Scovill Mfg. Co. v. Commissioner , 25 B.T.A. 265 ( 1932 )

SCOVILL MANUFACTURING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Scovill Mfg. Co. v. Commissioner

Docket Nos. 29854, 30238.

United States Board of Tax Appeals

25 B.T.A. 265; 1932 BTA LEXIS 1551;

January 20, 1932, Promulgated

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1. In its original income-tax return for 1918 the petitioner deducted an amount for amortization of war facilities. Pursant to an understanding between representatives of the Commissioner and the petitioner that the Commissioner would cause an investigation of the petitioner's books of account to be made and thus determine a reasonable allowance for amortization and that in the meantime the cost of certain additions might be claimed as expense deductions in its returns, the petitioner filed an amended return for 1918 in January, 1920, without claiming therein any deductions specifically for amortization, but in lieu thereof deducting from gross income the cost of certain additions shown as expense items upon its books of account. The original return for 1919, filed in the early part of 1920, was prepared upon the same basis. Held, that the petitioner made a claim for an amortization allowance within the meaning of section 1209 of the Revenue Act of 1926.

2. In its returns for 1918 and 1919 the petitioner deducted allowances for depreciation computed at the same rates on additions to plant and equipment made during the year as upon assets held during the entire year. The respondent has allowed depreciation on such assets at one-half the yearly rates. The action of the Commissioner is sustained.

3. In 1918 and 1919 the petitioner spent large amounts of money in the reconstruction of a dam for the purpose of insuring to itself an adequate supply of water for 24-hour operation. Held, that the amounts are not deductible from gross income as ordinary and necessary expenses.

H. A. Mihills, C.P.A., for the petitioner.

John D. Foley, Esq., and James C. Maddox, Esq., for the respondent.

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SMITH

These proceedings, consolidated for hearing, involve deficiencies in income and profits tax for 1918 and 1919 in the respective amounts of $253,373.25 and $197,650.51. The questions involved are (1) whether the petitioner is entitled to deductions on account of amortization of the cost of war facilities in its income and profits-tax returns for the calendar years 1918 and 1919; (2) the amount of a reasonable allowance for depreciation for 1918 and 1919; (3) whether the petitioner may deduct from the gross income of 1918 and 1919 amounts expended upon the Chestnut Hill dam and reservoir; and (4) whether the deficiency for the calendar year 1918 is barred by the statute of limitations.

FINDINGS OF FACT.

The petitioner is a Connecticut corporation with its principal office and place of business at Waterbury.

On June 14, 1919, the petitioner filed its corporation income and profits-tax return for the calendar year 1918. This return showed as a deduction from gross income on line 19 of Schedule A thereof, designated "Amortization of war facilities," the amount of $808,583.61. On or about March 2, 1920, the petitioner filed an amended income and profits-tax return for 1918, which showed no deduction on line 19 of Schedule A thereof, under the heading "Amortization of war facilities." On March 12, 1920, petitioner filed its income and profitstax return for the calendar year 1919. In said return for 1919 no deduction was taken or was claimed on line 26 of Schedule A thereof, under the heading "Amortization of war facilities."

On or about November 30, 1927, the petitioner filed with the General Counsel of the Bureau of Internal Revenue a book entitled "Detailed Cost Schedule and Other Pertinent Data in Support of Claim for Amortization of War Facilities." On January 3, 1928, petitioner filed a claim for refund of income and profits taxes for the calendar year 1918, said claim for refund being based on petitioner's alleged right to a deduction for amortization of war facilities. On September 11, 1925, petitioner filed a claim for refund of income and profits taxes for the calendar year 1919, and, on January 6, 1927, petitioner filed another claim for refund of income and profits taxes for the calendar year 1919, said claims for refund being based on petitioner's alleged right to a deduction for amortization of war facilities. On March 20, 1924, petitioner filed a claim for abatement of income and profits taxes assessed for the calendar year 1918 in the amount of $253,373.25. Said claim was not based upon any alleged right to a deduction for amortization of war facilities for said year.

The amortization on 1917 and 1918 costs is $2,008,485, and the amortization on 1919 costs is $363,572. The amortization period of the petitioner ended on March 31, 1919.

When petitioner filed its corporation income and profits-tax return for the calendar year 1918, in June, 1919, no regulations had been issued by the Commissioner as to the method of preparing a claim for amortization of war facilities. At that time T. B. Myers, who was in charge of making tax returns for the petitioner, was engaged in a revision of the tax return filed for 1917 and several prior years, and, owing to the size of the undertaking, was given desk space in the Treasury Annex at Washington, where he could work in conjunction with Bureau officials. He remained in Washington upon this task for a number of weeks. During this time he was in consultation with representatives of the Commissioner's office in determining the basis upon which amortization of war facilities should be computed. No definite program had been reached and no rulings or regulations and been issued with respect to the computation of the amortization allowance at the time the 1918 return was due for filing, but, based upon the tentative interpretation of the law as made jointly by these parties, the amount of $808,583.61 was computed as representing the 1918 deduction. Complete supporting schedules were attached to the 1918 tax return, showing the increased war facilities during the period from April 6, 1917, to December 31, 1918, upon which the amortization allowance was predicated. These schedules show that petitioner increased its plant facilities during the year 1917 in the amount of $3,082,353.58 and in the year 1918 in the amount of $4,220,753.78. These schedules further show that a lesser amount for each year was considered to be subject to an amortization allowance. The expenditures in 1917 after April 6, and the expenditures in 1918 which were regarded by petitioner as being subject to an amortization allowance, were classified upon the schedule according to type of buildings and nature of machinery and equipment.

The negotiations with the Bureau representatives continued throughout the year 1919 and in January, 1920, an amended tax return for the year 1918 was prepared by T. B. Myers, petitioner's representative, with the assistance of Bureau representatives, incorporating certain changes with respect to amortization of war facilities, inventories, depreciation, and certain expense deductions. At the same time amended returns for the years 1914 to 1917, inclusive, were also prepared and filed. Even at this time no definite program had yet been outlined as to how amortization of war facilities should be computed, although the Bureau representatives were then of the opinion that the formula used by the petitioner in determining the deduction taken on the original 1918 return was incorrect. Accordingly the amended 1918 return contained no specific deduction for amortization in the space provided therefor on the tax return, but in lieu thereof petitioner was permitted to include in its expense deductions certain expenditures made by petitioner for increased war facilities acquired during 1918 which it was deemed would have no value to the petitioner after completion of the war work. The same arrangement was made with respect to the tax return for 1917, petitioner being permitted to deduct as expense items certain expenditures for war facilities acquired during the period April 6, 1917, to December 31, 1917, which were deemed to have no practical value to petitioner after cessation for war work. The parties were in agreement at that time that it would be necessary to make a field examination of petitioner's plant for the purpose of making an accurate determination of the amortization allowance to which the petitioner was entitled, but it was decided to defer this action until after the promulgation of rules and regulations which were to outline definitely the procedure to be followed in the determination of a reasonable amortization allowance.

Petitioner at no time has withdrawn its claim for the amortization deduction set forth in its original 1918 tax return, but it agreed with one Van Pelt, head of the Amortization Section and representing the Commissioner at the time of the filing of the amended 1918 return, to permit an adjustment of the amortization allowance later. In the petitioner's corporation income and profits-tax return for the year 1919, which was filed in 1920, the petitioner made no specific claim for the deduction from gross income of an amount for the amortization of war facilities.

The petitioner has maintained no reserve for depreciation upon its books, but instead has consistently credited depreciation deductions directly to the asset accounts. The rates of depreciation for the years 1918 and 1919 were as follows:

	Rate
Classification	1918	1919
	Per cent	Per cent
Mill buildings	5	5
Corrugated iron buildings	10	10
Wooden buildings	10	10
Fireproof buildings	3	3
Brick buildings	5	5
Machinery	17 1/2	10
Inside equipment	15	10
Outside equipment	15	10

In the determination of the deficiencies for 1918 and 1919 the "respondent has used the same rates of depreciation as shown in the preceding paragraph applying same against the balance in the asset accounts at the beginning of each of the years 1918 and 1919, plus one-half of the agreed rates applied to additions for each of the two years respectively [sic.]."

Depreciation provided upon petitioner's books for the three-year period 1917 to 1919, inclusive, was as follows:

1917	$2,595.100.00
1918	3,003,874.40
1919	1,253,794.60

For 1917 and 1918 the depreciation charged off on the books was greater than the amount deducted in the tax returns for those years. The amount of depreciation charged off on the books of account for the four-year period 1915 to 1918, inclusive, was $4,616,983.20 in excess of the amounts deducted from gross income for depreciation on the tax returns for those years.

Depreciation sustained during the period 1915 to 1918, inclusive, during which time petitioner was manufacturing munitions and similar products for war purposes, was greater than normal, under the operating conditions which then obtained. Upon its original return for 1918 the petitioner deducted $1,874,373.54 for depreciation. It subsequently filed an amended return for 1918 and deducted $1,684,313.74 for depreciation, of which amount respondent has disallowed the deduction of $272,776.30 in the determination of the deficiency for 1918, reducing petitioner's allowance to $1,411.537.44. Petitioner deducted for depreciation in its return for 1919, $1,253,794.60, of which amount the respondent has disallowed the deduction of $171,095.90 in the computation of the deficiency.

During the year 1918 most of the plant was being operated day and night on a three-shift basis, employing both skilled and unskilled labor. The plant was being operated at the highest rate possible without regard to the ultimate effect upon the equipment, although maintained to the best of petitioner's ability under those circumstances.

In the computation of the deficiencies "the respondent has allowed depreciation in the amount of $368,617.37 for 1918 and of $217,653.78 for 1919 upon assets claimed by petitioner to be the proper subjects of allowances for amortization of war facilities."

In order to facilitate production under its war contracts petitioner was required to make many expenditures unnecessary in a peacetime business. These expenditures included extraordinary repairs, temporary improvements, special tools designed for specific war products, experimental equipment, temporary housing facilities for the greatly increased working force, recreation facilities, etc., all of which petitioner considered to be properly chargeable as a part of the cost of its abnormal operations and therefore not to be added to its capital account. Respondent has disallowed the deduction of such expenditures aggregating $1,011.875.07 in the year 1918, and $514,714.87 in the year 1919, and restored the items to income, claiming them to be capitalizable. Of the foregoing disallowances, the parties have stipulated that certain portions thereof constitute deductible expenses.

The respondent in his deficiency notices has refused to permit the petitioner to deduct from gross income of the calendar year 1918 the sum of $191,845.06 and from gross income for the calendar year 1919 the sum of $89,064.28, representing expenditures made in the respective years upon the so-called Chestnut Hill dam and reservoir. The respondent has capitalized these expenditures and has allowed depreciation thereon in the sum of $2,877.68 for 1918 and $7,004.98 for 1919. During the years 1918 and 1919 said dam and reservoir was the property of the Mad River Company and was one of the dams and reservoirs used for controlling the flow of the Mad River from which petitioner's water supply was drawn. During the calendar years 1918 and 1919 the stock of the Mad River Company was owned as follows:

	Shares
American Brass Company	242
International Silver Company	108
American Mills Company	63
Mattatuck Manufacturing Company	9
Gustave Cornelis	3
Scovill Manufacturing Company	175
Total	600

In or about the 1908 it was discovered that the Chestnut Hill dam was leaking and it became necessary to cut down the spillway about four feet; thereby greatly reducing the capacity of the reservoir. The petitioner attempted to persuade the other stockholders of the Mad River Company to join with it in authorizing the Mad River Company to do such work on the Chestnut Hill dam as would restore the reservoir to its former capacity, but the other stockholders refused to permit the corporation to make the necessary expenditures. The water was not used for power purposes, but solely for washing and other factory purposes and for condensing at the petitioner's plant. In order to insure to itself an adequate water supply the petitioner engaged in construction work on the Chestnut Hill dam. Its work was continued throughout the years 1918 and 1919 at a cost to it of $191,485.06 for 1918 and of $89,064.28 for 1919. The petitioner was not reimbursed by the Mad River Company or its stockholders for such cost of construction, nor was any reimbursement promised the petitioner by that company. During the calendar years 1918 and 1919 the yearly assessments for the running expenses of the Mad River Company had been levied in the following proportions:

	Parts
American Brass Company	33
Scoville Manufacturing Company	33
International Silver Company	17
American Milling Company	8
Mattatuck Manufacturing Company	8

Prior to June, 1923, the American Brass Company had practically discontinued the use of Mad River water, getting its supply from the Naugatuck River. In June, 1923, with the consent of the other stockholders of the Mad River Company, the Chestnut Hill dam and reservoir were conveyed by the Mad River Company to the petitioner for $1,290.

In the latter part of 1916, or the early part of 1917, it was estimated that the cost of making the improvement contemplated on the Chestnut Hill dam would be approximately $100,000. At the time the work was done in 1918 and 1919 the cost of labor had increased and, owing to the urgency of the situation, overtime work was performed, both of which facts greatly increased the cost of this project. In addition, the workmen ran into quicksand, which caused further expense, since it became necessary to drive steel interlocking sheet tile throughout the rest of the length of the core wall to stop the flow of water which would come down underneath.

The respondent determined the net income of the petitioner for the calendar year 1918 to be $4,741,092.05 and has determined an income and profits-tax liability for that year of $1,245,793.86. After applying against such tax liability the amount of $653,962.79, being the sum of $304,046.52 assessed on the basis of the original return, $96,543.02 assessed on the basis of the amended return, and $253,373.25 assessed on the March, 1924, list and involved in these proceedings, there remained a deficiency of $591,831.07 barred of assessment and collection. Said assessment of $253,373.25 has not been paid nor has a distraint or a proceeding in court been begun for the collection of said assessment of $253,373.25. On July 17, 1925, petitioner executed a bond to the United States in the sum of $270,000, with sureties, conditioned upon petitioner's payment upon final determination of such part of the tax covered by said claim for abatement as should be finally found to be due from the petitioner.

OPINION.

SMITH: 1. The first question presented by this proceeding is whether the petitioner made a claim for the deduction of an amount representing amortization of war facilities provided for by paragraph (8) of subdivision (a) of section 234 of the Revenue Act of 1918, before June 15, 1924. (See section 1209, Revenue Act of 1926.) Petitioner claims that it did; the respondent, that it did not.

Section 234(a)(8) of the Revenue Act of 1918 permits a corporation to deduct from gross income:

In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, * * * there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities * * * as has been borne by the taxpayer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income. * * *

Corporations making tax returns under the provisions of the Revenue Act of 1921 were entitled to make a corresponding deduction from gross income "for any taxable year ending before March 3, 1924 (if claim therefor was made at the time of filing return for the taxable year 1918, 1919, 1920, or 1921)."

Section 1209 of the Revenue Act of 1926 provides:

The deduction provided by paragraph (9) of subdivision (a) of section 214 or by paragraph (8) of subdivision (a) of section 234 of the Revenue Act of 1918 may (notwithstanding any provisions of the Revenue Act of 1921) be allowed for the taxable year 1918, 1919, or 1920 if claim therefor was made before June 15, 1924.

Article 185 of Regulations 45 provides in part as follows:

Amortization period. - The amortization allowance shall be spread in proportion to the net income (computed without benefit of the amortization allowance) between January 1, 1918 (or if the property was acquired subsequent to that date, January 1st of the year in which acquired) and either of the following dates:

(a) If the claim is based on (1) of article 184, the date when the property was or will be sold or permanently discarded as a war facility; or (b) if the claim is based on (2) of article 184, the actual or estimated date of cessation of operation as war facility.

The purpose and legislative history of section 234(a)(8) of the Revenue Act of 1924 are set forth in much detail in . See also ; . In , we said, referring to the above mentioned provision:

This provision of the statute is a relief provision, and, under the well known rules of statutory construction, if there is any doubt concerning its meaning, it must be liberally construed in favor of the taxpayer. * * *

In , we stated:

* * * The amortization provision is a relief measure, and should be liberally construed. A reading of the Act convinces us that the clause, "if a claim therefore was made" refers to and modifies the phrase "reasonable deduction for amortization." The making of the claim at the time of filing the return puts the Government on notice of the existence of the claim. Its duty then is to determine what constitutes a reasonable deduction. It is conceivable that a claim for a reasonable deduction for the amortization of war facilities set up as a lump sum with no itemization might he held to satisfy the provision that "a claim therefor be made." There is nothing in the Act specifically requiring itemization or forbidding amendment at any time before final settlement. We are satisfied that petitioner, having made claim for a reasonable deduction for amortization at the time of filing its return, may properly be allowed to amend its claim at the time of filing a petition with the Board, and may include items not listed in its original claim.

Clearly, under section 234(a)(8) of the Revenue Act of 1918 the petitioner is entitled to an allowance for amortization of war facilities in the computation of tax liability for the years 1918 and 1919. If it were not for the provisions of the 1921 Act and the 1926 Act, above quoted, no question could arise but that the petitioner is entitled to a deduction for amortization of war facilities in the determination of the deficiencies for 1918 and 1919. The respondent contends, in the first instance, that the petitioner abandoned its claim for amortization, so far as its return for 1918 is concerned, by having filed an amended return for 1918 without specifically claiming any deduction for amortization and, so far as the 1919 return is concerned, without claiming any deduction specifically for amortization in the return filed. The evidence of record shows, however, that the petitioner never abandoned its claim for an amortization deduction of its war facilities. It had made a claim for amortization in its original return for 1918 and that claim was under adjustment by the Commissioner at the time it filed the amended return for 1918. One Van Pelt, the head of the Amortization Section of the Income Tax Unit, permitted the petitioner to deduct from gross income in the amended return filed for that year, in lieu of any deduction specifically for amortization, the cost of certain additions to its plant and equipment which had been charged as expense items in its books of account. It was clearly understood between the representatives of the Commissioner and the petitioner that its amortization claim would be thoroughly investigated and that the final determination of tax liability would await such investigation and determination. The amended return for 1918 was filed in January, 1920, and at the same time or a little later the petitioner prepared and filed its original return for 1919. It was the recollection of the then secretary of the company, now the treasurer, that the 1919 return was prepared upon the same basis as the amended return for 1918. In other words, the cost of certain additions and improvements to its plant and equipment expensed upon its books of account were claimed as deductions from gross income in lieu of any specific deduction for amortization.

In the circumstances of this case we think it is immaterial to determine whether the petitioner made any claim for amortization of war facilities in its income and profits-tax return for 1919. In any event, by the regulations of the Commissioner (article 185, Regulations 45), the amortization allowance is required to be spread over the amortization period in accordance with the net income assignable to each taxable period within such amortization period. In , we held that it was not inconsistent for a petitioner before this Board to amend its claim for amortization allowance and to claim amortization upon other additions than those involved in the amortization claim filed with the Commissioner.

An inspection of section 1209 of the Revenue Act of 1926 shows that there is no requirement that a claim for amortization must be filed in connection with each of the tax returns for 1918, 1919, and 1920, in order that a deduction for an amortization allowance may be made in such returns. The provision was apparently put into the 1926 Act for the purpose of clarifying the provision contained in section 234(a)(8) of the Revenue Act of 1921, namely, "(if claim therefor was made at the time of filing of return for the taxable year 1918, 1919, 1920 or 1921). " Congress desired to make it entirely clear that claims for amortization under the Revenue Act of 1918 were not to be denied merely because claim therefor was not made at the time of the filing of the return. The statute simply requires that a claim for amortization allowance must be made before June 15, 1924. The petitioner made its claim for amortization prior to that date and it has never abandoned such claim. The Commissioner has determined the amount of the additions made by the petitioner in 1918 and 1919 which are subject to an amortization allowance. The allowance should be spread over the amortization period beginning January 1, 1918, in accordance with the stipulation of the parties.

2. The second point in issue is whether the petitioner is entitled to compute the depreciation allowances for 1918 and 1919 upon additions to plant and equipment made during those years at the same rates as upon like assets owned at the beginning of each year, or at only one-half of those rates, as contended by the respondent. At the hearing of this proceeding counsel for the petitioner stated:

The petitioner at no time maintained a reserve for depreciation upon its books, but instead credited the depreciation directly to the asset, and then applied the depreciation rates to that declining balance. In connection with the negotiations which have previously been referred to relating to 1917 and prior years, depreciation was one of the important questions and at that time parties agreed on the rates of depreciation applicable to the various properties and applied those rates to the declining balance at the close of the year 1917, for the year 1917. The understanding was that for subsequent years the same procedure would be followed; therefore the depreciation has been computed by petitioner upon the declining balance at the close of each taxable year. * * *

The petitioner then adduced evidence to the effect that the total amount of depreciation provided upon its books of account for the period 1868 to January 1, 1918, was $8,006,571.38, and that the residual value of depreciable assets at January 1, 1918, represented by cost less the depreciation which was charged directly against the assets, was $7,752,768.29. It was also testified that the depreciation charged off on the books of account for the four-year period 1915 to 1918, inclusive, was $4,616,983.20 in excess of the amounts deducted from gross income for depreciation on the tax returns for those years. The evidence was all directed to the point that the allowance for depreciation at rates allowed by the Commissioner upon the declining balances at the beginning of each of the years 1918 and 1919 and at one-half of those rates on additions in each of those years was not ample to cover depreciation and obsolescence in those years. It was contended that in view of the fact that the declining balances at the beginning of those years represented much less than the cost of the assets against which the rates were applied, the allowance made by the respondent was not adequate.

Although the petitioner's original returns for 1918 and 1919 were offered in evidence and although those returns referred to depreciation schedules accompanying the returns, such depreciation schedules were not attached to the returns offered in evidence and we have no means of knowing the bases which the petitioner and the respondent used in computing the depreciation allowance. However, there is attached to the amended return for 1918 the depreciation schedule used by the petitioner in computing the depreciation allowance for 1918 in the amount of $1,684,313.74, which it is insisted in this proceeding is the correct allowance for depreciation for 1918. Although the testimony of the witnesses indicated that the declining balance on depreciable assets at the beginning of 1918 was $7,752,768.29, and that such declining balance was the basis for the computation of the depreciation allowance, it is to be observed that this is not the basis used by the petitioner in computing its depreciation allowance. The depreciation schedule referred to shows that the balance at January 1, 1917 (including $261,701.80 for land), was $9,440,865.11, to which were added additions in 1917 of $3,093,198.68, for the purpose of arriving at the total on which 1917 depreciation was calculated, namely, $12,534,063.79. The above figure includes $308,171.45 as cost of land, upon which no depreciation was claimed. From the $12,534,013.79 referred to above was deducted $87,327.99 for sales and scrap during 1917. To the remaining $12,446,735.80 was added $4,220,753.78 representing additions in 1918 for the purpose of arriving at the basis of $16,667,489.58 on which the 1918 depreciation allowance of $1,684,313.74 was calculated. It is seen from the foregoing that the depreciation allowance was not computed by the petitioner upon the declining balance at January 1, 1918, plus the additions in 1918, but upon a substantially higher figure. The respondent has apparently computed his depreciation allowance upon the same basis as was used by the petitioner in computing its depreciation allowance. Apparently all that the respondent has done is to allow depreciation at the rates contended for by the petitioner upon the balances shown by the depreciation schedule at January 1, 1918, and to allow depreciation at one-half of those rates upon additions made during the year 1918. The reason for allowing depreciation upon additions made during the year at one-half the rates applied for the full year is that, in the absence of evidence to the contrary, the additions are presumed to have been acquired at the middle of the year and been subject, on an average, to wear and tear for only a six-months period.

Although the testimony of the witnesses was to the effect that the depreciation allowance made by the respondent was not adequate, we are of the opinion, upon an examination of the depreciation schedule attached to the 1918 amended return, that the testimony of the witnesses was upon the assumption that the depreciation allowance was based upon the declining balance as shown by petitioner's books of account at January 1, 1918. Such, however, was manifestly not the fact.

We have heretofore held, in , that "Depreciation for 1918 and 1919 computed upon the average balance of depreciable property during each year rather than upon the balance at the close of each year was correctly so computed." In that case the petitioner contended that "additions made to the plant account during the year should be depreciated as though they had been owned by the taxpayer at the beginning of the year." The Commissioner had based the depreciation allowance upon the average amount of the plant account throughout the year rather than upon the amount of the plant account as it existed at the close of the year. We sustained the Commissioner's contention. For lack of proof that the depreciation allowance computed by the respondent in the instant proceeding is not adequate his determination of the depreciation allowance is sustained.

In the computation of the deficiences the respondent allowed depreciation in the amount of $368,617.37 for 1918, and in the amount of $217,653.78 for 1919, upon assets which were claimed by the petitioner and which were, according to the stipulation filed, the proper subjects of allowances for amortization of war facilities, provided the petitioner's contentions with respect to the filing of a claim for amortization are sustained by the Board. Since in the opinion of the Board the petitioner timely filed a claim for amortization and was entitled to deduct an allowance for amortization of war facilities for both 1918 and 1919, the cost of such war facilities is not subject to any depreciation allowance. Such fact should be taken into account in the recomputation of the deficiences.

3. The third point in issue is whether the petitioner is entitled to deduct from gross income as an ordinary and necessary expense of carrying on its business the cost of certain work performed upon the Chestnut Hill dam and reservoir during each of the taxable years. The petitioner contends that these expenditures were necessary to insure to it an adequate supply of water during the performance of war contracts of 1918 and 1919, and that the effect of the expenditures was not to increase materially the asset value of its properties. The Chestnut Hill dam was located upon property of a corporation in which it was a stockholder, and not upon its own property.

The taxing statute permits the deduction from gross income of "All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." (Section 234(a), Revenue Act of 1918.) The act prohibits the deduction in the computation of net income of "Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate." (Section 215(b), Revenue Act of 1918.)

The line of demarcation between expenditures made in the operation of a trade or business and for improvements is not always sharply defined in accounting practice. In the instant case the petitioner did not consider in its accounting that the amounts expended were capital items; they were therefore charged to expense. It is to be noted, however, that they were not expenditures which would recur. For its own benefit the petitioner reconstructed the Chestnut Hill dam. It did not merely repair the dam. The work done was an improvement of the dam. The reservoir would thereafter afford an adequate supply of water for the petitioner for an indefinite term of years in the future, even if the plant should be operated on a 24-hour basis. In the light of such facts we are of the opinion that the respondent has properly regarded the expenditures in the reconstruction of the dam as capital expenditures and not as expenses. He has allowed the deduction during the taxable years of an amount for depreciation upon the dam. His treatment of the expenditures is approved and his action in disallowing the cost of the reconstruction as an expense item is sustained.

4. The final point raised by this proceeding is whether the deficiency for 1918 is barred by the statute of limitations. The respondent does not contend that any portion of the deficiency which has been determined by him for 1918 is collectible, except such portion thereof as was assessed on the March, 1924, list in the amount of $253,373.25. The respondent is protected in the collection of this deficiency by the surety bond filed in connection with the claim in abatement. Section 279(a) of the Revenue Act of 1924. .

Reviewed by the Board.

Judgment will be entered under Rule 50.