*2600 INVENTORIES. - It appears from the evidence that inventories are necessary in the determination of the income of the petitioner, but the respondent failed to give effect to the stocks of raw materials, supplies, and finished products on hand at the end of 1920. Held that the petitioner's gain and loss accounts for the years 1920 and 1921 should be readjusted by giving effect to an inventory of December 31, 1920, valued at $10,604.
*733 This proceeding results from the determination of deficiencies in income taxes amounting as follows: for 1922, $549.36; for 1923, $1,201.17; and 50 per cent fraud penalty for 1923, $600.59. At the hearing the respondent withdrew the assertion of the fraud penalty for 1923.
The petitioner alleges error in that respondent has failed to give consideration to an inventory of supplies and manufactured products on hand on December 31, 1920, with the result that the net loss for 1921 is understated, and as a consequence the tax liabilities for 1922 and 1923 are overstated.
*2601 FINDINGS OF FACT.
The petitioner is a corporation with its principal place of business at Biloxi, Miss., and it is engaged in the business of packing oysters and shrimp. Petitioner started in business in August, 1920. At that time it purchased a factory building located at Gulfport, Miss., took this building down, moved it to Biloxi and there erected it. These operations consumed about 2 1/2 or 3 months. As soon as *734 possible the factory was put into operation and packing of the products of the petitioner began. The factory was not ready during the height of the shrimp packing season, but some shrimp were packed during the latter part of September. Oysters were packed from October on. At the end of 1920 a quantity of manufactured product was on hand and it could not be shipped for the reason that the labels previously intended for use were rendered useless to the petitioner through the claims of another party, and it was necessary for the petitioner to secure new labels. The manufactured products were shipped out in the early part of 1921 after the new labels had been received. Sales of raw oysters and shrimp were made in 1920. An inventory of the manufactured*2602 product and supplies on hand was taken as of December 31, 1920, but it was not entered upon the books. At this time there were on hand at least 300 cases of oysters, grade 4 oz., market value $1.25 per case; 700 cases of oysters, grade 5 oz., market value $1.35 per case; 400 cases of oysters, grade 8 oz., market value $2.50 per case; 500 cases of shrimp, market value $2 per case. The 4 oz. oysters cost the petitioner an average of about 90 cents per case. The cost of supplies was reflected upon the books and upon the balance sheet taken therefrom and filed with the return as follows: stock, $1,450.80; box shooks, $782.25; boxes, $87.85; cans, $4,809.24; labels, $10.50; raw oyster boxes, $420.03; raw oyster cans, $652.46. The inventory was valued by the petitioner at approximately $14,500. The actual cost of the raw materials, supplies and manufactured products on hand at the end of 1920 amounted to at least $10,604.
The petitioner filed a return for 1920 reporting gross sales of $6,162.50; the cost of goods sold, $5,546.25; gross income, $616.25, and claimed a deduction for compensation of officers $1,000; thus arriving at a net loss of $383.75 and consequently no tax liability.
*2603 The petitioner filed a return for 1921 and reported as follows: Gross income, $89,620.09; cost of goods sold, $63,520.09; (opening inventory nil, closing inventory "cost" $3,462.51) and arrived at a net loss for the year of $1,906.89.
The petitioner sustained an operating loss from 1920 and a statutory net loss for 1921. In the deficiency letter they have been computed by the respondent as follows: for 1920, gross income, $13,425.55; total expenses, $27,459.53; net loss, $14,035.95; for 1921, gross income, $84,428.22; total expenses, $90,506.91; net loss, $6,078.69. In determining these losses the inventory claimed by the petitioner of $14,500 at the end of 1920 was not considered by the respondent.
In determining the tax liabilities of the petitioner for 1922 and 1923 the respondent has computed the taxable net incomes as follows:
| 1922 | 1923 | |
| Adjusted net income | $14,127.48 | $11,609.36 |
| Deduct 1921 net loss | 6,078.69 | |
| Remainder of income before deducting exemption of $2,000 | 8,048.79 | 11,609.36 |
*735 OPINION.
TRUSSELL: This appeal presents but one issue for determination. It is a question involving the quantity and the value for income-tax*2604 purposes of supplies and stock in trade on hand December 31, 1920. The petitioner contends that through a failure to consider the value of this inventory the operating loss sustained in 1920 and the statutory net loss for 1921 have not been correctly determined by the respondent. There is no dispute as to the aggregate of the net losses. The question is germane to the taxable years by reason of the provision of section 204 of the Revenue Act of 1921 allowing the deduction in the next two succeeding years of net losses suffered in years subsequent to December 31, 1920.
Section 203 of the Revenue Act of 1921 provides for the consideration of inventories whenever in the opinion of the Commissioner they are necessary to clearly determine income. The Commissioner, with the approval of the Secretary, has provided in articles 1581 to 1584, inclusive, of Regulations 62 for the use of inventories in a business such as the petitioner's where products were manufactured and sold by the taxpayer.
The evidence shows that quantities of supplies and manufactured products of the petitioner were left on hand at the end of 1920 and were sold in the following year. This fact has not been given*2605 effect in the computations by the respondent of the operating loss for 1920 and the statutory net loss for 1921. Since the respondent has not considered any amount of inventory it is obvious that the loss for 1921 would be increased and the loss for 1920 would be decreased by whatever amount of value may be assigned to the inventory.
The inconsistency of the respondent's determination is apparent on its face, for inventories at the end of each of the succeeding years were accepted and considered in the computations of the net incomes. To remedy this inconsistency it is necessary for us to determine as a matter of fact an allowable value for the inventory of December 31, 1920. Due to a failure to record the inventory properly or to close the books for 1920, the exact cost of the inventory is not in evidence. After a careful consideration of the testimony relative to the books of account and the quantities and values of the manufactured products, we are satisfied that the cost of the inventory amounted to at least $10,604. This is somewhat less than the two valuations *736 coinciding in an amount of $14,500 testified to by the former bookkeeper and arrived at by a public*2606 accountant who was employed to retrospectively reconstruct an inventory, but these valuations are unacceptable for the reason that they both are clearly shown to have been based upon market prices which we believe were greater than cost. The increment in value, unrealized at the end of 1920, if at all, is unallowable in the inventory valuation.
We conclude that a redetermination should be made giving effect to the value of $10,604 for the inventory at the end of 1920.
Judgment will be entered pursuant to Rule 50.