Court Opinion

ID: 4615396
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:32:15.924931+00
Date Added: 2024-06-11T07:54:56.568695
License: Public Domain

SAFE GUARD CHECK WAITER CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Safe Guard Check Writer Corp. v. CommissionerDocket No. 11451.United States Board of Tax Appeals10 B.T.A. 1262; 1928 BTA LEXIS 3913; March 9, 1928, Promulgated 1928 BTA LEXIS 3913">*3913  1.  Deduction allowed for machinery discarded and abandoned in the year 1919.  2.  An amount paid in the year 1926, for patent infringement covering prior years, not allowed as a deduction in 1919, for the reason that no liability existed during the year to pay the same.  Benjamin Mahler, Esq., for the petitioner.  J. L. Backstrom, Esq., for the respondent.  MILLIKEN 10 B.T.A. 1262">*1262  This proceeding results from the determination by the respondent of deficiencies in income and profits taxes for the calendar years 1919 and 1920, in the respective amounts of $1,576.52 and $665.41.  Two errors are assigned in the determination of respondent: (1) Failure to allow as a deduction for the year 1919, machinery and a part of a building, which was discarded, abandoned and demolished in that year; (2) failure to allow as a deduction for the year 1919 sums paid in the year 1926 for patent infringement.  FINDINGS OF FACT.  Petitioner was incorporated in November, 1917, under the laws of the State of Pennsylvania, with principal office at Lansdale, for the purpose of manufacturing check protector machines and check safeguard devices.  It began active manufacturing1928 BTA LEXIS 3913">*3914  on April 1, 1918.  The capital stock of petitioner was issued for the entire assets of two businesses engaged in a related trade or business.  Prior to incorporation, the values of the assets acquired were carefully appraised and capital stock issued therefor to the extent of their then fair market value.  Among the assets so transferred to petitioner were machinery and equipment, which had a fair market value at date of transfer of $17,726; also land and buildings, which had a fair market value of $15,000.  During the year 1918, petitioner was manufacturing a check protecting machine, which marked the words "Not Over $ " on checks.  In the year 1919, an improved machine was produced by it, which marked the actual amount payable in dollars and cents.  The manufacture of the improved machine required new and improved types of machinery.  Much of the machinery acquired by petitioner at the date of incorporation proved inadequate to meet the needs incident to the manufacture of the improved machine.  As a result of the same, petitioner discarded and abandoned in 1919, and sold for scrap, when possible, the latter.  The machinery which was discarded and 10 B.T.A. 1262">*1263  abandoned in 19191928 BTA LEXIS 3913">*3915  had cost petitioner $3,986, and the salvage value thereof was $320.21.  The machinery and equipment had depreciated while used by petitioner in its trade or business at the rate of 10 per cent per annum.  Petitioner, by reason of the manufacture of the improved machine, also found it necessary in 1919 to demolish and dismantle a japanning room and tool room.  In 1921 petitioner was served with a summons and complaint in an action brought by the Todd Protectograph Co. for damages for alleged patent infringement.  A master was appointed by the court to take testimony and make a report.  In 1926 the master made his report to the court and as a result of the same petitioner paid in 1926, as a lump sum settlement to the Todd Protectograph Co., the sum of $150,000, covering various years of patent infringement, manufacture and sale of the check protecting devices manufactured by petitioner.  OPINION.  MILLIKEN: In the computation of net income for the year 1919, petitioner should be allowed a deduction represented by the difference between the cost and salvage value of the machinery discarded and abandoned in that year.  Such amounts should be reduced by depreciation at the rate1928 BTA LEXIS 3913">*3916  set forth in the findings of fact.  Petitioner also claims as a deduction the cost less salvage value of a japanning and tool room, which was demolished in 1919.  It has failed, however, in its proof to show the cost of the same.  An official of petitioner was unable to state the cost, and also testified that, at the date of incorporation, no separate value was determined for land and building and that the rooms demolished were a part of a large building which it had acquired at the date of incorporation.  For lack of evidence, the respondent is sustained in his refusal to permit the deduction.  It is also contended that petitioner is entitled to a deduction in the year 1919 of a certain sum represented by the number of machines manufactured in that year; to be applied proportionately to the sum paid to the Todd Protectograph Co. in 1926.  It is sufficient to state that in the year 1919 petitioner had not been sued by the Todd Protectograph Co. and that no payment was made to the latter until 1926, and then on the basis of a lump sum settlement, which may have represented factors other than those which the petitioner requests us to take into consideration.  No liability existed1928 BTA LEXIS 3913">*3917  in the year 1919, and no sum was paid until the year 1926.  The respondent did not err in refusing to allow the deduction claimed.  Judgment will be entered on 15 days' notice, under Rule 50.