
    Appeal of ETTENSON WINNIG DRY GOODS CO.
    Docket No. 362.
    Submitted November 4, 1925.
    Decided February 19, 1926.
    Upon tbe evidence, held, that tbe Excelsior Springs Mineral Water & Bottling Co., a subsidiary of tbe Ettenson Winnig Dry Goods Co., sustained a net loss for tbe calendar year 1918, and tbe net income of tbe consolidated group for tbe fiscal year under consideration should be determined witb due regard to such loss.
    P. W. Shrader, Esq., for the taxpayer.
    
      A. H. Fast, Esq., for the Commissioner.
    
      Before SteRnhagen, LaNSdoN, and Arttndell.
    This is an appeal from the determination of a deficiency in income and profits taxes for the fiscal year ended January 31, 1919, in the amount of $1,407.40. The deficiency arises from the fact that the Commissioner determined the net income of a subsidiary company by-reference to certain journal entries and disregarded other accounts which the taxpayer contends must be considered in order to reflect its true income.
    BINDINGS OP PACT.
    The taxpayer is a Kansas corporation, with its principal office at Leavenworth.
    The Excelsior Springs Mineral Water & Bottling Co. is a Missouri corporation, with its principal office at Excelsior Springs.
    For the fiscal year ended January 31, 1919, the Ettenson Winnig Dry Goods Co., the Excelsior Springs Mineral Water & Bottling Co., and the Excelsior Springs Land & Waters Co. filed a consolidated return.
    The books of the taxpayer, the parent company, were maintained on the basis of an accounting period ending on January 31, while those of the Excelsior Springs Mineral Water & Bottling Co. were maintained on the basis of an accounting period coinciding with the calendar year.
    The Commissioner, using solely the journal entries closing the nominal expense and income accounts for the year into the profit and loss account as a basis, found that the sales for the year amounted to $20,339.96, the expenses to $11,069.93, and the net income to $9,270.03, the latter amount being the difference between the sales and expenses, as disclosed by the closing journal entries.
    The journal entries purporting to close the nominal expense and income accounts ,of the Excelsior Springs Mineral Water <& Bottling Co. for the calendar year 1918 into the profit and loss account, upon which journal entries the Commissioner relied as a basis for computing that company’s net income, were incomplete, in that they failed to close into the profit and loss account 19 expense accounts and 6 income accounts, said accounts being transferred to the profit and loss account without any journal entries.
    The 19 expense accounts "not included in the Commissioner’s computation of net income total $16,484.93, while the 5 income accounts not included in that computation total $6,444.73.
    In his computation of net income, the Commissioner allowed as deductions donations of $145 to the B.ed Cross, $20 to the Salvation Army, $5 to the Boys Fife and Drum Corps, $25 to the Y. M. C. A., $25 to the Excelsior Springs Military Band, and $2 to J. A. De Hoff, a total of $222.
    
      Advertising was allowed as a deduction by the Commissioner in the sum of $252.04, which is the amount shown by the closing journal entries transferring to profit and loss the sum of $211.04 from “ Complimentary advertising No. 1 ” and the sum of $41. from “ Complimentary advertising No. 2.” The correct amount transferred from “ Complimentary advertising No. 2,” as shown by the ledger account, was $46, the journal entry being in error.
    The result of operations for the calendar year 1918 was that the Excelsior Springs Mineral Water & Bottling1 Co. sustained an actual loss of $775.17.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 15 days’ notice, in accordance with Bule 50.
   OPINION.

Arttndell:

We have set out in our findings of fact the method resorted to by the Commissioner in computing what he alleges was the net income of the Excelsior Springs Mineral Water & Bottling Co. for the calendar year 1918. The Commissioner’s computation of net income, baséd solely upon the closing journal entries, is erroneous, since it fails to take into account 19 expense accounts totaling $15,484.93 and 5 income accounts totaling $5,444.73, which accounts were transferred to profit and loss without formal journal entry. Also, we have pointed out in our findings of fact that the journal entry transferring “ Complimentary advertising No. 2 ” to profit and loss is in error to the extent of $5.

It will be noted from the findings of fact that the Commissioner has allowed as donations amounts totaling $222. This was error, as donations are not deductible by corporations.

For the purpose of proving the accuracy of the ledger accounts and their dependability as a basis for computing net income for income and profits-tax purposes, the taxpayer presented in evidence the general ledger and journal of the Excelsior Springs Mineral Water & Bottling Co. for the entire calendar year 1918, and that company’s vouchers for the first eight months of the year. The vouchers for the last four months of the year have been misplaced or destroyed. The Board has made a careful examination of these records for the first eight months of 1918 and has satisfied itself that the general ledger accounts for that period of time are correct. Under such circumstances, we accept the gen-, e^al ledger accounts for the entire year 1918 as correct and as a proper basis for the determination of the results of the operations of the Excelsior Springs Mineral Water & Bottling Co.

We have found that, for the calendar year 1918, the Excelsior Springs Mineral Water & Bottling Co. sustained a net loss of $553.17, and this we have computed in the following manner:

Net profit as found by the Commissioner- $9,270.03
Add:
Income accounts not considered by Commissioner:
Rentals_ $128. 00
Receipts from operation of pavilion No. 1_ 3,857. 54
Receipts from operation of pavilion No. 2- 1, 085.17
Sales of bottles_ 374. 02
- 5,444.73
Total_ 14, 714. 76
Deduct: Expenses not considered by Commissioner:
Packing material_ 205. 30
Carbonating gas_ 429.47
Bottle supplies_1, 318.11
Superintendent’s salary_ 1, 200. 00
Fuel, light, water, power_i- 331. 32
Wages in plant__ 2, 704. 88
Repairs to machinery_ 245.98
Repairs to buildings- 51. 95
Repairs to grounds_ 36. 53
Sulpho-saline well wages- 588. 75
Sulpho-saline pavilions_ 482. 56
Opening expenses new pavilion_ 380. 03
Operating expenses new pavilion_■- 314. 91
Operating expenses pavilions 1 and 2_ 2, 809.47
Soda-water cases and bottles_ 26. 67
Empty cases supply account- 688.17
Ginger ale and soda water supplies_ 959. 35
Bottle supply account_'- 2, 482. 79
Insurance_:_ 228. 69
15, 484. 93
Difference_•_ 770.17
Add: Error in journal entry transferring “ Complimentary advertising No. 2 ” to profit and loss_ 5. 00
Actual loss sustained for year___ 775.17
Deduct: Donations allowed as deductions by Commissioner_ 222. 00
Loss for income-tax purposes_,_ 553.17

We conclude that the consolidated net income for the fiscal year ended January 31, 1919, should be computed, with due consideration to the loss of $553.17 sustained by the Excelsior Springs Mineral Water & Bottling Co. for the calendar year 1918.  