OPINION.
Marquette: The taxpayer herein kept its books on the accrual basis and reported as income subject to taxation discount earned within the year, and properly accrued all of its accounts subject to accrual with the exception of insurance. The Commissioner has computed the tax on a cash basis and has included as income in each year a reserve for unearned discount. We have had occasion in two appeals to disapproAre this procedure and to hold that discount neither received nor accrued within a taxable year is not income subject to tax in that year. Appeal of Chatham, & Phenix National Bank, 1 B. T. A. 460; Appeal of The Bank of Hartsville, 1 B. T. A. 920. When a bank keeps its books of account on a cash basis, discount is income only when it is received; upon an accrual basis discount becomes income as it is earned.
The Commissioner's contention herein is that the books of tnis taxpayer were not kept on an accrual basis and that it is therefore not entitled to make its returns of income on that basis. The further contention is made that if the taxpayer's books were kept on the accrual basis the method employed to calculate the unearned discount was an approximation and did not give an accurate accrual of the discount.
The facts disclose that every account of the taxpayer, whether income or expense, was accrued on its books, with the exception of its insurance liability, which it did not pay as it accrued. All other items were paid as they accrued, and it was unnecessary to set up accruals with respect to them, only to knock them down again by off-setting entries. The omission to accrue the insurance account does not, in our opinion, warrant a conclusion that the method of accounting regularly employed was not an accrual method. Such errors are likely to happen in the best regulated accrual systems, and it is not always an easy matter to determine when and what items are subject to accrual. We have no hesitation in saying that the method employed by the taxpayer was clearly an accrual method.
We find no merit in the contention that the method employed to calculate unearned discount was an approximation. As we view it, it was mathematically accurate, and it can make no difference whether the amounts are figured daily on the balances and added at the end of the month or computed monthly on the daily balances and then added. The result in either event is the same and would disclose the correct amount of unearned discount at the end of the month.
We hold that the amount of unearned discount at the end of each of the years in question was improperly included by the Commissioner in the gross income of the taxpayer in each year, and that such amounts should be excluded in the recomputation of the tax.
The Commissioner has admitted error in increasing the net income for 1920 by $14,428.65, and in deducting from invested capital in that year $50,000. The first amount was erroneously included through adding to book income $4,095 of disallowed depreciation, without deducting $14,426.65 claimed as depreciation by the taxpayer. The reduction of invested capital by $50,000 arises from a sale by taxpayer of its bank building and the investment of the proceeds. Both amounts should be restored and proper adjustment of invested capital should be made for unearned discount included in invested capital.