C. A. Dahl Co. v. Commissioner

C. A. DAHL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. C. A. Dahl Co. v. Commissioner Docket No. 19331. United States Board of Tax Appeals 10 B.T.A. 915; 1928 BTA LEXIS 4013; February 20, 1928, Promulgated *4013 1. The respondent reduced the amount of a deduction taken by the petitioner by insurance recovered in the taxable year, on the theory that he deduction was for a loss arising from fire. For lack of sufficient evidence to overcome the prima facie correctness of the respondent's determination, his action is approved. 2. For failure on the part of the petitioner to adduce sufficient evidence in support of its contention that its depreciation rate on greenhouses should be 10 per cent instead of 7 1/2 per cent as allowed by the respondent, the rate found by the respondent is approved. 3. The petitioner having failed to adduce sufficient evidence to bring it within the purview of section 327 of the Revenue Act of 1918, it is not entitled to a determination of its taxes under the provisions of section 328 of that Act. D. J. Gantt, Esq., for the petitioner. William H. Lawder, Esq., for the respondent. MORRIS *915 This is a proceeding for the redetermination of a deficiency of $993.74 in income and profits taxes for the year 1920. The questions urged by the petitioner for consideration are: 1. Whether the respondent erred in increasing*4014 the net income of the petitioner for 1920 by $1,000, representing partial recovery on a fire loss sustained in December, 1920; 2. Whether the respondent erred in reducing the rate of depreciation on greenhouses from 10 per cent, as claimed by the petitioner, to 7 1/2 per cent; and 3. Whether the petitioner is entitled to have its taxes determined under the provisions of sections 327 and 328 of the Revenue Act of 1918. FINDINGS OF FACT. Petitioner is a corporation, organized and incorporated under the laws of the State of Georgia, with its principal place of business in Atlanta, where it is engaged in the wholesale and retail florist business. The petitioner carried $8,000 fire insurance on its assets, which on December 25, 1920, were damaged or destroyed by fire. This insurance risk was divided between several insurance companies. On or before December 31, 1920, the petitioner succeeded in settling one of its insurance policies and it received the sum of $1,000. Settlement on the remainder of $7,000, placed with other companies, was withheld pending the necessary routine work of insurance adjusters. The *916 $1,000 received in 1920 for fire loss was set up*4015 in the petitioner's books of account in a "reserve for replacement fund," and appeared in its balance sheet, appended to its income and profits tax return for the year ended December 31, 1920, as such. The petitioner deducted in its return for the period aforesaid, under the heading of "repairs," a sum of $2,200 listed as "improvements, store, burned." In determining the deficiency here in controversy the respondent has reduced the amount of $2,200 above mentioned by the sum recovered and received in 1920 upon one of its policies, thereby increasing the income for the period in controversy by $1,000. Petitioner has two separate greenhouse plants, one on Forest Avenue known as the "old plant," and the other, the river plant which is known as the "new plant." The old plant is of the oldest type of construction, built entirely of wood and glass. Inasmuch as they are not kept painted, and due to the fact that there is a great amount of moisture in greenhouses, the deterioration is very rapid. The new plant, while not of the newest type of construction; that is, it is not of iron frame construction, is of a superior type, having some steam pipe supports and concrete around the edges. *4016 In the beginning the petitioner took 2 per cent depreciation on the new plant which was later increased to 5 per cent. These plants have not been painted since they were built. The old plant was valued at $13,500 and the new plant at $21,953.98 for depreciation purposes in the petitioner's return for the year ended December 31, 1920, on which amounts the rate of 10 per cent was deducted in the computation of net income for that period. The respondent has reduced depreciation as deducted by the petitioner from 10 per cent to 7 1/2 per cent, resulting in a portion of the deficiency here in controversy. The business of the petitioner was somewhat of a family affair and the importance of taking inventories was never fully realized nor appreciated. Therefore, at the time of the fire in 1920 when it became necessary to determine the amount of loss on account of said fire, several people engaged in similar business got together and made up a schedule of values which showed stock and furniture and fixtures of $30,000, of which amount about $20,000 may be considered stock on hand. Petitioner's inventories consisted of ribbons, baskets, vases and decorations of various sorts, which*4017 in quantity were fairly constant from year to year. L. D. Thomson, vice president and treasurer and majority stockholder of the petitioner, left practically all of his earnings in the business. He also made some money of real estate which he put in the business. At the beginning of 1920, the petitioner owed on "notes payable to officers," $13,430.78, and it also owed L. D. Thomson, on open account as of January 1, 1920, $25,996.05 and as of *917 December 31, 1920, $9,211.43. It also owed the Central Bank and Trust Corporation for money borrowed as of January 1, 1920, $15,000, and as of the end of 1920, $7,000. No dividends were ever paid by the petitioner. OPINION. MORRIS: The first allegation of error urged by the petitioner pertains to the action of the respondent in increasing net income for the year 1920 by the amount of $1,000, which sum represents a settlement of one of its insurance policies shortly after the fire occurring in December, 1920. The petitioner carried $8,000 of fire insurance evidenced by several policies placed with different companies. A fire occurred on December 25, 1920, and on or before December 31, 1920, the petitioner succeeded*4018 in settling one of those policies and it received the sum of $1,000. The amount received was entered in the books of account of the petitioner in a "reserve for replacement fund" and was carried in the petitioner's balance sheet for the year ended December 31, 1920. The petitioner having included in its income and profit-tax return for the year ended December 31, 1920, a deduction of $2,200 entitled "improvements, store, burned," the respondent reduced it by the amount of insurance recovered within the year. The petitioner contends that its net income should not have been increased by the sum of $1,000, but that that amount should have remained in the replacement fund in accordance with article 50 of Regulations 45, which reads: Replacement fund for loss. - In any case in which the taxpayer elects to replace or restore the lost, damaged, or transferred property, but where it is not practicable to do so immediately, he may obtain permission to establish a replacement fund in his accounts in which the entire amount of the compensation so received shall be held, without deduction for the payment of any mortgage, and pending the disposition thereof the accounting for gain or*4019 loss thereupon may be deferred for a reasonable period of time, to be determined by the Commissioner. * * * The sum of $2,200, against which the amount of recovery of one insurance policy has been applied by the respondent, represents improvements made to the premises of the petitioner which were destroyed by fire in 1920. In an effort definitely to determine the nature of this deduction for tax purposes, the respondent's counsel asked the witness, "What was the $2,200 you claimed as a deduction? Didn't that cover the loss of these premises in that year by fire?" A. "I suppose not. I don't know enough about bookkeeping to tell you." Furthermore, efforts to learn from the petitioner's witness what property was covered by the policy upon which the sum of $1,000 was collected in 1920, were fruitless. *918 As it appears from the record before us the petitioner deducted in its return for 1920, a portion of its fire loss, and the respondent has reduced that amount by the insurance settlement in 1920, which he considers to be a recovery on the property charged off. The respondent's determination is prima facie correct and for failure to overcome that prima facie correctness*4020 by the evidence, we must sustain his determination with respect to this item. Even assuming that the item of $2,200 was not a loss by fire but was, in fact, repairs or depreciation, the petitioner has failed on the evidence presented to bring itself within article 50, supra, in relation to the $1,000 insurance recovered in 1920. The second question is whether the respondent erred in reducing the rate of depreciation on greenhouses from ten per cent to seven and one-half per cent. Since we do not know the life of the green-houses in question, we are at a total loss to determine a proper rate of depreciation. Of course, the testimony is to the effect that due to moisture and lack of paint there is a rapid deterioration, but in order to determine a rate of depreciation we must first know how rapid that deterioration is. For failure to adduce sufficient evidence in support of this allegation of error we must sustain the findings of the respondent. The third question presented for consideration is whether the petitioner is entitled to a determination of its taxes under the provisions of sections 327 and 328 of the Revenue Act of 1918. We are of the opinion that the petitioner*4021 has not adduced sufficient evidence of abnormality, either in capital or income, to justify the determination of its taxes under the so-called relief provisions of the law. The petitioner has shown that at the beginning of 1920 it owed on notes payable to officers, $13,430.78, and on open account, $25,996.05, and at the end of 1920 it owed $9,211.43. It also owed the Central Bank & Trust Corporation for money borrowed as of January 1, 1920, $15,000, and at the end of 1920, $7,000. The mere fact that a taxpayer has the use of borrowed capital is not in and of itself evidence of abnormality unless the fact that it creates an abnormal condition is clearly shown by the evidence. We do not even know to what extent the borrowed capital contributed to the earnings of the petitioner during the taxable year. We are told that it had borrowed money at the beginning of 1920 of certain amounts and also at the end of 1920, but we are not told whether those amounts were employed in the business during the entire year or for any substantial portion thereof. We are unable to find from the evidence offered that any of the conditions provided for in section 327 of the Revenue Act of 1918 are*4022 present and we, therefore, deny the contentions of the petitioner. Judgment will be entered for the respondent.