*3958 1. Commissioner's adjustment of depreciation claimed on beer kegs, and on machinery and equipment in unit of brewery discontinued in 1918, sustained for lack of proof that errors were committed.
2. Amounts paid to employees during Christmas season for additional services rendered, allowed as deduction from gross income.
3. Sum paid Lager Beer Board of Trade held to be an ordinary and necessary business expense.
4. The evidence is insufficient to prove loss on fixtures.
5. Petitioner's inventory valued.
*1134 The Commissioner has determined deficiencies in income tax for the years 1918 and 1919 in the respective amounts of $6,262.76 and $6,640.32. The petitioner alleges that the respondent erred in making the following adjustments and disallowances in its returns for those years:
| 1918 | 1919 | |
| Depreciation (decreased) | $10,406.85 | |
| Christmas bonuses (disallowed) | 2,750.00 | $3,490.00 |
| Assessment of Lager Beer Board of Trade (disallowed) | 12,115.44 | |
| Inventory (increased) | 20,493.96 | |
| Obsolescence (decreased) | 25,401.59 | |
| Loss on fixtures (decreased) | 26,917.32 | 6,788.95 |
*3959 *1135 FINDINGS OF FACT.
The petitioner is a New York corporation with principal offices in New York City and prior to prohibition was engaged in the manufacture and sale of beer. Its brewery consisted of two operating units, each with a yearly capacity of 150,000 barrels.
During 1918 petitioner lost a number of beer kegs due to the failure of its customers to return them. At the close of 1918 the inventory value of kegs in the hands of customers and at the brewery, taken on the basis of market, was about $10,000.
During the Christmas season of the years 1918 and 1918, pursuant to its customary practice and in consideration of additional services rendered during the year, petitioner paid its employees, and charged to expense, the respective amounts of $2,750 and $3,490. The amount paid each employee ranged from $50 to $500 and was fixed by his length of service and the salary paid him during the year.
In the year 1918 petitioner paid the sum of $12,115.44 to the Lager Beer Board of Trade as its proportionate share of expense incurred by the latter and the United States Brewers Association on behalf of brewers, in the employment of counsel to test the constitutionality*3960 of war-time prohibition legislation, to conduct extensive investigations to determine whether beer of an alcoholic content of 2.75 per cent was intoxicating, and to carry on a campaign against assertions made by the Anti-Saloon League that brewers were wasting food products.
At the close of 1919 petitioner had on hand 15,764.58 barrels of real beer which had cost it $2.30 per barrel to manufacture. The stock of goods was subsequently used in manufacturing a cereal beverage or near beer. The value of the inventory for such a purpose was 77 cents a barrel, instead $1of per barrel, the figure at which it was inventoried and returned for the year 1919.
Because of the provisions of the "Brown Act," enacted by the New York State Legislature in October, 1917, reducing the number of saloons throughout the State, the petitioner lost a great many customers and its sales were reduced to 104,000 barrels of beer per year. On account of this loss of business in October, 1918, petitioner, pending a change in prohibition laws, ceased operating the unit of its plant composed of a storage building and brew-house erected in 1876 and 1881, respectively, and certain machinery and equipment located*3961 therein. The greater part of the machinery and equipment in the buildings consisted of kettles, boilers, generators, fermenters, starting tubs, brew vats, filling tanks and metal mash tubs, some of which were installed when the buildings were constructed. None of the machinery and equipment has been used since its discontinuance. The petitioner has endeavored to sell the property without success.
*1136 Prior to and during 1918 and 1919, petitioner rented and sold bar fixtures to owners of saloons. Upon the return of fixtures at the expiration of the leasehold period or in the event that they were repossessed for any reason, the property was examined and valued at its worth reconditioned. The figures at which the fixtures were so valued were entered in the petitioner's "fixtures" account. As a rule the fixtures received back were in such condition that they had to be reconditioned before being used again. Reconditioning, however, did not take place until the material was needed for installation in another establishment and the cost was then charged to expense. After October, 1918, when the Brown Act became effective, more fixtures were returned than petitioner needed*3962 in connection with this branch of its business. For inventory purposes, the fixtures were valued at what they would be worth reconditioned.
OPINION.
ARUNDELL: Of the amount claimed in 1918 as depreciation on empty beer kegs the respondent allowed $6,498.06, leaving in question here the sum of $10,406.85. Although the deduction was claimed as depreciation, the evidence indicates an attempt to prove an inventory loss rather than depreciation. Petitioner sought to sustain its allegation of error by proving the value of the opening and closing inventories for the year and a showing of how the loss during the year occurred. Its witness admitted that without the corporate books, which were not produced, he could not even approximate the opening inventory and from the evidence it is clear that he estimated the closing inventory. No evidence was offered to prove the cost of the kegs alleged to have been lost, the manner and amount at which they had been theretofore inventoried, or any other factor essential for a proper redetermination of the matter. For lack of proof that error was committed, we must sustain the respondent on this issue.
*3963 The amounts paid to employees during the Christmas season of each taxable year, though designated as gifts in the returns, and bonuses in the pleadings, were in reality additional compensation for services rendered, and are therefore deductible as a business expense. See , and .
The money paid to the Lager Beer Board of Trade was expended by it and the United States Brewers Association for the benefit of the petitioner. We are of the opinion that the expenditure was for a purpose coming within the provisions of the taxing act allowing a deduction for ordinary and necessary expenses paid or incurred in carrying on a trade or business. See , and .
*1137 The 15,764.58 barrels of real beer on hand in barrels at the close of 1919 were inventoried by petitioner at "cost or market, whichever lower." The market value, which was lower, was determined to be $1 per barrel, and this amount was reported in the income-tax returns of petitioner. *3964 On an audit of the return for that year, the unit price was increased to the cost of the goods, $2.30 per barrel, resulting in an addition to the item of $20,493.96, the amount in dispute here. Respondent's action was prompted by the fact that he did not accept petitioner's figure of $1 per barrel as representing the actual market value of the beer.
It was definitely known at the close of 1919 that the beer then on hand was unsalable except through the limited channels provided by the prohibition laws, and that, as a consequence, the goods had greatly depreciated in value. There was no market at that time within the usual acceptation of the term. Where a situation exists such as we have here the general rules for determining market fail to provide a basis for a proper valuation. Prohibition laws curtailing the sale of beer did not render the inventory valueless, but they practically did limit its worth to a salvage value. To require that the goods be returned at cost or on some theoretical market price in excess of its known value would amount to writing into the inventory a value that did not, in fact, exist, and distort the income. No evidence was offered to show what the*3965 property would have brought in the market provided by the prohibition laws. Petitioner had a market for the stock within its business, and the property undoubtedly was worth more to it as a brewer of near beer than to any other similar manufacturer. That value it determined from the manufacture of near beer from the stock of real beer to be 77 cents per barrel, which figure we hold should be used for inventory purposes instead of the cost price of $2.30 per barrel used by the respondent.
The issue involving obsolescence arises out of the disallowance of $25,401.59 of the total amount claimed as a deduction because of the abandonment of certain machinery and equipment located in the unit of the plant discontinued in October, 1918. The evidence shows that most of the machinery and equipment was installed in 1876 and 1881 when the buildings were erected. The record not only does not contain a list of such property but it fails to show the time of acquisition of the remainder, including the cost, if obtained after March 1, 1913. The only evidence of March 1, 1913, value of such property as may have been in the buildings on that date was the testimony of an officer of the petitioner*3966 corporation. His opinion, that the estimated value of the property at March 1, 1913, was $500,000, was based, in part, upon the fact that machinery was worth and cost *1138 more on that date than it did in 1881. Other evidence submitted by him clearly indicates that he did not know whether all the property on which obsolescence is claimed was in the buildings in 1881 or on March 1, 1913, and on cross examination he admitted he did not know the original cost of the machinery and equipment. For these and other reasons which we deem unnecessary to discuss, we are unable to accept the March 1, 1913, valuation of the witness. In the absence of evidence as to the March 1, 1913, value of the property acquired prior thereto, and the cost of the property acquired subsequent thereto, we must sustain the action of the respondent. .
The sixth assignment of error covers alleged loss on barroom fixtures in the taxable years. It is probable that the petitioner sustained a loss but we have insufficient evidence before us to determine the extent thereof. The Commissioner's determination is, therefore, approved.
Judgment*3967 will be entered on 10 days' notice, under Rule 50.