Court Opinion

ID: 4629766
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:06:04.099489+00
Date Added: 2024-06-11T07:57:25.851930
License: Public Domain

JOSEPH HENSLER BREWING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Joseph Hensler Brewing Co. v. CommissionerDocket No. 11874.United States Board of Tax Appeals12 B.T.A. 25; 1928 BTA LEXIS 3614; May 21, 1928, Promulgated *3614  1.  Russel Wheel & Foundry Co.,3 B.T.A. 1168">3 B.T.A. 1168, followed.  2.  Obsolescence deductions allowed in part and disallowed in part.  John A. Conlin, C.P.A., for the petitioner.  LeRoy L. Hight, Esq., for the respondent.  SIEFKIN*25  This is a proceeding for the redetermination of a deficiency in income and profits taxes for the calendar year 1919, in the amount of $13,395.82.  The following errors are alleged: 1.  Adjustment, by the respondent, of invested capital by charge for proration of income and profits taxes of 1918 paid in the year 1919.  2.  Denial, by the respondent, of obsolescence deduction upon (a) fixtures, (b) plant, equipment and cooperage, and (c) good will.  FINDINGS OF FACT.  The petitioner is a New Jersey corporation with principal office at Newark, and was incorporated November 11, 1889, for the purpose of brewing beer, ale and porter.  The petitioner continued in this business until July, 1919, when war-time prohibition became effective, but ceased manufacturing such products thereafter.  It sold the goods that it had on hand and entered the business of manufacture and sale of cereal beverage or near*3615  beer.  With the advent of prohibition, the petitioner abandoned the use of one of its buildings, designated #9, 2 refrigerating machines, *26  175 tanks and casks and 14,000 half-barrels, and took an inventory of all saloon fixtures which it had outstanding.  Building #9, before prohibition went into effect, had been used as a store house.  It is a three-story structure, about 42 feet by 76 feet in size, having cement floors and cork insulation on the inside.  It was used as a refrigerated storeroom for beer.  The first floor is three feet below the surface of the ground, the floor levels are of different heights, it has a fore-cellar, has small windows and the only access to the third floor is a stairway.  The only access to the building is through a private yard as it is in the center of petitioner's property.  It contains steel and wooden tanks, and removal of these would necessitate tearing away part of the building.  The building has not been used by petitioner since 1919 and had no market or salvage value.  Prior to prohibition, petitioner used three steam driven direct ammonia expansion refrigerating machines, but since it began manufacturing near beer it has used*3616  only one.  This one was installed in 1910.  The other two, which were installed prior to 1910, have not been used since 1919.  All three of these machines are of the same general type, and the two that were abandoned could not be used by petitioner, were obsolete and had no salvage value.  Prior to prohibition 201 casks and tanks were used in petitioner's plant.  Since 1919 only 26 of these have been used by petitioner.  The remainder have either been torn down or are standing idle.  They consist of fermenting, cooling, storage and chip tanks made of steel or wood.  Since 1919 the remainder of 175 tanks have been of no use to petitioner.  The petitioner, at the advent of prohibition in 1919, had on hand 16,000 half-barrels which were used for beer to be sold on draft.  Thereafter, only 2,000 of these were used in the near-beer business, and the other 14,000 were left on a lot in the weather.  After prohibition became effective the petitioner sold only a small quantity in small lots.  The policy of the petitioner before prohibition was to put fixtures in saloons to be used as long as the owner of the saloon used the petitioner's product.  The petitioner would sometimes set a saloon-keeper*3617  up in business.  The fixtures consisted of bar, back bar, mirrors, tables, coolers, etc., but these could not be used for any purpose except fixtures for a saloon.  When prohibition became effective the petitioner had fixtures in 225 saloons, and an inspection was made in October, 1919, of each of these places.  Some of the saloons remained in business and used the fixtures in the sale of petitioner's near beer.  To take these fixtures out would be very expensive, as they would *27  have to be detached from the plumbing and would also have to be repaired.  The handling would also be expensive.  The vice president of the petitioner, after making the inspection, was of the opinion that a liberal value of these fixtures would be 15 per cent of their cost on the books.  In the manufacture of both beer and near beer the petitioner used the same machinery, with the exception that in making beer a rest tank was used, in which the beer ceased fermenting and the product was clarified.  In manufacturing near beer one more process is necessary - that of dealcoholization, but this was done by the petitioner in the kettle, thus not necessitating new equipment.  The near beer produced*3618  requires refrigeration, but only for about two weeks, whereas beer required much longer refrigeration.  If the trade were large enough all the plant would have been used, but by the experience of others in States that had adopted prohibition the petitioner knew that a great deal of its equipment would become useless.  At a meeting of the board of directors of the petitioner on October 30, 1918, it was provided that such portions of the plant and equipment, as in the opinion of the general superintendent were necessary with the event of prohibition, should be abandoned and that adjustments incidental thereto should be made.  Since prohibition the petitioner has continued in the near-beer business in the hope of selling the plant as a going business rather than let the plant and machinery deteriorate.  It was stipulated between the parties that the books of petitioner show that the cost depreciated to January 1, 1913, the account and additions from January 1, 1913, to December 31, 1919, and the depreciation from January 1, 1919, to December 31, 1919, with regard to the property of petitioner is as follows: Chattels, cost depreciated to January 1, 1913$189,181.06Additions at cost, January 1, 1913, to December 31, 191957,760.99Depreciation January 1, 1913, to December 31, 1918, before lossdeduction of the year 1919 on chattels98,786.96Balance of cost depreciated as of December 31, 1919, beforeobsolescence or useful loss charged to the year 1919148,155.09CASKS AND TANKSCost as of January 1, 1913, less depreciation79,862.49Additions January 1, 1913, to December 31, 1919, at cost7,818.85Depreciation January 1, 1913, to December 31, 191835,369.93Depreciation for the year 191910,668.83Balance of cost December 31, 1919, depreciated41,642.58COOPERAGE AND SALES PACKAGESCost of January 1, 1913, less depreciation thereon$28,414.71Additions at cost January 1, 1913, to December 31, 191927,571.57Depreciation January 1, 1913, to December 31, 191821,296.36Depreciation for the year 19196,347.60Balance as of December 31, 1919, or cost depreciated28,342.32MACHINERY AND TOOLSCost as of January 1, 1913, less depreciation to that date129,502.77Additions January 1, 1913, to December 31, 191913,086.58Depreciation January 1, 1913, to December 31, 191950,123.09Balance as of December 31, 191992,466.261919 depreciation included8,303.28BUILDINGSCost January 1, 1913, less depreciation266,850.03Additions January 1, 1913, to December 31, 19196,990.19Depreciation January 1, 1913, to December 31, 191953,615.69Balance December 31, 1919220,224.53Including 1919 depreciation of5,585.72*3619 *28  The depreciated cost of the two refrigerating machines at December 31, 1919, was $8,325, and the depreciated book value of building #9 at the same date was $14,916.22.  OPINION.  SIEFKIN: In its pleading the petitioner raised the question as to the propriety of the respondent's reducing invested capital of the petitioner during 1919, by deducting a pro rata tax for 1918.  This action by the respondent must be upheld.  See . The petitioner also assigned as error the respondent's failure to allow absolescence of good will due to prohibition legislation but at the trial this contention was abandoned and no evidence was submitted in this regard due to precedents established by the Board.  . The remaining question to be decided is whether the petitioner is entitled to deductions from income in 1919 on account of obsolescence due to prohibition legislation, of plant, fixtures, equipment and cooperage.  Section 234(a) of the Revenue Act of 1918 provides: That in computing the net income of a corporation subject to the tax imposed by section 230 there shall*3620  be allowed as deductions: * * * (7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.  *29  On October 30, 1918, the board of directors of the petitioner adopted a resolution authorizing the abandonment of such portions of plant and equipment as, in the opinion of the general superintendent, was necessary due to the advent of prohibition.  Adjustment incidental thereto was also authorized.  It was testified that the directors in 1919, by observation of the experience of other brewers in States which had adopted prohibition, knew that parts of their plant would become valueless.  On December 18, 1917, Congress passed a resolution submitting the prohibition constitutional amendment to the States.  By January 15, 1919, the requisite number of States to make prohibition the law of the land had acted, and national prohibition was to become effective January 16, 1920.  In the meantime war-time prohibition was in effect.  On November 21, 1918, the manufacture of beer was prohibited and the sale thereof prohibited after June 30, 1919, except for export.  Prior to 1919, the petitioner*3621  had in use 201 steel and wooden casks and tanks.  Since 1919 only 26 of these have been in use.  The remainder have either been torn down or are standing idle and were of no value to the petitioner after 1919.  The depreciated cost of all casks and tanks as evidenced by the books of the petitioner as of December 31, 1919, was $41,642.58.  No evidence is submitted to show what proportion of the total value of all the tanks was represented by those retained by the petitioner.  It is not shown that each of the 201 casks and tanks was of equal value and we can not assume that such was the case.  We must, therefore, approve the action of the respondent in disallowing a deduction for obsolescence of casks and tanks.  Before prohibition the petitioner had on hand 16,000 half-barrels.  Afterwards only 2,000 of these were necessary for use in the near-beer business and the other 14,000 were left on a lot in the weather.  They were of no further value to the petitioner.  The book records as at December 31, 1919, showed that all cooperage had a value of $28,342.32.  The evidence shows that during 1919, sales of cooperage in small lots were made to individuals.  This indicates that the cooperage*3622  had some salvage value.  The burden of proving this value is upon the petitioner, and it having failed to submit such proof, we have no basis upon which to determine obsolescence.  Nor does it appear that the petitioner, in its calculations, has taken into consideration the sales referred to.  We must hold that no deduction for obsolescence of cooperage should be allowed.  The petitioner, prior to prohibition, had in use three refrigerating machines but after the manufacture of beer was discontinued only *30  one was used.  It was shown that the two abandoned machines were of an obsolete type and had no salvage value.  They were of no further value to the petitioner, or to anyone else and the depreciated book value, $8,325, should be allowed as obsolescence and the obsolescence period, December 18, 1917, to January 16, 1920, should be used as the basis of determining the obsolescence for 1919.  After prohibition the petitioner abandoned its building designated #9, which had been used as a refrigerated storeroom for beer.  The first floor of this building is three feet below the surface of the ground, the floor levels are of different heights, it has a forecellar, has small*3623  windows, and the only access to the third floor is by a stairway.  This building is located in the center of the petitioner's property and the only access to it is through the petitioner's private yard.  It contains steel and wooden tanks, the removal of which would necessitate tearing away part of the building.  This building was completely abandoned by the petitioner in 1919, and thereafter had no market or salvage value.  We, therefore, hold that obsolescence should be allowed to the extent of $14,916.22, its depreciated book value as of December 31, 1919.  Before prohibition the petitioner had followed the policy of placing fixtures in saloons to be used as long as the owner of the saloon retailed the petitioner's product.  In 1919 fixtures had been placed in about 225 saloons.  In October of 1919, after the petitioner had ceased manufacturing beer, the vice president of the petitioner made an inspection of each of the places containing these fixtures.  Some of the places were closed but some of them continued in business, retailing the near beer of the petitioner.  This witness estimated that a value of 15 per cent of the depreciated cost of all such fixtures represented the*3624  value to the petitioner of the fixtures while in use, retailing the near beer.  The value was placed upon all of the fixtures despite the fact that some of them were not in use, as it was expected that other persons would take the places of those who had gone out of business.  This witness testified that it would have cost more than the fixtures were worth to have removed them for salvage purposes.  We do not believe that such estimate is sufficiently grounded, covering as it does fixtures in different stages of use and nonuse, to permit us to say with anything approaching certainty that 15 per cent of the depreciated cost represented the value of the fixtures in October, 1919.  We therefore hold that no deduction on account of obsolescence of such property can be allowed.  Reviewed by the Board.  Judgment will be entered on 15 days' notice, under Rule 50.TRAMMELL dissents.