*789 Petitioner, engaged in the manufacture of coconut oil in San Francisco, purchased copra in the Philippines through its agents there, who were authorized to buy at a certain price and to whom funds were forwarded sufficient to cover the price authorized. In the years 1932 to 1935 copra was purchased at prices under those authorized and the excess of the funds advanced to petitioner's agents over the prices actually paid was retained by the agents and was carried on petitioner's books as "Manila Reserve", from which, in 1936, certain sums were transferred to petitioner's surplus. In 1937 the cost of copra was again less than the amounts advanced. In its income tax returns petitioner erroneously deducted as cost of goods sold the amounts authorized for the purchase of copra instead of the amounts actually spent, although the correct amounts were known. The statute of limitations has run as to the years 1933 to 1935. Held:
(1) Petitioner realized no income in 1936.
(2) As to 1936, estoppel, not having been pleaded by respondent, can not be considered as an issue.
(3) Respondent's determination of deficiency for year 1937 approved.
*995 These proceedings, consolidated for hearing, involve, respectively, a deficiency in income tax for the year 1936 in the amount of $4,500, and for 1937 a deficiency in income tax of $1,662.59 and in excess profits tax of $727.95. Respondent's answer was amended to claim an increase in income tax deficiency for 1936 of $699.61, or a total of $5,199.61.
In Docket No. 102248 for the year 1936 respondent contends that the entire sum of $34,664.07, held in that year by the petitioner's purchasing agent at Manila, which represented the excess over the actual cost of raw materials purchased in past years but claimed in full in petitioner's income tax returns as cost and thus allowed as a deduction on the sale in previous years, and which was carried on petitioner's books as "Manila Reserves", should be included in petitioner's income for that year. The respondent's second contention appears to be in the alternative, that the sum of $30,000 transferred by petitioner in 1936 from its "Manila Reserve" account to its general account at San Francisco and credited to surplus, shall be treated*791 as income in that year. In Docket No. 102247 for the year 1937, respondent has determined that petitioner overstated the cost of goods sold in 1937 by $11,811.92, and thereby understated its income.
FINDINGS OF FACT.
Petitioner is a corporation, with its principal office as San Francisco, California. It filed its returns for the years involved with the collector of internal revenue for the first district of California.
Petitioner is and at all times involved in this proceeding was engaged in the crushing of copra and the manufacture of coconut oil and other byproducts. Its manufacturing plant is in San Francisco.
At all times it has been necessary for petitioner to obtain its entire supply of copra by purchasing it in places outside of the United States. Since 1934 petitioner's supply of copra was purchased principally from the Philippine Islands.
Petitioner maintains a purchasing organization in Manila and agents at various points in the Philippine Islands, for the purpose of purchasing copra, and all such employees and agents were employed solely by petitioner.
Funds were advanced by petitioner and sent by draft of telegram to Manila with instructions to buy*792 copra st a certain maximum price. *996 Sometimes the Manila agency was able to buy copra at a less price, and the difference between the price actually paid and the advances sent over by draft was accumulated in the Manila office and was treated in the books of the petitioner as "Manila Reserves."
Although funds did not always accompany the authorization to purchase, they were sent over during the year and the amount of copra authorized to be purchased at a certain price was entered on petitioner's books as the cost of goods sold in an amount equal to the price authorized, irrespective of what the actual cost of goods sold may have been in any year.
In the return filed for the year 1936 the cost of goods sold was stated to be in the amount of $3,036,507.05, which was an understatement of the cost of goods sold in that year in the amount of $6,487.16.
In 1937 the cost of goods sold was overstated in the return filed by the petitioner in the amount of $11,811.92.
Petitioner's returns showed as costs for 1932 to 1935, inclusive, with resulting overstatements, as follows:
| Year | Returned as cost | Overstatement |
| 1932 | $2,075,000.93 | $2,755.17 |
| 1933 | 2,866,844.82 | 5,811.61 |
| 1934 | 1,802,897.88 | 17,598.72 |
| 1935 | 3,019,138.15 | 10,966.05 |
*793 The actual cost of goods sold for each of these years was known to the petitioner at the time the return for each year was filed.
The Commissioner, relying upon the representations of the petitioner contained in petitioner's income tax returns, allowed as a deduction in each of the four years preceding 1936 the cost of goods sold as reported in the returns for the years 1932 to 1935, inclusive.
The total amount in the "Manila Reserves" in 1936 was $34,664.07, all of which had previously been claimed and allowed as a deduction from income as an overstatement of the cost of goods sold in years prior to 1936.
At the end of this year petitioner transferred to its surplus account in San Francisco $30,000 from its "Manila Reserves" account.
OPINION.
KERN: Petitioner, with its main office at San Francisco, had a purchasing department at Manila through which it bought copra. The Manila agents bought from many small traders in the South Seas, but in later years mainly from those in the Philippine Islands, and at varying prices. The petitioner would name a certain price and send the Manila agency cash advances sufficient to meet purchases made at this price. The agent would*794 buy at a price around that *997 named, sometimes above but more often below. The named price, in short, was only a norm, and the petitioner's advances did not therefore conform, except in a general way, with the cost prices paid. But the named price was treated as cost on petitioner's books and in its income tax returns. The result was that for all the years from 1932 to 1937, inclusive, except 1936, the cost of copra was determined by petitioner at a higher figure than actual cost, and the resulting profits on petitioner's sales were reported proportionately lower in its returns.
Respondent did not know what the actual situation was until 1936, when the petitioner transferred $30,000 from its account called "Manila Reserves" to its San Francisco surplus account. Petitioner's method then transpired. On the other hand, petitioner knew what its actual costs were for the preceding calendar year before it had to file its return on March 15. Notwithstanding this fact, it made no effort to make a correct return when originally filed, to make an amended return, or to show actual cost for the preceding year when it filed its return for the next succeeding year. The statute*795 of limitations has now run for all years before 1936.
In Docket No. 102247 respondent determined a deficiency in petitioner's income and excess profits taxes for the year 1937 by reason of petitioner's understatement of income arising from its overstatement of the cost of goods sold by $11,811.92. At the hearing herein petitioner conceded this overstatement and has filed no brief under this docket number. We decide this issue in favor of respondent.
However, in Docket No. 102248, which involves the deficiency determined for the year 1936, in which there was an understatement of the cost of goods sold, petitioner earnestly urges error on the part of respondent in treating as income for that year the amount shown on petitioner's books as the balance in the "Manila Reserve" account, which represented the accumulation of overstatements of the cost of goods sold in the years 1932 to 1935, inclusive.
Respondent argues that the situation is analogous to those cases in which a reserve has been set up for certain liabilities and, the liabilities proving less than expected, the balance is then credited to profit and loss; citing *796 (App. D.C.), affirming ; (C.C.A., 7th Cir.), affirming ; Northwestern States Portland Cement Co. v. Huston, FedSupp. (Jan. 16, 1941); and that the reserves may be added to income by the Commissioner although not transferred to profit and loss by the taxpayer, citing (C.C.A., 6th Cir.); .
*998 The difficulty with respondent's contention is that the sums in question were not reserves in any sense and were not even analogous to reserves. In all of the cases cited by respondent there was some obligation either existent or contingent for the satisfaction of which sums were set aside either actually or by bookkeeping entries. In the instant proceeding there was no obligation of any kind on the part of petitioner on account of which or for the satisfaction of which this so-called "Manila Reserve" account was set up. The account merely represented*797 accumulations of the excess of sums forwarded to petitioner's purchasing agents over the sums actually expended for the purchase of copra. This excess belonged absolutely to petitioner and at no time was it set aside for the payment of any obligation actual or contingent. Even if it could be considered as a reserve it would be a reserve of a kind not recognized as a proper deduction from income and thus it would have to be restored to petitioner's income in the year or years when made. ; affd., (C.C.A., 7th Cir.); . See (C.C.A., 8th Cir., Mar. 12, 1942).
On the facts shown we can see no way in which the amount of the overstaterments of goods sold in prior years can be considered as income of petitioner in 1936.
The respondent makes a further argument in his brief on the subject of estoppel. The petitioner made representations of fact in its income tax return which were false, were known by the petitioner to be false, and were relied upon by the respondent in allowing*798 deductions which would not otherwise have been allowed. It is immaterial that the petitioner may not have intended to mislead the respondent. The latter had no duty in unsuspicious circumstances to go beyond the returns to the books of the petitioner. . However, there must be more than this to support an estoppel. An estoppel means that a party is estopped to deny as a fact a state of things which he has led another party to believe to be true. The estoppel must be specifically pleaded. ; . The petitioner misled the Commissioner into believing that certain sums were a part of cost of goods sold in prior years, but obviously it does the respondent no good to estop the petitioner to deny that the amounts were cost of goods sold, if the estoppel proceeds no further. The respondent filed an amended answer in which he makes reference to the fact that the cost of goods sold was overstated and too large deductions were taken in prior years, all of which was known to the petitioner and misled*799 the Commissioner. But that is as far as his allegations go, and even in his brief he does *999 not point out precisely what it is that the petitioner is estopped to deny which will result in some amount being income for 1936. An estoppel must be definite and certain and not vague and uncertain. Thirty thousand dollars was transferred at the end of 1936 from an account known as the "Manila Reserve" to the surplus account of the petitioner. But that transfer created no income. The respondent has failed to point out wherein there is any estoppel in connection with those transfers or where, in connection with the entire case, there is any estoppel which would make the $30,000 income. Since the estoppel was not pleaded and is not even demonstrated, we are unable to consider that there is any issue of estoppel in the case or if there is such an issue, that it may be decided to the respondent's advantage.
With regard to the deficiency determined for the year 1936 our decision is in favor of petitioner.
In Docket No. 102247 decision will be entered for respondent. In Docket No. 102248 decision will be entered for petitioner.