National Fireworks v. Commissioner of Internal Rev., 5156.

• Decision Date: 08 April 1957
• Docket Number: No. 5156.,5156.
• Citation: 243 F.2d 295
• Parties: NATIONAL FIREWORKS, Inc., et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — First Circuit

243 F.2d 295 (1957)

NATIONAL FIREWORKS, Inc., et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 5156.

United States Court of Appeals First Circuit.

Heard January 8, 1957.

Decided April 8, 1957.

Walter Powers, Boston, Mass., with whom George F. Smith, Jr., Washington, D.C., was on brief, for petitioners.

I. Henry Kutz, Atty., Dept. of Justice, Washington, D. C., with whom Charles K. Rice, Asst. Atty. Gen., and Lee A. Jackson and Sheldon I. Fink, Attys., Dept. of Justice, Washington, D. C., were on brief, for respondent.

Before WOODBURY and HARTIGAN, Circuit Judges, and WYZANSKI, District Judge.

HARTIGAN, Circuit Judge.

This is a petition for review of a decision of the Tax Court of the United States entered March 2, 1956, determining a deficiency in petitioner's excess profits tax for the fiscal year ending August 31, 1943.

The petitioner is an affiliated group of corporations consisting of a common parent, National Fireworks, Inc., hereinafter called Fireworks, and twelve other corporations. Petitioner filed consolidated corporation income tax and excess profits tax returns for the fiscal year beginning September 1, 1942 and ending August 31, 1943.

On July 31, 1942 all of the stock of Automatic Machinery Manufacturing Corp., hereinafter referred to as Automatic, was acquired by petitioner. This stock was sold to Seaboard Commercial Corporation, hereinafter called Seaboard, on December 22, 1942. The receipts, cost of goods sold, deductions and net income of Automatic and its subsidiaries were determined for the period September 1, 1942 to December 31, 1942 and the books of said companies were not closed as of December 22, 1942. Therefore, from the income determined for such period there was eliminated 9/122¹ and the balance was included in the consolidated net income reported in petitioner's consolidated corporation income and excess profits tax returns for its taxable year ending August 31, 1943.

Automatic's cost of goods sold of $570,785.38 was determined, as shown on petitioner's consolidated returns, by adding to the opening inventory of $1,393,269.84, purchases, salaries and wages and other costs to make a total of $2,171,378.15 from which was subtracted the closing inventory of $1,600,592.77.² Partially comprising this closing inventory were four types of machines in various stages of completion. These four items and their respective values as used to calculate cost of goods sold on the consolidated tax returns are as follows:

                  U-6 Hob Thread Millers .... $166,242.79
                  Collier Multiple Purpose
                       Machine ..............  438,277.66
                  Frankel Multiple Purpose
                       Lathe ................  191,706.59
                  SG-2-B Surface Grinders ...   99,242.02
                

It is the valuation of the closing inventory as to these four items in computing the cost of goods sold in petitioner's return for its taxable year ended August 31, 1943 which is in issue here.

The question of the value of Automatic's closing inventory on December 22, 1942 was raised for the first time by an amended petition in 1952, in which petitioner alleged that the closing inventory as to said four items was overvalued by $460,000. In the second amendment of the petition it was alleged that the overvaluation was in the amount of $740,000. Now petitioner contends, as it did at trial, that the overvaluation was in the amount of $703,642.94.

Petitioner's theory, as summarized by the Tax Court, is that Automatic always valued its inventory at the lower of cost or market; that on December 31, 1942 the market value of the four items in question was substantially lower than Automatic's cost; that through inadvertence, the cost figures, rather than the lower market value figures, were used in the computation of Automatic's closing inventory as of December 31, 1942; and that petitioner is now entitled to claim the lower market value, in order that Automatic's return will conform to its customary method of valuing inventory at the lower of cost or market value.

Apparently this revaluation by petitioner of its 1942 closing inventory to some extent was based on the fact that the Commissioner, in determining a deficiency on Seaboard's return for the taxable year ending December 31, 1943, ruled in effect that certain inventory items of Automatic, also in issue here, had been overvalued in Seaboard's opening inventory.³ As mentioned above, Seaboard purchased the stock of Automatic from petitioner on December 22, 1942. Accordingly, petitioner urges that if, under the Commissioner's ruling, these items were overvalued in Seaboard's opening inventory, they must have been overvalued in petitioner's closing inventory since presumably petitioner's closing inventory and Seaboard's opening inventory were the same.

The Tax Court ruled that the Commissioner's determination in the Seaboard case was immaterial and placed the burden on petitioner to go forward with any other evidence it could adduce to prove its inventory was overvalued. Thus, petitioner, in attempting to prove that the aforementioned four inventory items were overvalued, introduced the testimony of five witnesses, certain exhibits and a joint stipulation of the parties.

The Tax Court held, on two grounds, that petitioner could not reduce its 1942 closing inventory figures as to Automatic. The first ground was that "petitioner has not shown that Automatic's opening inventory was valued at the lower of cost or market, and without such a showing, the necessity for consistency requires that the closing inventory cannot be valued by such method." The second ground generally was that petitioner "has not established that the four items had a market value of $703,642.94 less than the amounts set forth in the computation of Automatic's cost of goods sold."

Since we believe that the first ground presents sufficient basis for affirming the Tax Court's decision, we deem it unnecessary to consider the second ground.

The Tax Court, in holding that petitioner had failed to show that Automatic's opening inventory was valued at the lower of cost or market, stated that there was "no evidence whatever as to the basis on which Automatic's opening inventory was valued." This statement, petitioner urges, misstated the evidence since Elder, treasurer of Automatic, and Reynolds, assistant treasurer of Fireworks, testified that the inventories of Automatic for tax purposes were kept at cost or market whichever was lower.

We believe that petitioner unduly emphasizes the above language of the trial judge. When taken in context with later passages in the opinion, it is clear that the trial judge merely concluded that petitioner had not shown the basis of Automatic's opening inventory. Certainly it was not clearly erroneous for the trial judge to so find, since the testimony of Elder and Reynolds on this point was so general as to be of little value.⁴ In any event the Tax Court was not required to blindly accept the testimony of these two witnesses which was the only evidence on this point in the case. See Gem Jewelry Co. v. Commissioner of Internal Revenue, 5 Cir., 1948, 165 F.2d 991, certiorari denied 1948, 334 U.S. 846, 68 S.Ct. 1516, 92 L.Ed. 1770.

It seems to us that petitioner in order to...