Court Opinion

ID: 6904359
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:58:17.726377+00
Date Added: 2024-06-11T16:06:17.231395
License: Public Domain

McLAUGHLIN, Circuit Judge
(dissenting).
The sole question before us is whether in 1943, petitioner rightfully deducted the sum of $17,068.68 as representing a loss arising from the scrapping of its tanks and tumbling barrels in that year. The Tax Court found there was no allowable loss, holding that petitioner had properly deducted cost of labor and materials when expended for manufacture of the equipment.
For a number of years prior to 1943, petitioner had manufactured metal handbag frames and other metal specialties. In polishing those products it used wooden tumbling barrels and tanks. The metal products to be polished together with a chemical solution, water and steel shot, were placed in the barrels. Those, barrels revolved in tanks containing a solution consisting principally of soap and water. The tanks and barrels used in the process were built by petitioner. Concededly, their average life was about a year. Because of the type of use to which the barrels and tanks were subjected, they would be replaced when they fell into disrepair. As the Tax Court said, “Each year petitioner abandoned as worn out, approximately the same number of barrels and tanks as it built during the year.”
Petitioner considered the barrels and tanks to be a factory supply item and up to the close of 1930 included their cost in merchandise inventory. That cost figure was eliminated from merchandise inventory in 1934 and at the same time from the 1934 opening inventory and it was added to the item of machinery and equipment. In 1936, experience having shown that the number of barrels on hand at the close of every year would vary very slightly because of the practice of replacing the discarded barrels, it was decided that thereafter the number, of tanks or barrels on hand at the end of any year would not be physically counted, However, the barrels and tanks were continued on substantially the same inventory basis up to 1943, and no depreciation was ever taken on them.
In 1943, war material work by petitioner forced discontinuance of its civilian products and, since the tanks and barrels were no longer useful, they were scrapped. To take care of this, petitioner’s accountants credited the tank and barrel account with the cost value of the barrels on hand at the beginning of 1943, namely, $17,068.68, and charged profit and loss. Barrels and *864tanks had been constructed almost up to the time scrapping was undertaken. The Tax Court, as already indicated, disallowed the claimed loss of $17,058.68.
Petitioner urges that its cost of producing the scrapped barrels and tanks had not been previously deducted and I think that is the fact. Actually what happened was that down to 1943, petitioner’s cost in producing its tanks and barrels was charged to expense upon consumption and use in operation of the tanks and barrels. In 1943 the tanks and barrels of that year were scrapped during the year and prior to their consumption through use. Ordinarily at the end of 1943, deduction would have been claimed for those tanks and barrels which would have been by that time consumed. But that situation never arose because by December 1943, petitioner was out of civilian production and had abandoned its tanks and 'barrels. • The evidence is clear that with the exception of 1943 the deduction for each year’s tanks and barrels was taken at the end of the particular year after the tanks and barrels had been consumed by use throughout the year. And it is this circumstance which furnishes the key to this confusing tax problem. ‘The accounting picture is further complicated by the fact that under petitioner’s approximation, the cost and number of the discards were the same as the cost and number of the replacements. However, as found by the Tax Court, and .there is no-evidence to the contrary, that was the way petitioner did keep its tank and barrel account. In connection with this, it must be remembered that the constant approximate figures did not represent the number and cost of the original barrels and tanks but rather the quantity and cost of the current barrels and tanks. It should be added that there has not been the slightest reflection cast upon petitioner’s probity because of its approximation method which while it has made for considerable misunderstanding in a .tax sense does seem to have been of practical assistance to the taxpayer. And in any event as Mr. Justice Brandeis said in Helvering v. Midland Ins. Co., 300 U.S. 216, 223, 57 S.Ct. 423, 426, 81 L.Ed. 612, 108 A. L.R. 436, “* * * bookkeeping entries, though in some circumstances of evidential value, are not determinative of tax liability.”
Basically there is no dispute on the facts. And from those facts, whatever might be said of petitioner’s bookkeeping, it convincingly appears that petitioner had not taken any prior deduction for the barrels which it scrapped in 1943. Petitioner’s system of not deducting the cost of the barrels and tanks until ¡they had been worn out followed Treasury Regulations 111, Section 29.23 (a)-3 which reads: “Cost of Materials. — Taxpayers carrying materials and supplies on hand should include in expenses the charges for materials and supplies only to the amount that .they are actually consumed and used in operation during the year for which the return is made, provided that the cost of such materials and supplies has not been deducted in determining the net income for any previous year. If a taxpayer carries incidental materials or supplies on hand for which no record of consumption is kept or of which physical inventories at the beginning and end of the year are not taken, it will be permissible for the taxpayer to include in his expenses and deduct from gross income the total cost of such supplies and materials as were purchased during the year for which the return is made, provided the net income is clearly reflected by this method.”
The Tax Court in its opinion agrees generally with petitioner’s method saying that it was “consistent with, indeed required by, the principle that articles with an anticipated -life of one year or less are to be dealt with by means of deductions for current expenses. W. B. Harbeson Lumber Co. [v. Com’r], 24 B. T. A. 542, 550”. But the Tax Court failed to appreciate that the 1943 deduction was sui generis. The deduction which would have been taken in due course at the end of that year and which would have been based on the barrels and tanks consumed during the year was never claimed because prior to that time arriving, the existent 1943 barrels and tanks, the only barrels and tanks petitioner then possessed, had been scrapped. It was *865solely on the loss resulting from ithe scrapping of the barrels and tanks that petitioner claimed the deduction in question.
I have no quarrel, of course, with the tax principle that expenses attributable to one year may not be charged off in a subsequent year. Section 29.43-2 Treasury Regulations 111. But that principle has no application under the present facts. Petitioner was here functioning, and quite properly in my judgment, under the above quoted Section 29.23 (a)-3 of the Regulations.
I think the decision of the Tax Court should be reversed.