*2611 Held that the evidence does not sustain the petitioner's contention that the closing inventory for 1920 as originally taken and included in its return should be reduced.
*660 This is a proceeding for the redetermination of a deficiency in income and profits taxes of $1,090.68 for 1920. The matter in controversy is the market value of the petitioner's closing inventory at December 31, 1920, the petitioner having abandoned at the hearing its contention that its profits-tax liability should be determined under the provisions of sections 327 and 328 of the Revenue Act of 1918.
FINDINGS OF FACT.
The petitioner is a Kentucky corporation with its principal office at Louisville. During the taxable year it was engaged in the manufacture facture *661 and sale of barrel staves and heading and the finished product, kegs and barrels, which included alcohol, vinegar, and kraut barrels, as well as almost all kinds of tight barrels.
During 1920 the petitioner operated mills at Crowder, Miss., Bonita, La., Water Valley, *2612 Ala., Louisville and in eastern Kentucky. The plan of operation was to buy a tract of standing timber and cut it into bolts, which were delivered at the mills and sawed into heading and staves. The heading and staves were shipped to the Louisville plant and there made into barrels. Each of the mills was operated as a separate unit, having a manager who made out his pay roll every two weeks and sent it in to the Louisville office. Separate accounts were kept for each mill in order to determine whether the mills were profitable. Monthly inventories were made by the mills and sent to the Louisville office, where they were checked back to see if the mills were holding up to the amounts reported. When heading and staves were shipped from the outside mills the Louisville office gave the mill from which they were shipped credit at the prevailing market price.
In addition to the heading and staves manufactured in the various mills, the petitioner also all during the year bought these products on the market, sometimes for the purpose of keeping its barrel plant running and at other times because it could sell its own stock of these products for more than the cost of replacing it. About*2613 20 per cent of the petitioner's business was in staves and the remaining 80 per cent was in the finished product. While all sales were made from the Louisville office, some of the products sold were shipped directly from the mill at which they were made. The principal market in 1920 for the petitioner's products was in the States of Kentucky, Ohio, Pennsylvania, New York, New Jersey, Maryland, and Massachusetts, with most of them being sent to New York.
The petitioner's closing inventory was taken on December 31, 1920, by employees in the office of the petitioner and under the supervision of the petitioner's president. The inventory was valued at cost or market, whichever was lower, as the petitioner always had done theretofore. The inventory at Louisville totaled $231,447.62 and that at the outlying mills totaled $230,810.88. These amounts were shown in the petitioner's original return for 1920, which was filed on March 15, 1921. About September 18, 1922, the petitioner filed an amended return showing the inventory at the Louisville plant as $162,265.46 and that at the mills as $167,988.47, making a reduction of $69,182.16 in the Louisville inventory and $62,822.41 in the*2614 inventory at the outlying mills, or a total reduction of $132,004.57.
*662 The specific changes in prices resulting in the above mentioned reductions are as follows:
| LOUISVILLE | ||||
| Quantity | Original | Revaluation | Decrease | |
| STAVES | ||||
| Bucked whiskey staves | 8,600 | $100.00 | $60.00 | $344.00 |
| Sawed whiskey staves | 1,572 | 100.00 | 60.00 | 62.88 |
| Wine staves | 45,898 | 100.00 | 60.00 | 1,835.92 |
| Split staves | 26,467 | 60.00 | 50.00 | 264.67 |
| W.O. oil staves | 313,732 | 72.00 | 54.00 | 5,647.18 |
| C.O. oil staves | 298,513 | 72.00 | 54.00 | 5,373.23 |
| R.O. staves | 102,945 | 67.50 | 49.00 | 1,904.48 |
| Gum staves | 692,618 | 46.75 | 35.50 | 7,791.95 |
| Total | 23,224.31 | |||
| ROUGH HEADING | ||||
| Wine and spirit heading | 17,949 | 90.00 | 56.50 | 601.29 |
| W.O. oil heading | 290,020 | 76.00 | 27.50 | 14,065.97 |
| C.O. heading | 442,415 | 76.00 | 27.50 | 21,457.13 |
| R.O. heading | 115,861 | 61.75 | 26.50 | 4,084.10 |
| Gum heading | 20,576 | 28.50 | 21.50 | 144.03 |
| Ash heading | 64,905 | 45.00 | 26.50 | 1,200.74 |
| Total | 41,553.26 | |||
| CIRCLED HEADING | ||||
| 20 1/8 whiskey heading | 275 | 1.50 | .84 | 181.50 |
| 20 1/2 wine heading | 18 | 1.25 | .75 | 9.00 |
| 14 clear of sap heading | 85 | .30 | .20 | 8.50 |
| 9 3/4 clear of sap heading | 100 | .20 | .15 | 5.00 |
| 21 3/4 oil heading | 87 | .90 | .35 | 48.72 |
| 20 1/2 oil heading | 375 | .80 | .34 | 172.50 |
| 19 3/4 oil heading | 17 | .50 | .33 | 2.89 |
| 16 7/8 W.O. oil heading | 945 | .50 | .33 | 160.65 |
| 14 W.O. oil heading | 252 | .30 | .15 | 37.80 |
| 12 W.O. oil heading | 325 | .25 | .14 | 35.75 |
| 9 3/4 W.O. oil heading | 255 | .20 | .12 | 20.40 |
| 20 5/16 R.O. heading | 120 | .70 | .33 | 44.40 |
| 20 1/2 R.O. heading | 2,964 | .70 | .33 | 1,096.68 |
| 20 R.O. heading | 16 | .45 | .33 | 1.92 |
| 16 7/8 R.O. heading | 1,634 | .45 | .20 | 408.50 |
| 14 R.O. heading | 750 | .30 | .15 | 112,50 |
| 12 R.O. heading | 2,440 | .25 | .14 | 268.40 |
| 9 3/4 R.O. heading | 250 | .20 | .12 | 20.00 |
| 20 5/16 gum heading | 6,500 | .40 | .30 | 650.00 |
| 14 gum heading | 641 | .20 | .12 | 51.28 |
| 12 gum heading | 216 | .20 | .12 | 17.28 |
| 17 dog heading | 524 | .20 | .12 | 41.92 |
| 20 1/2 and 5/16 dog heading | 488 | .20 | .15 | 24.40 |
| 20 5/16 gum heading | 9,846 | .40 | .30 | 984.60 |
| Total | 4,404.59 | |||
| Total adjustments - Louisville | 69,182.16 | |||
| BONITA MILL | ||||
| STAVES | ||||
| Gum staves | 118,500 | $20.00 | $18.00 | $237.00 |
| R.O. staves | 49,200 | 30.00 | 28.00 | 98.40 |
| W.O. 34-inch staves | 79,800 | 35.00 | 33.00 | 159.60 |
| R.O. 34-inch staves | 64,440 | 35.00 | 28.00 | 451.08 |
| Gum 36-inch staves graded | 193,280 | 30.00 | 25.00 | 966.40 |
| Total | 1,912.48 | |||
| HEADING | ||||
| W.O. heading | 463,856 | 45.00 | 20.00 | 14,926.40 |
| W.O. heading | 370,220 | 35.00 | 17.00 | 6,663.96 |
| R.O. heading | 814,324 | 45.00 | 19.00 | 21,172.43 |
| R.O. heading | 153,400 | 35.00 | 16.00 | 2,914.60 |
| Total | 45,677.39 | |||
| Total adjustments Bonita Mill | 47,589.87 | |||
| WATER VALLEY MILL | ||||
| STAVES | ||||
| Gum staves | 181,650 | $34.00 | $19.00 | $2,724.75 |
| Gum staves | 84,620 | 37.50 | 22.50 | 1,269.30 |
| Gun staves | 28,724 | 40.50 | 25.00 | 445.22 |
| Total adjustments Water Valley Mill | 4,439.27 | |||
| CROWDER MILL | ||||
| STAVES | ||||
| W.O. staves | 8,700 | $50.00 | $39.00 | $95.70 |
| R.O. staves | 18,000 | 45.00 | 34.00 | 198.00 |
| Gum staves | 14,800 | 30.00 | 24.00 | 88.80 |
| Total adjustments Crowder Mill | 382.50 | |||
| EASTERN KENTUCKY | ||||
| STAVES | ||||
| Staves | 220,930 | $42.50 | $37.50 | $1,104.65 |
| Staves | 48,786 | 45.72 | 33.50 | 596.16 |
| W.O. oil staves | 10,564 | 42.82 | 33.50 | 98.46 |
| R.O. oil staves | 3,866 | 42.82 | 28.50 | 55.36 |
| W.O. oil staves | 2,136 | 52.82 | 40.00 | 27.28 |
| Buck staves | 16,200 | 60.00 | 40.00 | 324.00 |
| Buck staves | 3,000 | 75.00 | 46.50 | 85.50 |
| Total | 2,291.41 | |||
| HEADING | ||||
| Heading | 475,622 | 35.00 | 20.00 | 7,134.33 |
| C.O. oil heading | 41,916 | 46.00 | 22.50 | 985.03 |
| Total | 8,119.36 | |||
| Total adjustments eastern Kentucky Mills | 10,410.77 |
*2615 *663 The petitioner's sales of circled heading from November, 1920, to December, 1921, were as follows:
| Barrel clear of sap | Barrel W.O. circled | Barrel R.O. | |||
| circled heading | heading | circled | |||
| heading | |||||
| Quantity | Selling price | Quantity | Selling price | Quantity | |
| 1920 | |||||
| Sets | Sets | Sets | |||
| November | 5,050 | $5,832.50 | |||
| December | 10,119 | 11,679.15 | 9,777 | ||
| 1921 | |||||
| January | 360 | 354.00 | 50 | ||
| February | 156 | 118.40 | 150 | ||
| March | 1,530 | 695.00 | 5,658 | ||
| April | 5,783 | 2,078.00 | 14,715 | ||
| May | 18,764 | 6,556.31 | 26,138 | ||
| June | 25,030 | 8,519.52 | 13,841 | ||
| July | 120 | ||||
| August | 200 | 80.50 | 140 | ||
| September | 2,185 | 909.25 | 5,853 | ||
| October | 1,551 | $909.84 | 9,162 | 2,756.50 | 5,160 |
| November | 11,120 | 3,612.35 | 10,542 | ||
| December | 10,330 | 3,012.88 | 1,100 |
| Barrel gum | Barrel oak dog circled heading | |||
| circled heading | ||||
| Quantity | Selling price | Quantity | Selling price | |
| 1920 | ||||
| Sets | Sets | |||
| November | ||||
| December | ||||
| 1921 | ||||
| January | ||||
| February | 105 | $60.50 | 9,087 | $2,271.75 |
| March | 95 | 45.25 | ||
| April | 40 | 16.00 | ||
| May | 90 | 34.20 | ||
| June | ||||
| July | 25 | 7.50 | ||
| August | 400 | 123.60 | ||
| September | ||||
| October | 5,594 | 1,350.00 | ||
| November | ||||
| December |
*2616 *664 At the beginning of 1920 and on up to November, the market for the petitioner's products was very active. During the last quarter of 1920 the market began to decline and continued to do so until about the middle of 1921. At December 31, 1920, the market was in a demoralized condition and most of the few contracts which the petitioner had for making delivery were canceled.
The values placed on the petitioner's inventories originally were determined by its president, J. N. White. The values determined by him were based on the market conditions and his experience and best judgment. At the time the inventory was made, the petitioner had no offered price for the inventoried articles and the valued used in the inventory were based on the prices being quoted to the petitioner and the prices at which it was trying to sell its product. While the petitioner had sales of barrels and certain kinds of circled heading in December, 1920, and during 1921, it had no sales of staves and rough or square headings. The items included in the petitioner's inventory and which were revalued were after December 31, 1920, manufactured into barrels and the barrels were sold.
After the*2617 filing of the 1920 return in March, 1921, it developed on account of the constantly declining market prices that the petitioner could not take its stock of materials at the inventoried prices, make them into kegs and barrels, and sell them without losing money.
In determining the deficiency here involved, the respondent used the inventory reported by the petitioner in its original return.
OPINION.
TRAMMELL: The only matter in controversy is the value of the petitioner's inventory at December 31, 1920, it being conceded that the petitioner's method of taking the inventory at cost or market, whichever was lower, was correct. The petitioner contends that the amount of the inventory at December 31, 1920, as shown in its original return was in excess of its actual market value at that time and that the amount shown in the amended return properly represents the market value. The reduction contended for by the petitioner does not result from a revision of its entire inventory but from a revision of the items set out in our findings of fact. The respondent contends that no change should be made in the value of the inventory as reported in the original return.
The petitioner*2618 contends that there was no market for its product at December 31, 1920, and in support thereof relies on the testimony of its president and two other witnesses to that effect. One of the witnesses, G. I. Fraser, a manufacturer and dealer in tight barrel staves and heading, testified that sales were made well up through 1920, and some sales were being made on December 31, 1920, although *665 at that time there was a wide difference of opinion as to the market, as many contracts were being canceled. The other witness, G. P. Nerving, while testifying to the market being in a demoralized condition and contracts being canceled, also stated that the company of which he was president and which dealt in cooperage material, including staves and heading, had quite a few sales about December 31, 1920. White testified that the petitioner bought raw material - staves and heading - on the market all during the year. While according to the evidence there was a substantial slackening toward the end of 1920 in the petitioner's sales of barrels and kegs, its sales of those classes of circled heading regularly sold during the year were greater in December, 1920, than in any other month of*2619 the year. In view of the foregoing, we are not convinced by the preponderance of the evidence that there was no market on December 31, 1920, for the petitioner's products.
In support of the revised values placed on the various items of inventory here involved, the petitioner also submitted the testimony of Fraser and Nervig. Fraser, after stating that from November 1, 1920, to December 31, 1920, there was a decline of from 30 per cent to 60 per cent in the market value of staves, heading and finished barrels as shown by sales when made, stated that his company had inventoried staves at $40 per thousand at December 31, 1920, and one particular lot which was "kept track of" brought less than $20 when sold in 1921. He also stated that the season of his company ended with staves being sold for $18 to $20 per thousand which had been inventoried at $40 per thousand. With respect to W.O. oil heading, he presumed that this kind of heading selling at $1 a set at the end of 1920 sold during the first six months of 1921 at an average of not more than 38 or 40 cents a set. Nervig stated that his company inventoried "mill run" W.O. and C.O. oil staves at $60 per thousand at December 31, 1920, and, *2620 based on actual sales and purchases made by the company during the first six months of 1921, the market value of the staves had depreciated more than 40 per cent. Nervig also stated that his company inventoried circled R.O. heading at 75 cents a set and circled W.O. heading at 80 cents a set, and the average of the company's sales and purchases for the first six months of 1921 was 32.9 cents a set for R.O. heading and 34 cents a set for W.O. His idea was that the market value of rough heading was about 15 cents a set less than circled heading. While it is not clear at what time in 1921 Fraser's company ended its season by selling staves at $18 to $20 per thousand, the remainder of his testimony and that of Nervig is based on the prices existing over the first six months of 1921.
White, the petitioner's president, priced the items used in both the original and the revised inventories. He stated that the prices used *666 in the original inventory were based on prices being quoted to the petitioner, what the petitioner was trying to sell its product, for, on his experience in the business and best judgment. He also stated that at that time the petitioner was "getting quotations*2621 from most everyone and that they were trying to unload; that they were trying to get rid of their stock." He further stated that the petitioner got information daily throughout the year as to market price when trying to buy or trying to sell. White was unable to state when he began revising the original inventory, except that it was at some time prior to the filing of the amended return. On direct examination White was asked twice why he did not correct the petitioner's inventory at the time the original return was filed on March 15, 1921, and a part of his answer each time was that he did not know it was too high at that time. With respect to the revised inventory he stated that he values used were based on information obtained in the same way as for the original inventory and that in the meantime the petitioner had had a number of sales so that he could determine what the value was. Other than indicating that these sales were made some time between December 31, 1920, and September, 1922, the record does not show when they were made.
Considering all the evidence in the case, we do not think that what transpired over a period ranging from the first six months of 1921 when the*2622 market was declining to September, 1922, affords the proper basis for determining what the market value of the inventory was on December 31, 1920. In , where we were considering the market value of inventories, we said:
That "market value" for inventory purposes generally means the replacement cost to the taxpayer or the price at which the taxpayer may replace the particular goods by purchase in the open market is not disputed.
The petitioner his introduced much testimony as to sales made by itself and others subsequent to December 31, 1920, but nothing as to replacement costs on December 31, 1920, or the prices at which Fraser and Nervig's companies were making sales at about that date. It is the market value on December 31, 1920, that we are concerned with and not what selling prices were over a period of from six to twenty months thereafter. The values testified to by the witnesses are arrived at from a consideration of the selling prices over a period during a substantial portion of which there was a falling market. During a period of declining prices it is entirely possible that the market value of an article on*2623 a particular date might be considerably more than it could be sold for a few weeks or months thereafter. We think that is very much the situation in the case before us. The petitioner's president, who priced *667 both the inventories, had long experience in the cooperage business and seems to have been well informed on December 31, 1920, as to market conditions and the prices at which the inventoried articles were being offered for sale by others. The only information he had before him when making the revised inventory that he did not have when he priced the original inventory was purchases and sales made subsequent to December 31, 1920. This information must have been obtained subsequent to March 15, 1921, as at that time he did not know that the inventory was too high.
Considering all the evidence in the case, we are of the opinion that the revised inventories reflect the decline in market value after December 31, 1920, rather than the market value on that date. We are, therefore, unable to find that the respondent erred in refusing to accept them instead of the original inventories.
Judgment will be entered for the respondent.