Court Opinion

ID: 4617304
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:36:16.968562+00
Date Added: 2024-06-11T07:55:16.676262
License: Public Domain

C. C. HUMPHRIES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  J. F. WHISNANT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Humphries v. CommissionerDocket Nos. 29821, 31522.United States Board of Tax Appeals17 B.T.A. 811; 1929 BTA LEXIS 2242; October 8, 1929, Promulgated 1929 BTA LEXIS 2242">*2242  1.  Cost of goods sold determined.  2.  Deductions for depletion held to have been improperly allowed by respondent.  Frank Reagan, Esq., for the petitioners.  F. B. Schlosser, Esq., for the respondent.  BARUNDELL 17 B.T.A. 811">*812  Deficiencies in income taxes for the year 1922, and penalties, are involved as follows: TaxPenaltyC. C. Humphries$8,988.73$2,247.18J. F. Whisnant1,019.01254.75The issues, while founded in each case on seven assignments of error, are, in substance, that the respondent made no allowance to the partnership of which petitioners were members for cost of goods sold.  FINDINGS OF FACT.  Petitioners, together with O. W. Waters, were members of a partnership which in 1920, 1921, and 1922 was engaged in the timber and lumber business under the firm name of O. W. Waters & Co.  In 1920 and 1921 the partnership owned a number of timber tracts and the timber thereon was worked into lumber by independent mill owners.  The partnership neither owned nor operated any sawmills.  By 1922 its large timber tracts were exhausted and the mill owners refused to work up the timber from the small scattered1929 BTA LEXIS 2242">*2243  tracts which the partnership was then able to acquire.  An arrangement was thereupon effected between the partnership and the mill owners, whereby the latter were to secure timber tracts for themselves and to sell the lumber produced therefrom to the partnership.  During the year 1922 the partnership expended the sum of $76,474.93, of which the amount of $35,398.96 represents direct purchases of sawed lumber from the mills and the remainder, $41,075.97, represents amounts borrowed by the partnership and advanced to mill owners to enable the latter to purchase timber.  In the cases where advances were made, the partnership was given credit for the amounts advanced when it purchased the sawed lumber from the mill.  Gross sales of the partnership in 1922 amounted to $262,230.92.  Among the deductions claimed in the partnership returns were the amounts of $41,075.97, designated as "notes paid," and $35,398.96, listed as "timber paid for," which deductions the respondent disallowed.  Amounts not claimed by the partnership but allowed as deductions by the respondent were $9,861.85 for depreciation and $10,773.88 depletion.  The adjustments of partnership income made by respondent were1929 BTA LEXIS 2242">*2244  based on the report of a revenue agent which was prepared in 1926 after the partnership books had been lost in a fire.  The agent's report contains the statement that it is based on the partnership 17 B.T.A. 811">*813  return and on an earlier report for the years 1920 and 1921.  The earlier report contains a statement that total timber purchases in 1920, 1921, and 1922 amounted to $53,869.42, which statement is erroneous, the amount of $53,869.42 having been entered early in 1921 as a part of the purchases theretofore made.  Said amount covers no purchases made in 1922.  The additional partnership income determined was distributed to the partners by the respondent at the rates of 71.25 per cent to petitioner Humphries, 18.75 per cent to petitioner Whisnant, and 10 per cent to O. W. Waters.  To the deficiencies determined the respondent added in each case a 25 per cent penalty for delinquency in filing return.  OPINION.  ARUNDELL: In accordance with our findings of fact the partnership should be allowed to deduct from gross income for 1922, the cost of goods sold in the amount of $76,474.93, consisting of the items of $41,075.97 and $35,398.96 listed in the partnership return as "notes1929 BTA LEXIS 2242">*2245  paid "and "timber paid for." The respondent made no allowance for cost of goods sold, apparently because of the manner in which the cost was shown in the return.  The items making up the cost were not deducted from gross sales as is customary, but the gross sales were returned as gross income and the cost of goods sold was listed among the expense deductions under the ambiguous headings above given.  In allowing depletion for 1922 the respondent relied on a revenue agent's report, wherein the cost of timber purchases made prior to 1922 was erroneously given as subject to depletion in 1922.  The evidence establishes that the timber purchased prior to 1922, and referred to by the revenue agent, was exhausted by the beginning of the taxable year and the partnership is not entitled to any deduction for depletion.  The amount of depletion allowed by respondent, $10,773.88, should accordingly be restored to partnership income.  There is no issue as to the depreciation allowed by respondent, nor as to the percentages used in distributing partnership income.  The only evidence as to the 25 per cent penalty is that contained in the deficiency notices to the effect that petitioners' returns1929 BTA LEXIS 2242">*2246  were not filed within the time prescribed by law.  The respondent's determinations in this respect must accordingly be approved, subject of course, to recomputation on the basis of the deficiencies, if any, as redetermined under Rule 50.  Judgment will be entered under Rule 50.