Case Name: Appeal of L. Z. DICKEY GROCERY COMPANY
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1924-11-29
Citations: 1 B.T.A. 108
Docket Number: Docket No. 156
Parties: Appeal of L. Z. DICKEY GROCERY COMPANY.
Judges: Before James, SteeNhageN, Trammell, and Trussell.
Reporter: Reports of the United States Board of Tax Appeals
Volume: 1
Pages: 108–111

Head Matter:
Appeal of L. Z. DICKEY GROCERY COMPANY.
Docket No. 156.
Submitted October 21, 1924;
decided November 29, 1924.
Taylor E. Gross, O. P. A., for the taxpayer.
Willis D. Nance, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner.
Before James, SteeNhageN, Trammell, and Trussell.

Opinion:
OPINION.
Trussell :
The property of this taxpayer used in its business and subject to depreciation and exhaustion consisted of a store and warehouse building and office and store equipment. The evidence shows that the building was constructed in the year 1920; that it stood upon a sandy soil foundation in close proximity to the main line of a railroad, where traffic was heavy and the constant movement of trains caused vibrations both of the soil foundation and of the building. The walls of the building were of poured concrete and only 6 inches in thickness, and its size was 75 by 250 feet. A building of this description cannot be regarded as a substantial structure, and its probable life in the location and surroundings in which it stood can not be compared with the substantial business structures which modern architecture is furnishing in the larger commercial centers of the country. The taxpayer appears to have regarded this building as having a probable life not to exceed 20 years and to have computed his depreciation deduction .upon that basis. The Commissioner, on the other hand, applied to. this property a rate of 2y2 per cent, which might be fair had the building been of the character and in a location more comparable with most commercial structures; but for a building in the location of this one and of the character of construction selected, we are of the opinion that the probable life, as estimated by the taxpayer, is not too short, and that the amount of depreciation claimed by him in his original return is reasonable.
Respecting the furniture and fixtures subject to exhaustion and depreciation, it appears that the larger amount of the value in this account consisted of office equipment the average life of which can not be estimated as more than four or five years and that it can be fairly depreciated on a basis of 20 per cent, and this having been substantially the rate used by the taxpayer, the amount claimed by him appears to us as being reasonable and must be allowed.
Concerning the claimed deduction of $669.68 on account of the grading and graveling of a private roadway leading to the taxpayer's store and warehouse, it appears that this private roadway was first constructed in the latter part of the year 1920; that the building of this roadway was necessary in order that the taxpayer and the public might reach the store and warehouse; and that it was constructed for that purpose, and that after having been constructed occasional repairs to the grade and graveling were necessary in order to keep the same in usable condition. The item of $669.68, charged on the books of the company during the year 1921, represents the total disbursements during that year on account of this roadway, and substantially all of this amount represented the cost of the original construction work which was done during the latter part of the year 1920 but not pa id for until 1921. This roadway was a necessary part of the taxpayer's business plant. Neither the taxpayer nor the public could reach its store and warehouse without using this roadway. The roadway itself, therefore, must be regarded as a part of the capital investment of the company and its cost a capital expenditure. It is fairly deducible from the oral testimony that some small part of this amount may have been for expenses of repairing and regraveling during the year 1921, but the amount of repairs and regraveling, if any, can not now be separated from the original cost of the roadway, and as the original cost of the roadway must be a capital expenditure which is not deductible from income we are compelled to hold that any small items of repairs which may have been included in the total but which can not now be distinguished and separated from the original cost must also be disallowed as a deduction on account of the taxpayer's inability to show what part of the total is capital expense and what part repairs.
It appears that in the latter part of 1920 while the taxpayer was constructing its store and warehouse building, it borrowed the sum of $10,000 for which it gave its note, bearing interest at 6 per cent, payable on demand, together with an accompanying agreement and understanding with the lender that when the taxpayer corporation was prepared to issue some part of its authorized preferred stock the lender would exchange the note for such preferred stock. This exchange occurred on or about March 1, 1921, although later in the same year a part of this $10,000 was repaid to the lender and in the following year the balance of it, and the preferred stock exchanged for the note was turned in and canceled. It seems to have been the theory of the taxpayer that all payments for the use of the $10,000 should be treated as interest. With this view, however, we can not agree. When the lender exchanged his note for preferred stock he ceased to be a creditor and became a stockholder and as such was not entitled to receive interest upon the amount of his investment. It appears, however, that the note bearing interest at 6 per cent was an outstanding obligation of the taxpayer corporation during the months of January and February, 1921, and that the interest which accrued upon this note during those two months must be an interest deduction; that the balance of payments made for the use of the money originally borrowed but converted into preferred stock on March 1, 1921, must be treated as a dividend upon such preferred stock and therefore not deductible as interest.
For the foregoing reasons, the total tax liability of this taxpayer must be recomputed in accordance with the views above stated.