New York Sun, Inc. v. Commissioner

The New York Sun, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent New York Sun, Inc. v. Commissioner Docket No. 36968 United States Tax Court 27 T.C. 319; 1956 U.S. Tax Ct. LEXIS 35; November 26, 1956, Filed *35 Decision will be entered under Rule 50. Income Tax -- Deductions. -- Held, that petitioner's membership in the Associated Press did not become worthless in 1945 as a result of either the decision of the Supreme Court of the United States invalidating the monopolistic provisions of the Associated Press bylaws or the subsequent amendments to such bylaws, and that petitioner is not entitled to deduct in that year, under section 23 (f) of the Internal Revenue Code of 1939, the basis of such membership. A. Harding Paul, Esq., Donald C. Hays, Esq., and Walter S. Long, Jr., Esq., for the petitioner. Clay C. Holmes, Esq., and James E. Markham, Jr., Esq., for the respondent. Atkins, Judge. ATKINS *319 The respondent*37 determined deficiencies in the petitioner's excess profits taxes for the calendar years 1944 and 1945 in the respective *320 amounts of $ 435,794.31 and $ 430,286.46, and a deficiency in income tax for the calendar year 1946 in the amount of $ 96,040.55. All issues raised by the pleadings, except one, have been agreed upon, as stated in the original stipulation of facts, or have beeen conceded by the respondent at the hearing or on brief. The sole issue remaining for decision is whether the petitioner sustained a deductible loss in 1945 in the amount of $ 650,000, the basis of its membership in the Associated Press as a result of the decision of the Supreme Court in Associated Press v. United States, 326 U.S. 1, and/or the consequent amendments in that year of the bylaws of the Associated Press. FINDINGS OF FACT. Some of the facts were stipulated and the stipulations and attached exhibits are incorporated herein by this reference. The petitioner is a corporation organized October 15, 1926, under the laws of the State of New York. Its business during the years in question was the publication in New York City of an evening newspaper, The Sun. *38 Its books and records are kept on an accrual method of accounting and a calendar year basis. In 1926 the petitioner acquired the stock of The Sun Printing and Publishing Association and, through a tax-free merger with that company on November 3, 1937, acquired an "evening" Associated Press membership. The cost and basis to the petitioner of this membership was, as of January 1, 1945, $ 650,000. This membership was at all times, until the latter part of 1945, carried on its books in an account captioned "Franchise, Circulation and Goodwill," the franchise consisting principally of the membership in question, which is a separate and distinct intangible asset. Petitioner's purpose in acquiring the Associated Press membership was to obtain a valuable news service. Acquisition of the membership resulted in an increase in petitioner's circulation and eliminated the competition of the newspaper from which the membership was obtained. The Associated Press (sometimes hereinafter referred to as AP) is a corporation organized under the Membership Corporations Law of the State of New York on May 23, 1900. It is prohibited by its certificate of incorporation from making a profit and from *39 making and declaring dividends. It is an association of persons owning or representing newspapers, united in a mutual and cooperative organization for the collection and interchange of news. No person not a member has any right to any privileges or benefits of the association. Under the bylaws each member has always been required to take a news service of the AP, and to pay for the services furnished, in the form of an "assessment," the amount of which depends upon the extent and nature *321 of the services and upon the number of members in the area in which the member is located. Each has always been required to publish the news regularly in whole or in part in the newspaper named in its certificate of membership. The publication required is that of a bona fide newspaper, continuously issued, to a list of genuine paid subscribers, and it is provided that a publication conducted for the purpose of preserving a membership and not for public sale and distribution is not a sufficient compliance. Each member has always been required to furnish to the corporation all the news in such member's district. No member has been permitted to furnish to nonmembers of the AP the news *40 which he or it receives from the corporation, and no member, except an associate member (provided for by an amendment to the bylaws in 1937), has been allowed to furnish to nonmembers the news which he or it is required by the bylaws to furnish to the corporation. The bylaws as they existed until the amendments made in 1945 provided that a member might assign his certificate of membership with a transfer of his newspaper, the new owner becoming a member by virtue of such assignment, or that in the absence of such assignment of the certificate, the new owner of the newspaper should be entitled to membership upon signing the roll of members and assenting to the bylaws. The bylaws have always contained the provision that no amendment thereto could become operative or take effect until recommended or ratified by the vote of the regular members at a meeting regularly convened. Prior to April 20, 1942, a vote of four-fifths of all such members was required; thereafter a vote of two-thirds of all such members was sufficient. The AP was originally composed of 612 members of which 18 were located in New York City. Six of these had evening memberships. Admission of new members to the AP has*41 always been governed by the bylaws. Under the original bylaws, applicants for membership could be elected by the board of directors or by the members. Certain of the original members, however, were entitled to a protest against the election, by the board of directors, of an applicant which published a paper in the same field (morning, evening, or evening and Sunday) in the same city or area as the existing member. If an applicant was located in an area where an existing member had a right of protest, the board of directors had no power to elect the applicant unless the member with a right of protest filed a waiver of such right of protest. If such waiver was not filed, a vote of four-fifths of all the members of the corporation was necessary to elect the applicant as a member. Before becoming a member it was required that an applicant should sign the roll of members and, in writing, assent to the bylaws and agree to be bound thereby and by any subsequent amendments thereto. Of the 18 original New York City members, 14 were granted rights *322 of protest, including all 6 in the evening field. The AP membership which the petitioner owned carried with it such a right of protest. *42 The combination of the right of protest and the requirement of a favorable four-fifths vote by the members for admission was, in practice, almost a total barrier against the admission to the AP of a newspaper in an area where there were existing members having a right of protest. In 1928, section 6 of article III of the bylaws of the AP was amended to give the right of protest to every member newspaper printed in the English language after it had been a member for 5 years. During the period 1929 through 1941, only one application involving a right of protest was voted upon and it was rejected. On April 20, 1942, article III of the bylaws of the AP, relating to the admission of members, was amended to provide that an applicant might be elected to membership by a vote of not less than a majority of the regular members voting on the application. However, it was provided that where there were one or more existing memberships in the field (morning, evening, or Sunday) in the city from which the applicant had been so elected, the applicant should not be admitted to membership until the applicant had paid to the corporation a sum equal to 10 per cent of the total amount of the regular *43 assessments received by the corporation from members in the field (morning, evening, or Sunday) in the city in which the applicant had been elected, during the period from October 1, 1900, to the first day of the month preceding the date of the election of the applicant, provided, however, that such payment should in no case be less than three times the current regular annual assessments. The moneys so payable to the corporation were to be paid by the corporation to the members in the field in the city in which the applicant was elected, the allocation being in proportion to the regular assessments paid by such members since October 1, 1900. The member or members entitled to receive the money so payable might waive, individually, the payment of such amounts or portions thereof. The board of directors had the power to elect members in a field in a city where there was no existing membership. It also had the power to elect applicants in a field in a city where there were one or more existing memberships, provided that such member or members in such field and city waived the payment, in whole or in part, of the moneys payable to them as above described. The amount which a New York*44 City applicant for an evening membership in the AP would have been required to pay upon the adoption of the above provision would have been $ 1,095,003.21. On February 9, 1943, the bylaws were amended to eliminate the provision that an applicant must pay a minimum of three times the current annual regular assessments in order to gain admission. Thereupon *323 the amount which a New York City applicant for an evening membership would have been required to pay would have been $ 575,003.49. During the period from September 1900 until November 28, 1945, no applicant for membership in the AP from New York City in any field (morning, evening, or Sunday) was elected to membership either by the board of directors or by the members of the AP, by obtaining a waiver or by any other means (although seven had applied prior to 1929). No New York City applicant obtained an AP membership except through the acquisition, by purchase or by other means, of a New York City newspaper which had a membership. The petitioner did not in any of its income tax returns report any profit or claim any loss as a result of the amendments to the bylaws of 1937, 1942, and 1943, nor did these amendments create*45 any change in the contractual relationship between the petitioner and the AP except as set forth in such bylaws, as amended. In Associated Press v. United States, 326 U.S. 1 (1945), the Supreme Court of the United States held that the bylaws of the AP, relating to the admission of new members who would be competing with old members, constituted unlawful restraints of trade under the Sherman Act. The Court stated in part: The joint effect of these By-Laws is to block all newspaper non-members from any opportunity to buy news from AP or any of its publisher members. Admission to membership in AP thereby becomes a prerequisite to obtaining AP news or buying news from any one of its more than twelve hundred publishers. The erection of obstacles to the acquisition of membership consequently can make it difficult, if not impossible, for non-members to get any of the news furnished by AP or any of the individual members of this combination of American newspaper publishers. The By-Laws provide a very simple and non-burdensome road for admission of a non-competing applicant. The Board of Directors in such case can elect the applicant without payment*46 of money or the imposition of any other onerous terms. In striking contrast are the By-Laws which govern admission of new members who do compete. * * * * * * These By-Laws, presently involved, leave the Board of Directors free to elect new members unless the applicant would compete with old members, and in that event the Board cannot act at all in the absence of consent by the applicant's member competitor. Should the old member object to admission of his competitor, the application must be referred to a regular or special meeting of the Association. As a prerequisite to election, he must (a) pay to the Association 10% of the total amount of the regular assessments received by it from old members in the same competitive field during the entire period from October 1, 1900 to the first day of the month preceding the date of the election of the applicant, (b) relinquish any exclusive rights the applicant may have to any news or news picture services * * * and (c) receive a majority vote of the regular members who vote in person or by proxy. These obstacles to membership, and to the purchase of AP news, only existed where there was a competing old member in the same field. * * * * *47 *324 We now turn to the decree. Having adjudged the By-Laws imposing restrictions on applications for membership to be illegal, the court enjoined the defendants from observing them, or agreeing to observe any new or amended By-Law having a like purpose or effect. It further provided that nothing in the decree should prevent the adoption by the Associated Press of new or amended By-Laws "which will restrict admission, provided that members in the same city and in the same 'field' (morning, evening or Sunday), as an applicant publishing a newspaper in the United States of America or its Territories, shall not have power to impose, or dispense with, any conditions upon his admission and that the By-Laws shall affirmatively declare that the effect of admission upon the ability of such applicant to compete with members in the same city and 'field' shall not be taken into consideration in passing upon his application." * * * Interpreting the decree to mean that AP news is to be furnished to competitors of old members without discrimination through By-Laws controlling membership, or otherwise, we approve it. On November 28, 1945, the AP amended its bylaws to comply with the Supreme*48 Court decision. Article II, relating to membership, was revised to eliminate any requirements for membership based upon whether the applicant would be competing with an existing member. The existing provisions requiring the applicant to make cash payments to the AP and which entitled existing members in the same city and field, including petitioner, to share in the distribution of such cash payments, were eliminated. The revised bylaws provided that the sole owner of any newspaper should be eligible for election as a regular member (having all the privileges and the right to vote) and that applicants might be elected by the affirmative vote of not less than a majority of the regular members voting on the application. They also contained the following provisions: Sec. 7. In voting upon an applicant for membership, whether such voting be by the members or by the Board of Directors, no member or director shall take into consideration in passing upon such applicant the effect of his or its admission upon the ability of such applicant to compete with members in the same city and field. Sec. 8. An applicant for membership elected as prescribed by these By-Laws shall not be admitted*49 to membership or be entitled to any of the rights or privileges of membership until he or it shall have signed a written assent to be bound by the By-Laws, and any amendments thereto which may be thereafter regularly adopted, and shall have entered into a contract with the Corporation which shall provide that the Corporation shall furnish and the member shall receive and use a regular news service of the Corporation for the purpose and in the manner therein prescribed. In other respects it shall be in such form and shall contain such provisions as shall be prescribed by the Board of Directors. Sec. 9. The contract may be assigned by a member to his or its successor publisher in connection with the sale or transfer of the business of the member to which the contract relates, upon condition that such successor shall have agreed in writing to be bound by the terms and conditions thereof and shall have filed application for membership, and upon such assignment the successor shall become a member in the same class as its predecessor, provided the successor shall in all other respects be qualified. Sec. 10. Each member of the Corporation as of November 28, 1945, shall enter into a contract*50 with the Corporation of the character hereinabove prescribed. *325 Until such members shall have entered into such contract, the rights and privileges of such members shall be governed by these By-Laws and any amendments thereto which may be hereafter regularly adopted, but their obligations and liabilities shall be determined by the By-Laws of the Corporation as they existed on November 27, 1945. * * * * Sec. 14. Membership and all rights and interest of the member in the Corporation and its property resulting therefrom shall cease upon the expiration or termination of his or its contract to which such membership relates. When a contract is subject to termination on notice, action by a member in terminating the contract in accordance with its terms shall be deemed to be notice of resignation from the membership to which that contract relates, which resignation shall become effective upon the date of the termination or expiration of the contract. After the adoption of the amended bylaws in 1945 the petitioner entered into a contract with the AP as therein contemplated. Since the amendment of the bylaws of the AP, any bona fide newspaper, publishing regularly, with sound financial*51 standing, and controlled by persons known in the newspaper industry to be of reliable character, has been able to obtain membership in the AP upon application therefor and upon compliance with the bylaws then in effect. On the same day that the bylaws were amended, 4 newspapers which had previously failed to obtain the necessary waivers of the rights of existing members, and had failed to receive sufficient votes for election, were elected to membership at a special meeting of the members. During the 5-year period, 1946 to 1950, inclusive, every newspaper which applied for a regular membership in the AP, including 7 applicants in New York City, was elected to membership without being required to pay any consideration for such memberships. The petitioner's evening AP membership was continuously owned by petitioner and its predecessor from 1923 to January 4, 1950, when the petitioner suspended publication of its newspaper, and sold such newspaper and newspaper properties to New York World-Telegram Corporation. Petitioner did not sell its AP membership, but on that date surrendered it to the AP for cancellation. The New York World-Telegram had an AP membership which it had acquired*52 in 1931. The petitioner did not receive any consideration or remuneration whatsoever for its membership, and at no time has petitioner or its predecessor recovered any part of its cost or basis for such membership. At all times from 1923 to November 28, 1945, petitioner's AP membership gave petitioner or its predecessor the right to protest the admission of membership of any other New York City evening newspaper, and from April 20, 1942, to November 28, 1945, entitled petitioner to share in the distribution of any cash payments which any member elected between April 20, 1942, and November 28, 1945, would have been required by the bylaws to make to the AP. *326 Prior to the Supreme Court decision in 1945, an AP membership was valuable not only for the purpose of obtaining the AP news service and suppressing competition, but also for securing credit. It had a substantial market value as a salable asset. (One corporation in 1931 acquired an original AP membership by purchase of an existing newspaper and kept such membership alive by the publication of The New York Repository with a view to a possible future sale of such membership. No buyer was found and the membership was terminated.) *53 After the decision of the Supreme Court and the change in the bylaws, such a membership could not be used for credit purposes or to suppress competition. Thereafter such a membership, including that of the petitioner, had no value as a salable asset. However, the AP continued to furnish to its members a news service which was valuable to the petitioner in its business, and the petitioner did continue to retain the membership and use it to obtain the news service until 1950 when the petitioner went out of business and surrendered its membership to the AP. After the amendments to the bylaws of the AP in 1945, the petitioner established on its books as of December 31, 1945, a reserve for a minimum loss for its AP membership in the amount of $ 340,624.37. It deducted that amount in its income and excess profits tax returns for the year 1945 and in connection therewith filed a statement to the effect that when the exact amount of such loss could be ascertained, a claim for refund based upon a larger deduction would be filed. Petitioner thereafter filed a claim for refund alleging that it had suffered a loss in the amount of $ 1,200,000 in the year 1945 with respect to such membership. *54 On June 28, 1951, respondent timely mailed to petitioner a notice of deficiency in which he disallowed the claimed deduction of $ 340,624.37 in determining the petitioner's excess profits tax net income for 1945 on the ground that the alleged loss did not represent an allowable deduction under any provision of the Internal Revenue Code. The petitioner's AP membership did not become worthless in 1945 but continued throughout that year to have value in the operation of petitioner's business. OPINION. The only question remaining for decision is whether in 1945 the petitioner sustained a deductible loss in the amount of $ 650,000, the basis of its membership in the AP. On June 18, 1945, the Supreme Court held that the bylaws of the AP regarding the admission to membership of applicants who would be in competition with existing members were in restraint of trade, and subsequently on November 28, 1945, the AP amended its bylaws to eliminate the discriminatory provisions. *327 Section 23 (f) of the Internal Revenue Code of 1939 provides that in computing net income there shall be allowed as deductions "In the case of a corporation, losses sustained during the taxable year and not compensated*55 for by insurance or otherwise." Pertinent provisions of Regulations 111 are set forth in the margin. 1 *56 We have previously been called upon to decide a similar question in Reporter Publishing Co., 18 T. C. 86, affd. Reporter Publishing Co. v. Commissioner, (C. A. 10) 201 F. 2d 743, certiorari denied 345 U.S. 993. There the taxpayer had an AP membership which had cost $ 79,734.67. After the Supreme Court decision in 1945, the taxpayer reduced the book value of its membership to $ 50,000 and claimed the difference as a deduction in its return. In the litigation before this Court the taxpayer contended that the full cost should be allowed as a deduction. It continued to use such membership in its business. We there held that the taxpayer sustained no deductible loss, pointing out that there had been no sale or other disposition of the AP membership and that the taxpayer still owned and used it in its newspaper business. We concluded that the mere fact that there was a reduction in sales value was not sufficient to justify the deduction of any amount *328 as a realized loss. We there relied upon Consolidated Freight Lines, Inc., 37 B. T. A. 576, affd. (C. *57 A. 9) 101 F. 2d 813, certiorari denied 308 U.S. 562. In that case the taxpayer had purchased a certificate of necessity under a State statute which was a prerequisite to entering business and in effect conferred monopolistic rights. The legislature subsequently took away only the monopolistic aspect of the certificate rights. The taxpayer was denied a deduction in that case because its right to stay in business continued under the franchise despite the removal of the monopolistic feature. In Reporter Publishing Co. v. Commissioner, supra, in affirming the decision of this Court, the Court of Appeals referred with approval to the regulations which we have quoted in the margin, and held that a deduction may be allowed only when there is a closed transaction during the taxable year, generally evidenced by the sale of the asset or abandonment of the asset as completely worthless. The court stated: The best evidence of value is found in the fact that appellant continues to use the membership in the same way and with the same benefits as before the decision by the Supreme Court. * * * so long *58 as the membership is being retained and used in the business, in the same way, for the same purposes and with the same beneficial results, it cannot be said to have no value. The court cited several cases, including Commissioner v. McCarthy, (C. A. 7) 129 F. 2d 84, in which it was stated: The rule to be deduced from the "abandonment" cases, we think, is that a deduction should be permitted where there is not merely a shrinkage of value, but instead, a complete elimination of all value, and the recognition by the owner that his property no longer has any utility or worth to him, by means of a specific act proving his abandonment of all interest in it, which act of abandonment must take place in the year in which the value has actually been extinguished. * * * For the same reasons stated in Reporter Publishing Co., supra, we think the deduction must also be denied in the instant case. It is true that prior to the Supreme Court decision and the 1945 amendments to the AP bylaws the petitioner had an asset which could be sold for a substantial sum, because of the monopolistic character of the membership. The petitioner*59 had the right, in the event of the admission of a new competing member to receive a portion of the substantial payment required of such new member. In addition, the membership was valuable for purposes of obtaining credit. After the Supreme Court decision and the amendment to the bylaws the value of the membership in these respects disappeared. However, such loss in value was not realized in 1945 for tax purposes by a sale or other identifiable event. Furthermore, the petitioner did not acquire the AP membership for the purpose of sale or to obtain credit. The evidence shows that it originally acquired the membership for the purpose of obtaining *329 the AP news service. Indeed, the bylaws required that each member subscribe for an AP service and print the news in a regularly published newspaper, thereby precluding the holding of a membership merely as an investment. Such news service was valuable in the petitioner's business and continued to be valuable therein after the Supreme Court decision and the amendments to the bylaws. This right to obtain the news service, which was inherent in the membership, was not affected by either the Supreme Court decision or the change*60 in the bylaws in 1945. The petitioner retained its membership and continued to obtain the valuable news service to which its membership entitled it. It therefore cannot be said that the useful value of this asset in the petitioner's business terminated in 1945. It did not become worthless within the intendment of the statute and the regulations. The petitioner contends that the decision in Reporter Publishing Co., supra, is not a governing precedent in the instant case. It states that the only issue raised there was whether a loss was sustained as a result of the Supreme Court decision, and that no contention was there made, as is made in the instant case, that the membership lost all of its value by virtue of changes in the bylaws voluntarily made by the AP, not required by the Supreme Court decision, which granted to any qualified newspaper the privilege of obtaining membership and the news service without the payment of any initial charge. In the first place, we have no evidence in the instant case that prior to the change in the bylaws in 1945 there was any initial charge upon new members except that imposed upon those who would be in competition*61 with an existing member. As we read the Supreme Court decision it required the elimination of that charge since it was one of the onerous burdens which the Court considered as being in restraint of trade. Be that as it may, we do not think that the result in the Reporter Publishing Co. case would have been different in any event, since the basic rationale of that case was that the membership did not become worthless as an asset in the petitioner's business and was not abandoned. The petitioner makes a point of the fact that the 1945 amendments to the bylaws contemplated that the old members should enter into a contract for the news service and that the petitioner did enter into a "new" contract, and claims that this constituted an identifiable event establishing a loss. Such contract is not in evidence and we do not know its terms. Nor do we know whether the petitioner had a written contract for the news service prior thereto. But these matters are not important in the view we take. A clear distinction should be made between the membership and any contract for news service. Each member has always been required to take a news service and *330 publish the news, but membership*62 was, and continued to be, a prerequisite to the right to the news service. The petitioner continued throughout 1945 to hold and use its membership to obtain the AP news service. We have carefully considered the contentions of the petitioner and the authorities cited, but no authority, either statutory or judicial, has come to our attention which would justify or require the allowance of a deduction in these circumstances. The petitioner has cited cases in which losses have been allowed on account of worthlessness of assets used in business, but in each case it was clearly shown that the assets had lost their useful value in the business. It has also cited cases involving deductions on account of worthlessness of investment properties. However, as indicated hereinabove the asset with which we are concerned here is not an investment asset, and those cases have no bearing here. We hold that the petitioner is not entitled to the deduction which it claims. At the hearing the respondent, on the basis of Flory Milling Co., 21 T. C. 432, affd. (C. A. 3) 222 F. 2d 903, conceded that petitioner's net operating loss of 1948 should*63 not be reduced by 50 per cent of the interest paid that year on borrowed capital in applying section 711 (a) (2) (L) (i) of the Internal Revenue Code of 1939 to the year 1946. On brief, the respondent also concedes that the petitioner is entitled to deductions of $ 4,000 in 1944 and $ 14,000 in 1945, paid in those years to the widow of Richard H. Titherington, a former officer of the petitioner. These concessions will be reflected in the computation under Rule 50. In the original stipulation it is stated that all other issues between the parties have been resolved. Decision will be entered under Rule 50. Footnotes 1. Section 29.23(f)-1 of Regulations 111, provides: Losses by Corporations. -- Losses sustained by domestic corporations during the taxable year and not compensated for by insurance or otherwise are deductible in so far as not prohibited or limited by sections 23(g), 23(h), 24(b), 112, 117, 118, and 251. The provisions of sections 29.23(e)-1 to 29.23(e)-5, inclusive, and section 29.23(i)-1 are in general applicable to corporations as well as individuals. * * * Section 29.23(e)-1 of Regulations 111, provides in part as follows: Losses by Individuals. -- * * * In general losses for which an amount may be deducted from gross income must be evidenced by closed and completed transactions, fixed by identifiable events, bona fide and actually sustained during the taxable period for which allowed. Substance and not mere form will govern in determining deductible losses. Full consideration must be given to any salvage value and to any insurance or other compensation received in determining the amount of losses actually sustained. * * * Section 29.23(e)-3 of Regulations 111, as amended by T. D. 5458, approved June 15, 1945, reflecting only minor changes in the regulations which had previously existed, provides in part as follows: Loss of Useful Value. -- When, through some change in business conditions, the usefulness in the business of some or all of the assets is suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from use in such business, he may claim as a loss for the year in which he takes such action the difference between the basis (adjusted as provided in section 113(b) and sections 29.113(a)(14)-1 and 29.113(b)(1)-1 to 29.113(b)(3)-2, inclusive) and the salvage value of the property. This exception to the rule requiring a sale or other disposition of property in order to establish a loss requires proof of some unforeseen cause by reason of which the property has been prematurely discarded, as, for example, where an increase in the cost or change in the manufacture of any product makes it necessary to abandon such manufacture, to which special machinery is exclusively devoted, or where new legislation directly or indirectly makes the continued profitable use of the property impossible. This exception does not extend to a case where the useful life of property terminates solely as a result of those gradual processes for which depreciation allowances are authorized. It does not apply to inventories. The exception applies to buildings only when they are permanently abandoned or permanently devoted to a radically different use, and to machinery only when its use as such is permanently abandoned. Any loss to be deductible under this exception must be fully explained in the return of income. The limitations provided in section 117↩ with respect to the sale or exchange of capital assets have no application to losses due to the discarding of capital assets.