries made to the general ledger account under dates of January 1, 1919, and January 1, 1920. Further, the Commissioner has reduced the net income shown by the return by the amount of $2,458.24, representing the increase in the accounts payable during the year.

Real estate was entered on petitioner's books of account under date of January 1, 1914, in the amount of $10,439.16, and there were no other charges nor any credits to this account until December 31, 1919, when, upon the advice of an accountant that the cost of the building foundation should not be carried in a capital account, a credit entry was made thereto in the sum of $2,324.39, thereby reducing the book value of the real estate to $8,114.77. The Commissioner has included real estate in the invested capital, for the years under consideration, at the book value of $8,114.77.

LITTLETON: Under the provisions of section 212 (b) of the Revenue Act of 1918, the petitioner was required to compute its net income in accordance with the method employed in keeping its books of account; but if the method employed does not clearly reflect the net income the computation must be made upon such basis and in such manner as in the opinion of the Commissioner will clearly reflect the net income. We have found that the petitioner's books of account were maintained upon a somewhat hybrid basis-partly on the receipts and disbursements basis and partly on the so-called accrual basis. The method employed can not and does not clearly reflect the petitioner's net income for the years in question. The Commissioner has exercised the discretionary power conferred upon him by statute and has made the computation of net income upon the accrual basis. In so doing he has treated, so far as we have been able to ascertain, all items of income and expense consistently. In adopting the accrual method as the basis for the computation of net income, the Commissioner has resorted to the method which, in our opinion, most closely approaches that predominating in the petitioner's system of keeping its accounts.

Petitioner raises the further question as to the correctness of the Commissioner's action in adding to net income, as reported in the return, the sum of $3,979.02, representing the increase in the accounts receivable during the year 1919, as indicated by the general ledger entries to the accounts receivable account of January 1, 1919, and

January 1, 1920. As pointed out in our findings of fact, the entry of $6,000 dated January 1, 1919, represented the total outstanding customers' accounts at that date, less the total of accounts which were deemed to be uncollectible, while the entry of $9,979.02, dated January 1, 1920, represented the total outstanding accounts at that date. without deduction for any accounts which may have been deemed worthless and uncollectible. The only witness who testified estimated that the total of worthless and uncollectible accounts included in the entry of January 1, 1920, was $3,979.02. If this were true, then a comparison of accounts receivable, after elimination of worthless accounts, at the beginning and close of 1919 would show no increase. But her testimony was not at all convincing that the general ledger entry of January 1, 1920, included any accounts which had actually been ascertained to be worthless and uncollectible during the year, or that it included any accounts antedating the year 1919 which were not included in the entry of January 1, 1919, with which the Commissioner compared the later entry to ascertain the increase in accounts receivable for the year 1919. The record evidence indicates an increase in the accounts receivable for the year 1919 of $3,979.02. Hence, the Commissioner, for the purpose of making the computation of net income upon the accrual basis, was justified in treating this increase as income for that year.

Real estate should be included in petitioner's invested capital at a value of $10,439.16.

Order of redetermination will be entered on 15 days' notice, under Rule 50.

APPEAL OF JAMES BUTLER GROCERY CO. ET AL.1

Docket No. 5978. Decided July 26, 1926.

James Butler Grocery Co. owned directly 90 per cent of the voting stock of James Butler, Inc., and the remaining 10 per cent of the stock of the latter was owned by the majority stockholders of the James Butler Grocery Co., who also owned all, or substantially all, of the voting stock of the other four corporations who are also parties to this proceeding. Held, that the first two corporations mentioned were affiliated under clause (1) and that the last four corporations mentioned were affiliated under clause (2) of subdivisions (b) and (c), respectively, of section 240 of the Revenue Acts of 1918 and 1921.

George E. Hamilton, Jr., Esq., and John F. McCarron, Esq., for the petitioners.

Percy S. Crewe, Esq., for the Commissioner.

The following corporations are also parties to this appeal: James Butler, Inc.: Seminole Condensed Milk Co.; Peerless Construction & Repair Co.; Direct Realty Co.; and Empire City Racing Association.