Olean Times-Herald Corp. v. Commissioner

THE OLEAN TIMES-HERALD CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Olean Times-Herald Corp. v. Commissioner Docket No. 86897. United States Board of Tax Appeals 37 B.T.A. 922; 1938 BTA LEXIS 967; May 20, 1938, Promulgated *967 OBSOLESCENCE. - Two newspapers combined on January 1, 1932, and thereafter used the plant of one to the exclusion of the other. A decision was reached in 1933 that the idle plant would never be used. The land and building were put up for sale in 1933 and a sale was made in 1935. Held, no deduction for obsolescence is allowable for 1933; held, further, that no amount is deductible as a loss sustained in 1933. James P. Quigley, Esq., for the petitioner. V. F. Weekley, Esq., and P. A. Bayer, Esq., for the respondent. MURDOCK *922 The Commissioner determined a deficiency of $1,589.66 in the petitioner's income tax for the calendar year 1933. The only assignment of error is as follows: "The Commissioner erred in the disallowance of the claim of $15,573.41 for obsolescence of real property." FINDINGS OF FACT. The petitioner is a corporation, having its place of business at Olean, New York. It filed its corporate income tax return for the *923 calendar year 1933 with the collector of internal revenue for the twenty-eighth district of New York. The Olean Times Publishing Co. and the Olean Herald, Inc., were each publishing*968 an evening newspaper in Olean in 1931. Each corporation owned a complete printing plant, including land, building, and equipment, for the publication of its newspaper and for doing job printing. The stockholders of these corporations entered into negotiations in 1931 to consolidate the two corporations in such a way as to eliminate competition. The petitioner was organized on January 1, 1932, and it took over at that time all of the assets and liabilities of the Olean Herald, Inc., in exchange for 40 percent of the petitioner's stock, and all of the assets and liabilities of the Olean Times Publishing Co. in exchange for 60 percent of the petitioner's stock. Thereafter but one newspaper was published. It was printed in the building formerly occupied by the Olean Times Publishing Co. No newspaper was published thereafter in the building formerly occupied by the Olean Herald, Inc. The petitioner in 1932 began to dismantle so much of the Herald plant as had been used for the publication of the newspaper. The part of the Herald plant which had been used for job printing was kept intact until the early part of 1933. The officers of the petitioner thought that the job printing*969 perhaps might be done in the Herald plant. Some of that work was done in the Herald plant but most of it during 1932 and 1933 was done in the Times plant. The officers of the petitioner decided early in 1933 that the Herald plant would not be needed and all of the job printing could be done in the Times building. The machinery and equipment remaining in the Herald building was then sold and a real estate agent was authorized to sell the Herald building and the land on which it stood. He sold the property in 1935 for $15,000. The Herald building was built in 1917, especially for the purpose of housing a printing plant. It had a frontage of approximately 24 feet and a depth of 10 feet, and was four stories high. The interior of the building received no light from the outside except at the front, at the rear, and through skylights. It had no central heating plant. Its floors and partitions were of heavy reenforced concrete, brick, stone, and steel, designed to carry heavy printing equipment. There was a large freight elevator near the front of the building. There was a large concrete partition on the first floor in the middle of the building. Back of that there was another*970 concrete wall and back of the concrete wall was a press room containing a large sink for the presses, with a pit beneath. Part of the building was used for storage purposes for a short time. *924 The construction of the building was such that it could not be readily adapted for use other than as a printing plant. An amount between $5,000 and $2,500 would have been required to convert the building to other uses in 1933. The value of the land in 1933 was $14,000. The petitioner placed the Herald land on its books at $14,201.25, and it placed the building on its books at $40,253.16. These were the same figures that had appeared on the books of the Olean Herald, Inc. The building at the beginning of 1933 appeared on the books of the petitioner at $39,372.16, which was the balance remaining after deducting depreciation taken for 1932. The petitioner on its return for 1933 claimed a deduction of $15,573.41 as obsolescence for 1933 on the Herald building. The Commissioner disallowed the deduction in computing the deficiency. The petitioner claimed a deduction of $20,000 for obsolescence of the Herald building on its return for 1934. The Commissioner disallowed that*971 deduction. The petitioner on its return for 1935 claimed a loss of $3,289.23 resulting from the sale of the property in that year. OPINION. MURDOCK: The only issue is whether or not the Commissioner erred in disallowing a deduction of $15,573.41 as obsolescence on the Herald building for 1933. Section 23(k) of the Revenue Act of 1932 permits the deduction of "a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence." Those deductions are for the purpose of permitting a taxpayer to recover the cost of its property out of its earnings as the property is used up in its trade or business. The total of the deductions plus the salvage value at the end of the useful life of the property should equal the cost of the property. The computation of a proper deduction for any year requires knowledge of certain factors, the first of which is the cost of the property. The Commissioner contends that the cost of the Herald building has not been shown. He concedes that the petitioner's basis for gain or loss on the building and for depreciation is the same as the basis of its predecessor, the Herald, *972 Inc., but he claims that the cost of the property to the Herald, Inc., has not been shown. A deduction for the physical wearing out of a building is based upon the estimated physical life of the building. "A deduction for obsolescence can be allowed only where there is substantial reason to believe that the assets will become obsolete prior to the end of their ordinary useful life." ; affd., ; affd., . "Obsolescence as *925 used in the statute is the state or process of becoming obsolete, and the provision allowing a deduction therefor is intended to care for losses of capital which take place over a longer period than the taxable year." Tennessee; . Thus, it is necessary for one claiming such a deduction to establish a period longer than the taxable year over which period the asset is becoming obsolete and at the end of which period it will be obsolete. There must be some identifiable event marking the beginning of the period and indicating that at the end of the period the*973 property will have become obsolete. The evidence in this case does not show that any event happened in 1933 which indicated that at some time after 1933 the building in question would become obsolete. No period of obsolescence is established. There is no evidence from which a rate could be determined and the cost of the building is in doubt. The part of the building used for printing newspapers had not been used since 1931. The officers of the petitioner in 1933 simply decided that they would have no further use for the Herald job printing plant, so they dismantled it. The value and usefulness of the building was really the same at all times after January 1, 1932. Although the building had been constructed especially for a printing plant, it could be put to other commercial uses. A purchaser was found in 1935 who converted it to other uses at a cost of about $2,500. It was not abandoned in 1933, but was put up for sale. The petitioner has failed to show that the Commissioner erred in disallowing the deduction. Cf. White Star Line, B.T.A. 111; *974 ; ; affd., . The petitioner in its brief attempts to claim a much larger deduction on the theory that the building became completely obsolete in 1933 and the difference between the basis and $15,000, the amount which was obtained later for the land and building should be deducted for that year. That issue is not pleaded and consequently is not properly before the Board. A deduction on account of loss is entirely different from a deduction on account of obsolescence. No loss deduction can be allowed unless the property is discarded, abandoned, or sold. . The sale of the property in question took place in 1935. If there was a loss prior to the sale, then it took place prior to 1933. Statements by counsel would indicate that when the sale took place in 1935 the petitioner benefited from the loss only to the extent of $2,000, since the loss was a capital loss and there were no capital gains which it could offset. That circumstance, although unfortunate, is no reason for allowing a deduction for obsolescence*975 in a prior year. Decision will be entered for the respondent.