Court Opinion

ID: 6803660
Source: CourtListenerOpinion
Date Created: 2022-07-23 18:44:10.886815+00
Date Added: 2024-06-11T16:03:20.664081
License: Public Domain

*812OPINION.
Trussell:
1. Section 326 of the Revenue Act of 1918 provides that invested capital shall mean (1) actual cash, (2) actual cash value of tangible property paid in for stock or shares, and (3) paid-in or earned surplus and undivided profits, exclusive of profits earned during the taxable year. The petitioner found at the close of 1916 by actual inventory of its physical properties that it had capital and profits represented by physical properties such as build*813ings and foundry equipment which had cost $125,038.85. It also found that the accrued depreciation upon such properties at that time amounted to $36,064.48.
These properties must be reflected in invested capital at the amount of $88,974.37.
2. The second assignment of error has been admitted by the Commissioner, but having taken the view of the invested capital issue as set forth above, the matter of the reinstating of the replacement account of $2,276.83 will be found to be wholly immaterial.
3. The record does not show why the $15,000 note was deposited with the taxpayer corporation. It appears, however, that this note lay in the files of the petitioner from 1906 to 1916 without ever having been used in any manner and during the latter year was withdrawn from its files and destroyed. We, therefore, agree with the Commissioner’s admission of error, that the amount of such note can not be included in the pre-war invested capital.
4. For the purposes of determining net taxable income for the years under consideration, the statute provides for, and there must be allowed, a reasonable deduction for exhaustion, wear and tear of buildings and equipment used in the petitioner’s business. The testimony of officers of the taxpayer corporation furnishes a general description of the buildings, and, accepting such descriptions, we are of the opinion that a reasonable allowance for exhaustion, wear and tear may properly be computed at 3 per cent. The testimony concerning the foundry equipment discusses the classes and the uses of such equipment, but does not furnish the values of the several classes, and, taken as a whole, we are of the opinion that the total equipment account may be properly depreciated on the basis of 7½ per cent a year.
5. Early in the year 1920 the managing officers of the taxpayer corporation apparently appreciated that that year was to be one of unusual prosperity in the petitioner’s business. And, in view of the fact that salaries previously paid had been comparatively small in amount, they determined upon what appears to be a generous increase in officers’ salaries and fixed the total of four salaries at the sum of $15,500. A few weeks later another $15,000 was assigned to this salary account. When inquiring as to the reasonable compensation for services of a corporation’s officers we may properly consider the duties performed, the responsibilities assumed, and the volume of business handled, and a comparison of these facts in respect to the corporation under inquiry with like facts respecting other taxpayers similarly circumstanced. In view of this petitioner’s business, as disclosed by the record, the volume of business done and the results thereof, as shown by net income, we are of the opinion that *814the salaries as first fixed at $15,500 for the four officers were reasonable and fair, and that the further amount proposed to be deducted was properly disallowed.
6. The petitioner produced no evidence tending to prove that any abnormality either as to invested capital or net income, or other reason, for the application of the provisions of sections 827 and 328 of the Revenue Act of 1918 were present during the year 1920, and we are, therefore, of the opinion that the tax liability for the year 1920 should be computed in accordance with the provisions of section 301 of the Revenue Act of 1918.
The deficiencies will be redetermined in accordance with the foregoing findings of fact and opinion upon 15 days’ notice, pursuant to Rule 50, and judgment will be entered in due course.