Opinion
Nos. 29056, 29057, 29059, 29060 and 29061
Decided July 29, 1942.
Taxation — Determining average value of stock of merchandise held for sale — Sections 5882 and 5389, General Code — Books kept and returns based upon retail inventory method — No deductions for mark-downs, shrinkage and other losses, when — 5-10-20 per cent formula proper, when — Due process not denied — Valuation for taxation fixed without finding of facts — Burden on taxpayer to prove right to deduction.
APPEALS from the Board of Tax Appeals.
The facts are stated in the per curiam opinion.
Messrs. Jones, Day, Cockley Reavis and Mr. Charles E. Bodurtha, for appellant, The Higbee Company.
Messrs. Dargusch, Caren, Greek King and Mr. Joseph O'Meara, Jr., for appellant, Rollman Sons Company.
Mr. Thomas J. Herbert, attorney general, and Mr. Perry L. Graham, for appellee.
These five cases are appeals from the decisions of the Board of Tax Appeals of Ohio and involve the valuation of stock of merchandise held for sale.
The first two are appeals by The Higbee Company of Cleveland, Ohio, and relate to returns filed by that company for the tax years 1937, 1938 and 1939. The last three are appeals by Rollman Sons Company of Cincinnati, Ohio, and involve its tax returns for the years 1936, 1938 and 1939.
The Higbee Company's appeals will be considered first.
These involve the same question as to each of the returns for the three separate years. Specifically the question relates to the right of the appellant to the deduction or allowance for subsequent mark-downs, shrinkage and other losses in the value of merchandise where the books are kept and returns based upon the "retail inventory method."
The Higbee Company operates a retail store in Cleveland and also in Ashtabula, Ohio. Only the Cleveland store is involved here. Higbee takes a physical inventory at the end of its fiscal year (January 31) and another in the middle of the year by using the "lower of cost or market" in ascertaining values. Under Section 5382, General Code, the merchant returns the average value of personal property held for sale in the course of his business. This average is determined by taking "the amount in value on hand, as nearly as possible, in each month of the next preceding year in which he has been engaged in business, adding together such amounts and dividing the aggregate amount thereof by the number of months that he has been in business during such year."
In making returns the appellant construed Sections 5382 and 5389, General Code, together. The part of the latter section involved here refers to personal property used in business. It appears, however, that counsel have deemed it proper to construe these provisions together and no question is made about the application of Section 5389 here. The part of the section, to which we refer, reads as follows:
"In the case of personal property used in business, the book value thereof, if any, less book depreciation, at such time or times, shall be listed and such depreciated book value shall be taken to be the true value of such property, unless the assessor shall find that such depreciated book value is greater or less than the then true value of such property in money. Claim for any deduction from net book value of accounts receivable or depreciated book value of personal property must be made in writing by the taxpayer at the time of making return; and when such return is made to the county auditor and required by this chapter to be transmitted to the commissioner for assessment, the county auditor shall, as deputy of the commissioner, investigate such claim and shall enter thereon, or attach thereto, in such form as the commissioner may prescribe, his findings and recommendations with respect thereto; when such return is made to the commissioner such claim for deduction from depreciated book value of personal property shall be referred to the auditor of each county wherein the property affected thereby is listed as such deputy, for investigation and report."
In determining the depreciated book value for each month the appellant was required to find the book value and deduct therefrom the book depreciation. The results for the twelve months were then added together and divided by twelve. The process gave the average value. Book value and book depreciation were determined in the following manner.
When goods came into the store there was a markup of the price and the difference between the cost and mark-up represented the expense of doing business plus anticipated profit.
What the goods actually cost was not shown on the books under the retail inventory method but only on inventory value. We quote from the testimony of Mr. Mitchell, who is the assistant treasurer of The Higbee Company:
"Q. On this retail inventory method, suppose that you would buy an article for $100, and your retail sales price on that article was $150, but you took a markdown of $10; what would you then, by your system of bookkeeping, assume the cost of that merchandise to be, after taking the mark-down of $10 from the original $150 sales price? A. It would be 2/3 of $140.
"Q. It would be 2/3 of $140, so that your books would then reflect those goods as having a cost of $93.33 1/3? A. Yes. * * *
"Q. So that the books of your company would actually reflect the value of that merchandise which cost you $100 to have a cost value of $93.33 1/3; that is correct, is it not? A. That's right.
"Q. So that under your system of bookkeeping, the cost price does not reflect the amount of money which was actually paid by you for the merchandise, does it? A. Well, we don't refer to that as cost price; we refer to it as inventory value, but in effect that is — the answer is the same.
"Q. The $93.33 1/3 is not cost to you of that amount of goods? A. That's right.
"Q. But the actual cost was $1007 A. That's right."
When goods could no longer be readily sold at the mark-up price, the price was marked down. Mr. Merrifield, the vice president and treasurer, testified:
"Q. On direct examination, Mr. Merrifield, I understood you to say that the mark-down price as named by your store to be that price at which the article may be readily sold; is that correct? A. That is correct. I might add one thing there. Of course, as you know, the retail method always presupposes goods carrying their customary average rate of profit. That is inherent in the retail system.
"Q. I see. Now, I will ask you the same question that I asked your predecessor: If you purchased an article at $100, cost to you, and for sales purposes, you mark it at $150, and you later marked it down to $140, what would be the figure that you would carry on your books, under your system, as the cost? A. Well, under the retail system, every individual article loses its identity the moment it goes into stock, because the retail system is predicated upon averages; thus, this particular example that you give me shows a rate of profit applied to that particular thing of 33 1/3. But it may be in a department where the average profit is 40%. Therefore, the retail system bases everything on average, and thus that is taken in on our books at 60% of $140, or $84.
"Q. Or $84? A. Yes.
"Q. So that your books would reflect, then, the cost of that article at $84? A. Right."
So when the appellant made its inventory, according to cost or market, whichever was lower, cost as used does not mean actual cost but inventory value. In the returns made by the appellant all allowances for previous mark-downs and so-called losses which were reflected in the book value were taken by the appellant. What the appellant claims should be allowed in its application for deduction from return values is "allowance for mark-downs, shrinkages and other losses in the value of the merchandise," and seeks to base this allowance "on the percentage of actual losses in the beginning inventory as experienced during the next twelve months, which percentage is applied to the average book value of merchandise for said twelve months' period and deducted therefrom." It is thus apparent that the deduction sought, which is termed in appellant's brief, "allowance for losses," were subsequent losses, losses which occurred after the first inventory. Or in other words the return shows the book value of the monthly inventory with existing mark-downs and losses and the application for deduction relates only to subsequent "mark-downs, shrinkages and other losses."
The then Tax Commission of Ohio (predecessor of the Tax Commissioner) made a deduction according to what is known as the 5-10-20 per cent formula which is a 5 per cent allowance on merchandise up to six months old; 10 per cent on merchandise from seven to twelve months old, and 20 per cent on merchandise over 12 months old. Whether the rule on which this formula is based is valid is not involved here, in our judgment, for the reason that the appellant cannot question it. Appellant asked for a considerably greater allowance than would be made under that formula. It does question the deductions which were made in accordance with the formula. Its complaint is that it did not get a greater deduction. It gets the benefit of the application of the formula and cannot complain about it. The statute provides that the depreciated book value, represented in a return, shall be taken as the true value of the property "unless the assessor shall find that such depreciated book value is greater or less than the then true value of such property in money."
In passing upon the application for deduction the question presented to the taxing authorities was what was the value of the property? In determining that question the Board of Tax Appeals was not absolutely bound by the subsequent mark-downs, shrinkages and losses suffered. These could be shown in evidence as bearing upon the question of value, it is true, but after the evidence was in, it was for the Tax Commission, in the exercise of its discretion, to determine the true value. A deduction was made, as stated, upon the whole evidence. This court cannot say that the decision was unreasonable or unlawful.
In the Rollman cases tax returns were for the years 1936, 1938 and 1939. This taxpayer also used the "retail inventory method," ascertained the depreciated book value by giving consideration to all previous mark-downs, and filed a similar application for deduction and the Tax Commission allowed deduction according to the 5-10-20 per cent formula. As in the Higbee cases the decision was affirmed by the Board of Tax Appeals. The facts are such as to raise the same question and we are compelled to reach a conclusion like that in the Higbee appeals with respect to this phase of the matter.
There is another question in the Rollman appeals however. Appellant maintains that there was lack of due process. It is asserted that without due process Judicial review is a "perfunctory process." We consider that this statement would be true with reference to a case involving rate making with respect to a public utility. The rate making function is complex — so complex in fact that without findings the constitutional requirement would not be met. But the statutes have never required taxing authorities to make findings of facts before values could be fixed. Nor is the Board of Tax Appeals required to do so by the statutes or by the constitutional requirement of due process. Fixing the valuation of property for the purpose of taxation, without making a finding of facts upon which to base it, is not denial of due process.
This appellant raises a further question as to the duty of the Board of Tax Appeals with respect to the evidence adduced. We quote from the appellant's brief: "To be sure, an administrative tribunal is not necessarily and always bound by opinion evidence; but the rule is well established by many cases that uncontradicted evidence of facts, not incredible in itself nor impeached or discredited in any way, must be accepted as true — when such evidence is introduced there is a positive duty to decide in accordance with it."
The hearing before the Board of Tax Appeals is de novo. New evidence may be introduced and the burden of proof is upon the taxpayer. The taxpayer was formerly bound to establish his claim "by clear and convincing evidence." Schumacher Stone Co. v. Tax Commission, 134 Ohio St. 529, 18 N.E.2d 405.
It seems that the provision requiring that high degree of proof was repealed on May 15, 1939 when Section 5611-2, General Code (118 Ohio Laws, 355), was amended.
But the burden is upon a taxpayer to prove his right to a deduction and he is not entitled to the full amount of deduction claimed merely because no evidence is adduced contra his claim. On the record presented there was a question of fact to decide.
It is our conclusion in the Rollman cases that the constitutional right of due process was not evaded and that the decision was not unreasonable or unlawful.
In each of the appeals the decision must be affirmed.
Decisions affirmed.
WEYGANDT, C.J., TURNER, WILLIAMS, HART and ZIMMERMAN, JJ., concur.