Court Opinion

ID: 4624429
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:55:08.207582+00
Date Added: 2024-06-11T07:56:31.651485
License: Public Domain

ALLIANCE MILLING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Alliance Milling Co. v. CommissionerDocket No. 15649.United States Board of Tax Appeals10 B.T.A. 457; 1928 BTA LEXIS 4109; February 1, 1928, Promulgated *4109  1.  Determination of Commissioner denying loss and obsolescence on machinery approved due to lack of evidence.  2.  Increase in invested capital determined.  G. D. Hunt, Esq., L. B. Smith, C.P.A., and Fred H. Miner, Esq., for the petitioner.  T. M. Mather, Esq., for the respondent.  MILLIKEN *457  This proceeding results from the determination by respondent of a deficiency in income and excess profits taxes for the year 1919, in the sum of $6,763.10.  In the words of the amended petition, two errors are assigned: (1) The respondent erred in failing to allow petitioner a deduction on account of a loss in the sum of $16,107.31 sustained in the year 1919, in ascertaining net taxable income, for that he determined that the salvage value of certain abandoned machinery and plant equipment belonging to the petitioner was the sum of $1,392.69 instead of $17,500, at December 31, 1918; (2) the respondent erred in determining that the invested capital of the petitioner, for the year 1919, was $114,096.48 instead of $129,832.80 for that the respondent asserts that the surplus of the petitioner at December 31, 1918, was $56,000.65 instead of $72,107.96, subject*4110  to adjustment of 1918 income tax.  FINDINGS OF FACT.  Petitioner is a Texas corporation with principal office and place of business at Denton, Tex., and is engaged in the manufacture and sale of flour and feed products from milling of wheat and other grains and is also engaged in the buying and selling of wheat and other grains.  *458  In the year 1916 petitioner installed machinery and equipment in its plant at a cost of $45,000.  Soon thereafter, it became apparent that the equipment so installed was inadequate to meet the growing needs of the business.  In December, 1916, a contract was made for the purchase of new machinery to take the place of that installed in the year.  In March, 1918, petitioner began dismantling the machinery installed in the year 1916, and placing in its stead the new machinery for which it had contracted in December, 1916.  By the fall of 1918, all the machinery installed in 1916 had been dismantled and removed from the plant.  During the year 1918, part of the machinery removed was sold for $7,000 or $7,200.  On December 31, 1918, petitioner had on hand machinery removed during the year which had a salvage value at that date of $17,500.  During*4111  the year 1919, petitioner sold a part of the machinery, which it thus had on hand, for the sum of $1,392.69.  In years subsequent to 1919, petitioner sold other parts of the machinery, and in August, 1927, had on hand approximately 228 pieces of machinery or equipment resulting from the dismantling of its plant in 1918.  Secondhand wheat milling machinery and equipment was difficult to procure during the year 1918, and the price which was received for same was approximately one-half the value of new machinery.  The demand and price for secondhand machinery was less in 1919 than in 1918.  In computing petitioner's invested capital for the year 1919, respondent allowed as the value of the dismantled machinery on hand at December 31, 1918, the sum of $1,392.69, the amount received from the sale of a part thereof in 1919.  OPINION.  MILLIKEN: At the hearing, petitioner offered in evidence a report of a revenue agent dated July 22, 1924, for the sole purpose of showing the basis upon which respondent predicated his action in determining the deficiency in controversy.  At that time, petitioner was denied the right to introduce said report in evidence, but was permitted to have the*4112  report marked for identification and noted of record.  Upon reconsideration, it is our opinion that the report should be admitted in evidence for the sole purpose for which it was sought to be introduced.  The only issues presented by the petition are those set out in the opening paragraph.  Petitioner, in the brief filed in its behalf, now insists that it is entitled to an allowance for obsolescence in the amount claimed as a loss.  *459  The pertinent parts of section 234 of the Revenue Act of 1918 read: SEC. 234(a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * * (4) Losses sustained during the taxable year and not compensated for by insurance or otherwise; * * * (7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence; * * * The above subdivisions are mutually exclusive.  The deduction which may be taken for losses sustained is an entirely different deduction from that which may be taken for exhaustion, wear and tear and obsolescence.  In order to sustain its claim for a loss*4113  on discarded machinery, petitioner must show either that it was disposed of during the taxable year at less than its salvage value when discarded or that during the taxable year it became entirely valueless.  It has introduced no evidence on this point.  We do not know what was the salvage value of the particular machinery, which was sold.  All we know is that the value of all the discarded machinery on hand on December 31, 1918, was $17,500, and that an indefinite part of this aggregate was sold for $1,392.69 in the year 1919.  From this data, we are unable to compute petitioner's loss, if any, on this particular sale.  Neither was the machinery remaining after the sale valueless.  Petitioner also sold in years subsequent to 1919, other parts of such machinery and now has on hand 228 pieces, concerning the value of which we are not informed.  It is clearly impossible for us to find that petitioner suffered a loss in 1919 of $16,107.31.  This amount represents the whole of the salvage value of the machinery on December 31, 1918, less the exact amount received on sales made in 1919, and includes machinery sold in years subsequent to 1919, and also machinery now on hand.  To make any*4114  finding that petitioner sustained a loss in 1919, with respect to this machinery, would be to indulge in pure speculation and this we decline to do.  Next, petitioner claims that it is entitled to an allowance for 1919, for further obsolescence, represented by the difference in value of the machinery on December 31, 1918, and the sum received from the sale of a part thereof in 1919.  While it seems clear that the discarded machinery became obsolete in 1918, when it was discarded, and that what petitioner asserts was further obsolescence was in fact shrinkage in value, which can not be determined as a loss until the machinery is disposed of, we are not called upon to decide this question for the reason, as above pointed out, we have no sufficient *460  data upon which to find as a fact what was the amount of the further obsolescence, if any.  We are clearly of the opinion that petitioner is not entitled, upon the record presented, to any further deduction in the nature of a loss or obsolescence.  When we come to the question of petitioner's invested capital for the year 1919, an entirely new issue is presented which in no way involves issues as to losses and obsolescence. *4115  We have found as a fact that the discarded machinery, after taking into consideration an allowance for obsolescence, was worth $17,500 on December 31, 1918.  This whole amount should be included in petitioner's invested capital.  Since respondent has included in invested capital for 1919, of the above amount, $1,392.69, petitioner is entitled to have his invested capital further adjusted by addition thereto of $16,107.31.  Judgment will be entered on 15 days' notice, under Rule 50.