*3833 Petitioner made monthly balance sheets which did not take into account such matters as bad debts, depreciation, etc., and made such a balance sheet for the closing month of the year, which the Commissioner used to determine profits of the year. Immediately after the close of the year it made a balance sheet which did take into account those items and which reduced surplus, as shown by the monthly balance sheet. Held, that the balance sheet last made is the one that properly shows surplus.
*306 This proceeding is for the redetermination of a deficiency in income and profits tax for the period of five months from August 1, 1921, to December 31, 1921, in the amount of $3,753.08.
There is only one assignment of error, which is in effect that the Commissioner increased petitioner's surplus and thus increased the profits for the period in the closing inventory of December 31, 1921, to the extent of $12,663.82.
FINDINGS OF FACT.
The petitioner is a Texas corporation with its main office in Waco. In 1921 its business was retail selling of Ford*3834 cars and parts. It kept its books according to the "Ford system" which system is generally, if not universally, used by Ford car dealers. Such system is designated *307 and known as the perpetual inventory system, that is, merchandise when purchased is charged to that account at cost, and when an article is sold an equal amount is credited to the account and the difference between the debit and credit sides shows merchandise on hand. At the close of each month a statement or list is made up from the books so kept. In such statement no account is taken of decline in cost prices, depreciation on depreciable assets, or of bad debts, the balance sheet so prepared reflecting only the temporary situation as shown by the books, unadjusted to reflect such items, if any, as depreciation, bad debts, and fluctuation in prices.
At the end of December, 1921, such a balance sheet was made out for that month and showed a surplus of $87,450.88. The surplus on August 1, 1921, was $69,701.08, the difference being $17,749.80. It was this balance sheet that was used by the revenue agent on whose report, apparently, the deficiency was determined.
At the close of the fiscal period and*3835 between January 1 and January 20, 1922, petitioner took a physical inventory of merchandise on hand and adjusted the cost price of each article at the list price (less discount) prescribed by the Ford Company, by which all Ford car dealers were governed, and being the list price as of December 31, 1921. During 1921 and 1922 cars as well as parts were gradually declining in price, hence the cost prices inventoried as of December 31, 1921, with respect to many items, if not all, were less than the original cost prices. However, in the subsequent sale of cars as well as parts petitioner was required to conform to the current list price, regardless of original cost.
In that last-made balance sheet there was taken into account the changes in list prices, also depreciation on depreciable assets and bad debts charged off. It showed surplus as of December 31, 1921, of $74,787.06, with an accumulation since August 1, 1921, of $5,085.98, and it was this last amount used by the petitioner in its return.
The tentative balance sheet made on December 31, 1921, which the Commissioner used in his computations, showed a total surplus of $87,450.88, with an accumulation for the taxable period*3836 of $19,380.68.
The balance sheet made as of the same date in which was taken into consideration the decline in market value of merchandise, depreciation, and bad debts, showed a surplus of $74,787.06, a difference of $12,663.82, which difference was brought about by:
| Inventory corrections | $5,939.60 |
| Bad debts charged off | 6,240.32 |
| Depreciation | 483.90 |
| 12,663.82 |
*308 The depreciation was taken on furniture and fixtures and at the hearing was conceded to be reasonable.
OPINION.
LOVE: In this case the burden of the petitioner is to establish its right to deduct from its monthly temporary balance sheet made December 31, 1921, certain items as it claims, so as to adjust it to the actual situation as it existed on that date. The items sought to be deducted are:
1. Merchandise inventory adjustments to make the cost of items correspond with cost prices as of December 31, 1921, regardless of original cost.
2. Bad debts charged off.
3. Depreciation.
While petitioner denominated its method of taking that inventory as the cost method, it was in fact taking it at market, that is, the list prices (less discount) as of that date. The evidence*3837 was that cars as well as parts were on the decline in prices and the result was that market being less than cost, the method was practically uniform, if not perfectly uniform, cost or market whichever is lower.
On the bad debt claim petitioner put in evidence a complete list of the bad debts charged off with the several amounts, and submitted satisfactory evidence of the ascertainment of worthlessness and charge-off in the taxable year. Only one such debt need be mentioned. There was due it by the County of McClennan $35.54, and the county was solvent and liable for its debts. However, the county authorities had established a rule that every item ordered for use of the county must be by a written order signed by the head of the department for which it was needed. Petitioner failed to obtain such written order through oversight or otherwise, and the county refused to pay. Petitioner upon such refusal was unable to testify who, or what department, purchased the merchandise and was not able to swear definitely what the items were. The county was a good customer and petitioner, rather than carry the matter to court, abandoned the claim. Under such circumstances, a suit would*3838 probably have proven futile, at least it would have been bad business policy. We believe that debt should be included with the others charged off.
With reference to depreciation claimed, it was conceded that if, under the circumstances, it was allowable, the amount was reasonable.
Judgment will be entered on 15 days' notice, under Rule 50.