Appeal of Williamson Milling Co. ( 1926 )

OPINION.

Arundell:

The Williamson Power Co. was given credit on the books of the petitioner for power furnished at a rate based on the number of barrels of flour produced and for income realized from the Power Company properties. The expenses incurred in the production of power and the operation of the Power Company properties were paid by the petitioner and charged on its books against the Power Company. The credits to the Power Company account exceeded the charges against it in both years. It is the difference between the charges and credits in the Power Company account that the petitioner now seeks to have allowed as an operating expense, but there is no evidence as to the liability of the company to pay their stockholders the amount set up on the books, and as a matter of fact no payments were ever made. The Williamson Power Co., as such, never made a return of the amount now sought to be deducted by petitioner, nor did the three Williamsons treat this amount as income in their individual tax returns. The evidence rather indicates that the power plant was operated as an integral part of the mill plant.

Evidence was introduced on the question of the allowance of officers’ salaries for both of the years 1917 and 1918. As the year 1917 is not before us for determination, we have made no reference to that year in our findings of fact. As to the year 1918, the petitioner entered on its books as officers’ salaries for that year only the amount of $750. A revenue agent’s report in evidence and a stipulation filed show that the agent attributed a part of the mill wages and salaries to officers’ salaries. While the action taken by the Commissioner is not clearly brought out, it appears that he allowed as mill wages and salaries the full amount shown in that account and did not allow any part of it as officers’ salaries. At any rate the petitioner now seeks an additional allowance, as salaries of its principal officers for the year 1918, of $2,250, which was entered on its books in 1919. As the evidence does not show any authorization, accrual on the books of the petitioner, or payment of these salaries in 1918, they are not an allowable deduction for that year. Appeal of Columbia Textile Co., 2 B. T. A. 472, 474, and cases therein cited.

The Commissioner allowed in part and disallowed in part the amount of $12,000 shown on the petitioner’s books as a depreciation charge for the year 1918. The amount disallowed included items aggregating $6,702.84, which were originally entered in a so-called “ repair account ” but which at the end of each month were transferred to depreciation account. Some of these items are obviously not deductible. Others may well be, but no evidence in explanation of the several items was offered. Only the account as disclosed by petitioner’s books was placed in evidence. The general statement that orders issued by the United States Food Administration requiring the production of flour in a manner different from the usual practice of petitioner necessitated more than the average amount of repairs can not serve to establish the deductibility of particular so-called repair items where not a single word of testimony is offered as to their nature.

The deductibility of certain alleged bad debts and of a loss on account of stock held by the petitioner in the Kansas Milling & Export Co. must likewise be denied for lack of evidence. As to what steps the petitioner had taken to secure payment or to determine the worthlessness of the accounts sought to be charged off we are not informed, nor is there any clear testimony as to the year in which the loss was sustained on account of stock owned in the Kansas Milling & Export Co. The mere fact of a receivership is not sufficient to prove the worthlessness of the item.

The 50 per cent penalty added by the Commissioner to the additional tax found due for 1918 was asserted, it appears, on the ground that the Williamson Power Co. was nothing more than a fiction in the accounts of the petitioner and the credits made to its account were solely for the purpose of reducing the petitioner’s income. The Williamson Power Co. made no return of income. After hearing the testimony of the president of the petitioner and examining the documentary evidence in the case, it is our opinion that the condition of affairs which occasioned the assertion of the penalty was due to lax methods of bookkeeping and not to any intent on the part of the petitioner or its officers to evade tax.

We accordingly approve the determination of deficiencies in tax for the years 1918 and 1919 and disapprove the determination that a penalty is due for the year 1918.

Judgment will be entered after 15 days’ notice, under Bule 50.