Court Opinion

ID: 4631295
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:09:20.487999+00
Date Added: 2024-06-11T07:57:41.880772
License: Public Domain

AMERICAN STEEL WOOL MFG. CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.American Steel Wool Mfg. Co. v. CommissionerDocket No. 15063.United States Board of Tax Appeals14 B.T.A. 762; 1928 BTA LEXIS 2918; December 17, 1928, Promulgated *2918  The respondent's disallowance of a part of a claimed deduction for depreciation of machinery upheld where the petitioner failed to establish the cost of such assets at the date of acquisition.  George A. O'Donohue, Esq., for the petitioner.  Bruce A. Low, Esq., and George S. Herr, Esq., for the respondent.  SIEFKIN*762  This is a proceeding for the redetermination of deficiencies in income taxes for the calendar years 1920 and 1921 in the respective amounts of $1,487.45 and $323.36.  It is alleged that the respondent erred in failing to allow the deduction from gross income for 1920 and 1921 of depreciation upon machinery amounting to $3,233.60.  FINDINGS OF FACT.  The petitioner, a Delaware corporation, was organized January 2, 1920, and on January 10, 1920, took over, by merger under the laws of New York, the assets of the American Steel Wool Mfg. Co., a New York corporation, and assumed its liabilities.  The petitioner issued 1,600 shares of preferred stock, par value $100 per share, and 3,200 shares of common stock of no par value, in exchange for the stock of the old corporation.  Prior to January, 1919, the majority of the stock*2919  of the old corporation was owned by David Wolf.  *763  Amos Steinhardt and his brother, Melvin G. Steinhardt, desired to purchase the stock from Wolf, but he was reluctant to sell.  The parties could not agree upon the price.  Wolf thought that the assets of the corporation were worth $120,000 to $130,000.  It was finally decided to appraise the assets.  An appraisal company was employed and the appraisal was made during October and November, 1918.  According to this appraisal the value of the machinery and fittings of the corporation at the time of appraisal was $91,108.24.  On January 23, 1919, the two Steinhardt brothers purchased 201 of the 400 shares of stock of the corporation upon the basis of a statement of assets and liabilities in which machinery and fixtures were entered at the appraised valuation.  The machinery account for 1919 included on the debit side a write-up for appreciation of $64,671.93, representing the difference between the opening balance of the account of $31,984.30 and the appraised value of the assets of $91,108.24.  At the end of 1919 the machinery account showed a balance of $105,285.29, and the "patent machinery" account showed a balance of $3,470.09, *2920  a total for machinery of $108,755.38.  In its return for 1920 the petitioner deducted $6,584.95 for exhaustion, wear and tear of assets.  This amount included 5 per cent upon $108,755.77.  Its return for 1921 included a similar deduction.  The respondent, for each of the years 1920 and 1921, disallowed $3,233.60, being 5 per cent of $64,671.93, as depreciation on appreciated value of machinery.  The steel wool manufacturing machines used by petitioner were not standard built and were not kept in stock by manufacturers of machines.  The petitioner had built most of them.  In arriving at replacement cost the appraiser obtained the quotations on castings, but the costs of material, labor and designing as used in the appraisal, were his own estimate.  In arriving at the value of the machinery and fixtures the appraiser subtracted from the replacement cost an amount for depreciation sustained prior to the time of appraisal.  The depreciation was based upon the then appearance of the machinery and age was not considered as a factor.  The rate of depreciation taken on machinery for time prior to the appraisal was 7 per cent, while the rate on other assets ranged from 25 to 60 per cent. *2921  The machinery was in sound condition and good operating order at time of the appraisal.  At the time of the appraisal there were 94 steel wool manufacturing machines, 14 to 18 of which were of the new chain driven type, which were from 50 to 100 per cent more productive than the old belt-driven machines.  There was considerable improvement in these machines after 1919.  In 1920 petitioner paid $1,500 each for an order of 24 of the new type machines.  *764  Between the time of appraisal, October and November, 1918, and January 1, 1920, there was no general decline in the cost of production of assets of this character.  The peak of production cost of this type of machinery was reached in May, 1920.  OPINION.  SIEFKIN: The petitioner, a Delaware corporation, on January 10, 1920, acquired the assets and assumed the liabilities of the American Steel Wool Mfg. Co., a New York corporation.  All of the capital stock of the petitioner was issued in exchange for the capital stock of the old corporation.  On January 1, 1919, the machinery account on the books of the old corporation showed a balance of $31,984.30.  In accordance with the result of an appraisal that was made in October*2922  and November, 1918, this account was written up to show a balance of $91,108.24, the value shown by the appraisal.  At the beginning of 1920 the machinery accounts showed a total balance of $108,755.38, and in its returns for each of the years 1920 and 1921 the petitioner claimed as a deduction depreciation at the rate of 5 per cent on the total value of machinery as carried on the books.  The respondent disallowed for each year $3,233.60, this being 5 per cent of $64,671.93, the amount by which the machinery account on the book was increased as a result of the appraisal.  Section 214(a)(8) of the Revenue Act of 1918 provides: That in computing net income there shall be allowed as deductions: * * * (8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.  We have heretofore held that the basis for determination of depreciation is the cost of the depreciable asset to the taxpayer.  . The property in question was acquired by the petitioner from the old corporation as a result of an exchange of stock of the*2923  two corporations, the stockholders of the petitioner presumably being the same as the stockholders of the old corporation.  The two corporations, however, were separate entities and the basis for determining depreciation is the value of the assets at the time acquired by the petitioner, January 10, 1920.  To establish such value the petitioner relies upon the result of an appraisal made in October and November, 1918, and upon the fact that Amos Steinhardt and Melvin G. Steinhardt purchased from David Wolf, in January, 1919, 201 shares of the total of 400 shares of stock of the old corporation upon the basis of a statement of assets and liabilities in which the machinery and fixtures were entered at the valuation established by the appraisal.  The appraisal itself is entitled *765  to little, if any, weight in determining the value of the assets since it was made upon the basis of replacement cost.  See , and cases cited therein.  Nor can it be said that the sale of stock by Wolf to the Steinhardt brothers, which occurred in January, 1919, based upon the value of machinery as determined by the appraisal, establishes the value*2924  of the assets in question as of January 10, 1920, the date they were acquired by the petitioner.  The petitioner having failed to show the cost of the machinery as of the date of acquisition by the petitioner, the action of the respondent in disallowing a part of the depreciation claimed is approved.  Judgment will be entered for the respondent.