Evansville Tool Works v. Commissioner

EVANSVILLE TOOL WORKS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Evansville Tool Works v. Commissioner Docket No. 21760. United States Board of Tax Appeals 22 B.T.A. 369; 1931 BTA LEXIS 2136; February 25, 1931, Promulgated *2136 1. F. J. Thompson, inc.,1 B.T.A. 535, followed. 2. Upon the record, held, respondent in determining petitioner's invested capital erred in finding that petitioner had not charged off sufficient depreciation in prior years. 3. Evidence held insufficient to overcome respondent's determination as to the remaining issues. John E. McClure, Esq., for the petitioner. James L. Backstrom, Esq., for the respondent. LOVE *369 This proceeding is for the redetermination of deficiencies in income and profits tax for the fiscal years ended October 31, 1919, and October 31, 1920, in the respective amounts of $2,961.18 and $294.51. Several of the errors assigned in the amended petition were either abandoned or withdrawn by petitioner. Those remaining for our consideration are (1) the exclusion from invested capital for the taxable years before us of excessive 1917 taxes in that the respondent erred in computing the 4 per cent tax imposed by section 4 of *370 the Revenue Act of 1917 upon ten-twelfths of the net income for the fiscal year ended October 31, 1917, after deducting therefrom the profits tax imposed by*2137 the Revenue Act of 1917, instead of upon the 1917 portion of the net income reduced by the profits tax; (2) the disallowance by respondent of a portion of the exhaustion, wear and tear deducted by petitioner on its income tax returns for the fiscal years 1919 and 1920; (3) the reduction by respondent of petitioner's invested capital for the fiscal years 1919 and 1920 on account of an alleged insufficient amount of depreciation charged off by petitioner in prior years, and (4) the refusal of the respondent to find that petitioner was entitled to the benefits of sections 327 and 328 of the Revenue Act of 1918 for the fiscal years 1919 and 1920. Upon motion granted, the hearing in the first instance with respect to the last assignment of error, namely, the issue relating to the special assessment, was confined to the issues defined in subdivisions (a) and (b) of Rule 62 of the Board's rules of practice. FINDINGS OF FACT. Petitioner is a corporation organized under the laws of Indiana on November 6, 1897, with its principal office at Evansville, Ind. The respondent determined that petitioner's net income for the fiscal year ended October 31, 1917, was $62,256.92; that the excessprofits*2138 tax for the 10 months in 1917 was $10,164.95; and that the 4 per cent tax imposed by section 4 of the Revenue Act of 1917 on ten-twelfths of the net income, after deducting from such net income the excess-profits tax, was $1,736.40. The respondent further determined that no part of the $1,736.40 was a part of petitioner's invested capital for the fiscal years 1919 and 1920. During the fiscal years 1919 and 1920, petitioner used in its business certain buildings, building equipment, machinery, furniture and fixtures, and delivery equipment. It charged off on its books for those years as exhaustion, wear and tear of such assets, the amounts of $14,791.23 and $12,966.56, respectively. The respondent determined that petitioner was entitled to deduct from its gross income as exhaustion, wear and tear of its assets for those years only the amounts of $9,313.67 and $8,787.16, respectively. Petitioner's business was that of manufacturing edged tools, hammers, sledges, axes, butcher cleavers, etc. From the time it was organized in 1897 until November 1, 1918, it had charged off on its books as sustained depreciation, the amount of $25,952.77, of which $23,350 was credited to a depreciation*2139 reserve, and $2,602.77 was credited to various physical asset accounts. The respondent determined that as of November 1, 1918, petitioner's physical assets *371 should be increased by a net amount of $5,333.42; that its depreciation reserve should be increased by the amount of $50,577.12; and that its surplus account should be decreased by the difference, or $45,243.70. This had the effect of decreasing petitioner's invested capital for the fiscal year 1919, as shown by its books, by the amount of $45,243.70. The respondent further determined that as of November 1, 1919, petitioner's physical assets should be decreased by a net amount of $3,950.45; that its depreciation reserve should be increased by the amount of $36,432.28; and that its surplus account should be decreased by the sum of the two, or $40,382.73. This had the effect of decreasing petitioner's invested capital for the fiscal year 1920, as shown by its books, by the amount of $40,382.73. On October 31, 1918, and October 31, 1919, petitioner's books reflected the cost of its physical assets, the depreciation sustained and written off, and the undepreciated cost to be included in the following year's invested*2140 capital, to be as follows: Oct. 31, 1918 Oct. 31, 1919 Cost of depreciable assets $147,955.42 $159,221.34 Less depreciation sustained and written off 25,952.77 37,873.97 Undepreciated cost to be included in invested capital 122,002.65 121,347.37 The respondent determined that petitioner's books should have reflected the following: Oct. 31, 1918 Oct. 31, 1919 Cost of depreciable assets $150,686.07 $152,668.12 Less depreciation sustained 73,927.12 71,703.48 Undepreciated cost to be included in invested capital 76,758.95 80,964.64 Reduction of surplus 45,243.70 40,382.73 Petitioner at all times maintained its depreciable assets in firstclass condition, as distinguished from ordinary repair. Prior to the taxable years here involved, a great many replacements were made by petitioner which were charged to expense on its books instead of being capitalized. This was particularly true as to the labor cost of the replacements that were constructed by petitioner's own employees whose wages and compensation were all charged to expense. Such replacements consisted of new floorings, truck carriages, pipes and findings, emery*2141 wheel grinders, forging presses, trip hammers, grinding frames, polishing frames, dies and belting. During the fiscal years 1919 and 1920, petitioner paid its officers compensation for services rendered in the amounts of $13,300 and $13,450, respectively. *372 OPINION. LOVE: The first issue is whether petitioner's invested capital for the years now before us should be increased by $67.77 on account of alleged excessive income taxes determined by the respondent for the fiscal year ended October 31, 1917. In this connection petitioner contends the the respondent erred in determining the additional 4 per cent income tax for the fiscal year 1917, imposed by section 4 of the Revenue Act of 1917 to be $1,736.40 instead of $1,668.63. The respondent computed the additional 4 per cent income tax as follows: Net income full fiscal year 1917 $62,256.92 Less excess profits tax for 10 months in 1917 10,164.95 52,091.97 10/12 of $52,091.97 equals 43,409.98 4 per cent of $43,409.98 equals 1,736.40 Eptitioner contends the additional 4 per cent should be computed as follows: Net income full fiscal year 1917 $62,256.92 10/12 of $62,256.92 equals 51,880.76 Less excess profits tax for 10 months in 1917 10,164.95 41,715.81 4 per cnet of $41,715.81 equals 1,668.63 *2142 The question as to which of the two above methods of computation is correct has been previously considered by us in , , and , in which cases we held that the respondent's method was correct and in accordance with the statute. We adhere to our former decisions, and, therefore, approve the respondent's determination as to this issue. The evidence introduced by petitioner with respect to the second and fourth issues, does not in any way show that respondent committed any errors in his determination as to those issues. The third issue is whether petitioner charged off a sufficient amount of depreciation in prior years. The respondent determined that on October 31, 1918, and October 31, 1919, petitioner's depreciable assets were overstated in the net amounts of $45,243.70 and $40,382.73, respectively, and that those amounts formed no part of petitioner's invested capital for the fiscal years 1919 and 1920. The evidence, which consisted of the testimony of four witnesses, conclusively shows that petitioner's*2143 depreciable assets as reflected on its books of account were not overstated, and that , if anything, they were understated due to the fact that prior to the taxable years in question it had been the consistent practice of petitioner to charge most of its replacements to expense instead of capitalizing them. The respondent's determination on this issue is disapproved. *373 The deficiencies should be redetermined by restoring to invested capital for the fiscal years 1919 and 1920, the amounts of $45,243.70 and $40,382.73, respectively. Judgment will be entered under Rule 50.