Montaldo v. Commissioner

*519 The above entitled proceedings were consolidated for hearing and decision. In the case of George Montaldo, Jr., respondent determined deficiencies in income taxes for 1920 and 1921, in the amounts of $222.33 and $101.74, respectively. In the case of Frank Montaldo, respondent determined deficiencies in income taxes for 1920 and 1921, in the amounts of $203.17 and $47.45, respectively. The sole issue presented by these proceedings is whether respondent, in computing the net income of the partnership of Montaldo Furniture Co., for 1920 and 1921, has made inadequate deductions to cover the cost of goods sold. Petitioners allege that the deductions made by respondent are less than the actual cost of goods sold by $4,815.30 for 1920, and $9,655.30 for 1921.

FINDINGS OF FACT.

During the years in controversy, petitioners were equal partners in the firm of Montaldo Furniture Co., and were engaged in selling furniture and household furnishings for*4078 cash and on the installment plan. The partnership books were kept on the accrual basis; and the gross contract price of all installment sales in each year was treated as income of the year in which such sales were made.

The accounting procedure for installment sales was, briefly, as follows: When a sale was made on the installment plan, an account was opened for the purchaser in the accounts receivable ledger, to which there was charged the full contract price of the sale, and this account was credited with the installment payments as and when received. At the same time the amount of the sale and the cost thereof were entered in a day book. The cost of the sale was taken from a ticket attached to the merchandise, and, in the case of new merchandise (other than that obtained by repossession), represented the invoice price of the merchandise to the Montaldo Furniture Co. If the purchaser subsequently defaulted in payments and the merchandise was *520 repossessed, a single entry was made crediting the purchaser's account in the accounts receivable ledger with the unpaid balance of the contract price. The repossessed merchandise was placed on the floor for resale, and on*4079 the ticket attached thereto there was recorded a cost equivalent to the credit to the account of the defaulted purchaser. When the merchandise was resold, the sale was entered in the day book, with the cost thereof as shown on the ticket attached to the merchandise, as in the case of an original sale. No account was kept for merchandise purchases.

In computing net income for the years under consideration, respondent allowed deductions for cost of goods sold, which in their respective amounts were equivalent to the total of the costs of sales entered in the day book for those years.

OPINION.

LANSDON: It should be stated at the outset that there is no question concerning the reporting of income by the installment method. The sole issue is that respondent has made inadequate deductions to cover the cost of goods sold; and this, the petitioners allege, arises out of his failure to include as a part of the cost of goods sold, for each of the years on appeal, the values placed upon repossessed merchandise resold in the year of repossession, and which, in each instance, represents the credits to the defaulted purchasers' accounts to wipe out the unpaid balances.

The partnership's*4080 bookkeeper was the sole witness called by the petitioners, and she merely testified as to the accounting procedure followed in the case of installment sales, which is precisely that outlined in the findings of fact. The revenue agent who examined the partnership books for the years under consideration, upon whose findings and recommendations respondent's determination is based, testified that because of poor inventories and lack of a proper record of merchandise purchases, he was unable to determine the cost of goods sold by the usual method of adding to the opening inventories the purchases and deducting from the result the closing inventories; and that he accepted as correct the cost of sales as reflected by the total of the daily entries of costs in the day book. If the witness called by the petitioners testified correctly, the revenue agent omitted nothing which could be properly included in the cost of goods sold. In any event, no evidence was offered to show that the cost of goods sold was other than what respondent determined it to be.

Judgment will be entered for the respondent.