The taxpayer appeals from the determination of deficiencies in income and profits tax for the calendar years 1919 and. 1920 of $2,282.31 and $265.67, respectively.
FINDINGS OF FACT.
The taxpayer is a Tennessee corporation with its office and place of business at Nashville. It has been in business since 1911. No inventory of merchandise on hand was taken until December 31, 1920. The taxpayer filed returns showing no net income subject to tax for the calendar years 1919 and 1920. In its 1920 income-tax returns it stated that its inventory at December 31, 1920, was $18,-891.02. It also stated " on account of the fact that we did not take an inventory on December 31, 1919, and the further fact that it was absolutely impossible for us to determine what this inventory would amount to, we were compelled to arrive- at our gross profits under the £ neglected inventory method ' by taking the total amount of our sales since 1911, the total amount of our purchases since 1911, and the amount of our inventory on December 31, 1920, and determine from this data the percentage of profit made on the gross sales for this entire period. This percentage was 42.76,'and we applied that per cent to the amount of our sales for 1920 to determine our gross profit."
Instead of the indicated percentage of 42.76 used by the taxpayer, the Commissioner has used the percentage of 42.58 and has applied that percentage to gross sales for 1919 and 1920, to arrive at the gross profit for each year. The percentage 42.58 is the percentage determined by the Commissioner of the relation of gross profits to gross sales for the four years 1917 to 1920, inclusive.
Although the taxpayer took no inventories of merchandise prior to December 31, 1920, it filed certain statements with bankers, com mercial agencies, etc., which show the value of merchandise on hand at different dates as follows:
December 31, 1916_$2, 274. 93
December 81, 1917_._ 3, 864.92
December-31. 1918_ 9,265.65
There was an average increase in the cost of merchandise dealt in by the taxpayer of not less than 25 per cent during the taxable years 1917 to 1920.
DECISION.
The determination of the Commissioner is approved.