17 T.C. 1280">*1280 This proceeding involves petitioner's request for redetermination of excess profits tax deficiencies of $ 254,237.29 for the fiscal year ended May 31, 1944, and $ 124,188.79 for the fiscal year ended May 31, 1945. Mutual concessions by each party have left for decision the questions:

17 T.C. 1280">*1281 (1) In determining the excess profits credit under the income method for the taxable years ended May 31, 1944, and May 31, 1945, are alleged wheat inventory losses for the base period fiscal years 1938 and 1939 abnormal deductions under section 711 (b) (1) (J), Internal Revenue Code?

(2) Is the deduction of $ 45,000 taken by petitioner for the1952 U.S. Tax Ct. LEXIS 279">*281 base period fiscal year 1937 disallowable as an abnormal deduction under section 711 (b) (1) (J) without being limited by section 711 (b) (1) (K) (iii)?

FINDINGS OF FACT.

Some facts are stipulated and are so found.

Petitioner is a corporation organized and existing under the laws of the State of Colorado and having its principal place of business in Denver. The tax returns for the years involved were filed with the collector of internal revenue for the district of Colorado, at Denver, in which it computed its excess profits credit on the basis of income as provided in section 713, Internal Revenue Code.

At all times material herein petitioner owned approximately 160 grain elevators and approximately 21 flour mills, and its principal business activity was the milling and merchandising of wheat, flour, and other wheat products.

Petitioner's inventories consist principally of wheat and flour. Since about 1917, petitioner, with the consent of the Commissioner, has consistently computed its closing inventories of wheat on the basis of the average cost of wheat per bushel purchased during that year, plus the opening inventory.

Petitioner at all times material herein sold its wheat, flour, 1952 U.S. Tax Ct. LEXIS 279">*282 and other wheat products at the current market prices thereof. The current market prices of flour and other wheat products are based primarily upon the current market price of wheat.

Statistics published by the United States Department of Agriculture show the average monthly prices per bushel of wheat during petitioner's base period years as follows:

17 T.C. 1280">*1282 From the time of its organization to March 1943 petitioner corporation did not engage in the practice of hedging by selling wheat futures. Beginning in March 1943 petitioner has continuously engaged in the policy of hedging.

In its excess profits tax returns filed for the taxable years ended May 31, 1944, and May 31, 1945, petitioner, in computing its excess profits credit based on income, restored to income for the taxable1952 U.S. Tax Ct. LEXIS 279">*283 year ended May 31, 1938, the amount of $ 170,674.35 and for the taxable year ended May 31, 1939, the amount of $ 1,182,554.05 as deductions abnormal in amount as to the petitioner and disallowable under section 711 (b) (1) (J) of the Code.

The following schedule shows the actual cost of goods sold per petitioner's books and as reported in its income tax returns for the base period years, and the adjusted theoretical cost of goods sold per petitioner's formula in adjusting opening inventories for the purpose of measuring a gain or loss, if any:

1952 U.S. Tax Ct. LEXIS 279">*284 Petitioner claimed the above sum of $ 170,674.35 as an abnormal deduction in class for the fiscal year 1938 and the sum of $ 1,182,554.05 (excess of $ 1,235,889.81 over $ 170,674.35 / 4 x 125%) as an abnormal deduction in amount for the fiscal year 1939.

The sums of $ 170,674.35 for the fiscal year ended May 31, 1938, and $ 1,235,889.81 for the fiscal year ended May 31, 1939, actually represent reductions by petitioner in its cost of goods sold for its 21 flour mills, and approximately 160 grain elevators, per its income tax returns for the base period fiscal years 1938 and 1939 by petitioner reducing actual opening inventory values for each such year pro tanto. These adjustments to inventories or cost of goods sold were computed by petitioner taking the excess of the book basis of wheat sold within each of the base period fiscal years 1938 and 1939 over the average cost of a like number of bushels purchased at the average purchase price within each such fiscal year. Petitioner's computation or formula for reducing its actual opening inventories (1) assumes that a fixed percentage of its wheat sales for the fiscal years 1938 and 1939 were made from opening inventory wheat, and1952 U.S. Tax Ct. LEXIS 279">*285 (2) uses 17 T.C. 1280">*1283 a substituted cost basis in lieu of the actual inventory values for that part of the assumed wheat sold from opening inventories. Petitioner's computation or formula uses its actual wheat purchases. These adjustments to the actual inventory figures used by petitioner were for the purpose of measuring gain or loss, if any existed, and the actual closing inventory for one year would be the opening inventory for the succeeding year.

In determining the deficiencies in excess profits tax for the taxable years ended May 31, 1944, and May 31, 1945, as reflected in the notice of deficiency, which is the basis of this proceeding, respondent held that no part of either of the amounts of $ 170,674.35 for the fiscal year ended May 31, 1938, and $ 1,182,554.05 for the fiscal year ended May 31, 1939, was disallowable as abnormal deductions under the provisions of section 711 (b) (1) (J).

Prior to the year 1936 it had been the practice of petitioner to conduct its business under a policy of avoiding legal controversies and court litigation and it did not employ counsel on a retainer basis. Petitioner very rarely employed attorneys for any substantial amount of time or service.

1952 U.S. Tax Ct. LEXIS 279">*286 On January 6, 1936, the Supreme Court of the United States held that the Agricultural Adjustment Act was invalid and unconstitutional.

Just prior to January 6, 1936, petitioner engaged the services of an attorney to enjoin the collection of the tax imposed by the above Act on the processing of wheat pending the final determination of the validity of the Act, and litigation to this end was instituted and successfully prosecuted by the attorney so engaged.

On February 6, 1936, petitioner and the attorney agreed upon a fee of $ 60,000 for the services of the attorney, of which amount $ 15,000 was payable and was paid by petitioner on February 6, 1936, together with incidental expenses in the amount of $ 178.88, and the balance was payable upon certain contingencies during the taxable year ended May 31, 1937.

In accordance with the agreement, petitioner paid to the attorney during the taxable year ended May 31, 1937, on account of the services, the sum of $ 45,000. Petitioner deducted the payment of $ 45,000 in computing its taxable income for the taxable year ended May 31, 1937.

Such deduction for the taxable year ended May 31, 1937, was not the consequence of an increase in the gross1952 U.S. Tax Ct. LEXIS 279">*287 income of petitioner in its base period or a decrease in the amount of any other deduction in its base period or of a change at any time in the type, manner of operation, size or condition of petitioner's business.

In its excess profits tax returns filed for each of the taxable years ended May 31, 1944, and May 31, 1945, petitioner, in computing its 17 T.C. 1280">*1284 excess profits credit based on income, restored the $ 45,000 payment to income for the taxable year ended May 31, 1937, as a deduction abnormal in kind or class under the provisions of section 711 (b) (1) (J).

The petitioner corporation paid and deducted attorney fees in the amounts of $ 19,323.27 for the taxable year ended May 31, 1944, and $ 15,187.07 for the taxable year ended May 31, 1945, which did not include accounting fees for tax counseling by petitioner's accounting firm.

In determining the deficiencies in excess profits tax for the taxable years ended May 31, 1944, and May 31, 1945, as reflected in the notice of deficiency, which is the basis of this proceeding, the respondent held that only $ 25,676.73 of the attorney's fee for the taxable year 1944 and only $ 29,812.93 for the taxable year ended May 31, 1945, should1952 U.S. Tax Ct. LEXIS 279">*288 be disallowed under the provisions of section 711 (b) (1) (J), as limited by section 711 (b) (1) (K) (iii). The amount of the abnormal deduction for the base period year ended May 31, 1937, as limited under section 711 (b) (1) (K) (iii) to the excess of such 1937 deduction over the same class of deduction for the current taxable years ended May 31, 1944, and May 31, 1945, was determined by the respondent as follows:

OPINION.

Petitioner engages in the business of milling and selling wheat, flour, and other wheat products. It has consistently inventoried wheat on the average cost method. In computing the average base period net income it is necessary to ascertain the excess profits net income for each base period year. The excess profits net income for a base period year is determined by starting with the petitioner's normal tax net income as adjusted for such year and applying against it certain additions and deductions as provided1952 U.S. Tax Ct. LEXIS 279">*289 for under section 711, Internal Revenue Code. Of these latter adjustments provided for under section 711 (b) (1) (J) (i) and (ii)¹ are the elimination of deductions for such prior base period years which are abnormal in class and abnormal in amount.

1952 U.S. Tax Ct. LEXIS 279">*290 17 T.C. 1280">*1285 In its excess profits tax returns for the taxable years ended May 31, 1944, and May 31, 1945, the petitioner, for purposes of computing its excess profits credit, reduced its actual opening inventories by use of a formula for each of the base period fiscal years 1938 and 1939 and claimed abnormal deductions therefor under section 711. Petitioner reduced its opening inventories by computing the excess of the book basis of wheat sold during each of the base period years 1938 and 1939 over the average cost of a like amount of wheat purchased at the average purchase price within each such base period year. The Commissioner determined that such inventory reductions are not disallowable as abnormal deductions for such base period years within the purview of section 711.

Petitioner's alleged "abnormal deduction," being an inventory adjustment, is a reduction of cost of goods sold, and as such is not within the class of items which are deductions from gross income under section 23 of the Code. In Universal Optical Co., 11 T.C. 608, 621, we said:

* * * Clearly, section 711 (b) (1) (J) permits adjustment only of "deductions", abnormal, or normal, 1952 U.S. Tax Ct. LEXIS 279">*291 if abnormal in amount. The meaning of the statutory term "deductions" is well established. Without express enlargement of its usual meaning to include other items than those specified as deductions under the Internal Revenue Code, no item which is not shown to have been a statutory deduction may be adjusted under section 711 (b) (1) (J).

We adhered to this principle in Crow-Burlingame Co., 15 T.C. 738, affd. (C. A. 8) 192 F.2d 574.

Petitioner further argues that as applied to it the tax is unconstitutional as being upon gross receipts without allowance for cost of goods sold. Its brief states: "Anyone who owns millions of pounds of wheat and watches the market price decline more than 50% from what he paid for it suffers a loss when he sells it." Passing the contention challenging the validity of a tax on gross receipts, it is plain that no such tax is involved herein. Petitioner is correct in arguing that under the Internal Revenue Code there must be a disposition of the 17 T.C. 1280">*1286 inventory before a loss is recognized, for mere fluctuations in the value of inventory without disposition gives rise to no gain or loss. 1952 U.S. Tax Ct. LEXIS 279">*292 However, when petitioner sells wheat below its cost its gross receipts from sales figure is lower than if the wheat were sold at its cost. Also the decrease in inventory value is reflected in the inventory figures and in turn in the cost of goods sold figure. Gross profit on sales equals net sales minus cost of goods sold. Petitioner has had the benefit of subtracting its actual cost of goods sold from gross sales receipts in arriving at gross income. It is only the further adjustment to inventories of the base period years 1938 and 1939 made in the excess profits tax returns for the taxable years 1944 and 1945 that is not allowed by respondent. Thus, the tax is not upon petitioner's gross receipts and respondent's determination as to this issue is approved.

Petitioner employed an attorney relative to proceedings enjoining the collection of processing taxes on wheat pending the invalidation of the Agricultural Adjustment Act in a decision by the United States Supreme Court on January 6, 1936. The agreed attorney fee was $ 60,000 and was paid by petitioner, $ 15,000 during the fiscal year ended May 31, 1936, and $ 45,000 during the fiscal year ended May 31, 1937. In computing1952 U.S. Tax Ct. LEXIS 279">*293 its excess profits credit for each of the taxable years ended May 31, 1944, and May 31, 1945, petitioner restored the amount of $ 45,000 to income for the base period year ended May 31, 1937, on the basis that such sum was a disallowable deduction under section 711 (b) (1) (J), I. R. C. The respondent determined that the disallowable amount for the base period year 1937 was limited to the excess of $ 45,000 over the attorney fees deducted in each of the respective current taxable years ended May 31, 1944, and May 31, 1945, under section 711 (b) (1) (K) (iii), which reads as follows:

SEC. 711. EXCESS PROFITS NET INCOME.

* * * *

(b) Taxable Years in Base Period. --

* * * *

(K) Rules for Application of Subparagraphs (H), (I), and (J). -- For the purposes of subparagraphs (H), (I), and (J) --