City Park Brewing Co. v. Commissioner

CITY PARK BREWING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. City Park Brewing Co. v. Commissioner Docket No. 7973. United States Board of Tax Appeals 10 B.T.A. 925; 1928 BTA LEXIS 4001; February 21, 1928, Promulgated *4001 Claimed deductions for obsoleteness of brewery plant and equipment allowed in part and disallowed in part. R. M. O'Hara, Esq., for the petitioner. Harold Allen, Esq., and H. D. Thomas, Esq., for the respondent. ARUNDELL *925 This is a proceeding for the redetermination of a deficiency in income and profits taxes in the amount of $62,589.37 for the year 1919. The only issue is whether petitioner is entitled to deductions, either as obsolescence or losses, on account of the abandonment of tangible property resulting from prohibition legislation. A claim in the petition for obsolescence on intangibles was abandoned at the hearing. FINDINGS OF FACT. Petitioner is a Pennsylvania corporation with its principal office at Philadelphia. It was incorporated October 1, 1881, under the name of Louis Bergdoll Brewing Co. Its name was changed about 1921 to the City Park Brewing Co. Petitioner was engaged in the manufacture and sale of lager beer until October 28, 1919, when it was forced to cease such manufacture by reason of prohibition legislation. Thereafter it manufactured and sold near beer until 1923, when it ceased operations. *4002 At the time of its incorporation in 1881 petitioner acquired certain land and buildings at a cost of $400,000. Other buildings were subsequently constructed, and in the taxable year it owned, among others, the buildings, with the dates of construction, cost, and March 1, 1913, fair market value, as follows: Building Constructed Cost Mar. 1, 1913, value B. Fermenting house [1876] $79,500 $43,287.01 G. Cooper shop [1905] 2,400 1,327.76 H. Stock house [1895] 76,537.07 M. Tap room [1897] 1,407.06 O. Stock house [1876] 24,600 13,552.36 P. Malt house [1872] 66,600 22,938.71 Q. Wagon house [1876] 8,700 4,628.33 R. Horse hospital [1884] 3,346.52 *926 Additions were made to buildings B and Q as follows: Year Cost of addition Building B - Fermenting house [1883] $5,000.00 [1888] 8,000.00 Building Q - Wagon building [1886] 513.30 [1891] 2,095.00 [1902] 433.00 The March 1, 1913, values set out above include these additions. The cost of buildings H, M, and R, less a reasonable allowance for depreciation as shown on petitioner's books at December 31, 1919, and the depreciation allowed on these buildings by*4003 respondent, are as follows: Depreciation allowed Building Acquired Depreciated value, Dec. 31, 1919 [1919] 1918 and 1919 H [1895] $45,305.20 $2,893.83 $2,893.83 $5,787.66 M [1897] 497.51 29.13 29.13 58.26 R [1884] 728.21 88.42 88.42 176.84 The average rate of depreciation of petitioner's buildings, representing a reasonable allowance for wear and tear, as shown by petitioner's books from 1881 to 1916, inclusive, was 2.04 per cent per year, and for the period 1917 to 1919, inclusive, 3 per cent per year. Building B, which is variously described as a fermenting building and beer storage building, contained 6 floors, one of which was not used after the fall of 1919. Building G, a two-story structure, was the cooperage and blacksmith shop. The cooperage shop was moved to another location about 1918 or 1919. The blacksmith shop was in use until 1922 or 1923. Building H was a four-story stock house, one floor of which was not used after the fall of 1919. Building M, the tap room, was a one-story building for the use of employees during lunch hours. Until the latter part of 1919 petitioner had a bartender on duty there. *4004 The tap room was thereafter open for the use of employees until in 1920, but was not used to the extent that it had been prior to the cessation of the manufacture of beer. Building O was a one-story house or beer storage building. The use of it was discontinued in the fall of 1919. It was of no further use to petitioner and it had no salvage value. The use of building P, the malt house, was discontinued prior to the year 1915. Building Q, the wagon house, was in use until in 1920. Building R, the horse hospital, was used for the isolation of sick horses from others. Petitioner did not dispose of its horses until 1920 or later. *927 Among the items of equipment for which obsolescence is claimed are the following, with figures as to cost as shown by petitioner's books at December 31, 1919, fair market value at March 1, 1913, and a statement of depreciation allowed by respondent for the years 1918 and 1919: Equipment Acquired Cost Mar. 1, 1913, value Depreciated cost Dec. 31, 1919 Depreciation allowed in each of years 1918 and 1919 Electric beer pump Aug. 16, 1907 $475.00 $429.00 $142.97 $47.50 2 Parker boilers Sept. 21, 1906 15,732.86 10,309.50 4,074.30 1,573.29 Colby racker Feb. 6, 1913 1,100.00 1,100.00 Colby racker arm Aug. 18, 1915 300.00 718.20 135.00 1 revenue stamp perforator July 9, 1903 68.00 51.00 8.99 6.80 Do Feb. 24, 1909 85.00 72.25 12.74 3.50 1 labeler Aug. 30, 1913 618.00 341.74 61.80 1 labeler Aug. 10, 1910 437.00 472.50 186.62 43.70 1 perforator Mar. 16, 1913 85.00 45.22 8.50 1 conveyor Aug. 13, 1913 338.89 187.41 33.89 1 300-ton ice machine June 30, 1911 29,363.73 20,878.50 13,771.58 2,936.37 1 engine generator set Aug. 30, 1913 10,756.59 5,948.38 1,075.66 1 Quaker City mill Oct. 18, 1906 54.00 41.25 14.07 5.40 1 horse cleaner June 3, 1910 575.00 500.25 269.67 57.50 1 oat crusher Oct. 6, 1909 250.00 364.56 96.25 25.00 27 fermenting tubs [1905] 1,323.25 2,474.50 317.58 132.33 46 chip casks [1905] 29,477.25 26,956.44 7,074.54 2,947.73 *4005 Petitioner ceased to use at the time it discontinued the manufacture of real beer, and within the year 1919, the following items of equipment set out in the foregoing tabulation: Electric beer pump; two Parker boilers; Colby racker; two revenue stamp perforators; label perforator; ice machine; chip casks and fermenting tubs. The two Parker boilers were not used after the fall of 1919 as other boilers were sufficient to take care of the reduced output. After its usual custom petitioner, upon shutting down the boilers in 1919, cleaned the flues and relined the fire boxes. It also shellacked and filled with water the tubs and casks when it discontinued their use in 1919, and it followed the practice of turning over the ice machine daily for a half hour or so to keep it from tightening up or rusting. These items of equipment were of no further use and they had no salvage value. The other equipment listed above was continued in use subsequent to 1919 in connection with the manufacture of a cereal beverage, with the exception of the conveyor, the use of which was discontinued in 1918, and the labelers, which, while not used after the fall of 1919, were sold by petitioner subsequent*4006 thereto. A reasonable rate of depreciation for machinery and equipment from date of acquisition to March 1, 1913, is 4.2 per cent on cost. The items of machinery and equipment, the use of which was discontinued by petitioner, had practically no salvage value. *928 Sales of beer during a part of the preprohibition period and of cereal beverage thereafter were as follows: Beer Barrels Cereal Beverage Barrels November, 1916 14,404 1/6 November, 1919 2,691 3/4 December, 1916 13,574 1/3 December, 1919 2,364.412 November, 1917 12,007.58 1/3 January, 1920 1,637 December, 1917 11,527.33 1/3 February, 1920 1,310 November, 1918 7,865.34 December, 1918 10,807.9123 During the years immediately preceding national prohibition petitioner was aware of the agitation throughout the country against alcoholic liquors, and not later than February, 1919, its officers determined to write off its books the assets which it was felt were becoming obsolete. Carrying into effect this determination, journal entries were made on February 22, 1919, as of December 31, 1918, crediting the amounts of $65,459.73 to brewery grounds equipment and $17,775.23*4007 to fixtures, machinery, and equipment, and debiting surplus in the same amounts. On December 31, 1919, the amount of $65,459.73 was credited to brewery grounds and buildings and charged to surplus and the amount of $9,860.40 was credited to fixtures and equipment and debited to surplus. OPINION. ARUNDELL: In the Appeal of Yough Brewing Co.,4 B.T.A. 612, we refused to accept as a matter of law the proposition that all breweries became obsolete with the advent of prohibition, as this proposition was based on assumptions of fact which we did not feel warranted in making. The question in that case, as in the instant appeal, was not what effect prohibition had on the business of manufacturing and selling beer, but what effect it had on the physical assets of the particular taxpayer. The Yough Brewing Co., like the petitioner, upon ceasing the manufacture of beer as a result of prohibition legislation, continued the use of its plant and equipment in the production of other beverages, and in such circumstances we denied the deduction for obsolescence of the facilities. See *4008 Star Brewing Co.,7 B.T.A. 377. While the petitioner ceased the manufacture of beer in 1919, there was no complete cessation of its activities, or of the use of facilities, for on the date that the manufacture of beer was discontinued it began the production of a cereal beverage. True, the output was reduced, but as we said of the plant in the Yough case, supra, "the fact that it was not operated to full capacity is not sufficient evidence that it was then obsolete." If the facilities are being put to any use at all the very opposite of a state *929 of obsoleteness is indicated. This is true of most of petitioner's property. To be specific, it applies to buildings B, G, H, M, Q, and R, and to the engine generator set, the horse cleaner, and oats crusher. Coincident with the cessation of the manufacture of beer in 1919 as a result of prohibition legislation, petitioner discontinued the use of building O, the electric beer pump, 2 Parker boilers, the Colby racker and racker arm, 2 revenue stamp perforators, label perforators, 300-ton ice machine, 27 fermenting tubs and 46 chip casks. *4009 The evidence is that the cost of demolishing building O would be greater than the value of the material that could be salvaged and as to the equipment, that it had practically no salvage value after its use was discontinued. Unless we make the assumption, which we declined to make in the case of the Appeal of Yough Brewing Co., supra, we can not say that the imminence of prohibition legislation, which might have been foreseen during the last of the year 1917, would serve to make obsolete these particular facilities upon the date the Eighteenth Amendment became effective. See Frederick C. Renziehausen v. Commissioner,8 B.T.A. 87. We are satisfied from the evidence, however, that before the end of the year 1919 these facilities and building O had ceased to be of any use to petitioner and that when their use was discontinued, they had no salvage value. Building O could not be used for any other purpose and the cost of wrecking it would have been greater than the amount realizable from the sale of the material it contained; there was no market for the tubs and casks and it was entirely likely that if removed and exposed to the air they would fall*4010 to pieces. The machinery could have been removed only at a cost greater than the price that could be realized from its sale. There is some point made by the respondent of such facts as the turning over of the ice machine, the shellacking of the tubs, the painting of the racker and the cleaning of the boilers, apparently on the theory that where any care is given to equipment there is neither obsolescence nor obsoleteness. These facts, however, merely go to the weight of the evidence. If the proof is sufficient to establish the obsoleteness of the facilities and their lack of use to the petitioner and in addition that they have no value, it matters not that petitioner preserved them. We think that the petitioner has established the requisite factors to entitle it to a loss deduction for 1919 for obsoleteness of the tangible property discussed in the preceding paragraph, which should be based on the depreciated cost of the property in 1919. The use of building P was discontinued in 1915 and the use of the conveyor listed among the equipment was discontinued prior to *930 the taxable year. Under such circumstances no deduction may be allowed for them in the year 1919. *4011 Although the labelers were no longer used after the fall of 1919, they were thereafter sold. Whether or not this took place within the taxable year is not disclosed by the record, nor is the price received for them furnished us. No evidence with reference to the Quaker City Mill was introduced. The Commissioner must be sustained as to these items. Judgment will be entered on 15 days' notice, under Rule 50.