Court Opinion

ID: 6839945
Source: CourtListenerOpinion
Date Created: 2022-07-23 20:14:51.080674+00
Date Added: 2024-06-11T16:04:49.066273
License: Public Domain

WOODROUG-H, District Judge
(dissenting). The taxpayer being a contractor, of course its true ineome for any year was the difference between the receipts from its contracts and the cost to it of fulfillment; due allowances being made. Obviously the collector could not get at this amount from the book figures of the company because it charged the steel material for each job at the market, when, in fact, as stipulated, the same was supplied in part out of its own stock on hand, which had cost'it less thaii the market. Avoiding impasse, both parties naturally turned to inventory. There is no suggestion in the stipulation that the collector compelled recourse to inventory. The taxpayer and the assessor both use inventory. The dispute is about the kind of inventory valuations that the taxpayer sets up. On account of rising prices for steel in 1917, 1918, and 1919, valuation at the market of the steel inventory on hand at the end of each of those years figured out a considerable gain, which went into the assessment for income tax. After the fall of prices in 1920, the taxpayer benefited by corresponding reduction of its assessment and tax. It has undoubtedly paid tax on some gains which it did not liquidate into cash money, just as it got credit later on for a loss not actually paid out of-pocket. But that is no ground to cancel the tax. That is what recourse to inventory for income tax assessment means. The taxpayer has not taken his gains in money. They are in his inventory, and the collector has to go there to find and assess them. I cannot see how this taxpayer stands in any different ease than thousands of others whose inventory values rose and fell in the period. Many who were entitled *59to it got relief under the inventory loss abatement provisions of sections 214 (a) (12) and 234 (a) (14) of the Revenue Act of Í918. The matter of such rebate for appellant was considered by the Board of Tax Appeals, and it was denied after hearing, and no appeal is prosecuted. Its valuation plaá for its steel inventory wipes out all income from inventory gains, and avoids the tax altogether, and so avoids all tax much more effectually than the mere abatemént for loss contemplated and provided for by Congress. But its plan, as I see it, is nothing more nor less that the old minimum inventory method which does not conform to the best accounting practice in trade or business. This for the obvious reason that it conceals the profits and loss of the business/ and so defeats the object of keeping books. It arbitrarily picks out a time, December 31, 1916, when steel was at a certain price, and settles on the amount of steel that happened to be on hand at that time, and proposes to carry that amount at that same price through the ensuing years of price advance, and then, upon the fall of price and the return to normal, to resume inventory of 'all its steel at the market or cost if lower. Thus it eliminates consideration in particular years, and ^defeats any assessment therefor, and the tax goes with it. Of course, the company made some money by keeping an adequate stock of steel on hand and using it-on a constantly rising market. But its plan of inventory valuation conceals the fact and excludes the government from any share. If it had held its steel in its piles during the period, there might be room for argument. But it did not.
The stipulation consists with the steel having been kept for about the same purpose and used in about the same way that stocks of raw material are ordinarily kept and used in many lines of business. The structural shapes and plates were produced in Pittsburgh and used at remote points. A stock had to be, and was, kept on hand. Not enough, of’ course, to fill all contracts, but enough “to insure prompt and orderly execution of contracts in view of delay, etc. incident4 to shipments from the mills and other exigencies affecting the availability for use when needed of material ordered for a particular job.” There is no suggestion that the use was only when there was unusual or extraordinary delay of shipments, merely the “delay incident to shipment.” Not a use confined to extraordinary “exigencies,” merely the exigency that the job has to be done here and the mills are at Pittsburgh.
No stocks are .carried on hand by merchants, manufacturers, or fabricants from choice. It is always done to insure orderly and prompt dispatch of business necessitated because the production or accumulation of goods or materials is at one point and the business at another. Such considerations suggest no test for the tax collector. His test is whether there is a continued commingling in an indistinguishable mass and a productive use out of the mass in the business. If there is, and the gains of the business are included in the increased value of the mass, he must compare the changing values of it every fiscal year, and that is what he has done in this case. The taxpayer had to carry a stock of steel and use it in its business. It fell as low as 1,500 tons in 1912, and rose as high as 11,000 tons in 1920, but fluctuated always in both quantity and value, and no cost price of any piece was ever to be distinguished in the mass. The collector rightly valued it at the market from year to year, assessed the increase, when there was any, with other gains and made deductions at the slump for losses. To upset this action seems to me to invite chaos in the collection of the revenues.
I am not unmindful of the words “emergency use” in the stipulation applied to appellant’s use of the steel which it proposes to put in minimum inventory. I think the Commissioner acceded to the use of the words “emergency use” in the stipulation as reflecting appellant’s mental processes about it. They refer to the contractor’s preference to handle the steel direct from the mill to the place of fabrication and to the job without double handling at its yards when feasible; perhaps even direct from the mills to the job; the stipulation is not clear.. It also refers to the preference that the stock be kept up to a desirable point as near as feasible. But the words cannot have any other reference or significance in the face of the plain admission in the stipulation that production was remote from the jobs to be done, and the material had to he carried in stock and used to insure orderly execution of contracts. I take it- that the same preference to avoid double handling of heavy stuff and to keep stock up is general, and so all such stocks are for “emergency” use in that sense. I do not understand that the court concedes any more to counsel’s arguments likening the use of steel from the pile to a borrowing from a neighbor than I do.' Nor to the arguments about which structural piece came from the top or the bottom of the pile; nor to the matter of what pieces may have stayed in the pile all through the *60history. These are simply attacks upon the recourse to any inventories by the tax collector. I understand it is not intended to strike down the acts and regulations concerning resort to inventory for income tax assessments, but the court discerns in the ease of this taxpayer a peculiar situation amounting to an exception. It is to that conclusion, that there is anything peculiar about this stock carried or the uses made of it or the reasons for carrying it, that I cannot agree. It was necessary to carry it because the points of production, fabrication, and use were remote; it was replenished as are other stoeks, not evenly, but with such intermitteney that the mass fluctuated constantly; on a rising market, it gathered the gains of the business and on collapse its shrunken value reflected the loss. If this taxpayer can get its money back, so should thousands,- because the use of inventories is practically universal. Nor can the government-in the future count with any security upon the taxes it collects in times of rising prices. A span of years may even them up again, and, by this minimum inventory system of accounting, payments cheerfully made on gains well recognized at the time will' be recovered by the shrewd and wary at the expense of the general.
The tax was laid and paid for the year 1918 when we had 10,000,000 men registered for war and millions in the field. The company ought not to get it back; nor for the year 1919 (dependent ease No. 8359) either, when the men were coming back — mostly.