Before BIGGS, Chief Judge, and McLAUGHLIN and O'CONNELL, Circuit Judges.
O'CONNELL, Circuit Judge.
Petitioner ("Mergott"), a Delaware corporation on the accrual tax basis, seeks review of a decision of the Tax Court holding that there are deficiencies in its declared value excess-profits tax for the year 1943 and in its excess profits tax for the year 1944.
Whether or not there was a tax deficiency in those years is dependent upon the propriety of a 1943 deduction of $17,068.68, that sum purportedly representing a loss resulting from the scrapping of 103 tumbling barrels and 58 tanks by Mergott in that year. The facts are substantially as follows: For at least several years prior to 1930 and up to 1943, Mergott had been manufacturing metal handbag frames and other metal specialties, in the process of which fabrication Mergott used patented wooden barrels for a polishing operation.*fn1 The oak used for the barrels was specially selected, milled to Mergott specifications, and stored in a particular manner on Mergott property. The barrels all were constructed under Mergott supervision by two Mergott carpenters continuously on the Mergott payroll. The production rate on the barrels was between 52 and 78 per year. The useful life of the barrels was six months to two years, the average being one year. As the Tax Court said, "Each year petitioner abandoned, as worn out, approximately the same number of barrels and tanks as it built during the year."*fn2
In 1943, war material work by Mergott forced discontinuance of its civilian products and, since the tanks and barrels then on hand were no longer useful, they were scrapped.*fn3
Such was the function, and the history, of the tumbling barrels. The accounting treatment which Mergott accorded them requires some detailed explanation. Prior to 1931, the value of the barrels was included in the merchandise inventory account. At the suggestion of a Mergott accountant, in 1931 the $18,980 item representing the value of the barrels was subtracted from opening inventory and added to the machinery and equipment account, "purely for balance sheet purposes."*fn4 This amount was adjusted to reflect the actual value of barrels on hand as of the close of the years, 1932, 1933, 1934, 1935, and 1936;*fn5 subsequent to December 31, 1936, the practice was discontinued and the value as of that date, viz., $17,068.68, was carried unaltered through the years 1937 to 1943. Mergott, nevertheless, continued to charge directly to operating expenses the labor and material costs incurred in the production of replacement barrels. When the barrels were scrapped in 1943, Mergott charged to profit and loss the item of $17,068.68 carried since 1936. The Tax Court held that, since Mergott had taken a deduction for the full amount expended by Mergott in labor and materials in the manufacture of the barrels on hand in 1943, an allowance of the deduction of $17,068.68 would be granting Mergott a double deduction, and therefore upheld the deficiency determination of the Commissioner. 1948, 11 T.C. 47.
The case before us is not one in which the law is disputed. All members of this Court agree that "bookkeeping entries, though in some circumstances of evidential value, are not determinative of tax liability", Helvering v. Midland Ins. Co., 1937, 300 U.S. 216, 223, 57 S. Ct. 423, 426, 81 L. Ed. 612, 108 A.L.R. 436. The sole question before the Tax Court, as well as before us, is factual: When did Mergott suffer the loss for which it now seeks to claim credit? The difficulty stems from the vacillating accounting practice adopted by Mergott,*fn6 which has created problems entirely of its own making. Even if we were to assume arguendo that, by virtue of section 36, P.L. 773, 80th Congress, 26 U.S.C.A. § 1141(a), this Court may substitute its concept of proper accounting practice for that prescribed by the expert tribunal, the Tax Court, we are not prepared to say that the instant Tax Court decision is without substantial foundation in the evidence.
The item of $17,068.68 represented the value of the barrels on hand on December 31, 1936. Those barrels, presumably, had long since been consumed and discarded by 1943. Consequently, it could not be the 1936 barrels, but barrels constructed thereafter, for which Mergott attempted to deduct in 1943. As to any barrels built subsequent to December 31, 1936, the Tax Court has found that "Labor and material costs for their construction were treated in the same manner as were the costs incident to the creation of the products it sold," that "the cost of producing the barrels was in all instances deducted as a current expense," and that "For each [barrel abandoned in 1943] petitioner was given a simultaneous deduction for the full amount expended in labor and materials." While the Mergott accountant did present testimony indicating that the effect of what was done amounted to setting off the material and labor cost in producing the barrels against the cost of the discarded barrels, we know of no reason why the Tax Court had to be bound by his testimony. The fact that the figure representing the value of the barrels on hand remained absolutely constant for more than 6 years, between 1936 and 1943, a period when the national economy was undergoing radical changes.*fn7 (plus the obvious fact that at least in 1943, under its own theory, Mergott would have been deducting the 1943 operating expenses of making the barrels as well as writing off the same barrels, certainly permitted the Tax Court to draw the conclusion that, whatever may have been intended by the Mergott officials, what they actually accomplished was to charge to current expenses the cost of the barrels on hand.*fn8
It requires no citation to state that the cost of the barrels actually on hand in the year 1943, having been charged to the cost of operations with the commensurate tax advantages, cannot again be charged off simply because they are on hand. See David Hanover v. Com'r, 1949, 12 T.C. 342, referring to the instant Tax Court decision.
Somewhere in prior years, petitioner probably should have charged off to expense the item of $17,068.68. This was not done; why, we can only speculate. It may well be that such an action would not have been profitable taxwise. Whatever the reason of taxpayer may have been, the principle has long been established that, for tax purposes, expenses attributable to one year may not be charged off in a subsequent year. Sec. 29.43-2 Treasury Regulations 111, 492 C.C.H. Standard Fed. Tax Rep. Par. 409.
The decision of the Tax Court will be affirmed.
MCLAUGHLIN, Circuit Judge (dissenting).
The sole question before us is whether in 1943, petitioner rightfully deducted the sum of $17,068.68 as representing a loss arising from the scrapping of its tanks and tumbling barrels in that year. The Tax Court found there was no allowable loss, holding that petitioner had properly deducted cost of labor and materials when expended for manufacture of the equipment.
For a number of years prior to 1943, petitioner had manufactured metal handbag frames and other metal specialties. In polishing those products it used wooden tumbling barrels and tanks. The metal products to be polished together with a chemical solution, water and steel shot, were placed in the barrels. Those barrels revolved in tanks containing a solution consisting principally of soap and water. The tanks and barrels used in the process were built by petitioner. Concededly, their average life was about a year. Because of the type of use to which the barrels and tanks were subjected, they would be replaced when they fell into ...