*1582 1. Merchandise purchased by petitioner, title to which remained in seller, can not be included in inventory, if any, kept by petitioner.
2. No abnormality having been shown to exist, held, petitioner not entitled to benefit of special assessment provision.
*872 This is a proceeding for the redetermination of an asserted deficiency in income tax for the fiscal year ended January 31, 1921, in the amount of $9,134.06.
The following errors are assigned by petitioner:
(a) Failure to permit the petitioner to take as a deduction from its gross income a loss which it actually sustained within the taxable year upon the decline in the market value of certain merchandise which it, for all practical purposes, had in its inventory, which loss amounted to $25,574.25; or
(b) If it should be determined that the respondent properly disallowed the deduction referred to above, then the failure to permit the tax to be computed under the provisions of section 328 of the 1918 Act on account of abnormal conditions contemplated in section 327 of the same act.
*1583 The motion of the Commissioner, filed June 28, 1930, that the hearing in this proceeding be limited in the first instance to issues defined in paragraph (a) and (b) of Rule 62 of the Board's rules of practice, was granted.
FINDINGS OF FACT.
The petitioner was incorporated February 23, 1917, under the laws of the State of Wisconsin, as the Defnet & Jagerson Supply Company. On March 14, 1921, its name was changed to Jagerson Fuel Company.
The petitioner since its incorporation has been engaged in the business of buying and selling slab wood, edgings, baled shavings and sawdust. It maintained at Neenah, Wis., an office only and none of the merchandise was shipped to the petitioner. It was its custom to purchase such merchandise from various sawmills throughout Wisconsin and elsewhere, which was, upon orders given from time to time by the petitioner to the mills, shipped by the mills direct to customers of the petitioner.
In purchasing such merchandise on which inventory loss is claimed by the petitioner, agreements in various forms were entered into, nine being letters from the sellers to the petitioner confirming agreement of purchase and sale accepted by the petitioner; *1584 one a formal agreement; one a letter from the petitioner to the seller; two in the form of receipts; and two in the form of an order blank of seller signed by the petitioner.
Other agreements were entered into which were taken into account in arriving at the claimed loss of $25,574.25, but were not offered in evidence, because either the contract or information as to the existence of the merchandise was missing.
*873 All of the agreements produced were dated in the year 1920 and provided for the delivery of the merchandise f.o.b. cars location of seller upon order of the petitioner, except one, that of the Holt Lumber Company dated January 26, 1920, which is in letter form and states that "Agreeable with arrangements made with your Mr. Jagerson today" an order for fuel wood as set forth had been entered. Another letter dated June 5, 1920, from the Holt Lumber Company covering a later order by George A. Jagerson for fuel wood states that such order for fuel wood was entered "f.o.b. cars." The fuel wood purchased under these agreements ranged from 1,000 to 3,100 cords. The purchases under these agreements, in addition to fuel wood, included 60 cars of baled shavings and*1585 15 cars of trimmings. The petitioner under most of these agreements was required to and paid in advance amounts ranging from $500 to $5,000 to apply on account, the formal agreement providing that the payment of $1,000 thereunder was "to be applied on the last shipments." All the sellers under the agreements were located in Wisconsin, except one, the Von Platen-Fox Company of Iron Mountain, Mich. The agreement with this company is in letter form written by the seller and addressed to the petitioner at Neenah, Wis. Below the signature of the seller the following appears: "Accepted. [Signed] Defnet & Jagerson Supply Co., Geo. A. Jagerson, Pres."
The purported inventory of the merchandise on January 31, 1921, was arrived at by deducting the merchandise ordered shipped by the petitioner to its customers from the merchandise purchased by the petitioner under the agreements.
An original income-tax return dated April 13, 1921, was filed by the petitioner. The item of $25,574.25 is shown on this return on the first page thereof as a deduction under "Losses sustained during taxable period and not compensated for by insurance or otherwise."
The deficiency letter dated July 12, 1926, attached*1586 to the petition contains the following:
Reference is made to your protest dated March 6, 1926, against the denial of your application for assessment of your profits tax under the provisions of Section 328 of the Revenue Act of 1918, as set forth in Bureau letter dated February 5, 1926.
After a careful review of your protest and all the evidence presented in support of your contentions, you are advised that the Bureau holds that your application was properly denied because the conditions claimed to have affected your net income and invested capital are not such as would bring your case within the scope of paragraph (d) of Section 327. Accordingly, the conclusions set forth in the above-mentioned letter are sustained.
The letter from the office of the Commissioner of February 5, 1926, referred to in the deficiency letter, contains the following:
* * *
*874 After careful consideration and review and an examination of all the facts submitted, your application under the provisions of Section 327 for assessment of your profits tax under Section 32, of the Revenue Acts of 1918 and 1921 has been denied for the reason that no abnormality has been disclosed which would bring*1587 the case within the scope of Paragraph (d) of Section 327.
The deficiency in tax of $9,134.06 as indicated in Bureau letter dated May 22, 1923, is therefore, sustained.
* * *
Attached to the letter of May 22, 1923, referred to in the letter of February 5, 1926, was a statement showing recapitulation of tax for years 1918, 1919, 1920 and 1921, and containing the following computation of tax for fiscal year ended January 31, 1921:
| Net Income shown on amended return | $33,829.23 | ||
| Invested capital 1/31/20 | 100,654.71 | ||
| Additions: Increase in tax overpayment | 443.71 | ||
| Cash surrender value of insurance policy | 2,891.85 | ||
| 103,990.27 | |||
| Deduction for inadmissibles | 13,102.77 | ||
| Invested capital as corrected | 90,887.50 | ||
| Excess profits credit | 10,271.00 | ||
| Total profits tax | 7,841.99 | ||
| Net Income | $33,829.23 | ||
| Less: | |||
| Interest on U.S. obligations not exempt | $95.00 | ||
| Profits tax | 7,841.99 | ||
| Exemption | 2,000.00 | ||
| 9,936.99 | |||
| Balance subject to tax at 10% | 23,892.24 | ||
| Amount of tax at 10% | 2,389.22 | ||
| 11/12 of $2389.22 or 1920 portion | 2,190.12 | ||
| 1921 tax - 10% of $25,892.24 | 2,589.22 | ||
| 1/12 of $2589.22 or 1921 portion | 215.77 | ||
| Total tax assessable | 10,247.88 | ||
| Tax assessed | 1,113.82 | ||
| Additional tax due | 9,134.06 |
*1588 The $2,000.00 specific exemption is not applicable to your income under the 1921 law.
This statement refers to amended income-tax return dated January 5, 1922, for the fiscal year ended January 31, 1921, filed by the petitioner. The total tax assessable on the amended return as computed by petitioner is $10,378.15, which exceeds by $130.27 the total tax assessable - $10,247.88, as shown on the statement dated May 22, 1923. The claimed inventory loss is not shown on the amended return as an inventory loss or otherwise deducted from gross income.
*875 OPINION.
MCMAHON: The petitioner contends that it should be permitted to take as a deduction from its gross income a loss of $25,574.25 which it claims it actually sustained within the taxable year upon the decline in the market value of certain merchandise which it, for all practical purposes, had in its inventory.
The books of account of the petitioner were not produced at the hearing and from the testimony we are unable to determine just how or at what time the purchases and sales were entered therein. It is apparent from the testimony, however, that no book inventory was kept. The quantity of merchandise remaining*1589 in the possession of the mills was ascertained by deducting the quantity ordered shipped to the customers of the petitioner from the aggregate total amounts shown on the agreements to purchase.
The petitioner contends that it had title to this merchandise and that, having title, it should be permitted to inventory it and deduct the loss due to the decline in price of the merchandise.
The respondent contends that the petitioner never adopted a proper method of inventorying; that title to the merchandise remained in the seller, and that the agreements were merely agreements to purchase.
All of the agreements were entered into with mills in Wisconsin except one, which was entered into with the Von Platen-Fox Company of Iron Mountain, Mich., but accepted apparently by the petitioner at Neenah, Wis. Whether they are all Wisconsin contracts or one of them a Michigan contract is immaterial, as the Uniform Sales Act is in force in both States and the supreme court of each State has determined the same question before us, both before and after the enactment of the Uniform Sales Act.
All the purchases were made, as shown by the contracts, f.o.b. cars location of mill. A sale f. *1590 o.b. mill, or location of mill, passes title to purchaser when the merchandise is placed on the cars at the mill or ther place provided. ; ; ; , and cases cited therein; ; ; ; ; and ; . The Supreme Court of Michigan in the latter case state in its opinion: "The words 'free on board' in such contracts have acquired a settled judicial meaning * * *," citing ; .
The contract in the Vogt case, supra, was similar to the contracts in this proceeding:
*876 Received of Paul Vogt of Milwaukee, Wis. Five (5) Dollars on account of sale to him by me, made this 15th day of November, 1902, of 100,000 feet more*1591 or less of pine one inch lumber at Eight Dollars per 1000 feet cull and Fifteen Dollars per 1000 feet common or better, now at Stadler's Mill, f.o.b. cars Butternut, Wis., to be delivered upon demand within two months from above date. Inspection fees paid by both of us.
Therefore, as title to the merchandise covered by such contracts was in the sellers and not in the petitioner, the petitioner may not include such merchandise in its inventory. .
The determination of the respondent in disallowing the claimed inventory loss is approved.
As we have held that the merchandise purchased under the contract involved herein may not properly be included in the petitioner's inventory, it is not necessary for us to determine other questions relating to the claimed inventory loss, raised by the respondent.
The petitioner's alternative contention that, if it should be determined that the respondent properly disallowed the deduction, then the tax ought to be computed under provisions of section 328 of the Revenue Act of 1918 on account of abnormal conditions contemplated in section 327 of the same act, is, we think, without*1592 merit. There was some testimony of a slump in prices of wood in 1920 and 1921 ranging from $1, to $3 a cord, but this decline in prices affected all dealers in wood and was not a condition peculiar to the business of the petitioner. . Abnormality is a fact which must be determined in each case and the burden of proof in this respect in upon the petitioner. See ; ; ; and .
The respondent's determination of deficiency as shown in the statement attached to its letter of May 22, 1926, is therefore approved.
Judgment will be entered for the respondent.