Case Name: Kennedy Laundry Company, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1942-01-14
Citations: 46 B.T.A. 70
Docket Number: Docket No. 104965
Parties: Kennedy Laundry Company, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Judges: Smith and SteRNHagen dissent.
Reporter: Reports of the United States Board of Tax Appeals
Volume: 46
Pages: 70–78

Head Matter:
Kennedy Laundry Company, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Docket No. 104965.
Promulgated January 14, 1942.
James A. O'Callaghan, Esq., for the petitioner.
E. G. Sievers, Esq., for the respondent.

Opinion:
OPINION.
Van Fossan:
The question underlying determination of the stated issue in this case is the proper rate of depreciation applicable to the petitioner's machinery and equipment for the years from 1932 to 1935, inclusive. The petitioner contends that the life expectancy of those assets was 12% years, effective January 1,1932; that the depreciation sustained must be computed at the 8 percent rate from 1932 to 1938, inclusive, even though the 10 percent rate had been used from 1932 to 1935, inclusive; and that the unexhausted base cost should be increased to the extent that the depreciation during the latter period was not deducted from income.
The respondent states the issue to be "whether the unrecovered cost for the years prior to 1936 should be reduced by depreciation computed on the 10-year life claimed and allowed, or on the 12% year life now claimed." He then argues that the 10 percent depreciation used from 1932 to 1935, inclusive, was reasonable in the light of the then known existing conditions and thus should not be disturbed, and, (1) that the 8 percent rate is not applicable because the petitioner has not shown that the 10 percent rate was not availed of in eliminating taxable income; and (2) that the case of Pittsburgh Brewing Co. v. Commissioner, 107 Fed. (2d) 155 (reversing 37 B. T. A. 439), relied on by the petitioner, is distinguishable and not controlling.
The record sustains petitioner in its contention that a rate of 8 percent for the period from 1932 to 1935, inclusive, was reasonable and should have been used by it. The removal of a large part of its business to the Gary plant and the loss of the Atlantic & Pacific Tea Co. business, occurring just prior to and within the period, respectively, decreased the use of the machinery from 30 to 40 percent. The further facts that in 1937 the petitioner adopted the new rate, with the Commissioner's approval, and that the Commissioner applied it retroactively to the year 1936 are corroborative of the petitioner's position. If the 8 percent rate was "reasonable" for 1936, as determined by the Commissioner, it was equally reasonable for the preceding period during which the circumstances causing the extension' of life expectancy arose.
The respondent argues that the depreciation should be computed on the basis of facts known in the taxable year. The pertinent facts were known in 1932 and 1933, but they were ignored ana the petitioner thereby fell into an error, which was corrected in 1937.
This conclusion brings us to the question of law involved in the determination of the base as of December 31, 1935.
Petitioner cites Pittsburgh Brewing Co. v. Commissioner, supra, as controlling. In construing section 113 (b) (1) (B) of the Revenue Act of 1932 (identical with corresponding provisions of the Revenue Act of 1936) specifically, the words "to the extent allowed (but not less than the amount allowable) ", the court in the Pittsburgh Brewing Co. case, said:
After full consideration of this question we have reached the conclusion that depreciation is not "allowed" within the meaning of the act unless it is actually taken as a deduction against taxable income.
In the years 1932, 1934, and 1935 petitioner's returns showed net losses of $5,221.37, $6,222.36, and $5,385.88, with claims for depreciation in the respective amounts of $22,387.60, $17,306.73, and $17,694.44. To the extent of the net loss in each of these years petitioner received no tax advantage from the depreciation deduction. Under the ruling in the Pittsburgh Brewing Co. case, depreciation was accordingly not "allowed" in the full amount of 10 percent claimed by petitioner in its returns. We, therefore, turn to the "amount allowable" which we have found should be computed at a rate of 8 percent for the years 1932, 1933, 1934, and 1935.
We hold that, to the extent that it received no tax advantage in such preceding years, petitioner's base for depreciation as of December 31, 1935, should be computed by employing a rate of 8 percent for the years 1932 to 1935, inclusive. This holding is not inconsistent with the conclusion reached in Beckridge Corporation, 45 B. T. A. 131, where the taxpayer had never taken depreciation in preceding-years and the Board sustained the Commissioner in holding that the basis should be adjusted for the "amount allowable." In the Pittsburgh Brewing Co. case the court reached the same conclusion on a different set of facts.
Reviewed by the Board.
Decision will be entered wider Rule 50.
Smith and SteRNHagen dissent.
SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
*
(1) Depreciation. — A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. *
(n) Basis for Depbeciation and Depletion. — The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be as provided in section 114.
SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION.
(6) Basis fob Depbeciation. — The basis upon which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 113 (b) for the purpose of determining the gain upon the sale or other disposition of such property.
SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
*
(b) Adjusted Basis. — The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided.
(1) General Rule. — Proper adjustment in respect of the property shall in all cases be made—

(B) in respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent allowed (but not less than the amount allowable) under this Act or prior income tax laws. Where for any taxable year prior to the taxable year 1932 the depletion allowance was based on discovery value or a percentage of income, then the adjustment for depletion for such year shall be based on the depletion which would have been allowable for such year if computed without reference to discovery value or a percentage of income;