*2680 1. Loss in a shortage of inventory is a legal deduction from gross income.
2. The deductible loss on the sale of real estate determined.
3. Deduction for exhaustion of cost of patent disallowed.
*39 This is a proceeding for the redetermination of a deficiency in income and profits tax for the calendar year 1919 in the amount of $707.74. The petitioner alleges that in determining the deficiency herein the Commissioner erred in the following particulars:
1. In disallowing deductions claimed for shortage in bamboo inventory in the amount of $840, and in broom inventory in the amount of $895.17.
*40 2. In disallowing a deduction of $1,000 claimed on account of an alleged loss on the sale of property.
3. In failing to allow a deduction from gross income on account of amortization of cost of patent.
FINDINGS OF FACT.
The petitioner is a Pennsylvania corporation engaged in manufacturing and selling brooms. It filed an income and profits-tax return for the calendar year 1919, in which it deducted from gross income $840*2681 as "depreciation" of its cane inventory, and $895.17 as "depreciation" of its broom inventory. It also claimed as a deduction $666.22 as a loss resulting from the sale of real estate during the taxable year.
In the audit of the tax return the Commissioner disallowed the deductions claimed with respect to the bamboo and broom inventories and disallowed an alleged deduction of $1,000 for loss on the sale of real estate.
In the latter part of June, 1919, the petitioner caused an inventory to be made of its raw materials and finished products. At that time it was discrovered that the cane account, as reflected by the petitioner's books, was $840 greater than the actual inventory. It was also discovered that the broom account, as shown by the books, was $895.17 greater than that shown by the actual inventory. The petitioner had been in the habit of making a profit and loss statement as of June 30 and December 31 of each year. In order to reflect the inventory losses as separate items the following entry was made on the petitioner's books:
| Debit | Credit | |
| Profit & Loss | $1,735.17 | |
| Cane | $840.00 | |
| Brooms | 895.17 |
In making up its income-tax return for 1919, *2682 the petitioner included in gross sales $895.17 representing the charge made to the credit of the broom account. In determining the cost of the materials going into the manufacture of brooms, it excluded therefrom $840 representing the shortage in the inventory item as of June 30.
In 1919 the petitioner sold land, with the buildings thereon, at a price, excluding commission paid on the sale, of $21,097.50. The depreciated cost of the property at the date of sale was $22,416.22. The loss upon the sale of the property was $1,318.72. In its incometax return the petitioner deducted a loss of $666.22 but failed to deduct such part of the loss as was represented by the commission paid to the real estate broker, namely, $652.50. In determining the deficiency the Commissioner added to the net income reported $1,000 in respect of this transaction.
*41 Prior to 1919 the petitioner acquired patents in exchange for $10,000 of its capital stock. In the determination of invested capital for 1919 the Commissioner allowed $6,250 as the cash value of the patents at the date acquired and included that amount in invested capital, which was equal to 25 per cent of the capital stock outstanding.
*2683 OPINION.
SMITH: 1. The first question presented is whether the petitioner is entitled to deduct from gross income the difference between its book inventory at June 30, 1919, and the actual inventory of cane and bamboo and of manufactured brooms in the amounts of $840 and $895.17, respectively. The Commissioner has assumed that the petitioner is claiming a double deduction in respect of these items. He has assumed, in the first place, that the cane and bamboo inventory is included in the cost of goods sold and that the shortage in the broom account is not reflected in the gross sales. The evidence of record, however, clearly shows that this is not the case. The cane inventory at January 1, 1919, was $4,849.42. Purchases during the year amounted to $11,329.16, making a total of inventory at the beginning of the year and total purchases during the year of $16,178.58. Proper credits to the account, exclusive of the $840 charged to profit and loss, were $3,187.63; the inventory at the close of the year was $3,121.74, making the total of these items $6,309.37. The difference between $16,178.58 and $6,309.37 would indicate that the cost of the goods used in the manufacture was*2684 $9,869.21. The schedule attached to the petitioner's return for 1919 shows, however, that only $9,029.21 was used as representing the cost of materials used. It is, therefore, plain that the petitioner has not attempted to include in the cost of materials used the $840 representing the shortage in the inventory discovered at June 30, 1919. Clearly, the amount is a legal deduction from gross income.
The exhibits introduced in evidence also show that the shortage in the broom account was credited to the broom sales account and appears as a part of the gross sales for the year 1919. Since this amount was erroneously included in the gross sales it is proper to deduct it from gross income as a loss. The $840 and $895.17, representing the shortage in inventories at June 30, 1919, are deductible from gross income.
The deficiency letter shows that the Commissioner added to the petitioner's gross income for 1919, $1,000 by reason of a sale by it of real estate during the year. The facts are clear that the loss on the sale of the real estate was $1,318.72. Since in its return the petitioner deducted only $666.22 in respect of the transaction, it is entitled to a further deduction*2685 of $652.50.
*42 The petitioner acquired patents at some time in exchange for $10,000 of its capital stock, upon which the Commissioner has allowed invested capital of $6,250. The evidence does not show the date of acquisition of the patents or that they had any value on March 1, 1913, assuming that they were acquired prior thereto. Upon this state of the record the claim of the petitioner for the deduction for exhaustion of the patents is disallowed.
Judgment will be entered on 15 days' notice, under Rule 50.
Considered by LITTLETON, TRUSSELL, and LOVE.