1929 BTA LEXIS 2277">*2277 1. Collection of tax for 1920 held not barred where notice of deficiency was mailed to the petitioner within the five-year period as extended by a written consent.
2. Traveling expenses incurred on behalf of petitioner by its president and paid by petitioner during the taxable year 1920 held deductible in computing taxable income of that year.
3. Action of respondent in adjusting the closing and opening inventories for 1920 approved in the absence of proof of error in such adjustments.
17 B.T.A. 628">*629 This proceeding is for the redetermination of a deficiency for the calendar year 1920 in the amount of $18,157.56. The year 1921 also is incorporated in the petition but it appearing that there is an overassessment for 1921 the proceeding, in so far as it relates to that year, was dismissed at the hearing for want of jurisdiction. There are three issues involved - (1) the statute of limitations; (2) deductibility of traveling expenses; and (3) inventories.
FINDING OF FACT.
The petitioner is a corporation with1929 BTA LEXIS 2277">*2278 its principal place of business at 630 Jackson Avenue, Long Island City, N.Y. It was organized in 1917. About 95 per cent of its capital stock of $300,000 is owned by its president, Joseph Elias. It is engaged in the business of wholesale distribution of glass, such as plate glass, window glass, rolled or figured glass, and other kinds. It buys the glass direct from the factories and distributes it to builders, furniture makers, and others.
During the taxable year 1920 the most of the petitioner's sales were made in the eastern or Atlantic seaboard territory extending from the New England States to North Carolina. Its purchases were made from factories located in the States of Ohio, Pennsylvania, Virginia, West Virginia, and foreign countries. All of the purchasing for petitioner was done by its president, Joseph Elias. He made trips to various factories for this purpose on an average of about once a week. His expenses on such trips varied from $150 to $500. He kept a memorandum account of such expenses, which, during the taxable year 1920, totaled $14,059.66. At a meeting of the petitioner's board of directors, held December 24, 1920, the account was approved and repayment1929 BTA LEXIS 2277">*2279 to Joseph Elias of the total amount was authorized. In its return for the year 1920 petitioner claimed the deduction of the amount as an expense of doing business. The respondent has disallowed the deduction.
The petitioner took a physical inventory of its stock in trade at the close of each calendar year. These inventories were made under the personal supervision of Joseph Elias. The inventories were valued by Joseph Elias at a figure representing, in his opinion, the 17 B.T.A. 628">*630 market value, or the price at which the goods could be sold as of the date of the inventory, less a discount of 10 per cent on all goods, less a further discount of 2 cents a square foot on the plate glass. The 10 per cent discount was said to allow for breakage, shop wear, and defects. The discount of 2 cents a square foot represented an allowance made by the manufacturers known as "OB." Inventories were taken in this manner in the taxable year 1920 and prior years. The petitioner regularly kept a large quantity of glass in stock. Some of this consisted of factory shipments in their original packings and some of miscellaneous lots that had been left over from filling orders. There was also a1929 BTA LEXIS 2277">*2280 limited quantity of rejected and partially unsalable glass included in the inventories at what Joseph Elias considered its market value.
Petitioner's closing inventory for 1920 was valued at $272,935.80. The following representative items are shown in the inventory:
| Polished plate glass, sheets | $106,368.12 |
| Polished plate glass, cut sizes | 26,512.67 |
| 3/16-inch glass sheets | 6,465.10 |
| 3/16-inch cut sizes | 5,531.10 |
| Miscellaneous polished plate glass, sheets | 1,974.42 |
| Salvaged glass | 510.71 |
| Rolled glass | 33,704.41 |
| Prism glass | 210.55 |
| Ordinary window glass | 36,351.68 |
The 1920 closing inventory also included an item "copper store fronts," $19,307.05. This was sheet copper that the petitioner sold for the construction of store fronts. Much of it was rejected or unsalable material. During the following year 1921 the entire lot was sold at a salvage price of about $4,000. The inventory value of $19,307.05 was the amount which Joseph Elias estimated at that time that it might be sold for. In his audit of petitioner's return for 1920 the respondent increased the closing inventory by the amount of $42,648.49. He likewise adjusted the opening inventory on the1929 BTA LEXIS 2277">*2281 same basis as the closing inventory, adding thereto the amount of $25,088.78.
The petitioner filed its 1920 return on March 15, 1921. On January 27, 1926, the petitioner and the respondent executed a written consent as follows:
In pursuance of the provisions of existing Internal Revenue Laws JOSEPH ELIAS & CO. of 630 Jackson Ave. Long Island CityNew York, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess profits or war profits taxes due under any return made by or on behalf of said taxpayer for the year (or years) 1920 and 1921 under existing revenue acts, or under prior revenue acts.
17 B.T.A. 628">*631 This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926 and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of1929 BTA LEXIS 2277">*2282 said notice of deficiency and the date of final decision by said Board.
The deficiency notice on which this proceeding is predicated was mailed to the petitioner on August 11, 1926, and the petition herein was filed with the Board October 9, 1926.
OPINION.
SMITH: First, we will consider the statute of limitations question. The petitioner contends that the collection of any additional tax found to be due for the year 1920 is barred; that the effect of the waiver above set out was to extend the time for assessment only and not the time for collection, which expired March 15, 1926, five years after the return was filed. We think that the petitioner's contention is without merit. Before the expiration of the statutory 5-year period for assessment and collection the petitioner and the respondent entered into a written consent, as provided by section 278(c) of the Revenue Act of 1924, for a later assessment. Prior to the expiration of the time for assessment as extended by the agreement the deficiency notice herein was mailed to the petitioner, and within 60 days from the date thereof the petition was filed. Under the terms of the written consent the period for assessment was1929 BTA LEXIS 2277">*2283 extended from December 31, 1926, by the number of days transpiring between the date of mailing the deficiency notice and the date of final decision of the Board. It is futile to argue that the statute makes provision for the preservation of the respondent's rignt to assess and at the same time forbids the collection of the tax. Such an anomaly may not be imputed to a taxing statute. The right of the respondent to assess the additional tax found to be due for 1920 still exists and under the provisions of section 278(d) of the Revenue Acts of 1924 and 1926 collection may be made within 6 years from the date of assessment. See ; ; .
We think that it was error for the respondent to disallow the deduction claimed for traveling expenses in the amount of $14,059.66. The petitioner's president, Joseph Elias, testified that he, personally, incurred all of the expenses on petitioner's behalf as a necessary part 17 B.T.A. 628">*632 of its business operations, that is, in traveling to and from the various1929 BTA LEXIS 2277">*2284 glass factories located in Ohio, Pennsylvania, Virginia, West Virginia, and other States for the purpose of purchasing material for the petitioner. He testified that he kept a memorandum account of the monies expended on such trips which, for the year 1920, totaled $14,059.66. Near the close of the year 1920 the petitioner, by its board of directors, approved the expenditures and authorized repayment to its president of the full amount. From the evidence the expenditures do not seem unreasonable in amount, nor does there appear to be any other reason for questioning the validity of petitioner's claim for the deduction.
This leaves the question of inventories. The statute makes no specific provision either as to when or in what manner inventories shall be made. The statute does provide in section 203 of the Revenue Act of 1918, that inventories shall be taken whenever, in the discretion of the Commissioner, it is necessary in order clearly to determine income upon such basis as the Commissioner may prescribe as conforming as nearly as may be to the best accounting practice and as most clearly reflecting income. Pursuant to the statute the Commissioner has promulgated regulations1929 BTA LEXIS 2277">*2285 requiring inventories under certain conditions of doing business and prescribing that such inventories be valued at cost, or cost or market whichever is lower. See articles 1582, 1583, 1584, Regulations 45. We have held that these regulations conform to the statute and are reasonable. ; . From the evidence before us we are unable to determine definitely what method of valuation the petitioner employed in making its inventories. To all appearances the method employed conformed to neither of those required by the Commissioner's regulations. Joseph Elias, who personally valued the inventory for petitioner, on being asked what basis he used in making his valuations, testified as follows:
* * * We have to take a practical idea as to what the market is, and what we can sell it for and the present situation that surrounds us as to what we can market the glass for, and it is almost an understanding, or, rather, I would say it is a prevailing price through the market to the trade.
Q. Assume that you can buy glass, say for $100, a certain quantity; it comes up at the inventory period1929 BTA LEXIS 2277">*2286 that there is glass at that method of valuation would amount to $100; is that based upon the then market for the glass, that is the cost of replacement, or is it the sales price of the glass?
A. On the prevailing price that $100 may be figured on 110, it may be figured at $60.00 or $75.00; it all depends upon what the conditions of the market are at that time.
* * *
17 B.T.A. 628">*633 A. Well, we inventory the glass according to the quantity that we have in stock that has been rejected from time to time, and accumulate it, and then the market conditions, what we have to sell it for, and that is all we can do, - if we take anything else into consideration that is not practical, it would be only fictitious * * *.
Q. Well, supposing that ten thousand square feet of glass was of a kind that had appreciated in value tremendously; how would that be taken into the inventory?
A. It would be taken into the inventory at the appreciated value in a reasonable way.
* * *
Q. And then your ten per cent would be taken off of that appreciated price?
A. On account of rejections, yes, sir.Q. Is that the way the company has consistently taken its inventories in years past?
1929 BTA LEXIS 2277">*2287 A. Yes, sir.* * *
Q. * * * we will say for 1920, at the end of 1920 you can sell this glass for a dollar and it costs you fifty cents; what did you take it at in your inventory?
A. We would take it then twenty-five per cent of the dollar; we base our cost, our overhead around between twenty-five and thirty per cent.
The petitioner was entitled to take its inventory at cost, or cost or market whichever was lower. Apparently the bulk of the petitioner's inventory was valued at market, as determined by Joseph Elias, less certain discounts for depreciation, overhead and other purposes. It is not shown whether this so-called market value was less or greater than cost. Clearly this is not a proper basis for valuing inventories. The respondent has made adjustments in both the closing and opening inventories for 1920 and, in the absence of proof of error in these adjustments, the respondent must be sustained upon this issue.
Judgment will be entered under Rule 50.