*2851 Deductions allowed for physical loss of bottles and also for loss sustained upon sale of bottles.
*435 For good cause shown the petitioner's motion to vacate the findings of fact and opinion in , in so far as they relate to losses upon bottles and cases, was granted and a rehearing was allowed. The petitioner was allowed to amend its original petition by substituting for the first assignment of error contained therein, the following:
(a) The Commissioner has allowed no deduction in computing net taxable income for the years 1918 and 1919, for -
(1) The physical loss of bottles and cases belonging to the petitioner;
(2) An actual loss suffered by petitioner on quart bottles and cases sold by it in the year 1919, and
(3) Small cooperate.
*436 FINDINGS OF FACT.
The Buckeye Brewing Co. prior to December, 1918, was in the business of making alcoholic beer. In December, 1918, operations ceased, due to Government*2852 regulations prohibiting the use of malt in order to conserve the food supply. This regulation continued in force until about May 27, 1919, when, by legislation, the State of Ohio, by virtue of an amendment to its constitution, prohibited the manufacture and sale of intoxicating liquors, within which category fell alcoholic beer and the Buckeye Brewing Co. did not resume the manufacture of alcoholic beer after December, 1918, but in 1919 and thereafter, manufactured near beer. It was necessary to obtain new trade for this product. The name of the manufacturer was changed to "The Buckeye Producing Company."
Prior to prohibition, petitioner sold its product in both barrels and bottles, in 1917 the proportion being about 60 per cent in bottles and about 40 per cent in barrels. Petitioner sold its product in Toledo, Ohio, wherein petitioner's plant was located, direct to consumers, but its shipping trade, which was located in Michigan and Indiana, consisted generally of carload customers.
Due to prohibition in Michigan and Indiana, the petitioner's shipping trade into those States discontinued in 1918, and the return of bottles and cases from those customers was almost nil. During*2853 the year 1918 the petitioner made intensive efforts to get back from its customers the bottles and cases then in the customer's possession. But in spite of petitioner's efforts, at the end of 1918, when a check up was made in petitioner's plant, it was discovered that a large extraordinary physical loss had resulted in bottles and cases over and above the ordinary depreciation. This loss amounted to about $80,000. The petitioner continued its intensive efforts to recover bottles and cases in the year 1919. Petitioner discovered, during these years, that a number of the bottles and cases belonging to it were being collected by junk dealers, both in the States of Indiana and Michigan, and also in the State of Ohio. These intensive efforts to recover bottles and cases were not continued after December of 1919. No further extraordinary losses over and above the usual and ordinary depreciation were incurred after December 31, 1919.
The volume of petitioner's business after it ceased the manufacture of alcoholic beer was about one-half of its volume during the time that it manufactured alcoholic beer. Despite this fact, the petitioner was compelled to purchase a great number of*2854 pint bottles and cases in the year 1919, by reason of the stortage of bottles and cases due to the failure of its customers to return them.
Petitioner found that there was no market for near beer sold in quart bottles and in July of 1919 sold to junk dealers in and about *437 Toledo, Ohio, 1,165 gross of quart bottles that it still had on hand, at a price of $2.85 a gross, which had cost petitioner $3.75 a gross. About 406 gross of these quart bottles had been purchased by the petitioner in 1918. The remainder were purchased in 1916 and 1917.
No formal inventory of bottles, cases, or small cooperage was made at the end of 1918 or 1919, but in December of 1918, an informal inventory or check up of the supply of bottles and cases was made, in which this extraordinary loss of about $80,000 appeared. A check up was made at the end of each year by petitioner's general manager for the purpose of enabling him to determine what purchases of bottles and cases would be necessary in the succeeding year. An inventory of bottles and cases was made on October 10, 1925, in the amount of $39,597.64. This inventory was based upon the cost of the last items purchased. From this inventory*2855 the petitioner made calculations of losses on bottles and cases at the ordinary rate of depreciation and presented a calculated inventory on each of these items, as of December 31, 1919. On December 31, 1918, petitioner set up on its books a lump sum of $640,412.73 as a reserve for depreciation for that year and as a blanket charge covering the extraordinary loss resulting to petitioner through the adoption of prohibition in the State of Ohio. The extraordinary loss of about $80,000 in bottles and cases, discovered at the end of 1918, was included in this item.
From 1915 to 1919, inclusive, 236,055 barrels of beverage were bottled, and depreciation on bottles and cases was allowed by the respondent in the amount of $171,606.32, an average of 72.697 cents per barrel bottled. From December 31, 1919, to October 10, 1925, purchases of bottles and cases were made in the amount of $82,268.55. The ledger showed cases and bottles on hand at December 31, 1918, to the value of $276,634.30. The reserve for depreciation in 1919 was $128,316.10, and depreciation for the year 1919 was allowed by the respondent in the amount of $31,890.83. The allowance by the respondent for depreciation*2856 included no part of the loss on account of extraordinary depreciation that occurred in the years 1918 and 1919 as hereinbefore found. At the rate of 72.697 cents per barrel bottled, the depreciation sustained on bottles and cases from December 31, 1919, to October 10, 1925, was $74,840.83.
In 1920 and subsequent years some of the bottles shipped out in prior years were returned to petitioner. An old bottle was indistinguishable from a new one.
OPINION.
SIEFKIN: The testimony discloses that the petitioner customarily took an inventory at the end of each year in order to determine the quantity of bottles and cases it would be necessary to purchase for *438 the succeeding year. These inventories were not preserved. However, the petitioner does have a record of an inventory taken October 10, 1925, which shows bottles and cases on hand on that date valued at $39,597.64. To arrive at a calculated inventory as of December 31, 1919, the petitioner added to this figure depreciation sustained from January 1, 1920, to October 1, 1925. This amounted to $74,840.83 and was calculated at the rate of 72.697 cents per barrel bottled, which was the rate allowed by the respondent. *2857 The evidence shows that the normal rate of depreciation or breakage of bottles was 20 per cent per year. The evidence shows further that after 1919 there was no unusual loss of bottles and cases.
The petitioner then deducted from the resulting figure the amount expended for purchase of bottles and cases over the period, thus arriving at a calculated inventory at December 31, 1919. Since the depreciated book value of bottles and cases as of December 31, 1919, was $116,427.37, the petitioner contends that the difference between this amount and the calculated inventory is a net loss due to prohibition legislation. This calculated loss includes loss on both pint and quart bottles and the loss on each is not segregated. The respondent contends that since bottles sent out by petitioner in prior years were received by petitioner in 1920 and subsequent years, the allowance of this calculated loss would allow loss on bottles which were not really "lost." However, any bottles returned prior to October 10, 1925, have been reflected in the physical inventory of that date and we believe the receipt of bottles thereafter may be considered negligible.
At the rehearing witnesses testified*2858 that they recalled that the inventory of bottles and cases taken December 31, 1918, established a loss of about $80,000. This, the evidence shows, was due to the fact that customers in Michigan, Indiana, and Ohio failed to return bottles after the advent of state prohibition in Indiana and Michigan. There is no evidence to show just how much of the calculated loss was sustained in each of the years 1918 and 1919. However, since the return for 1919 showed a net loss, any deduction allowed for either 1918 or 1919 is deductible from 1918 income. See section 204(b) of the Revenue Act of 1918.
Prohibition became effective in Ohio on May 27, 1919, and thereafter after petitioner manufactured near beer instead of beer. There was no demand for near beer in quart bottles so petitioner sold 1,165 gross of quart bottles to junk dealers for $2.85 per gross. These had cost petitioner $3.75 per gross. The evidence showed that there is no depreciation in value of bottles due to age and we hold that the petitioner is entitled to a deduction for loss sustained on the bottles of $1,048.50, the difference between the cost and the sale price. However, the petitioner has not shown whether the*2859 bottles just referred *439 to were included in the calculation of lost bottles in the inventory of October 10, 1925. This being true we must add their value, $4,368.75 to the inventory of $39,597.64 as of October 10, 1925. Adding depreciation of $74,840.83 and deducting the amount of purchases, $82,268.55 leaves a calculated inventory as of December 31, 1919, of $36,538.67. The depreciated book value of bottles and cases as of December 31, 1919, was $116,427.37 but the evidence shows and we have found facts resulting in a depreciated cost of $105,027.98. We hold that the petitioner sustained a loss equal to the difference between that figure and the calculated inventory, or $68,489.31. In view of the additional evidence adduced by the petitioner we hold that petitioner is entitled to deductions of $1,048.50 and $68,489.31 from income of the year 1918.
Judgment will be entered under Rule 50.