1928 BTA LEXIS 3026">*3026 Evidence held insufficient to show any amount to be excluded from the petitioner's income representing profits carried on its books on consignment accounts which was not realized by sale by the consignee during the taxable year.
14 B.T.A. 96">*96 This is a proceeding for the redetermination of a deficiency in income and profits tax for the calendar year 1921 in the amount of $5,590.67. Only part of the deficiency is in controversy, the petitioner alleging that the Commissioner erred in adding to its reported taxable net income the amount of $14,147.12, which he determined to be a reserve for contingency and as such not deductible from gross income.
FINDINGS OF FACT.
The petitioner is a Tennessee corporation having its office and principal place of business at Johnson City, where it is engaged in the business of manufacturing hardwood flooring. A slump in the flooring market which occurred during the year 1920 left the petitioner with a considerable surplus of manufactured flooring on hand. An1928 BTA LEXIS 3026">*3027 attempt was then made to dispose of this excess flooring through J. Summerfield Smith, a resident of the City of Philadelphia, Pa., who had been for some time in the hardwood flooring business.
For some years the petitioner had sold its product to various retail concerns in Philadelphia, and in order that it should not appear to be opening a retail business in that city in competition with its customers it adopted the name of the Southern Flooring Co. for the 14 B.T.A. 96">*97 purposes of its transactions with Smith. A contract was entered into, a portion of which was as follows:
This contract entered into on this the 11th day of November, 1920, between the Southern Flooring Co. in Johnson City, Tennessee, party of the first part, and J. S. Smith of Philadelphia, Pennsylvania, party of the second part.
* * *
The party of the first part further agrees to furnish to the said Smith not less than $1,500,000 feet of stock during the succeeding twelve months, and such additional amount as said Smith may order, provided the said party of the first part is able to furnish it.
Said Smith further agrees to sell this flooring at as great an advance as may be possible over the price invoiced1928 BTA LEXIS 3026">*3028 by the said Southern Flooring Co., plus $10.00 per thousand for expenses incident to its handling; said excess to be apportioned at the rate of 50% each to the said Smith and the said Southern Flooring Co. It is further agreed that all sales amounting to over $1,000.00 shall first be submitted to the said Southern Flooring Co. for its approval, and that for any losses on less than this amount same shall be deducted from the profits of the said Smith, unless remitted to him by the party of the first part.
It is further agreed that the title to such flooring as may be shipped from time to time shall be vested in the Southern Flooring Co. until same has been disposed of and settlement made by said Smith.
* * *
It is further agreed that this contract shall remain in force for a period of twelve (12) months from the date hereof, unless dissolved by mutual consent prior to that date.
Witnesseth our hands this the 11th day of November, 1920.
(Signed) SOUTHERN FLOORING CO.,
By SAM R. SELLS,
Party of the First Part.
(Signed) J. SUMMERFIELD SMITH,
Party of the Second Part.
Sam R. Sells, whose signature appears for the party of the first part on the above contract, 1928 BTA LEXIS 3026">*3029 was the president and the sole stockholder of the petitioner. In accordance with this contract, the petitioner shipped to Smith during the year 1921 flooring of various grades, invoicing to him at the same prices as those it used with other concerns in Philadelphia. The account was entered on its journal under the regular merchandise sales account, all the entries for the year 1921 in relation to this particular shipping account being as follows:
| 1921 | |||||
| Journal page | |||||
| 34 | Jan. 1 | Sou. Flg. Co. (Dec. 23/21 ccc & St L. 4473) | $5,332.80 | ||
| Jan. 1 | Sou. Flg. Co. (Dec. 4/21 W.P. 18072) | 9,424.39 | |||
| Jan. 1 | Sou. Flg. Co. (Dec. 2/21 S.L.S.F. 128785) | 11,386.84 | |||
| Jan. 31 | Mdse Sales | $26,955.30 | |||
| 34 | Jan. 31 | Mdse (Gross Profit 40%) | $10,782.12 | ||
| P & L (Gross Profit) | $10,782.12 | ||||
| 40% Gross Profit on sales | |||||
| 36 | Mar. 31 | Southern Flooring Co. | 5,609.03 | ||
| Mdse (Sales) | 5,906.86 | ||||
| Mar. 31 | Mdse (Gross Profit) | 5,020.83 | |||
| P & L (Gross Profit) | 5,020.83 | ||||
| 85% Gross Profit on Sales | |||||
| 42 | May 28 | Sou. Flg. Co. (C.G.W. 27808) | 4,703.45 | ||
| Mdse (Sou. Flg. Co. Sale) | 4,703.45 | ||||
| car refused by J. Weiser & Co. sold Sou. Flg. Co. | |||||
| 43 | June 21 | Sou. Flg Co | 4,955.92 | ||
| Mdse Sales | 11,616.38 | ||||
| June 30 | Mdse (50% Gross Profit Sales) | 5,808.19 | |||
| Profit & Loss (Gr. Profit) | 5,808.19 | ||||
| 50% Gross Profit on Sales June, 1921 | |||||
| 47 | Aug. 19 | Sou. Flg. Co. (McClatchey) | 672.36 | ||
| John H. McClatchey | 672.36 | ||||
| 12,035 Ft. 5/16 X 2 P.R.I.Strips at $60.00 | $722.00 | ||||
| Less frt. 13.238 at 37 1-2 | 49.64 | ||||
| 672.36 | |||||
| used by Sou. Flg. Co. instead of John H. McClatchey | |||||
| 48 | Aug. 2 | Sou. Flg. Co. Phila | 2,113.03 | ||
| Aug. 10 | Sou. Flg. Co. Phila | 4,887.79 | |||
| Aug. 25 | Sou. Flg. Co. Phila | 2,841.80 | |||
| Aug. 31 | Mdse (Sales) | 22,175.26 | |||
| Mdse (Gross Profit) | 11,087.63 | ||||
| P & L (Gross Pro. Mdse) | 11,087.63 | ||||
| 50% Profit on Sales | |||||
| 49 | Sept. 3 | Southern Flg. Co | 2,319.62 | ||
| Sept. 15 | Southern Flg. Co | 3,113.88 | |||
| Sept. 28 | Southern Flg. Co | 2,892.43 | |||
| Sept. 30 | Southern Flg. Co | 3,970.47 | |||
| Mdse (Sales) | 29,837.64 | ||||
| Sept. 30 | Mdse (Gross Profit) | 14,918.82 | |||
| Profit & Loss | 14,918.82 | ||||
| 50% Gross Profit on Sales | |||||
| 51 | Oct. 31 | Mdse (Sou. Flg. Co.) | 10,000.00 | 10,000.00 | |
| Partial adjustment on prices. | |||||
| Charged flooring shipped with the understanding prices were to be adjusted as sales made. | |||||
| 52 | Oct. 11 | Sou. Flg. Co | 2,589.98 | ||
| Oct. 14 | Sou. Flg. Co | 3,485.40 | |||
| Oct. 20 | Sou. Flg. Co | 9,879.05 | |||
| Oct. 21 | Sou. Flg. Co | 4,802.39 | |||
| Oct. 31 | Chg Mdse Sales | 51,537.93 | |||
| 52 | Oct. 31 | Mdse (Gross Profit) | $25,768.96 | ||
| Profit & Loss (G. P. Sales) | $25,768.96 | ||||
| 50% Gross Profit on Sales Oct. | |||||
| 55 | Nov. 23 | Sou. Flg. Co | 2,974.12 | ||
| Nov. 30 | Mdse (Sales) | 7,458.17 | |||
| Nov. 20 | Mdse (Gross Profit Sales) | 3,729.08 | |||
| P & L | 3,729.08 | ||||
| 50% Gross Profit on Sales | |||||
| 56 | Dec. 1 | Mdse (Sou. Flg. Co.) | 4,822.81 | 4,822.81 | |
| Full adjustment of prices on stock shipped to Phila. per statement on file in Invoice File Sou. Flg. Co. | |||||
| 58 | Dec. 22 | Sou. Flg. Co | 2,417.13 | ||
| 20 | Sou. Flg. Co | 2,064.46 | |||
| 28 | Sou. Flg. Co | 2,732.77 | |||
| Mdse Sales | 21,201.08 | ||||
| Dec. 31 | Mdse (Gross Profit) | 10,600.54 | |||
| P & L (Gross Profit) | 10,600.54 | ||||
| 50% Gross Profit Sales |
1928 BTA LEXIS 3026">*3030 14 B.T.A. 96">*99 (Note: Merchandise sales other than the Southern Flooring Company account which were noted on the journal as a part of the total merchandise sales from month to month have been omitted.)
There appear also on the petitioner's journal at different times entries for the Southern Hardwood Flooring Co. and the Taylor Hardwood Flooring Co., most of which are contained in the regular merchandise sales. The following entries for these two concerns were designated consignment accounts:
| Journal page | ||||
| 54 | Sept. 22 | Consignment a/c (Sou. HardwoodFlg. Co.) car Southern 132815 shipped to Sou. HardwoodFlg. Co. New York onconsignment | $3,013.10 | $3,013.10 |
| Nov. 23 | Consignment a/c (Taylor Hardwood Flg. Co.) | 5,252.78 | ||
| Mdse (consignment) car CC&O 8287 shipped to Taylor Hardwood Flg. Co. on consignment | 5,252.78 | |||
| Nov. 26 | Consignment acct (Taylor Hardwood Flg. Co.) | 4,706.83 | ||
| Mdse ( consignment) car B&O 187391 shipped to Taylor Hardwood Flg. Co. N.Y. on consignment | 4,706.83 |
The sole Southern Hardwood Flooring Co. consignment account was carried into merchandise sales for September and formed part of the total sales of the month for which1928 BTA LEXIS 3026">*3031 a 50 per cent gross profit was noted, but no such profit and loss entry was carried on the Taylor Hardwood Flooring Co. consignment account.
14 B.T.A. 96">*100 The journal contains the following additional entries in regard to these three consignment accounts:
| Journal page | ||||
| 58 | Dec. 31 | Profit & Loss (consignment a/cs) | $9,431.44 | |
| Consignment Sou. Flg. Co | $6,896.14 | |||
| Consignment Sou. HardwoodFlg. Co | 602.62 | |||
| Consignment Taylor Hardwood Flg. Co | 1,932.68 |
Above 20% on account shown per ledger same being charged regular price & profit taken in advance of final sale.
The entries on the petitioner's ledger for the year 1921 on these three consignment accounts are as follows:
| Southern Flooring Co., Philadelphia, Pa., mail invoice and statement to J. S. Smith, 1205 Windrim Avenue, Philadelphia, Pa. | ||||||
| Date | Charges | Credits | Date | |||
| Jan. 1 | SHST 178785 | 34 | $11,386.84 | $1,000 | C-128, check | Apr. 11 |
| 1 | W.P. 18072 | 34 | 9,424.39 | 1,500 | C-130, check | May 3 |
| 1 | C.C. & St. L. 4473 | 34 | 5,332.80 | 1,000 | C-130, check | May 6 |
| Mar. 31 | Inv | J-36 | 5,609.03 | 2,000 | C-130, check | May 19 |
| June 21 | Inv | J-43 | 4,955.92 | 2,000 | C-134, check | June 13 |
| May 28 | C.G.W. 27808 | J-42 | 4,703.45 | 2,000 | C-138, check | July 13 |
| Aug. 18 | McClatchey | J-47 | 672.36 | 3,750 | J-47, note H. Vassnak | Aug. 17 |
| 2 | McClatchey | J-48 | 2,113.03 | 1,755.47 | C-142, check Vassnak | Do. |
| 10 | Inv | J-48 | 4,887.79 | 2,000 | C-142, check | Aug. 18 |
| 25 | Inv | J-48 | 2,841.80 | 1,000 | C-146, check | Sept. 7 |
| Sept. 3 | Inv | J-49 | 2,319.62 | 1,000 | C-148, check | Sept. 16 |
| 15 | Inv | J-49 | 3,113.88 | 4,887.79 | J-49, notes H. Vassnak | Sept. 1 |
| 28 | Inv | J-49 | 2,892.43 | 3,000 | C-2, check | Oct. 3 |
| 30 | Inv | J-49 | 3,970.47 | 2,500 | C-2, check | Oct. 8 |
| Oct. 11 | Inv | J-52 | 2,589.98 | 1,500 | C-2, check | Oct. 15 |
| 14 | Inv | J-52 | 3,485.40 | 500 | C-2, check | Oct. 17 |
| 20 | Inv | J-52 | 9,879.05 | 37.51 | C-2, disct. and shortage | Do. |
| 21 | Inv | J-52 | 4,802.39 | 1,000 | C-2, disct. and shortage | Oct. 21 |
| 400 | J-50, 3 mos. note W. T. Field | Oct. 3 | ||||
| Nov. 23 | Inv | J-55 | 2,974.12 | 3,246.78 | J-50, notes W. A. Herbert | Oct. 10 |
| 1,000.00 | J-50, note H. Vassnak | Oct. 20 | ||||
| 2,828.50 | J-51, notes Martin Molony | Oct. 25 | ||||
| 672.36 | McClatchey. | Aug. 18 | ||||
| 10,000.00 | J-51, adjustment | Oct. 31 | ||||
| 3,000.00 | C-6, check | Nov. 17 | ||||
| 2,741.04 | C-8, note and check | Nov. 22 | ||||
| 1,000.00 | C-8, check | Do. | ||||
| Dec. 1 | McClatchey, a/c trans | 1,638.06 | 4,822.81 | J-56, adjustment | Dec. 1 | |
| 22 | Sales | J-58 | 2,417.13 | 900.00 | J-56, note M. Molony | Dec. 9 |
| 20 | Sales | J-58 | 2,064.46 | 4,000.00 | C-14, check | Dec. 20 |
| 28 | Sales | J-58 | 2,732.77 | 6,896.14 | J-58, 20 per cent loss on stock | Dec. 31 |
| Balance | 27,584.58 | Do. |
| Southern Hardwood Flooring Co., New York, N.Y. | ||||||
| Date | Charges | Credits | Date | |||
| Sept. 22 | Sou. 132815 | J-54 | $3,013.10 | $602.62 | J-58, 20 per cent loss | Dec. 31 |
| Taylor Hardwood Flooring Co. | ||||||
| Date | Charges | Credits | Date | |||
| Nov. 23 | C.C. & O. 8287 | J-54 | $5,252.78 | $296.23 | C-14, check | Dec. 22 |
| 26 | B. & O. 187391 | J-54 | 4,706.83 | 1,932.68 | J-58, 20 per cent loss | Dec. 31 |
| Balance | 7,730.70 | Do. |
14 B.T.A. 96">*101 The journal contains among its closing entries for December 31, 1921, the following:
| Journal page | ||||
| 75 | Dec. 31 Profit & Loss | $14,147.12 | ||
| "Reserve for Consignment" | $14,147.12 |
30% on Gross $47,157.20 hereby set aside to cover losses on Consignments of 1921. On hand and not sold at 3/11.22 and subject to drop in prices.
Southern Flooring Co.
Southern Hardwood Corp.
Taylor Hardwood Corp.
Any deductions made by these 3 concerns in 1922 covering 1921 shipments, are to be charged to "Reserve for Consignments" and not to Profit & Loss.
The Commissioner added to net income the above amount of $14,147.12, determining that it represented a reserve1928 BTA LEXIS 3026">*3033 for contingency. The petitioner has always taken its inventories at cost.
OPINION.
MURDOCK: The amount in dispute is designated on the petitioner's books as a "Reserve for Consignments" and has been determined by the Commissioner to be a reserve for contingency and, as such, not a proper deduction from gross income. The petitioner does not now contend that this amount represents in any sense a deduction but that it should be eliminated from its income for the taxable year in that it represents the amount of profit included in those consignment sales noted on its books for the year 1921, which it did not receive in that year because such sales were not made by the consignee, and that the elimination of the amount of profit written up on such consignments is the same thing as a restoration of such unsold merchandise to inventory.
We will pass by the question as to whether or not the proof is sufficient to show that the three accounts represented in this amount are consignment accounts such that title to the merchandise shipped remained in the petitioner until such merchandise was sold by the consignee, inasmuch as we are of the opinion that the evidence is not sufficient for1928 BTA LEXIS 3026">*3034 us to find that any part of the amount can be eliminated from income.
A reduction of the petitioner's income should possibly be allowed if it appears that the petitioner has eliminated from income only those amounts appearing on its books as profit from shipments of flooring not sold during the year but held by the consignees for a future sale for the petitioner's account. It is therefore necessary for us to inquire whether the petitioner's evidence sufficiently shows the amount of profit entered on its books and not realized by sale.
14 B.T.A. 96">*102 The petitioner cites the case of , as authority for the deduction claimed and contends that the two cases are similar. In the Cleveland Woolen Mills case the Board permitted the taxpayer's net income for the year 1918 to be reduced by the difference between the amount charged to sales of goods shipped to customers and returned by them during the year, and the inventory value of the goods. The amount of this difference was found as a fact by the Board and must be considered by us to have been admitted in the pleadings, or to have been proven by the testimony.
1928 BTA LEXIS 3026">*3035 In the present case the sole testimony, aside from that contained in those parts of the petitioner's books offered in evidence at the hearing, is that as to one of the consignment accounts the merchandise was invoiced to the consignee at the same price as that given to other concerns of the locality where the consignee was in business. It appears from the contract as to this consignment account contained in our findings of fact that any advance over the invoice price realized by the consignee on a sale was to be apportioned equally between the petitioner and the consignee. The deduction claimed by the petitioner appears in its journal at the close of the year as a reserve for losses of 30 per cent of an amount of $47,157.12, unexplained except that it represents consignments of 1921 "On hand and not sold at 3/11/22 and subject to drop in prices." We are unable to determine from this explanation alone what part of the reserve covers losses due to a drop in prices as distinguished from an unrealized profit on goods unsold but already included in sales on the petitioner's books.
In the journal the Southern Flooring Co. account appears from month to month with the merchandise sales, 1928 BTA LEXIS 3026">*3036 a percentage of the total monthly sales, varying from 40 per cent to 85 per cent, being noted on the books for each month under profit and loss as the gross profit on sales. This is carried out on the books throughout the year, except that for two shipments no notation appears under profit and loss. An examination of the journal shows that while nearly all of the Southern Flooring Co. account was included in merchandise sales and various percentages of profit were noted upon such sales from month to month, no such percentages were carried as a profit upon the two consignment entries of the Taylor Hardwood Flooring Co. There is no explanation to indicate whether the amounts of profit so noted on merchandise sales were included in the amount credited to sales, or whether the different percentages were merely arbitrarily chosen and noted on the journal.
The petitioner's income return for the year is not before us and any light which might be given by a comparison of the return with the amounts on the petitioner's books is denied to us. We do not know 14 B.T.A. 96">*103 whether all the amounts charged to profit on the journal were used by the petitioner in computing income before the attempted1928 BTA LEXIS 3026">*3037 deduction of the amount in dispute, and, as pointed out above, no profit is entered on some of the Southern Flooring Co. shipments and the exhibits before us contain no amount of profit written up on the Taylor Hardwood Flooring Co. account. As far as the record shows the percentage deducted in the closing entry is purely an arbitrary one and there is not sufficient evidence to enable us to find the correct amount of unrealized income, if any there is. Also, as we do not know, except by inference, the composition or method of determining the amount credited to sales on the petitioner's books, we would be unable to find the cost of those shipments remaining unsold at the end of the year even if such shipments had been identified which has not been done. Further, the mere fact that remittances for part of the merchandise are not credited on the petitioner's books does not show conclusively that all or part of this merchandise had not been sold by the consignee during the year, particularly when we do not know whether some of these remittances in the Southern Flooring Co. account did not represent an extra profit to the petitioner in accordance with its contract on consignments sold1928 BTA LEXIS 3026">*3038 above the invoice price.
When the petitioner has neglected to prove material facts, we can not indulge in conjecture as to the amount of unsold merchandise, the cost thereof or the amount of the profits which may have been carried on the petitioner's books and noted on its return and which were not realized by sale through the consignee. The evidence is insufficient to show the right of the petitioner to exclude from income the amount contended for or any part thereof.
Judgment will be entered for the respondent.