Strong v. Commissioner , 14 B.T.A. 902 ( 1928 )

HOMER L. STRONG, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Strong v. Commissioner

Docket No. 19507.

United States Board of Tax Appeals

14 B.T.A. 902; 1928 BTA LEXIS 2891;

December 21, 1928, Promulgated

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Expenses for experimental work which do not result in the acquisition, development or improvement of a capital asset are deductible in computing net income.

Homer L. Strong pro se.

J. Arthur Adams, Esq., for the respondent.

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MORRIS

This proceeding is for the redetermination of a deficiency in income tax of $203.60 for the calendar year 1923.

The sole question for our consideration is whether the respondent erred in disallowing a deduction of $4,461.77, representing the aggregate of amounts expended by the petitioner during the year 1923 in the prosecution of experimental work for the improvement and perfection of a centrifugal threshing machine.

FINDINGS OF FACT.

The petitioner is an individual, with his residence at Wichita, Kans., who in 1923 was engaged in the grain commission business under the firm name of Strong Trading Co., and several years prior thereto in the sale of agricultural implements in conjunction with said business.

In 1923 the petitioner was preparing to manufacture and sell a centrifugal threshing machine, the principle of which was covered by issued May 22, 1917, to Monroe Davis. Said Davis, who was the original inventor of the machine, had organized a corporation and had spent in the neighborhood of $500,000 in an effort to perfect it so that it could be sold. The machine was of the type that, had it been successful, could have been sold to farmers for one-half the cost of threshing machines then in use, and it was this feature which impelled the petitioner to purchase it. The petitioner discovered upon acquisition of the machine that it had many mechanical imperfections, that it would waste grain, would throw it into the stack and would not clean it. Realizing that the machine was mechanically imperfect, and that improvements should be made before it would be suitable for commercial work, the petitioner incurred expenses in 1923 totaling $4,461.77 for labor, material, drawings, patterns, models, and work of an experimental nature, calculated to result in the required improvements of said machine for commercial purposes. Nothwithstanding these attempted improvements, the petitioner developed nothing during 1923 that was of subsequent use to him or improved the machine in any way. No part of that sum represents the purchase price of the machine itself nor the cost of securing any patent or patents thereon.

The items of expenses in controversy were entered in the petitioner's books of account in 1923 as they were incurred and expended, and in preparing his individual income-tax return he deducted the aggregate amount thereof, to wit, $4,461.77, as "expense experiments thresher patent" which amount was disallowed by the respondent for the reason "that the expenses in question were for betterments and improvements, therefore, represent capital expenditures and are not allowable deductions for income tax purposes."

OPINION.

MORRIS: The issue presented for consideration resolves itself into the simple question of whether the amount by which the respondent has increased the petitioner's income for the year 1923 is deductible under the statute in arriving at the net income subject to tax.

Respondent's disallowance of the amount in controversy was predicated upon the fact that it constituted a capital expenditure. In reaching the conclusion that an amount of this character is a capital expenditure instead of a deductible expense, it is essential that the expenditure result in the acquisition, development or improvement of a capital asset having a useful life beyond the taxable year in which the outlay was made. The record here is clear that the original inventor of the machine acquired by the petitioner expended in the neighborhood of $500,000 in an effort to perfect it; that upon acquisition by the petitioner it was discovered that it had many mechanical imperfections, namely, that it would waste grain, would throw it into the stack, and would not clean it; that the petitioner expended the amount in question for labor, material, drawings, patterns, and models, all of which were used in experiments, in his endeavor to bring about the desired improvements and correct the defects just related. The record further shows that, notwithstanding these attempted improvements, the machine was mechanically imperfect as it was theretofore and was an absolute failure all during 1923. We are convinced, therefore, that the amounts expended, aggregating $4,461.77, added no capital improvement to the machine, certainly not of a lasting nature, which could in anywise be considered as a capital investment. The petitioner was engaged in purely experimental work in the development of this machine for commercial purposes and the losses sustained or expenses incurred by him are, in our opinion, deductible in the computation of his net income for the year 1923.

Judgment will be entered under Rule 50.