Court Opinion

ID: 4603243
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:31:31.945067+00
Date Added: 2024-06-11T07:52:49.184058
License: Public Domain

LASSEN LUMBER & BOX CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Lassen Lumber & Box Co. v. CommissionerDocket No. 3431.United States Board of Tax Appeals6 B.T.A. 241; 1927 BTA LEXIS 3561; February 19, 1927, Promulgated *3561  1.  Petitioner had a ten-year contract for cutting timber on a Federal forest reserve.  There was a substantial supply of privately owned logs and timber available.  The contract with the Government contained a provision for extension should conditions warrant such a change in its condition.  There was a large supply of Federal forest rescrve timber available for the petitioner's purposes on the usual terms for the sale of such timber to private operators.  Held, that in these conditions the petitioner was not entitled to depreciate its plant assets with a normal useful life in excess of ten years on the basis of the ten-year term of the timber sale agreement with the Government.  2.  Basis of depreciation for plant assets determined from the evidence adduced at the hearing.  Walter Slack, Esq., O.K., Cushing, Esq., and C. V. Rowe, C.P.A., for the petitioner.  A. Calder Mackay, Esq., for the respondent.  LANSDON *242  This is a proceeding for the redetermination of deficiencies in income and profits taxes for the years 1919 and 1920, in the respective amounts of $10,881.68 and $29,525.93, which arise from a controversy over the proper*3562  basis for depreciating certain tangible assets, to ascertain the annual deductions for exhaustion, wear and tear to which the petitioner is entitled for the taxable years.  All the issues raised in a supplementary petition were abandoned at the hearing The whole amount in controversy is $40,407.61.  FINDINGS OF FACT.  The petitioner is a California corporation with its principal office at San Francisco.  During the taxable years it was engaged in logging, in converting logs into lumber, in manufacturing boxes, and in the marketing of the various products resulting from its operations.  Its manufacturing plant is located at Susanville, in the northeastern section of California, on the eastern slope of the Sierra Nevada Mountains.  On May 13, 1918, the petitioner entered into a timber sale agreement with the Forest Service of the United States Department of Agriculture, whereby it agreed to purchase all the saw logs and lodgepole pine ties in 26,000 acres of the forest reserve of the Government of the United States in two tracts designated as the Norval Flat Logging Chance and the McCoy Logging Chance.  The tracts so acquired were estimated in the agreement to include 233,200 thousand*3563  board feet of saw timber, and 35,000 lodge-pole pine railroad ties.  This agreement contained many provisions, of which only the following are material to the issues to be determined: The cutting and removal of timber under this agreement shall begin not later than July 1, 1918, and unless extension of time is granted shall be completed not later than July 1, 1929.  Unless such amounts are reduced in writing by the Forester at least 10,000,000 feet B.M. will be cut prior to July 1, 1919; at least 76,000,000 feet B.M. will be cut prior to July 1, 1922; at least 145,000,000 feet B.M. will be cut prior to July 1, 1925; at least 213,000,000 feet B.M. prior to July 1, 1928, and the remainder of the timber during the remaining period.  * * * Saw mills, camps, buildings, roads, and other necessary structures will be located and operated subject to such regulation by the forest officer in charge as may be necessary for the protection of National Forest interests.  Except as hereinafter provided, all improvements will be removed from National Forest lands within six months after the termination of this agreement, unless permits or easements are secured from the officer of the United States*3564  having jurisdiction and in accordance with Federal laws for their future occupancy and use.  If not removed within such time or further occupancy and use under such permits or easements authorized, they will become the property of the United States.  * * * (f) It is further agreed that the Secretary of Agriculture will, upon written application from the purchaser showing good and sufficient reasons therefor *243  and specifically the existence of a serious emergency arising from changes in market conditions since the readjustment, at his option, when action of either character is necessary to relieve the purchaser from hardship, either - (1) Redetermine and establish the stumpage rates and designate a date when the rates as redetermined shall be effective, which date shall be within six months of the date of application; or (2) Grant an extension of time, within which the respective amounts of timber specified in Section 3 shall be removed, not to exceed the total period allowed for cutting all the timber.  Included in the agreement were the rules, regulations, and restrictions under which the operations of the petitioner were to be conducted, and provisions that it*3565  should make, deliver, and maintain a bond in the amount of $40,000, to guarantee satisfactory compliance with all the terms and conditions of such agreement.  Upon the execution of the timber sale agreement, the petitioner at once began the erection of buildings, the installation of all the necessary machinery and equipment and material for logging and manufacturing and marketing lumber and boxes. In its income and profits-tax return for the year ended December 31, 1919, the petitioner, under "Schedule A-18 Exhaustion, Wear and Tear," included the following statement and deducted the depreciation thereon indicated from its gross income for such year: ACQUIRED 1918-1919.PROBABLE LIFE.DEPRECIATION 1919.SUSANVILLE.Automobile$3,119.107 years$463.25Box Factory Machinery and Equipment75,159.81Ten years7,165.98Mill #1 Construction50,513.45do5,051.34Mill #2 Construction17,533.05do1,753.29Box Factory Construction34,533.11do3,453.31Construction Tools731.264 years182.81Bond Construction7,732.69Machine Shop Construction769.81Ten years76.98Office Construction3,775.08do377.50Cottage Construction40,154.96do4,015.50Garage Construction1,635.80do163.58Stable Construction934.55do93.45Dormitory & Dining Hall5,571.66Fire Equipment5,226.094 years1,306.52Hose House Construction155.89do38.97Hotel Construction15,956.84Ten years1,595.99Hotel Equipment9,444.554 years2,361.14Machine Shop Equipment1,719.40do429.78Mill #2 Machinery & Equipment30,013.51Ten years2,851.36Mill #1 do do76,703.52do6,770.35Office Equipment2,128.18do212.81Oil House Construction192.92do19.29Pond Unloading Equipment2,174.76do217.47Planing Mill Construction1,688.68Spur Construction9,276.44do927.64Stable Equipment996.20do99.62Tent House685.934 years171.48Water Lines9,206.22Ten years920.62Shook Warehouse Construction7,206.99do720.69General Warehouse Construction2,523.68do252.37Yard Trackage25,796.81do2,309.38Yard Construction19,583.33do1,958.33Yard Equipment14,364.81do1,436.48SAN FRANCISCO.Office Furniture1,440.18Ten years144.02Totals478,649.3547,541.30*3566 *244  In its income and profits-tax return for the year ended December 31, 1920, the petitioner, under "Schedule A-18 Exhaustion, Wear and Tear," included the following statement, and deducted the depreciation thereon indicated from its gross income for such year: VALUE.ALL ACQUIRED DURING YEARS 1918-1920.PROBABLE LIFE.DEPRECIATION PREVIOUS YEARS.DEPRECIATION THIS YEAR.SUSANVILLE.Autos$10,017.414 yrs$463.25$2,503.39Box Factory Const40,757.5410 yrs3,453.314,075.75Box Factory Machinery & Equipment91,030.8910 yrs7,165.989,103.09Cottage Const82,629.6210 yrs4,015.508,262.96Cabins5,772.2810 yrs577.22Dormitory Const7,443.3110 yrs744.33do Equip2,136.9610 yrs213.69Electric Const2,123.4710 yrs212.35Fire Equipment25,826.674 yrs1,306.526,456.67Water Tank6,562.2510 yrs656.22Garage Const3,435.0710 yrs163.58343.50Gas Supply stand321.3010 yrs32.13Gotel Annex Const20,785.1510 yrs2,078.51do do Equip511.364 yrs127.88Hose House155.8910 yrs38.9715.58Hotel Alpine const19,272.9210 yrs1,595.991,927.29Hotel Alpine Equip10,925.637 yrs2,361.141,638.84Improvement, Sidewalks1,201.1610 yrs120.11Lath Mill Const3,448.7210 yrs344.77Machine Shop Const2,000.4010 yrs76.98200.04Machine Shop Equip7,255.094 yrs429.781,813.77Mill #1 Const53,302.1710 yrs5,051.345,330.22Mill #1 Mach & Equip75,364.397 yrs6,770.357,536.44Mill #2 Const23,571.2710 yrs1,753.292,357.12Mill #2 Mach & Equip25,278.0510 yrs2,851.362,527.80Office Const5,215.5910 yrs377.50521.56Office Equipment3,423.7110 yrs212.81342.37Oil House192.9210 yrs19.2919.29Pond Const25,973.3610 yrs2,597.33Pond Unloading Equip4,320.7510 yrs217.47432.07Planing Mill Const16,434.9710 yrs1,643.49Pipe Shop Equip504.5810 yrs50.45Power Plant98,280.1310 yrs9,828.01Stable Constr961.0010 yrs93.4596.10Construction Tools1,855.9510 yrs182.81185.59Tent House760.604 yrs171.48190.13Warehouse Const3,065.9410 yrs252.37306.59Shook House Const7,206.9910 yrs720.69720.69Yard Trackage30,197.0410 yrs2,309.383,019.70Yard Constr33,231.6910 yrs1,958.333,323.17Yard Equip19,653.3410 yrs1,436.481,965.33Camp #213,333.7110 yrs1,333.37Camp #314,299.0910 yrs1,429.90Well955.0010 yrs95.50Duck Lake Spur1,495.972 yrs747.99Stable Equip1,963.5710 yrs99.62196.35Live Stock1,550.005 yrs310.00Spur Constr9,276.4410 yrs927.64927.64Water Lines9,487.8110 yrs920.62948.78Logging Equip188,808.665 yrs18,880.86Warehouse Equip147.8110 yrs14.78Pond Unloading Tools & Equip6.1410 yrs.61Discarded Machinery1,485.002 yrs742.50SAN FRANCISCO.Office Furniture1,452.1810 yrs144.02145.21Total1,016,668.9147,541.30110,215.03*3567  The total aggregate cost of all plant assets to December 31, 1918, the cost of additions to such assets during the year 1919, and the total aggregate cost at December 31, 1919, were as follows: Total aggregate cost, December 31, 1918.Additions, 1919.Total aggregate cost, December 31, 1919.Automobile and Trucks$803.00$2,316.10$3,119.10Box Factory Construction21,562.8912,970.2234,533.11Box Factory Mach. and Equipt34,970.4540,189.3675,159.81Camp #2 ConstrCamp #3 ConstrConstruction Tools731.26731.26Cottage Constr2,588.5637,566.4040,154.97Cabins ConstrDormitory Constr5,571.665,571.66Dormitory EquiptElectric ConstFire Equipt2,460.882,765.21[*] Fire Protection Water TankGarage Constr217.811,417.991,635.80Gas Supply StandHose House Constr155.89155.89Hotel Annex ConstrHotel Annex EquiptHotel Alpine Constr15,956.8415,956.84Hotel Alpine Equipt9,444.559,444.55Improvement A/CLive Stock A/CLath Mill ConstLogging EquiptMachine Shop Constr644.20125.61769.81Machine Shop Equipt1,040.41679.081,719.49Mill #1 Constr97,304.4446,790.8950,513.45Mill #1 Machy. and Equipt34,349.4542,354.0776,703.52Mill #2 Constr17,990.31457.2617,533.05Mill #2 Machy. and Equipt12,386.6817,626.8330,013.51Office Constr2,270.171,504.913,775.08Office Equipt. and Furn1,576.86551.322,128.18Oil House Constr192.92192.92Pond Constr7,679.1453.557,732.69Pond Unloading Equipt2,023.44151.322,174.76Planing Mill Constr1,688.681,688.68Pipe Shop EquiptPower PlantSpur Constr9,493.27216.839,276.44Stable Constr517.21417.34934.55Stable Equipt996.20996.20Tent House A/C685.93685.93Warehouse Constr. Genl2,523.682,523.68Warehouse EquiptWater Lines5,944.793,261.439,206.22Shook Warehouse Constr7,206.997,206.99Yard Trackage3,803.6021,993.2125,796.81Yard Constr4,506.2015,077.1319,583.33Yard Equipt2,148.6612,216.1514,364.81WellDuck Lake SpurDiscarded MachineryPond Unloading Tools and EquiptS.F. Office Furniture1,440.181,440.18267,169.57211,479.78478,649.35*3568 *245  The total aggregate cost of all plant assets of the petitioner at December 31, 1919, the cost of additions thereto during the year 1920, and the total aggregate cost at December 31, 1920, were as follows: Total aggregate cost December 31, 1919.Additions, 1920.Total aggregate cost December 31, 1920.Automobiles and Trucks$3,119.10$6,898.31$10,017.41Box Factory Construction34,533.116,224.4340,757.54Box Factory75,159.8115,871.0891,030.89Camp #2 Constr13,333.7113,333.71Camp #3 Constr14,299.0914,299.09Construction Tools731.261,124.691,855.95Cottage Constr$40,154.96$42,474.66$82,629.62Cabins Constr5,772.285,772.28Dormitory Constr5,571.661,871.657,443.31Dormitory Equipt2,136.962,136.96Electric Const2,123.472,123.47Fire Equipt5,226.0920,600.5825,826.67Fire Protection Water Tank6,562.256,562.25Garage Constr1,635.801,799.273,435.07Gas Supply Stand321.30321.30Hose House Constr155.89155.89Hotel Annex Constr20,785.1520,785.15Hotel Annex Constr511.36511.36Hotel Alpine Const15,956.843,316.0819,272.92Hotel Alpine Const9,444.551,481.0810,925.63Improvement A/C1,201.161,201.16Live Stock A/C1,550.001,550.00Lath Mill Const3,448.723,448.72Logging Equipt188,808.66188,808.66Machine Shop Constr769.811,230.592,000.40Machine Shop Equipt1,719.495,535.607,255.09Mill #1 Constr50,513.452,788.7253,302.17Mill #1 Machy. and Equipt76,703.521,339.1375,364.39Mill #2 Constr17,533.056,038.2223,571.27Mill #2 Mach and Equipt30,013.514,735.4625,278.05Office Constr3,775.081,440.515,215.59Office Equipt and Furn2,128.181,295.533,423.71Oil House Constr192.92192.92Pond Constr7,732.6918,240.6725,973.36Pond Unloading Equipt2,174.762,145.994,320.75Planing Mill Constr1,688.6814,746.2916,434.97Pipe Shop Equipt504.58504.58Power Plant98,280.1398,280.13Spur Constr9,276.449,276.44Stable Constr934.5526.45961.00Stable Equipt996.20967.371,963.57Tent House A/C685.9374.67760.60Warehouse Constr. Genl2,523.68542.263,065.94Warehouse Equipt147.81147.81Water Lines9,206.22281.599,487.81Shook Warehouse Constr7,206.997.206.99Yard Trackage25,796.814,400.23[*] Yard Constr19,583.3313,648.3633,231.69Yard Equipt14,364.815,288.5319,653.34Well955.00955.00Duck Lake Spur1,495.971,495.97Discarded Machinery1,486.141,486.14Pond Unloading Tools and Equipt6.146.14S.F. Office Furniture1,440.1812.001,452.18478,649.35538,019.561,016,668.91*3569 *246  Upon audit of the petitioner's income and profits tax returns for the years 1919 and 1920, the Commissioner disallowed deductions from gross income for each of such years on account of depreciation in the respective amounts of $25,640.97 and $66,701.90, and added such amounts to the taxable income of the petitioner for the respective taxable years.  The petitioner began the erection of its plant and the assembly of its logging and manufacturing equipment in the latter half of the year 1918, while the World War was still in progress.  At that time, and for many months thereafter, it was very difficult, and, as to many necessary items, wholly impossible, to purchase new machinery and equipment.  The plant assets acquired in 1918 and 1919 were largely secondhand, and, in many instances, were too light for economic use in logging and manufacturing the heavy timber owned *247  by the petitioner.  During the taxable years, all completed sections of the manufacturing plant were operated two shifts a day for eight and one-half months of each year.  The water supply of the petitioner was impregnated with alkali, and the useful life of boilers, fire extinguishing equipment*3570  and water mains was thereby greatly reduced.  The useful life of plant assets is as follows: 20 years - box factory, cottages, cabins, dormitories, water tank, hotel buildings, lath mill, machine shop, office building, pond construction, planing mill, warehouses and trackage spurs; 15 years - except in mill No. 1, machinery of all types, the buildings of mill No. 1 and mill No. 2, power plant and warehouse equipment; 10 years - camp construction, electrical installation, gas supply stand, hose house, office equipment and furniture, oil house, pond equipment, track equipment, water lines, garage, and stables; 7 years - hotel equipment and machinery and equipment of mill No. 1; 5 years - live stock and logging equipment; 4 years - automobiles, fire equipment, tent house; 2 years - Duck Lake Spur and discarded machinery.  OPINION.  LANSDON: The sole issue for consideration here is the correct deduction from gross income to which the petitioner is entitled in its income and profits-tax returns for each of the taxable years on account of exhaustion, wear and tear of tangible assets used in its business.  In the computation of the amounts to be so deducted, the petitioner and the respondent*3571  differ - (1) as to the proper method of depreciating assets added by purchase during each of the years in question; (2) on the value and term of usefulness of plant assets that have a normal, useful life of less than ten years; and (3) on the method of computing depreciation of plant assets with a normal useful life in excess of ten years.  The petitioner now admits that the average value of plant additions made during any given year, or one-half the total cost thereof for such year, is the proper basis for computing depreciation on annual additions to plant assets.  This admission leaves only two phases of the controversy for our consideration.  The petitioner constructed its plant and assembled its logging equipment during and immediately subsequent to the World War.  At the time it was difficult, and, as to many items, impossible to secure new machinery.  Consequently, a large amount of secondhand equipment, much of it unsuitable for the heavy duty required by the nature of the timber to be logged and manufactured, was purchased and installed.  Much of the equipment acquired in 1918 and 1919 had a useful life of less than ten years.  We are also convinced by *248  the evidence*3572  adduced by the petitioner that its lists of assets with a useful life of less than ten years and its computations of depreciation thereon, as reported in its income and profits-tax returns for the years 1918 and 1919, are substantially correct, and, on this point, we sustain the contention of the petitioner.  The most important question for our consideration is whether the plant assets owned by the petitioner during the taxable years should be depreciated for income and profits-tax purposes on the basis of their normal useful life or on that of their alleged economic usefulness which the petitioner contends is, by the terms of its timber sale agreement with the Department of Agriculture, limited to eleven years from July 1, 1918.  It appears from the evidence that the timber sale agreement contained a provision for extension of time for cutting the timber thereby acquired if conditions warranted such change; that there was a considerable supply of logs and timber privately owned that was available for the operations of the petitioner and that in the taxable years it purchased substantial quantities of such raw materials; that there was much privately owned timberland within a profitable*3573  operating radius of the petitioner's plant; and that there were also large supplies of Government-owned timber within profitable operating distance of the plant, and that the petitioner was advised that such timber was available on the conditions imposed by the Department of Agriculture.  The petitioner installed mills and equipment at a cost of more than one million dollars.  It is fair to assume that men experienced in logging and manufacturing lumber must have believed that there was a reasonable prospect for securing timber during the normal life of a plant of such cost.  To be entitled to recover the entire cost of its plant during the term of its contract with the Government, the petitioner must show that there was a practical certainty that it could not use its assets for the purposes of its business after the expiration of such contract.  Appeal of Eimer & Amend, 2 B.T.A. 603. We are of the opinion that it has not sustained the burden of proof necessary to show that there would be no raw material available for its purpose at the termination of its original contract with the Government Having decided that the allowances for depreciation of its plant assets*3574  should not include obsolescence determined by the terms of the timber sale agreement, it follows that whatever allowances the petitioner is entitled to take on account of depreciation are matters of fact to be established by evidence.  We have made a careful study of the testimony adduced at the hearing and we are of the opinion that the assets had a normal, useful life as set forth in our findings of fact.  *249  Depreciation should be recomputed on the basis of our findings in conformity with this opinion.  Judgment will be entered on 20 days' notice, under Rule 50.