Appeal of Champion Stove Co.

OPINION.

Smith:

This appeal is from a deficiency in income and profits taxes for the year 1920. The only question in issue is the right of the taxpayer to reduce its book inventory at December 31, 1920, in the amount of $50,571.17. The Commissioner has refused to allow this reduction on the ground that it has not been substantiated by affirmative evidence and that the reduction due to obsolescence and depreciation in the value of stock was not warranted by the provisions of articles 1581-1585 of Regulations 45 (1920 edition) as amended by T. D. 3296.

Section 203 of the Revenue Act of 1918 provides:

That whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

After a careful examination of the evidence submitted we are of the opinion that the taxpayer has substantiated its claim for its reduction of inventories, as prayed for. The record shows that the taxpayer carefully inventoried its stock and material. It has presented catalogues and detailed inventories showing the stoves which it has ceased to manufacture, and the stock on hand, carefully enumerated by name and number. It has shown the cost of the stoves and castings and the current reproduction cost of the parts retained, and has presented uncontroverted testimony of the current reproduction cost. The testimony shows that there was an actual physical inventory which was later checked by a reputable firm of certified public accountants, and still later the inventory, with slight adjustments, was accepted by a revenue agent. In fact, everything was done that could reasonably be expected to show that the reduction was bona fide and reflected true conditions for the year ending December 31, 1920.

The testimony and the documentary evidence submitted are, we believe, sufficient to substantiate the claim of the taxpayer.