Appeal of Wernecke-Schmitz Hardware Co. , 2 B.T.A. 914 ( 1925 )

OPINION.

James:

The Board has heretofore had occasion to consider whether net income may be proven by reconcilements of surplus alone. As a matter of accounting theory, there can be no question that the method is correct. But its correctness as applied to any case depends entirely upon the correctness of the balance sheets involved in the analysis of surplus. In other words, if the balance sheets are accurate, if capital additions and distributions are taken into account, If proper adjustment is made for dividends, and similar withdrawals, then the difference between surplus at the beginning and at the end of the year correctly reflects the income. But. if any item on the balance sheet, either at the beginning or at the end of the year, should be erroneous, that error may affect surplus either at the beginning or at the end of the year, and the entire computation becomes worthless. We have so held in the Appeal of Bruce & Human Drug Co., 1 B. T. A. 342, and in the Appeal of Gaukler & Stewart, 1 B. T. A. 578.

The taxpayer in this appeal has undertaken to rely solely upon what it regards as patent errors upon the face of the revenue agent’s report, but offered no proof that the findings were erroneous. An examination of that report indicates a painstaking effort to arrive at the truth under difficult conditions. The revenue agent did not rely upon the balance sheets as being correct but on the other hand indicated clearly their shortcomings. Such being the case, we are not disposed to disturb his findings or the determination of the Commissioner based thereon.