A. P. Mitchell Auto Co. v. Commissioner

*1001 This proceeding results from the determination by respondent of a deficiency in income and profits taxes for the calendar year 1920, *1002 in the amount of $8,963.21. Petitioner assigns error on the ground that the respondent incorrectly stated the closing inventory of certain new Cleveland and Chandler automobiles owned and held for sale by petitioner at December 31, 1920.

FINDINGS OF FACT.

Petitioner is a Texas corporation with principal office at 515 Commerce Street, Fort Worth, and was engaged in business during the year 1920 as sales agent for Chandler and Cleveland automobiles. At the close of 1920, petitioner had on hand 45 Cleveland cars, comprising 36 touring cars, 6 roadsters and 3 sedans, and 34 Chandler cars, comprising 6 dispatch cars, 20 touring cars, 6 sedans, 1 roadster and 1 coupe. The aggregate cost of the 45 Cleveland cars was $57,309.31 and of the 34 Chandler cars, $61,123.75. The closing inventory for 1920, as reported in*3985 return filed, included 45 Cleveland cars at an aggregate valuation of $45,609.39 and the 34 Chandler cars at an aggregate valuation of $56,193.75. The respondent Approved and allowed the valuation of $45.609.39, being lower than cost, for the 45 Cleveland cars, but rejected the valuation of the 34 Chandler cars and changed the inventory by entering the last-mentioned cars at the cost price thereof, or $61,123.75.

The automobiles in question were purchased pursuant to a contract with the manufacturers thereof, made prior to 1920, under the terms of which petitioner was required to receive and pay for at agreed prices, a certain allotted number of cars.

In the first part of the year 1920, the demand for cars exceeded the supply. In September, coincident with the reduction in price of other competing automobiles, a slump occurred in the market for automobiles. Petitioner had on hand more cars than it could market and its president made several trips to the factory in an effort to have the manufacturers relieve it of its commitments, and finally in the fall of 1920 advised the manufacturers of Cleveland and Chandler cars that it would take no more.

In the fall of 1920, serious*3986 mechanical defects of major importance existed and developed in the 1920 models of Chandler and Cleveland automobiles, which petitioner then had in stock. Numerous complaints were being received from purchasers. It was also known in December that new models of the Cleveland and Chandler would be placed on the markets in the month of January, 1921, which further retarded the sale of the 1920 models comprising the inventory. Petitioner advertised the cars comprising the inventory, employed several men and sent each out with a car to western Texas and the State of New Mexico, with instructions, if they could get from $600 to $700 for the cars, to sell. Despite such efforts, petitioner was unsuccessful *1003 in selling the cars. Large allowances, ranging from $200 to $300 more than the old car was worth, were offered in attempts to sell the cars, but without success.

A dealer in San Antonio, Tex., had refused to take a shipment of 100 Cleveland and Chandler cars and a special representative of the manufacturers offered the cars to dealers in Texas, on the following prices: Open Clevelands, $650, closed Clevelands, $1,200; open Chandlers, $900, and closed Chandlers, $1,500. *3987 These were the same type cars as comprised the inventory. The dealers declined to accept the cars at prices offered and the representative of the manufacturer sold the cars in Mexico through local advertising and at the following prices: Open Clevelands, $650, $700, and $750; open Chandlers, $1,150 and $1,200; closed Chandlers, $1,450.

The Cleveland cars on hand at December 31, 1920, had a market value as follows:

The Chandler cars on hand at December 31, 1920, had a market value as follows:

OPINION.

MILLIKEN: The inventory of Chandler and Cleveland automobiles was taken by petitioner at cost or cost or market, whichever was lower, in conformity with article 1582 of Regulations 45. It is contended that market was lower than cost and petitioner seeks to report on such basis. There can be no dispute that market was lower than cost. It only remains to determine the market value on December 31, 1920, of the automobiles in question. Taking into consideration the market conditions*3988 obtaining as evidenced by sales efforts, and the price at which the manufacturers of Cleveland and Chandler automobiles offered and sold the models and types which petitioner had on hand at December 31, 1920, we are of the opinion that the fair market value of the automobiles in question was as set forth in our findings of fact.

Judgment will be entered on 15 days' notice, under Rule 50.