不 exchanges of stock or securities in connection with reorganizations, consolidations, or mergers, occurring only in 1918 and subsequent years. It has been the uniform practice of the Department under the prior income tax statutes in dealing with all exchanges of stock in one corporation for stock in another corporation to recognize the different entities and to regard the stock received in exchange as essentially different property from that disposed of. Under those statutes this office has consistently held that gain or loss arises from such transactions if the stock received in the exchange has a market value even though the aggregate par value of the stock received in the exchange is not greater than the aggregate par value of the stock parted with. SECTION 202, ARTICLE 1563: Exchange of (See 13-21-1528; sec. 201, art. 1544.) Securities of one corporation converted into those of a new and distinct corporation. SECTION 202, ARTICLE 1566: Exchange of prop erty and stock. 23-21-1670 O. D. 938 In 1917 a domestic corporation purchased tangible property in a foreign country for a stated sum in the currency of that country at an exchange rate of $0.20. Later in the same year the property was transferred to a newly organized corporation of the same foreign country in exchange for its capital stock of a total par value equal to the same amount as the cost of the tangible property, the rate of exchange at the time of the transfer being $0.30. Held, that gain or loss was realized by the domestic corporation through the exchange of the property for stock of the new foreign corporation in the amount that the fair market value of such stock in American money at the time of such exchange was greater or less than the cost of the property in American money. SECTION 202, ARTICLE 1569: Exchange of stock 22-21-1660 O. D. 932 A received in the case of a consolidation of corporations in 1920 new stock with a par value in excess of the par value of the old stock exchanged, but the market value of the new stock was less than the cost in 1918 of the stock exchanged. Held, that he sustained no deductible loss. Paragraph 2, subdivision (b), section 202, of the Revenue Act of 1918, refers only to a possible gain in connection with a reorganization, merger, or consolidation. There is no provision of law permitting the deduction of a loss under such circumstances. B, in the case of a consolidation in 1920, received new stock having an aggregate par value less than the par value of the stock exchanged, but having a market value in excess of the cost of the old stock in 1918. Held, that this case falls within the provisions of article 1567 of Regulations 45. SECTION 203.-INVENTORIES. SECTION 203, ARTICLE 1581: Need of inven tories. 12-21-1517 O. D. 848 A taxpayer, engaged in the real estate business, is not permitted to inventory real estate which is held for sale for the purpose of calculating net income subject to Federal income tax. SECTION 203, ARTICLE 1581: Need of inventories. 24-21-1683 A. R. M. 129 Held, that the M Company can not take into its inventory as of December 31, 1918, certain goods delivered in the year 1918 under a bona fide sale subject to a condition which was fully taken care of in a compromise resale, thereby establishing a basis, in the taxable year 1919, for determining loss. The Committee has had under consideration the request for a ruling on a claim filed by the M Company for alleged inventory loss. This claim is one of many filed by a number of taxpayers arising out of the action of the United States Army in commandeering in the year 1918 certain quantities of canned goods, subject to price fixing and allotment by the United States Food Administration. In the instant case, a tentative price was fixed by the Food Administration, but this was subsequently increased. The shipments were to be made subject to an initial inspection and the Government had until July 1, 1919, to make final inspection as to quality. Under the terms of Food Administration Bulletins No. 10 and No. 11 there was the following provision: Goods guaranteed against spoils and swells until July 1, 1919. Spoiled or swelled goods are to be held subject to seller's order. In the instant case all shipments that were allotted by the Food Administration were made in the year 1918 and paid for by the United States Army, subject to the above guarantee. In May, 1919, on reexamination and inspection of a part of the goods so shipped, it was found by the inspectors of the Army that a certain portion of the goods were spoiled and swelled and not suitable for use of the United States Army, and in order to finally dispose of the matter without considerable expense and loss, it was agreed in a bill for resale duly executed by the representatives of the Army and the taxpayer, that the taxpayer should take back the goods which it had delivered and pay to the United States the provisional price for each and every case less certain deductions by way of allowance for concession to cover the cost of new cases, recasing, relabeling, stenciling, marking, etc. These allowances were definitely stated at varying rates per case. Claim has been submitted by the taxpayer in the following language: Claim is hereby made for adjustment of 1918 taxes based upon the rejection of canned goods sold to the United States Army in 1918, by reducing the rejected goods to a valuation of cost as at December 31, 1918. The sales were canceled by the Government, and having been canceled, the profit taken into account at the tax rates of 1918 should also be canceled, the goods rejected be revalued at cost as at December 31, 1918. Sheet No. 1 of Form 1120 is submitted as an amended return, to which is attached a statement of the manner in which the taxable income previously reported has been reduced to the taxable income upon which the revised calculation of taxes has been made. Although we have previously valued such goods as we may have had at the close of a year at market prices, inasmuch as the goods in question were rejected by the Government, and all other packers similarly affected are following the above procedure, it would result in great injustice to this company if not allowed to reduce the rejected goods to a valuation of cost, as of December 31, 1918. There are still outstanding upwards of 100 cases of rejected goods upon which the Army has been unable to give us an exact statement, which we will be required to reclaim when the exact quantities are determined, and we wish to reserve the right to amend our claim when final statement is available from the Army. The field auditor of the inventory section, who has made a careful investigation of all of these claims, recommends that the claims be allowed on the ground that the contention of claimant is well founded and that he should be permitted to consider the sale canceled as of 1918, thereby restoring the goods to inventory as of the close of that year and file amended returns to conform therewith. The chief of the inventory section of the Income Tax Unit does not concur in the findings of the auditor on the ground that a bona fide sale was effected, and that any loss sustained by the taxpayer should be considered as a loss for the taxable year in which the returned goods are resold. It is clearly evident that the resale of these goods to the taxpayer was in the nature of a compromise. It is admitted in the bill of resale that all of the goods were not inspected and that of those inspected only a certain portion was found to be bad. The Government did not have the facilities for repacking after inspection, nor could the goods be immediately consumed. Consequently, considerable loss would have resulted from a complete inspection. It would appear, however, that subject to this condition of rejection the sale which was consummated in the first instance by the taxpayer was a closed transaction. While the price paid for the goods was somewhat below the market price, it was nevertheless subject to adjustment based on final consideration by the Food Administration. It is evident that resale to the taxpayer at original purchase prices less certain definite concessions was, in substance, a compromise sale and was a new transaction. As of December 31, 1918, the goods in question were not the property of the taxpayer. They had been shipped out by him, and he was eventually paid in accordance with the terms of purchase. It does not seem possible, therefore, to consider this stock as a part of the inventory of taxpayer as of December 31, 1918, particularly when it is shown that all of the goods purchased by the Government under these contracts have not been returned to taxpayer or accounted for. It is clear the M Company had the opportunity in the taxable year 1919 to determine its loss by a subsequent sale or other disposition of the goods so bought back from the Government. The Committee is accordingly of the opinion that two transactions are involved and that the M Company can not take into its inventory as of December 31, 1918, any goods delivered in the year 1918 under a bona fide sale subject to a condition which was fully taken care of in a compromise resale, thereby establishing a basis in the taxable year 1919 for determining loss. SECTION 203, ARTICLE 1582: Valuation of in ventories. 1-21-1382 T. D. 3108 Article 1582, Regulations 45, is hereby amended to read as follows: ART. 1582. Valuation of inventories.-Inventories must be valued at (a) cost or (b) cost or market, as defined in article 1584 as amended, whichever is lower. (See article 1585 for inventories by dealers in securities.) Whichever basis is adopted must be applied consistently to the entire inventory. A taxpayer may, regardless of his past practice, adopt the basis of "cost or market, whichever is lower" for his 1920 inventory, provided a disclosure of the fact and that it represents a change are made in the return. Thereafter changes. can be made only after permission is secured from the Commissioner. Inventories should be recorded in a legible manner, properly computed and summarized. and should be preserved as a part of the accounting records of the taxpayer. Goods taken in the inventory which have been so intermingled that they can not be identified with specific invoices will be deemed to be the goods. most recently purchased. Approved, December 30, 1920. SECTION 203, ARTICLE 1582: Valuation of inventories. (See 10-21-1491; sec. 212, art. 22.) change. Inventories of foreign ex SECTION 203, ARTICLE 1582: Valuation of inventories. 17-21-1590 O. D. 888 A dealer may value used or secondhand automobiles included in a closing inventory on the basis of cost or market, whichever is lower, in accordance with article 1582 of Regulations 45, if he can furnish satisfactory evidence of the market value of such secondhand automobiles at the date of the inventory; otherwise they must be valued at cost. Article 1584 of Regulations 45 defines the term "market" and contains the latest ruling of the Department as to the method of determining the market value in valuing an inventory on the basis of "cost or market, whichever is lower." SECTION 203, ARTICLE 1582: Valuation of inventories. 20-21-1631 A. R. R. 506 Recommended, that the action of the Income Tax Unit in refusing to accept, for tax purposes, an amended inventory taken by the M Company, as of December 31, 1919, on the basis of cost or market, whichever was lower, and computing taxable net income on the basis of an original inventory taken as of the said date on the basis of cost, be reversed. The Committee has had under consideration the appeal of the M Company from the action of the Income Tax Unit in refusing to accept for tax purposes an inventory rendered on the basis of cost or market, whichever was lower, for the year 1919. The records show that the M Company is a corporation trading in various supplies and rendering its returns on a calendar-year basis. At the beginning of the year 1919 it contracted for a large supply of a certain commodity at a definite price. Soon thereafter the price dropped very materially and all sales of this commodity during the year were made at a loss. On December 31, 1919, an inventory was 61360°-21-4 taken at cost, which had been the usual custom, and the books were closed on that basis. In preparing the corporation's tax returns for the year 1919, the firm of accountants having the work in charge amended the inventory by taking this particular commodity on hand as of December 31, 1919, at market, that being the only inventory item on which the market was lower than cost. This reduced the total of the inventory by a dollars, which was charged against the amount of surplus shown by the books as they had been closed. The revenue agent who investigated the 1919 return refused to accept the amended inventory and made up an amended tax return on the basis of the original inventory for the stated reason that They have at all times taken their inventory on cost basis, and this inventory was so taken except the commodity in question. The Income Tax Unit sustained the revenue agent in his adjustment of the matter, and it is from this action the company now appeals. The appellant company contends that prior to the close of the year 1919 inventories had always been taken at cost for the reason that the cost of all its inventory items was less than market, and that prior to the close of 1919 it had no election and exercised no option in taking its inventories on the basis of cost; and it claims that under the provisions of section 203 of the Revenue Act of 1918, which reads: That whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income. and article 1582 of Regulations 45 (original edition) which reads, in part, as follows: A taxpayer may, regardless of his past practice, adopt the basis of "cost or market, whichever is lower," for his 1918 inventory, provided a disclosure of the fact and that it represents a change is made in the return. Thereafter changes can be made only after permission is secured from the Commissioner. it was entitled to adopt, as it did, an inventory taken at the close of 1919 on the basis of cost or market, whichever was lower, and use same in the preparation of its 1919 tax return. During a hearing which was granted by this Committee on April 15, 1921, to a representative of the taxpayer, it was stated that at the time the 1919 inventory was taken for the purpose of closing the books for that year the taxpayer was unaware that it had the option to change from a strictly cost to a cost or market basis, and therefore such inventory was taken on the basis of cost, but that in the preparation of its 1919 tax return an amended inventory taken on the basis of cost or market, whichever was lower, was used, an adjustment made on its books and a notation made on the return, disclosing the fact that a change in inventory basis had been made. It appears from the records in the case that at the close of the year 1918 the market on all inventory items of the M Company was higher than cost, and it was not until the close of 1919 that conditions were such as would have permitted the company to exercise an option to change from the cost basis to cost or market, whichever was lower, and at the close of that year market was lower than cost with regard |