Reporter's Statement of the Case was given by the Commissioner to the claim of March 30, 1933, and that the application for reopening plaintiff's case under this amendment was denied. 11. The parties agree that the present suit is based on the following claims: (a) That in computing the December 31, 1918, inventory all of the following items carried in the inventory should be priced on the "cost or market, whichever is lower" basis. These items are: MATERIALS Manufactured Parts and Supplies: Finished gun tools Wood boxes, paper boxes, and labels for cartridges and Miscellaneous Stores: Salvage stores__-. Balbach smelting stores- Stores in transit__ Uninspected stores_ Indirect Material: Fuel, except coal Oils and liquids_. Builders' hardware Direct Material: $18, 263. 82 11, 239. 17 988. 07 12, 719. 84 17, 400. 21 2,799. 44 54, 350.67 82, 478. 19 1, 563. 62 5, 752. 22 4, 016. 15 Pipe supplies, electrical supplies, miscellaneous brass, Total. 18, 512. 32 230, 083. 72 93, 765. 19 Material in Government contracts__ Total of specific reductions of materials claimed.-- $323,848.91 (b) That the labor content in all the inventory items acquired for other than Government contracts should be adjusted from "cost" to "cost or market, whichever is lower," by applying the same average percentage as was applied by the Commissioner in his allowance for labor reduction on certain of the items permitted to remain in the inventory Reporter's Statement of the Case and with respect to which the original claim was allowed in part. The items for labor claimed are as follows: Labor in stationery, cartridge labels, pack ing cases, paper boxes, gun packing cases, and other wooden cases.. Labor in tool steel blanks and tools in process- Labor in finished miscellaneous tools, cast $94, 383. 84 336,840. 09 iron parts, machine and machine parts-- 277, 638. 42 Total of labor items in Inventory--- $708, 862. 35 Reduction claimed (8.53% of above). $60, 465.96 Grand total of specific reductions to be covered in suit-- $384, 314. 87 (c) In addition, plaintiff claims adjustment from "cost" to "cost or market, whichever is lower" on certain miscellaneous items which were eliminated from the inventory by the Commissioner on the ground that they were unaccounted for, or, being accounted for, on the ground that there was no evidence as to the market value thereof. 12. By eliminating the materials allocated to contracts completed after December 31, 1918, the amount involved in the claim for adjustment in the material items allocated to Government contracts is now reduced from $93,765.19 to $66,798.67. Of this amount, $7,712.71 represents adjustment claimed on materials allocated to cost plus contracts. All of the material upon which this claim is based, except as to a few minor items, is such that it may reasonably be presumed that it would become a physical part of the product hereinafter referred to as Class 1 items. 13. In the amount sued for, claimed on materials allocated to commercial contracts totaling $230,083.72 (finding 11 (a)), there are included classified items totaling $54,542.89, upon which adjustments from cost to market were disallowed by the Commissioner in his final determination on the deductions taken on the return, on the ground they were supply items not subject to the "cost or market, whichever is lower" basis, and items totaling $175,540.83, on the ground that an arbitrary percentage basis was used in reducing the book cost to "cost or market, whichever is lower." Reporter's Statement of the Case 14. All of the items appearing in the inventory upon which adjustment to "cost" or "cost or market, whichever is lower" is claimed may be classified as follows: Class 1. Items of material which become a physical part of the manufactured product. Class 2. Items in the nature of consumable supplies which are used in productive processes and indirectly become a part of the manufactured product. Class 3. Finished production tools and tools in process, including materials for making same, the life of which is indeterminable. Class 4. Miscellaneous small production tools and materials used for making the same, the life of which may reasonably be presumed to be less than one year. Class 5. Capital asset items, replacement and maintenance parts therefor, and materials for making same. Class 6. Supply and other miscellaneous items not allocable to any of the foregoing classifications. Class 7. Salvage items of direct materials, such as copper, brass, etc. Class 8. Unidentified items impossible of practical classification. 15. Included in the items totaling $54,542.89, referred to in finding 13, are items of the following classifications: 16. Included in the items totaling $175,540.83 (finding 13) are items of the following classifications: Reporter's Statement of the Case The breakdown of "Uninspected Stores" has been reduced by a reclassification by plaintiff to $79,694.44 and the total of these items to $172,757.08. 17. Included in the item "Uninspected Stores" are materials which, according to the nomenclature of the several entries, fall into classes 1, 2, 3, 4, 5, 6, and 8 (finding 14), in the following amounts, respectively: as to classes after adjustment for non-bonus periods, the inventory falling in classes 1, 3, 4, 5, and 6. Items falling in classes 3, 4, and 5 represent items disallowed on the ground the cost of items produced could not be segregated from cost of items purchased. Items falling in classes 1 and 6 represent items eliminated from the inventory on the ground they were not such as under the law and regulations could be priced at "cost or market, whichever is lower." The total reductions originally claimed in the petition were $60,465.96, but have been reduced to $37,224.33. Segregated as to classes after adjustment for non-bonus periods, the items are as follows: 19. In addition to the claims based on classified material and labor items, a blanket claim is made for adjustment from cost to market of unaccounted-for inventory amounting to $47,724.80, and certain other items upon which no reduction was allowed by the Commissioner of Internal Revenue because of lack of evidence as to the market value. Opinion of the Court The unaccounted-for inventory claim represents the difference between the cost ledger total for the several items and the total for which substantiating vouchers are available. This claim was disallowed by the Commissioner on the ground that no substantiating vouchers were available in 1925 when the revenue auditor examined the books. The difference between the cost ledger total in the several accounts and the total of substantiating vouchers available may be classified as follows: The court decided that the plaintiff was entitled to recover. GREEN, Judge, delivered the opinion of the court: This is a suit to recover a portion of income and profits taxes paid for the year 1918. Several refunds have been made and so far as the refund involved in this case is concerned, it is based on the ground that the Commissioner of Internal Revenue placed a wrong value upon certain items of plaintiff's closing inventory for that year. The principal defense set up by defendant raises the issue that no claim for the refund now sought to be recovered was filed in time to permit the plaintiff to avail itself of the inventory adjustment which it now seeks to have made. It appears that in filing its return for 1918 plaintiff, in making its inventory, followed the rule of "cost or market, whichever is lower" and, since market was lower than cost, at least for many items in its inventory, claimed a decrease in taxable income for 1918 of $1,190,172.84 on the ground that the market value of its inventory at December 31, 1918, was that much less than cost. On an audit of this return, the Commissioner reduced the inventory reduction claimed of $1,190,172.84 to $494,992.22, such inventory allowance being based upon a revaluation of materials entering into plaintiff's inventory. After making this reduction in the |