
    M. G. STOLLER, MAGDALENE STOLLER, KENNETH M. STOLLER AND ELLSWORTH J. STOLLER v. THE UNITED STATES
    
    [No. 468-58.
    Decided July 12, 1963]
    
      
      G. Charles Scharfy for plaintiffs.
    
      J. Mitchell Reese, with whom was Assistant Attorney General Louis F. Oberdorfer, for defendant.
    Before Jones, Chief Judge, Whitaker, Laramore, Durfee and Davis, Judges.
    
    
      
       It is stipulated that Kenneth M. Stoller and Ellsworth J. Stoller have no interest in the subject matter of the suit and are not proper parties.
    
   Per Curiam :

This case was referred pursuant to Pule 45 to Wilson Cowen, a trial commissioner of this court, with directions to make findings of fact and recommendation for conclusions of law. The commissioner has done so in a report filed April 23, 1963. Plaintiffs failed to file a notice of intention to except to the commissioner’s findings or recommendation within the time provided for doing so pursuant to Pule 46(a). On May 22, 1963, defendant filed a motion to adopt the commissioner’s report, to which plaintiffs have also failed to file a response, the time for so doing pursuant to the Pules of the court having expired. The case has been submitted to the court on defendant’s motion filed May 22, 1963. Since the court is in agreement with the findings and recommended conclusion of law of the trial commissioner, as hereinafter set forth, pursuant to Pules 46(a) and 4-8, it hereby adopts the same as the basis for its judgment in this case. Defendant’s motion filed May 22, 1963, is allowed. Plaintiffs are therefore not entitled to recover and the petition is dismissed.

OPINION OP COMMISSIONER

M. G. Stoller and his wife brought this action to recover $41,477.20 of income taxes paid for the year 1950. Since Mrs. Stoller is a party only because of the filing of a joint tax return, M. G. Stoller will be hereinafter referred to as plaintiff. The claim for refund is 'based upon an alleged net operating loss from plaintiff’s wholly owned business in 1951 that exceeded the 1950 income. Plaintiff seeks a carryback of the alleged loss to 1950.

In 1951 and for a number of years prior thereto, plaintiff, doing business under the name of Stoller Seed House and Elevator Company, was engaged in the seed and grain elevator business. In the spring of 1951, plaintiff had serious financial difficulties, and on May 2,1951, he filed in the District Court for the Northern District of Ohio a petition seeking an arrangement under Chapter XI of the Bankruptcy Act. On May 7, 1951, a receiver was appointed. He took possession of plaintiff’s property and managed the business for the remainder of the year. An arrangement was not consummated, however, and on April 15, 1952, plaintiff was adjudicated a bankrupt and a trustee hi bankruptcy was appointed.

At the first meeting of plaintiff’s creditors, held May 21, 1951, it was revealed to the Bankruptcy Court that plaintiff had converted and sold substantial quantities of grain, principally soybeans, that had been stored in his elevators by the owners of these commodities. Claims aggregating $290,-216.44, which represented the value of the converted grain, were filed with the receiver. None of the claims was paid until 1953 when the assets of the bankrupt were liquidated and distributed. At that time, approximately 45 percent of the claims asserted by the owners of the stored commodities were paid to them.

Plaintiff’s books of original entry, surrendered to the receiver pursuant to the order of the court, were lost during the bankruptcy proceedings. The receiver is deceased, and efforts to locate the books have proved fruitless. However, plaintiff’s canceled checks, deposit slips, and bank statements from the four banks with which he did business were preserved and his claims for refund were prepared by his accountant on the basis of these records.

The evidence as a whole shows that the converted grain was sold by plaintiff before May 2, 1952, and that the proceeds of the sales were deposited in his personal bank accounts. The evidence also leads to the conclusion that the proceeds of the sales were included in his 1951 income tax return as a part of a total of $3,123,498.07 received from the sale of seed, feed, etc. In view of the loss of plaintiff’s original books of entry, however, an accurate determination cannot be made of the quantity of converted grain which plaintiff sold in 1951 or the total proceeds thereof , that were included in his 1951 income tax return as a part of sales.

In computing the claimed loss for 1951, plaintiff deducted the $290,216.94, representing the value of the converted commodities, as a part of the cost of goods sold. The proper treatment of this item is the principal issue in the case.

I

The parties are in disagreement as to the correct accounting period to be considered in determining plaintiff’s gain or loss for 1951. Plaintiff contends that the Stoller Seed House and Elevator Company continued in existence as a taxable entity throughout 1951 and that the entire calendar year should be utilized, whereas defendant maintains that only the period from January 1 to May 7,1951, when the receiver was appointed, is relevant in determining whether plaintiff sustained a net operating loss.

While such events as the death of an individual taxpayer or the dissolution of a corporation may create a taxable / period of less than one year, the courts have held that the appointment of a receiver does not end one taxable year and begin another.

In In re Kepp Electric & Manufacturing Co., 98 F. Supp. 51 (D. Minn. 1951), a debtor had assigned all his tax claims to the receiver. This, said the referee, put the receiver in the “same position as the debtor from the standpoint of a taxable entity.” The court accepted the referee’s report in full, saying that the “confirmed arrangement did not operate to create two taxable entities where before only one had existed * * *” Id. at 53.

In In re Lister, 177 F. Supp. 372 (E.D. Va. 1959), the question was whether the receiver should file a fiduciary return or a partnership return. Said the court:

Clearly the return is properly filed on form 1065 [for partnerships] as, for this purpose, the partnership continues to exist. Certainly it is true that two taxable entities are not created under a Chapter XI proceeding, where before only one had existed.

In re Sussman, 289 F. 2d 76 (3d Cir. 1961), is a recent case holding that the filing of a petition in bankruptcy does not start the running of a new taxable period. The taxpayer-debtor had filed a petition in bankruptcy on June 7, 1956. The business had a loss for that year. The trustee filed a claim for refund on the theory that ownership of the debtor’s refund claim had passed to him along with the other assets. The refund was collected and the debtor was successful in getting the court to turn the money over to him and his wife. Noting that a carryback loss claim does not mature until the end of the taxable period in which the loss was sustained, the court said:

It has already been stated that Sussman’s taxable year was the calendar year. There is no provision in law that banlcruptey terminates a taxable year. Therefore, when Sussman filed his bankruptcy petition 'he had no “right of action” against the United States for the trustee to acquire * * * Id. at 77-78. [Emphasis added.]

The statute dealing with assessment and payment of taxes after bankruptcy proceedings begin (11 U.S.C. 797) seems to point in the direction taken in the above cases. It provides:

* * * all taxes which may be found to be owing to the United States * * * from a debtor * * * and all taxes which may become owing to the United States * * * from a receiver or trustee of a debtor or from a debtor in possession, shall be assessed against, may be collected from, and shall be paid by the debtor or the corporation organized or made use of for effectuating an arrangement under this chapter * * *.

Accordingly, it is concluded that plaintiff’s gain or loss for 1951 should be computed on the basis of the entire calendar year.

II

For many years prior to 1951, plaintiff had kept his business financial records and accounts on the basis of cash receipts and disbursements, taking into account inventories, and he reported income for Federal income tax purposes on that basis. Although the parties have agreed that plaintiff’s gain or loss from the operation of his business for 1951 is to be computed by using this hybrid system of accounting, they disagree on the application of the system to specific items of income and expense for that year. Plaintiff has accrued not only purchases but operating expenses as well. On the other hand, he did not accrue sales on account. Defendant insists that sales on account be accrued but says that purchases may not be accrued under the method followed by plaintiff. Both parties agree that the treatment of accounts payable and receivable in 1951 must be consistent with plaintiff’s handling of these accounts for the years prior to 1951. Unfortunately, the evidence with respect to the handling of accounts payable and receivable for these years is less than satisfactory. However, there is very little leeway in the required treatment of these items where the taxpayer is on a cash basis method of accounting and his income is derived from the sale of goods.

Section 41 of the Internal Revenue Code of 1989,26 U.S.C. (I.R.C. 1939) §41 (1952 ed.), required a method of accounting that clearly reflects income. The accrual method of accounting that clearly reflects income would, under the circumstances of this case, be the most accurate one. But the statutory mandate is not that the method be the most accurate, but only that it “clearly reflect” income. If a taxpayer’s gross receipts are largely from sale of goods, obviously his income for any given year might not be clearly reflected by a pure cash basis method. This problem was anticipated by the 1939 Code, 26 U.S.C. (I.R.C. 1939) § 22 (c) (1952 ed.):

Whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken * * * upon such basis as the Commissioner * * * may prescribe * * *

The Commissioner’s “opinion” as to when inventories are necessary is spelled out by Treas. Regs. Ill, § 29.22 (c)-l (1943) :

In order to reflect the net income correctly, inventories at the beginning and end of each taxable year are necessary in every case in which the production, purchase, or sale of merchandise is an income-producing factor. * * *

Proper use of inventories of course contemplates a matching of a particular sale during the taxable year with the “purchase expense” attributable to that sale. If the taxpayer is on a cash receipts method of accounting and sells goods on account, there is a reduction of inventory but no corresponding increase in cash. Thus merely keeping inventories does not insure matching of sales and cost. However, a satisfactory solution is provided by Treas. Regs. Ill, §29.41-2 (1943):

* * * in any case in which it is necessary to use an inventory, no method of accounting in regard to purchases and sales will correctly reflect income except an accrual method. [Emphasis added.]

This regulation completes the picture. Thus, it seems clear plaintiff, a cash basis taxpayer, is required to accrue both sales and purchases. The logical conclusion, however, is that the regulations “implicitly sanction concurrent use of the cash basis for all other items,” Note, 65 Harv. L. Rev. 351, 352 (1951). This conception of accounting for Federal income tax purposes by taxpayers on a cash basis is nothing-new. In fact, it has long been the hornbook rule for accountants.

The principles laid down in the 1939 Code and the regulations issued pursuant thereto have been followed in computing (a) plaintiff’s net income for 1951 as shown in finding 8, and (b) plaintiff’s net income in the period from January 1 to May 7,1951, as shown in finding 10.

While it may not be said that the courts were entirely in agreement on the limits of a combined cash and accrual method of accounting prior to the enactment of the Internal Revenue Code of 1954, the use of the part cash, part accrual method was sanctioned in Glenn v. Kentucky Color & Chemical Co., 186 F. 2d 975 (6th Cir. 1951).

Ill

Plaintiff’s right to recover stands or falls on his right to deduct from his 1951 earnings the sum of $290,216.94, which represented the value of commodities stored by Ms customers and sold by plaintiff without their knowledge or consent.

It is not entirely clear from the record whether all of the grain was sold by plaintiff in 1951, but the proceeds of the sales constituted income in whatever year received, James v. United States, 366 U.S. 213; Rutkin v. United States, 343 U.S. 130.

In James, the Supreme Court held that embezzled funds constituted income, expressly overruling Commissioner v. Wilcox, 327 U.S. 404. Rutkin v. United States, supra, teaches that:

An unlawful gain, as well as a lawful one, constitutes taxable income when its recipient has such control over it that, as a practical matter, he derives readily realizable economic value from it.

This principle was recently applied in Muldrow v. Commissioner, 38 T.C. 91. In that case, the petitioner, who owned and operated a licensed cotton warehouse, converted and sold 812 bales of cotton in 1955 and the court held that the proceeds were properly includible in his gross income that year.

While it is clear that the proceeds of converted goods are properly included in gross income, this does not fully answer the question whether the value of the converted grain in the present case may be deducted as a part of the “cost of goods sold.” The gist of plaintiff’s argument is that the $290,000 is a purchase expense which must be matched against the proceeds from the sale of the grain in order to clearly reflect income. The question cannot be evaded by saying that a cash basis taxpayer can deduct only purchases that have been paid for during the year, because as has been pointed out above, the Internal Revenue Code of 1939 and the regulations issued thereunder require even cash basis taxpayers to accrue sales and purchases, when inventories are kept and the sale of goods is a significant source of income.

Nevertheless, the $290,000 is not deductible for the simple reason that plaintiff never “purchased” the grain in any ordinary or commercial sense of that word. Resort to Webster’s or Black's is not necessary to show that “conversion” and “purchase” are not synonomous terms. Although, plaintiff made no attempt to prove that he sold the grain with the prior consent or acquiescence of the owners, he did acknowledge the conversion after the commodities had been sold. However, neither such belated information nor the recognition of an obligation to repay the owners the value of the grain gave birth to a retroactively effective purchase by plaintiff from the owners. The requirements of a realistically applied revenue law are not met by such fictional purchases. A vendor usually has an opportunity to determine the terms of the sale and the acceptability of the proposed vendee. It is unlikely that the owners of the grain here would have consented to the sales had they known of plaintiff’s financial difficulties.

Plaintiff relies chiefly on Hofferbert v. Anderson Oldsmobile, Inc., 197 F. 2d 504 (4th Cir. 1952), holding that the amount paid for an automobile in excess of the OPA ceiling price was deductible by the dealer as a cost of goods sold expense. Plaintiff also cites United States v. Sullivan, 274 U.S. 259 (1927), which held taxable all gains from an illicit liquor business. These cases are inapposite here, for in both the taxpayers actually purchased goods for resale and the issue was whether the full cost of the goods was deductible or whether there were policy reasons for denying part of the claimed deduction. There is a further distinction between the case at bar and Anderson Oldsmobile, supra. In Anderson there was a willing buyer and a willing seller. Here the owners of the converted grain were hardly willing sellers.

In City Ice Delivery Co. v. United States, 176 F. 2d 347 (4th Cir. 1949), which was cited in Anderson, the Fourth Circuit emphasized the necessity for the taxpayer to prove that an actual sale was made to him before he may deduct the purchase price as a part of the cost of the goods sold. In that case, City Ice, which was a retailer of ice, was owned by four ice-producing companies, one of which was Wiggins Ice and Fuel Co. A “surplus” of ice was being produced and, in order to keep prices up, the directors of City Ice ordered their company to make payments to Wiggins Ice and Fuel Co. to discontinue the manufacture of ice. “Cost of goods sold” was unsuccessfully advanced by the taxpayer for deductibility of the payments made to Wiggins Ice and Fuel Co. In denying the taxpayer’s contention, the court stated:

The contention that the Wiggins payments are deductible on the score of cost is fallacious, for it flies right in the face of economic reality, which is here controlling. The parties with which we are here primarily concerned are taxpayer and Wiggins; the transaction, sale of ice. But as between these two parties, the transaction under the option was just the opposite of a sale— a non-sale; and, by the same token taxpayer was a non-buyer, Wiggins a non-seller. And cost here ordinarily indicates the price, or part of it, paid by the buyer to the seller as a consideration for the sale of goods.
* * *
To include, then, the Wiggins payments under the item of cost would be at best, in commercial practice, an anomalous misnomer.

Since plaintiff is not entitled to deduct the value of the converted grain as a part of his cost of sales in 1951, it follows that he had a net income for that year of $159,151.47 as shown in finding 8, and is not entitled to recover.

FINDINGS OF FACT

1. This action was brought by M. G. Stoller (hereinafter referred to as plaintiff) and Magdalene Stoller, husband and wife of Paulding, Ohio, for a refund of income taxes. Plaintiffs are sole owners of the cause of action. They claim that in 1951 they sustained a net operating loss that exceeded their taxable income for 1950. The basis of their timely claim for refund is a carryback of the alleged loss.

2. For the year 1950, M. G. Stoller and Magdalene Stoller reported taxable income of $96,403.77 on which they paid tax of $41,570.62. Their return for that year was audited by the Internal Eevenue Service; the examining agent found an overpayment of income tax due of $93.42, for which, credit was given to taxpayers, making the net tax paid by them for 1950 $41,477.20.

3. During the years 1948, 1949, 1950, and 1951, plaintiff, doing business under the name of Stoller Seed House and Elevator Company, was in the seed and grain elevator business and had engaged in business of the same character with continuity during prior years.

4. For many years prior to 1950 and 1951, plaintiff kept business financial records and accounts on the basis of cash receipts and disbursements, taking into account inventories, and reported income for Federal income tax purposes on that basis. The parties are agreed that plaintiff’s income or loss for 1951 from the operation of his business is to be computed by using this hybrid system of accounting.

5. In the spring of 1951 plaintiff became involved in financial difficulties, and on May 2, 1951, he filed a petition in Proceedings Under Chapter XI of the Bankruptcy Act (11 U.S.C. 701-799) in the District Court for the Northern District of Ohio. On May 7,1951, a receiver was appointed to take possession of plaintiff’s property and to operate and manage his business. The receiver managed the business for the remainder of the calendar year 1951. However, an arrangement under Chapter XI of the Bankruptcy Act was not consummated, and on April 15, 1952, plaintiff was adjudicated a bankrupt and a trustee in bankruptcy was appointed and took possession of the property held by the receiver.

6. Plaintiff’s books of original entry, surrendered to the receiver pursuant to the order of the court, were lost during the bankruptcy proceedings. The receiver is now deceased, and efforts to locate the books have proved fruitless. However, plaintiff’s canceled checks, deposit slips, and bank statements from the four banks with which he did business are available. His accountant prepared the claim for refund in this action from accounting schedules which were in turn based on the canceled checks, deposit slips, and bank statements.

7. The plaintiff contends that the full calendar year of 1951 is the proper accounting period for determining his gain or loss for 1951, whereas defendant argues that the proper period is from January 1 to May 7, 1951, when the receiver took over the management of the business. Irrespective of the period used, there are substantial differences between the parties as to various items of income and expense that should be included in determining whether plaintiff suffered a gain or a loss.

8. The greater weight of the evidence shows that plaintiff’s net income for the entire calendar year 1951 was as

shown in the following table:

Sales :
Payment received_$3,139, 940. 60
Accrued sales_ 34, 664. 94
Gross sales- 3,174, 609. 64
Returned sales- 56,196. 60
3,118,409.04
Cost of Goods 'Sold :
Opening inventory, Jan. 1, 1961- 112, 679.27
Purchases_ 2, 806, 762. 67
Total- 2,919,441.94
Closing inventory- 30,148.41
Cost of goods sold, 1951_ 2, 889,293. 63
Gkoss Pkofit_ 229,115. 41
Operating expenses_ 69,363.94
Net Income_ 159,751.47

9. The following is an explanation of the principal items that are involved in the determination of plaintiff’s net income for 1951 as shown in the above tabulation:

a. At the first meeting of creditors held on May 21, 1951, it was established that plaintiff had converted and sold substantial quantities of grain, principally soybeans, stored in his elevators. The cash value of the converted commodities as of May 31,1951, totaled $290,216.94, which included grain valued at $228,757.80 and stored on warehouse receipts by The Dracket Company, Spencer-Kellogg & Son, and Ralston-Purina Co., and grain valued at $61,459.14 stored for various farmers. All the owners of the converted commodities filed claims with the receiver. At the termination of the bankruptcy proceedings in 1953, $130,597.62 or approximately 45 percent of the amounts claimed were paid. There is no evidence that plaintiff had purchased the converted grain prior to the time he sold it, nor is there any evidence that the sales were made with the knowledge or consent of the owners. The evidence as a whole shows that the converted grain was sold by plaintiff prior to May 2, 1952, that the amounts he received from the sales were deposited in his personal bank accounts, and that the proceeds of the sales were included as a part of a total of $3,123,498.07, reported in his 1951 income tax return as sales of seed, feed, etc. However, in view of the lack of detailed records, it is impossible to determine with accuracy how much of the converted grain was sold during 1951 or the amount of the receipts thereof that were included in plaintiff’s 1951 tax return as a part of sales. In his claim for refund and in his schedules filed in this suit, plaintiff has included the $290,216.94 as an accrued purchase, but that item has been eliminated in determining his gain or loss for the period pertinent to this suit, because there is no evidence that plaintiff purchased the stored commodities or that he paid the owners thereof the $290,216.94 in 1951.

b. Gross Sales. To reflect income with the accuracy required by the Internal Revenue Code of 1939, a taxpayer using the hybrid method of accounting that plaintiff employed should accrue the two major items affecting income, viz., sales and purchases. Plaintiff accrued purchases but not sales. Plaintiff’s accounts receivable on May 31,1951, stood at $48,331.96. Of this, $34,664.94 represented sales after January 1,1951. This amount should be accrued and added to sales under plaintiff’s method of accounting.

c. Returned Sales. Plaintiff deducted $61,196.50 as returns and allowances, but this amount is overstated by $5,000. Plaintiff claims that $18,414.50 represented checks returned to the National Bank of Paulding, Ohio. However, his analysis of the Paulding Bank transactions shows only two returned checks: No. 2291, February 1, 1951, the McMillen Feed draft and No. 22589, March 21,1951, the Cargall draft. These two checks were for $5,000 and $8,414.50 respectively, or a total of $13,414.50.

d. Opening Inventory. Plaintiff took a physical inventory at the end of 1950, which he used for his 1950 closing inventory and bis 1951 opening inventory. Neither the taking or the value ($112,679.27) of this inventory is disputed.

e. Purchases.

(1) A purchase of $20,222.34 on account from McCabe Grain Co., Ltd., was counted twice by plaintiff. Therefore, purchases were reduced by that amount.

(2) A purchase for $32,155.62 is overstated by $1,000. This item was included in accounts payable as of May 31, 1951. The only detailed analysis of this item is shown in the Internal Revenue Service’s audit of plaintiff’s 1951 income tax return in which this item totals $31,155.62.

f. Olosmg Inventory. This figure of $30,148.31 was arrived at by totaling the receiver’s sales after December 31, 1951. Since the receiver made no purchases after taking over the management of the business, this is a sufficiently accurate valuation of the grain in his possession at the end of the year. The figure is not contested by defendant.

g. Operatmg Expenses.

(1) In preparing the claim, plaintiff accrued not only purchases, but also certain operating expenses. This is improper under the cash basis, inventories considered, method of accounting. The following items totaling $7,883.63 were improperly accrued and are disallowed:

(a) Office supplies and expense- $93. 63
(b) Insurance_ 376.96
(c) Rent_ 225.00
(d) Legal and auditing_1, 810. 77
(e) Brokerage fees_ 260.00
(f) Heat, light, power_ 1,052. 64
(g) Telephone and telegraph_ 388. 31
(h) Dues and subscriptions_ $38. 75
(i ) Advertising_ 1, 040. 03
(j) Gasoline and oil_ 991.11
(k) Repairs and maintenance_1, 531. 68
(l) Seed testing- 84. 85
Total_ 7,883.63

(2) Plaintiff erroneously charged to operating expenses two non-expense checks drawn on the Paulding bank and issued to the Gillen Co., totaling $1,165.59, allegedly for gas and oil. Three Paulding bank checks were made payable to the Gillen Co. One for $1,931.35 was listed by plaintiff as the cost of a GMC truck and was properly carried as a non-expense item. The other two non-expense Paulding bank checks payable to the Gillen Co. totaled $1,165.59. Gas and oil expenses paid by checks drawn on the Paulding bank properly total $1,082.35 rather than $2,197.94 as claimed by plaintiff.

(3) Seed Testing. Plaintiff accrued this item of $84.85 under “purchases.” His prior practice was to carry “testing” as an operating expense. As an operating expense, it should not be accrued under plaintiff’s method of accounting.

10. The greater weight of the evidence shows that plaintiff’s net income from January 1 to May 7,1951, was as shown in the following table. In arriving at this computation of net income, the receiver’s transactions have been eliminated from the statement of earnings for the full calendar year 1951 (finding 8 supra) and adjustments for inventories and depreciation have been made.

Net Profit Calendar Tear 1951-$159, 751.47

Eliminate Receiver’s Transactions:

Income _ 305,278.11

Expenses _ 21,460. 56

Receiver’s Net Income_ 283,817.55

Loss prior to inventory and depreciation consideration _ (124,066.08)

Receiver’s Inventory 12/31/51_ 30,048.31

(154,114. 39)

May 7,1951 Inventory_ 479,271.11

Profit before depreciation adjustment_ 325,156. 72

Adjustment for depreciation after May 7, 1951_ 7, 576.73

Net Income (January 1 to May 7, 1951)_ 332,733.45

11. To the extent not explained in finding 9 supra, the following is a statement of the principal determinations made in computing plaintiff’s net income in the period January 1 to May 7,1951:

a. Receiver's Transactions.

(1) Receipts. The receiver’s total receipts were $331,472.51. Included were three non-business items which should be eliminated in determining profit or loss for the period the receiver managed the 'business. The three items, totaling $25,194.40 were cash, $1,540.86; sale of farm, $12,877 and collection on accounts receivable, $10,776.54. The receiver’s gross receipts, as adjusted, were $305,278.11.

(2) Disbursements. Plaintiff included a $4,420.04 non-expense item in receiver’s disbursements. This amount should be eliminated in order to accurately reflect the gain or loss of the business while managed by the receiver. The receiver’s disbursements, therefore, were $21,460.56 and his net receipts were $283,817.55.

b. Depredation. The net income of $159,751.47 (finding 8 supra), includes a deduction of $11,656.50 for the full year’s depreciation. In computing gain or loss from January 1 to May 7,1951, that portion of depreciation allocable to the period after May 7 ($7,576.73) should be eliminated.

c. May 7, 1951 immenbory. In computing plaintiff’s claimed net loss for the period from January 1 to May 7, 1951, plaintiff has valued his inventory as of that date at the amount at which the inventory was appraised by the receiver in bankruptcy; this valuation was approximately 45 percent of the cost of the goods inventoried and included grain and seed in plaintiff’s elevators, plus a considerable quantity of seed that had been seized by the U.S. Department of Agriculture and was stored in various warehouses in other cities. In his sworn petition filed in the bankruptcy proceedings on May 2, 1951, plaintiff stated that the value of his inventory at that time was $538,714.01. This inventory was taken when all his books and records were available, and the evidence shows that it was made in the same way and on the same basis as previous inventories prepared by him. The seed which had been impounded at the instance of the Department of Agriculture was relabeled, released, and later sold by the receiver, except a portion thereof which was condemned. As nearly as can be determined from the record, the cost of the condemned seed was $59,442.90. This amount has been deducted from the value of the inventory as listed by plaintiff in his petition in bankruptcy, thus reducing his inventory of May 7, 1951, to $479,271.11.

12. The Stoller Seed House and Elevator Company retained its identity as a single taxable entity for the calendar year 1951.

13. Plaintiff has not established by a preponderance of the evidence that he sustained a net loss in the calendar year 1951 or during the period beginning January 1 and ending May 7,1951.

CONCLUSION OF LAW

Upon the foregoing findings of fact which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiffs are not entitled to recover and the petition is therefore dismissed. 
      
       Plaintiff’s accounting for 1949 and 1950 apparently satisfied the Internal Revenue Service because upon audit plaintiff was found to have overpaid his taxes for each year.
     
      
       No one system of accounting — such as the accrual method — was imposed on all taxpayers by the 1939 Code. Treas. Regs. 111, § 29.41-3 (1943).
     
      
       “The so-called cash basis of reporting income for federal income tax purposes, as governed by the law and the regulations, is really a mixed cash-accrual basis. If the sale of purchased or manufactured goods is a major source of income, recognition must be given to sales on account, purchases on account, and inventories.” Finney and Miller, Principles of Accounting — Intermediate 19 (4th ed. 1951).
     
      
       It is stipulated that Kenneth M. Stoller and Ellsworth J. Stoller have no interest in the subject matter of the suit and are not proper parties.
     