*645OPINION.
James :The taxpayer alleged the following errors as the basis of its appeal:
1. That the Commissioner erroneously substituted arbitrary inventories in the computation of the taxpayer’s income for each of the several years in place of the cash receipts and disbursements basis used by the taxpayer.
2. That the invested capital of the taxpayer was erroneously reduced on account of patents and good will paid in for stock.
3. That the invested capital of the taxpayer was erroneously reduced as to the years 1919 and 1920 by the deduction as to those years of the sum of $5,347.98 withdrawn by C. H. Gullatt.
In addition, the taxpayer in its evidence and brief has alleged further errors with respect to the several advances to the Torrey Razor Company, with respect to certain alleged automobile expenses claimed as deductions, and with respect to the omission from invested-capital of a certain alleged payment to the corporation by Mrs. P. A. Gullatt in 1915, in the sum of $4,300.
*646The taxpayer not having set forth the three last named errors either in the enumeration of errors from which it took the appeal or in the facts set forth in its petition, and not having amended its petition or offered to do so, such alleged errors will not be considered in connection with this decision. The Board is, moreover, justified in its adherence to the pleadings by the failure of the evidence presented to convince the Board that the Commissioner erred in any of these points.
Upon the second point above, the evidence and testimony relate solely to expenditures of the partnership which preceded the corporation. There is no evidence in the record either- as to the value of patents and good will at the date of organization of the corporation or the amount of stock issued therefor; neither is the report of the examining revenue agent clear on this point. He has merely disallowed an item which had not appeared upon any of the early balance sheets of the corporation, but'which did appear in various forms upon balance sheets from 1915 to the date of the beginning of the examination. Under the above stated record the claim of the taxpayer upon the second point for additional invested capital on account of patents and good will paid in for stock must be denied.
The taxpayer further claims that the Commissioner erred in deducting from invested capital as to the years 1919 and 1920 a certain sum withdrawn by C. H. Gullatt and by him invested in leases on oil lands in the State of Tennessee.
The testimony on this point given by Gullatt at the hearing is voluminous, but very far from clear. At one point he testified that he withdrew the money and gave his note to the corporation, and that the funds so withdrawn were loaned to him by the corporation. At another point he testified that he withdrew the money, giving his note for it, but “ I really used it for the corporation in Tennessee.” He further testified, “ I gave my personal note for it, and later when the transaction in Tennessee was actually wound up, I transferred to the corporation all the holdings in Tennessee that was covered by the various amounts that I borrowed from the corporation.”
It appears from the testimony that a corporation was organized in 1919 to take title to the oil leases in question and that Gullatt transferred all of his interest in such leases, purchased with the money withdrawn from the Dixie Manufacturing Company, for 333,000 shares of the stock of the oil company, of a par value of $1. This transfer occurred in 1919. It further appears that by 1921 Gullatt had withdrawn a total of approximately $17,000 from the taxpayer corporation on account of these oil operations, and in 1921 transferred the 333,000 shares of stock above mentioned to the corporation, whereupon the book charge against his account was can-celled.
Three possible alternatives as to tax liability are presented by the above record. If Gullatt was really acting for the taxpayer corporation and not on his own account, the exchange of the oil leases for stock in the oil company in 1919 produced a closed transaction subject to consideration in connection with the taxpayer corporation’s income and profits tax return for that year. There is no evidence in the record as to the value of the stock received by Gul-latt in 1919.
*647If Gullatt was operating on bis own account, tbe exchange of oil leases taken in his name and for his own account for stock in the oil company in that year, would give rise to taxable income or deductible loss to him personally, depending upon the value of the stock received in exchange in Í919.
If Gullatt was operating upon his own account and, after completing the transaction set forth above, transferred the stock to the taxpayer corporation in liquidation of his indebtedness in 1921, that transaction gave rise to gain or loss on the part of both Gullatt and the taxpayer corporation if the property (the oil stock) received by the taxpayer corporation in 1921 had a readily realizable market value.
Upon the evidence presented by the entire record, any of the above three situations is possible. It is clear that, in any event, the amount withdrawn by Gullatt was not withdrawn from the assets of the corporation, and should not be treated as a deduction from invested capital. Presumably, it was so treated by the examining agent upon the theory that the cash so withdrawn represented a dividend distribution. On this point he, however, submits no evidence, and there is no evidence on the record before the Board. In these circumstances, the taxpayer’s invested capital for the years 1919 and 1920, should not be decreased by the above mentioned sum of $5,847.98. Whether its taxable income should be increased, either in the year 1919 or 1921, the Board does not decide. If the Commissioner concludes that further examination should be made into this transaction and tax liability asserted either against the corporation or C. H. Gullatt, or both, the way is open to him to do so.
The main point of the taxpayer’s appeal rests upon the proposition that it should not be charged with a theoretical inventory upon the basis computed by the examining agent as of the close of each of the years 1917 to 1920, inclusive.
We have already set out the detailed inventories as worked out by the examiner. The agent was called as a witness by the taxpayer and was subjected to thorough examination by both the taxpayer’s and the Commissioner’s counsel. C. H. Gullatt, president of the taxpayer, also testified. At many points the testimony of the agent and of Gullatt was in sharp conflict.
An examination of the table showing the inventory computations made by the examining auditor is a conclusive demonstration of the danger of attempting to supply accounting facts from hypothetical computations. The accuracy of the examiner’s inventory computations rests entirely upon an assumed ratio of gross sales and paid sales, constant for all years, an assumed ratio of returned razors to razors sent out, and an assumed ratio of razors returned in a damaged condition to total razors returned. The examining agent made a thorough, painstaking, and intelligent use of the material at hand and available for the theoretical construction of inventories on the basis he sought to use, but the results be secured completely refute themselves. From an inventory of $875 at the close of 1916, representing on the basis of average prices ábout 2,500 razors, the agent’s computations of inventories rise until, on December 31, 1920, he has a closing inventory of 106,673 razors and a value of $34,796.54, this on sales which in the highest year totaled only 120,371 razors. *648It is inconceivable that the taxpayer would continue to order and pay for razors for use in its business if it had on hand usable or salable razors in the quantity set forth in the inventory presented by the examiner.
Nor are we convinced that the use of inventories in the taxpayer’s case would result in more clearly reflecting the income'than that income is reflected without the use of inventories. The undisputed testimony shows that large quantities of razors sent out are never heard from again, although such razors are sent out on consignment and title remains with the taxpayer in theory until they are paid for or returned. It further appears from the undisputed testimony that of the razors returned, at least a very substantial quantity are in such condition as to be useless for resale. The taxpayer bought razors for cash and sold for cash. It sold on a ten-day free-trial-offer plan. It seems reasonable to believe, therefore, that the taxpayer’s cash receipts and cash disbursements measured with reasonable accuracy its income year after year. If there was any substantial difference between purchases of razors and shipments of razors, so that a substantial quantity of any razors remained in inventory at the close of any year, that fact would be reflected in the succeeding year. From all the evidence, however, it appears very doubtful if such was the case.
It is, therefore, the opinion of the Board that the examining agent’s opening invested capital for the year 1917 has not been shown to be erroneous, and must therefore be presumed to be correct, and that his further adjustment for the year 1919 has been shown to be erroneous and should not be adopted. It is further the opinion of the Board that taxable income should be adjusted as follows:
1917.
From the income reported by the taxpayer of $115.54 should be deducted depreciation in the sum of $235.15, making a net loss for the year of $119.61.
1918.
To the net income reported by the taxpayer of $5,841.82 should be added advances to the Torrey Razor Co., $318.44, capital expenditures improperly deducted as expense, $1,006.03, profit on sale, of capital assests, $181.37, and advances to Betk Bros., $4,160.00, making a corrected net income of $11,507.66.
1919.
To the income reported by the taxpayer on its return of $9,188.03 should be added advances to the Torrey Razor Co., $175.49, excessive depreciation, $58.15, and sales not reported, $3,364.54, total additions of $3,598.18, and from the above should be deducted the purchases from Berk Bros, of $4,160.00, and expenses of the Atlanta branch office, $2,628.68, total deductions of $6,788.68, making corrected net income of $5,797.53.
*6491920.
To the income reported by the taxpayer of $2,688.76 should be added cash commissions, $172.70, and advances to the Torrey Razor Co., $83.86, from which should be deducted additional depreciation of $82.58, making the corrected net income $2,864.24.
The final determination of the Board on the basis of the foregoing with appropriate adjustments of invested capital from year to year will be settled upon notice as set forth in the decision.