*2025 1. INVENTORIES. - Value of opening inventory determined upon the evidence. Value of inventory at the end of 1918 left undetermined for lack of evidence.
2. GROSS INCOME. - In the absence of the value of the intermediate inventory at the end of 1918, a method of allocating gross profit ratably according to sales is approved.
*513 This is a proceeding for the redetermination of deficiencies in income taxes and penalties thereon, amounting as follows:
| Penalties | |||
| Year | Deficiencies | Per cent | Amount |
| 1918 | $4,237.18 | 25 | $1,059.30 |
| 1919 | 2,963.52 | 25 | 740.88 |
| 1920 | 62.94 | 25 | 15.74 |
| 1921 | 12.00 | 25 | 3.00 |
| 1922 | 12.00 | 50 | 6.00 |
| 1923 | 9.00 | 25 | 2.25 |
The petitioner alleges error with reference to the following issues: (1) In computing income for 1918 the respondent has erroneously included the amount of an inheritance by the petitioner from his brother; being $25,000 in cash; a bank deposit of $1,905.68; liquors on hand of a value of $28,000; less debts of the decedent amounting to*2026 $1,298; (2) in computing the income for 1918 and 1919 the respondent has failed to consider the inventory of merchandise on hand on December 31, 1918, amounting to $19,904.76; (3) the respondent has erroneously asserted the several penalties for the taxable years. Upon motion duly made and granted the petitioner was permitted to amend the pleading to allege (4) that the amount of income for 1922 is overstated with reference to salaries received.
At the hearing the petitioner abandoned the fourth issue, and the third issue was disposed of by the parties as follows: the petitioner admitted liability for penalties of 25 per cent for failure to file returns for the years 1918, 1919, 1920, 1921, and 1923; the respondent admitted error relative to the imposition of a fraud penalty of 50 per cent for the year 1922.
*514 FINDINGS OF FACT.
The petitioner is a resident of Biloxi, Miss., where he has lived for 12 years. Prior to his marriage in 1916 he was engaged in the business of retailing liquors from a small boat along the Louisiana coast in the Gulf of Mexico, carrying a small stock which he usually purchased on credit, and he was required to pay for it upon his return*2027 from each voyage. After his marriage he gave up this liquor business and entered the employ of his brother, Joseph Anticich, at a salary of $100 per month. The brother was engaged in the liquor business, operating a floating bar and liquor supply store at Grant Pass, La., together with a number of hired boats which were used in vending the liquor in the surrounding waters. In October, 1918, the brother left the petitioner in charge of his business at Grant Pass and went to New Orleans on a business trip. He paid to a dealer at New Orleans from whom he purchased liquor a considerable sum in cash, amounting to $7,000 or $8,000. Subsequently he was taken ill at New Orleans with the "flu" and died there on October 13, 1918. At this time there was on hand, on the several boats at Grant Pass used by the brother in his business, a stock of liquor which had a value of $25,000, and, in a safe on one of the boats, cash in the amount of $25,000. These assets the petitioner took possession of in his own right as the sole heir of the deceased. There was also an amount of cash on deposit at the French Market Savings Bank of New Orleans in the amount of $1,905.68. It was necessary for the*2028 petitioner to institute court proceedings in Orleans Parish in order to come into possession of this deposit. Indebtedness of the decedent amounted to $1,298. Petitioner continued operation of the liquor business formerly conducted by his brother, and he opened an account with the Peoples Bank of Biloxi, Miss., in October, 1918, depositing therein within 60 days an aggregate of $25,606.25. Subsequently large deposits were made.
Petitioner made purchases of liquor in the fall of 1918, which included purchases pursuant to a contract which had been entered into by his brother. Petitioner kept no books of account. Further purchases of liquor were made in 1919. Notwithstanding that the busiest season for selling the liquor was around Christmas time there remained a stock of liquor on hand in the business at December 31, 1918. However, an inventory was not taken by the petitioner. The petitioner sold out all of the liquor in 1919 and discontinued the business. Thereafter, he entered the business of packing oysters and shrimp.
The petitioner failed to file returns for 1918, 1919, 1920, and 1921. For 1922 a joint return of husband and wife was filed. Subsequently, delinquent*2029 returns were filed for the years mentioned. The tax liability *515 of the petitioner was investigated by revenue agents, who ascertained the amount of gross income from bank deposits, and this method resulted in a determination of large amounts of tax liabilities of the petitioner. The petitioner sought out counsel who protested the revenue agents' report and secured a reexamination. A public accountant was employed to ascertain the results of the operations of the business, and upon the basis of his report and of the reinvestigation by revenue agents the tax liabilities were determined by the respondent. In determining the deficiencies the respondent has not made any allowance for the inherited stock in trade and the stock on hand December 31, 1918.
An exemption for both years of $2,400 was determined.
The respondent has determined the tax liabilities upon the following computations of net income:
| 1918 | 1919 | |||
| Total deposits | $44,415.25 | $101,231.57 | ||
| Deduct deposits made to repay loans | 39,943.44 | |||
| 61,288.13 | ||||
| Deductions: | ||||
| Liquor purchased | $16,914.76 | $33,918.98 | ||
| Expenses | 103.91 | 1,759.12 | ||
| Interest | 2.00 | |||
| 17,018.67 | 35,680.10 | |||
| Net income | 27,396.58 | 25,608.03 |
*2030 OPINION.
TRUSSELL: Two issues survive for decision. The first relates to cash and stock in trade inherited by the petitioner from his brother. The second is a question of inventory on hand at the end of 1918. Both issues are questions purely of fact.
A great deal of the rather voluminous testimony in this case is too indefinite to enable an exact finding of all of the relevant facts, yet, even though we also attach little weight to the investigations and the conclusions of a public accountant employed by the petitioner in an endeavor to uncover the missing details, we are satisfied that the determination of the respondent is grossly erroneous and are of opinion that it should be revised so far as now possible.
We will consider, first, the cash inherited by the petitioner and which the petitioner alleges in the first issue was included in income by the respondent. The petitioner makes no further contention relative to the bank deposit of $1,905.68, and there is no satisfactory evidence in support of the allegation. We are unable to make any redetermination in this respect. An amount of $25,000 cash was also inherited by the petitioner, and in this regard there may have*2031 *516 been opportunity for error. The petitioner contends that this cash was deposited in the bank along with the cash income from the business which the petitioner proceeded to conduct after the death of his brother, and, since the respondent has computed the income upon the basis of the aggregate of the bank deposits, an overstatement of income in the amount of $25,000 resulted. The evidence shows that within 60 days after the death of the brother the petitioner deposited in the bank an aggregate of $25,606.25 and subsequently there were further large deposits. These deposits were made at various times, and we are without information as to the dates and amounts which combine to make the aggregate in evidence or as to the source of the cash deposited. In the entire absence of proof that the $25,000 inherited cash was at any time actually deposited, in whole or in part, in the bank, we are asked to entertain a presumption that it must have been included in the aggregate of the deposits during the first 60 days, although the fact that the business was operated during that period offers possibilities and even probabilities of the realization of large amounts of cash. We do*2032 not feel that the income has been shown to have been overstated by the respondent in this respect.
The remaining part of the first issue and the whole of the second issue relate to inventories of stock in trade on hand at the beginning of petitioner's business operations and at the end of 1918. For reasons which will presently appear, we will consider these questions together. A careful consideration of the evidence convinces us that there was undoubtedly a considerable stock of liquors on hand on the boats at Grant Pass when the petitioner's brother died. As to its value, we are of opinion that it was worth at least $25,000. In determining the tax liabilities of the petitioner for the taxable years, that value of the opening inventory is allowable in the computation of subsequent gains or losses. This opening inventory has not been given consideration by the respondent in computing income. However, this fact alone is not determinative of the issues for, obviously, in this business, requiring the consideration of inventories, a computation of the income depends also upon the closing inventory. We are satisfied that at the end of 1918 a stock in trade remained on hand. The*2033 contentions of the petitioner, therefore, when combined amount to this: that the amount of the income for 1918 is erroneous to the extent that the opening inventory differs from the closing inventory, and the amount of the income for 1919 is overstated by the amount of the opening inventory which, of course is the same as the closing inventory for the previous year. Unfortunately, the petitioner failed to take an inventory at the end of 1918; there is no satisfactory evidence, and we have no idea of its allowable value. Petitioner proposes to use an estimated inventory *517 prepared by a public accountant in his employ, but this is unallowable in every way. The quantities are estimated, the prices are selling prices, and there is no evidence whatever of the cost of the stock. The market value may only be used when lower than cost. Compare section 203 of the Revenue Act of 1918 and articles 1581 to 1584, inclusive, of Regulations 62.
We are nevertheless satisfied that the determination of the respondent should be revised in this respect if there is any means at hand to do so. The respondent has used, a number of times, various percentage methods of computing income. *2034 See ; ; ; . In other cases we have approved apportionment of income upon a time basis. See ; . In the case of , the gross profit was apportioned on a percentage basis.
In the instant case we think a use of the percentage of gross profit is the most satisfactory method at hand. Over the period during which the petitioner operated his business beginning with the inheritance of it from his brother, and ending in the following year with a disposal of the entire stock in trade and the closing up of the business, we have the following known factors: the aggregate of gross income, the aggregate of stock in trade purchased, and in addition we have determined in this opinion the value, for income-tax purposes, of the opening inventory. From these factors the rate per centum of gross profit on sales should be computed and the gross income should be apportioned ratably according to*2035 the amount of the sales attributed to each year. The deductions allowed by the respondent other than the cost of goods sold are not at issue and should be allowed without alteration in the redetermination.
Judgment will be rendered pursuant to Rule 50.