*3518 1. The evidence establishes that respondent erred in increasing the value of the closing inventory of materials and product, but error is not shown with reference to supplies.
2. Current earnings available for dividends should not be reduced by a "tentative tax." L. S. Ayers & Co.,1 B.T.A. 1135">1 B.T.A. 1135.
*468 This proceeding results from the determination of a deficiency in income and profits taxes for the fiscal year 1920 amounting to $9,966.39.
Petitioner alleges error with reference to the following issues: (1) Respondent should not have increased the closing inventory in the amount of $20,267.44; (2) respondent erred in deducting from surplus a part of the Federal income and profits taxes for prior years; (3) in determining the amount of current earnings available for dividends, a deduction for tentative income and profits taxes should not have been made; (4) surplus at the beginning of the taxable year should not have been reduced by a portion of the dividends paid during the taxable*3519 year.
The second issue was withdrawn by petitioner at the hearing.
FINDINGS OF FACT.
Petitioner is an Indiana corporation with principal place of business at Indianapolis, and has been engaged since 1902 in the manufacture and sale of fertilizer and animal foods.
The raw materials and the mixed products of petitioner are stored in piles in sheds and bins, the piles of materials sometimes assuming the shape of mounds 35 to 40 feet in height, 90 feet in width and 150 feet in length. The contents of the mounds range from 100 tons to 10,000 tons. In using the raw materials or in making shipment of the products, abstractions from the piles resulted in the piles assuming irregular shapes. Piles of raw materials of the same general classification contained varying amounts of ammonia, phosphoric acid, potash or other ingredients. Variations in the weight of the materials would also result from the source of the ammonia, whether *469 from animal products or from nitrate of soda. The president of petitioner was a college graduate with a degree in agriculture. He has been connected with petitioner since 1902 and has been its president since 1915. During a period of 14*3520 years he worked his way through every department of the factory, the purchasing department, sold goods on the road, and is now in charge of sales. He keeps informed of trade conditions through reports and correspondence. The secretary and general manager of petitioner has been engaged in the business of petitioner since 1905, and he has been connected with petitioner since May, 1919. In 1920, one of his duties was to assist in the purchasing of raw materials.
In 1920 the market was very much disturbed; there was practically no buying, and prices declined to a serious extent. In 1920, packing-house products ranged in cost from $8.50 per unit of ammonia down to $2.50. Based upon the tonnage handled by petitioner such a range would amount to $100,000.
The closing inventory for the fiscal year 1920 was taken under the method which has been regularly followed by petitioner for over 15 years. Acting independently, the president and the secretary-general manager of petitioner took separate physical inventories at the market values according to their experience and personal opinions. About 30 days thereafter, upon the return of the president from New York where he had acquired*3521 further information relative to market conditions, the two men met in conference, compared their inventories, discussed the details of their differences, and established and agreed upon the quantities and the value of the inventory.
Empty bags and bagging purchased for use as shipping containers of the products of petitioner were inventoried as to quantity by a computation of the approximate number contained in the cubical contents of the bins. The estimated quantity exceeded 80,000. The inventory arrived at was at follows:
| Commercial fertilizer | $83,312.51 | |
| Acid and sulphur | 4,071.00 | |
| Animal feed items | 79,751.00 | |
| Total raw materials and products | 167,134.51 | |
| Supplies: | ||
| Coal | $588.25 | |
| Bags and bagging | 6,008.70 | |
| 6,596.95 | ||
| Total | 173,731.46 |
The amount of $173,731.46 was used by petitioner in the computation of income.
In the deficiency letter respondent adjusted the amount of net income stated to be reported on the return by the following addition thereto:
| Closing inventory understated: | |
| Supplies | $4,005.80 |
| Merchandise | 16,261.64 |
| Total | 20,267.44 |
*470 OPINION.
LOVE: The first issue relates to the valuation of*3522 the inventory of petitioner at the close of the taxable year. The question is whether respondent erred in valuing the inventory in the amount of $193,998.90, thereby increasing the gross income in the amount of $20,267.44. The inventory comprehends raw materials, supplies, and the products of petitioner which are fertilizers and animal food mixtures. The ascertainment of the quantities on hand at any given date is always a matter of considerable complexity due to the prohibitive expense if not the utter impracticability of weighing and analyzing huge irregular shaped piles of raw materials and of mixtures in process of production. At the particular date under consideration, market values were almost nonexistent due to a condition of stagnation aptly described by one witness who testified that "the bottom dropped out." The method of inventorying is fully detailed in the findings and need not be repeated here. What may be termed the completed inventory is the result of collaboration of two officers of petitioner who we are satisfied were well qualified for the task. The evidence as to the correctness of the procedure followed is convincing, and the result of their endeavors is*3523 deserving of confidence. It appears the higher valuation used by respondent was arrived at by one of the officers as a "tentative inventory." Subsequently in the customary conference of the collaborators the officer finally determined the inventory to accord with the averages they agreed upon, and he approved the lower valuation, which is the completed inventory used by petitioner. Both officers took the stand and testified positively that the inventory of petitioner was correct and was valued at the market prices.
In addition to its accuracy, petitioner's inventory conforms to the practice which petitioner has followed for many years, including the beginning of the taxable year, which is not questioned by respondent. We see no reason for disturbing that practice. See . Nothing before us points to a conclusion that income for the taxable year is not reflected with clarity or that good accounting principles have been violated. The statute does not in every case limit the inventory to one of the two bases of cost, or the lower of cost or market. See *3524 . Methods of inventorying are frequently modified to suit the circumstances. See ; Lord Motor*471 ; ; ; .
Something is said in the briefs and in the deficiency letter about confusing bookkeeping entries. The books are not in evidence. No significance may be attached to the allusions. Upon the evidence adduced we are of the opinion that respondent erred with relation to the inventory of the raw materials and the products of petitioner. Petitioner's inventory should be accepted. This does not apply, however, to the supplies such as the empty bags, not directly employed in production. They should be valued at cost. See . Since petitioner has failed to show that respondent has valued the supplies in excess of cost, respondent is sustained as to the inventory of supplies.
*3525 The third and fourth issues are the same; they are controlled by . Available current earnings should not be reduced by a tentative correct tax. All .
Judgment will be entered under Rule 50.