*2613 1. Respondent's adjustments of raw cotton inventories to cost reversed.
2. Two similar and undistinguished lots of the same merchandise can not be inventoried on different bases.
3. Where raw cotton was acquired and in possession of the petitioner, expenditures for public warehousing and subsequent drayage to the petitioner's mill, do not constitute additional costs of the cotton for inventory purposes, but are business expenses and proper deductions from income. The warehousing and drayage add no capital value to the cotton, nor does the petitioner thereby acquire anything that it did not already posses.
*301 This proceeding seeks the redetermination of deficiencies in income and profits-taxes for the six-month period ended December 31, 1918, and the calendar years 1919, 1920, and 1921, in the total amount of $25,264.96.
The alleged errors of the Commissioner are:
(1) The increase of income by an adjustment of the raw cotton inventory at December 31, 1918, from market to cost.
(2) The increase of closing*2614 inventories by the inclusion of alleged expense items as additional costs.
(3) The pricing of cotton in stock in process inventories at the cost of raw cotton as of the close of each taxable period involved, rather than at the known price of such cotton.
(4) Denial of relief under sections 327 and 328 of the Revenue Act of 1921.
*302 (5) The inclusion of certain manufacturing expenses in computing cost of the stock in process inventory.
(6) Denial of adequate depreciation deductions on machinery, equipment and plant for the year 1920.
FINDINGS OF FACT.
The petitioner is a Georgia corporation with its principal place of business at Newnan. It was incorporated and doing business prior to June 30, 1918.
The petitioner's raw cotton inventory at December 31, 1918, was taken at market, that being lower than cost and in accordance with the petitioner's practice of taking such inventories at cost or market, whichever is lower. The respondent has increased this inventory by adjusting it from market to cost.
During the taxable periods involved the petitioner carried a six or eight-month supply of cotton. Being unable to warehouse so large a supply, a public*2615 warehouse was used. The respondent has added warehouse charges and drayage to the cost of this cotton, thus increasing inventories. The petitioner charged the cost of warehousing and drayage therefrom to the mill, to expense, in accordance with its consistent practice in prior years.
The petitioner in taking its stock in process inventories priced the cotton at the "known price" of the cotton involved, this "known price" being determined by averaging the cost of cotton purchased during the year. The nature and effect of the respondent's adjustment, if any, of this inventory item does not appear.
In determining the amount of its stock in process inventories, the petitioner included among other items, labor, road expenses and oil, and did not include salaries, discounts, commissions or freight. The respondent has included officers' salaries, insurance, taxes, and other administrative expenses in the stock in process inventories.
During the six-month period ended December 31, 1918, R. B. Hubbard, secretary and treasurer of the petitioner, conducted its business. His salary during this period was at the rate of $2,400 per year.
During 1920 the petitioner's mill was operated*2616 on two shifts, each being 60 hours per week. On the night shift the cord room and six spinning machines operated and as the work required, one-third of the twisters and winders were also used.
OPINION.
MARQUETTE: We shall first discuss the two issues resulting from the respondent's adjustments of cotton inventories. It appears that the petitioner while asserting its right to price its December 31, 1918, raw cotton inventory at market, contending market to be lower than *303 cost, is at the same time inventorying the cotton in stock in process at an average designed to represent the "known price" without regard to market at the inventory date. There has been no evidence to differentiate by lot, grade, price, or otherwise, between the raw cotton in stock and the cotton in stock in process.
We know of no authority lending countenance to an inventory method under which two lots of the same merchandise which are similar and undistinguished, may be priced on different bases, and we find no merit in the petitioner's plea of convenience. The evidence shows that it was the petitioner's custom to take its closing inventories at cost or market, whichever was lower, and that*2617 it followed that custom in regard to its raw cotton in its closing inventory for 1918. The market price of cotton is admitted to have been lower than cost on that date, and the petitioner was, therefore, clearly within its rights in taking its inventory at market. For the reasons above stated, the December 31, 1918, inventory of stock in process should be taken on the same basis. We have before us no evidence as to the cost or market price of cotton as of December 31 of other years involved, and in the absence of that evidence we can only approve the respondent's determination as to the inventories of cotton in stock in process for those years.
The respondent has increased the petitioner's closing inventories of raw cotton by the addition of sums paid as warehousing and drayage charges on such of the cotton as the petitioner stored in a public warehouse because of its own limited storage facilities. The respondent's action is premised on the theory that these storage and drayage charges constituted an additional cost of the cotton. The petitioner contends that the payments are expense.
When the cotton was warehoused it had been acquired by the petitioner and was in its possession. *2618 The warehouse and drayage charges on a supply such as petitioner had on hand are business expenses and are properly deductible from income as such. They do not increase the cost of the cotton for inventory purposes. See .
On the issues involving special assessment, allocations of manufacturing expense, etc., in computing the stock in process inventories and depreciation, the evidence is wholly inadequate to warrant us in disturbing the respondent's determination. The respondent's determinations in respect thereof are, therefore, approved.
Reviewed by the Board.
Judgment will be entered on 15 days' notice, under Rule 50.