*4149 Valuation of lumber inventory determined by the respondent on an average cost basis, which has been used both prior and subsequent to the taxable year, should not be disturbed in the absence of clear proof that the income is not accurately reflected thereby.
*232 The respondent has asserted a deficiency for the year 1921 in the amount of $6,223.87. Only that part of the deficiency is in controversy which arises from an increase by the respondent of petitioner's closing inventory in the amount of $62,561.36, of which petitioner *233 admits $56,329.59 was a proper increase. The petitioner contends that the respondent's method of computing the inventory at cost overstates the correct inventory valuation by $6,231.77, which is the only issue presented.
FINDINGS OF FACT.
The petitioner is a Washington corporation, with its principal office at Eatonville, Wash. During the taxable year it was engaged in the business of logging and manufacture of lumber and shingles. Five grades of lumber, exclusive of shingles, *4150 were produced and marketed by petitioner at different stages of manufacture, namely, kiln dried dressed in planing mill, kiln dried rough, green dressed in planing mill, green dressed in saw mill, and green rough. Each grade of lumber represents the completion of one process or step of the manufacturing operation, green rough being the first product, which may be improved by dressing in the saw mill or planing mill, or may be dried in the kiln and then dressed. The stock of lumber on hand consisted of the five grades in quantities which varied from time to time as the market required more of one grade and less of another.
On December 31, 1921, petitioner's inventory list showed the following amounts of shingles and lumber:
| Kiln dried, dressed | Kiln dried, rough | Green, dressed in plaing mill | Green, dressed in sawmill | Green, rough | Shingles |
| Feet | Feet | Feet | Feet | Feet | |
| 2,972,964 | ,546,881 | 4,123,743 | 3,038,317 | 6,417,897 | 1 63,800 |
The petitioner has computed the unit cost for each process of manufacture and applies to each*4151 grade of lumber only the process costs incident thereto. Overhead, including depreciation, is arbitrarily applied equally to each product. The unit cost for each grade, as computed by petitioner, follows:
| Kiln dried, dressed | Kiln dried, rough | Green, dressed in planing mill | Green, rough | Green, dressed in sawmill | Shingles | |
| Logs | $4.8012 | $4.8012 | $4.8012 | $4.8012 | $4.8012 | $4.8012 |
| Sawmill | 3.1822 | 3.1822 | 3.1822 | 3.1822 | 3.1822 | |
| Yard | .6412 | .6412 | .6412 | .6412 | .6412 | |
| Overhead | 2.5472 | 2.5472 | 2.5472 | 2.5472 | 2.5472 | 2.5472 |
| Dry kiln | 1.3817 | 1.3817 | ||||
| Planing mill | 1.9769 | 1.9769 | ||||
| Shingles | 6.3453 | |||||
| Total per M | 14.5304 | 12.5535 | 13.1487 | 11.1718 | 11.1718 | 13.6937 |
*234 The respondent has increased the opening inventory by $13,057.29 and the closing inventory by $62,561.36, which results from recomputing petitioner's inventory list at corrected production and marketing costs under article 1582 of Regulations 62. The opening inventory was computed on average market, which both parties admit was lower than cost of production at that time. The average market price used was $9 per thousand, without regard to the quantities of*4152 the different grades on hand. The closing inventory was compiled by respondent at average cost. The total production cost for the year was divided by the total number of board feet produced during the year, giving the average cost per board foot, which was multiplied by the number of board feet in the closing inventory list, without regard to the grade of the lumber. The average cost per thousand board feet as computed by respondent was $12.645.
The petitioner has computed its inventory for many years at average cost or market, whichever was lower, using the respondent's method of arriving at average cost or market rather than the process cost now advocated by petitioner. The closing inventory determined by the respondent for the taxable year was used as the opening inventory for the year 1922, against which the statute of limitations has run.
OPINION.
LANSDON: The only question presented in this proceeding is which of two methods of inventory valuation more clearly reflects the income. The respondent has computed the inventory value on a basis of average cost, without regard to the different production costs of distinct grades of lumber. The petitioner contends that*4153 the valuation should be computed by determining the cost per board foot of each grade and multiplying such cost by the quantity of each grade listed in the inventory.
It is apparent that the average cost method used by the respondent would be accurate only if the ratio between the total quantity produced and the quantity of each grade produced equaled the ratio between the total inventory list and the grade inventory list. It is unlikely that such percentages would be equal when each grade of lumber is marketed as a completed product. However, the method advanced by petitioner is not free from fault. The accuracy of this method depends upon the system of books kept, whether the books clearly show the production cost of each grade and the quantity of each grade produced. To some extent, at least, petitioner's computation is based on estimates and calculations made by its accountants several years subsequent to the closing of its books for the taxable year. The determination of the number of board feet of lumber kiln dried during the year, for example, was made *235 from the time-book by multiplying the amount of lumber hauled to the kiln at one load by the number of loads*4154 hauled by one man per day, by the number of men working during the year. It is obvious that such methods admit of gross error.
The petitioner has for several years computed its inventories at average market or cost, whichever was lower. The opening inventory for the taxable year was computed at average market, which was lower than cost. The opening inventory for the year 1922 has been computed on the average cost basis at the increased value determined by the respondent, and the statute of limitations has run against any adjustment for that year. To adopt the method now offered by petitioner would sacrifice consistency, since the method of inventory for one period only is to be changed. This Board has repeatedly held that consistency in inventory practice is of the highest importance. ; ; . Determinations of the respondent involving inventories which have a compensating effect upon succeeding taxable years should not be disturbed in the absence of convincing evidence of error. *4155 .
We are not convinced that the method of inventory valuation offered by the petitioner does more clearly reflect the income, when applied to the facts, than the method used by the respondent.
Judgment will be entered for the respondent.
Footnotes
1. Shingles were computed to board feet for the purpose of finding the unit cost of production. ↩