Court Opinion

ID: 4616832
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:35:18.7226+00
Date Added: 2024-06-11T07:55:11.514995
License: Public Domain

AMERICAN MULTIGRAPH CO. AND SUBSIDIARY COMPANIES (AMERICAN MULTIGRAPH SALES CO. AND INTERNATIONAL MULTIGRAPH CO.), PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.American Multigraph Co. v. CommissionerDocket No. 6772.United States Board of Tax Appeals10 B.T.A. 406; 1928 BTA LEXIS 4112; January 31, 1928, Promulgated *4112  1.  An inventory loss sustained under a contract performed partially in 1916 and partially in 1917, is not deductible in its entirety in 1917, where it appears that a portion of the loss occurred in 1916, even though the amount of the loss was not definitely ascertained until 1917.  2.  In the absence of evidence of the amount of loss that occurred in each year, the total loss is apportioned to the respective years upon the basis of the contract period falling within each year.  Arthur B. Foye, Esq., for the petitioners.  L. C. Mitchell, Esq., for the respondent.  VAN FOSSAN *406  This proceeding involves the redetermination of income and profits taxes for the calendar year 1917, for which the Commissioner has determined deficiencies of $16,289.25, $9,824.15, and $989.30 against the American Multigraph Co., American Multigraph Sales Co., and International Multigraph Co., respectively.  It is alleged that the Commissioner erred in denying a deduction of the sum of $122,296.71, being a part of a total inventory loss in the sum of $183,455.06, sustained in 1917.  The petitioners are affiliated corporations, the parent company being the American*4113  Multigraph Co., and in this proceeding will be referred to as the petitioner.  FINDINGS OF FACT.  The petitioners are Ohio corporations with principal offices at Cleveland.  The regular business of the petitioner is and was the manufacture and sale of multigraphing machines.  In July, 1916, it began the manufacture of parts for a brass time fuse for the British Government under a contract for approximately $1,500,000 fuses.  The fuse contract was completed in March, 1917, except for the delivery of spare parts in April, May, and June of 1917.  In its regular business the petitioner employed an average of 350 or 400 men in its plant, but the force was increased to a maximum of 1,506 workmen at one time to carry out the fuse contract.  The petitioner contracted for all the raw materials required for this contract at one time, but deliveries thereof were made at different times during the work on the contract.  As the materials were received petitioner charged the same to inventory and when the completed parts were shipped the brass *407  content was credited to inventory.  The system of accounting used was adequate for petitioner's regular business but it did not provide*4114  an accurate check on materials under the fuse contract.  In the manufacture of the fuse parts there resulted a natural shortage of materials in waste and scrap, such as commonly develops in the handling of large quantities of material.  The petitioner also discovered that the workmen, who were paid on a piece-work basis, were taking credit and charging it for parts not produced and were stealing parts and material in varying quantities.  It was found that the workmen on one shift removed completed parts, which had been counted and credited to workmen on another shift, from the boxes and placed them in their own boxes where they again were counted and credited as additional production.  This practice appeared to be general as to all workmen engaged in the manufacture of fuse parts.  It also was found that employees were concealing parts on their persons and disposing of them outside the plant.  The space in petitioner's plant was limited.  Material was coming in all the time, some parts were made before others, and there was no room to properly store these materials and parts.  They were stacked along the walls on every floor of the building.  No adequate check of materials or parts*4115  was made and the timekeeping department did not keep a close check on the production.  At December 31, 1916, petitioner was behind in deliveries on the contract and was being constantly pressed for prompt delivery of the parts.  A physical inventory would have delayed further the production and deliveries under the contract.  No physical inventory, complete or partial, of materials and fuse parts was taken at December 31, 1916, or at any other time during the performance of the contract.  Upon completion of the contract in 1917, a physical inventory was taken, which disclosed a shortage of $183,445.06, resulting from the natural shortage in manufacture, stealing of production by the employees, and theft of parts by employees.  The shortage disclosed by this inventory was entered upon petitioner's records in August, 1917.  In 1916, the petitioner learned of the thefts of parts and stealing of production by its employees, but the necessity for speedy production and delivery prevented it from making any proper check upon the extent of the practice.  It also knew then that a natural shortage would result from the manufacture of such large quantities of material, and allowance was made*4116  therefor by the addition of 10 per cent to cost of completed fuse parts delivered.  The amount of the shortage, however, was not definitely ascertained until August, 1917, after the completion of the contract and the physical inventory of materials and parts had been made.  *408  The respondent allowed a deduction in the taxable year for $61,148.35 of the total shortage of $183,445.06 and allocated the balance of $122,296.71 to the taxable year 1916.  OPINION.  VAN FOSSAN: The only question presented in this proceeding is whether or not the respondent erred in the determination of the amount of a deduction allowable in 1917 for an inventory loss sustained under a contract performed partially in 1916 and partially in 1917.  The total amount of the loss, $183,445.06, is not in controversy.  The petitioner contends that since the amount of the inventory shortage was not determined and entered upon its books until the year 1917, the entire amount of the shortage is a loss sustained and deductible in that year.  The respondent contends that a portion of the loss was sustained in the year 1916, and although it was not definitely ascertained in amount, that portion is deductible*4117  in the year 1916, and not in the year 1917.  Respondent further urges that, in the absence of evidence showing the exact amount of the loss in the respective years, the total loss should be apportioned to each year upon the basis of the contract period falling within each year.  Section 12(a) of the Revenue Act of 1916, not amended by the Revenue Act of 1917, provides that in computing the net income there shall be allowed a deduction for losses actually sustained in the taxable year.  It is clear that under this provision of the statute only those losses actually sustained within the taxable year may be deducted from gross income for that year, and that a loss must be deducted, if at all, in the year in which actually sustained and can not be deducted in any other year.  This is true even though the amount of the loss can not be determined until a later year.  (See .) Operations under the contract covered a total period of nine months, six of which fell within the year 1916, and the remaining three in 1917.  Upon this basis the respondent has allocated two-thirds of the total inventory shortage to the year 1916, *4118  and the balance of one-third to the year 1917, and has allowed a deduction in the taxable year of one-third of the total loss, or $61,148.35.  There is no evidence of the actual loss sustained in the respective years, nor does the petitioner advance any more equitable basis of allocation of the total loss than that employed by the respondent.  In the absence of evidence of the exact amount of the loss sustained in the respective years, we are of the opinion that the basis employed by the respondent for the allocation of the total loss is fair and equitable.  We are *409  unable to say, upon this record, that the loss sustained in the taxable year 1917 exceeded the amount determined by the respondent.  (Cf. ; .) We find no error in respondent's determination.  Judgment will be entered for the respondent.