*3421 Where respondent determined that petitioner sustained a net loss in 1919, but later determined that his prior determination was erroneous, and no net loss was actually sustained, held that his action in refusing to allow as a deduction against 1920 income a portion of a net loss previously determined was correct.
*1015 This proceeding is for the redetermination of a deficiency in income tax for 1920 of $4,906.46, of which amount $4,905.65 is in controversy. The only issue involved is whether petitioner is entitled to a deduction against his income for 1920 of an amount of $20,759.40 as representing a portion of a net loss for 1919.
FINDINGS OF FACT.
The petitioner is an individual residing in Buffalo, N.Y., and during the years 1917, 1918, 1919, and 1920 was engaged in the wholesale metal and rubber business and in the selling of other scrap materials.
For the years 1917 through 1919, the petitioner filed income-tax returns in which inventories were used at both the beginning and the end of the year to determine income from the business*3422 and taxable net income. During 1920 a revenue agent made an examination of the petitioner's records and returns for the years 1917 through 1919. Being of the opinion that the inventories which were recorded on loose sheets not a part of the petitioner's books were estimates, the agent computed the petitioner's net income without *1016 the use of inventories. This, with other changes made by the agent, disclosed net losses for 1917 and 1919 resulting in the overpayment of the taxes paid for those years in the respective amounts of $134.75 and $90.57, and an additional tax for 1918 of $1,997.10 in excess of the tax of $48.41 previously paid, or a net additional tax for the three-year period of $1,771.78. The changes made in the 1919 return showed a net loss for that year of $38,673.42. In computing the additional tax for 1918 the agent did not apply against the taxable net income of $17,029.02 as determined by him for that year any part of the net loss for 1919. The action of the revenue agent was approved by the respondent and the net additional tax of $1,771.78 was paid by the petitioner about November 12, 1921, and after he had objected to the determination of his tax*3423 liability for the three years without the use of inventories. The inventories shown by the petitioner's returns were as follows at the dates indicated:
| Jan. 1, 1917 | $54,020.00 |
| Jan. 1, 1918 | 73,410.00 |
| Jan. 1, 1919 | 58,400.00 |
| Dec. 31, 1919 | 103,038.59 |
Being of the opinion that the additional tax was incorrectly determined, the petitioner filed a claim for its refund.
Acting on information received from the revenue agent in 1920, the petitioner did not use inventories in his return for that year. Permission was obtained from the collector of internal revenue to use inventories in determining income for 1921, and in his return for that year the petitioner used inventories.
In July, 1925, a revenue agent made an examination of the petitioner's books and records for the years 1920 and 1921. The agent made no change in the 1921 return. For 1920, he proposed an additional tax, which resulted principally from reducing the cost of goods sold as shown in the return by the amount of the opening inventory for 1921. In October, 1925, a supplemental examination was made, during which the agent found that the petitioner was entitled to use inventories in computing*3424 income for 1920, and that the disallowance of the use of inventories in computing income in prior years was erroneous. The petitioner's net income was found to be $44,641.65. The agent's findings were approved by the respondent.
In determining the deficiency involved herein, the respondent denied the petitioner's contention that there should be applied against his income for 1920 the amount of the net loss of $38,673.42 which the respondent previously determined for 1919 that remained after reducing it by the amount of his 1918 income.
The petitioner's returns for the years 1917 through 1921 were prepared from his books of account. The petitioner has used inventories *1017 throughout the history of his business and is of the opinion that the use of inventories is necessary in properly computing his income. The inventories for 1917 through 1920 were taken by weighing the various materials which had been listed on slips of paper, then adding the amounts on the slips and transcribing to loose-leaf inventory sheets the data on the slips. Each item of material on hand at the date of inventories is listed on the inventory sheets.
OPINION.
TRAMMELL: The only issue*3425 in this proceeding is whether the petitioner is entitled to a deduction in computing taxable income for 1920 of the amount of $20,759.40, representing the excess of the net loss for 1919 as determined by the respondent over the taxable net income for 1918. While the petition refers to the excess of the loss for 1919 over the amount of the taxable income for 1918 as being $20,759.40, the evidence shows that the net loss as determined by the respondent was $38,673.42 and that the taxable net income for 1918 as determined by him was $17,029.02, leaving a net difference of $21,644.40 instead of the amount mentioned in the petition. This difference, however, is not material to a consideration of the case.
The petitioner does not contend that the action of the respondent in determining his income for 1920 by the use of inventories is erroneous, but does contend that the respondent erred in refusing to apply the net loss of $38,673.42 as determined for 1919 against the net income for 1918, and to carry forward and apply the excess of the loss against income for 1920.
The respondent contends that whether the petitioner sustained a net loss for 1919 is a question of fact, and that if*3426 the inventories reported by the petitioner in his return for that year are used in determining his income, there is no net loss, but a profit of $5,965.17 for that year. He also points out that the opening inventory for 1920 was the closing inventory for 1919 and urges that in order for the petitioner's income to be properly determined for 1919 inventories should be used.
Nowhere in the record does the petitioner contend that the respondent's method of determining the net loss for 1919 by eliminating inventories was correct. He does not contend that he sustained a net loss during 1919, but bases his contention for the allowance of the deduction merely on the fact that the respondent once determined that he had sustained a loss in that year. The petitioner appeared as a witness in his own behalf and testified as to the manner in which the inventories for 1917 through 1920 were taken. He further testified that throughout the history of his business he had always taken inventories and was of the opinion that the use of inventories is *1018 necessary to correctly determine his income. The evidence shows that petitioner objected to the respondent's action in eliminating inventories*3427 in the determination of his tax liability for the years 1917 to 1919, and although he paid the net additional tax determined against him he filed a claim for refund. From a consideration of the facts we are led to the conclusion that the petitioner did not sustain a net loss in 1919, and, since there was no net loss sustained in that year, there was no loss to apply against income for either 1918 or 1920. The fact that the respondent once determined that the petitioner had sustained a net loss in 1919, when considered in connection with the other facts in the case, is insufficient to support a finding that such a net loss was actually sustained. As the petitioner sustained no net loss in 1919, the action of the respondent in refusing to allow the deduction sought was correct.
Judgment will be entered for respondent.