Court Opinion

ID: 4611935
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:50:03.042592+00
Date Added: 2024-06-11T07:54:21.163849
License: Public Domain

SPANG-CHALFANT & CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Spang-Chalfant & Co. v. CommissionerDocket No. 10469.United States Board of Tax Appeals9 B.T.A. 858; 1927 BTA LEXIS 2506; December 23, 1927, Promulgated *2506  1.  Payment of $25,000 in the year 1918 to an officer of the petitioner held to constitute a donation and, therefore, not deductible.  2.  In computing depreciation upon equipment account, held that the average of that account for the year is the proper basis therefor.  3.  Commissioner's determination of depreciation on tracks approved, and correct amount on furniture determined.  4.  Commissioner's action in reducing invested capital for the taxable year by deducting therefrom at the beginning of the year the income and profits taxes for the preceding year, prorated to the date when each installment became payable, approved.  Russel Wheel & Foundry Co.,3 B.T.A. 1168. 5.  Evidence fails to establish that the petitioner is entitled to a determination of tax liability under section 328 of the Revenue Act of 1918.  Walter W. McVay, Esq., for the petitioner.  George G. Witter, Esq., for the respondent.  LOVE *858  This proceeding is for the redetermination of a deficiency in income and profits tax for the year 1918 in the amount of $40,210.50.  The petitioner alleges error as follows: 1.  In disallowing as a deduction*2507  the amount of $25,000 paid, under the circumstances hereinafter described, to one of its officers, which amount it did not deduct from gross income and which it now seeks to deduct.  2.  In computing depreciation on its equipment account, the Commissioner used as a basis therefor that account at the beginning of the year rather than the average shown by that account of the beginning and end of the year.  3.  In disallowing the amount of $6,499.27 claimed as depreciation on tracks, and in erroneously determining depreciation on office furniture to be $2,509.56 instead of $2,899.43.  4.  In reducing invested capital for the year 1918 by deducting therefrom at the beginning of the year the income and profits taxes *859  for the preceding year, as determined by the Commissioner and paid by the petitioner.  5.  In refusing to determine petitioner's tax liability for the year 1918 under section 328 of the Revenue Act of 1918.  FINDINGS OF FACT.  The petitioner is a Pennsylvania corporation with its principal office at Pittsburgh.  It was engaged during the year 1918 in the manufacture of wrought iron and steel tubular products.  George Mathieson, Jr., had been in the*2508  petitioner's employ for many years, and had risen from a mill hand to the position of vice president and treasurer.  During the year 1918, until March, he was vice president and at that time he was elected treasurer, and during the rest of the year he performed the duties of both offices.  Mathieson was, in fact, the managing head of the petitioner.  He managed the mills and also looked after petitioner's financial affairs.  He was of great value to the petitioner on account of his business ability.  On January 15, 1918, the following resolution was adopted: Upon motion duly seconded, it was resolved that the vice-president, George Mathieson, Jr., should receive forthwith in recognition of his services one hundred shares of the capital stock of this company to be issued out of the treasury stock of the company and an amount in cash equal to his salary for the year 1917.  Shortly thereafter, Mathieson was paid $15,000 in cash and $10,000 in treasury stock and the amount of $25,000 was charged to profit and loss account as an expense.  However, the purpose of the petitioner was to make a gift of this amount to Mathieson and Mathieson accepted the amount as a gift.  In order to*2509  make sure that the amount so given to Mathieson would be properly treated, the petitioner later charged the amount to contingent reserve so that it would be reflected in taxable income for the year.  In other words, the amount of $25,000 given to Mathieson was not taken as a deduction and the petitioner reported that amount as part of its taxable income.  In its return for 1918, the petitioner deducted as salary paid to Mathieson the amount of $20,059.92, which deduction the Commissioner allowed.  In its return for the year 1918 the petitioner stated its equipment account for the period December 31, 1917, to December 31, 1918, to be $1,475,363.75, and claimed depreciation thereon at the rate of 10 per cent or $147,536.39, and the Commissioner allowed the deduction claimed.  However, petitioner's equipment account on December 31, 1917, was $1,475,363.39 and on December 31, 1918, was $1,528,558.73, additions thereto having been made during the taxable year *860  The petitioner used in its business certain tracks, the account for which disclosed a cost of $52,510.80, and on which the petitioner claimed depreciation in the amount of $10,000.  Of the amount claimed the Commissioner*2510  disallowed $6,499.27, fixing the rate of depreciation to be 6 2/3 per cent, or $3,500.73.  The petitioner also possessed certain office furniture, the account for which disclosed a cost of $28,994.32.  In its return for 1918 the petitioner claimed a deduction for depreciation thereon in the amount of $2,509.56.  The Commissioner, upon audit of the return, fixed the rate of depreciation on the furniture at 10 per cent but allowed the deduction of $2,509.56 to stand.  The proper deduction for depreciation of furniture is $2,899.43.  Upon audit of petitioner's return for the year 1918 the Commissioner also reduced its invested capital by deducting therefrom the income and profits taxes for the preceding year, prorated to the date when each installment became payable.  And the Commissioner further determined that the petitioner was not entitled to have its tax liability for taxable year computed under section 328 of the Revenue Act of 1918.  OPINION.  LOVE: The petitioner's allegations of error will be discussed in the order in which they are above enumerated.  It is contended by the petitioner that it is entitled to deduct the amount of $25,000 paid to Mathieson in 1918, under*2511  the circumstances described in the findings of fact.  In support of this contention it is urged that Mathieson was paid additional salary in that amount and that in view of the services rendered by him and of the business transacted by the petitioner, the total amount received by him is reasonable for services rendered and, therefore, deductible.  It may be remarked in passing that we should hesitate to hold that the total amount received by Mathieson in 1918 would be unreasonable compensation to him for that year.  We are fully impressed with his great value to the petitioner, and of his business acumen, as disclosed by the record.  However, we feel that we are not called upon in this instance to pass upon the question of reasonableness of a salary.  It seems that the petitioner has attempted to take two positions with respect to the same matter.  In its return for 1918, petitioner did not deduct the amount of $25,000 as additional salary to Mathieson.  In fact, it is established by clear and uncontroverted proof that it deliberately refrained from deducting the amount, so that it would be reflected in taxable income, and a tax thereon was paid.  It is further shown that this*2512  action was *861  taken designedly so that the amount of $25,000 paid pursuant to the resolution of January 15, 1918, would be unmistakably earmarked as a gift.  The petitioner intended to make a gift of the amount in question and Mathieson accepted it as a gift.  It is clear, therefore, that we can not make that salary which was not in fact salary, without resort to legal legerdemain.  The intention of the parties having been clearly and unmistakably expressed with respect to the amount now claimed as a deduction, we must hold that amount not to be deductible.  The second assignment of error is to the effect that the Commissioner erred in determining the depreciation upon petitioner's equipment account.  The evidence shows that the petitioner reported its account as of December 31, 1917-December 31, 1918, to be $1,475,363.75 and claimed depreciation thereon in the amount of $147,536.39, which amount the Commissioner allowed.  It seems, therefore, that the Commissioner allowed that which was claimed by the petitioner and that there was no error on his part, unless he had other figures at hand.  However, it is established that petitioner's equipment account as of December 31, 1918, was*2513  $1,528,558.73, resulting from additions thereto during the year of $53,194.98.  It is clear that by using "straight line" depreciation on the basis of the opening account, the petitioner is allowed no depreciation on the amount of additions acquired during the taxable year and under the statute it is entitled to a deduction thereon.  The rate of depreciation is not in dispute as both parties agree that 10 per cent is proper.  We are of the opinion, therefore, that the equipment account at the beginning and the end of 1918 should be added together and divided by two, thereby creating an average of the account during the year and that the average so obtained should be depreciated at the rate of 10 per cent.  We are aware of the fact that the average of the equipment account thus obtained might not reflect with meticulous accuracy the exact amount of depreciation upon the respective items therein, but we believe that meticulous accuracy in such a case should not deprive the petitioner of the right to a depreciation deduction on assets acquired during the taxable year.  The depreciation allowance on the equipment account should, therefore, be recomputed in accordance with the foregoing*2514  paragraph.  The third contention of the petitioner is that the Commissioner erred in disallowing the amount of $6,499.27 claimed as depreciation on certain tracks and that he further erred in determining the depreciation on office furniture to be $2,509.56.  There was insufficient evidence introduced to enable the Board to determine the life of the tracks in question and in the absence *862  thereof, we can only approve the Commissioner's determination.  However, as to the depreciation on office furniture it appears that the Commissioner erred.  The furniture account shows the cost thereof to be $28,994.32.  The petitioner claimed and the respondent allowed depreciation thereon in the amount of $2,509.56.  Upon audit of the return, the rate of depreciation was fixed at 10 per cent but the deduction of $2,509.56 was unchanged.  It is obvious therefore that the proper deduction is $2,899.43, a difference of $389.87 and accordingly taxable income should be reduced by that amount.  The fourth assignment of error relates to the action of the Commissioner in reducing invested capital for the year 1918 by deducting therefrom the income and profits taxes for the preceding year, *2515  prorated to the date when payable.  The issue thus presented has been decided by the Board in , wherein the Commissioner's action was approved and upon that authority it is approved herein.  The last assignment of error relates to the Commissioner's refusal to compute petitioner's tax liability for 1918 under the provisions of section 328 of the Revenue Act of 1918.  In the absence of any evidence showing any abnormality with respect either to income or invested capital, the Commissioner's determination in regard thereto is approved.  Judgment will be entered on 15 days' notice, under Rule 50.Considered by TRUSSELL, SMITH, and LITTLETON.