Elm City Nursery Co. v. Commissioner , 6 B.T.A. 89 ( 1927 )

OPINION.

Milliken :

The respondent, in computing net income for the years in question, has not allowed deductions, as part of cost of goods sold, of the cost of purchases of stock in the amounts of $7,495.34 and $7,225.61, respectively. The inventory of stock for each of the years and the cost of purchases of additional stock were carried on the books of account in a so-called “ nursery stock ” account. The inventory at January 1, 1919, is stated therein at a value of $164,-523.07,' and the additions thereto during the year amounted to $21,206.77, of which $7,495.34 is shown as cost of purchases, and $13,711.43 as a balancing figure added to the inventory at the close of the year, or an appreciation of the inventory. The same situation is reflected as concerns the year 1920, as set forth in the findings of fact.

The respondent’s computation of net income, for each of the years in question, was based upon the debits and credits to the profit and loss account as it appeared upon the books. Though he made some adjustments in respect of other items, ho accepted the book value of the inventories as correct and the credits to profit and loss of the two items of appreciation of inventories as proper. We are convinced that the books of account did not correctly reflect the actual and true situation. The petitioner has proven that such is the fact.

The evidence also convinces us that all of the nursery stock purchased during the year was acquired for the purpose of filling orders for stock; that it was actually used for this purpose, and was not on hand at the close of the respective years. Hence, petitioner’s books are in error in carrying the cost of these purchases in the inventory at the close of the year.

Deducting from the value of the inventory as set up on the books at December 31, 1919, to wit, $185,729.84 — an appreciation of $13,-711.43, and cost of purchases in the sum of $7,495.34, and from the book value of inventory at December 31, 1920, to wit, $197,668.48, the total appreciation of $18,424.46 and the total purchases of $14,-720.95, the corrected inventories at both dates are found to be in the same amount of $164,523.07. Since the inventories at the opening and close of both years are the same, the cost of goods sold for each year is represented by the cost of the purchases made during the year.

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