Appeal of Swinehart Tire & Rubrer Co.

OPINION.

Smith:

The taxpayer’s petition alleges that the Commissioner erred in computing the alleged deficiency for the period September 1 to December 31, 1917, in the following manner:

1. In disallowing as a deduction from gross income an amount of $9,558.92 which the revenue agent making an examination of the taxpayer’s books of account alleged was an error by the taxpayer in general expense impossible to allocate.

2. In allocating to the taxable year ended August 31, 1917, and the four months’ period ended December 31, 1917, a discrepancy between book and physical inventories discovered at December 31, 1917.

3. In failing to allow as a deduction sufficient depreciation on plant and equipment.

The Commissioner confesses error with respect to the disallowance of $9,558.92, general expense.

With respect to the second allegation of error, it is to be noted that the taxpayer claims not to have taken inventory at the close of its fiscal year ended August 31, 1917. The net income shown on the tax return was made upon the basis of a book inventory, A physical inventory of finished product was taken at the taxpayer’s branches but this was ignored in making up the tax return. This physical inventory showed finished product at the branches of $189,995.49, whereas the taxpayer’s book inventory showed finished product at the branches of only $16,552.08. The taxpayer now claims that the true inventory at August 31, 1917, was $994,517.61, instead of $886,369.44, the amount shown upon the tax return; in other words, the taxpayer claims that there should be added to the book inventory at the date mentioned $108,148.17, or an amount in excess of the discrepancy in the inventory found at December 31, 1917.

The Board is not satisfied from the evidence before it that the true inventory at August 31, 1917, was $994,517.61. It may have been, and probably was, greater than $886,369.44, the amount shown by the book inventory. But the taxpayer has submitted no evidence .which convinces the Board that the true inventory at August 31, 1917, was in excess of $941,180.57, the amount allowed by the Commissioner.

Prior to 1917 the taxpayer charged off very little depreciation upon its depreciable properties. In its amended returns for the fiscal year ended August 31, 1917, and for the four months’ period ended December 31, 1917, the taxpayer claimed deductions of $31,-616.58 and $11,565.97, respectively, for depreciation. The amounts allowed by the Commissioner for these periods were $11,176.50 and $5,588.24, respectively. Depreciation upon buildings was allowed by the Commissioner at the rate of 2% per cent per annum, which we think was ample. We think, however, that depreciation was sustained on certain of the depreciable assets at rates in excess of those originally applied by the taxpayer. The rates which should be applied for each of the respective periods are at the per annum rates of—

Per cent.

Buildings_ 2%

Machinery and tools_ 7

Molds and cores__ 15

Furniture and fixtures_ 10

Auto trucks_ 20

Branch equipment_ 7

These rates of depreciation should not be applied for years prior to the fiscal year beginning September 1, 1916. Appeal of Cleveland Home Brewing Co., 1 B. T. A. 87.