Uncasville Mfg. Co. v. Commissioner

UNCASVILLE MANUFACTURING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Uncasville Mfg. Co. v. Commissioner Docket Nos. 9968, 11117. United States Board of Tax Appeals 19 B.T.A. 920; 1930 BTA LEXIS 2301; May 12, 1930, Promulgated *2301 1. The Board has no jurisdiction to review determination of deficiencies for years prior to 1916; 2. Nor has it jurisdiction to review the determination of an overassessment for the year 1917. 3. The sworn categorical opinion of the taxpayer corporation's officers, standing alone, is insufficient to establish that the ultimate facts (in this case, the March 1, 1913, value and the probable useful life of property) support a lower profit or a higher allowance for depreciation and obsolescence than that determined by the respondent. 4. The taxpayer must prove the correct ultimate facts which will support its claim, and if the respondent use values shown on the books which do not accurately show factors of cost, it is not enough for the taxpayer merely to thus indicate a weakness in his method of determination. 5. A corporation is not entitled to any deduction for the exhaustion of patents owned by its sole stockholder and used by it with his permission but without payment or obligation to pay for the use thereof. 6. Waivers purporting to bear the signature of the Commissioner affixed on his behalf by a subordinate pursuant to delegated authority are valid. 7. Evidence*2302 held insufficient to justify special assessment. John E. Hughes, Esq., for the petitioner. F. R. Shearer, Esq., for the respondent. STERNHAGEN *921 These proceedings bring properly in issue the following deficiencies in income and profits tax: Docket No. 11117 [1916] $889.09 [1918] 109,612.21 Docket No. 9968 [1919] $21,361.67 [1920] 1,740.57 [1922] 1,245.88 Various errors of determination are assigned. FINDINGS OF FACT. Petitioner, a Connecticut corporation with principal office at Uncasville, Conn., was engaged in the manufacture of denim cloth. On March 1, 1913, and during the taxable years in question it was the owner of a manufacturing plant located in Uncasville, which comprised the following buildings and equipment: (1) a main building of granite construction, six stories in height, with pitch roof and interior of heavy timber; (2) a brick engine house with modern roofing, attached to the main building; (3) a two-story brick cloth house with gravel roof; (4) a two-story brick storehouse with gravel roof; (5) a one-story brick boiler house with concrete floors and gravel roof; (6) a two-story*2303 heavy brick picker building with mill construction floor and slate roof; (7) another brick storehouse, with flat gravel roof, known as Storehouse No. 1 and used for cotton; (8) another flat-roofed storehouse, of wood construction on heavy foundation, known as Storehouse No. 5, and used for cotton; (9) a one-story brick dye house built in 1898, with large windows, gravel roof and timbered with southern pine on top of *922 maple flooring; (10) a brick weave shop of one story and basement similar to the dye house; (11) a two-story brick power house constructed about 1898 to transmit power to weave shop; (12) a main brick office building with large basement; (13) a wood construction office building near mill; (14) a wood barn; and (15) twenty-three tenement houses. The Uncasville plant was sold in 1923. It had been operated to the time of sale. Its machinery was then usable for purposes of production. In addition to the Uncasville property petitioner also owned at Montville, Conn., a plant known as the Pequot Mill, which it purchased for $20,000 in 1908. Between purchase and March 1, 1913, the property was thoroughly renovated. It comprised: (1) a five-story building equipped*2304 for preparing cotton for cards, spinning and spooling; (2) a stone picker house of mill construction with flat gravel roof; (3) a cotton house of stone with mill construction roof; (4) a stone slasher building, abandoned in 1916; (5) a two-story stone boiler house; (6) a three-story weave mill of heavy stone with open flooring; (7) a two-story brick finishing room; (8) an office building of wood; (9) sixteen tenement houses of which one was stone and the others were wood. Petitioner used the Pequot Mill for manufacturing purposes until 1919 when it was sold, together with its appurtenances and twenty-five acres of ground, for $85,000. At the time of sale the machinery was worn, but still usable and turning out denim. The purchasers did not continue its use. On March 1, 1913, the petitioner was the owner of a large stone construction double dam, with apertures for overflow, located at Uncasville, and of another stone dam at Pequot, and of a third at Oxoboxo Lake, of heavy granite, containing a sluiceway and iron lifting gates. Petitioner operated its two plants partly by water power from these dams and partly by steam. At Uncasville it had machinery for the water power, including*2305 five Hercules wheels of 450 horsepower connected with the main channel. These wheels had been installed a few years prior to 1913. Petitioner also owned 100 feet of penstock, 5 feet in diameter, heavy pipe connections, rotary pumps attached to the water wheels, and steam pumps from the boiler house. It also had reservoirs for automatic sprinklers with which its buildings were equipped. The Uncasville reservoir contained 141,000 gallons of water, conducted to the main hydrants by 10-inch pipe 300 to 400 feet in length. By this means it was able to use water power during the dry season of the year. Petitioner also owned five 1,000-horsepower pressure boilers, installed with heavy piping and flues, and three engines; a 200-horsepower Armington & Sims engine; a 100-horsepower Greene condensing engine installed in 1903 for weaving and dyeing; and a 700-horsepower Harris-Corliss engine installed in 1908; and two smoke stacks, one of brick *923 construction, 90 feet high, and one of steel, 80 feet high. New stacks were built in 1915 and not abandoned by the purchaser in 1923. In addition to the machinery above mentioned, petitioner also owned in 1913 pickers, openers, breakers, *2306 carding machines, speeders, spinning frames, spooling machines, warping machines, drying cans, weaving mills, etc. About 1918 the period of usefulness of this equipment was considerably reduced by new inventions such as the automatic loom, which was developed over a period of years and has now replaced all hand looms, generators attached to steam engines and a new cleaning system. On account of war conditions in 1918 petitioner was unable to procure efficient labor and was forced to run overtime to the detriment of its old equipment and of its additional machinery installed between 1913 and 1918. Petitioner also owned a waterpower site at Oxoboxo Lake, and it controlled a site known as Wheeler Pond, two miles away from its Uncasville plant. In 1918 an electric power plant was constructed on the Thames River to distribute power to surrounding individual plants. Petitioner made no changes, but continued the use of its own power until it sold the plant in 1923. Thereafter the purchaser abandoned the plant's power system and began the use of electric power purchased from the power company. Petitioner's own power systems at Pequot were used until sale of that plant in 1919. *2307 In his final computation of the petitioner's tax for the year 1917 the Commissioner allowed a deduction for the exhaustion, wear, tear and obsolescence of petitioner's property in the sum of $11,892.27, and in such computation for 1918 the deductions for exhaustion, wear, tear and obsolescence of petitioner's property which were allowed by the Commissioner and the values and rates upon which they were allowed were as follows: Item Rate of depreciation Value Amount of depreciation Per cent Brick buildings, Uncasville [2] $112,161.47 $2,243.23 Wood buildings, Uncasville [3] 45,596.53 1,367.90 Machinery and equipment, Uncasville [4] 143,457.85 5,738.31 Dam, reservoir, etc., Uncasville [2] 5,321.93 106.44 Brick buildings, Pequot [2] 26,429.33 528.59 Wood buildings, Pequot [3] 7,163.77 214.91 Machinery and equipment, Pequot [4] 38,520.87 1,540.83 Dam and reservoir, Pequot [2] 2,563.84 51.28 Total depreciation 11,791.49 The basis to which said rates were applied was the amount determined by the respondent to represent cost of said properties as of December 31, 1917, and includes additions between March 1, 1913, and December 31, 1917, in*2308 the following amounts: *924 Brick buildings, Uncasville $28,333.98 Wood buildings, Uncasville 843.13 Machinery and equipment, Uncasville 52,787.49 Dam, reservoir, and so forth, Uncasville 1,113.72 Brick buildings, Pequot 20,665.29 Machinery and equipment, Pequot 11,658.58 Dam and reservoir, Pequot 2,411.44 In his final computation of petitioner's tax for the taxable years 1919, 1920, and 1922 the deductions allowed by respondent for the exhaustion, wear and tear and obsolescence of petitioner's property and the values upon which they were allowed and the rates at which they were allowed were as follows: Uncasville Depreciation allowed Cost [1922] Brick buildings, 2 per cent Net additions to Dec. 31, 1917 $112,161.47 $2,243.23 $2,243.23 $2,243.23 [1918] 2,415.00 48.30 48.30 48.30 [1920] 4,551.39 45.51 91.03 [1922] Total 119,127.86 2,291.53 2,337.04 2,382.56 Buildings, wood, 3 per cent Net additions to Dec. 31, 1917 45,596.55 1,367.90 1,367.90 1,367.90 [1920] 500.00 7.50 15.00 [1922] 3,284.40 48.77 Total 49,380.95 1,367.90 1,375.40 1,431.67 Dams, reservoirs, etc., 2 per cent Net additions to Dec. 31, 1917 5,321.93 106.44 106.44 106.44 [1918] 3,000.00 60.00 60.00 60.00 [1922] Total 8,321.93 166.44 166.44 166.44 Machinery, etc., 4 per cent Net additions to Dec. 31, 1917 143,457.85 5,738.31 5,738.31 5,738.31 Net additions to 1918 3,156.00 63.12 126.24 126.24 Removed 1918 21,698.73 433.98 867.95 867.95 Added 1919 6,571.04 131.42 262.84 262.84 Removed 1919 12,084.75 241.69 483.39 483.39 Added 1920 32,793.46 656.00 1,311.74 Removed 1920 7,694.52 153.89 307.78 Added 1921 41.33 1.65 Removed 1921 1,920.63 176.83 Added 1922 7,150.93 143.02 Removed 1922 750.00 15.00 Total 5,064.90 4,971.33 5,780.95 Grand total 8,890.77 8,823.76 9,761.62 *2309 *925 Pequot Rate Brick Cost 2 per cent Value Mar. Depreciation building depreciation 1, 1913 3 and 2 Net additions $5,764.04 $115.28 $22,985.93 $574.65 to Mar. 1, 1913 [2] Net additions, 20,665.29 413.31 20,665.29 413.31 1913-1917 Wood buildings, 3 per cent 5, 7, and 3 Net additions 7,163.77 214.91 33,835.79 1,353.43 to Mar. 1, 1913 [3] Net additions, 1913-1917 [3] Net additions, [1918] Machinery and equipment 4 per cent 5 and 4 Net additions 26,862.29 1,074.49 38,378.43 1,918.92 to Mar. 1, 1913 [4] Net additions, 11,658.58 466.34 11,658.58 466.34 1913-1917 [4] Net additions, 11,725.56 459.02 11,725.56 459.02 [1918] Dams, etc., 2 per cent 2, 5 Net additions 152.40 3.05 1,866.30 46.66 to Mar. 1, 1913 [2] Net additions, 2,411.44 48.23 2,411.44 48.23 1913-1917 [2] Net additions, [1918] Total 2,794.63 5,280.56 Property sold Oct. 18. Depreciation computed 9 1/2 months: $2,794.63 X 9 5/12 2,212.42 $5,280.56 X 9 5/12 4,180.44 From 1917 to 1919 petitioner was permitted without contract to*2310 use two patents belonging to its sole stockholder, one covering an indigo dyeing process and the other a process by which a shorter staple cotton, known as comber cotton, could be used for denim work. Petitioner was incorporated in 1839. Its earliest extant records go back to 1892. Prior to 1916 expenditures for labor in construction were charged to expense and do not appear in capital. In determining petitioner's invested capital for 1918 the Commissioner added $278,315.44 to book value as disclosed by petitioner's balance sheets of January 1, 1918, in order to restore to surplus amounts entering into the cost of petitioner's plant. For 1918 petitioner paid to the State of Connecticut a tax on the income disclosed by its Federal return for said year; i.e., $160,482.78. Petitioner was incorporated in 1839. Its earliest extant records go 1916 were filed in each instance during the year immediately following the taxable year. Petitioner's tax return for 1919 was filed with the collector of internal revenue for the district of Connecticut on March 4, 1920. In December, 1924, the Commissioner and the taxpayer consented in writing to extend the time prescribed by law for*2311 the determination, assessment and collection of the amount of income and profits taxes due under any return made by or on behalf of said petitioner for the years 1909 to 1919, inclusive, such consent to be filed in effect from the date it was signed by the taxpayer *926 for a period of one year after the statutory period of limitation within which assessment of taxes might be made for the years mentioned, or for a period of one year from the date of signing thereof. A similar consent so signed was executed August 6, 1923, by the Commissioner and petitioner, extending to April 1, 1924, the period within which a determination, assessment, and collection of petitioner's taxes for the years 1909 to 1916, inclusive, might be made, and another consent, dated September 20, 1924, extending such period one year from the termination of the statutory period, including extension by waiver, covering the years 1909 to 1915, inclusive, and a similar consent, dated July 21, 1924, relating to 1916, and five other consents, dated November 3, 1925, extending such period to December 31, 1926, for the years 1909, 1912, 1913, 1915, and 1916. For 1917, 1918, and 1919 petitioner executed consents*2312 in writing which bear respondent's signature signed by some employee of the Bureau of Internal Revenue to whom he delegated authority to sign his name to consents in writing. In determining petitioner's invested capital for the years 1917, 1918, and 1919 the Commissioner made deductions of proposed deficiencies of $392.08, $190.15, $57.36, $92.82, and $889.09 for the respective years 1909, 1912, 1913, 1915, and 1916. OPINION. STERNHAGEN: The respondent determined deficiencies for 1909, 1912, 1913, and 1915 which the petition attempts to attack. They are not within the Board's jurisdiction. ; ; ; . For 1917 respondent has determined an overassessment and the Board has no jurisdiction. ; . No deficiency has been determined for 1921. Except for the evidence in respect of the statute of limitations, all of which was undisputed, the evidence consists entirely of the testimony and accompanying*2313 exhibits of two witnesses taken by deposition. In respect of the value on March 1, 1913, and the probable useful life of petitioner's property, the testimony upon which petitioner attempts to prove that the ultimate facts support a lower profit or a more favorable allowance for depreciation and obsolescence consists of the simple statement of the opinions of the petitioner's president and superintendent. The facts and circumstances are non constat those upon which respondent based his official determination, and within his consideration in modifying the profit or the deductions claimed on the sworn return. The sworn categorical opinion of the taxpayer corporation's officers is, standing alone, not *927 sufficient to prove that the value and useful life are different from those determined by respondent, and after considering all the evidence we have left such determinations of fact undisturbed. ; Bogle & co. v.; ; *2314 ; . If it be true that respondent has used book values and that the books are not historically accurate to show factors of cost, it is still not enough that petitioner thus indicate a weakness in respondent's method of determining the profit or the allowance for depreciation and obsolescence. It must prove affirmatively the correct ultimate facts which require the profit or allowance claimed. See . The respondent's determinations as to value on March 1, 1913, profit, and depreciation and obsolescence are sustained. The evidence does not support any deduction by the taxpayer in respect of the two patents referred to in the findings. There was no obligation to pay for the use of the patents and no such payments were made. The further claim to a deduction for exhaustion of the patents is not sustained because the patents were not owned by the corporation. The expiration of the statutory period of limitation is sought to be founded upon the fact that the waivers were signed not by the Commissioner himself, but by a subordinate*2315 acting by virtue of his delegation, and that since such authority could not be lawfully delegated, the waivers are void. The waivers were good, and the deficiencies are not outlawed. . The respondent computed petitioner's tax for 1918 by the comparative method of section 328, Revenue Act of 1918, and found that it yielded no relief from the tax under section 301. For the remaining years of the profits tax, respondent found no ground for such special assessment. The evidence does not, in our opinion, sufficiently bring the case within section 327 to require special assessment for any year. The remaining assignments of error fall with one or more of the foregoing points. Judgment will be entered for the respondent.