Chickasha Cotton Oil Co. v. Commissioner

CHICKASHA COTTON OIL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Chickasha Cotton Oil Co. v. Commissioner Docket No. 30165. United States Board of Tax Appeals 18 B.T.A. 1144; 1930 BTA LEXIS 2509; February 14, 1930, Promulgated *2509 1. Held that the petitioner has not established error on the part of the respondent in including in income gains realized from insurance on two cotton gins destroyed by fire, the evidence being insufficient to show that petitioner complied with the requirements of section 234(a)(14) of the Revenue Act of 1921 in acquiring one gin by foreclosure and in constructing another. 2. Deductions allowed for the cost of replacing parts of cotton gins, the replacements being made after petitioner had sold the gins. Albert A. Jones, Esq., and John W. Anderson, C.P.A., for the petitioner. Arthur Carnduff, Esq., for the respondent. ARUNDELL *1144 The deficiencies involved herein are for the fiscal years ended June 30, 1923, and June 30, 1924, in the respective amounts of $2,294.72 and $1,552.16, of which only a part is in controversy. The errors alleged are (1) the inclusion in income for the fiscal years ended in 1921 and 1922 of certain amounts as profits realized from fire insurance on two cotton gins; (2) the refusal to allow as deductions for the same years the cost of replacements on its Davis-Duke gin, and Caddell, Alex, and Ryan gins, *2510 respectively, and (3) the disallowance as deductions for the fiscal year ended June 30, *1145 1924, of losses sustained on its El Dorado, Apheaton and Strong City gins, abandoned during the year. The fiscal years ended in 1921 and 1922 are involved because net losses for those years were claimed and allowed as deductions in 1923. At the hearing the petitioner abandoned the issues involving the Alex and El Dorado gins and the respondent admitted error in including in income for the fiscal year ended June 30, 1922, the sum of $2,254.64 representing profit realized on the sale of the Ryan gin. FINDINGS OF FACT. The petitioner, a Delaware corporation with its principal office at Chickasha, Okla., operates about 175 cotton gins located in the western part of Oklahoma and the northern part of Texas. On October 1, 1920, during the middle of the cotton-ginning season, petitioner's cotton gin located at Temple, Okla., was destroyed by fire. From a recovery of $11,795.44 under insurance policies covering the property, it realized a profit of $8,072.25. The insurance money was not credited to a replacement fund account. It was not practicable to rebuild the gin. Subsequent*2511 to the destruction of the cotton gin the petitioner acquired another cotton gin at Temple, known as the Blackwood gin, under foreclosure proceedings. The amount of the judgment obtained under the proceedings was considerably more than $12,000, the amount set up on the books as the estimated value of the plant. The petitioner's cotton gin at Chillicothe, Tex., was destroyed by fire October 17, 1921. The insurance collected on the property amounted to $9,004.47, and resulted in a profit of $7,002.30. No cotton gin was constructed at Chillicothe to replace the one destroyed and no replacement fund was established on account of the loss. Thereafter the petitioner purchased a lot at Weatherford, Okla., located about 150 miles from Chillicothe, on which lot the construction of a cotton gin costing $17,677.89 was begun March 14, 1923. The profit realized by the petitioner on the sale in the summer of 1920 of its Davis-Duke gin was entered on the corporate books September 8, 1920, as of June 30, 1920. The amount of $1,325.33 representing one-half of the cost of replacements made on the property was charged to an account designated "Depreciation Reserve," May 24, 1921. The item*2512 has never been taken out of the account. No part of the cost of replacements has ever been charged to an account reflecting the profit realized on the sale or to a profit and loss account. In his audit of the petitioner's books, the revenue agent did not make any adjusting entries for the item. *1146 Subsequent to the sale of petitioner's Caddell cotton gin it made certain replacements of materials belonging to the property at a cost of $564.40, one-half of which, or $282.20, was charged to surplus on October 19, 1921. The revenue agent changed the entry by charging the item to "Gins and Buildings" and crediting surplus. No other entry has even been made for the item. During the fiscal year ended June 30, 1924, the petitioner made the following entries on its books respecting its Apheaton and Strong City gins: Apheaton Gin 8/26/14 Indep. Oil Co. Lawton $6,439.54 6/30/17 Add 343.83 3/24/20 1 Condenser -180.00 3/29/21 Sale of building -275.00 6,328.37 Deduct Depre $2,400.00 Value of land 1,250.00 3,650.00 Charged off year ended 6-30-1924 2,678.37 Strong City Gin 12-31-13 $8,201.75 6-30-15 Fire -29.14 6-30-15 Repl. Office 231.45 6-30-18 Add 25.00 6-30-20 Sale -249.00 7,980.06 Deduct Deprec 6,017.11 Charged off year ended 6-30-24 1,962.95 *2513 The properties were inactive for several years prior to the time their book values were charged off the books. During the time they were not being operated, the gins gradually disappeared, the machinery being stolen, and the petitioner has never been able to account for the property on the premises at the time it acquired ownership. The petitioner realized prior to 1924 that the properties had no value for operation purposes. The gins were carried on its books as assets a long time after the improvements on the properties had disappeared. The deficiencies in controversy were determined by the respondent in accordance with the report of the revenue agent. *1147 OPINION. ARUNDELL: Section 234(a)(14) of the Revenue Act of 1921 provides that "If property is compulsorily or involuntarily converted into cash or its equivalent as a result of (A) its destruction in whole or in part, * * * and if the taxpayer proceeds forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, to expend the proceeds of such conversion in the acquisition of other property of a character similar or related in service or use to the property*2514 so converted, * * * or in the establishment of a replacement fund, then there shall be allowed as a deduction such portion of the gain derived as the portion of the proceeds so expended bears to the entire proceeds." The petitioner is not seeking to exclude from its income the profit it realized upon the destruction of five of its Temple and Chillicothe gins on the ground that it established a replacement fund. Its basis for the exclusion of the amounts is that upon the loss of the properties it proceeded forthwith in good faith to expend the sums in the acquisition of other property of a similar character. Webster's New International Dictionary defines "forthwith" as follows: Immediately; without delay; directly; hence, within a reasonable time under the circumstances of the case; promptly and with reasonable dispatch; - the meaning of the term in a particular case is relative to the circumstances. Bouvier's definition of the term, cited with approval in , is: "As soon as by reasonable exertion, confined to the object, it may be accomplished." The Temple gin was destroyed October 1, 1920, and thereafter*2515 the petitioner acquired by foreclosure proceedings the Blackwood gin located in the same city. The evidence does not disclose when the petitioner decided to institute the foreclosure proceedings, when the suit was filed, the date judgment was rendered, when possession and title to the property was obtained, or when the estimated value of the property acquired was entered on the books. Moreover, it is not shown that any part of the proceeds of the insurance on the Temple gin was used to acquire the Blackwood gin. Although the Chillicothe gin was destroyed by fire on October 17, 1921, construction operations on the gin at Weatherford were not started until March 14, 1923, a year and four months later, and well after the close of the next cotton ginning season. We do not know the date on which the petitioner decided to erect the plant at Weatherford, or the time the lot was acquired. No explanation has been given for the delay in replacing the property destroyed. The evidence before us on this issue, in our opinion, fails to prove that the petitioner is entitled to the benefits of the statute. Accordingly, *1148 the respondent's action in refusing to allow the profits*2516 as deductions under the provisions of section 324(a)(14) of the taxing act is sustained. The respondent does not claim that the cost of replacements in the Davis-Duke and Caddell gins are not allowable deductions, but that effect has been given to the expenditures made in the computation of profit on the sales. The replacements were apparently made under a warranty of petitioner in connection with the sale. But whether or not there was a technical warranty, the fact is that petitioner expended money in making good under its contract of sale and in our opinion it is entitled to deduct the amounts spent. Respondent's contention that effect has been given to the expenditures is refuted by the record. The amounts expended for replacements in both cases were entered in balance sheet accounts and not profit and loss accounts and no adjusting entries have been made to correct the erroneous charges. It is obvious that the cost of replacements has not been allowed to petitioner and the net losses determined by the respondent for the years 1921 and 1922 should be adjusted by allowing the amounts of $1,325.33 and $282.20, respectively, as deductions. The evidence presented in connection*2517 with the remaining issue is contrary to the idea that the alleged losses were sustained in the fiscal year ended June 30, 1924. The uncontradicted testimony of the only witness presented by the petitioner is that prior to 1924 the gins ceased to have any value for operation purposes and that values for the gins were retained on its books a long time after the improvements on the properties could not be accounted for. This evidence clearly establishes that the losses were not sustained in the fiscal year 1924. The respondent's refusal to allow the claimed losses as deductions is approved. Decision will be entered under Rule 50.