*3301 1. Upon the evidence, held that petitioner is not on a "long-term contract" basis.
2. The parts of the accounting records introduced in evidence do not enable a revision of the books to more accurately compute the cost of various grades of lumber purchased on a log-run basis.
*138 This proceeding results from the determination of a deficiency in income and profits tax for the year 1920, amounting to $19,878.63.
Petitioner alleges error with reference to the computation of income from sales of lumber which was purchased at "log-run" prices.
FINDINGS OF FACT.
Petitioner is a New York corporation with its principal office at Utica, N.Y., and is engaged in the purchase and sale of lumber at wholesale.
Hardwood timber must be cut into logs after the sap leaves the tree, that is in the fall. The logs are then delivered to the foot of the mill slip, being taken from the forest and hauled to the mill pond. *139 These logs must be cut into boards by July, else a chemical change takes place in the logs, *3302 which deteriorates them very rapidly. From September to the end of the year the bulk of the cut has been shipped. Any surplus left over is absorbed in the spring of the following year.
In cutting logs of hardwood into lumber various grades are derived attributable in part to the quality and kind of the wood and in part to the dimensions of the product. Careful cutting results in a higher percentage of the more valuable grades. Experienced buyers of lumber are skilled in estimating the probable yields of the various grades and these factors are considered in buying at log-run rates. In buying, preference is given to agreements specifying separate prices for each grade.
During the year 1920 a peculiar situation developed in the hardwood lumber industry. At about January, 1920, conditions were normal. Thereafter, early in April or possibly in March, a demand grew into considerable proportion. Business increased in every grew into considerable proportion. Business increased in every department.
The small quantity of raw supply normally available for spring shipments was quickly used up. An artificial shortage was created. A prospective purchaser would resort to numerous*3303 wholesalers. These wholesalers in turn would make inquiry from numerous mills. The result was that an enormous volume of buying occurred in excess of actual demand. Toward the latter part of 1920, when it was realized that there was duplicate ordering, a great drop resulted. The bottom dropped out of the market.
In 1920 petitioner entered into the following purchase agreements:
| Date | Party | Quantity | Prices |
| Jan. 19, 1920 | J. R. Chabot | 70,000 ft | 5 X 5 sq. timber |
| 1 common and better, | |||
| 100 per M | |||
| #1s and #2s, $75 per M. | |||
| #1 common, $60 per M. | |||
| #2 common, $40 per M. | |||
| #3 common, $25 per M. | |||
| Jul. 3, 1920 | J. R. Chabot | 300,000 ft | #1s and 2s, $110 per M. |
| #1 common, $80 per M. | |||
| 4/4 and 5/4 #2 common, | |||
| $50 per M | |||
| 6/4 #2 common, $60 per M. | |||
| 4/4 and 5/4 #3 common, | |||
| $30 per M | |||
| 6/4 #3 common, $35 per M. | |||
| Dec. 4, 1920 | Connell & Starks | Log-run, $50 per M. | |
| May 25, 1920 | The Gill Lumber Co | Mill run, $65 | |
| per M. | |||
| Jan. 27, 1920 | W. A. Hadley | 100,000 ft. birch | |
| 225,000 ft. maple | |||
| 35,000 ft. elm | |||
| Mar. 31, 1920 | McLeod Brothers | 10,000 ft. 6/4 | |
| birch | |||
| 44,000 ft. 4/4 birch | $65 per M. | ||
| 6,000 ft. 4/4 maple | |||
| 5,000 ft | Log-run birch, wide run | ||
| trimmed spalky stock, | |||
| $55 per M. | |||
| 5,000 ft | Log-run birch, not as | ||
| high grade, $50 per M. | |||
| Sep. 22, 1920 | McLeod Brothers | #1 common and better | |
| birch. | |||
| 28,000 ft. 4" | |||
| 30,000 ft. 3" | |||
| 45,000 ft. 2" | |||
| 32,000 ft. 6/4 | |||
| #3 common and better | |||
| birch, 86,000 ft. | |||
| 4/4. | $75 per M. | ||
| #1 common and better | |||
| maple, 7,000 ft. 8/4 | |||
| #3 common and better | |||
| maple, 22,000 ft. | |||
| 4/4. | |||
| Log-run brown ash, | |||
| 13,000 ft. 4/4. | |||
| May 28, 1920 | Colin C.MacPherson | ||
| #3 common and | |||
| better birch, | |||
| 160,000 ft | $70 per M. | ||
| #3 common and better | |||
| maple, 250,000 ft. | $60 per M. | ||
| #3 common and better | |||
| white ash, 15,000 | |||
| feet. | $60 per M. | ||
| #3 common and better | |||
| basswood, 100,000 ft | $65 per M. | ||
| #3 common and better | |||
| brown ash, 10,000 ft | $45 per M. | ||
| #3 common and better | |||
| elm. 40,000 ft. | $45 per M. | ||
| #3 common and better | |||
| beech, 40,000 ft. | 45 per M. | ||
| Jan. 15, 1920 | Towanda Lumber Co | Log-run | $40 per M. |
*3304 *140 It was the custom of petitioner to annually inventory its stocks of lumber on hand at its yards, but the lumber, the property of petitioner which was on hand at the various mills, was not inventoried nor was it entered upon the books of account until it was shipped either to some customer or to one of the yards of petitioner. In computing on the books the profits for the year 1920, lumber in stock at the mills was not considered. The profits attributed to sales shipped from the mills during 1920 of lumber purchased under the aforementioned agreements were computed on a basis of the log-run prices without distinction as to the various grades, and were carried in special accounts designed to temporarily separate the results from the profit and loss account. In its return for 1920 petitioner did not report the profits shown by these reserve accounts. Respondent added the amount thereof to the income reported. The lumber, purchased from the mills under the agreements, which was shipped to the yards of petitioner, was commingled with the general yard stocks and the results of sales thereof were reflected in the profit and loss account.
The inventory of lumber on hand*3305 in the yards of petitioner on December 31, 1920, was valued estimated selling prices.
The accounts of petitioner are kept on the accrual basis.
The market values per thousand feet of the lumber on hand at the mills were as follows, the prices varying according to the thickness of the lumber:
| Birch | Maple | Beech | Basswood | Miscellaneous | |
| #1 and #2 | $95- $105 | $90- $100 | $60- $65 | ||
| #1 common | 42- 48 | 40- 45 | 38- 42 | ||
| #2 common | 20- 30 | 20- 30 | 20- 25 | ||
| #3 common | 12- 15 | 12- 15 | 10- 15 | $12- $15 | |
| Log-run elm | $35 | ||||
| Log-run ash | 40 | ||||
| Log-run soft maple | 40 | ||||
| Log-run hemlock | 25 | ||||
| Log-run butternut | 35 | ||||
| Log-run oak | 40 |
*141 OPINION.
LOVE: The question for decision is what method should be used in computing and reporting for income-tax purposes the income derived by petitioner from sales of lumber, which lumber had been purchased at "log-run prices," which are average prices applied indiscriminatingly to various grades of lumber. The circumstances peculiar to the taxable year are detailed in the findings and need not be repeated here. Suffice it to say that early in the year the market for lumber*3306 was a "seller's " market, petitioner departed from its usual custom of buying lumber on grade, and it entered into a number of purchase contracts for lumber at log-run rates, well knowing when it did so that the output of the mills would include a variety of grades. As time went on and sales of the more profitable grades preponderated, the ultimate resulting profits of the ventures of petitioner in the purchases became more and more doubtful and petitioner very prudently kept separate account on its books, of the "profits" attributable to sales of the lumber purchased at log-run prices. At the end of the taxable year the amount of the book profits thus reserved was not transferred to the profit and loss account nor was it reported in the income-tax return. Respondent has added the amount of these profits to the income reported on the return.
The first contention of petitioner is that it is on a "long-term contract" basis with relation to the lumber purchased at log-run prices, and, therefore, the entire proceeds of the sales of the lumber should be held in reserve until all of the lumber contracted for has been acquired and disposed of, whereupon the profit or the loss attributable*3307 to the entire venture will be carried to profit and loss account and reported for income-tax purposes. Petitioner relies upon this provision of article 36, of Regulations 45:
ART. 36. Long-term contracts. - Persons engaged in contracting operations, who have uncompleted contracts, in some cases perhaps running for periods of several years, will be allowed to prepare their returns so that the gross income will be arrived at on the basis of completed work; that is, on jobs which have been finally completed any and all moneys received in payment will be returned as income for the year in which the work was completed.
*142 It hardly appears necessary to answer at length such a contention. Having acquired a quantity of lumber by purchase, contracted for more, and sold a part of that acquired, petitioner contends it should at present report no income since the ultimate outcome is doubtful of the venture in purchasing the lumber. There were no unfilled sales orders at the end of the year so far as we know. The situation was simply that a quantity of the lumber remained on hand unsold. By no stretch of the imagination can such a situation be included in the provisions*3308 of article 36, which obviously refers to sales or executory contracts which are directly productive of gross income.
The provisions of the Revenue Act of 1918 pertinent to this issue are as follows:
SEC. 233. (a) That in the case of a corporation subject to the tax imposed by section 230 the term "gross income" means the gross income as defined in section 213 * * *
SEC. 232. That in the case of a corporation subject to the tax imposed by section 230 the term "net income" means the gross income as defined in section 233 less the deductions allowed by section 234, and the net income shall be computed on the same basis as is provided in subdivision (b) of section 212 or in section 226.
SEC. 213. That for the purposes of this title (except as otherwise provided in section 233) the term "gross income" -
(a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including in the case of the President of the United States, the judges of the Supreme and inferior courts of the United States, and all other officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or any political subdivision thereof, *3309 or the District of Columbia, the compensation received as such), of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivison (b) of section 212, any such amounts are to be properly accounted for as of a different period; * * *
SEC. 212. (a) That in the case of an individual the term "net income" means the gross income as defined in section 213, less the deductions allowed by section 214.
(b) The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such*3310 method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. * * *
Petitioner comes squarely within these provisions. It is on the accrual basis, employs inventories in the computation of income and *143 derived gross income within the taxable year from sales of the lumber, which sales were completed transactions. We agree with respondent that there is no ground for a deferment to a subsequent year of the computation of the profit or loss. Cf. , wherein we said:
While this presents a situation which has a strong appeal we can not overlook the fact that the taxing statutes have been designed to levy income and profits taxes upon the gains and profits of business for annual periods and that each annual period must necessarily, under the provisions of the law stand by itself.
In the alternative, petitioner contends for a complete revision of its books so that (1) accuracy will be attained in the determination of the profits reflected in the reserve*3311 accounts attributable to the sales of lumber shipped from the mills direct to customers; (2) its income will be computed through the use of an inventory of the lumber on hand at the mills at the end of the year valued on a basis of the lower of cost or market.
The proposed revision follows the usual procedure of a taxpayer on the accrual basis accustomed to valuing its inventories on the basis of the lower of cost or market. Taxpayer did not physically inventory the lumber on hand at the mills and it now proposes to assume that the lumber shipped from the mills in subsequent years was actually cut during 1920 and therefore was on hand at the end of the year.
There appear good grounds for the claim that the cost of the lumber sold, as entered on the books, is inaccurate and that the entries result in an overstatement for income-tax purposes of the profits for the taxable year. The buyers who represented petitioner were experienced men capable of estimating the probable quantities of the yield in the respective grades. The summary prices at which they purchased reflected their opinions of the average cost of the aggregate expected to be derived. In only the narrowest, most*3312 meticulous sense, may it be held that the better grades cost no more and the low grades cost no less, than the "log-run" price. We agree with petitioner that more accurate costs should have been computed but we can not approve the method of computation of the revision proposed by petitioner, for the reason that it contains many assumptions. However well it may be supported by the opinions of experts as representing normal conditions and average results, it, nevertheless, will lack a satisfactory basis of fact. This is purely a fact question. From the varied details exhibited in the brief of petitioner it seems probable that the full accounting books and records available to petitioner may afford sufficient data for the revisions contended for. However, we have carefully considered the evidence before us and reluctantly conclude that we are not in the favored *144 position of the taxpayer in this regard. The parts of the books introduced in evidence do not enable an ascertainment of the respective quantities of each grade of lumber actually derived from the mills. Furthermore, we are not convinced that all of the lumber shipped from the mills in subsequent years was actually*3313 cut and on hand at the end of the taxable year. We are left in a position where we can not direct, and respondent can not make a computation of revised separate grade costs based upon evident facts, nor can quantities on hand be satisfactorily ascertained to the end that the drop in log-run prices be availed of through an inventory priced at the market value. There is nothing to do but sustain the respondent. Cf. ; .
Judgment will be entered for respondent.