OPINION.
Trammell:
The questions presented are whether the Commissioner may compel this taxpayer to pay its income and profits taxes for the period from August 1,1918, to July 31, 1920, on a fiscal year basis ended July 31 of each year, and whether the Commissioner may compute the income of the taxpayer, for income and profits tax purposes, for the period from August 1, 1920, to July 31, 1921, by taking the income as shown by the books of the taxpayer from August 1, 1920, to December 31, 1920, and adding to that amount seven-twelfths of the taxpayer's income for the calendar year 1921 as shown by the taxpayer's books.
Section 212 (b) of the Eevenue Act of 1918 provides:
The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the incoma If the taxpayer's annual accounting period is other than a fiscal year as defined in section 200 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year.
If a taxpayer changes his accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, subject to the provisions of section 226.
Section 212 (b) of the Eevenue Act of 1921 is substantially the same.
The above section of the Act requires that the net income of a taxpayer shall be computed upon the basis of the taxpayer's annual accounting period, in accordance with the method of accounting regularly employed in keeping its books. The only qualifications of this mandatory provision are:
(1) If the method of accounting does not clearly reflect the income, the Commissioner may compute the income upon a basis that will clearly reflect it; (2) if the taxpayer changes its accounting period from a calendar year to a fiscal year basis, or vice versa, the net income shall, with the approval of the Commissioner, be computed upon the new or changed basis.
The taxpayer had established a fiscal year basis for the years 1918 and 1919 and for those years it has not been shown that the method of accounting does not clearly reflect the income. The action of the Commissioner, therefore, in computing the income for those years upon the fiscal year basis, is in accordance with the statute.
The taxpayer being on a fiscal year basis and not having applied for the approval of the Commissioner to change therefrom as required by the regulations, under the provisions of section 212 (b) of the Eevenue Act of 1921, the tax must be computed upon that basis.
Since the taxpayer did not close its books or take inventory for 1921 on July 31, as it did for 1919 and 1920, the Commissioner arrived at the income subject to tax for that fiscal period by adding to the income for the period from August, 1920, to December, 1920, the proportion of the income for the entire year 1921 which the number of months in the fiscal period ended in that year bore to the entire calendar year; that is, to the income for the five months' period in 1920 there was added seven-twelfths of the income for 1921.
It is the opinion of the Board that the action of the Commissioner in that respect is correct.