Buckeye Producing Co. v. Commissioner

BUCKEYE PRODUCING CO., SUCCESSORS TO THE BUCKEYE BREWING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Buckeye Producing Co. v. Commissioner Docket No. 8779 United States Board of Tax Appeals 11 B.T.A. 96; 1928 BTA LEXIS 3864; March 21, 1928, Promulgated *3864 1. Where petitioner alleges obsolescence or loss in useful value of cases and bottles due to prohibition legislation, and the proof of the amount of loss includes actual physical loss, no segregation of losses due to each cause being made, no deduction may be allowed. 2. Alleged loss on small cooperage in 1918 and 1919 disallowed as a deduction under section 234(a)(7) of the Revenue Act of 1918 where there is no evidence of obsolescence due to prohibition legislation, and under section 234(a)(4) of the same Act where an inventory, calculated as of December 31, 1919, from a physical inventory taken December o1, 1923, failed to take into consideration losses subsequent to December 31, 1919. 3. Loss of good will of a brewery disallowed as a deduction under section 234(a)(4) of the Revenue Act of 1918. George Roscoe Davis, Esq., and H. Kennedy McCook, Esq., for the petitioner. Benton Barker, Esq., for the respondent. SIEFKIN *96 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the year 1918 in the amount of $70,823.80, which was determined by the respondent after allowing, as a deduction*3865 from gross income for that year, a net loss for the year 1919 in the amount of $71,674.85. It is alleged that the Commissioner erred (1) in allowing no deduction in computing net taxable income for the years 1918 and 1919 for obsolescence or loss in useful value of bottles and cases and small cooperage; (2) in allowing no deduction for obsolescence or loss in useful value of other assets retained for partial use, and (3) in allowing no deduction for loss of good will, valued as of March 1, 1913. At the hearing petitioner abandoned the second assignment of error and also abandoned the contention as to the value of the good will as of March 1, 1913, confining the basis for determining the loss on good will to the actual cost thereof. FINDINGS OF FACT. The Buckeye Brewing Co. was incorporated in August, 1885, and acquired the assets of Jacobi, Coghlin & Co., a partnership engaged in the brewing business, from Dennis Coghlin to whom all assets of the partnership had been transferred, among which was the good will of the business and for which there was paid $15,561.59. The Buckeye Brewing Co. continued the business of making alcoholic beer *97 until December, 1918, *3866 at which time operations ceased due to Government regulations prohibiting the use of malt in order to conserve the food supply. This regulation continued in force until about May 27, 1919, when, by legislation, the State of Ohio, by virtue of an amendment to its constitution, prohibited the manufacture and sale of intoxicating liquors within which category fell alcoholic beer, and the Buckeye Brewing Co. did not resume the manufacture of alcoholic beer, but manufactured near beer. It was then necessary to obtain new trade for this product. The name of the company was changed to the "Buckeye Producing Company". Prior to prohibition petitioner sold its product in both barrels and bottles, in 1917 the proportion being about 60 per cent in bottles and about 40 per cent in barrels. Petitioner sold its product in Toledo, Ohio, wherein petitioner's plant was located, direct to the consumers, but its shipping trade, which was located in Michigan and Indiana, consisted generally of carload customers. Due to prohibition in Michigan, the petitioner's shipping trade in that State discontinued in 1918, and the return of bottles, cases and cooperage from these customers was almost nil. *3867 So, in 1918, prior to the effective date of prohibition in Ohio, a loss resulted in bottles and cases above the ordinary depreciation. Efforts were made to get the outstanding packages before and after prohibition in 1918 and 1919, but were largely unsuccessful due to the fact that the large customers had gone out of business. In 1920 petitioner's books showed a small profit, but for the years 1921 to 1924, inclusive, net losses were shown. No inventory of bottles, cases or small cooperage was made in 1918 or 1919. An inventory of small cooperage, which consisted of one-quarter and one-half barrels, was made on January 2, 1924, as of December 31, 1923, in the amount of $1,458.25, and an inventory of bottles and cases was made on October 10, 1925, in the amount of $50,785.70. These inventories were based upon the cost of the last items purchased. The petitioner made calculations of losses for bottles, cases and small cooperage based upon the physical loss of these items through failure on the part of customers to return them. The calculation with regard to bottles and cases also included loss on quart bottles in cases, which could not be used after prohibition, but this*3868 loss is not segregated and the actual amount which represents the physical loss in the hands of customers can not be determined. On December 31, 1918, petitioner set up on its books a lump sum of $640,412.73, not itemized, as a reserve for depreciation for that year and as a blanket charge covering the extraordinary loss through the adoption of prohibiton in Ohio. The petitioner did not allocate this loss to the various classes of property. *98 From 1915 to 1919, inclusive, 236,055 barrels of beverage were bottled, and depreciation on bottles and cases was allowed by the respondent in the amount of $171,606.32, an average of $.72697 per barrel bottled. From December 31, 1919, to October 10, 1925, purchases of bottles and cases were made in the amount of $82,268.55. The ledger showed cases and bottles on hand at December 31, 1918, to the value of $276,634.30. The reserve for depreciation in 1919 was $128,316.10, and depreciation for the year 1919 was allowed by the respondent in the amount of $31,890.83. From January 1, 1919, to December 31, 1923, sales of small cooperage brought $2,332.92. Over the same period purchases of cooperage were made in the amount of $1,199.41. *3869 The books show that on January 1, 1919, there was small cooperage on hand of the value of $34,909.01. The accumulated depreciation to that time was $12,665.50, and in 1919 the respondent allowed depreciation in the amount of $1,745.45. The income of the petitioner from 1920 to 1924 was as follows: Year Per books Per income tax return — 1920 — $5,851.80 $3,960.15 — 1921 — 1 30,049.79 1 29,899.45 — 1922 — 1 27,858.12 1 22,692.67 — 1923 — 1 20,035.94 1 19,264.47 — 1924 — 1 26,649.39 1 20,233.72 Total net loss 98,741.44 88,130.16 In 1918 the petitioner had an invested capital of $842,143.49. OPINION. SIEFKIN: This proceeding raises questions as to the failure of the respondent to allow, as deductions from income for 1918, an alleged obsolescence or loss in 1918 and 1919 in useful value of: (1) Bottles and cases in the amount of $85,389.26; (2) small cooperage in the amount of $18,031.85; and (3) loss of good will in the amount of $15,561.59, due to legislation in the State of Ohio prohibiting the manufacture and sale of intoxicating liquors. The year 1918 is considered because the return of the petitioner for 1919 showed a net loss, *3870 the amount of which, as applied against 1918 income, is in question and affects the deficiency for 1918. The evidence shows that in December, 1918, the petitioner set up on its books a lump sum of $640,412.73, not itemized, as a reserve for depreciation for that year, including a blanket charge covering the extraordinary loss through the adoption of prohibition in Ohio. *99 Due to Federal regulations for the conservation of food the petitioner did not manufacture beer after December, 1918. On May 27, 1919, the State of Ohio prohibited the manufacture and sale of beer, and the petitioner thereafter manufactured near beer instead of beer. Due to prohibition in Michigan, the petitioner's shipping trade to that State discontinued in 1918, and petitioner sustained a loss on bottles, cases, and cooperage through failure of customers of that State to return them. No inventories were taken in 1918 or 1919, but the petitioner offered in evidence inventories of bottles and cases and cooperage as of December 31, 1919, as calculated from inventories taken as of December 31, 1923, and October 10, 1925. These inventories were taken upon the basis of the cost of the last items*3871 purchased. 1. The petitioner calculated the losses on bottles and cases as being $84,257.45. This calculation included actual physical losses and also losses on quart bottles due to obsolescence caused by prohibition legislation and the losses due to each cause are not segregated. Obsolescence is allowed by section 234(a)(7) of the Revenue Act of 1918, and is prorated over the period of obsolescence. Konrad Schreier Co.,9 B.T.A. 407. A deduction for the physical loss of property is allowed by section 234(a)(4) of this Act but only in the year in which it is sustained. The petitioner alleges a loss on bottles and cases in the amount of $85,389.26, due to obsolescence or loss in useful value, while the evidence adduced is to the effect that a loss of $84,257.45 was sustained by actual physical loss and also obsolescence, but it is not shown over what period the obsolescence took place or, conversely, that a portion of the obsolescence was not sustained other than in the years in question. Since the amount attributable to each cause is not shown we may not allow any deduction under either provision of the Act with regard to bottles and cases, and the determination*3872 of the respondent is approved. 2. The petitioner calculated the loss on small cooperage as follows: Physical inventory as of Dec. 31, 1923 $1,458.25 Add sales from Jan. 1, 1919, to Dec. 31, 1923 2,332.92 Total 3,791.17 Deduct purchases from Jan. 1, 1919 to Dec. 31, 1923 1,199.41 Balance, representing inventory Jan. 1, 1919 2,591.76 It is shown that the balance in the asset account for small cooperage January 1, 1919, was $34,909.01. There is subtracted from this the accumulated depreciation in the amount of $12,655.59, leaving a net book value of $22,243.51. Then, deducting the inventory *100 as calculated for January 1, 1919, amounting to $2,591.76, leaves $19,651.75. Deducting $1,745.45, the depreciation allowed for the year 1919 by the respondent leaves a loss not allowed by the respondent, of $17,906.30. There is no evidence that there was any loss on small cooperage due to obsolescence caused by prohibition legislation, and it is clear that no deduction can be allowed under section 234(a)(7) of the Revenue Act of 1918. The respondent contends that the use of such a calculated inventory is improper because it is based upon the cost*3873 of reproduction at a later date instead of the actual cost or the fair market value at the close of the taxable year involved, and because it would reflect physical losses in taxable years subsequent to the obsolescence period as well as the taxable years here involved. The inventory of small cooperage as of January 1, 1919, was arrived at by adding actual sales during the period January 1, 1919, to December 31, 1923, to the physical inventory of December 31, 1923, and by deducting therefrom the actual purchases during the same period. However, during that period there must have been some loss and by the method employed by the petitioner this is not taken into account, and if this method were adopted by us we would thereby allow losses for the years in controversy which really occurred in subsequent years. This is not allowed under section 234(a)(4) of the Revenue Act of 1918. We must hold that the petitioner has failed to show the amount of any loss sustained during 1918 and 1919 on small cooperage. 3. The petitioner confines the basis for determining the loss of good will to the actual cost thereof. In 1885 the petitioner purchased the assets of a partnership which was*3874 engaged in the brewing business. The good will was purchased for $15,561.59, and it was testified that its value at the time prohibition took effect in Ohio was considerably more than that figure. Petitioner relies upon section 234(a) of the Revenue Act of 1918, which provides in part: 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. In Appeal of Morand Brothers,8 B.T.A. 1262, the petitioner claimed that it was entitled, under the provisions of section 234(a)(4) of the Revenue Act of 1918, to deduct from income the loss on intangibles due to prohibition legislation. In that case we stated: * * * It is difficult to apprehend that the claimed deductions may be brought within the provisions of the statute upon which the petitioner relies. They provide for the deduction of only such losses as are "sustained during the taxable year"; and surely the facts do not support a finding the petitioner *101 has sustained such a loss as to bring it within those provisions. A loss*3875 is sustained, within the meaning of the statute, only when it is a realized loss and is evidenced by a completed and closed transaction, Appeal of A. J. Schwarzler,3 B.T.A. 535; Appeal of Old '76 Distilling Co., 3 B.T.A. 1346; and A. H. Fell v. Commissioner,7 B.T.A. 263; and until the investment is converted into terms of money by sale or other disposition, or its worthlessness otherwise demonstrated, there is neither loss nor gain and income is neither greater nor less. Marigold Garden Co. v. Commissioner,6 B.T.A. 368. Petitioner continued in business after the advent of prohibition; and its good will continued as an inseparable part of the business. There could be no loss in respect of the good will until the business is terminated by sale or other disposition, and neither of these events occurred within the taxable years in question. Cf. Frederick C. Renziehausen v. Commissioner, supra. It is literally true that prohibition wholly destroyed the predominating and most lucrative feature of its business; and that after the advent of prohibition it carried on with a mere remnant of its former business, in new*3876 marts of trade. But the most favorable view to the taxpayer to be had in these circumstances is that the March 1, 1913, value of its good will was greatly diminished by prohibitory legislation; but a loss of this character is not within the statute. It is useless to argue the equities of a case in which a taxpayer's business has been destroyed, either in whole or in part, by legislation. There are no equities save those that are founded upon the taxing statutes. Diminishing values, unrealized until converted into terms of money, are an ever present and necessary evil in our complex economic structure. Nothing of value, whether tangible or intangible, is immune to fluctuations in market values. The particular cause is of no importance whatever; and losses in value resulting from the acts of the sovereigh have no preferred standing under the taxing statutes. In the instant proceeding the petitioner continued in business after prohibition became effective, and no sale or other disposition of the business was made. The decision in the cited case is controlling and we hold that no deduction for loss of good will is allowable. Judgment will be entered for the respondent.*3877 Footnotes 1. Losses ↩