Higbee Co. v. Evatt

• Decision Date: 29 July 1942
• Docket Number: 29057,29056,29059-29061.
• Citation: 140 Ohio St. 325,43 N.E.2d 273
• Court: Ohio Supreme Court
• Parties: HIGBEE CO. v. EVATT, Tax Com'r (two cases). ROLLMAN & SONS CO. v. SAME (three cases).

43 N.E.2d 273

140 Ohio St. 325

HIGBEE CO. v. EVATT, Tax Com'r (two cases).

ROLLMAN & SONS CO. v. SAME (three cases).

Nos. 29056, 29057, 29059-29061.

Supreme Court of Ohio

July 29, 1942

Jones Day, Cockley & Reavis, and Charles E. Bodurtha, all of Cleveland, for appellant Higbee Co.

Dargusch Caren, Greek & King, of Columbus, and Joseph O'Meara Jr., of Cincinnati, for appellant Rollman & Sons Co.

Thomas J. Herbert, Atty. Gen., and Perry L. Graham, Asst. Atty Gen., for appellee.

PER CURIAM.

These five cases are appeals from the decisions of the Board of Tax Appeals of Ohio and involve the valuation of stock of merchandise held for sale.

The first two are appeals by The Higbee Company of Cleveland, Ohio, and relate to returns filed by that company for the tax years 1937, 1938 and 1939. The last three are appeals by Rollman & Sons Company of Cincinnati, Ohio, and involve its tax returns for the years 1936, 1938 and 1939.

The Higbee Company's appeals will be considered first.

These involve the same question as to each of the returns for the three separate years. Specifically the question relates to the right of the appellant to the deduction or allowance for subsequent mark-downs, shrinkage and other losses in the value of merchandise where the books are kept and returns based upon the 'retail inventory method.'

The Higbee Company operates a retail store in Cleveland and also in Ashtabula, Ohio. Only the Cleveland store is involved here. Higbee takes a physical inventory at the end of its fiscal year (January 31) and another in the middle of the year by using the 'lower of cost or market' in ascertaining values. Under Section 5382, General Code, the merchant returns the average value of personal property held for sale in the course of his business. This average is determined by taking 'the amount in value on hand, as nearly as possible, in each month of the next preceding year in which he has been engaged in business, adding together such amounts and dividing the aggregate amount thereof by the number of months that he has been in business during such year.'

In making returns the appellant construed Sections 5382 and 5389, General Code, together. The part of the latter section involved here refers to personal property used in business. It appears, however, that counsel have deemed it proper to construe these provisions together and no question is made about the application of Section 5389 here. The part of the section, to which we refer, reads as follows:

'In the case of personal property used in business, the book value thereof, if any, less book depreciation, at such time or times, shall be listed and such depreciated book value shall be taken to be the true value of such property, unless the assessor shall find that such depreciated book value is greater or less than the then true value of such property in money. Claim for any deduction from net book value of accounts receivable or depreciated book value of personal property must be made in writing by the taxpayer at the time of making return; and when such return is made to the county auditor and required by this chapter to be transmitted to the commission for assessment, the county auditor shall, as deputy of the commission, investigate such claim and shall enter thereon, or attach thereto, in such form as the commission may prescribe, his findings and recommendations with respect thereto; when such return is made to the commission such claim for deduction from depreciated book value of personal property shall be referred to the auditor of each county wherein the property affected thereby is listed as such deputy, for investigation and report.'

In determining the depreciated book value for each month the appellant was required to find the book value and deduct therefrom the book depreciation. The results for the twelve months were than added together and divided by twelve. The process gave the average value. Book value and book depreciation were determined in the following manner.

When goods came into the store there was a mark-up of the price and the difference between the cost and mark-up represented the expense of doing business plus anticipated profit.

What the goods actually cost was not shown on the books under the retail inventory method but only on inventory value. We quote from the testimony of Mr. Mitchell, who is the assistant treasurer of The Higbee Company:

'Q. On this retail inventory method, suppose that you would buy an article for $100, and your retail sales price on that article was $150, but you took a mark-down of $10; what would you then, by your system of bookkeeping, assume the cost of that merchandise to be, after taking the mark-down of $10 from the original $150 sales price? A. It would be 2/3 of $140.

'Q. It would be 2/3 of $140, so that your books would then reflect those goods as having a cost of $93.33 1/3? A. Yes. * * *

'Q. So that the books of your company would actually reflect the value of that merchandise which cost you $100 to have a cost value of $93.33 1/3; that is correct, is it not? A. That's right.

'Q. So that under your system of bookkeeping, the cost price does not reflect the amount of money which was actually paid by you for the merchandise, does it? A. Well, we don't refer to that as cost price; we refer to it as inventory value, but in effect that is--the answer is the same.

'Q. The $93.33 1/3 is not cost to you of that amount of goods? A. That's right.

'Q. But the actual cost was $100? A. That's right.'

When goods could no longer be readily sold at the mark-up price, the price was marked down. Mr. Merrifield, the vice president and treasurer, testified:

'Q. On direct examination, Mr. Merrifield, I understood you to say that the mark-down price as named by your store to be that price at which the article may be readily sold; is that correct? A. That is correct. I might add one thing there. Of course, as you know, the retail method always presupposes goods carrying their customary average rate of profit. That is inherent in the retail system.

'Q. I see. Now, I will ask you the same question that I asked your predecessor If you purchased an article at $100, cost to you, and for sales purposes, you makr it at $150, and you later marked it down to $140, what would be the figure that you would carry on your books, under your system, as the cost? A. Well, under the retail system, every individual article loses its identity the moment it goes into stock because the retail system is predicated upon...