Seward City Mills v. Commissioner

SEWARD CITY MILLS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Seward City Mills v. Commissioner Docket No. 92099. United States Board of Tax Appeals 44 B.T.A. 173; 1941 BTA LEXIS 1373; April 10, 1941, Promulgated *1373 During the taxable year petitioner's grain mill, which was operated by water power, was damaged as a result of unusual ice formations exerting pressure against the underpinning or foundation of the mill. Held, under the facts shown, petitioner is entitled to a loss deduction under section 23(f) of the Revenue Act of 1934 in the amount of the damage sustained. Burdette Boyes, for the petitioner. William V. Crosswhite, Esq., for the respondent. TURNER *173 The respondent determined a deficiency in income tax for the fiscal year ended June 30, 1935, in the amount of $115.19. He also asserted a 10 percent penalty in the amount of $11.52, under section 406 of the Revenue Act of 1935, for failure to file a timely return. The question presented is whether petitioner sustained a deductible loss under section 23(f) of the Revenue Act of 1934 as a result of certain ice damage to its mill during the taxable year. FINDINGS OF FACT. Petitioner is a Nebraska corporation, organized in 1925 for the purpose of acquiring and operating a grain milling business. Its mill and principal place of business was located at Seward, Nebraska. In about the*1374 latter part of 1939 the mill burned down, together with a portion of its records. It filed its income tax return for the fiscal year ended June 30, 1935, with the collector of internal revenue at Omaha, Nebraska, on October 16, 1935. Prior to the organization of the petitioner the business was operated by a partnership, the original mill having been constructed *174 in about 1893 at a cost of about $10,000. An addition to the mill was constructed in 1900 and in 1905 repairs were made to the extent of about $10,000. When the business was taken over by petitioner in 1925 another addition to the mill was constructed on the northeast corner at a cost of about $25,000. The petitioner claimed no deductions for depreciation on the returns filed from 1926 to 1933, inclusive. No taxable income was reported by the corporation during those years. Deductions for repairs were claimed on the returns as follows: 1926, $600; 1927, $2,265.22; 1928, $1,606.25; 1929, $1,561.88; 1930, $805.19; 1931, none; 1932, none; 1933, $400.96. The books of the corporation have never shown an operating profit or surplus and no dividends have ever been paid. Petitioner's mill was situated on the*1375 bank of the Big Blue River and was operated by water power. During the winter months of the taxable year its mill was damaged by unusual ice formations exerting force against the underpinning or foundation of the mill. Such unusual ice formations had never before existed at petitioner's mill and apparently resulted from a combination of causes, the occurrence of which was not anticipated by petitioner. The pressure exerted by the ice formations caused the underpinning at the southwest corner of the mill to give way and that corner of the building began to settle. This caused the alignment of the spouting and certain parts of the milling machinery to become disrupted and it was necessary to cease operations in order to make temporary repairs. Permanent repairs to the damaged underpinning could not be made until the water fell in the river the following July and August. During the year following the taxable year the petitioner expended between $1,900 and $2,000 in raising that corner of the building, replacing the damaged underpinning, and restoring the spouting and milling machinery to proper alignment. This expenditure was not claimed as a deduction for repairs in its return*1376 for that year. In its income tax return for the fiscal year ended June 30, 1935, petitioner claimed a deduction for depreciation on the building and machinery in the total sum of $3,600. No information was disclosed on the return to show how the amount of depreciation was computed. In the notice of deficiency the respondent recomputed the allowable depreciation and allowed a deduction therefor in the sum of $1,799.73, and disallowed the remainder, or $1,800.27. He also disallowed a deduction for taxes in the sum of $226.99, which action has not been contested by petitioner. The depreciation schedule attached to the deficiency notice shows March 1, 1925, undepreciated cost of the building and equipment in the amount of $44,200, which included the 1925 addition to the mill in the sum of $25,000. This cost was increased by the amounts of $785.55 and $15.24 representing *175 additions to the mill subsequent to 1925. The schedule also showed an estimated life of 25 years beginning with 1925; rate 4 percent; reserve or depreciation allowable up to the taxable year $16,650.62; and depreciation allowed for the taxable year in the amount of $1,799.73. OPINION. TURNER: *1377 Petitioner now concedes that the amount of depreciation allowed by the respondent is probably correct, but with respect to that portion of the deduction disallowed relies on its allegation that the amount thereof was a loss resulting from the ice damage above described. It is conceded that it was improper to classify ice damage as depreciation, but it is claimed that the amount of such ice damage was in excess of the depreciation disallowed and that petitioner is entitled to the deduction of the amount of loss sustained, under section 23(f) of the Revenue Act of 1934. 1 The respondent contends that the petitioner is not entitled to a loss deduction because it has not established that any loss was sustained during the taxable year, and on brief argues further that petitioner has failed to prove the basis for the allowance of any deduction for loss sustained as herein claimed. The evidence shows that the*1378 damage to petitioner's mill occurred during the latter part of December and during January of the taxable year. During that period the ice jam caused the damage to the underpinning of the structure and the southwest corner settled and threw the spouting and machinery out of alignment. The loss, if any, occurred at that time. Respondent states on brief that it is his "theory" that the loss was due to the deterioration of the mill which had been occurring over a period of years and that such deterioration became noticeable during the taxable year. That "theory" is supported only by inference. The petitioner's president testified that the foundation of the structure was in good condition before the ice jam and that in his opinion it was in no better condition after it was repaired. The evidence shows that during the following year more than $1,800.27, the amount now claimed as a deduction, was expended in restoring the mill to its condition prior to the damage. We conclude that the loss was sustained during the taxable year and that the amount thereof was at least equal to $1,800.27, the amount by which petitioner's income was increased *176 by respondent through the disallowance*1379 of a portion of the depreciation deduction claimed. With respect to respondent's argument as to basis, it is to be noted that his notice of deficiency indicates a basis far in excess of the loss claimed and proven and, under such circumstances, the petitioner was not required to put the question of basis in issue and thereby take on the unnecessary burden of proving a point which respondent's own determination accepts as established. We hold that petitioner is entitled to the deduction claimed. No evidence has been presented with respect to the 10 percent penalty asserted by the respondent and it is accordingly sustained. Another issue raised by the respondent in an amended answer and a claim for an increased deficiency were abandoned by him at the hearing. Decision will be entered under Rule 50. Footnotes 1. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * (f) LOSSES BY CORPORATIONS. - In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise. ↩