Case Name: Appeals of HERBERT J. GERST et al.
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1926-07-31
Citations: 4 B.T.A. 658
Docket Number: Docket Nos. 3879, 3888, 5365, 5366, 5367
Parties: Appeals of HERBERT J. GERST et al.
Judges: Before LittletoN, Smith, and Trussell.
Reporter: Reports of the United States Board of Tax Appeals
Volume: 4
Pages: 658–663

Head Matter:
Appeals of HERBERT J. GERST et al.
Docket Nos. 3879, 3888, 5365, 5366, 5367.
Decided July 31, 1926.
I). N. Burnham, O. P. A., for the petitioners.
B. G. Simpich, Esq., for the Commissioner.
Before LittletoN, Smith, and Trussell.
The following appeals were heard with the above-named appeal and are decided herewith : Maurice G. Long, No. 3888; Maurice G. Long, No 5365 ; Herbert J. Gerst, No. 5366; and Herbert J. Gerst, Co-administrator of Estate of Albert Gerst, No. 5367.

Opinion:
OPINION.
Littleton
: The petitioners placed in evidence the reports of the Commissioner's field agents for the purpose of showing the total cost, including the cost of additions, of the property upon which the amount of the deductions for exhaustion, wear and tear is in controversy.
Certain witnesses testified that, at.the time the machinery was acquired in June, 1918, it had been in use for some time and was in a bad state of repair; that, due to the fact that during the taxable years it was operated twelve hours a day, exhaustion, wear and tear thereof was greater than when operated the usual ten hours a day, and that the ordinary useful life of machinery of this character is eight years.
The evidence is somewhat indefinite as to the period of time the machinery had been in use and as to the additions and replacements made prior to June, 1918, the date on which the entire plant was purchased by Gerst & Long; also as to the extent of the additions and replacements between June, 1918, and December 31, 1921. There is credible evidence, however, showing that the machinery purchased in June, 1918, had been in use for some years and that at that time at least 75 per cent thereof was considerably worn and in a bad state of repair. The petitioners were entitled to a deduction for exhaustion, wear and tear of the machinery at such a rate as may reasonably be expected to return to them the cost thereof oyer the period of its useful life in the business. We are convinced from all of the evidence submitted that the deduction for exhaustion, wear and tear of machinery during the taxable years should have been computed at the rate of 12 per cent, instead of 10 per cent, as allowed by the Commissioner.
The petitioners claim that the partnership should have been allowed a deduction for exhaustion, wear and tear of delivery equipment at the rate of 50 per cent per annum, instead of 25 per cent, as allowed by the Commissioner. The evidence before the Board upon this question is not sufficient to sustain the contention made.
It is claimed that the cost of the motor boat should have been exhausted over a period of four years from July, 1920, the date on which it was purchased, upon the ground that its use was discontinued within that time and it was of no further use in the business. The fact that the use of the boat was discontinued within four years after its purchase has no necessary relation to the amount which may be deducted for the jshysical exhaustion thereof. The Commissioner computed the deduction for exhaustion at the rate of 10 per cent per annum, and we believe his action in this regard should be approved.
On the question of whether the petitioners were correct in reporting the profit upon the sale of the real estate by allocating the percentage of profit to the cash received and the extent to which the trust notes endorsed by the petitioners with recourse were discharged within the year, we are not convinced from the evidence that the Commissioner's determination that the profit upon the sale should have been reported in the year in which the sale was made should be reversed. The petitioners were, of course, secondarily liable upon the trust notes endorsed with recourse. It has not been shown to our satisfaction that the amount of the notes could not have been collected out of the property and from the person or persons primarily liable thereon.
As to the fair market value of the third trust notes totaling $9,800.57, given to Albert Gerst and his associates by E. L. Simpson as part consideration for the 26th and Granby Street property, and the fourth trust notes totaling $15,200, given by D. Pender as part consideration for the 14th and Granby Street property, the evidence satisfactorily shows that the fair market value of these notes was not in excess of 40 per cent of their face value. One of the partners in these transactions testified that the makers of these notes were not financially responsible and that the value of the particulár property on which they were given was not sufficient to. give these notes a value in excess of 50 per cent of their face amount. He further testi- fled that during the year 1920 he sought a purchaser for these notes and was offered 25 cents on the dollar, but declined this offer for the reason that he regarded the notes as being worth more than that amount.
Order of redetermination, will J>e entered on 15 days' notice, under Rule 50.