27 T.C. 592">*592 These consolidated proceedings involve the following deficiencies in income tax and additions to tax determined against petitioners:

1956 U.S. Tax Ct. LEXIS 10">*12 The issues to be decided are: (1) Whether the income of the partnership, Patchen and Zimmerman, was properly reported on the cash receipts and disbursements basis for the years involved herein; (2) if not, whether respondent's computation of the partnership income 27 T.C. 592">*593 on an accrual basis was correct; and (3) whether the additions to tax under section 294 (d) (1) (A) and section 294 (d) (2) may both be held applicable against petitioners in Docket No. 55768 for the taxable year ended December 31, 1951.

Certain other issues raised by the pleadings have been conceded and such concessions will be taken into account under a Rule 50 computation.

Some of the facts were stipulated.

FINDINGS OF FACT.

The stipulated facts are so found and are incorporated herein by this reference.

The petitioners are residents of Augusta, Georgia. They filed their joint Federal income tax returns for each of the taxable years ended December 31, 1948, to December 31, 1951, inclusive, with the former collector of internal revenue for the district of Georgia.

During these years, petitioners Josef C. Patchen, Frank C. Mingledorff, Harry F. Zimmerman, and John J. Evans were members of a partnership known 1956 U.S. Tax Ct. LEXIS 10">*13 as Patchen and Zimmerman, Engineers. The partnership was formed on November 15, 1946, and since that time has engaged in the practice of professional engineering. It designs airports, sewage treatment plants, and chemical plants. Most of its clients are State and local governments, Federal agencies, and major industrial firms. United States partnership returns of income for the partnership were filed with the former collector of internal revenue for the district of Georgia for the taxable period ended December 31, 1946, and for the taxable years ended December 31, 1947, to December 31, 1951, inclusive. The taxable net income of the partnership for these years was distributable and taxable to the partners in the following proportions:

The growth of the partnership's business and the size of its operation are reflected in the total annual fees reported, as follows:

27 T.C. 592">*594 The bookkeeping records kept by the partnership for the taxable period ended 1956 U.S. Tax Ct. LEXIS 10">*14 December 31, 1946, and the taxable year ended December 31, 1947, were limited and incomplete. In order to compile the necessary information for the partnership's Federal income tax returns for 1946 and 1947, its accountants had to make a complete analysis of every transaction. These returns were filed on the cash receipts and disbursements basis.

In the early part of 1948, the partnership directed its accountants to install a formal system of accounting which would enable the partners to ascertain the cost of each individual job and correctly bill their clients. An essentially accrual system of accounting was established which included accrual accounts for accounts receivable, vouchers payable (synonymous with accounts payable), interest payable, and taxes payable, and, in addition to reserves for depreciation, reserve accounts for such items as slack-time pay, ² vacation pay, vacation pay-partners, and a reserve for litigation. All expenses attributable to the various jobs on which the firm was engaged were charged to a jobs-in-progress account, and then allocated to the specific jobs in a jobs-in-progress subsidiary ledger. The additions to the reserves for slack-time pay, 1956 U.S. Tax Ct. LEXIS 10">*15 vacation pay, and liability litigation were also treated as expenses and were charged to the jobs-in-progress account and then allocated to the accounts maintained for the various jobs in the jobs-in-progress subsidiary ledger. When bills for services were issued by the partnership, income was accrued by entering the amounts billed as accounts receivable. At the same time, the estimated items of expense incurred in connection with earning the amounts billed were transferred from the jobs-in-progress account to the job costs account. In determining its income per its books, the partnership treated the amounts in the job-costs account as deductible expenses, whereas the amounts in the jobs-in-progress account were treated as deferred charges and appeared under the current assets listed on its balance sheet. At the end of each of the years December 31, 1948, to December 31, 1951, inclusive, the balances of the deferred charges in the jobs-in-progress account were as follows:

1956 U.S. Tax Ct. LEXIS 10">*16 In general, the partnership had four types of fee arrangements with its clients. These were: (1) Lump-sum fee; (2) hourly rate for work performed; (3) cost-plus lump sum; and (4) percentage of 27 T.C. 592">*595 cost of construction. Billing methods and practices varied with the type of contracts. Contracts for services on an hourly basis were invoiced periodically on the basis of man-hours performed. Contracts predicated on a percentage of construction costs were not billed ordinarily until the plans and specifications were completed; but where the terms of the contract provided for interim billings, periodic invoices were prepared based upon a partner's evaluation of the percentage of completion. If a contract permitted the client to retain a portion of the fee until the construction of the project was finished, it was the practice of the partnership to enter these billings on its books net, i. e., after deducting the amount to be withheld by the client. In some instances, the partnership had to make adjustments in the amounts billed due to disputes with clients. These adjustments were the usual adjustments made by any business. At the end of each of the years December 31, 1948, 1956 U.S. Tax Ct. LEXIS 10">*17 to December 31, 1951, inclusive, the balances in the partnership's accounts receivable account were as follows:

Some of the contracts which were performed by the partnership contained provisions for the reimbursement of the partnership for salaries of engineers, travel, or other expenses. At the end of each of the years set forth below, the jobs-in-progress account had been charged with the following aggregate amounts for certain of the contracts being performed by the firm, part of such amounts being for reimbursable items:

The partnership did not, at any time, hold merchandise inventories which would require the use of an accrual method in keeping its books or reporting its income. At the end of each of the years here involved, the accounting firm employed by it audited its books and determined its income according to an accrual method. On its returns for these years, the partnership continued to use the cash receipts and disbursements method. It did not, at any time, request permission from the Internal Revenue Service to 1956 U.S. Tax Ct. LEXIS 10">*18 change its method of accounting from the cash to an accrual method, and it did not desire to change the method used in preparing its returns. In preparing the partnership income tax returns for the years in issue, the partnership's accountants prepared memorandum journal entries converting 27 T.C. 592">*596 all elements of income and expense to the cash receipts and disbursements method. Such adjusting entries are shown in the accountants' working papers, but are not entered on the partnership's books. These working papers and memorandum journal entries were kept by the accountants as a permanent part of their records and were available and furnished to the respondent's examining officers in the course of their examination. Without such working papers, the partnership's net income on the cash method was not readily ascertainable from its records.

Respondent determined that the partnership's income tax returns for the taxable years 1948 through 1951, inclusive, should have been prepared on an accrual basis since, during such years, its books were kept predominantly on that method. In determining the partnership's income on an accrual basis, respondent accepted the income reflected on its1956 U.S. Tax Ct. LEXIS 10">*19 books with certain minor adjustments. These adjustments included the disallowance of the various deductions appearing on the partnership's books for partners' salaries and the additions to the reserves for slack-time pay, vacation pay, and liability litigation. Respondent treated the balances in the jobs-in-progress account in the same manner in which they were handled on the firm's books, thus, as deferred charges rather than deductions. Set forth below is the net income of the partnership for the years 1948 through 1951, as reported on its returns on the cash basis, as disclosed by its books, and as determined by respondent on an accrual basis:

OPINION.

The principal issue to be decided is whether respondent can require a taxpayer, ³ which has changed its method of accounting, to adopt a conforming change in the method by which it reports its income. The partnership whose returns are here in issue was1956 U.S. Tax Ct. LEXIS 10">*20 formed on November 15, 1946, to engage in the practice of professional engineering. During the period ended December 31, 1946, and the year ended December 31, 1947, such books and records as were kept by it were extremely rudimentary. However, they appear to have been essentially on the cash basis, and the returns which it filed were prepared on the cash basis. By 1948, the partnership's business had expanded 27 T.C. 592">*597 substantially and an accounting firm was employed to install a more detailed system of accounting. An essentially accrual system of accounting was thereafter maintained during the years 1948 through 1951, inclusive, but, in preparing its income tax returns for such years, the partnership continued to use the cash receipts and disbursements method.

1956 U.S. Tax Ct. LEXIS 10">*21 Section 41 of the 1939 Code ⁴ requires that a taxpayer report its income "in accordance with the method of accounting regularly employed in keeping the books of such taxpayer * * *." There is no ambiguity in that language and we accordingly hold that it was entirely proper for respondent to determine that the partnership income should have been reported on the accrual method for the years here in issue. Charles D. Mifflin, 24 T.C. 973 (1955); Melvin E. Tunningley, 22 T.C. 1108 (1954); Deakman-Wells Co., 20 T.C. 610 (1953), reversed on other grounds 213 F.2d 894 (C. A. 3, 1954); Bradstreet Co. of Maine, 23 B. T. A. 1093 (1931), reversed on other grounds 65 F.2d 943 (C. A. 1, 1933); Louis Kamper, 14 B. T. A. 767 (1928); Ribbon Cliff Fruit Co., 12 B. T. A. 13 (1928). In Ribbon Cliff Fruit Co., supra, the following pertinent statement appears, at page 16:

The provisions of section 212 (b) of the Revenue Act of 19211956 U.S. Tax Ct. LEXIS 10">*22 are controlling in the decision of this issue, and, so far as material here, are as follows:

The net income shall be computed upon the basis of the taxpayer's annual accounting period * * * in accordance with the method of accounting regularly employed in keeping the books of such taxpayer * * *