Bernard B. Carter v. Commissioner, 36 B.T.A. 514 (1937)

A taxpayer who merely retains informal records such as check stubs and dividend statements in a file, without systematically recording business transactions in a book of account, does not satisfy the requirement of “keeping books” under Section 41 of the Internal Revenue Code, and thus must compute net income on a calendar year basis.

Summary

The case concerns whether Bernard Carter, the petitioner, kept adequate books of account to justify filing income tax returns on a fiscal year basis. Carter maintained a file of financial documents but did not systematically record transactions in a traditional book. The Board of Tax Appeals ruled that Carter’s filing system did not constitute “keeping books” as required by Section 41 of the Internal Revenue Code. Therefore, he was obligated to file based on the calendar year. The decision clarified the standard for what records are sufficient to allow a taxpayer to use a fiscal year for tax reporting.

Facts

The petitioner, Bernard Carter, sought to file income tax returns for fiscal years ending October 31. He received permission from the Commissioner contingent on maintaining books of account or competent records accurately reflecting his income. Carter maintained a file of financial documents, including dividend statements, mortgage interest statements, and broker statements. He did not maintain a formal ledger or book of original entry. His accountant prepared a ledger from these files, but it wasn’t regularly used. The file lacked comprehensive information such as asset details, depreciation schedules, and details about partnership income beyond what was reported on the K-1.

Procedural History

The Commissioner determined that Carter did not meet the condition of keeping adequate books of account. The Commissioner thus determined that Carter should use a calendar year basis. Carter petitioned the Board of Tax Appeals (B.T.A.) for a review of the Commissioner’s determination.

Issue(s)

Whether the petitioner, by maintaining a file of financial documents and having an accountant prepare a ledger from those documents, satisfied the requirement of “keeping books” under Section 41 of the Internal Revenue Code, thereby entitling him to file income tax returns on a fiscal year basis.

Holding

No, because Section 41 of the Internal Revenue Code requires more than simply maintaining a file of financial documents; it requires systematically recording business transactions in a book of account, which the petitioner failed to do.

Court’s Reasoning

The court reasoned that Section 41 requires taxpayers to keep books if they wish to report income on a fiscal year basis instead of a calendar year basis. The court noted that bookkeeping involves recording business transactions distinctly and systematically in blank books designed for that purpose. Informal records like check stubs and dividend statements do not meet this requirement. The court observed that Carter’s file lacked essential information and that the ledger prepared by his accountant was not a book of original entry but rather a summary of information, and was not consistently used or maintained by Carter himself. The court emphasized, “placing the pieces of paper on the file from day to day was not keeping books within the meaning of section 41 so as to justify the use of a period other than the calendar year for reporting income.”

Practical Implications

The decision establishes a clear threshold for what constitutes “keeping books” for tax purposes. Taxpayers seeking to use a fiscal year reporting period must maintain a systematic record of their transactions in a recognized book of account. This case highlights that merely retaining supporting documentation is insufficient. It emphasizes the need for organized and comprehensive bookkeeping practices. This case impacts tax planning and compliance, emphasizing the importance of proper record-keeping to support a taxpayer’s choice of accounting period. Subsequent cases have relied on this decision to determine whether taxpayers have met the ‘keeping books’ requirement. For example, it’s often cited when the IRS challenges a taxpayer’s use of a fiscal year based on inadequate records.