*3027 Petitioner has failed to show abnormalties to entitle it to special assessment.
*103 Proceeding for the redetermination of deficiencies in income and profits taxes for the calendar years 1920 and 1921 in the amounts, *104 respectively, of $1,674.43 and $30.43. Petitioner claims to be entitled to special assessment on the ground of abnormalities in income and capital. On motion of counsel for the respondent the hearing was limited to the question of whether petitioner is entitled to have its taxes determined under the special assessment provisions.
FINDINGS OF FACT.
Petitioner is a New York corporation and for many years has been engaged in the sale of both domestic and foreign made musical instruments.
Petitioner's importations, prior to the World War, came from manufacturers in Japan, France, England, Germany, Switzerland, Czecho-Slovakia, and Austria. Its imports before the war amounted to about 35 per cent of its total purchases and its sales of imported merchandise represented about*3028 50 per cent of the total sales, not including domestic phonographs.
In 1914 petitioner ordered from foreign manufacturers several bills of goods, mostly band instruments, violins and accessories, accordions, and harmonicas, which, by reason of the war, were impounded in Holland until the latter part of 1919. These goods were billed to petitioner by the manufacturers as follows:
| Date of invoice | Manufacturer | Price |
| Apr. 27, 1915 | Borland & Fuchs, Bohemia | $771.17 |
| Aug. 7, 1915 | do | 1,165.20 |
| Oct. 22, 1915 | F. T. Merz, Germany | 304.63 |
| July 15, 1915 | C. W. Meinel, Germany | 851.38 |
| Oct. 22, 1915 | F. A. Boehm, Germany | 5,362.85 |
| Nov. 16, 1915 | do | 2,795.65 |
| Aug. 22, 1916 | do | 6,971.44 |
| July 30, 1915 | Theodor Stark, Germany | 3,434.11 |
| Oct. 30, 1915 | do | 5,365.03 |
| Mar. 11, 1916 | do | 5,219.85 |
| Nov. 21, 1916 | do | 6,661.13 |
| Total | 38,902.44 |
The merchandise covered by these invoices was received by petitioner late in 1919. Prior thereto the petitioner, believing the goods lost, had charged off the cost as a loss. A small part, perhaps 10 or 15 per cent, was sold in 1919 and the balance during 1920 and 1921.
During the years that these goods were impounded the*3029 demand for imported musical instruments, particularly those of German make, greatly increased, due to the inability of dealers to secure importations, with a resultant increase in prices. Petitioner's normal profit on imported goods, prior to the war, was from 33 1/3 to 40 per *105 cent on cost. The impounded goods were sold in 1920 and 1921 at much higher profits, as shown by the following examples:
| Cost | Sales price | |
| Violins | $1.30 | $5.75 |
| 2.02 | 7.50 | |
| 30.82 | 150.00 | |
| 3.85 | 18.00 | |
| Bows --- dozen | 7.84 | 24.00 |
| Bows --- per dozen | $9.45 | $33.00 |
| Accordions | 1.67 | 11.00 |
| 1.80 | 12.00 | |
| 5.87 | 28.00 |
The profit realized on the impounded merchandise in 1920 and 1921 was between $90,000 and $110,000 over normal profits on similar goods.
After the impounded merchandise was received petitioner received two refunds of custom duties, one on October 1, 1920, of $1,662.40 and the other on December 16, 1920, in the amount of $4,140, due to the drop in rates of exchange, the merchandise having been billed to petitioner in German marks.
After importations were resumed petitioner, in 1920 and 1921, was able to and did secure preference over other dealers*3030 in shipments from foreign manufacturers. This was by reason of petitioner's long established dealings with the manufacturers and its reputation for prompt payment. The profit on importations in these years was two or three times the normal profit on imported goods.
Following are financial statistics as to petitioner's business and condition in the taxable years:
| 1920 | 1921 | |
| Net sales | $1,825,667.42 | $1,717,289.58 |
| Victor sales, included in above | 646,293.11 | 769,730.16 |
| Net income | 219,112.50 | 34,355.09 |
| Surplus, Jan. 1 | 276,344.22 | 159,808.60 |
| Capital stock, Jan. 1 | 249,900.00 | Not given. |
The item Victor sales listed represents sales of Victrolas and Victor records upon which the profit was about 16 2/3 per cent of the selling price. Good will was carried on the books at $62,500. The comparatively small net income for 1921 is due to the shrinkage in closing inventory which resulted from the drop in both costs and market values in 1921. Costs of imported merchandise dropped because of the low rate of exchange and market values fell because merchandise became plentiful before the close of the year. Petitioner's inventories were taken on the basis of cost*3031 or market whichever was lower.
During the taxable years the following salaries were paid:
| 1920 | 1921 | |
| Henry Stadlemaier, president | $20,700 | |
| Hans Hohner, president | $6,000 | |
| C. F. Bruno, secretary Jan. 1 to June 30 | 5,800 | |
| Jerome Harris, secretary July 1 to Dec. 31 | 2,785 | |
| Jerome Harris, secretary | 5,900 | |
| W. J. Hausler, director | 5,000 | |
| W. J. Hausler, vice president and treasurer | 12,000 | |
| Total | 34,285 | 23,900 |
*106 In 1920 Stadlemaier performed the duties of general manager of petitioner, Bruno acted as sales manager of the Victor department during part of the year, and thereafter Harris managed that department. Petitioner had no vice president in 1920. In a claim for refund filed by petitioner for the year 1920 salaries paid were stated as amounting to $36,192.39. The difference of $1,907.39 between the amount actually paid and the amount stated in the refund claim consists of certain expense items paid to Stadlemaier.
During at least a part of the taxable years petitioner's board of directors was controlled by the Alien Property Custodian, who fixed the salaries paid. A business of the kind conducted by petitioner in order to be successful*3032 requires management by persons having considerable expert knowledge and experience of the several phases of the business. The president must be able to supervise the business generally, must know what to import and when to import it and at what prices to purchase. The treasurer of a business such as petitioner's is required to supervise credit matters which are important in that kind of business, and to attend to bank loans, and to generally attend to the financial affairs of the corporation. Executives having the requisite training and experience were difficult to secure in the taxable years. Salaries are to some extent based on the volume of sales.
At December 31, 1920, petitioner had borrowed capital in the amount of $75,000 and at December 31, 1921, its borrowed capital was $223,000. The average of the borrowed capital for 1920 was $63,701.49.
OPINION.
ARUNDELL: In claiming special assessment counsel for petitioner rely upon these three points: (1) abnormal profits on impounded goods; (2) low salaries paid officers; and (3) capital employed was largely borrowed. We will consider the several points in the order stated.
1. It is claimed that net income was abnormally*3033 high because of extra large profits on goods impounded in Europe from 1916 to 1919, and finally released in the latter year and sold in 1920 and 1921. The *107 chief difficulty we find with the evidence on this point is the lack of complete and accurate figures. All that is given that is certain is the cost of the foreign merchandise and the net sales, i.e., gross sales less discounts and returns and allowances. It was testified that profits realized from this merchandise amounted to from $90,000 to $110,000 above normal profits, and that normal profits were from 33 1/3 to 40 per cent of cost. Using 35 per cent as an average normal profit and applying it to cost gives, in round numbers, $13,600 normal profit, which, added to cost of approximately $39,000, gives $52,600 as the normal gross sales price. Adding to this the $110,000, the outside figure given as the excess over normal profits, we have $162,600 as the possible gross selling price, all of which represented gross profit due to the fact that the cost was charged off in prior years. Again it was testified that the selling price for this kind of goods in the taxable years were from 200 to 300 per cent above the regular*3034 prices. Using again the outside figure of 300 per cent applied to the normal selling price of $52,600, we have $210,400 as the possible gross selling price. The net sales in the taxable years amounted to over $3,500,000. On the basis of sales of the foreign merchandise in the amount of $162,600, they amounted to less than 5 per cent of the total sales, and using the higher figure of $210,400, they amounted to only 6 per cent of the total sales. Taking either set of figures, we still do not know the sales expenses and other expenses properly chargeable against the sales price and so we can not determine to what extent income was affected by the sale of the foreign merchandise. We realize that the figures we have used are open to the serious objection of inaccuracy, but in making the computation we have taken the figures and amounts most favorable to the petitioner, have disregarded the fact that from 10 to 15 per cent of the impounded goods were sold in a year prior to the years in controversy, and we are still unable to find that the sale in the taxable years of this merchandise resulted in any abnormality.
2. Petitioner claims that the salaries paid its officers were unusually*3035 low compared with salaries paid by others in a similar line of business. There is testimony in the record that, based on volume of sales and considering the duties which would ordinarily be performed by an officer of a concern of this type, reasonable salaries would be much larger than those paid by petitioner. This testimony, however, was given without accurate information as to the condition of petitioner's business and of the duties performed by its officers. We ascribe to it no great weight. From the evidence it may be inferred that the salaries paid were not greater because of the fact that petitioner's board of directors was controlled by the Alien Property Custodian, but of this we can not be sure for it is not shown what the salaries *108 were either before or after the period of the Alien Property Custodian's control. We can find no abnormality on this ground.
3. It is claimed that the petitioner had only a small amount of invested capital and that it was enabled to transact the volume of business which it did because a large portion of capital was borrowed and could not be reflected in invested capital for profits-tax purposes. We do not know what petitioner's*3036 invested capital was during the taxable years. As to the borrowings, all we know is that for 1920 they averaged $63,701.49, at December 31, 1920, they stood at $75,000, and at December 31, 1921, they amounted to $223,000. How this borrowed money was used in the business and to what extent it contributed to income is not shown. Petitioner's claim to special assessment on this ground can not be sustained.
Judgment will be entered for the respondent.