Marigold Garden Co. v. Commissioner , 6 B.T.A. 368 ( 1927 )

OPINION.

SteRNhagen :

The respondent concedes thnt his determination of net income included a duplicate disallowance of one item and hence that his determined net income should be reduced by $1,710.07, and also that his determined invested capital should be increased by $4,289,63. ‘

May the petitioner deduct as a loss the $1,710.-07 cost of glassware which prohibition made useless to it in its business but which it kept in storage? It was not abandoned,- for petitioner has it'in its exclusive possession, where, should' an occasion arise, it may call it into use. It was not sold, and it does not appear whether any effort was made to sell. The evidence is only that it became useless to petitioners and was stored.

In considering the principle, the particular cause of the claimed loss matters little, if at all. Uselessness to á taxpayer’ does' not determine a deductible loss any more when attributable to a statutory prohibition than when attributable to any other extraneous cause 6ver which the owner has no control.- A change in style or market, or an exhaustion of the supply of raw materials for manufacture may destroy the utility of equipment just as effectually as the intervention of the law, and the detriment to the owner may be just as great.

It seems clear that property is not ipso facto lost to a taxpayer because it is no longer useful to him. Ownership and possession still exist, and in some cases value may not wholly disappear. Yalue and usefulness are not necessarily interdependent, even though they very commonly look to each other for support. The want of either does not make certain the absence of the other. It should be kept in mind that the considerations in ascertaining net income must always be expressed in money and that all the factors relied upon must be translated into terms of money. Use is only significant to the extent that it is susceptible of such expression. hTo one would urge that an income deduction may be claimed because a fixture or tool proves less useful than expected when the purchase was made! Until the investment is converted into terms-of money by sale or other disposition or its worthlessness otherwise demonstrated, there is neither loss nor gain and income is neither greater nor less.

So when we put aside the legislative cause of petitioners’ misfortune, and find further that the evidence shows only that the glass could no longer be used by petitioner in its business, we are still far removed from the establishment of such a loss as offsets income. It is not necessary to consider whether we should be brought closer if no sale or disposition could have been made after reasonable effort, for there is no evidence of an effort; and voluntary storage is not a final disposition. The respondent is' on this point sustained.

The respondent, using a fixed-percentage basis and applying the straight dine theory of depreciation, has recomputed the depreciation on the personal property of the Randolph Hotel Co. for all years from 1897 to 1918, inclusive, and. has determined that the total accumulated depreciation is in excess of the amount thereof shown in the depreciation reserve on the books of 'account. This has reduced earned surplus on account of alleged inadequate depreciation charged off in prior years.

From 1897 to 1915, during which period the books of the company were kept by one of its executive officers, the company had not accounted for depreciation at constant rates, nor according to any particular method of -calculation.- Such amounts were charged off as in the well considered opinion of its officers were sufficient to take care of the wear, tear and exhaustion actually sustained. They also charged to expense certain items which might property have been capitalized. After 1915, when the books were kept under the supervision and direction of certified public accountants, such depreciation was charged off as the accountants advised was proper. The appraisal of 1916 indicated a higher value than that shown on the books. There is no evidence othér than the result of a straight-line calculation to show that the depreciation on the books did not represent the actual depreciation sustained or that the property of the company had a value or was in a condition other than that shown by its books. The issue is controlled by Cleveland Home Brewing Co., 1 B. T. A. 87; Russell Milling Co., 1 B. T. A. 194, and Rub-No-More Co., 1 B. T. A. 228, and the Commissioner’s action in reducing the earned surplus on account of alleged inadequate depreciation charged off in prior years is in error.

In the return which the petitioners filed for the year under consideration, a deduction in the amount of $18,000 was ■ claimed as depreciation on the personal property of the Randolph Hotel Co. Of the total deduction claimed, the Commissioner allowed the sum of $8,162.14, and disallowed the balance. The Commissioner’s allowance appears to have been computed upon the basis of 10 per cent of the book value of the personal property after deducting therefrom the book value of certain items which, under the method used by him in computing the accumulated depreciation reserve for prior years, he treated as exhausted by depreciation. The petitioners do not dispute the rate per cent which the Commissioner has used, but contend that the basis to which it should be applied is the book value of the personal property at January 1, 1919, after deducting the erroneous charge of $9,000 to the personal property accounts, with an additional allowance for additions made during the year computed on the basis of 6 per cent of the cost thereof. The total allowance contended for by the petitioners is $13,447.34.

The book value of the personal property, after eliminating the erroneous charge of $9,000 described in the findings of fact, at January 1,1919, was $133,002.49, and the cost of additions made during the year was $2,941.94. To apply the rates of 10 per cent and 5 per cent, respectively, to these amounts would result in a sum which the petitioners contend is a proper allowance. However, it will be noted from the findings of fact that the corrected book value of $133,002.49 includes a write up of $13,420.99 in the personal property accounts resulting from taking into the books of account the appraisal values. This amount should be excluded. Deducting tin's item of $13,420.99 from the book value of $133,002.49, the result is $119,581.50; and applying to this basis the rate of 10 per cent ($11,958.15) and a rate of 5 per cent to the cost ($2,941.94) of additions made during the year ($147.10), the petitioners are entitled to a deduction of $12,105.25 for depreciation of the personal property of the Randolph Hotel Co. The deficiency should be redetermined by (1) making the adjustments conceded by respondent, (2) restoring to surplus the depreciation erroneously assumed to have occurred in prior years, and (3) recomputing the current depreciation as indicated.

Judgment will be entered on 15 days’ notice, under Rule 50.

Trammell and Trussell dissent.