Gus Holstine Dry Goods Co. v. Commissioner of Internal Revenue, Docket No. 24656.
| Decision Date | 24 June 1929 |
| Docket Number | Docket No. 24656. |
| Parties | GUS HOLSTINE DRY GOODS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Frank F. Nesbitt, Esq., for the petitioner.
W. Frank Gibbs, Esq., for the respondent.
This proceeding results from respondent's determination of a deficiency of $13,620.43 in income and excess-profits taxes for the fiscal year ended February 28, 1921. Petitioner alleges the deficiency is barred by the statute of limitations.
It is further alleged that the respondent erred in holding that the closing merchandise inventory for the fiscal year ended February 28, 1921, was $204,844.98 and not $161,477.89, and that the petitioner's net income for the fiscal year was $114,592.40 instead of $70,225.31.
At the close of the hearing respondent moved to amend his pleading to allege that the respondent erred in computing the closing inventory of the petitioner at $205,844.98, and that it should be computed at $228,071.62.
FINDINGS OF FACT.
Petitioner is a corporation with principal offices at Lima, Ohio, where it conducts a retail department dry goods store. During the year in question the business was conducted in a two-story building with a basement, which was used for display purposes. In September of 1920 a fire broke out, which caused a large part of the first floor to collapse. Water was thrown on all floors and smoke filled the entire building, causing damage to goods not reached by the flames. The business was insured. A fire sale on damaged goods retained by petitioner was opened in October. The new goods (not damaged) in stock at the closing inventory date were acquired after October 20, 1920.
Petitioner's opening inventory for the year in question, as well as all prior inventories, had been taken on a cost basis. Gus Holstine, the president, was ill and not in Lima at the time the physical inventory as of January 31 was begun. In accordance with prior customs the heads of the various departments took the inventory of their respective divisions using the cost tags attached to the articles in stock. The inventory thus taken amounted to $181,979.70. This figure did not take into account the month of February with which the fiscal year ended. The closing inventory for the fiscal year was computed as of February 28 by adding February purchases and deducting the sales less the gross gain per cent of the preceding eleven months. By such computation $46,091.92 was added to the $181,979.70 obtained by the physical inventory of January 31, to extend it to February 28 — making a total of $228,071.62 closing inventory as of the end of the fiscal year.
Such inventory figures were turned over to an accountant who was employed to make out the income-tax return. Upon the return of Gus Holstine from Florida in April of 1921, he insisted such inventory was too high, as it included damaged goods on hand at cost. He went over the stock to ascertain the extent of such excess and reduced the inventory by $22,226.64 on account of the damaged goods on hand. The reduced amount, or $205,844.98, was the amount given in the return filed about June 15, 1921, pursuant to a time extension granted at the request of the accountant. The tax liability of the petitioner was computed by the respondent upon the basis of a closing inventory of $205,844.98.
The accountant did not participate in the taking of the inventory. He knew nothing about it, or the basis upon which it had been taken. He assumed that petitioner, in common with his other clients, took the inventory on the basis of market. The settlement with the insurance company had been made on that basis. In making out the certificate of inventory for the year in question he caused the statement to be entered thereon that the closing inventory was taken at "market value time of inventory." The certificate was signed by Magdalen Van Pelt, petitioner's treasurer, who was in charge of the office in the absence of Gus Holstine.
Some time in 1924 another accountant employed by petitioner discovered the inconsistency between the statement in the certificate of inventory and the basis actually used. Thereafter, in June, 1925, S. H. Holstine, petitioner's merchandise manager, listed all the goods contained in the closing inventory in question and wrote the manufacturers thereof (i. e., those still in business and with whom petitioner still traded) and requested information concerning the comparative prices of such goods in October and at January 31, the date of the inventory. Most of the manufacturers answered, giving him the percentage of reduction in wholesale prices as of the two dates, and, in some instances, exact data on specific items.
From the information thus obtained S. H. Holstine revised the closing inventory figures. In such revision he revised each item separately. In some lines of goods he did not have answers from all manufacturers who had contributed to that line, but on the information at hand the entire line was revised. Where the reduction was based on percentage data, an average percentage was used. Where exact reductions were given on specific items, such actual reductions were made. By this means the closing inventory at market (lower than cost) was estimated at $159,568.32, of which $46,091.92 (which remained a constant) represents the addition to extend the inventory to include February.
Prices generally in the class of goods handled by petitioner had suffered a consistent decline beginning early in 1920 and extending through the year in question, the sharpest reduction occurring between August and October. The decline between October, 1920, and February 28, 1921, as respects silks, woolens and domestics (carried in Department No. 6) is indicated by a comparative price table of several commodities as follows:
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| October |
| (last 10 | February
| days) | 28
--------------------------|----------|----------
Spot cotton _____________ | 21 to 22 | 11
Lawn ____________________ | 18 to 19 | 15
Sateen __________________ | 14 to 15 | 13
Sheeting ________________ | 14 | 8
Print cloth: | |
Size "A" ____________ | 14 | 9
Size "B" ____________ | 10 | 7
Size "C" ____________ | 7 | 4
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Petitioner filed its return for the fiscal year ended February 28, 1921, on or before June 15, 1921. No further return was filed respecting that year. The deficiency letter bears the date of December 30, 1928. That part of the statement attached thereto showing adjustments to income is as follows:
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