Kansas City Structural Steel Co. v. Commissioner of Internal Revenue

• Decision Date: 30 April 1928
• Docket Number: Docket No. 6232,13554.
• Citation: 11 BTA 877
• Parties: KANSAS CITY STRUCTURAL STEEL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

11 B.T.A. 877 (1928)

KANSAS CITY STRUCTURAL STEEL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 6232, 13554.

Board of Tax Appeals.

Promulgated April 30, 1928.

Phil D. Morelock, Esq., and Armwell L. Cooper, Esq., for the petitioner.

O. Bennett, Esq., for the respondent.

The respondent has determined deficiencies in income and profits taxes for the years 1918 and 1920 in the respective amounts of $38,277.86 and $42,673.14. Only parts of the deficiencies are in controversy.

The petitioner alleges that the respondent erred in increasing its opening and closing inventories for the taxable years, in disallowing a loss in inventory as of December 31, 1918, due to a decline of prices in March, 1919, and in disallowing a deduction for a bad debt in 1920. No evidence was introduced by petitioner in support of its claimed deduction for a bad debt in 1920 and such contention will be deemed to have been abandoned.

A stipulation of all the facts was entered into by the parties.

FINDINGS OF FACT.

The petitioner is a corporation, organized and existing under the laws of the State of Missouri, with its offices at Kansas City, Mo.

During the taxable year it was engaged in the fabrication and erection of structural steel plates for buildings, bridges, tanks, etc., and fabricated material for specific structures or contracts. It carried no finished product in stock. Material was ordered and procured from the mills for each specific structure or contract, except that a supply of material was kept on hand for emergency use to insure the prompt and orderly execution of contracts. When such material was used it was charged to the contract at its replacement cost and promptly replaced with material of a like kind and in a like quantity.

As at December 31, 1916, the company had on hand 5,554 tons of structural steel which it priced at $1.70 per hundredweight, f. o. b. Pittsburgh, representing cost price. This price represented the highest normal market encountered since 1895. Beginning with 1916 the price of structural steel advanced suddenly until it reached $4.50 per hundredweight f. o. b. Pittsburgh for structural shapes and $9.45 per hundredweight f. o. b. Pittsburgh for tank plates. On September 24, 1917, the Government fixed the price of steel f. o. b. Pittsburgh as follows:

                    Structural shapes ______________________  $3.00 per cwt
                    Tank plates ____________________________   3.25 per cwt
                

Following the relinquishment by the Government of control, prices per hundredweight, f. o. b. Pittsburgh, at the close of the taxable years were as follows:

                -------------------------------------------------------------------
                                            | 1918.   | 1919.   | 1920.   | 1921
                ----------------------------|---------|---------|---------|--------
                Structural shapes _________ |   2.80  |   2.65  |   2.45  |    1.50
                Tank plates _______________ |   3.00  |   3.10  |   2.65  |    1.50
                -------------------------------------------------------------------
                

Petitioner at the end of the years 1916, 1917, 1918, 1919, and 1920 valued its said supply of 5,554 tons at $1.70 per hundredweight, f. o. b. Pittsburgh. The total inventory as valued by the company and as valued by the Commissioner, together with the difference, follows:

                ----------------------------------------------------------------------
                                Date      | Company's   | Commissioner's |  Increase
                                          | valuation.  |   valuation.   |
                --------------------------|-------------|----------------|------------
                Dec. 31, 1917 ___________ | $271,827.87 |  $402,688.55   | $130,860.68
                Dec. 31, 1918 ___________ |  446,984.06 |   612,833.52   |  165,849.46
                Dec. 31, 1919 ___________ |  449,976.69 |   562,992.28   |  113,015.59
                Dec. 31, 1920 ___________ |  319,189.26 |   436,302.87   |  117,113.61
                ----------------------------------------------------------------------
                

The total amount of petitioner's inventory dropped below the 5,554 tons during each year. However, it was replaced before the close of these years, except the years 1917 and 1921. The company had on hand at the stated dates the following amounts of steel in tons:

                   Date.               Amount in tons
                December 31, 1916 ____________  5,554
                December 31, 1917 ____________  5,298
                December 31, 1918 ____________  5,887
                December 31, 1919 ____________  6,957
                December 31, 1920 ____________  7,246
                December 31, 1921 ____________  4,512
                December 31, 1922 ____________  9,341
                December 31, 1923 ____________  8,732
                December 31, 1924 ____________ 10,411
                December 31, 1925 ____________  7,202
                December 31, 1926 ____________  8,126
                

All materials of like dimensions are piled piece upon piece in perpendicular piles. Material for specific contracts is not included in above figures.

The following tons of steel were fabricated by the company yearly:

                                                 Tons.
                1916 _________________________  27,999
                1917 _________________________  28,319
                1918 _________________________  20,266
                1919 _________________________  31,432
                1920 _________________________  40,827
                1921 _________________________  27,040
                1922 _________________________  35,925
                1923 _________________________  58,124
                1924 _________________________  34,425
                1925 _________________________  33,105
                1926 _________________________  35,863
                

When the material on hand at the close of the year exceeded 5,554 tons the excess was priced by petitioner at cost or market, whichever was lower. Beginning with December 31, 1921, and for subsequent years, after prices became normal, the entire inventory was priced by petitioner at cost or market, whichever was lower.

The respondent in recomputing the inventory value for the taxable years has disregarded the fixed quantity of 5,554 tons and priced the entire inventory at market, as shown by petitioner's most recent purchases.

In March, 1919, between the 20th and 27th, market prices were reduced from those which prevailed when the inventory was priced December 31, 1918, to the following:

                Tank plates ________________________ $3.24 per cwt. f. o. b. Kansas City
                Steel bars _________________________  2.94 per cwt. f. o. b. Kansas City
                Structural shapes __________________  3.04 per cwt. f. o. b. Kansas City
                

Steel prices remained relatively constant throughout the remainder of the year 1919.

During the first three and one-half months of 1919 the company sold and withdrew from stock:

                                                             Pounds of steel.
                January __________________________________________  1,507,930
                February _________________________________________  1,545,411
                March one-half of tonnage ________________________    738,413
                                                                   __________
                                                                    3,791,754
                

There were on hand at December 31, 1918, 11,774,497 pounds of steel. After subtracting therefrom the 3,791,754 pounds withdrawn from December 31, 1918, to March 16, 1919, there remained on hand March 15, 1919, 7,982,743 pounds of steel. No physical inventory was taken on March 15, 1919. In allocating the tonnage to the following classifications the same proportion has been applied to the 7,982,743 pounds as existed with respect to the inventory at December 31, 1918:

                Balance March 15, 1919, 7,982,743 pounds, at $3.4544 ______________ $275,755.84
                    Tank plates, 4,375,763 pounds, at $3.24 __________  $141,744.72
                    Steel bars, 565,222 pounds, at $2.94 _____________    16,617.53
                    Structural shapes, 2,914,294 pounds, at $3.04 ____    88,594.54
                    Scrap iron, 127,464 pounds, at $1.00 _____________     1,274.64
                                                                        ___________  248,261.43
                                                                                    ___________
                Loss in inventory claimed by petitioner ___________________________   27,494.41
                

The $3.4544 applied as a multiple in arriving at the value of the 7,982,743 pounds of steel on hand as at March 15, 1919, is the average price of the composite inventory as at December 31, 1918, as established by the respondent. The prices applied as multiples to the classes of material as at March 15, 1919, in computing the value of each class are taken from the Iron Trade Review, plus 59 cents freight per hundredweight to Kansas City.

No claim for abatement was filed under the provisions of section 214 (a) (12) (a) of the Revenue Act of 1918.

OPINION.

LANSDON:

There are two questions presented for determination: (1) Which of two methods of inventory more clearly reflects the income, and (2) whether petitioner is entitled to deduct from its income for 1918 an alleged loss in inventory resulting from a decline in price of structural steel in March, 1919.

With regard to the first question, section 203 of the Revenue Act of 1918 provides:

That whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly...