<strong><em>S. Rossin & Sons, Inc. v. Commissioner</em></strong>, 113 F.2d 652 (2d Cir. 1940)

A taxpayer’s consistent use of an accounting method, tacitly approved by the Commissioner through its actions, is permissible even if it deviates from the precise method used in the taxpayer’s books, as long as the method clearly reflects income.

<strong>Summary</strong>

S. Rossin & Sons, Inc. (the taxpayer) challenged a tax deficiency assessment by the Commissioner of Internal Revenue. The taxpayer had changed its method of accounting for inventory, adopting a direct costing method different from the one reflected in its books. The court found that the Commissioner had tacitly approved the change through his actions and the taxpayer’s consistent use of the new method. The court reversed the Tax Court’s decision, holding that the taxpayer’s method of accounting was proper because the Commissioner had essentially approved the change. This case underscores the importance of consistency in accounting practices, especially where the Commissioner is aware of and seemingly consents to a change.

<strong>Facts</strong>

The taxpayer, S. Rossin & Sons, Inc., changed its method of reporting inventory costs. While the exact details of the change are not fully specified in the brief, the court notes that the new method, direct costing, differed from the method used in the company’s books. The change was brought to the attention of the Commissioner’s representatives, and they appeared to give their tacit approval, particularly in the year 1948 when the new method was used. The taxpayer consistently used the new method in subsequent years. The Commissioner later assessed a tax deficiency, arguing that the taxpayer’s accounting method was improper. The Tax Court upheld the Commissioner’s assessment.

<strong>Procedural History</strong>

The Commissioner assessed a tax deficiency against S. Rossin & Sons, Inc. The taxpayer challenged this assessment in the Tax Court, which upheld the Commissioner’s determination. The taxpayer appealed the Tax Court’s decision to the Second Circuit Court of Appeals.

<strong>Issue(s)</strong>

1. Whether the taxpayer’s change in accounting methods was properly approved by the Commissioner, even without a formal request.
2. Whether the taxpayer’s accounting method was permissible even though it did not precisely match the method used in the taxpayer’s books.

<strong>Holding</strong>

1. Yes, because the Commissioner tacitly approved the change through his actions, especially in 1948.
2. Yes, because the Commissioner’s regulations prioritize consistent accounting methods that clearly reflect income, even if there are minor variances from the books.

<strong>Court’s Reasoning</strong>

The court focused on the importance of consistency in accounting methods, as emphasized by the Commissioner’s own regulations. The court noted that a taxpayer’s consistent use of a method, especially after the Commissioner has implicitly acknowledged it, should be given significant weight in determining whether the method clearly reflects income. In 1948, the third year of the new accounting system, the Commissioner had the chance to object but appeared to accept the new method, even adjusting a previously determined overassessment. The court concluded that the Commissioner’s actions regarding the 1948 tax filing indicated approval of the method.

The court found that the Commissioner tacitly approved the method through his actions, even without a formal request or explicit consent. As the court stated, “That would be the equivalent and have the effect of a formal request on the part of petitioner to change its method of reporting and a formal approval by the Commissioner of that change.”

The court also addressed the requirement in Section 41 that a taxpayer’s accounting method match the method employed in its books. The court clarified that this requirement is not absolute. It noted that there are often variances between the books and the tax return and that consistency in reporting is more crucial when there are permissible alternatives. The court stated, “we think it more fundamental that the method of reporting be consistent.”

<strong>Practical Implications</strong>

This case illustrates that taxpayers should carefully document any communications with the IRS regarding changes in accounting methods. Even without formal written approval, clear evidence that the IRS was aware of and did not object to the change can support the taxpayer’s position. Taxpayers can also rely on consistency in accounting practices to support their method of accounting and should be mindful of the Commissioner’s regulations emphasizing that the method adopted clearly reflects income.

This ruling suggests that if a taxpayer clearly reflects income and has consistently applied a method, and the IRS is made aware of it without objection, the IRS may be estopped from later challenging that method. The case highlights that accounting practices should be consistent, that is more important than maintaining a perfect match between the books and the returns, particularly where the Commissioner has implicitly approved a change. Tax professionals can use this to evaluate the weight given to consistency in case of disputes.