*2445 1. Deficiency held not barred by limitation. Palmetto Coal Co.,11 B.T.A. 154">11 B.T.A. 154, and Denholm & McKay Co.,15 B.T.A. 225">15 B.T.A. 225, distinguished.
2. Held that under Regulations 62 the petitioner is required to compute his inventory at the close of the fiscal year ending February 28, 1921, upon the basis of cost, his inventory at the beginning of that taxable year and in prior years having been upon that basis.
*1125 This proceeding results from respondent's determination of a deficiency of $13,620.43 in income and excess-profits taxes for the fiscal year ended February 28, 1921. Petitioner alleges the deficiency is barred by the statute of limitations.
It is further alleged that the respondent erred in holding that the closing merchandise inventory for the fiscal year ended February 28, 1921, was $204,844.98 and not $161,477.89, and that the petitioner's net income for the fiscal year was $114,592.40 instead of $70,225.31.
At the close of the hearing respondent moved to amend his pleading to allege that the*2446 respondent erred in computing the closing inventory of the petitioner at $205,844.98, and that it should be computed at $228,071.62.
FINDINGS OF FACT.
Petitioner is a corporation with principal offices at Lima, Ohio, where it conducts a retail department dry goods store. During the year in question the business was conducted in a two-story building with a basement, which was used for display purposes. In September of 1920 a fire broke out, which caused a large part of the first floor to collapse. Water was thrown on all floors and smoke filled the entire building, causing damage to goods not reached by the flames. The business was insured. A fire sale on damaged goods retained by petitioner was opened in October. The new goods (not damaged) in stock at the closing inventory date were acquired after October 20, 1920.
Petitioner's opening inventory for the year in question, as well as all prior inventories, had been taken on a cost basis. Gus Holstine, the president, was ill and not in Lima at the time the physical inventory as of January 31 was begun. In accordance with prior customs the heads of the various departments took the inventory of their respective divisions*2447 using the cost tags attached to the articles in stock. The inventory thus taken amounted to $181,979.70. This figure did not take into account the month of February with which the fiscal year ended. The closing inventory for the fiscal year was computed as of February 28 by adding February purchases and deducting the sales less the gross gain per cent of the preceding eleven months. By such computation $46,091.92 was added to the $181,979.70 obtained by the physical inventory of January 31, to extend it to February 28 - making a total of $228,071.62 closing inventory as of the end of the fiscal year.
Such inventory figures were curned over to an accountant who was employed to make out the income-tax return. Upon the return of Gus Holstine from Florida in April of 1921, he insisted such inventory was too high, as it included damaged goods on hand at cost. *1126 He went over the stock to ascertain the extent of such excess and reduced the inventory by $22,226.64 on account of the damaged goods on hand. The reduced amount, or $205,844.98, was the amount given in the return filed about June 15, 1921, pursuant to a time extension granted at the request of the accountant. *2448 The tax liability of the petitioner was computed by the respondent upon the basis of a closing inventory of $205,844.98.
The accountant did not participate in the taking of the inventory. He knew nothing about it, or the basis upon which it had been taken. He assumed that petitioner, in common with his other clients, took the inventory on the basis of market. The settlement with the insurance company had been made on that basis. In making out the certificate of inventory for the year in question he caused the statement to be entered thereon that the closing inventory was taken at "market value time of inventory." The certificate was signed by Magdalen Van Pelt, petitioner's treasurer, who was in charge of the office in the absence of Gus Holstine.
Some time in 1924 another accountant employed by petitioner discovered the inconsistency between the statement in the certificate of inventory and the basis actually used. Thereafter, in June, 1925, S. H. Holstine, petitioner's merchandise manager, listed all the goods contained in the closing inventory in question and wrote the manufacturers thereof (i.e., those still in business and with whom petitioner still traded) and requested*2449 information concerning the comparative prices of such goods in October and at January 31, the date of the inventory. Most of the manufacturers answered, giving him the percentage of reduction in wholesale prices as of the two dates, and, in some instances, exact data on specific items.
From the information thus obtained S. H. Holstine revised the closing inventory figures. In such revision he revised each item separately. In some lines of goods he did not have answers from all manufacturers who had contributed to that line, but on the information at hand the entire line was revised. Where the reduction was based on percentage data, an average percentage was used. Where exact reductions were given on specific items, such actual reductions were made. By this means the closing inventory at market (lower than cost) was estimated at $159,568.32, of which $46,091.92 (which remained a constant) represents the addition to extend the inventory to include February.
Prices generally in the class of goods handled by petitioner had suffered a consistent decline beginning early in 1920 and extending through the year in question, the sharpest reduction occurring between August and October. *2450 The decline between October, 1920, and February 28, 1921, as respects silks, woolens and domestics (carried in *1127 Department No. 6) is indicated by a comparative price table of several commodities as follows:
| October (last 10 days) | February 28 | |
| Spot cotton | 21 to 22 | 11 |
| Lawn | 18 to 19 | 15 |
| Sateen | 14 to 15 | 13 |
| Sheeting | 14 | 8 |
| Print cloth: | ||
| Size "A" | 14 | 9 |
| Size "B" | 10 | 7 |
| Size "C" | 7 | 4 |
Petitioner filed its return for the fiscal year ended February 28, 1921, on or before June 15, 1921. No further return was filed respecting that year. The deficiency letter bears the date of December 30, 1928. That part of the statement attached thereto showing adjustments to income is as follows:
| Net income reported | $85,289.09 | |
| Additions: | ||
| Donations | 25.00 | |
| Excessive depreciation | 37.28 | |
| Income for January and February 1921 restored | 15,741.14 | |
| Fire insurance gain | 20,525.27 | |
| Total | 121,617.78 | |
| Deductions: | ||
| Income for January and February 1920 eliminated | $6,583.36 | |
| Exempt interest | 142.02 | |
| General expense reduced | 300.00 | |
| Total deductions | 7,025.38 | |
| Net income as adjusted | 114,592.40 |
OPINION.
SIEFKIN: It appears that*2451 more than five years elapsed between the time the return was filed and the mailing of the deficiency notice. Did petitioner's failure to file another return under the Act of 1921 prevent the running of the statute of limitations? The return filed apparently meets the requirements of the Revenue Act of 1918, which was in force at the time of filing. Petitioner concedes that the $2,000 credit allowed was reduced by $366.67 under the provision of the 1921 Act. The result would be that the 1921 Act resulted in an additional tax. In , and , no additional tax was due under the Revenue Act of 1921 and those cases are not controlling upon these facts. The facts in this proceeding are comparable to those in , and cases therein cited. We must hold that a return was necessary under *1128 the 1921 Act, and, no such return having been filed, the statute of limitations has not run.
The evidence discloses that the petitioner intended that the inventory of merchandise on hand at February 28, 1921, the end of the fiscal year, should*2452 be taken at cost or market, whichever was lower, but due to the mistake of an accountant it was computed at cost. The inventory at cost which amounted to $228,071.62 was reduced to $205,844.98 on account of damaged goods on hand and this figure was submitted in the return as the closing inventory and was used by the respondent in computing the petitioner's tax liability for the year in question. Petitioner now contends that the market value of the inventory should be used instead of the cost.
Section 203 of the Revenue Act of 1921 provides:
That whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.
Article 1582 of Regulations 62, which was promulgated under the Revenue Act of 1921, provides in part:
* * * Any goods in an inventory which are unsalable at normal prices or unusuable in the normal way because of damages, imperfections, *2453 shop wear, changes of style, odd or broken lots, or other similar causes, including second-hand goods taken in exchange, should be valued at bona fide selling prices less cost of selling whether basis (a) or (b) is used, or if such goods consist of raw materials or partly finished goods held for use or consumption, they should be valued upon a reasonable basis, taking into consideration the usability and the condition of the goods, but in no case shall such value be less than the scrap value. Bona fide selling price means actual offerings of goods during a period ending not later than 30 days after inventory date. The burden of proof will rest upon the taxpayer to show that such exceptional goods as are valued upon such selling basis come within the classifications indicated above, and he shall maintain such records of the disposition of the goods as will enable a verification of the inventory to be made.
In respect to normal goods whichever basis (a) or (b) is adopted must be applied with reasonable consistency to the entire inventory. Taxpayers were given an option to adopt the basis of either (a) cost or (b) cost or market, whichever is lower, for their*2454 1920 inventories, and the basis adopted ror that year is controlling and a change can now be made only after permission is secured from the Commissioner. * * *
Petitioner's opening inventory for the year in question, as well as all prior inventories, had been taken on a cost basis. Under article 1582 of Regulations 62, petitioner is, therefore, required to compute its inventory at the close of the fiscal year ended February 28, 1921, upon the same basis. Petitioner depends upon article 1582 of Regulations 45, which provides in part as follows:
*1129 * * * A taxpayer may, regardless of his past practice, adopt the basis of "cost or market, whichever is lower", for his 1920 inventory, provided a disclosure of the fact and that it represents a change is made in the return. Thereafter changes can be made only after permission is secured from the Commissioner. * * *
However, Regulations 62, and not Regulations 45, applies to the inventory in question. The Revenue Act of 1921 applies to the taxable year 1921, and, as pointed out in section 200 of that Act, the term "taxable year" means the calendar year or the fiscal year ending during such calendar year. Likewise, Regulations*2455 62, promulgated under the Revenue Act of 1921, applies to fiscal years ending during the calendar year 1921.
We must hold that under Regulations 62 the petitioner is required to compute its closing inventory for the fiscal year ending February 28, 1921, upon the basis of cost.
At the hearing the respondent moved that he be allowed to amend his pleading to allege that the closing inventory should be increased to $228,071.62. As stated above, this was the cost of the goods on hand. This motion is herewith granted.
Article 1582 of Regulations 62 allows taxpayers to enter damaged goods in the inventory at bona fide selling prices, less cost of selling. Petitioner has shown that some of its goods were damaged by a fire, but, due to the fact that the motion of the respondent was made at the end of the hearing, it has had no opportunity to show "actual offerings of goods during a period ending not later than 30 days after inventory date." The case will be restored to the calendar for further hearing upon this question.
Reviewed by the Board.