Kansas City Structural Steel Co. v. COM'R OF INT. REVENUE

Citation33 F.2d 53
Decision Date14 May 1929
Docket NumberNo. 8358.,8358.
PartiesKANSAS CITY STRUCTURAL STEEL CO. v. COMMISSIONER OF INTERNAL REVENUE.
CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)

Armwell L. Cooper, of Kansas City, Mo. (Ellison A. Neel, Whitson Rogers and John P. Cooper, all of Kansas City, Mo., on the brief), for appellant.

Randolph C. Shaw, Sp. Asst. Atty. Gen. (Mabel Walker Willebrandt, Asst. Atty. Gen., Sewall Key, Sp. Asst. Atty. Gen., C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Clark T. Brown, Sp. Atty., Bureau of Internal Revenue, of Washington, D. C., on the brief), for appellee.

Before LEWIS, Circuit Judge, and WOODROUGH and McDERMOTT, District Judges.

McDERMOTT, District Judge.

This appeal brings on for review a decision by the Board of Tax Appeals, sustaining a deficiency assessment against the appellant in the sum of $7,656.74. The case was presented to the Board upon a stipulation of facts. The Board made findings of fact, which are substantially as stipulated. There is no record of any evidence being offered in addition to the stipulation, except that the opinion states "the evidence establishes clearly that same undeterminable part of the steel on hand in 1916 remained during the taxable years."

Whether there was other evidence of this fact is not material, for it is a natural inference deducible from the facts stipulated and found.

The question presented is whether, in arriving at the taxable income of the appellant, the Commissioner had a right to consider the inventory value of a stock of steel, set apart by the appellant as an "emergency" or "reserve" or "stand-by" stock.

It is stipulated that:

"The Company is engaged in the fabrication and erection of structural steel plates for buildings, bridges, tanks, etc. It fabricates material for specific structures or contracts and carries no finished product in stock. Material is ordered and procured from the mills for each specific structure or contract, except that a supply of material as shown in Exhibit A has been kept on hand for emergency use (from which material is borrowed and replaced) to insure the prompt and orderly execution of contracts in view of delay, etc., incident to shipments from the mills and other exigencies affecting the availability for use when needed of material ordered for a particular job. When such material is used it is charged to the contract at its replacement cost and is promptly replaced with material of a like kind and in a like quantity."

Upon argument, it was stated, and not denied, that the business of the taxpayer consisted, in large part at least, of bidding for the steelwork of buildings and bridges and other structures where steel is used; these bids are predicated upon firm offers procured from the mills for the steel involved, plus the cost of fabrication and a profit. If the bid was accepted, the materials were ordered for the job. This seems to be the only inference that can be drawn from the facts stipulated, to wit, "It fabricates material for specific structures or contracts and carries no finished product in stock," and "material is ordered and procured from the mills for each specific structure or contract." The taxpayer's business is closely akin to that of a building contractor, which, as far as steel is concerned, it is.

It is further stipulated that this emergency reserve consisted of 5,554 tons of structural steel, being the amount on hand on December 31, 1916. Its cost was $1.70 per cwt. f. o. b. Pittsburgh. It is stipulated that this price of $1.70 "represented the highest normal market encountered since 1895." From that date on until December 31, 1921, this steel was treated as above stipulated. All materials of like dimensions were piled piece upon piece in perpendicular piles. This stock varied in size during the year, being both below and above the 5,554 tons, as material was used therefrom and replaced therein; the extreme limits from 1916 on, for any part of the year, being approximately 4,000 and 11,000 tons. Except for the years 1917 and 1921, the reserve exceeded 5,554 tons on December 31 of each year. These years are not in controversy, and the shortage was inconsiderable. Whenever the reserve exceeded 5,554 tons on December 31, the excess was valued at current prices, and a tax paid thereon.

In figuring up its taxable profit for the years 1918 to 1920, inclusive, the appellant treated this emergency steel as a part of its fixed equipment, and carried it at the 1916 cost price of $1.70 per cwt. The stipulation states:

"The Company, at the end of the years 1916, 1917, 1918, 1919 and 1920, valued its said supply of 5554 tons at the cost price prevailing at the close of 1916, or $1.70 per hundred weight f. o. b. Pittsburgh."

Since the reserve did not consist of the identical pieces in the pile on December 31, 1916, and which cost $1.70 per cwt., and since it was impossible to ascertain the cost of the steel actually in the pile, the Commissioner inventoried the entire stock at the market price of the steel most recently purchased, under the rule prescribed by article 1582, Regulation 45, that the presumption is "the first in, the first out." Whether this presumption is a fair one in the face of the actual probability that workmen would take a girder off the top of a pile instead of the bottom, is challenged by the appellant, but need not be considered.

The result of the two methods of pricing the inventory was that the government figured the income of the appellant to be $18,230.10 more than the appellant figured it. A deficiency assessment of $7,656.74 was made; an appeal to the Board of Tax Appeals was unsuccessful; and the case is here on review.

Since the taxpayer figured this emergency steel as a part of its fixed equipment, no claim was filed for abatement under sections 214(a) (12), and 234(a) (14) of the Revenue Act of 1918 (40 Stat. 1066, 1079), for inventory losses occurring when prices began to fall. On December 31, 1921, "after prices became normal," and when the price of the steel had dropped below the 1916 level ($1.50), the taxpayer acquiesced in the government position, and the emergency reserve was priced by the taxpayer at its cost, or market, whichever was lower. It will thus be seen that the taxpayer had 5,554 tons of $1.70 steel on hand on December 31, 1916; and 5,554 tons of $1.50 steel of a like kind and in a like quantity on hand on December 31, 1921; and that no income had been enjoyed by the taxpayer through its maintenance of this reserve during the five years.

While no claim for abatement was made under the cited sections of the 1918 law, as recited in the stipulation, it does appear that before the Board of Tax Appeals the taxpayer asked credit for a loss in the inventory, due to the falling market in the year 1919. This claim is inconsistent with its present contention, and the record is not clear as to whether the taxpayer asserted this claim as a counter attack, after the government had asserted the right to tax the paper profits on the same steel during the advancing prices. The Board of Tax Appeals upheld the government's right to tax the profit on the advancing market, but denied the taxpayer the credit for losses on the falling market because they were not actual losses. The taxpayer has not appealed from that part of the order, but insists that, if the Board denies a credit for losses because they are not actual, it ought not to tax income unless it is realized.

The good faith of the taxpayer is not questioned. The stipulation sets out facts indicative of good faith. The reserve was set apart when prices were at the highest level since 1895; during the succeeding years its market value doubled, and yet the taxpayer did not liquidate it and take its profit; it kept it until prices were below the 1916 level, and it showed a loss; although the amount actually on hand, at the close of the year, was sometimes much more than 5,554 tons, it accounted for the excess to the government. It must be assumed that the reserve was in fact maintained for the purpose as stipulated, and that it was reasonable in amount.

It will be seen at once that the underlying question is the propriety of including this reserve supply in an inventory taken as an aid to the ascertainment of income. Before dealing with that, it may be as well to consider one or two arguments made by the government in support of its position. It is urged that in 1921, when prices had gone down, the appellant itself included the entire emergency reserve at 1921 prices, and that the taxpayer applies one rule when prices are high and another when prices are low. The government makes the very sound argument that one of the prime requisites of any tax system is consistency; that, when a taxpayer has adopted one system, it should be adhered to, in fair weather or in foul; and that no taxpayer should be permitted to play fast and loose with his government. This very fair and sound rule does not apply, however, where the taxpayer changes his position at the government's requirement; if the appellant is right in its contention, it cannot be denied relief because it, although still protesting, acquiesced in the ruling, either because the drop in price had eliminated any substance to the disagreement or because it became weary of the contest. It is also urged that the appellant, during these very years, included as a part of its income the increase in value of the excess of the emergency steel over 5,554 tons, and thereby attested the correctness of the government's position. The conclusion does not follow. As to the excess, the appellant doubtless recognized that an emergency supply must bear a fair proportion to the requirements of the business; having determined that 5,554 tons was an adequate reserve for a business that fabricated about 30,000 tons a year, it should account for any excess above that amount. Moreover, that the taxpayer may have paid more taxes than it should have is not...

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