Court Opinion

ID: 4611705
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:49:31.68069+00
Date Added: 2024-06-11T07:54:18.602523
License: Public Domain

WILLIAMS FURNITURE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Williams Furniture Corp. v. CommissionerDocket No. 104191.United States Board of Tax Appeals45 B.T.A. 928; 1941 BTA LEXIS 1049; December 9, 1941, Promulgated 1941 BTA LEXIS 1049">*1049  1.  Petitioner's furniture plant was destroyed by fire in 1936 and petitioner collected certain amounts under use and occupancy insurance policies in addition to regular fire insurance, and it used the money thus collected in forthwith acquiring a new plant for carrying on the same business as before.  Held, since the use and occupancy insurance did not insure petitioner against the loss of net profits of the business, but was merely additional insurance on the destruction of the plant by fire of a certain amount per day multiplied by the number of days it would reasonably take to rebuild the plant, there is no reason for treating these proceeds any differently than the proceeds from the straight fire insurance, and, therefore, no gain or loss should be recognized on the proceeds from the use and occupancy insurance under section 112(f) of the Revenue Acts of 1934 and 1936.  Piedmont-Mt. Airy Guano Co.,3 B.T.A. 1009">3 B.T.A. 1009, followed.  2.  Just prior to the fire petitioner had erected certain concrete foundations preparatory to erecting certain water and liquid storage tanks near the plant that was destroyed.  After the fire, petitioner decided to build its new plant1941 BTA LEXIS 1049">*1050  elsewhere and abandoned such foundations permanently from use in its business.  For the loss of the useful value of such tank foundations petitioner was not compensated by insurance or otherwise.  Held, petitioner is entitled under article 23(e)-3 of Regulations 86 to deduct as a loss the cost of the tank foundations.  H. A. Mihills, C.P.A., for the petitioner.  F. L. Van Haaften, Esq., for the respondent.  BLACK 45 B.T.A. 928">*928  This proceeding is for the redetermination of deficiencies in income and excess profits taxes determined by the respondent against petitioner for the fiscal years ended May 31, 1936 and 1937, in amounts as follows: Fiscal year ended -Income taxExcess profits taxMay 31, 1936$3,743.30$1,358.12May 31, 193729,823.211,526.1045 B.T.A. 928">*929  In determining the deficiencies herein the respondent adjusted the net income as disclosed by petitioner's returns as follows: Fiscal year 1936Fiscal year 1937Net income as disclosed by return$188,964.31$131,932.92Unallowable deductions and additional income:(a) Use and Occupancy insurance26,000.0094,000.00(b) Local taxes accrued May 31, 19351,451.270(c) Tank foundations written off1,317.060$217,732.64$225,932.92Nontaxable income and additional deductions:(d) Local taxes accrued increased1,533.190(e) Depreciation increased11.18497.92Net income adjusted$216,188.27$225,435.001941 BTA LEXIS 1049">*1051  In his deficiency notice, the respondent explained adjustments (a) and (c) as follows: (a) On March 31, 1936 your plant was destroyed by fire and, in addition to other insurance, you collected $120,000.00 in use and occupancy insurance.  It is held that the proceeds from use and occupancy insurance contracts constitute taxable income prorated between the two years, $26,000.00 to the fiscal year ended May 31, 1936, and $94,000.00 to the fiscal year ended May 31, 1937.  (c) The claimed loss of $1,317.06 on account of abandonment of a tank foundation has been disallowed for the reason that this item was covered by fire insurance.  Petitioner, by appropriate assignments of error, contest adjustment (a) for both years and adjustment (c) for the year 1936.  It also assigned error as to adjustment (e) for both years, but at the hearing it abandoned that issue.  FINDINGS OF FACT.  Petitioner is a corporation organized under the laws of the State of South Carolina, with its principal office and place of business at Sumter, South Carolina.  The returns for the years here involved were filed with the collector for the district of South Carolina.  Petitioner was organized in the1941 BTA LEXIS 1049">*1052  year 1929, succeeding a business which started in or about 1925 as the O. L. Williams Top & Panel Co. Petitioner has been continuously engaged in the manufacture of lowpriced bedroom and dinette furniture.  Petitioner continued to use the buildings formerly occupied by the O. L. Williams Top & Panel Co. after alterations and additions which were completed and in operation in 1929.  It subsequently made further additions to its plant and at March 31, 1936, was operating a plant of approximately 350,000 square feet.  On March 31, 1936, the plant was conpletely destroyed by fire, with the exception of a few small outlying buildings and a part of the fence.  About one-third to one-half of the lumberyard was completely destroyed, the remaining lumber inventory being saved.  45 B.T.A. 928">*930 The building which was destroyed by fire was a frame iron-clad building, the floors being of heavey plank on timber construction, and the foundations were of brick and concrete.  The equipment was practically all motor driven, of modern design, and at the time the fire occurred petitioner had just completed installation of a new conveyor system, modern and complete in every respect.  Following the1941 BTA LEXIS 1049">*1053  fire, petitioner conducted negotiations with the insurance companies and their adjusters.  Petitioner employed an insurance adjuster for its own protection, and to draw up their proofs of loss.  He participated in the negotiations with the representatives of the fire insurance companies and arrived at the loss agreed upon.  Petitioner had two forms of insurance coverage - the regular standard type of fire insurance policy on the buildings, stock and machinery, and also three policies of an aggregate face value of $200,000 in the form of use and occupancy insurance.  The total amount of insurance proceeds, including both standard fire insurance and use and occupancy insurance, was $526,331.71, to which have been added proceeds from sale of scrap on the burned plant amounting to $2,705.74.  The inventory destroyed was valued at $62,481.87, which amount was deducted from the proceeds of the straight fire insurance in the amount of $406,331.71.  A meeting of petitioner's board of directors called on April 16, 1936, authorized the immediate rebuilding of the plant, and also the purchase of a new site on which was located a building that could be used temporarily as a manufacturing1941 BTA LEXIS 1049">*1054  building.  An account, known as "Replacement Fund," was immediately created upon the books of petitioner.  All cash proceeds, either from insurance policies or the sale of scrap or other salvage, were credited and appeared in the "Replacement Fund" account.  The new building was completed about February 1937.  The new building was placed in gradual operation from October 1936 to February or March 1937, when it was finally completed.  The first expenditure or commitment for the new plant, following the decision of April 16 to replace the destroyed plant, was on April 18, 1936.  The cost of replacement up to the end of the first fiscal year after the fire is recorded and recited in the "Replacement Fund" schedule and appears in the amount of $125,226.91 at May 31, 1936.  The total cost of replacement up to May 31, 1937, as appears in the "Replacement Fund" schedule, was $553,012.64.  The excess of total cost of assets replaced over and above total insurance recoveries and proceeds from sale of scrap, less the value of inventory destroyed, was $86,457.46, which was the amount petitioner expended in replacement of its plant, over and above its net recoveries of $466,555.58 on account1941 BTA LEXIS 1049">*1055  of plant loss.  45 B.T.A. 928">*931  Standard fire insurance coverage was considered by petitioner as insufficient because of limitations on collection at a fixed amount.  Standard fire insurance rates are higher than use and occupancy insurance rates, being 77 1/2 cents on each $100 as compared to 48 to 50 cents in the case of the use and occupancy insurance.  Between the date the standard fire insurance policies were placed upon petitioner's property and the date the use and occupancy insurance policies were placed, additional equipment had been installed at a cost of about $35,000.  There was no increase of standard fire insurance placed in reference to those increased facilities.  On July 8, 1935, petitioner took out with the Pennsylvania Lumbermens Mutual Fire Insurance Co. of Philadelphia its first use and occupancy policy.  The policy number was 560501 and was for a face amount of $30,000.  The premium paid was $150 which was at the rate of 50 cents on each $100 of insurance.  The policy provided in part as follows: (1) The conditions of this contract are that if the building(s) situate East Calhoun Street, Sumter,Sumter County, S.C. and occupied as a Furniture Factory1941 BTA LEXIS 1049">*1056  and/or machinery and/or equipment, and/or raw stock, * * * contained therein, be destroyed or damaged by fire occurring during the term of this policy so as to necessitate a total or partial suspension of business, this Company shall be liable under this policy for the actual loss sustained consisting of: I.  Net profits on the business which is thereby prevented; II.  Such fixed charges and expenses as must necessarily continue during a total or partial suspension of business, to the extent only that such fixed charges and expenses would have been earned had no fire occurred; III.  Such expenses as are necessarily incurred for the purpose of reducing the loss under this policy; for not exceeding such length of time, commencing with the date of the fire and not limited by the date of expiration of this policy, as shall be required with the exercise of due diligence and dispatch to rebuild, repair or replace such part of said building(s) and machinery and equipment * * * as may be destroyed or damaged subject to the following conditions and limits, to-wit: (2) Total Suspension Clause - The per diem liability under this policy during the time of total suspension of business of1941 BTA LEXIS 1049">*1057  all the properties described herein shall be limited to the "Actual Loss Sustained," not exceeding 1/300 of the amount of this policy for each business day of such suspension, except that in the case of business being operated on Sundays and/or holidays, in which event the said per diem liability shall not exceed 1/365 of the amount of this policy for each business day of such suspension, due consideration in either case being given to the experience of the business before the fire and the probable experience thereafter.  On October 22, 1935, petitioner took out with Lloyd's of London its second use and occupany policy.  The policy number was LC-5022 and was for a face amount of $100,000.  The premium was at the rate of about 48 cents on each $100 of insurance.  Lloyd's of London were not licensed to place insurance in the State of South Carolina.  Petitioner was informed that Lloyd's45 B.T.A. 928">*932  would require what is known as a warranty of an admitted company, on which to base the Lloyd's policy, it being agreed, in the customary manner, that Lloyd's would pay any loss on exactly the same basis that the admitted company paid their loss, and that any endorsements or changes in1941 BTA LEXIS 1049">*1058  the policy would apply to the Lloyd's policy, without notice to Lloyd's; any changes made in the admitted company's policy to also bind Lloyd's without notice to Lloyd's.  The Pennsylvania Lumbermens Mutual Fire Insurance Co. of Philadelphia was, for the purpose of the policy issued to petitioner, accepted by Lloyd's as the required admitted company.  On December 8, 1935, Policy No. 560501 was changed by a written endorsement entered into between petitioner and the Pannsylvania Lumbermens Mutual Fire Insurance Co. whereby for an additional premium of $21,88 the amount of the policy was increased from $30,000 to $37,500, and the old form of the policy was canceled and a corrected form agreed upon, the material provisions fo which are as follows: $37,500.00 on the Use and Occupancy of the building or buildings, structures or other property, and additions and extensions, and contents thereof, constituting the plant operated by Williams Furniture Corporation situated East Calhoun Street, Sumter, S.C.It is understood and agreed that this policy covers pro rata of the total amount of insurance carried.  It is a condition of this contract of insurance that if by fire occurring1941 BTA LEXIS 1049">*1059  during the continuance of this policy, the said building structures and/or contents, or either of them, or any part thereof, or other property, shall be destroyed or so damaged as to entirely prevent the production of goods or use of said premises, this company shall be liable at the rate of $125.00 per day for each working day of such prevention or in case of partial prevention of production or use of said premises, this Company shall pay a proportionate amount of said $125.00 per day.  It is a condition of this contract of insurance that in the event that the said buildings, structures and/or contents, or either of them, or any part thereof, or other property, shall be destroyed by fire, the said loss (which in no case shall exceed the sum insured) is to be computed from the date of the occurrence of any fire to the time when the buildings, or stroctures and/or contents or other property could, with ordinary diligence and dispatch, be repaired or rebuilt and refitted or replaced and operations resumed.  * * * The preceding written endorsement of Policy No. 560501 was also binding and effective as to Policy No. LC-5022 taken out with Lloyd's on October 22, 1935.  1941 BTA LEXIS 1049">*1060  On January 10, 1936, petitioner took out with the Pennsylvania Lumbermens Mutual Fire Insurance Co. of Philadelphia its third use and occupancy policy.  The policy number was 560560 and was for a face amount of $62,500.  The premium paid was $312.50, which was at the rate of 50 cents on each $100 of insurance.  The per diem 45 B.T.A. 928">*933  liability was $208.33 per day, which is 1/300 of the face amount of the policy.  The provisions of this policy, except for amounts, were identical with the written endorsement of Policy No. 560501.  Each of the three use and occupancy policies covered the same subject matter and was intended to cover the same risks proportionately.  A. F. Harrison represented the PennsylvaniaLumbermen's Mutual Fire Insurance Co. as an independent adjuster.  Petitioner mailed a letter to him on May 27, 1936, attaching thereto proof of loss as required within sixty days after the fire, relating to Policy No. 560560 in the sum of $62,500.  A separate proof of loss under Policy No. 560501 in the amount of $37,500 was also filed at the same time, the aggregate fact amount of the two policies being $100,000.  A similar proof of loss in respect to the Lloyd's policy, 1941 BTA LEXIS 1049">*1061  face amount $100,000, was also filed.  The statement of claims on the three above named policies aggregated $158,333.33.  The amount of the claims aggregating $158,333.33 was determined upon the following factors.  The total per diem liability of the three policies was 1/3000 of $200,000, or $666.67 per day.  The year was considered as having 300 working days or 25 working days per month.  Nine and one-half months reduced to days amounts to 237.5 days, which multiplied by $666.67 equals $158,333.33.  The amount of $120,000 received as the aggregate sum under the three use and occupancy insurance policies was agreed upon by bargaining with the adjuster for the Pennsylvania Lumbermens Mutual Fire Insurance Co.  As compared to petitioner's estimate of 9 1/2 months, the Pennsylvania Co. adjuster first estimated reconstruction time of 6 1/2 months, later 7 months, and finally agreed upon 7 months and 5 days as being sufficient to restore the property into its original condition.  Seven months and five days reduced to working days amounts to 180 days, which multiplied by $666.67 equals $120,000.  The settlement was made strictly upon a time element deemed sufficient to restore the property1941 BTA LEXIS 1049">*1062  to its original condition.  The Lloyd's payment was made and settled on the same basis as arranged by the adjuster for the Pennsylvania Co., apportionment being necessary between the three policies for the reason that they covered the same risk but in different amounts and the loss was fixed in accordance with that apportionment.  Petitioner was never called upon to and never did submit a statement of profit of loss or any other financial statement in connection with the use and occupancy policies.  Petitioner was out of operation for about six or seven weeks before manufacturing could again be resumed.  During that period petitioner had some expenses, as salaries were continued to be paid to straight time foremen and office 45 B.T.A. 928">*934  employees.  Petitioner had no outstanding loans with banks or any mortgages at the time, but had other fixed charges, including rents for market space and taxes.  No reference was made at any time, either when any use and occupancy policy was negotiated, or when settlement was accomplished, to past or estimated future profits.  No consideration was given to any profits with respect to the use and occupancy policies, but instead it was merely stated1941 BTA LEXIS 1049">*1063  that in case of loss the company was due to pay the insured a particular amount per diem for the time sufficient to restore it to its original condition.  The policies constituted a valued form of use and occupancy type of insurance.  As a part of the new plant petitioner acquired for $50,000 a tract of land on which there was one building, the new plant being erected on the same site.  Of this $50,000 consideration, $10,000 represented land.  Petitioner still owns the old property but has been unable to dispose of it because of its unusable condition.  It was impossible to relocate on the old plant site because of the large amount of debris.  Petitioner was enabled by acquisition of the new tract of land to make use of a building situated thereon, and continued production in a restricted manner by operating three crews in the temporarily acquired new building.  Petitioner was compelled to reduce its line of product to one suite as compared to a number of products at the time of the fire.  The new buildings constructed by petitioner were more modern and better than the buildings destroyed by fire, but the conveyor system was practically a duplicate of the system which had been1941 BTA LEXIS 1049">*1064  completed and put in use shortly before the fire.  After the new building was completed, petitioner made the same line of furniture as formerly.  The new plant had the same productive capacity as the plant destroyed by fire.  No change in the type of business conducted by petitioner occurred after restoration of the plant.  In its income tax returns filed for the fiscal years ended May 31, 1936 and 1937, petitioner claimed that, under section 112(f) of the Revenue Acts of 1934 and 1936, no gain or loss should be recognized in connection with any of the insurance proceeds collected.  The respondent allowed this claim with respect to the proceeds from the straight fire insurance, but disallowed it with respect to the proceeds from the use and occupancy insurance, and determined that the $120,000 of proceeds from the use and occupancy insurance "constitute taxable income prorated between the two years, $26,000.00 to the fiscal year ended May 31, 1936, and $94,000.00 to the fiscal year ended May 31, 1937." 45 B.T.A. 928">*935  Petitioner deducted the amount of $1,317.06 in its tax return for the year ended May 31, 1936, as tank foundations not destroyed by fire, charged off.  Respondent disallowed1941 BTA LEXIS 1049">*1065  the loss claimed.  The loss of $1,317.06 covered foundations that had just been poured for a 75,000 gallon elevated tank that petitioner was getting ready to erect to give additional water supply for fire protection; also the elevation for a liquid storage tank, for alcohol, etc.  The liquid storage tank had already been constructed several months before the fire.  The tanks were moved, but the foundations were abandoned, because the fire occurred and petitioner did not rebuild on that location and had no further use for them.  No specific use of any kind has been made of these foundations and no use could be made of them unless another building could be constructed on the same site.  Any such plan has been completely abandoned.  The building foundations below the ground level are not included as insurable property and the cost was eliminated when the fire adjustment was made, by exclusion from the value of the buildings as property not destroyed.  The cost of the foundations was eliminated from the insured value and petitioner received no compensation by insurance or otherwise on account of the loss of useful value of these foundations.  OPINION.  BLACK: The principal issue1941 BTA LEXIS 1049">*1066  in this proceeding is whether, under section 112(f) of the Revenue Acts of 1934 and 1936, no gain or loss should be recognized in connection with the proceeds of $120,000 received by petitioner as use and occupancy insurance as the result of the fire which destroyed the greater part of petitioner's plant on March 31, 1936, which proceeds, together with straight fire insurance proceeds, were credited to a replacement fund account on its books and all used in the acquisition of other property similar or related in service or use to the property destroyed by the fire.  As an alternative petitioner contends that, if gain is to be recognized, it all accrued during the fiscal year ended May 31, 1936, and none of it is taxable for the fiscal year ended May 31, 1937.  Section 112(f) of both acts is identical and is printed in the margin. 11941 BTA LEXIS 1049">*1067 45 B.T.A. 928">*936  At the time petitioner filed its returns for the taxable years in question it reported the occurrence of the fire and the receipt of the proceeds, but contended that no gain or loss should be recognized since it had used all of the proceeds, and more too, in the acquisition of other property similar or ralated in service or use to the property destroyed.  The respondent allowed the contention with respect to the proceeds of straight fire insurance, but rejected the contention with respect to the proceeds of $120,000 from the use and occupancy insurance, and in his deficiency notice "held that the proceeds from use and occupancy insurance contracts constitute taxable income prorated between the two years, $26,000.00 to the fiscal year ended May 31, 1936, and $94,000.00 to the fiscal year ended May 31, 1937." The respondent has not cited any authority for his determination and subsequent to the hearing he notified us that he did not desire to file a brief.  Article 112(f)-1 of Regulations 86 and 94 contains a paragraph, identical in both regulations, which reads as follows: The proceeds of a use and occupancy insurance contract, which by its terms insured against actual1941 BTA LEXIS 1049">*1068  loss sustained of net profits in the business, are not proceeds an involuntary conversion but are income in the same manner that the profits for which they are substituted would have been.  Doubtless the Commissioner relied upon this regulation in his determination of the deficiencies.  It seems to be well settled that, if under the terms of a use and occupancy insurance contract the taxpayer is insured against actual loss sustained of net profits in the business, then it is true that the proceeds received under such a policy are not proceeds of an involuntary conversion, but are income in the same manner that the profits for which they are substituted would have been.  ; ; certiorari denied, . If, however, the contract of insurance does not insure against the loss of net profits, but is a contract to pay the insured a flat per diem allowance for the loss of the use and occupancy of the property destroyed by fire, measured from the date of the occurrence of the fire to the time when the destroyed property can, with ordinary diligence, 1941 BTA LEXIS 1049">*1069  be replaced and operations resumed, then upon receipt of the proceeds under such a policy no gain or loss should be recognized, providing the proceeds are expended in the acquisition of other property similar or related in service or use to the property destroyed. ; . In the instant proceeding two of the three policies originally insured petitioner against the loss of net profits, but on December 8, 1935, this form of policy was cancelled and a corrected form adopted providing that if petitioner's plant were destroyed by fire, petitioner 45 B.T.A. 928">*937  would be paid a straight per diem amount measured by a reasonable time required for reconstruction.  The third policy was on the corrected form.  The record, therefore, clearly shows that the use and occupancy insuranice carried by petitioner was not bused upon and had no relation to insurance of profits, but, instead, was based entirely upon a per diem allowance multiplied by the estimated number of days it would take to rebuild petitioner's plant.  No income statements or other financial statements were required or requested1941 BTA LEXIS 1049">*1070  of petitioner.  The only dispute between petitioner and the insurance companies was over the time it would take to rebuild.  Petitioner claimed it would take 9 1/2 months.  The insurance companies first estimated 6 1/2 months.  A compromise of 7 months and 5 days was finally agreed upon.  For the purposes of the application of section 112(f), supra, we know of no valid reason why proceeds from use and occupancy policies of the type here involved should be treated any differently than the proceeds from the straight fire insurance policies.  We think the evidence clearly shows that petitioner's plant (as a result of the fire) was involuntarily converted into money, namely, proceeds from straight fire insurance and proceeds from use and occupancy insurance, and that this money was forthwith in good faith expended in the acquisition of other property similar or related in service or use to the property so converted.  All of the money thus received was so expended.  We, therefore, hold that under section 112(f), supra, no gain or loss should be recognized upon the receipt of the proceeds of the use and occupancy insurance in the amount of $120,000.  1941 BTA LEXIS 1049">*1071 ;Relative to the second issue, the respondent disallowed a deduction taken by petitioner on its income tax return for the fiscal year ended May 31, 1936, in the amount of $1,317.06 representing the cost of tank foundations, abandoned as a result of the fire.  The reason given in the deficiency notice for the disallowance was that this item was covered by fire insurance.  In its brief petitioner contends that the amount it deducted on its return "is an allowable deduction, because not covered by insurance, or in the alternative as a loss of useful value." The applicable statute is section 23(f) of the Revenue Act of 1934, which is as follows: SEC. 23.  DEDUCTIONS FROM GROSS INCOME.  In computing net income there shall be allowed as deductions: * * * (f) LOSSES BY CORPORATIONS. - In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.  The record in this case refutes the respondent's determination that this item was covered by fire insurance.  The evidence shows in the 45 B.T.A. 928">*938  first instance that these foundations1941 BTA LEXIS 1049">*1072  were uninsurable, and further shows that their value was eliminated from the insured values when the fire loss was adjusted.  Clearly, therefore, the alleged loss was not "compensated for by insurance or otherwise" and accordingly becomes an allowable deduction if the record satisfies the statutory requirements that a loss was actually sustained.  As early as the Revenue Act of 1918 and continuing through all the subsequent revenue acts, the Commissioner in his appropriate regulations has allowed a deduction for "loss of useful value" of capital assets, when through some change in business conditions the usefulness in the business of a capital asset is suddenly terminated so that the taxapayer discards it permanently from use in the business.  This was intended as an exception to the rule requiring a sale or other disposition of property in order to establish a loss, and was made applicable to buildings "only when they are permanently abandoned or permanently devoted to a radically different use." The material provisions of article 23(e)-3 of Regulations 86 are printed in the margin. 21941 BTA LEXIS 1049">*1073 In , the taxpayer in 1919 began the construction of a hotel building.  During that year he incurred liabilities of $7,992.17 in putting in the foundation, after which the entire project was abandoned.  We allowed the taxpayer in that case to deduct as a loss in that year the amount expended in connection with the hotel venture. In , we held that a corporation which, through a change of business conditions, has no use for a building erected for a particular purpose and abandons the building is entitled to deduct the loss sustained by reason of such abandonment.  Substantially to the same effect see ; ;  (6th issue); affirmed upon other issues, ; certiorari denied, . 45 B.T.A. 928">*939  In the instant proceedings, the evidence definitely shows that after the fire petitioner decided to rebuild its new plant elsewhere, and that it had no possible further use for the tank foundations.  The1941 BTA LEXIS 1049">*1074  usefulness to petitioner of these foundations was as fully destroyed by the fire as was the plant itself, and petitioner thereafter abandoned such foundations permanently from use in its business.  The respondent does not claim that the foundations had any salvage value.  Under the authorities above cited, we hold that petitioner is entitled to deduct the cost of the foundations as a loss sustained during the fiscal year ended May 31, 1936.  Decision will be entered under Rule 50.Footnotes1. SEC. 112.  RECOGNITION OF GAIN OR LOSS.  * * * (f) INVOLUNTARY CONVERSIONS. - If property (as a result of its destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation, or the threat or imminence thereof) is compulsorily or involuntarily converted into preperty similar or related in service or use to the property so converted, or into money which is forthwith in good faith, under regulations prescribed by the Commissioner with the appfoval of the Secretary, expended in the acquisition of other property similar or related in service or use to the property os converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund, no gain or loss shall be recognized.  If any part of the money is not so expended, the gain, if any, shall be recognized, but in an amount not in excess of the money which is not so expended. ↩2. ART. 23(e)-3.  Loss of useful value.↩ - When, through some change in business conditions, the usefulness in the business of some or all of the capital assets is suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from use in such business, he may claim as a loss for the year in which he takes such action the difference hetween the basis (adjusted as provided in section 113(b) and article 113(a)(14)-1, 113(b)-1, and 113(b)-2) and the salvage value of the property.  This exception to the rule requiring a sale or other disposition of property in order to establish a loss requires proof of some unforeseen cause by reason of which the property has been prematurely discarded, as, for example, where an increase in the cost or change in the manufacture of any product makes it necessary to abandon such manufacture, to which special machinery is exclusively devoted, or where new legislation directly or indirectly makes the continued profitable use of the property impossible.  This exception does not extend to a case where the useful life of property terminates solely as a result of those gradual processes for which depreciation allowances are authorized.  It does not apply to inventories or to other than capital assets.  The exception applies to buildings only when they are permanently abandoned or permanently devoted to a radically different use, and to machinery only when its use as such is permanently abandoned.  * * *