Court Opinion

ID: 4592676
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:08:29.29188+00
Date Added: 2024-06-11T07:50:54.364537
License: Public Domain

A. DAIGGER & CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.A. Daigger & Co. v. CommissionerDocket Nos. 14733, 14734.United States Board of Tax Appeals13 B.T.A. 35; 1928 BTA LEXIS 3324; July 24, 1928, Promulgated *3324  INVENTORIES. - Petitioner took its inventories at cost or market whichever was lower.  Certain items of merchandise were included in petitioner's inventory on December 31, 1920, at a cost of $22,774.22 when as a matter of fact the market value of such merchandise was only $3,769.02.  Held, that the closing inventory for 1920 of $135,712.95 as determined by the respondent should be reduced by $19,005.20 and the deficiencies for 1920 and 1921 be redetermined accordingly.  M. Manning Marcus, Esq., for the petitioner.  Harold Allen, Esq., for the respondent.  GREEN *35  In this proceeding the petitioner seeks a redetermination of its income-tax liability for the calendar years 1920 and 1921, for which the respondent in his deficiency letters dated February 24, 1926, and February 6, 1926, determined deficiencies of $10,526.05 and $148.85, respectively.  Two errors were assigned.  The first was withdrawn at the hearing, leaving only the question as to whether the closing inventory for the year 1920 was overstated in the amount of $19,005.20.  *36  FINDINGS OF FACT.  The petitioner is an Illinois corporation with its principal office in*3325  Chicago.  Its business is buying and selling, both at wholesale and retail, laboratory supplies and chemicals.  Its operations were divided into several departments, namely, the Laboratory Supply Department, the Heavy Chemical Department, and the Specialty and Foreign Department.  The basis on which the petitioner took its inventories was cost or market whichever was lower.  Early in 1920 the petitioner's president, Max Woldenberg, went to Berlin, Germany, for the purpose of purchasing chemicals, but due to the scarcity of these commodities in the market he was not successful and thereupon determined to purchase other merchandise.  He was introduced to the firm of Feller & Company, with whom he made an agreement whereby Feller & Company were to purchase for the petitioner and German merchandise which in their opinion could be profitably marketed in the United States and as compensation for such services they were to receive 50 per centum of the profits made by the petitioner on the sale of such merchandise.  It was further agreed that should a loss occur on such articles the German company would receive no compensation and the petitioner would bear the entire loss.  During 1920, *3326  and in accordance with the above mentioned agreement, articles such as scissors, razors, door checks, miscellaneous cutlery, small musical instruments, spectacle frames, ships, dolls, and miscellaneous toys costing $22,774.22 were purchased by Feller & Company and shipped to the petitioner at Chicago.  Although the above merchandise was actually received by the petitioner during 1920, none of it was sold during that year.  In making up its inventory for the close of 1920, Woldenberg consulted officials of at least five of the leading firms of Chicago and one of Milwaukee as to what in their opinion was the market value on December 31, 1920, of the merchandise it had received from Feller & Company.  Based on this information, he personally determined that the market value of the goods which had cost $22,774.22 was only $3,769.02.  During the subsequent years 1921 and 1922, the foreign goods in question sold for a little over $6,000.  The spectacles which had been invoiced as 14 carat gold turned out to be brass and obsolete.  The respondent determined that the market value on December 31, 1920, of the merchandise purchased by Feller & Company for the petitioner was equal to its*3327  cost.  The market value of such goods on December 31, 1920, was $3,769.02.  *37  In determining the deficiency for 1920, the respondent used as a total closing inventory for that year the amount of $135,712.95.  In determining the deficiency for 1921, the respondent used as a total opening inventory for that year the amount of $119,422.62.  OPINION.  GREEN: Although the question here relates to inventories, it resolves itself into a question of fact as to the market value on December 31, 1920, of certain goods purchased in Germany.  We have found that this market value was $3,769.02.  We turn now to the effect that such a finding will have on the deficiencies determined by the respondent.  The respondent determined the deficiency for 1920 on the basis of a total closing inventory for the year of $135,712.95 and a net income of $39,623.68.  We find that the correct inventory is $116,707.75, which results in correct net income for 1920 of $20,618.48.  The respondent determined the deficiency for 1921 on the basis of a total opening inventory for that year of $119,422.62 and a net income of $7,974.87.  We find that the correct inventory is $116,707.75, which results*3328  in a correct net income for 1921 of $10,689.74.  The deficiencies should be redetermined in accordance with the above opinion.  Judgment will be entered under Rule 50.