Appeal of Schlemmer & Graber Co. , 2 B.T.A. 823 ( 1925 )

OPINION.

James:

The method used by the Commissioner in determining the taxpayer’s net income for the year 1920 has been the subject of consideration by the Board in the Appeal of Bruce & Human Drug Co., 1 B. T. A. 342; and Appeal of Gaukler & Stewart, 1 B. T. A. 578, in which we have said that mere reconcilements of surplus, unsupported by proof of the correctness of the books and the balance sheets derived therefrom, are not determinative of net income. In the instant appeal, the Commissioner, after finding the net income for 1919 of $7,912.29 and showing no distribution thereof, starts the reconcilement of surplus for 1920 with no surplus at the beginning of that year. There is nothing in the record to support such a method, but, on the contrary, the testimony before the Board is entirely to the effect that the books of the taxpayer were so kept as to be virtually worthless for the purpose of determining net income.

It is also in evidence that, when the manager of the taxpayer’s business was finally discharged, the business was found to be hopelessly involved, and was liquidated with the loss not only of the investment of the stockholders therein but heavy personal losses in addition, resulting from the voluntary assumption of its debts by its principal stockholders. Upon the entire record, we are of the opinion that the taxpayer had no net income in either year, and that the deficiencies determined by the Commissioner are erroneous and should be disallowed.