*288 Decision will be entered under Rule 50.
Petitioner is a corporation engaged in the processing and selling of meat products. In 1938, it purchased from the Cudahy Packing Co. 225,420 pounds of beef which petitioner had contracted to sell and deliver to the United States Government at Manila. On its arrival the Government rejected the entire shipment of beef, as failing to meet contract specifications. Petitioner thereupon sold the meat in Manila at a price considerably under its cost. Petitioner claims that in computing its excess profits net income for the base period year 1938, it is entitled to an adjustment of the entire loss sustained in that year as an abnormal deduction. In the taxable year, petitioner claimed a deduction of $ 4,107.95, as constituting expenditures for repairs to one of its buildings. The respondent allowed the sum of $ 1,000, and capitalized the balance. Held:
(1) The loss deduction on the sale of the rejected meat was not abnormal in class to petitioner under subparagraph (J) (i) of section 711 (b) (1), Internal Revenue Code.
(2) Petitioner has failed to establish error in the respondent's determination that only $ 1,000 of the $ 4,107.95 constituted*289 a deductible expense.
*90 This proceeding involves deficiencies in declared value excess profits tax of $ 1,440.49 and excess profits tax of $ 23,518.13 for the calendar year 1941. The issues submitted were:
1. Whether respondent erred in determining that petitioner was not entitled under section 711 (b) (1) (J) to an adjustment in computing its excess profits net income for the base period year 1938 by reason of a loss sustained in that year on the sale of meat in the Philippine Islands.
2. Whether the Commissioner erred in disallowing as a deduction in the taxable year the sum of $ 3,107.95 for repairs.
3. Whether respondent erred in disallowing as a deduction in the taxable year sales taxes of $ 13,118.69 asserted against petitioner by the State of Arizona on sales made by petitioner in the period May 1, 1935 to April 30, 1939.
The case was submitted on a stipulation of facts, oral testimony and exhibits. The facts stipulated are so found. Other facts not stipulated which are contained in our findings are found from the evidence.
*290 FINDINGS OF FACT.
Petitioner is an Arizona corporation, having its principal office and place of business at Phoenix, Arizona. This proceeding was brought *91 under its former name, Tovrea Packing Co. It engaged in processing and selling meat and meat products, and maintaining ranches for the production of cattle and other meat stock. Petitioner kept its books and filed its Federal tax returns on the accrual basis of accounting. Petitioner filed its Federal tax returns for the calendar years 1934 to 1941, inclusive, with the collector of internal revenue for Arizona at Phoenix, Arizona.
During 1938, petitioner contracted to sell and deliver to the United States Government at Manila, Philippine Islands, 1,350,000 pounds of frozen beef (grade B, Army specification). Petitioner thereafter contracted with the Cudahy Packing Co., a Maine corporation (hereinafter referred to as "Cudahy"), to furnish it in excess of 225,420 pounds of frozen beef which petitioner had contracted to sell and deliver to the United States Government as aforesaid. Cudahy processed, prepared, and delivered to petitioner, under that contract, at the Los Angeles Harbor, the 225,420 pounds of meat during*291 June, July, and August 1938. Cudahy knew that this meat was to be delivered and resold by petitioner to the Government at Manila under its contract and warranted such frozen beef to be grade B Army specification beef, and to be wrapped in cheesecloth or stockinette and sewed in burlap of good quality. Petitioner paid Cudahy the agreed price of $ 30,431.70 for such 225,420 pounds of meat prior to its inspection at Manila. Petitioner also paid $ 4,195.03 for freight and insurance charges for transporting such meat to Manila, Philippine Islands. Immediately upon the arrival of the meat in Manila, the Government inspected the same and refused to accept any part thereof, or to pay to petitioner any part of the agreed contract price of $ 35,323.38. Petitioner thereupon notified Cudahy of such rejection and tendered back the meat. Cudahy refused to accept the same or to return the purchase price.
Petitioner held the meat in storage in Manila until about November 17, 1938, when it sold the same for $ 14,384.44. Petitioner incurred necessary and reasonable expenses in the amount of $ 1,851 in connection with this sale. Petitioner, through its attorneys, was in continuous contact with*292 Cudahy in an attempt to settle the matter, but was unsuccessful. On November 30, 1939, petitioner instituted a damage suit for breach of warranty against Cudahy in the District Court of the United States for the Southern District of California, Central Division. On July 26, 1940, that District Court entered a judgment for petitioner. On September 16, 1940, the amount of the judgment was reduced to $ 22,915.80, which was paid to petitioner and reported as income for that year.
On petitioner's books the purchase of the meat and the freight on its shipment were charged to petitioner's "Beef Purchases" account. *92 The sale was credited in "Beef Sales" account and charged to the United States Government in the customers' accounts receivable ledger. Upon rejection of the meat by the United States Government, this account receivable was transferred to a separate account entitled "Rejected Manila Beef Account" in petitioner's general ledger. The costs of disposing of the meat were charged to "Rejected Manila Beef Account" and the amount realized upon its disposition was credited to this account. The net balance remaining in this account after the above described entries was then*293 charged against petitioner's "Beef Sales" account. In petitioner's income tax return for 1938, which followed these book records, the transaction was reflected in the computation of its gross profits on sales by reducing them.
In computing petitioner's excess profits tax credit for the year 1941, the respondent made no adjustment, under the provisions of section 711 of the Internal Revenue Code, in determining petitioner's excess profits tax net income for the year 1938 by reason of the loss sustained in that year as hereinabove set forth.
The income of petitioner for the base period years reported on its returns and the adjustments made thereto by the respondent are as follows:
| 1936 | 1937 | |
| Gross income | $ 1,079,068.35 | $ 1,182,808.63 |
| Gross sales | 4,683,604.70 | 5,519,598.38 |
| Additional depreciation allowed | 1,120.12 | 1,120.12 |
| Additional deduction for capital stock | ||
| tax | ||
| Declared value excess profits tax | ||
| disallowed |
| 1938 | 1939 | |
| Gross income | $ 1,240,642.61 | $ 1,369,235.97 |
| Gross sales | 5,286,599.72 | 5,735,291.85 |
| Additional depreciation allowed | 1,120.12 | 1,120.12 |
| Additional deduction for capital stock | ||
| tax | 750.00 | |
| Declared value excess profits tax | ||
| disallowed | 112.21 |
*294 The petitioner's "Cost of Goods Sold" in each of the years 1936 to 1939, inclusive, was as follows:
| 1936 | $ 3,715,859.36 |
| 1937 | 4,370,352.90 |
| 1938 | 4,117,506.73 |
| 1939 | 4,531,106.64 |
Petitioner's customers comprised the general trade, including hotels, restaurants, and other accounts, such as state institutions and hospitals, Government accounts in Arizona and Southern California, in addition to Government accounts outside the United States, principally in the Hawaiian and Philippine Islands. The Government accounts covered the sale of meat to the United States Army and Navy, either for delivery by petitioner in this country or in the Hawaiian or Philippine Islands.
Petitioner first took Government contracts for sale of meat for delivery to the Army and Navy in the Hawaiian and Philippine Islands commencing in 1932 for the Hawaiian sales, and in 1933 for *93 the Philippine sales. This practice of taking business for delivery outside the continental United States continued through 1938 and thereafter, with possibly one year excepted. On all sales of meat for delivery in the United States petitioner always filled the orders from its own production. Sometime after petitioner*295 began to take Government contracts for delivery of meat in the Hawaiian and Philippine Islands in 1932 and 1933, it commenced the practice of purchasing some of the meat from other meat processors or packers, such as Cudahy, the Breen Packing Co. of Seattle, and the Custis Packing Co. of Seattle and Tacoma. The only time petitioner ever had an entire shipment of meat rejected for any cause was the one incident in 1938 involving the meat purchased by petitioner from Cudahy and delivered in Manila, Philippine Islands. There were, however, instances before, during, and after 1938 in connection with the sales of meat to the United States Government and other customers where small amounts, such as a quarter of beef in a large shipment, were rejected for "many reasons," including its having become spoiled or dirty in transit. There were other occasional instances where weight differences occurred. In all of these cases adjustments were made by charging the amounts of the adjustments for these rejections and weight differences to the sales account on the books of petitioner as "sales adjustments" and crediting them to the accounts of the respective customers.
The loss sustained in 1938*296 by reason of the rejection of an entire shipment of beef which petitioner sold at less than its cost did not constitute a deduction abnormal in class to petitioner.
In the taxable year 1941, petitioner owned, and still owns, a building known as City Branch Building, located at 137 East Monroe Street, Phoenix, Arizona. It is a one-story brick building, 40 feet in width, abutting the sidewalk. Prior to 1941, the west wall had been repaired from time to time because of a continuing settling process. Cracks which appeared from top to the bottom of the wall were repaired at various times without success. In 1941 it was determined that the west wall was in imminent danger of collapse. It was assumed that some fault under the foundation had been causing the wall to crack. Commencing at a point on the west wall about 4 feet from the ground, 18 feet in depth of the west wall toward the rear of the building was removed. The roof covering an entrance way 20 feet in width and located at the northwest corner of the building was removed. The removal of the 18-foot section of the west wall and the corresponding section of the roof covering the entrance way required the repairing of the upper*297 portion of the east and south walls of the entrance way. After the removal of the 18-foot section of the west wall, a cement pier was placed under a portion of the remaining west wall. The construction of the pier was carried out by petitioner's own construction crew and the cost *94 thereof capitalized. On the roof across the front of the building there was a false top or superstructure of about 6 or 8 feet in depth and 4 to 6 feet in height. The top was covered with tiling and cement work, which was in bad condition. Additional height was given to the superstructure on all the walls. The walls in the front of the building were covered with a coating of cement, whereas before they were open brick. The accounting and cashier's office in the front portion of the building, east of the entrance way, occupied a floor space of 20 feet by 20 feet. The maple flooring was loose because of termite infestation in the floor and supporting joists. Because of the limited supply of maple wood flooring, a cement floor was installed. The installation of the cement floor required the removal of the partitions dividing the manager's office and the cashier's office, counters, wiring, *298 and fixtures, all of which were anchored to the floor. New partitions and new counters were installed. A new cashier's cage was built. New wiring and fixtures were installed. The cost of the entire inside work was charged to expense. A brick marquee extending across the front of the building was removed and a new marquee made of tin was installed in its place.
A showcase, occupying the front 4 feet of the office building along the window located in front of the building, was installed, and a new neon sign was added to the building. The cost of these two items was capitalized.
The bill submitted by the Dell E. Webb Construction Co. for the demolition and reconstruction work it did on both the exterior and interior of petitioner's City Branch Building totaled $ 5,052.71. Of this amount, petitioner charged to its repair account the sum of $ 4,107.95, which amount it claimed as an expense deduction in the taxable year. Of the latter amount, in his deficiency notice the respondent allowed $ 1,000 as expense and capitalized the balance of $ 3,107.95. Petitioner has failed to establish that it is entitled to an expense deduction for repairs in excess of the $ 1,000 allowed by the*299 respondent.
In the taxable year 1941, petitioner claimed a deduction of the sum of $ 13,118.69, representing Arizona state sales taxes imposed with respect to sales in the period May 1, 1935, to April 30, 1939, which it had accrued on its books in the taxable year and which it paid, in part, under protest in that year. The respondent disallowed the deduction.
OPINION.
The first issue submitted is whether, in computing petitioner's excess profits net income for 1938, it is entitled to an adjustment because of its stipulated loss on its shipment of beef to the United States Government in Manila during that year, under section *95 711 (b) (1) (J) (i) of the Internal Revenue Code. 1 Petitioner has abandoned any claim that the loss was abnormal in amount under section 711 (b) (1) (J) (ii).
*300 The respondent takes two positions. The first is that, since his regulations have always treated cost of goods sold as a deduction, not from gross income to arrive at net income, but from gross sales to determine gross income, the loss involved here is not within the meaning of the term "deductions" as that term is used in the statute, because petitioner treated it as cost of goods sold. From such premise, the respondent argues that to allow the claimed adjustment, it would be necessary to hold that the established statutory concept of the term "deductions" has been broadened by section 711 (b) to include subtractions from gross sales. The second contention of the respondent is that, in any event, the deduction does not qualify as abnormal in class for petitioner.
We pass the question raised in the first position and decide the issue by affirming respondent in his second contention.
In arguing his second position, respondent relies on the rationale of Arrow-Hart & Hegeman Electric Co., 7 T. C. 1350, and Oaklawn Jockey Club, 8 T. C. 1128. Petitioner, on the other hand, argues that the loss was abnormal in class, and in*301 support of its position relies upon Green Bay Lumber Co., 3 T.C. 824">3 T. C. 824. The first two cited cases dealt with "interest" deductions. It was decided that although the interest was paid for different purposes, the deductions were not different in class. In the Green Bay case, it was held that a bad debt arising out of loans made by the taxpayer to employees to purchase stock in another corporation was of a different class from bad debts arising from trade accounts.
The statute grants a deduction for any class if abnormal to the taxpayer. Abnormality in class depends upon the facts in each case. City Auto Stamping Co., 7 T. C. 354, 360. Petitioner was engaged in processing and purchasing from other processors meats for sale to various customers, one of whom was the United States Government. The record establishes that, although petitioner had not previously *96 experienced a loss as a result of the rejection of an entire shipment of meat, it was required from time to time to make price adjustments "for many, many reasons," including its products being damaged or spoiled in transit and as a result of shrinkage in*302 weight. It is true these adjustments were small as compared to the respective shipments in connection with which they occurred. But we see no logical difference in character between such minor losses normally experienced by petitioner and the loss sustained because an entire shipment of meat was rejected, as here, and then sold by petitioner as its property at less than its cost. They have common characteristics and differ only in degree. As one of the witnesses for petitioner testified in denying the comparability of the loss involved here to these smaller losses: "No, in any of these other minor instances that I spoke of the loss amounted to about, just a part of 1 per cent, whereas this was about 66 2/3rds per cent." Petitioner apparently considered the normal losses and the loss sustained on the sale of the rejected meat as of the same class although the detail was more complicated, since the effect of its book entries reflecting all of them was the same. While book entries are not decisive, they are of evidentiary value, as showing how petitioner regarded the transaction at the time. United States v. Pure Oil Co., 135 Fed. (2d) 578; Rio Grande Oil Co. v. Welch, 101 Fed. (2d) 454.*303
Petitioner contends that, since this is the first time in its experience that a processor, from whom it purchased meat, breached its warranty to furnish meat complying with contract specifications, the transaction is abnormal in character as to it. We, however, do not think such argument is available to petitioner under the circumstances here. Until a transaction is closed and completed, the loss is not sustained. United States v. White Dental Mfg. Co., 274 U.S. 398">274 U.S. 398. The only closed and completed transaction taking place in 1938 respecting the rejected meat was its sale as petitioner's meat at less than cost. Petitioner so treated the transaction on its books and in its income tax returns. Moreover, it stipulated here that the loss occurred in 1938. And when recovery from Cudahy occurred in 1940, the amount of that recovery was reported in income for that year. Had the petitioner regarded the transaction as giving rise to a valid claim for breach of warranty against a solvent processor, we think no loss was sustained in 1938. Lee Mercantile Co. v. Commissioner, 79 Fed. (2d) 391. Cf. Lewellyn v. Electric Reduction Co., 275 U.S. 243">275 U.S. 243.*304 In fact, it is not apparent that any loss on this ground ever resulted, since petitioner recouped from Cudahy in 1940. We refer to this phase of the matter only for the purpose of demonstrating the unavailability of such argument to petitioner. Our determination must be premised on the facts as stipulated. We conclude the loss in question was not abnormal to petitioner, under section 711 (b) (1) (J) (i) of the code, and sustain the respondent on this issue. We are not, therefore, required to determine whether *97 petitioner has established the negative factors set forth in section 711 (b) (1) (K) (ii).
The second issue relates to the propriety of the respondent's disallowance of a deduction of the sum of $ 3,107.95 in the taxable year which petitioner contends constituted expenditures made on its City Branch Building in the nature of repairs. We have set forth in our findings the material facts bearing on the phases of work done on the building, as fully as possible from the confused state of this record. It would serve no purpose to discuss them again. We find it impossible, on this record, to segregate the respective items between those which can be properly characterized*305 as repairs and those constituting improvements of a permanent character, and capital in nature. Accordingly, we hold that petitioner has failed to establish error in respondent's determination that only $ 1,000 of the amount claimed constituted expenditures in the nature of repairs.
On the final issue as to the Arizona state sales taxes, the respondent, on brief, concedes that petitioner is entitled, in the taxable year, to a deduction in the sum of $ 12,547.56. Petitioner, in its reply brief, accepts such amount as being correct. Effect will be given to these respective concessions in the computation under Rule 50.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 711. EXCESS PROFITS NET INCOME.
* * * *
(b) Taxable Years in Base Period. --
(1) General rule and adjustments. -- The excess-profits net income for any taxable year subject to the Revenue Act of 1936 shall be the normal-tax net income, as defined in section 13 (a) of such Act; and for any other taxable year beginning after December 31, 1937, and before January 1, 1940, shall be the special-class net income, as defined in section 14 (a) of the applicable revenue law. In either case the following adjustments shall be made (for additional adjustments in case of certain reorganizations, see section 742 (e)):
* * * *
(J) Abnormal Deductions. -- Under regulations prescribed by the Commissioner, with the approval of the Secretary, for the determination, for the purposes of this subparagraph of the classification of deductions --
(i) Deductions of any class shall not be allowed if deductions of such class were abnormal for the taxpayer, * * *↩