
    JOHN B. HUNT v. THE UNITED STATES
    [No. J-556.
    Decided July 5, 1932]
    
      
      Mr. William J. Byo-ne for the plaintiff. Mr. J. O. Trimble was on the briefs.
    
      Mr. Ralph G. Williaonson, with whom was Mr. Assistant Attorney General Charles B. Rugg, for the defendant.
   Booth, Chief Justice,

delivered the opinion:

The plaintiff, John B. Hunt, was an equal partner with G. I. Frazier, and was engaged in manufacturing pieces of timber into barrel staves. The copartnership operated a number of mills located at various points in Tennessee, some ten or twelve miles from railroad stations. The main office of the firm was in Nashville, Tennessee.

Plaintiff filed his individual income tax return on March 13, 1921, for the calendar year 1920. This return disclosed a net income of $40,968.63 and an income tax due thereon of $6,525.51, which was duly paid in installments. In October, 1924, the Commissioner of Internal Revenue assessed an additional tax against the plaintiff of $54.00, which was also duly paid.

Plaintiff’s return of individual income for the calendar year 1920 included- an item of. $37,825.38, his distributive share of income from the partnership of Frazier & Hunt, and the additional tax of $54, assessed by the commissioner in October, 1924, was arrived at by increasing plaintiff’s distributive share, as above mentioned, from $37,825.38 to $38,025.38. .

In computing the net income of the copartnership of Frazier &■ Hunt the closing inventory for the calendar year 1920 disclosed as of December 31, 1920, the possession of 1,081,520 pieces of staves on hand at the mills, valued at $40 per thousand, a total value of $43,260.80. This inventory was prepared for the firm by accountants in Nashville, Tennessee, upon information furnished by the firm, and value was ascribed thereto upon the basis of either market f. o. b. cars, or cost thereof.

Plaintiff now asserts that the inventory involved should have been at the market value of the pieces of staves at the mills, i. e., $15.90 per thousand instead of $40, and if so valued would result in a diminution of his tax liability for the calendar year 1920 to .the extent of $2,925.21, for which amount a judgment is sought, with interest on $1,239.84 from September 15, 1921; on $1,631.37 from December 15, 1921; and on $54 from November 10, 1924.

. Plaintiff states that the single issue for adjudication is “ What was the market value per thousand of the partnership’s staves on hand December 31, 1920,” and to sustain the contention cites article 1584 of Treasury Department Regulations 45, which is as follows:

ART. 1584. INVENTORIES at market. — Under ordinary circumstances, and for normal goods in an inventory, k£ Market ” means -the current- bid price prevailing at the date of the inventory for the particular merchandise in the volume in which usually purchased by the taxpayer and is applicable in the cases (a) of goods purchased and on hand, and (5) of basic elements of cost (materials, labor, and burden). in goods in process- of manufacture and in finished goods on hand ;* -**. Where no open market exists or where quotations are nominal, due to stagnant market conditions, the taxpayer must use such evidence of a fair market price at the date or dates nearest the inventory as may be available, such as specific purchases or sales by the taxpayer or others in reasonable volume and made in good faith, or compensation paid for cancellation of contracts for purchase commitments. Where the taxpayer in the regular course of business has offered for sale such merchandise at prices lower than the current price as above defined, the inventory may be valued at such prices less proper allowance for selling expense, and the correctness of such prices will be determined by reference to the actual sales of the taxpayer for a reasonable- period before and after the date of the inventory. Prices which vary materially from the actual prices so ascertained will not be accepted as reflecting the market. * * *

The record conclusively establishes that the return of the copartnership of Frazier & Hunt discloses a partnership income of $76,577.51 for the calendar year 1920, computed in part upon a closing inventory -for the year, valued as to the item involved at $43,260.80, and that plaintiff’s one-half share thereof is correct unless .the closing inventory as to staves may be computed upon the markét value thereof prevailing at the mills on the date the same was taken, leaving, as plaintiff states, the single issue as to whether article 1584 of regulations 45 entitles plaintiff to value the item of staves at the market price thereof at the mills instead of f. o. b. the cars. No jurisdictional issue is involved in the case. Plaintiff’s refund.claim was filed in time, and the suit is properly before the court.

Plaintiff concedes that the copartnership of Frazier & Hunt was a manufacturing one, that the pieces of staves manufactured, in so far as-the firm is concerned, were finished products, and this concession in our opinion brings again before the court the question whether the closing inventory of December 31, 1920, is to be valued Under “(a),” i. e., of goods purchased and on hand ” or (b)” “ of basic elements of cost (materials, labor, and burden) in goods in process of manufacture and in finished goods on hand,” of article 1584, regulations 45, above quoted.

The record furnishes no proof by which the inventory may be valued under “b” above. -.Valuation of - the same-was predicated either upon cost or market value of the finished product, when it should have been valued, as the regulations prescribe, under “ b ” of article 1584.

The court in a recent opinion in the case of Bedford Mills v. United States, ante, p. 412, in discussing this precise issue, said:

“ To sustain the last contention of the plaintiff would, we think, exact of the court an opinion as to reasonableness and lawfulness of the regulations under which the plaintiff’s tax liability is to be determined. This issue we regard as no longer res integra. The use of inventories in .ascertaining correct income, the circumstances under which they must be used, the manner of their taking, and the basis of .valuation thereof, together with the numerous other details concerned in their preparation, are provided for by the commissioner in extensive, plain, and lengthy regulations, and the courts have uniformly sustained the regulations. It is, we think, too late to indulge another academic discussion as to whether they conform ‘ to the best accounting practice in the trade or business and as most clearly reflecting the income.’ Riverside Mfg. Co v. United States, 67 C. Cls. 117; Chicago Frog & Switch Co. v. United States, Id. 662; United States v. Kemp, 12 Fed. (2d) 7; Lucas v. Kansas City Structural Steel Co., 281 U. S. 264.”

This case, we think, falls within the principles of the' Bedford case and the authorities therein cited, and the petition will be dismissed. It is so ordered.

Whaley, Judge; William:s, Judge; LittletoN, Judge and GeeeN, Judge, concur.  