JOHN R. BROWN, Circuit Judge.
This case is not so much the problem of who did what to whom. Rather, it is who really did the act and when. This simplification is beguiling, however, for specifically involved is the right of the Commissioner to make pre-1954 adjustments occasioned by 1957-1958 changes in the Taxpayer's method of accounting pursuant to § 481,
The Tax Court held that the change was initiated by the Taxpayers
It starts with the principle that taxable income is to be computed under the method of accounting on the basis of which a taxpayer regularly computes his income in keeping his books.
The magic word is, of course, "initiated". The legislative history illumines the amendatory clause and reflects a congressional purpose to treat the word both broadly and specifically. Thus, the House Report, taking cognizance of the change wrought by § 481 as originally enacted that, without regard to the party
Several things bear emphasis. Foremost, § 481(a) (2) still imposes a condition on pre-1954 adjustments. The condition is that the change in the method of accounting giving rise to the necessity for the adjustment be "initiated by the taxpayer." If, therefore, the change is not initiated by the taxpayer, it matters little who else might have done it or the governmental authority of such person for such act. In other words, as a logical-legal matter generally, demonstration of the negative is not proof of the positive. Thus the mere showing (or finding) that the examining Revenue Agent affirmatively lacked the power to bind the Commissioner, i. e., lacked power to "initiate", is not a sufficient basis for concluding the opposite — that it was the Taxpayer who "initiated" the change. Metaphysics cannot be carried that far that fast. Formidable as is the presumptive correctness of the Commissioner's implied finding, the record must finally show a factual basis for it. See Phillip's Estate v. Commissioner of Internal Revenue, 5 Cir., 1957, 246 F.2d 209, 214.
This brings us to the facts which, although largely uncontradicted, are hardly simple in revealing the undulating process through which the Commissioner, personifying the whole Revenue Service establishment, finally arrives at the determination carrying presumptive correctness.
Welch Grain Company, the partnership, up to 1957 maintained its books and records and reported its income on the cash method. It reported its cash receipts as income and its expenses as deductible when paid. Although it had records showing the precise status of inventories of grain on hand in determining or reporting income for tax purposes, inventories
In 1956 began a series of revenue agent examinations which did not terminate until 1959. The first was by Agent Martin who examined returns for 1953 and 1954 of one of the Taxpayers. He advised Taxpayers that the books of the partnership were in good shape and no adjustments were proposed.
Next came the examination of Agent Black in 1957. This examination covered the returns, books and records of the Taxpayers and the partnership for the years 1954, 1955 and 1956. The testimony was uncontradicted that Agent Black arrived from the Dallas office with the announced purpose of changing the Company from a cash to an accrual or inventory method. And he did just that. During his examination, Agent Black was preoccupied with inventory problems, records and data. At the conclusion of his examination, he filed a Revenue Agent's Report, corroborated completely by his later court testimony, in which he computed income for the Grain Company on the basis of inventories. In reconstructing the income statement, Agent Black allowed no opening inventory for 1954 and estimated closing inventories for 1954, 1955 and 1956 by spreading back the 1956 closing inventory over each of those years in approximately equal thirds. On the basis of these inventory adjustments and without inclusion of any amount for accounts
And before he left town, Agent Black nailed down what he came to do. He prepared for each of the two sets of Taxpayers on Form 870 a Waiver of Restrictions on assessment and collection,
Immediately below this were figures for inventories as of January 1, 1957.
Although it breaks the sequence of the successive Revenue Agent examination, it is both significant and in keeping with chronology to here point out that action of the Government did not end — nor was it intended to — with Agent Black's RAR and the executed forms 870 and 875. On the contrary, decisive action was taken by persons acting strictly in accordance with their authority. The official Certificates of Assessments and Payments
Consistent with the instruction in Agent Black's handwritten memo (note 23, supra), the partnership information return for 1957 was filed in June 1958 using the specified opening inventory plus purchases and ending inventory. Later that year, in October 1958, the partnership returns for 1954, 1955 and 1956 were again re-examined, this time by Agent Leidiker. Accepting the inventory adjustments made by Agent Black's RAR and a resulting no change for 1954, Agent Leidiker increased partnership income by $35,670.17 by inclusion of accounts receivable.
But it was not yet over. Twenty-five months after Agent Black's examination and the execution of Forms 870 and 875 and fourteen months after Agent Leidiker's acceptance of, and adjustment to, Black's report, Agent Culberson in December 1959 made a re-examination which undid the whole thing.
This recitation leaves us with the conviction that none of the changes in accounting methods can really be characterized as one "voluntarily" made by Taxpayers "on their own accord." Consequently, the record fails to sustain the essential element that they were taxpayer-initiated. The contrary finding of the Tax Court is clearly erroneous and cannot stand.
The record is uncontradicted that everything done was occasioned by Agent Black's examination in 1957. Up to that time it is undisputed that these Taxpayers, acting in unchallenged good faith, were totally ignorant of their mistaken bookkeeping and income tax reporting methods. Light dawned with Agent Black's arrival. Agent Black, energetically and conscientiously performing his duty, came with the announced purpose of having the partnership change from cash to an accrual-inventory basis. True to his word and, more important, true to regulations binding on taxpayers and agents alike, he stated orally and in writing that for this character of business, the law required the use of inventories as a basis of determining true income for tax purposes. Advice alone to that effect might well have made his observations nothing more that the mere "suggestion" which we held the Tax Court entitled to find in Falk v. Commissioner, 5 Cir., 1964, 332 F.2d 922.
But it did not stop there, nor did Agent Black intend for it to stop. Recognizing fully — just as Form 870 declares — that a waiver of restrictions on immediate assessment and collection does not foreclose further action by the Commissioner and the assertion of deficiency notices of the very kind later issued here (see note 24 and accompanying text, supra), an agent making a field audit may properly propose execution of Form 870 for the purpose of securing agreement by the Taxpayer to the proposed changes and the immediate assessment and collection of the tax without the delays called for by a formal deficiency notice. Its use is permitted. And its use by an agent in a field audit is certainly authorized.
Moreover, when Form 870 is used, it is effective when signed by the taxpayer without any signature by the Commissioner. 9 Mertens, § 49.12. It is an express unconditional waiver and it is expected that the additional taxes will be assessed, just as they were here.
By every act done by Agent Black and adopted by his superiors to the extent of assessing and collecting additional taxes, it is simply beyond belief to say that these Taxpayers set this business in motion. There was nothing they did voluntarily or of their own accord. Everything they did they were required to do by an agent whose actions were authorized. Indeed, we think that Congress, in articulating the test in terms of a "change * * * required by a revenue agent upon examination," had in mind this very situation of a conscientious Agent properly utilizing the machinery for determination, imposition and collection of added taxes.
The effect of our holding, however, is to sustain the Government's protective appeal for reconsideration on remand of
At this stage, it is now determined for all practical purposes that it was the Commissioner who required the adjustments. Obviously under § 446(b) the Commissioner could properly determine that "the method used [by the Taxpayers] does not clearly reflect income" and then conclude that "the computation of taxable income" should "be made under" a traditional accrual-inventory method in order to "clearly reflect income." That brought into play § 481(a). Under it the Commissioner, regardless of who — taxpayer or Commissioner — makes the change, is required to take "into account those adjustments which are determined to be necessary solely by reason of the change in order to prevent amounts from being duplicated or omitted, * * *." The only limitation on those adjustments is that no pre-1954 adjustments shall be made. For obvious reasons we do not begin to make even so much as a faint whisper of a possible suggestion as to the timeliness, or merits of the asserted deficiency for the years 1955-1956, the effect of the assessments pursuant to Forms 870 or any other matters. All of these, whether mentioned or not, are for consideration by the Tax Court on remand. The only restraint imposed by our mandate is that the Tax Court's adjudication be consistent with the basic holding that the changes instituted in 1957 were instigated by the Commissioner and not initiated by the Taxpayers.
Reversed and remanded.
As recognized by the joint stipulation and motion of the parties, the question of overassessments to whatever extent they are or will be pertinent is likewise open.
"(ii) The portion of the adjustments arising from a voluntary change in method of accounting * * *"
"(3) If the change in method of accounting is not voluntary (that is, not initiated by the taxpayer), * * *"
"(5) A change in the taxpayer's method of accounting required as a result of an examination of the taxpayer's income tax return will not be considered as initiated by the taxpayer. On the other hand, a taxpayer who, on his own initiative, changes his method of accounting in order to conform to the requirements of any Federal income tax regulation or ruling shall not, merely because of such fact, be considered to have made an involuntary change."
(a) (b) (c) (d)
12-31-53 12-31-54 12-31-55 12-31-56Grain $61,320.23 $80,911.85 $138,510.54 $104,105.00 Receivables 8,161.84 16,229.60 27,820.41 35,670.17
The difference between the estimated and actual inventory figures and the omission of account receivables is presumably the principal subject of the Governor's protective inconsistent deficiency notice and appeal which is now open for reconsideration on the remand. See notes 4, supra, and 27, 30, 40 infra.
"Q. Did you tell them that if they did not sign you would pick up all of the pre-1954 adjustments and make them pay taxes on them?
"A. No, sir. I would have had the other years."
"Welch Grain Co. Inventories 1/1/57 Grain $ 99,605.00 Feed 4,500.00 ____________ Total $104,105.00" ============
This figure of $104,105.00 was the precise amount listed on Exhibit "A" to his RAR for inventory, end of year 1956. See also Col. (d), note 17, supra.
Received or Liability Payments Taxable Scheduled Description And and Credits Balance Supplemental Period Date (Abatement) Applied Information
(a) (c) (d) (e) (f) (g) (i)1955 2-14-56 Full-paid return 2,109.82 2,109.82 pd. 0 1955 Audit deficiency: Assessed 9-30-57 Addl. Tax 3,473.25 First notice 9-30-57 Int. to 8-11-57 275.91 Delinquent account Penalty 37.61 issued 10-29-57 12-10-57 Payment 1,779.93 2,006.84
As the assessment record (Form 899, see note 25, supra) reflects, substantial partial payments on the audited deficiency were made December 10, 1957, leaving balances due and now presumably subject to readjustment on remand to the extent that they are the subject of timely claims, protective deficiency notices, cross appeal, stipulated overassessments, etc. See notes 5, 17, supra, and 30, 40, infra.
Year1954 $ 0 1955 27,820.41 [see Col. (c), note 17, supra] 1956 7,849.76 [see Col. (d), minus Col. (c), _________ note 17, supra] Total increase in income $35,670.17
A second deficiency issued May 19, 1961, is the inconsistent protective notice for the years 1955 and 1956, the subject of the Government's appeal and now open for reconsideration on remand. See notes 5, 17, 27, supra, and 40, infra.