August Grill, Inc. v. Commissioner

AUGUST GRILL, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. August Grill, Inc. v. Commissioner Docket No. 7372. United States Board of Tax Appeals 9 B.T.A. 381; 1927 BTA LEXIS 2602; November 28, 1927, Promulgated *2602 Invested capital and depreciation for certain assets acquired by the petitioner for stock determined. Joseph Kopelman, Esq., for the petitioner. J. E. Marshall, Esq., for the respondent. MORRIS *381 This proceeding is for the redetermination of deficiencies in income and profits taxes of $5,035.55 for 1918 and $672.35 for 1919. The petitioner alleges that respondent erred in reducing invested capital by eliminating therefrom paid-in surplus for each of the years and, secondly, that respondent erroneously reduced the depreciation deduction for each of the years. FINDINGS OF FACT. August Grill, Sr., had been in the wholesale natural ice business since 1880, with a plant nine miles south of Albany, and an office in Brooklyn, N.Y. In June, 1914, he incorporated his business under the laws of the State of New York, for $50,000, retaining 52 per cent of the stock for himself and dividing the balance equally among his four sons. The entire capital stock was issued in payment for the business and assets. The records of the business as conducted by August Grill, Sr., and the corporation prior to January 1, 1918, consisted of a check book*2603 and a customer's ledger. He paid his expenses by check and deposited his receipts. In January, 1918, a double-entry set of books was installed. At that time, a paid-in surplus of $97,600 was set up on the books, representing depreciable assets acquired in June, 1914. The properties which the petitioner acquired at the date of incorporation consisted of some 190 acres of land with adjacent water rights, 2 ice houses, 3 dwelling houses and 2 barns, dock facilities, 6 horses, harness, tools and equipment, an office building in Brooklyn, an ice bridge, hoist motor and equipment, and 5 ice boats. The land is located at Shad's Island upon the Hudson River and was valued at $40,000 by the respondent in computing invested capital for 1918 and 1919. A few years prior to incorporation, namely, 1908 and 1909, August Grill, Sr., constructed a road from the main land to Shad's Island at a cost of $2,000. This road was maintained in a good state of repair and was in use each year, particularly during the ice harvest *382 season. A second improvement on the land was begun in 1909 and continued through the year 1915. This latter improvement consisted of dredging a creek so that*2604 ice forming therein would not touch the bottom. The work was performed and paid for from time to time during the several years, 1909 to 1915, inclusive, at a total cost of $8,260.49. The two ice houses acquired in 1914 were of 37,718 tons capacity and 15,093 tons capacity. The larger house was constructed in 1892 and an addition thereto was constructed in 1898. The cost of reproducing this ice house new in June, 1914, was $35,595.80. The smaller house was erected in 1908. Its cost of reproduction new in June, 1914, was $14,676.71. The estimated life of ice houses of this type is 30 years. In 1895, August Grill, Sr., contracted for the construction of four ice boats. These boats were built and delivered during that year at a total cost of $16,240. The cost of reproduction new of these boats in June, 1914, was $25,200. The value of these boats at that time was $12,000. The fifth boat had a value of $1,500 when turned in to the corporation. The estimated life of such boats is 30 years. The three dwelling houses acquired consisted of a 9-room foreman's house, an 8-room dwelling house and a 6-room house. The 8-room house was finished in 1908 or 1909, but the dates of*2605 construction of the other houses are unknown. The estimated life of houses of a similar type of construction is 60 years. The cost of reproduction new in June, 1914, was $2,500 for the 9-room house, $5,500 for the 8-room house and $2,000 for the 6-room house. These houses had a value in June, 1914, of $2,000, $5,000, and $1,500, respectively. The two barns acquired would have cost $900 and $1,500, respectively, to reproduce them new in June, 1914, and had a value at that date of $1,700. The average useful life of such barns is 60 years. Petitioner also acquired certain equipment consisting of plows, horses, saws, hooks and tools which were used in the business and which had an estimated total value in June, 1914, of $1,000. The office building located at the foot of Hewes Street, Brooklyn, had a value at the date of acquisition of $5,000. In addition to the building there was also an ice bridge with hoist and motors which were worth $1,000 in June, 1914. During the taxable years and for years prior thereto, petitioner expended considerable sums of money during each year for repairs necessary for the upkeep of the several properties. A force of 8 or 10 men working under*2606 a foreman were kept busy from 6 weeks to 2 months of each year in the making of such repairs. Each fall, petitioner used between $300 and $400 of lumber, while the repair bill was approximately $100 per week. This work included repairs *383 to properties, such as the road, the ice houses, the dwelling houses and barns, and the various tools and equipment. All of the assets hereinabove described were in use during the taxable years in question. The respondent reduced invested capital by $97,100 and $92,267.21 for the years 1918 and 1919, respectively by the elimination for each year of $97,600 from the petitioner's depreciable assets, and other minor adjustments and allowed depreciation at the rate of 10 per cent on the reduced value, which was $10,500 for the year 1918 and $10,100 for the year 1919. Such action resulted in the disallowance of depreciation of $9,940 and $9,553.50 for 1918 and 1919, respectively. OPINION. MORRIS: The petitioner seeks a paid-in surplus for depreciable assets which were paid in for stock in June, 1914, and asserts that respondent has erroneously computed its depreciation deductions. Section 326(a)(2) of the Revenue Act of 1918*2607 provides: That as used in this title the term "invested capital" for any year means * * *: * * * (2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus: * * * Considerable difficulty has been encountered in the determination of the questions involved in this proceeding due to the fact that the only evidence of value presented as to some of the assets was the cost of reproduction new in June, 1914, the time such assets were acquired by the petitioner. Obviously such cost is not the equivalent of actual cash value or fair market value of a depreciable asset which has been in existence for a number of years, and when reduced by depreciation from date of acquisition, it is merely evidentiary, and not sufficient, in the absence of other evidence to overcome*2608 the prima facie correctness of the respondent's determination. See ; ; . In the case of certain other assets acquired by the petitioner at the date of its incorporation, we have found their value at that time, but we have no evidence of the date of their acquisition by Grill, *384 from whom the petitioner received them, their condition or probable useful life in 1914. As the questions involved are the amount of depreciation to which the petitioner is entitled for the taxable years in question and the amount to be included in invested capital for these depreciable assets, the failure to adduce evidence on the above factors is fatal to the petitioner's contentions. Evidence of the probable useful life of similar assets is not sufficient when the date of the beginning of that life for the assets in question is unknown. For the foregoing reasons we are unable to make any determination as to the invested capital or depreciation to which the petitioner may be entitled on the*2609 following assets: the two ice houses, the ice boat - upon which we found a value of $1,500 when turned in to the petitioner, the nine and six-room dwelling houses, the two barns, and the office building located in Brooklyn. The evidence indicates, however, that as to certain of the assets, the respondent was clearly in error as to the amount of invested capital and depreciation allowed thereon for the taxable years in question. He computed invested capital of $10,500 and $10,100 on the depreciable assets and allowed depreciation at the rate of 10 per cent on said amounts. To the extent that the total of the following items exceeds the amounts allowed by the respondent, invested capital should be increased. Four ice boats which were constructed in 1895 had a value of $12,000 in June, 1914, when acquired by the petitioner. Their useful life was 30 years. Their depreciated value based on their June, 1914, value and remaining useful life from that date, should be included in invested capital and depreciation allowed for the years 1918 and 1919 on that basis. The depreciated value of the 8-room house, having a value of June, 1914, of $5,000 and a 60-year life from 1908, should*2610 be included in invested capital, said depreciated value being based on June, 1914, value and the remaining useful life from that date. Depreciation should be computed on that basis for the taxable years in question. Certain miscellaneous equipment, such as plows, saws, hooks, etc., having a value at date of acquisition of $1,000, and an ice bridge with hoist and motors located in Brooklyn and having a value of $1,000 were part of the assets acquired by the petitioner and, allowance being made for depreciation at an annual rate of 10 per cent, should be included in invested capital and depreciation allowed thereon for 1918 and 1919. Invested capital should be further increased by the additional amounts of $2,000, which was expended for the construction of a road which was on the property when acquired by the petitioner, and $8,260.49 for *385 the dredging of an artificial pond, which improvements were used during the taxable years and increased the value of the property at date of acquisition to that extent. Judgment will be entered on 15 days' notice, under Rule 50. Considered by MURDOCK and SIEFKIN.