Hug & Sarachek Art Co. v. Commissioner

*990 This proceeding is for the redetermination of a deficiency in income and profits taxes of $853.97 for the calendar year 1920.

While two issues were raised by the pleadings, one was expressly waived by counsel for the petitioner at the hearing of this proceeding, leaving for our consideration the sole question of whether the respondent erred in his rejection of the December 31, 1920, inventory as returned by the petitioner, resulting in an increase in said inventory, and a consequent increase in net income as reported for that year.

FINDINGS OF FACT.

The petitioner, a corporation, organized and incorporated under the laws of the State of Missouri in 1917, succeeded to the*3007 business of the Finley Art Co., which was organized in or about 1914. It is engaged in buying and selling at retail, various objects of art, consisting principally of prints, sheet pictures in oils and water colors, art etchings and engravings, mirrors, mouldings and mirror and picture frames.

The petitioner's inventory at December 31, 1920, aggregating $23,817.97 in amount, included framed pictures, mirrors and mirror frames, miscellaneous frames, sheet pictures, mezzotints, water colors, color etchings, black and white etchings, oil paintings, and mouldings, all of which were priced at cost. Included in that inventory were of great number of pictures, prints, mirrors, picture and mirror frames which had been rendered obsolete by changed conditions and demands for works of art or had become damaged due to shop wear. The petitioner's officers surveyed the various obsolete and damaged articles, and after having sought the advice of its accountants, who were charged with the duty of preparing its income and excess-profits-tax return for 1920, and having been *991 granted permission by the respondent to reprice its inventory to reflect cost or market, whichever was lower, *3008 the total value of the inventory as determined in the first instance, to wit, $23,817.97, was reduced by 10 per cent, or $2,381.79, making the inventory, as reported for that year, $21,436.18.

The amount by which the petitioner reduced its inventory was restored to income for 1920 by the respondent.

Those damaged or obsolete items, which had been in stock for a number of years, were on hand in 1919 and in substantially the same condition at that time as they were in when the inventory in controversy was computed.

It has been the custom of the petitioner to conduct regular sales of its stock in each year, at which time the normal reduction in selling price is 25 per cent off, while on damaged and obsolete goods the reduction is usually 33 1/3 per cent off. The various damaged and obsolete items were repriced and shortly after December 31, 1920, placed on sale at reductions of 33 1/3 to 50 per cent off, and, although a diligent effort was made to dispose of them at those prices, some of them are still on hand.

OPINION.

MORRIS: The petitioner's counsel, on direct examination, developed to our satisfaction the cost of the various obsolete and damaged articles included in*3009 the petitioner's inventory at December 31, 1920, and also that these articles had not been sold because of their damaged condition or obsoleteness. We are not satisfied, however, that the market value, which purports to be lower than cost, has been properly evidenced. We are told that these items were repriced at figures ranging from 33 1/3 to 50 per cent off, and that a diligent effort was made to sell them at a sale which took place shortly after December 31, 1920. We learn on cross-examination that the sale which took place after December 31, 1920, was not merely for the purpose of disposing of the damaged or obsolete stock, but was a general sale which was held every year. Of course, the witness testified that the reduction at that sale in 1921 on saleable articles was only 25 per cent instead of 33 1/3 to 50 per cent, but these factors do not, without more, establish the true market values so that we may find as a fact just exactly what those values were.

As to such items in the inventory as the petitioner alleges were unsaleable due to their damaged or obsolete condition, the evidence is that this condition existed prior to the taxable year. These items had been in stock*3010 for a number of years, were on hand in 1919, and as the witness, Hug, himself, testified "were in the same condition in 1919 as they were at the end of 1920." This being the case, any *992 loss in respect thereto was sustained in a prior taxable year, when the items became unsaleable and should have been accounted for by the exclusion of these items from the inventory of such year.

Under the facts of the case we are of the opinion that the petitioner has not adduced sufficient evidence to overcome the prima facie correctness of the respondent's determination.

Judgment will be entered for the respondent.