Case Name: Appeal of LEEDY MANUFACTURING CO.
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1925-06-30
Citations: 2 B.T.A. 203
Docket Number: Docket No. 1759
Parties: Appeal of LEEDY MANUFACTURING CO.
Judges: Before Smith, Littleton, and Tkussell.
Reporter: Reports of the United States Board of Tax Appeals
Volume: 2
Pages: 203–207

Head Matter:
Appeal of LEEDY MANUFACTURING CO.
Docket No. 1759.
Submitted May 4, 1925.
Decided June 30, 1925.
George S. Olive, O. P. A., and Frank G. Olive, Esq., for the taxpayer.
J. Harry Byrne, Esq., for the Commissioner.
Before Smith, Littleton, and Tkussell.

Opinion:
OPINION.
Smith:
This appeal comes before the Board on the following assignments of error:
(а) The Commissioner erred in disallowing as a deduction in computing the taxpayer's taxable net income for the year 1919, three thousand three hundred ninety-five dollars and fifty-six cents ($3,395.56), representing depreciation on buildings, machinery, and equipment of the taxpayer.
(б) The Commissioner erred in disallowing as invested capital in computing the taxpayer's income and pxcess profits tax liability for the years 1919 and 1920, thirteen thousand seven hundred seventy dollars and forty-five cents ($13,770.45'), claimed by the Commissioner to represent appreciation of Plant Account, arbitrarily written up by the taxpayer.
(c) The Commissioner errfed in disallowing as invested capital1, in computing the income and excess profits tax liability of the taxpayer for 1919, sixteen thousand nine hundred eleven dollars and seventy-six cents ($16,911.76), representing additional depreciation, claimed by the Commissioner to have accrued prior to January 1, 1919.
(A) The Commissioner erred in disallowing as invested capital, in computing the income and excess profits tax liability of the taxpayer for 1920, thirteen thousand five hundred sixteen dollars and twenty cents ($13,510.20), representing additional depreciation claimed by the Commissioner to have accrued prior to January 1, 1920.
Although the appeal states four assignments of error, they are all resolvable into one, namely, the Commissioner has refused to accept the taxpayer's books of account as reflecting the sound value of depreciable assets at January 1, 1919, and January 1, 1920. The basis of the rejection by the Commissioner is stated in a revenue agent's report which was admitted in evidence.
As indicated by the findings of fact, it has been the practice of the taxpayer in the past to take depreciation upon the "diminishing balance " method. It has also been its practice to charge the cost of repairs which tend to prolong the' life of depreciable assets to capital account before applying the rates for depreciation. The revenue agent found that for the years 1913 to 1920, inclusive, the taxpayer had capitalized $15,909.83 of expense items. Of this total $1,759.80 was for the year 1919, and $5,192.21 for the year 1920. It was impossible for him to make anjr segregation of the expense items capitalized prior to 1913, but he did find that the plant account had been appreciated, as shown by the books of account, for the years 1906,1907,1909, and 1911, in the aggregate amount of $13,770.45, and that only $1,347.58 had been taken as depreciation prior to 1913.
The books of account for years prior to 1913 were not submitted in evidence. A revenue agent, after an examination of those books of account, reduced claimed invested capital for each of the years 1919 and 1920 by $13,770.45, which he alleged represented appreciation in book values. At the hearing the taxpayer contended that the write-up in the book values of depreciable assets did not represent merely appreciation of book values but represented a correction of its plant account to include therein the cost of tools, machinery, and buildings constructed by the taxpayer during the years in which there was a write-up of the plant account. The evidence upon this point is not satisfactory and, for lack of evidence, the reduction in invested capital made by the Commissioner is approved.
The evidence is to the effect that the taxpayer's books of account have been carefully kept, at least from January 1, 1913, and that depreciation has been charged off in a consistent manner. We are of the opinion that the evidence proves that the book values of the assets at January 1, 1919, after the reduction of those values by the elimination of $13,770.45 representing appreciation for the years 1906, 1907, 1909, and 1911, were not in excess of sound values. Cf. Appeal of Cleveland Home Brewing Co., 1 B. T. A. 87.
In its original return for 1919, the taxpayer claimed depreciation of $10,450.39. Only $3,395.56 of this amount has been disallowed as a deduction by the Commissioner. The rates of depreciation applied by the Commissioner are in our opinion ample to offset depreciation sustained and appear to be equal to if not greater than the rates used by the taxpayer. The Commissioner has, however, applied his rates to a much smaller cost of depreciable assets than is shown by the taxpayer's books of account. We are of the opinion that the amount of depreciation claimed by the taxpayer for 1919 is not in excess of the amount of depreciation actually sustained.