Sprague Tire & Rubber Co. v. Commissioner

*610 The respondent has asserted a deficiency in income and profits tax for the year 1919 in the amount of $886.72. The only issue is whether the inventory of the petitioner as reported in its income and profits-tax return for the taxable year in correct.

FINDINGS OF FACT.

In the taxable year the petitioner was a corporation with its principal office and place of business at Omaha, where it was engaged in the manufacture of automobile tires.

It was the custom of the petitioner to keep its materials records by what is known as the perpetual inventory system. As shipments of supplies and materials to be used in producing its products were received the items and cost thereof were appropriately entered in *611 books of record and such materials were stored in a stock room. As such supplies and materials were needed in manufacturing processes the foremen of the several departments took them from the stock room and reported such withdrawals to the bookkeeper who credited such withdrawals*3767 against the amounts shown on the running inventory. The cost of supplies on hand at December 31, 1919, as determined by this method and reflected on the books of the petitioner, was $305,012.48.

Some time in the latter part of December, 1919, the petitioner made a physical inventory of supplies and materials then on hand by actual count and weight, at cost or market, whichever was lower, the total of which was $265,494.52, and included such amount in the proper schedule in its income and profits-tax return for such year. No adjusting entries were made on the petitioner's books of account to reconcile the perpetual and physical inventory figures as of December 31, 1919.

Some time in the year 1925 the petitioner's books were removed from its office at Omaha by order of one of the courts of Nebraska and used as evidence in a legal proceeding in Stanton County. Before the conclusion of such proceedings the petitioners had ceased operations and no one was in charge of its office and accounts. The sheriff, who had custody of the books and papers of the petitioner, returned part or all of such records to the office of the petitioner, but no one was there to receive and store them*3768 and many of the records were lost, misplaced or destroyed. Among the papers so lost were the inventory sheets made up at December 31, 1919.

The income and profits-tax return of the petitioner for the taxable year was made up by a firm of accountants which had access to all the books and records afterwards destroyed or lost, including the inventory sheets as of December 31, of such year. From such sheets the inventory amount of $265,494.52 was taken and included in such return. Upon audit of this return the respondent disallowed the value of the physical inventory taken by weight and count, at cost or market, whichever was lower, at December 31, 1919, and based his determination of the deficiency here in controversy on figures of the running or perpetual inventory which the books reflected in the amount of $305,012.48.

In addition to the foremen in charge of operations in the several departments of the petitioner's plant many other employees had access to the stock room. The discrepancy between the perpetual and physical inventories resulted from the shrinkage of materials in weight, and from the removal of stock without record of withdrawals on the books.

*612 *3769 OPINION.

LANSDON: The evidence is adverse to the determination of the respondent in this proceeding. The head bookkeeper of the petitioner testified that the physical inventory as of December 31, 1919, was taken by count and weight under his immediate and personal supervision and that he priced, computed, extended and totaled the values of all items at cost or market, whichever was lower. Such total was reported in the petitioner's income and profits-tax return for the taxable year. Since it is established that the inventory sheets of such physical inventory have been lost and that every possible effort has been made to produce them, the testimony of the man under whose supervision the inventory was made and who computed the values of the several categories of materials is accepted as persuasive of the correctness of the amount claimed. By reason of some misunderstanding between the bookkeeper and the firm of accountants which audited the accounts and business and made up the income and profits-tax return of the petitioner for the taxable year, no adjusting entries to reconcile the perpetual and physical inventories were ever made. This was bad bookkeeping but can not be made*3770 the basis for additional tax liability.

Judgment will be entered for the petitioner.