Case Name: Appeal of KANSAS MILLING CO.
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1926-02-13
Citations: 3 B.T.A. 709
Docket Number: Docket No. 2835
Parties: Appeal of KANSAS MILLING CO.
Judges: Before Littleton, Smith, and Tetjssell.
Reporter: Reports of the United States Board of Tax Appeals
Volume: 3
Pages: 709–712

Head Matter:
Appeal of KANSAS MILLING CO.
Docket No. 2835.
Submitted July 15, 1925.
Decided February 13, 1926.
P. J. Barnes, G. P. A., and O. B. Abel, O. P. A., lor the taxpayer.
Arthur H. Fast, Esq., for the Commissioner.
Before Littleton, Smith, and Tetjssell.

Opinion:
OPINION.
Smith
: In its petition the taxpayer alleges that the deficiency is predicated, in part, upon the following errors:
(a) That the Commissioner has arbitrarily reduced the invested capital shown on the taxpayer's books of account, without adducing affirmative evidence that such books of account overstated the amount of invested capital within the meaning of the tax statutes.
(5) That the Commissioner has not allowed the taxpayer a reasonable allowance for the exhaustion, wear and tear of property arising out of its use or employment in the business.
(e) That the Commissioner erred in computing its excess-profits-tax liability for the year 1917 under the provisions of section 201 of the Eevenue Act of 1917, whereas, in view of existing circumstances, such determination should have been made under the provisions of section 210.
The first allegation of error is directed toward the Commissioner's action in rejecting, for invested capital purposes, the reserve for depreciation as shown by • the taxpayer's books and substituting therefor a reserve of a considerably greater amount, thereby materially reducing taxpayer's invested capital.
The evidence before us indicates that at January 1, 1917, the taxpayer had accrued on its books a reserve for depreciation in the sum of $19,324.19; that, in addition to this reserve, the taxpayer from 1907 to the close of 1916, had charged as current operating expense certain capital expenditures in lieu of charging off depreciation, specifically as such, annually at uniform rates; that of the capital expenditures charged to operating expense the revenue agent was able to identify items totaling $47,172.69, and this amount the Commissioner restored to the asset accounts and to invested capital; and that, by the application of a mathematical formula to property costs, based upon the straight-line theory of depreciation, going back to the date of taxpayer's organization, the Commissioner has determined that the reserve for depreciation at the beginning of the taxable year 1917 should be stated in the sum of $98,681.59.
We can not approve the Commissioner's action in this respect. It appears from the facts that, from 1907 to the end of 1916, the taxpayer took depreciation upon its books as such in the amount of $19,324.19, and in addition thereto expended at least the amount of $47,172.69 in betterments and additions which were not capitalized. The question here involved is the determination of the invested capital of this taxpayer as of January 1, 1917. For that purpose the Commissioner has, on the one hand, added the above amount of $47,172.69 to capital items, and, on the other hand, has applied straight-line depreciation to the taxpayer's assets from 1907 to 1917. The facts are thus .not substantially different from the facts in the Appeal of Cleveland Home Brewing Co., 1 B. T. A. 87. In that appeal we said (p. 91):
Depreciation, we have already said, is a question of fact. Congress has allowed taxpayers " a reasonable allowance for wear and tear of property used in the trade or business " as a deduction from income, to make whole tbeir capital investments before levying a tax upon that income. The Oommissioner in this case asks us to accept a readjustment of taxpayer's invested capital upon a mere assumption that the property of this taxpayer was reasonably depreciable at certain arbitrary rates and in equal annual amounts over a period of 11 completed years. No evidence is offered that the alleged depreciation has actually occurred. None is even offered that property of the kind here in question usually deteriorates at approximately the rates used in the computations of the examining agent. Upon the record so made, we must sustain the position of the taxpayer.
The evidence before us discloses that the amount charged off its books, by the taxpayer against its physical assets, both in the reserve and in capital expenditures charged to expense, was substantial. There is no evidence before us that such assets suffered any greater depreciation than the amount so charged off, or that the Commissioner's computation is more nearly correct than the taxpayer's. In these circumstances, we are of the opinion that no change should be made either in the asset accounts or in the depreciation reserve as they stand in the taxpayer's books as of January 1, 1917. Appeal of Cleveland Home Brewing Co., supra; Appeal of Russell Milling Co., 1 B. T. A. 194; Appeal of Rub-No-More Co., 1 B. T. A. 228; Appeal of City National Bank, 2 B. T. A. 623.
As pointed out in our findings of fact, the deduction for depreciation which the Commissioner has allowed the taxpayer for the year 1917 does not include any allowance for depreciation of the physical properties comprising the plant located at St. John, Kans. Any part of the deficiency occasioned by the failure of the Commissioner to make such an allowance is in error. The costs of the properties comprising this plant are set out in our findings of fact. We conclude that those costs should form the basis for the determination of a reasonable allowance for depreciation, computed at the following rates: Ice plant, 10 per cent; manager's residence, 5 per cent; machinery, 10 per cent; building, 5 per cent.
In support of its allegation of error, that the Commissioner erred in determining its excess-profits tax under the provisions of section 201 of the Revenue Act of 1917, when, under the existing circumstances, such determination should have been made under the provisions of section 210, the taxpayer contends that its invested capital can not be satisfactorily determined. We are unable to find, from any evidence which has been presented to us, that the invested capital is not susceptible of accurate ascertainment, or that the invested capital as determined by the Commissioner, subject to adjustment in accordance with this opinion, is not correct.