O. A. Steiner Tire Co. v. Commissioner

O. A. STEINER TIRE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. O. A. Steiner Tire Co. v. Commissioner Docket No. 13356. United States Board of Tax Appeals 9 B.T.A. 1289; 1928 BTA LEXIS 4259; January 14, 1928, Promulgated *4259 Where taxpayer inventoried his stock of goods at cost and then deducted from the value of his whole inventory 10 per cent thereof, held, under the facts of this case, that the Commissioner did not err in restoring the amount deducted to the inventory. James A. Caldwell, C.P.A., for the petitioner. T. M. Mather, Esq., for the respondent. MILLIKEN *1289 This proceeding involves respondent's determination of petitioner's income and profits taxes for the calendar years 1920 and 1921. Respondent determined a deficiency of $833.43 for the calendar year 1920, and an overassessment of $50.10 for the calendar year 1921. Petitioner asserts the following errors: (a) That respondent erred in adding to its closing inventory for the year 1920, the amount of $2,208.50; (b) that respondent erred in allocating this amount to the calendar year 1921, rather than to the calendar year 1920; (c) that respondent overstated its income for the calendar years 1920 and 1921 by the sum of $1,208.50, which represents the difference between the addition of $2,208.50 to petitioner's closing inventory for 1920 and a disbursement of $1,000 made in 1921; and (d) that*4260 respondent erred in deducting from its invested capital as of January 1, 1920, the whole of the sum of $947.68 representing additional taxes for the year 1918, without taking into consideration a refund of $483.32. Respondent, in his brief, concedes error as to contention (d). FINDINGS OF FACT. Petitioner is, and was at times hereinafter mentioned, a corporation organized under the laws of Oklahoma, with its principal office *1290 at Tulsa, Okla., and was, during such times, engaged in the business of dealing in automobile tires and accessories. It took its closing inventory for the year 1920 as of December 31 of that year. This inventory was taken by its president, assisted by its secretary and manager and by its bookkeeper. Its whole stock was gone over, item by item, billings were referred to and then each item was entered in the inventory at its cost. The inventory totaled $22,085.02. This inventory contained items, aggregating about $8,200, which were obsolete or practically unsalable. These items were gone over again, item by item, and after a consultation it was determined to reduce the total of the inventory by 10 per cent and thereupon the amount of $2,208.50*4261 was deducted from the total of the inventory. The closing inventory for the year 1920, upon the basis of which petitioner made its return for income and profits taxes, amounted to $19,876.52. Sales made in 1921 showed that the obsolete and depreciated articles were worth less than the difference between their cost and the sum of $2,208.50. Respondent restored $2,208.50 to petitioner's closing inventory. OPINION. MILLIKEN: Since respondent determined an overassessment for the year 1921, this proceeding is dismissed in so far as that year is involved. . Petitioner took its closing inventory for the year 1920 on the basis of cost. This inventory contained articles which were obsolete or practically unsalable. Believing that petitioner had suffered a material loss with respect to these articles, those taking the inventory, after consultation and discussion, arrived at an estimate of this loss which was precisely 10 per cent of the total of the whole inventory. Petitioner's president, who assisted in taking the inventory, was asked how he arrived at this horizontal reduction of 10 per cent. He answered: We*4262 had on our racks some fabric tires that had cost us something like $24 or $25 apiece at that time, and we were unable to sell them for anything. We made up an estimate that those tires were worth about $5 apiece, the 32 by 3 1/2, and we had some 35 by 4 1/2 that cost us about $37. We made an estimate of their worth at $15, and put that down on a slip of paper, separate from our inventory, and all through the stock different things we came to we figured that that was the depreciation, that it had depreciated to a certain extent, and when we got through, it amounted to about twenty-four hundred or twenty-five hundred dollars. Mr. Bay, the young man in charge of the store, and who was also secretary of the corporation, he and I figured that a 10 per cent deduction from this inventory would equalize the thing fairly well. Petitioner's bookkeeper, who assisted in taking this inventory, testified that the reduction was taken after a discussion between him *1291 and two of petitioner's officers who assisted in taking the inventory. Asked what this discussion was, he answered: The discussion was to the value of this old stuff or old stock of merchandise. We arrived at what*4263 about the deduction should be, and it was then decided that it would be about ten per cent of the inventory, and that deduction was made. Petitioner's president was recalled and testified as follows: Q. What to your mind, does the inventory of $19,867.52 represent? A. It represented the true inventory of our stocks. Q. On what basis? A. On the basis of cost, less 10 per cent. Q. What did it represent? Did it represent cost less 10 per cent, or did it represent what was then the market value of the goods on hand? What did it represent? A. It represented the market value of goods on hand. From the above excerpts, it appears that it is petitioner's contention that although the reduction was in fact taken solely on obsolete and practically unsalable goods, this reduction, by a peculiar and exceptional coincidence, was precisely equal to 10 per cent of the total inventory accompanied by the further striking circumstance that although the inventory was taken at cost, a straight reduction of 10 per cent converted it into an inventory taken at cost or market whichever was the lower. We are not impressed with these contentions. Giving to petitioner the most*4264 favorable construction that can be placed upon the testimony, it appears that it took an inventory of its salable goods at cost and an inventory of its depreciated goods at market and then combined the two into one. Section 203 of the Revenue Act of 1918 provides as follows: That whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income. In accordance with the authority conferred by statute, the Commissioner promulgated articles 1582, 1583, and 1584 of Regulations 45. We have held that the regulations are in conformity with the statute and its requirements reasonable. . Petitioner has not complied with the same. Petitioner had the right to take its whole inventory at cost or its whole inventory at cost or market whichever was the lower. It followed neither method but attempted*4265 to combine the two. It has not been shown that the inventory claimed by the petitioner more nearly reflected the income than that determined by the Commissioner and in view of the entire record we are of the opinion that *1292 the Commissioner's determination should be approved. Respondent, therefore, did not err in restoring to petitioner's closing inventory the amount representing the straight deduction of 10 per cent. Cf. , and . Reviewed by the Board. Judgment will be entered on 15 days' notice, under Rule 50.