26 T.C. 301">*301 Respondent determined a deficiency of $ 14,844.71 in income tax for the1956 U.S. Tax Ct. LEXIS 190">*191 calendar year 1950. The question presented is the propriety of petitioner's practice, when reporting income, of eliminating certain items from book inventories and deducting those items directly on its returns.

FINDINGS OF FACT.

Some of the facts have been stipulated and are hereby found.

Petitioner is an Ohio corporation with its principal office and place of business in Cleveland, Ohio. It was, during the years affecting this proceeding, in the business of fabricating metal stampings for use in the automotive, household appliance, and office equipment industries. It maintained its books and records and filed its Federal income tax returns on an accrual and calendar year basis. Its return for 1950 was filed with the collector of internal revenue for the eighteenth district of Ohio.

The deficiency in dispute was determined in a statutory notice of deficiency which contains an inventory adjustment to the years 1949 and 1950 and is explained as follows:

(a) It is held that cost of goods sold is understated in the taxable year ended December 31, 1949 by the amount of $ 783.94, and overstated in the taxable year ended December 31, 1950 by the amount of $ 35,728.59, by reason of your1956 U.S. Tax Ct. LEXIS 190">*192 failure to include in beginning and ending inventories in each year Supplies Inventory, and indirect expenses applicable to inventories of Work in Process and Finished Goods. ( Section 22 (c) of the Internal Revenue Code.)

The amounts of the adjustments referred to in the statutory notice were computed by respondent by including in opening and closing inventories the following amounts of supplies and indirect expenses (both variable and nonvariable items): 26 T.C. 301">*302

Petitioner's books for 1949 and 1950 were kept on the "absorption basis," that is, they reflected these valuations for supplies ¹ and indirect expenses ² in the opening and closing inventories for those years. These amounts, however, were not included in the opening and closing inventories on petitioner's 1950 income tax return, which is in accordance with the "direct costing" method. 1956 U.S. Tax Ct. LEXIS 190">*193 This latter method of accounting used by petitioner in its 1950 return is not the same as the absorption method. On its 1950 return, supplies were charged to other costs and indirect expenses taken from the books were charged to cost of goods sold through adjustments to the beginning and ending inventories. This was explained by a schedule attached to the return relating to Schedule M, "Adjustments for Tax Purposes Not Recorded on Books." The effect of applying supplies and indirect expenses against the income of 1950 was to increase the cost of goods sold. As these amounts were not incorporated in inventory they were not carried over and deferred to later years.

1956 U.S. Tax Ct. LEXIS 190">*194 This practice of eliminating supplies and indirect expenses from book inventories for tax reporting was begun by petitioner on its 1946 amended return and continued to the time this proceeding was heard. Petitioner's treatment of these expenses is related to a comparable problem of the Barium Steel Corporation group. Barium had acquired subsidiary companies, each with its own facilities and bookkeeping system, and Barium's effort to achieve uniformity of 26 T.C. 301">*303 bookkeeping throughout the group raised problems with respect to the different companies. While petitioner and another company filed separate returns in 1946, Barium's other subsidiaries were on a consolidated return basis. In order to obtain some measure of consistency throughout the group, Barium decided to adopt the method of letting each subsidiary continue to maintain its established bookkeeping methods but at the same time to let them all report for tax purposes on a uniform and consistent basis. The particular method chosen was that used by petitioner. It was believed that that method would not, if used consistently over a period of years, distort net income. In the 10 years during which petitioner used this1956 U.S. Tax Ct. LEXIS 190">*195 method, taxable income was greater on the returns than on the books in 5 years and was less in the other 5 years.

Petitioner's returns for 1946, 1947, and 1948 were adjusted as a result of audits by respondent's agents. Among the adjustments made to petitioner's 1946 and 1947 returns were adjustments to inventory as in this proceeding, disallowance of deductions claimed as repairs, and adjustments to amortization of leasehold improvements, depreciation on machinery, and payments claimed as expense deductions. Culminating prior negotiations, settlement of the 1946 and 1947 taxes was effected at a conference on October 31, 1951, at the offices of the Technical Staff in Cleveland and between representatives of petitioner and respondent. Both petitioner and respondent conceded certain issues in reaching the settlement, respondent allowing petitioner's treatment of the inventory issue for those years. The adjustments to the 1948 return also included an inventory adjustment similar to the one in this proceeding. The revenue agent's report relating to 1948, received by petitioner on October 9, 1950, while the issues with respect to 1946 and 1947 were pending before the Technical Staff, 1956 U.S. Tax Ct. LEXIS 190">*196 reflected an overassessment of $ 11,757.38. By letter dated May 26, 1952, respondent's agent advised petitioner that the overassessment for 1948 was $ 349.27 and that a check for that amount, together with interest, would be sent to petitioner. The recomputation accompanying this letter reflected an inventory adjustment which was tantamount to reversing the treatment of inventories in the revenue agent's report and restoring the inventories as originally reported by petitioner on the 1948 return. The reduced amount of overassessment was due to this change in the inventory adjustment. On June 19, 1952, petitioner received a refund check of $ 401.46 consisting of the overpayment for 1948 of $ 349.27 plus interest of $ 52.19. No other refunds were ever received by petitioner with respect to 1948. Petitioner, on the advice of counsel, accepted this reduced amount to be consistent with the returns as previously filed and with the settlement of the inventory issue.

26 T.C. 301">*304 OPINION.

Petitioner's main reliance is upon a supposed estoppel directed against respondent by the conduct of his representatives. While in the view that we take it is unnecessary to pass directly upon this contention1956 U.S. Tax Ct. LEXIS 190">*197 it may not be amiss to point out that in addition to the general difficulty of creating an estoppel against respondent as a representative of the sovereign, James Couzens, 11 B. T. A. 1040, 1151, there is in this case reasonably clear evidence that petitioner did not rely upon the conduct of which it now complains. By the time any clear-cut attitude on respondent's part had been developed ³ which was with respect to respondent's determination of overassessment for the year 1948, petitioner had already filed a return for 1950, the year now in issue, and paid the tax shown thereby to be due. As we have said, however, it is not the concept of estoppel which in our view must determine the present result.

The rule is not so much that there is a duty of consistency resting upon the Commissioner, which is somewhat doubtful (see Niles Bement Pond Co. v. United States, 281 U.S. 357">281 U.S. 357; Mt. Vernon Trust Co. v. Commissioner, (C. A. 2) 75 F.2d 938,1956 U.S. Tax Ct. LEXIS 190">*198 certiorari denied 296 U.S. 587">296 U.S. 587; Harry C. Fisher, 29 B. T. A. 1041, 1045, affirmed per curiam (C. A. 2) 74 F.2d 1014) as that there must be some recognition that the Commissioner's own regulations ⁴ require consistent treatment by the taxpayer. Where there is a choice of alternative methods of treatment and no suggestion that the method adopted is not permissible from an accounting standpoint consistency of treatment can be of great significance as demonstrating that the method used clearly reflects income. We think it should follow that respondent ought to take account of the extent to which a taxpayer's conduct conforms to respondent's own requirements. See Maloney v. Hammond, (C. A. 9) 176 F.2d 780; R. G. Bent Co., 26 B. T. A. 1369, acq. XII-1 C. B. 2.

1956 U.S. Tax Ct. LEXIS 190">*199 That petitioner changed its method of reporting, see Pacific Vegetable Oil Corporation, 26 T.C. 1, that this change was brought to the attention of the Commissioner's representatives, and that they gave the procedure their tacit approval is reasonably clear from this record. That would be the equivalent and have the effect of 26 T.C. 301">*305 a formal request on the part of petitioner to change its method of reporting and a formal approval by the Commissioner of that change. S. Rossin & Sons, Inc. v. Commissioner, (C. A. 2) 113 F.2d 652, reversing 40 B. T. A. 1273 on another point; Fowler Brothers & Cox, Inc., 47 B. T. A. 103 affd. (C. A. 6) 138 F.2d 774. It is noteworthy that respondent never contests the propriety of the direct costing method as such. That question is not raised in this proceeding and we do not reach it. The fact that no conditions were imposed so as to reconcile the different methods, a compelling and primary reason for securing the Commissioner's consent, Gus Blass Co., 9 T.C. 15;1956 U.S. Tax Ct. LEXIS 190">*200 Kahuku Plantation Co. v. Commissioner, (C. A. 9) 132 F.2d 671, is in this case of no significance.

The year as to which respondent's acquiescence in petitioner's changed method of reporting is the clearest is 1948. In that year, which was the third under the new system, a large refund would have been due petitioner had the other method of reporting been adopted. An overassessment was, in fact, first determined by respondent on this theory but when he subsequently refunded only a small part of the overpayment, so as to reach a tax computation in accordance with the new reporting system, petitioner maintained its consistent position, made no protest to the reduced amount of the refund and accepted the determination. It follows that respondent was given the opportunity to make any necessary adjustment in that year and evidently made the only one that was required, which was to reduce the overassessment earlier determined. While we agree with respondent that no such clear-cut situation existed in the years 1946 and 1947, when claimed deficiencies were apparently settled in Tax Court proceedings prior to hearing, we think the conclusion inescapable1956 U.S. Tax Ct. LEXIS 190">*201 that as to 1948 respondent's approval was tacitly requested and effectively given for the change in reporting methods.

By 1950, the year now before us, the new method had been uniformly followed by petitioner for 5 years, and by 1955 when the method had been in use for 10 years taxable income was greater in 5 years and less in the other 5 years under the one method than it would have been under the other. The consistency required of taxpayers in reporting their income and the uniformity shown by petitioner consequently results, as is so often the case, in the long-range consequences being no different under one system than under the other. This is at once the theoretical reason and the practical demonstration of the superior significance of consistency where permissible alternatives are involved. See, e. g., Atlantic Coast Line Railroad Co., 4 T.C. 140.

It is no obstacle to this conclusion that under section 41 a taxpayer might appear to be required to do his reporting in accordance with the method of accounting employed in maintaining his books. Concededly 26 T.C. 301">*306 this element is absent here. It has been held, however, that such a requirement1956 U.S. Tax Ct. LEXIS 190">*202 is not absolute. R. G. Bent Co., supra;National Airlines, Inc., 9 T.C. 159. And we should be most hesitant to say that respondent, where he feels that the method of reporting clearly reflects income, must withhold his approval because such a method is not precisely reflected in the taxpayer's books. There is in fact a tacit assumption that variances between books and returns are bound to occur. Otherwise there would be no reason for the elaborate provision for reconciliation between book entries and return items, which is a part of every corporate return. At any rate, where as here the choice must be made between conformity to a bookkeeping system on the one hand and consistency of reporting on the other, and where respondent's task is not rendered impossible by the complete absence of the figures from the taxpayer's accounting records, we think it more fundamental that the method of reporting be consistent. See R. G. Bent Co., supra.

For the reason therefore that what amounted to a request for a change in method of reporting was submitted to and granted by respondent, we conclude that 1956 U.S. Tax Ct. LEXIS 190">*203 petitioner's method of reporting in the year in controversy was proper and the deficiency is accordingly disapproved.

Decision will be entered for the petitioner.