were instructed to, and presumably did, agree with the customers orally that such rebates would be made.

In this connection the following affidavit has been submitted by A, sales manager of the M Company:

A being duly sworn, deposes and says: That he has been for upwards of two years last past the sales manager of the M Company. That for the past 10 years deponent has been familiar with the trade customers and practices of all of the larger concerns selling and distributing the particular products and has been in charge of all domestic sales of said products for the M Company since August, 1918. That prior to 1919 it was the universal trade practice, in the event of a decline in the price of the product, to rebate to all customers the difference represented by the decline of price upon all unused stocks of customers.

That, prior to August, 1919, the M Company followed this trade practice and all salesmen were authorized to, and did, sell the particular product expressly subject to price-decline rebate on all unused stocks of customers. That, in August, 1919, deponent caused to be sent out to all the customers of the M Company a circular letter stating that the rebates paid to customers would be limited to stocks on hand, not to exceed 50 days and not to exceed y cases to any one customer. That practically all of its competitors modified the rebate agreement with their customers in the same manner during 1919. That, during 1918 and 1919, prices declined and rebates were paid by the M Company on some or all of its brands of the goods on the following dates, viz, February, March, April, May, and June, 1918; February, March, and April, 1919. That all of said rebates were paid by the M Company to its customers because of its express or implied promise so to do, made at the time of sale of the goods rebated upon.

That deponent frequently instructed his salesmen throughout the country to call the attention of their customers to the M Company's guaranty that it would protect them against price declines and authorized them to make their sales expressly subject to said guaranty. That deponent is informed and believes that in accordance with his instructions the said salesmen frequently used said guaranty as an argument to the customers to provide themselves with ample stocks.

That deponent in the pursuance of his duties as a sales manager keeps himself informed of the movements of all competitors of the M Company, and therefore knows that the practice of the M Company, above referred to with reference to rebates, is the uniform practice of the particular trade, and that all of the larger concerns selling this product in the United States announce a similar practice to their customers and pay their rebates thereof in the same manner and usually at about the same times that the M Company pays them.

That deponent is informed and believes that announcements were sent out to all of the respective customers of said concerns at or about the time of the dates thereon, and that in pursuance thereof said concerns actually did pay the rebates to their customers therein guaranteed to be paid.

That, from deponent's experience of over 10 years in the sale of the particular products, he can confidently say that it would be ruinous to the business of any company selling the particular products to refuse to guarantee its customers against price declines so long as it remained the practice of other reputable concerns in the trade.

The taxpayer further contends as follows:

Irrespective of whether or not oral contracts were actually entered into ir every case, it was the universal custom of the company to make these rebates, and this universal custom was so thoroughly published as to make it a part of each contract of sale entered into by the claimant.

*

This custom was recognized by the company to create an obligation which went with every contract of sale. This is evidenced from the fact that the company considered it necessary to serve notice on all of its customers and the trade in general when on August, 1919, it wished to limit its guarantee against decline to a maximum period of time and a maximum quantity of goods.

*

**

The contracts for the sale of goods in which agreements for rebates were made are not in writing. Memorandums of sale were of course made according to the commercial custom on order blanks, but these order blanks did not contain, nor did they purport to contain, all of the conditions of the sale.

With regard to the fact that contracts were not made in writing, the taxpayer contends that it is a well-settled principle of law that:

When the whole of a contract has not been reduced to writing such a contract in its entirety is to be regarded as a parol contract subject to all the incidents of purely parol contracts. Evans v. Schoonmaker, 2 App. (D. C.).

The taxpayer contends that there were in existence oral or parol contracts with respect to each sale of goods in 1918 and the agreement to rebate under the conditions, hereinbefore outlined.

In further support of the existence of contracts, the taxpayer through its representatives has cited the following authorities:

Robinson v. United States, 13 Wall. 363, page 366. The court in this case held that:

"Parties who contract on a subject matter concerning which known usages prevail by implication incorporate them into their agreements if nothing is said to the contrary."

In Smith v. Wright, 1 Caines 43, the following principle is laid down:

"The true test of commercial usage is its having existed long enough to become generally known and to warrant a presumption that contracts are made in reference to it."

Bliven v. New England Screw Company, 23 How. 420, page 431, the court in this case held that:

*

"Customary rights and incidents, universally attached to the subject matter of a contract in the place where it was made, are impliedly annexed to the language and terms of the contract, unless the custom is particularly and expressly excluded. Parol evidence of custom, consequently, is generally admissible to enable the court to arrive at the real meaning of the parties, who are naturally presumed to have contracted in conformity with the law of established usages many of their orders thus given at short intervals had been expressly accepted to be filled in turn or in course, and the correspondence plainly showed that the plaintiffs well knew what was meant by those terms. Evidence to prove that orders had been taken up in turn and filled in proportion to the orders given by other customers was therefore admissible in order to show that the defendants had fulfilled their contract and done no injustice to the plaintiff; and it is equally clear that evidence to show what had been a usage of the defendant's business was also admissible, because that usage constituted an essential part of the several contracts which were the subject of controversy."

In further substantiation of the fact that the agreement upon sales to rebate as hereinbefore outlined was a consideration entering into the purchase by a vendee, the taxpayer has submitted several affidavits from consumers and purchasers of their products. These several affidavits are practically the same in substance, and for that reason but one of them is quoted here:

I, , being first duly sworn, on oath depose and say that I am a wholesaler and have engaged in or connected with the wholesale business for 32 years; that I am owner of the O Company, which has an invested capital of 3r dollars; that I have been familiar with the sales methods of manufacturers of the particular product for 32 years; that to my knowledge the practice of guaranteeing to the purchaser of this product a rebate on stock on hand on the decline in the manufacturer's price has existed for more than 10 years; that I have purchased this product from the M Company and from its predecessors for more than 10 years; that all purchases of this product in the year of 1918 from the M Company and prior thereto from any or all of these companies were made by me or my company upon agreement expressed by salesmen of these companies or by the company or companies; that these manufacturers guaranteed to rebate the amount of decline on stock on hand in the event of a decline in price; that this guaranty was one of the terms of every sale of the product made to me in the year 1918 by the M Company and that because of the custom in universal practice of making this a term and condition of sale. I would not have made purchases from the M Company in 1918 had not that company made the guaranty against decline one of the considerations for the sale.

1

After careful consideration of the foregoing arguments and affidavits, the Committee is of the opinion that sufficient evidence has been submitted to show the existence of oral contracts in pursuance of which the rebate payments in question were made. It appears to the Committee that it has been established as a fact that there existed in the trade a usage or custom of paying rebates on decline which has become so general and so thoroughly established as to be beyond doubt one of the conditions of every contract for sale entered into by the taxpayer during the taxable year 1918.

It is also the opinion of the Committee that the authorities hereinbefore cited are conclusive to the effect that an oral contract or a contract implied from past dealings of the taxpayer and from the usages and customs of the trade in general can not but be interpreted as included in the scope of the word "contract" as used in section 214(a) 12, Revenue Act of 1918; further, that the rebate payments in question, having been made in discharge of these actual contractual liabilities which the taxpayer could not escape, constituted the payment of "rebates in pursuance of contracts entered into " during the taxable year 1918.

Therefore, it is recommended in the appeal of the M Company that the action of the Income Tax Unit in denying a claim for abatement based upon a deduction of 21 dollars rebates paid in 1919 pursuant to contracts of sale entered into and consummated in 1918, be reversed, and accordingly that the taxpayer's claim for a deduction of such amount in his 1918 return and his claim for abatement based on such adjustment, be allowed.

SECTION 214(a)12, ARTICLE 262: Loss from rebates.

REVENUE ACT OF 1917.

31-21-1754 A. R. M. 136

Held, that the claim of the M Company for abatement of 3r dollars, taxes assessed under statement of income as originally returned, should be denied by the Income Tax Unit for the reason that rebates allowed in the year 1918 on shipments made in 1917 were contingent losses and, therefore, only deductible when definitely determined as the result of a closed or completed transaction. The Committee has had under consideration the request for an expression of opinion whether certain rebates made to jobbers in the year 1918 on sales made in the year 1917 by the M Company are deductible from gross income in the year 1917 or in the year 1918.

The M Company, in the year 1917, according to established practice, notified its jobbers that all shipments made in the year 1917 were subject to reduction in invoice to be determined by any decline in market price at any time before a particular purchase was sold by the purchaser. It was understood that when a decline in the market was established the jobber would inventory his stock on hand and give notice of same to the M Company, which company would rebate to the jobber on basis of the decline in market, thereby insuring the jobber full protection under competitive conditions.

In 1918 this corporation filed its tax return, reporting net income 40 dollars. In June, 1918, it filed an amended return reporting its net income at 35 dollars, and this amended return was supported by

a claim for the abatement of 3r dollars, corporation income and excess profits taxes for the year 1917 based on this reduction in net income of 5 dollars. A schedule was submitted with the claim showing rebates aggregating 5 dollars made in the year 1918 on sales made in 1917. That the company anticipated such rebates to be made in 1918 is shown by a reserve for x dollars appearing on its balance sheet as of December 31, 1917. It would appear from the files before the Committee that to the extent of this accrual a deduction from gross income has been allowed by the Income Tax Unit for the year 1917 and the same is not now included in the deduction covered by claim in abatement amounting to 5 dollars.

The taxpayer, in submitting the case to the Income Tax Unit, contends that the Government must, for taxation purposes, determine the true net income of a corporation within the definite taxable period, and that it can not fail to take into consideration the obligations incurred under its agreements with brokers, which agreements are binding and enforceable by the jobbers upon the happening of decline in market price. Otherwise, it is contended the true net income of the corporation for the taxable period in question is not accurately determined.

It is stated by the taxpayer that during the latter part of 1917 the price of its product was an unprecedented one, the normal price being a little more than one-half that price. The taxpayer further states that the usual time for decline in the price of its product is during the first months of the year, and the likelihood of such a decline in February and March is well known to those connected with the trade. It is stated that one of the reasons for this is that the production of the raw material begins to increase in the month of March. It is contended that the true net income of the corporation for the year 1917 can not be stated without taking these conditions into consideration and the company should, therefore, be allowed to reduce its taxable income for the year 1917 by the rebates made in 1918 on 1917 shipments.

It is assumed the accounting practice of this taxpayer is to set up an account receivable for full amount of invoice at date of shipment. If full payment is made on this invoice it is a closed transaction, and a rebate subsequently made is the result of the happening of a contingency. It is further assumed that if the full amount of the original invoice has not been paid that the balance equivalent to such recognized rebate is an uncollectible account definitely ascertained and determined.

The Revenue Act of 1916, under section 13 (d), provides as follows: A corporation, joint-stock company or association, or insurance company keeping accounts upon any basis other than that of actual receipts and disbursements, unless such other basis does not clearly reflect its income, may, subject. to regulations made by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, make its return upon the basis upon which its accounts are kept, in which case the tax shall be computed upon its income as so returned.

This basis of accrual is further recognized in Treasury Decision 2433 (not in bulletin service) issued January 8, 1917, but this Treasury Decision provides that:

The reserves contemplated by the foregoing ruling are those reserves only which are set up to meet some actual liability incurred, the amount necessary to discharge which can not at the time be definitely determined, and do not

contemplate reserves to meet losses contingent upon shrinkage in values, losses from bad debts, capital investments, etc., which losses are deductible only when definitely determined as the result of a closed or completed transaction and are charged off.

In the instant case not only did the taxpayer fail to accrue a reserve approximating the amount of deductible income now claimed, namely, 5 dollars, but the deduction, even if accrued, could not be allowed because of its contingent nature until definitely determined as the result of a closed or completed transaction. This principle is generally recognized in the income-tax law. In the 1918 Revenue Act, however, under section 214 (a) 12, express provision is made for such rebate allowances, but by the terms of the Act the deduction is limited to "actual payment after the close of such taxable year of rebates in pursuance of contracts entered into during such year upon sales made during such year." This is a remedial provision which is not written into the Revenue Act of 1916, as amended.

The Committee is accordingly of the opinion that the claim of the M Company for abatement of 3x dollars, taxes assessed under statement of income as originally returned, should be denied by the Income Tax Unit for the reason that rebates allowed in the year 1918 on shipments made in 1917 were contingent losses and, therefore, only deductible when definitely determined as the result of a closed or completed transaction.

SECTION 214(a) 12, ARTICLE 267: Disposition of claims.

30-21-1745 A. R. R. 554

Recommended that the action of the Income Tax Unit in rejecting a claim for abatement of 1918 taxes filed by the M Company on account of reduction in inventory values, be sustained.

The Committee has had under consideration the appeal of the M Company from the action of the Income Tax Unit in rejecting that company's claim for an inventory loss of 342 dollars for the year 1918 and abatement of 21 dollars taxes assessed for that year.

The records in the case show that the December 31, 1918, merchandise inventory of the M Company, engaged in the manufacture and sale of certain merchandise, was taken at "cost or market whichever was lower" and amounted to 102 dollars. The company's tax return for the calendar year ended December 31, 1918, showed a taxable net income of 25x dollars and a total tax of 10 dollars. In April, 1919, the taxpayer filed a claim under section 234 (a) 14 of the Revenue Act of 1918 for the abatement of 23 dollars taxes assessed for the year 1918 on account of a reduction of inventory values amounting to 31 dollars.

The said claim was placed in the hands of a field agent for investigation, and under date of November, 1920, he reported, in part, as follows:

A stated in the presence of B and of the examiners that he had not sustained a net loss in the disposition of the entire inventory. The examiners draw particular attention to this statement of A, as the representative of the accounting firm employed by the taxpayer in the second conference held with him in order that he might present proofs in favor of his client, gave the examiners a contrary answer to this statement. The representative's further statement was that to show disposition of the inventory in its entirety would be impossible. At the second conference the representative was again informed of the requirements relative to showing the disposition of the entire inventory and given ample time