Opinion ID: 1483983
Heading Depth: 1
Heading Rank: 1

Heading: Depreciation of the Steel Drums.

Text: The next item is for the depreciation of drums used to ship alcohol. Until the year 1932 whenever the taxpayer shipped alcohol it charged the buyer six dollars for the drum (a little more than its cost) which the buyer agreed to return in ninety days. If he did, he was credited with six dollars and the drum was used again, and so on until it became too worn out for further service, or the supply became too large. It was then sold, or junked, for whatever it would bring. The taxpayer between 1922 and 1929 did not keep any account on its books of gradual deterioration of these drums; nor did it claim any such deduction in its returns; it merely claimed a deduction of six dollars when the drum was finally scrapped or sold  charging itself with whatever was salved. It was not until November 1931 that it suggested any change and claimed an overpayment for 1928 and 1929, based upon a depreciation of the whole mass of drums, calculated upon a uniform deterioration over a stipulated life of ten years. The Commissioner denied this claim and the Tax Court affirmed his ruling. Section 41 of the Revenue Act of 1928, 26 U.S.C.A. Int.Rev.Acts, page 363, directed a taxpayer's income to be computed in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but    if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the commissioner does clearly reflect the income. Article 322 of Regulations 74, which were promulgated for the Act of 1928, enacted that a taxpayer who wished to change his method of accounting employed in keeping his books    should, before computing his income on such new basis for purposes of taxation, secure the consent of the Commissioner, for which he must apply at least 30 days before the close of the period to be covered by the return. The taxpayer made no such application until nearly two years after the close of the second year  1929  and it is therefore impossible to see what standing it had to vary the method of accounting regularly employed by it. This has been the view taken in a number of decisions. Elmwood Corp. v. United States, 5 Cir., 107 F.2d 111; St. Paul Union Depot Co. v. Commissioner, 8 Cir., 123 F.2d 235; Franklin County Distilling Co. v. Commissioner, 6 Cir., 125 F.2d 800; Commissioner v. Saunders, 5 Cir., 131 F.2d 571. But the claim is without merit anyway. There was no actual realized loss in a drum until it was scrapped; so far as appears, it served its purpose quite as well until then, though it would not fetch as much upon a sale. Nevertheless, it is quite true that the law does recognize depreciation not realized, and treats it as a deductible loss, when in the jargon of the statute, not to do so will distort, and not clearly reflect, the income; by which we understand only that it will be more equitable to allow depreciation. In this case there is no persuasive evidence that annual depreciation would a priori have had such a result: certainly none conclusive enough to justify the Tax Court in overruling the Commissioner. In the end, if the taxpayer had carried out its method of deducting only scrapped or junked drums it would have recovered all its actual losses; the only question is as to whether the distribution of these losses by means of an annual deterioration allowance was so much fairer that the Commissioner had no discretion to refuse it. We do not think that it was. It is true that such an allowance over the years 1922 to 1929 would have been more than three times as great; and that for the years 1928 and 1929 it would have been more than twice as great. This is understandable. The records show only the drums on hand in 1922 at the Peoria plant and these were less than 4,000; but as the number of drums in that plant in 1928 and 1929 was about one half of all the taxpayer's drums, we may suppose that the total number of drums in 1922 was in the neighborhood of 8000. As this number had grown by 1928 and 1929 to over 180,000, there was an inevitable lag between an allowance based upon scrapped and sold drums and a depreciation allowance; indeed, the surprising thing is that more than 34,000 should have been scrapped or sold between 1922 and 1929. But we cannot see why  even if the Commissioner had had the power to allow a change  it was unfair to hold the taxpayer to a method chosen by it, and adapted in the end to allow it all its actual losses. It is not true that the annual loss would have no relation to the annual income. We should assume, at least after the system had been working for ten years, that the mass of drums on hand would always contain the same proportion of aged drums; if so, an increase in business in any year, resulting in a greater average number of trips for each drum, should result in a larger number scrapped. The correspondence would not be close, no doubt, but that is not necessary; all we need find is that the method chosen was not calculated to work out so egregiously to the taxpayer's disadvantage as to force the Commissioner to grant it the favor which it asked. That question was certainly not to be decided because in 1932 the system was forcibly ended, and the loss imposed by the necessity of disposing of all the old drums at once happened to coincide with the depth of the depression.