OPINION.
Lansdon
: There is no contention as to what constitutes the gross income of the taxpayer. To be entitled to the deduction contended for, it must bring its case within the purview of section 234 or 236 of the Revenue Act of 1918. Section 234 (a) consists of 14 paragraphs. The case is clearly not within the purview of paragraphs (2) to (14). Paragraph (1) with its introductory clause is:
See. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered, and including rentals or other payments required to be made as a condition to the continued use or possession of property to which the corporation has not taken or is not taking title, or in which it has no equity.
To bring its claim within this provision of law it must show that the money to be paid for the bags on their return is a necessary expense paid or incurred during the taxable year.
For some reason, whether to avoid waste, to keep in close touch with its customers, or, whatever it may have been, the company charged the purchaser an arbitrary amount, determined by itself, for each bag, and contracted with the purchaser that it would pay him that amount for each bag returned in usable condition. It manufactured the cement and bought the bags. Then it sold both and received pay for both. Thus far the bags were simply merchandise. The contract with the purchaser was practically unilateral, lie was under no legal obligation to return the bags. He might keep them, sell them to someone else, or return them, as he chose. But the company obligated itself to pay him a specified price for each usable bag returned.
On receipt of returned bags they were inspected and payment was made for such as were usable. They were then cleaned, repaired, and placed in stock for further use. If the company had not bought them it would have been under the necessity of buying elsewhere. More nearly than anything else, they were merchandise bought and sold, bought again, placed in stock and sold again. The liability of the taxpayer was only a liability to receive and pay for them when received. The whole transaction wras an exchange of commodities — the receipt of so much and the payment of so much in return— a quid fro quo in each case and not " an ordinary and necessary expense." The obligation to pay for (hem when received was not itself an expense.
The transaction is clearly not within the purview of section 236.
The taxpayer has withdrawn its claim for depreciation, and the Commissioner admits error in disallowance of taxpayer's claim for a deduction of $1,979.91 on account of salary paid Fritz IVorm, one of the company's emjfioyees, for the year 1918, if the claim was actually disallowed. Proper adjustment should be made.
Order of redelermination will be entered on 15 days' notice, under Rule 50.
Stekni-iagen and Smith concur in the result only.