18 



HARDWOOD RECORD 



December 25, 1920 



Lumbermen Seek Fair Inventory Basis 



An urgent appeal for a more equitable definition of the basis for 

 inventory valuation for manufacturers' income tax returns was 

 made by representatives of the National Lumber Manufacturers' 

 Association and the American Hardwood Manufacturers' Associa- 

 tion before the Committee on Appeals and Eeview of the Internal 

 Eevenue Bureau on Dee. 14. 



The advisory tax committee of the lumbermen's associations, 

 consisting of General L. C. Boyle, Ernest Dolge, E. B. Goodman, 

 A. W. Clapp, E. M. Eickey, Jesse Andrews and George W. Ward, 

 urged amendments to the present form and application of Article 

 1584 of Regulations 45 on "inventories at market," as it applies 

 to the lumber industry. 



Declarations that the lumber manufacturers will be compelled 

 to inventory lumber at a cost price "substantially in excess of 

 the price at which the manufacturers could go into the open market 

 and purchase exactly the same kind of lumber," if the Commis- 

 sioner of Internal Eevenue should continue the present form and 

 application of Article 1584, were made by the lumbermen at the 

 hearing. 



A broader interpretation of the term "market" was asked by 

 the committee, and the following proposed amendment of the first 

 sentence of Article 1584 of Eegulations 45 (the amendment consist- 

 ing of the addition of the language italicized) was offered by 

 Jesse Andrews of the National Lumber Manufacturers' Associa- 

 tion: "Market means the current bid price prevailing at the date 

 of the inventory for the particular merchandise, and is applicable 

 to goods purchased and on hand to goods manufa^ttured and on 

 hand, which are substantially indistinguishable from Mice products 

 of other marmfacturers and )iave a market price, and, as to other 

 goods manufactured, to basic materials in goods in process of manu- 

 facture and in finished goods on hand, exclusive, however, of goods 

 on hand or in process of manufacture for delivery upon firm sal^ 

 contracts at fixed prices entered into before the date of the inven- 

 tory, which goods must be inventoried at cost. ' ' 



"It will be observed," said Mr. Andrews, "that this amendment, while 

 now suggested and proposed by the lumber industry, is by no means con- 

 fined In its application to those manufacturers who are members of that 

 industry. The proposed amendment involves a change in Article 1584 

 (as we understand its interpretation by the commissioner) with respect 

 to the application of 'market' in the case of those manufacturers who elect 

 to inventory on bases (b) — cost or market whichever Is lower." 



"The particular manufacturers to be affected," he continued, "are those 

 who produce goods of such a character that the goods of one producer 

 are substantially Indistinguishable from those of others in the same indus- 

 try, and which have a market price. Lumber manufacturers as a class are 

 such manufacturers, but they are not asking to have the regulations 

 changed to cover their situation only ; they suggest that whatever change 

 Is wise or necessary should apply to all manufacturers of products which 

 In the above respects fall in the same classification as does lumber." 



Object to Newton's Interpretation 

 The lumbermen voiced their objections to Deputy Commissioner 

 George V. Newton's interpretation of the term "market" in a 

 letter to the West Coast Lumbermen's Association, in which he 

 says : 



Attention is particularly Invited to the fact that Article 1584 of Regu- 

 lations 45, Inventories at Market, is Interpreted to mean in the case of 

 manufacturers in general, including lumber manufacturers, that market 

 does not mean the market price at which finished goods are sold, but the 

 market price at which basic materials are purchased, plus actual costs 

 added to such basic goods by the manufacturer. Market, In the case of 

 lumber manufacturers, means the current cost at which stumpage (stand- 

 ing timber) may be purchased or in the case of log buying mills, the cur- 

 rent price at which logs may be purchased. Thus a given lumber manu- 

 facturer having adopted method (b) would use market rather than cost 

 only when the current fair market value of stumpage Is less than the 

 actual cost of the manufacturers' stumpage (or the fair market value as 

 of March 1, 1913, as the case may be) or, when the current fair market 

 value of logs is less than actual cost. 



"This interpretation of 'market' if applied indiscriminately to 

 finished products of manufacturers, to-wit., that market means 

 the current price of the basic materials, plus additional cost added 

 by the manufacturer, will in effect nullify for many taxpayers the 

 option given by basis B, " Mr. Andrews said: 



"The taxpayers thus affected," Mr. Andrews told the board, "are manu- 

 facturers of products described In the proposed amendment, that is to say, 

 products 'substantially Indistinguishable,' and for which there is a market 

 price. Commodities for which there is an open market have a market 

 price 'which is a price for the commodity as such,' and unless the tax- 

 payer having on hand a stock of such a commodity, is allowed to use this 

 price for 'market,' without regard to the manner in which he acquired 

 the commodity — ^by purchase or manufacture — he is being wholly deprived 

 of the benefit of the 'cost or market' rule." 



Mr. Andrews declared that the present interpretation of market 

 as applied to finished products of such manufacturers as are above 

 referred to is wrong, because the result of its application forces 

 the taxpayer to ignore the one essential fact, "the going market 

 price of the commodity itself," and substitutes in its place a wholly 

 arbitrary figure composed of factors of value which may not have 

 and seldom have any substantial or definite relation to the market 

 value of the finished product — the article on hand, the very thing 

 which is being inventoried. * 



Wrong in Principle 



The present application is wrong in principle, he said, because 

 it is based on an incorrect presumption — that there is a sort of a 

 constant and necessary and substantial relation between the mar- 

 ket price of basic material and finished product. 



"This may never be so where the finished product is of the character 

 described in our proposed amendment," he said. 



"It Is perhaps safe to say that at least 75 percent of the lumber in the 

 United States is produced by manufacturers who do not purchase their 

 basic material In the form of logs, from year to year, or otherwise ; but 

 who, on the contrary, own in the form of standing timber, or stumpage, 

 their own supply of this basic material — a supply in the majority of 

 instances sufficient for a number of years' operation. 



"Manufacturers of this class each year charge into the cost of produc- 

 tion the original cost of the standing timber converted during the year 

 or, in the event it was acquired prior to March 1, 1913, its market value 

 as of that date," he continued. "While market values of timber fluctuate 

 at times rapidly and widely, this is not true of values of stumpage. The 

 marked advances In values of lumber in the years 1917, 1918 and 1919, 

 was accompanied by an advance in the value of stumpage which, while 

 substantial, was small In comparison with the advance of values of lum- 

 ber ; and no one can contend that the extraordinary drop In market values 

 of lumber within the last six months has had an effect on the values or the 

 current market prices of stumpage. 



"Therefore, in the case of the producers of at least 75 percent of the 

 lumber output of the country, there would be rare. If any Instances, In 

 which the taxpayer could claim that at the end of 1920 the market price 

 of stumpage such as he had converted and charged Into the cost of the 

 lumber during the year was less than the cost or value at which he had so 

 charged it. In all of these cases, therefore, 'market' as interpreted under 

 the present regulation would be In no case less than 'cost,' although the 

 actual market price of the commodity lumber is in many instances at the 

 present time substantially lower than cost." 



Mr. Andrews told the committee that if the present form and 

 application of Article 1584 continues a very large number of lum- 

 ber manufacturers will be compelled to inventory lumber at a 

 price (cost) substantially in excess of the price at which the manu- 

 facturers could go into the open market and purchase exactly the 

 same kind of lumber. 



"We insist that to compel this under conditions prevailing at the present 

 time is not only unjust, and Inequitable, but Is in direct contravention to 

 sound accounting principles and to all of the reasons which actuated the 

 commissioner In the adoption of the general rule that Inventories might 

 be taken at cost or market, whichever is lower," he told the revenue 

 officials. 



An early decision is expected, as the problem is one requiring 

 prompt action on the government 's part. 



