Farmers Feed Co. v. Commissioner , 17 B.T.A. 507 ( 1929 )

FARMERS FEED CO. OF NEW YORK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Farmers Feed Co. v. Commissioner

Docket No. 12398.

United States Board of Tax Appeals

17 B.T.A. 507; 1929 BTA LEXIS 2282;

September 26, 1929, Promulgated

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1. Additional salaries voted by the board of directors for 1917, credited in the petitioner's books of account to the various officers and employes affected before the close thereof for 1917, and claimed as a deduction in the computation of net income for that year, may not be deducted in 1918.

2. Patents and contracts, the costs of which have been heretofore charged off in the petitioner's books of account, should be restored thereto to the extent of the proven costs less normal exhaustion and the amount of salvage or recovery from assets received therewith.

3. The petitioner is entitled to deduct obsolescence during the period January 1, 1918, to January 16, 1920, upon its buildings and machinery and equipment at the Melrose, Newark and Brooklyn plants, based upon the depreciated cost thereof less salvage and recovery on the sale or disposition of parts thereof.

4. Obsolescence of good will disallowed. Manhattan Brewing Co.,6 B.T.A. 952">6 B.T.A. 952, followed.

5. For failure to prove obsolescence of patents and contracts because of the advent of national prohibition no deduction therefor should be allowed.

6. Invested capital should be reduced for the taxable years by $12,155.83 because of an erroneous overstatement of the Buffalo assets.

7. The petitioner acquired the Bush patent rights with its original assets in 1905, the cost of which was entered upon its books of account at $39,000. In 1908 that entire amount, except $1, was charged to expense. In the respondent's deficiency notice he restored $38,000 of that amount so written off to the petitioner's assets, thereby increasing invested capital by that amount. Held, the patent having been acquired in 1905, and at least twelve years of its life having been spent in 1917 and thirteen years in 1918, the amount restored by the respondent should have been reduced by exhaustion occurring during those twelve and thirteen years, respectively.

8. Petitioner, having failed to adduce proof of the life of the foregoing Bush patent rights, acquired by it in 1905, is not entitled to deduct exhaustion thereon during the fiscal years 1918 and 1919 in the computation of its net income for those years.

A. B. Hyman, Esq., Karl D. Loos, Esq., and Preston B. Kavanagh, Esq., for the petitioner.

John F. Greaney, Esq., and Oscar McPeak, Esq., for the respondent.

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MORRIS

This proceeding is for the redetermination of deficiencies in income and profits taxes for the fiscal years ended September 30, of each of the taxable years 1918 to 1920, both inclusive, amounting to $107,650.01, $118,965.32, and $4,228.32, respectively.

The errors urged by the petitioner are:

(1) That the respondent has erroneously computed the net income of the petitioner for 1917 in that he has disallowed officers' salaries amounting to $60,000 paid for services performed during that year, or

(2) If the respondent did not err as alleged hereinabove, he did err in failing and refusing to allow said amount as a deduction in the computation of net income for 1918; and

(3) That the respondent erroneously excluded from invested capital for the years 1917 to 1920, inclusive, the cost of certain patents, and rights relating to patents, in the total amount of $88,216.91 and the cost of certain contracts in the amount of $220,628.75; and

(4) That in the event it should be held that said patents and contracts were depreciable assets, the respondent has erroneously computed income for each of the years 1917 to 1920 in that he has failed to make reasonable allowance for exhaustion, wear and tear of patents and certain rights relating to patents and certain contracts used in the petitioner's business; and

(5) That the respondent has erroneously computed income for the years 1918, 1919, and 1920 in that he has failed and refused to make a reasonable allowance for exhaustion, wear and tear, including a reasonable allowance for obsolescence of machinery and buildings used in the petitioner's business; and

(6) That the respondent has erroneously computed income for the years 1918, 1919, and 1920 in that he has failed and refused to make any allowance whatsoever for the exhaustion, wear and tear, including a reasonable allowance for obsolescence of patents, contracts, good will and other intangible assets.

Upon motion of counsel for the respondent, made at the hearing of this proceeding, amendments to his answer were made, alleging:

(7) That the deficiency as determined should be increased to the extent that the proof offered with respect to the $12,155.83 overstatement in the Buffalo assets may justify; and

(8) That he should exclude from invested capital 12/17 of $38,000 for the fiscal year ended September 30, 1918, and 13/17 of that amount for the fiscal year ended September 30, 1919, representing the expired portion of the Bush patent rights acquired by the petitioner in October, 1905.

Whereupon the petitioner moved to amend its petition to allege:

(9) That it is entitled to deduct exhaustion for the fiscal years ended September 30, 1918, and September 30, 1919, based upon the $38,000 valuation referred to in the allegation numbered eight above.

The petitioner also alleged that the respondent erred in failing to determine that the assessment and collection of taxes for the years 1917 to 1920, both inclusive, were barred by the statute of limitations. This issue was, upon motion of the petitioner, separately heard, considered, and disposed of in Farmers Feed Co.,10 B.T.A. 1069">10 B.T.A. 1069, in which we held that collection of the deficiency for 1917 was barred by the statute and that the collection of the deficiencies for 1918, 1919, and 1920 was not barred.

FINDINGS OF FACT.

The petitioner is a corporation which was organized and incorporated under the laws of the State of New York in October, 1905, with an authorized capitalization of $500,000, for the purpose of acquiring the assets of a New Jersey corporation (hereafter referred to as the New Jersey Company) bearing the same name as that of the petitioner and engaged in the same business, namely; purchasing refuse grains from brewers remaining after the completion of the process of brewing beer or ale, curing said grains through the use of specially designed machinery, and selling the resulting product for cattle feed. Its principal place of business is located at 532 East 76th Street, in the City of New York, and during the years in controversy it relied upon brewers in the metropolitan district, New York City, including the Bronx, Brooklyn, Hoboken, N.J., and Newark, N.J., for its supply of grains acquired pursuant to contracts arranged with brewers.

The assets and liabilities of the New Jersey Company, acquired by the petitioner for its capital stock, were recorded in the petitioner's books of account on October 2, 1905, as follows:

ASSETS
Sundry accounts receivable	$33,342.55
Real estate, New York factory	218,746.50
Real estate, New York vacant lots	57,000.00
Real estate, New York Brooklyn	40,000.00
Busch or [Bush] Patent Rights	39,000.00
Contracts	106,768.75
Consumers Park Br. Co. Stock	900.00
Drier Plant N.Y.	40,000.00
Machinery & Fixture, N.Y.	30,000.00
Machinery & Fixture, Brooklyn	20,591.78
Office Furniture & Fixture	2,000.00
Stock Merchandise	75,000.00
Marine Stock	15,000.00
	678,349.58
LIABILITIES
Farmers Feed Company of New Jersey	$500,000.00
Sundry Accounts Payable	12,099.53
Bills Payable	42,250.00
Mortgages Payable:
76th Street Property improved	80,000.00
76th Street Property vacant lot	40,000.00
Brooklyn property	4,000.00
	678,349.58

The item of $106,768.75 in the foregoing statement represents amounts expended by the New Jersey Company for the acquisition of competitive interest hereafter discussed. This account was carried on the books of the New Jersey Company at $176,000.

Upon incorporation in 1905 the petitioner acquired two plants, one on 76th Street in the City of New York, and the other in Brooklyn, both of which were located in more of less sparsely settled tenement communities. Subsequently to its incorporation it acquired the Melrose Grain Drying Co., a plant in Newark, N.J., and a plant in Buffalo, N.Y.

The petitioner was very profitable until its fiscal year 1920. Since that time, however, due to the fact that it has been compelled to rely upon brewers of near-beer for its supplies of wet grains, it has sustained losses. Its books of account record the following amounts paid as dividends from 1906 to 1916:

1906	$10,000
1908	25,000
1909	65,000
1911	100,000
1912	115,000
1913	$170,000
1914	140,000
1915	145,000
1916	100,000

While there was competition in the business of drying brewers' wet grain and converting it into cattle feed at the time of petitioner's inception it had no competitors even approaching its magnitude. The competitors engaged in the business at that time were the Empire Dairy Feed Co., National Grain Drying Co., Charles F. Wigand, or Brewers Grain & Feed Co., and while those companies were not considered as large as the petitioner or its predecessor, it was recognized that they had potential possibilities. They had the same access to breweries as the petitioner or the New Jersey Company and by paying larger sums to the brewers for the purchase of wet grains they were enabled to acquire contracts. That was particularly true of the Empire Dairy Feed Co., situated in New York, and the National Grain Drying Co., which held patent rights on certain machinery which they could have sold to brewers in New York City. The Empire Dairy Feed Co. had already procured contracts with brewers and the New Jersey Company felt its competitive force. In order that wet grain might be obtainable in and about New York without difficulty, and that competition in buying, which created higher costs, might be eliminated, it was found necessary to contract for the purchase of as many competitive interests as possible. There was also the possibility that brewers would install machinery for drying their own grains, something the New Jersey Company, and as will be seen hereafter, the petitioner, sought to prevent.

In each instance where the New Jersey Company entered into contract for the acquisition of competitive interests it paid cash, except in the purchase of the controlling interest in the National Grain Drying Co. of Philadelphia, for which it paid $10,000 in cash and $50,000 of its capital stock.

George E. Todd, president of the New Jersey Company, entered into a contract in March, 1905, with Charles F. Wigand, the owner of the entire capital stock of the Brewers Grain & Feed Co., heretofore referred to as a competitor of the New Jersey Company, to purchase said capital stock for the payment of $19,000. The pertinent provisions of that contract are as follows:

SECOND: The party of the first part [Charles F. Wigand] further covenants and agrees to and with the party of the second part, [George E. Todd] his executors, administrators and assigns as a further inducement to him to purchase the holdings of stock of the party of the first part in the said Company, that for a period of twenty-five (25) years from the date hereof, he will not either directly or indirectly engage in or become associated with, financially or otherwise, the business of manufacturing, drying, buying or selling wet brewers grains or malt sprouts or the business of manufacturing, buying or selling machines for drying brewers grains, within the territorial limitation of the Boroughs of Manhattan and Bronx, Counties of Kings and Queens in the State of New York and County of Hudson, in the State of New Jersey, nor will he for a like period of twenty-five (25) years from the date hereof, either directly or indirectly become associated with, interested or engaged in or identified with, either financially or otherwise, as stockholder, director, trustee, agent, officer or employee of any other person, firm or corporation, engaged in the said business of manufacturing, buying, selling or drying wet brewers grains or malt sprouts or manufacturing, buying or selling machines for drying brewers grains within the aforesaid territorial limitations. The party of the first part further covenants and agrees to and with the party of the second part that during a like period of twenty-five (25) years from the date hereof he will not purchase from any person, firm or corporation engaged in the brewing business within the territorial limitations aforesaid any dried brewers grains, excepting however that the party of the first part may continue to purchase during the unexpired term of certain existing contracts, the dried grains product of the Kips Bay Brewing and Malting Company, The Seitz Brewing Company and the Franklin Brewing Company, with which Companies, he the said party of the first part is now under obligation, by virtue of certain executed contracts to purchase the dried grains of such breweries.

THIRD: The party of the first part further covenants and agrees and does hereby vest in the party of the second part to the extent of his present or future interest in the patent rights, the exclusive right and license during the unexpired term of a certain U.S. patent, dated and bearing No. to use and operate certain grain driers known as the "P. & H. Drier, Burkholz Patent," within the territorial limitations of the Counties of New York Kings and Queens in the State of New York, and County of Hudson, State of New Jersey aforesaid, subject only to the right of the Kips Bay Brewing and Malting Company, Seitz Brewing Company and the Franklin Brewing Company, to continue to use and operate such driers of the said patent as are now constructed and installed in their respective breweries. * * *

The fourth article of that agreement provides that Wigand should use his best efforts to procure, either by purchase or otherwise, any outstanding interest in the Burkholz patent, and P. & H. Drier owned by others than himself, and the fifth article provides that thereupon the license granted by that agreement should extend to and cover the full title therein. That agreement provides further that:

SIXTH: The party of the first part does hereby further vest and grant to the party of the second part, his executors, administrators and assigns, the sole and exclusive right and license to use and operate within the territorial limitations aforesaid during the period of any patent or patents which may hereafter be applied for or granted or if not applied for then for a period of twenty years from the date hereof, a certain pressing machine invented or controlled by the party of the first part and now a part of the assets of the Brewers Grain and Feed Company or machine substantially similar thereto and the party of the first part does further covenant and agree to and with the party of the second part that he will not during the aforesaid period, sell, dispose of or give away either directly or indirectly for use or operation within the territorial limitations aforesaid, any pressing machines for pressing grains either as devised or designed or invented by the party of the first part or as the same hereafter may be improved upon.

That contract further provided for the purchase by the said Todd of certain presses specified therein, or at his election to pay the sum of $5,000 in lieu of the purchase of said presses. The option was exercised and the $5,000 was paid, in addition to the $19,000 hereinbefore provided for the purchase of capital stock, making the total consideration growing out of that contract $24,000.

The assets of the said Brewers Grain & Feed Co. specifically conveyed by that contract with the sale of said stock were:

1 Pressing Machine; 1 Grinding Machine; 1 Hydraulic Press; 2 Grain Driers with shafting, pulleys, belting, conveyors, elevators, etc., belonging thereto, 15 Horses, 2 Mules or in lieu thereof the sum of $300., Harness and Blankets; 7 Trucks, Contracts with V. Loewer's Gambrinus Brewing Company; Contracts with D. Stevenson Brewing Company; Contract with Jacob Rupert; Contracts with William A. Miles and Company; Lease of premises 626-632 West 30th Street, Lease (not signed) of premises East 91st Street; Stables Lease, Keasly Mfg. Company (Assumed), and all other contracts and assets of the Brewers Grain and Feed Company of every kind and nature whatsoever excepting two Black Horses and the outstanding accounts payable to the vendor on the first day of February, 1905.

In paragraph eight of the agreement aforesaid, Wigand agreed to hold Todd harmless of any and all claims and liabilities which might be asserted against the Brewers Grain & Feed Co. for any indebtedness of that company existing prior to February 1, 1905, and that he should defend, at his own expense, suits that may be instituted, but that the limit of his obligation to so respond, with a certain exception therein stated, should not exceed the amount of the purchase price of the stock so purchased, namely, $19,000. Pursuant to that covenant, Todd insisted upon the execution of agreements on the part of Otto C. Wigand, Minnie Cornehlson, Richard Dudensing, Jr., Christian Cornehlson, John Bardes and Nicholas Scholl, persons interested in the sale of said stock by Charles F. Wigand to Todd, in which they agreed that in the event of default by said Charles F. Wigand "in the payment of any sum or sums of money which under the provisions of the eighth paragraph of the agreement between him [Wigand] and the said George E. Todd" they would pay upon demand to George E. Todd or to the Brewers Grain Co., sums aggregating $10,500 in amount. Those parties also agreed, as did Wigand, that they would neither directly nor indirectly engage in or become associated with the business of manufacturing, drying, buying or selling wet or dried brewers' grain for a period of 25 years within the territorial limitations of the Boroughs of Manhattan and Bronx, Counties of Kings and Queens in New York State, and County of Hudson in the State of New Jersey.

Of the tangible assets acquired by the New Jersey Company in the foregoing transaction with Wigand, those which were usable had a value at that time of $2,500, exclusive of the value of the contract itself, and the remainder were scrapped.

On March 10, 1904, William S. Gordon, counsel for the New Jersey Company, entered into an agreement with Charles Schutte for the acquisition of 125 shares of preferred and 25 shares of the common stocks of the New Jersey Company in consideration of the payment of $5,875 therefor, and an additional sum of $5,000, in consideration of Schutte's covenant that he would neither directly nor indirectly engage or become interested in or associated with any business of manufacturing, drying, buying or selling brewers' or other wet or dried grain in any State or Territory in the United States south of the Dominion of Canada and east of the Mississippi River for a period of 25 years, making $10,875 the total contract price for the stock so purchased and the covenant of Schutte.

On the same day and date of the foregoing agreement, to wit, March 10, 1904, the said Gordon entered into an agreement with Henry Kern for the acquisition of two shares of common stock of the New Jersey Company owned by said Kern, in consideration of the payment of $145. That agreement contained a similar prohibitory clause to that contained in the Schutte contract, that is, that Kern should not again enter into the business of manufacturing, drying, buying or selling wet or dried grain for a period of 25 years within the territory specified therein. That agreement, in referring to the consideration paid Kern, recites that "The said payment representing to a considerable extent the consideration for the covenants hereby entered into by the party of the first part [Henry Kern]."

On the same day and date of the Schutte and Kern transactions hereinabove related, to wit, March 10, 1904, the said Gordon entered into an agreement with Louis Demmert, similar in every respect to the Kern agreement, by which Gordon acquired two shares of the common stock of the New Jersey Company, and the covenant of Demmert to remain out of the business of manufacturing, drying, buying or selling brewers' or other wet or dried grain within the period of 25 years in consideration of the payment of $145. That agreement also recites that the amount paid represented to a considerable extent the consideration for the covenants entered into by Demmert.

An agreement was entered into with Charles V. Schmidt, at or about the same time as the three agreements hereinabove referred to, for the acquisition of his stock in the New Jersey Company. That agreement exacted a covenant of Schmidt that he would not engage in the business of buying or selling wet or dried brewers' grain for a period of about 50 years. The consideration there was divided into the amount paid for Schmidt's stock and the amount paid for his covenant to remain out of the business, which was $40,000. In fact, Schmidt's covenant to remain out of business was the principal element in the transaction.

The New Jersey Company entered into contracts with the National Feed Co. in 1893 and paid in connection therewith $10,000 cash and $50,000 in stock. It also entered into a contract with the Empire Dairy Feed Co.

The petitioner, following the policy of its predecessor, also entered into a number of contracts, some for the acquisition of patents covering machinery used in the drying and curing of wet brewers' grains, and others for the acquisition of going plants engaged in that business, all of which, however, contained the vendors' covenant to remain out of business for a certain number of years.

On June 8, 1908, the petitioner entered into an agreement with the Grupe Drier & Boiler Co., Durbin Grupe and John P. Grupe, for the purchase of the territorial rights in Letters Patent No. 659,299, granted October 9, 1900, and Letters Patent No. 738,106, granted September 1, 1903, in and for the territory of Greater New York, comprising the Boroughs of Manhattan and Bronx, the Counties of Westchester, Kings, Queens, Nassau, Richmond, and Staten Island, in the State of New York, and Jersey City, town of Union, Union Hill, Hoboken, and West Hoboken, and any other city or town in the County of Hudson, State of New Jersey, in consideration of the payment by the petitioner of $15,000. The covenants in that agreement pertinent to the issues here, are as follows:

(2) The Grantors further represent, covenant and agree to and with the Grantee that they will not during the term of this agreement either directly or indirectly, use, sell, lease, license, loan, construct or deliver any driers, or any part or parts thereof, under the aforesaid Letters Patent, or any other drier with or being an improvement or improvements thereon, or any part or parts thereof, to any person, firm or corporation other than the Grantee or its successors or assigns, for use or intended for use in the aforesaid territory; and that all machines hereafter sold, leased, licensed, loaned, constructed, delivered or disposed of by the Grantors or any of them shall be restricted to use outside of the said territory by proper notices inscribed on the plate of each and every machine in addition to which an express contract shall be made by the Grantors in reference to the sale, use, license, loan or other disposition of the said machines under the aforesaid Letters Patent or any improvement or improvements thereof which shall contain a provision that the machines so sold, leased or disposed of shall be limited to use outside of the territory herein provided for. The territorial grant hereby made shall and is intended to include during the term of any further or other patents hereafter granted any and all improvements which the Grantors, or either or any of them, may hereafter make, obtain or control in relation to the said driers, but shall include new driers of any other class not covered by the aforesaid patents or improvements only during the term of both the Durbin Grupe patents above mentioned.

(3) The Grantors further covenant and agree to and with the Grantee, its successors and assigns, as a further inducement, to purchase the territorial rights aforesaid and make payment therefor as herein provided; that during the life of both of the aforesaid Letters Patent neither or any of them will either directly or indirectly engage in or become associated with, financially or otherwise, the business of manufacturing, drying, buying or selling grains driers, or wet or dry Brewers grains or malt sprouts, within the aforesaid territorial limitation, nor will they or either or any of them, during the life of both of the patents aforesaid, either directly or indirectly, become associated with, interested or engaged in or identified with, either financially or otherwise, as stockholders, directors, trustee, agent, officer or employee or any other person, firm or corporation, engaged in whole or in part within the territorial limitation aforesaid, in said business of manufacturing, buying, selling or drying wet brewers' grains or malt sprouts, or the sale of Brewers' or distillers' grains in the dried state, or engaged in whole or in part in the manufacture, purchase or sale within the aforesaid territorial limitation of machines for drying brewers, or distillers grains. The Grantors further covenant and agree to and with the Grantee that during the life of the patents aforesaid, they or either or any of them will not purchase from any person, firm or corporation engaged in the brewing or distilling business, within the territorial limitations aforesaid, any brewers' or distillers grains in the dried state.

* * *

(7) It is further agreed that if the Grantee, its successors or assigns, shall manufacture, sell, lease, or license any grain driers, containing any of the improvements covered by either of the two Letters Patent aforesaid, issued to Durbin Grupe, for use by any other person, firm or corporation, the Grantee will by express contract with such other person or persons and by notice printed or otherwise inscribed upon the plate of such driers limit the use of the same to the territorial limits above described.

An assignment, executed by the grantees, was duly recorded in the records of the United States Patent Office on August 26, 1908.

The petitioner entered into an agreement with Carl Rach on April 14, 1909, for the acquisition of the exclusive territorial rights in Letters Patent No. 621,074, granted March 14, 1899, covering improvement in rotary steam driers in the New York and New Jersey territory provided for in the Grupe agreement hereinabove, for and in consideration of the sum of $10,000. It was agreed that he, Rach, would enter the employ of the petitioner for a period of 10 years as consulting chemical engineer at a salary of $1,000 per annum. The covenants restricting the manufacture and sale of the machines covered by that patent and prohibiting Rach from entering into a competitive business for a period of 25 years are, in effect, the same as those contained in the Grupe contract.

On September 9, 1909, the petitioner entered into an agreement with Charles H. Caspar for the purchase of the territorial rights in Letters Patent Nos. 779,264 and 791,877 granted January 3, 1905, and June 6, 1905, respectively, covering improvements in driers, during the unexpired term thereof, in the same territory as provided in the preceding agreements. Caspar's covenants with respect to engaging in a competitive business and restricting the further manufacture and sale of driers within the prescribed territory, are, in effect, the same as in the preceding agreements. The total consideration mentioned in that contract was $12,700, payable, $2,700 in cash and the remaining $10,000 was satisfied by the petitioner transferring to Caspar the following machinery and equipment: two driers, two presses, one wet and one dry grain tank, one vapor pipe, one system for conveying dry grains, one system for conveying wet grains, and shafting, pulleys, hangers, etc.

On January 27, 1909, the petitioner entered into an agreement with the Biles Drier Co. and J. W. Biles, for the acquisition of the territorial rights in Letters Patent No. 766,868, granted August 9, 1904; No. 829,758, granted August 28, 1906; No. 12,491, granted June 5, 1906; No. 907,219, granted December 22, 1908, covering improvements in driers, in the territory hereinabove named in similar agreements, for and in consideration of the payment of $6,000. That agreement also contains covenants restricting the manufacture and sale of the machines covered by those patents and prohibiting the covenantors from engaging in a competing business during the life of said patents the same, in effect, as those hereinbefore discussed. An assignment, made pursuant to the contract aforesaid, was executed by the grantor and was duly recorded in the United States Patent Office on February 8, 1909.

The petitioner entered into an agreement with S. J. Vernsten on November 23, 1909, for the purchase of the territorial rights, during the unexpired term, in patent application No. 484,211, filed March 18, 1909, covering improvements in drying machines, in the Greater New York and New Jersey territory as specified in agreements hereinabove discussed. That agreement contained covenants restricting the manufacture and sale of driers in the territory licensed to the petitioner and prohibiting the vendor from engaging in a competing business for a period of 25 years similar, in effect, to the covenants found in other agreements hereinabove related. The consideration paid by the petitioner for the territorial rights and Vernsten's covenant to remain out of business for 25 years was $6,000. Pursuant to the contract entered into, Vernsten executed an assignment which was duly recorded in the records of the United States Patent Office on November 26, 1909.

The Galland-Henning Pneumatic Malting Drum Manufacturing Co. and F. B. Giesler entered into an agreement with Dr. Carl Rach for the sale to the latter of the territorial rights in Letters Patent No. 694,366, granted March 4, 1902, covering improvement in rotary steam driers, in substantially the same territory as mentioned in other similar agreements hereinabove. The covenants there restricting the manufacture and sale of machinery covered by that patent and prohibiting the grantors from engaging in a competing business are similar to those found in other agreements entered into by the petitioner. Rach paid the grantors $6,000 under that agreement. On or about March 18, 1910, Dr. Carl Rach executed an assignment of his rights under the aforesaid agreement of December 14, 1909, and a supplemental agreement thereto to the petitioner. Only a nominal consideration is stated in the assignment of Rach to the petitioner.

The petitioner entered into two agreements, one on February 23, 1910, and the other on March 23, 1910, with Adolph Baer and Phonix-Werk G.M.B.H. of Germany, respectively, for the acquisition of the sole and exclusive privilege and license, during the unexpired term of certain letters patent, granted to Phonix-Werk, G.M.B.H. by the Empire of Germany, upon the rotary steam grain drier and grain drying machinery known as the "Neuste Type Otto's Treber Trockner 'Neuestes System Otto,'" and a yeast mixer known as the "Phonix Hefeund Gelager-Mischmaschine D.R.G.M.," and during the term of any new patents which may be granted by Germany for improvements thereon and during the term of any patent or patents which may be granted by the United States Patent Office upon applications made, or to be made, within the territorial limitation substantially as hereinabove stated in discussing similar contracts, for and in consideration of the sum of $2,000. The period within which the covenantors should not deal in, manufacture, etc., drying machines covered by these patents was the life of the agreement, or in no event less than 15 years.

The petitioner entered into an agreement with Herbert W. Shepard on July 11, 1910, wherein Shepard represented that he was the owner of 74 shares of the common capital stock of the Atlantic Drier Co. having a total capitalization of 350 shares, 250 of which are common stock, and 100 of preferred stock; that in addition to the 74 shares of common stock owned by him, 76 shares of common stock were held by various other persons and 25 shares of preferred stock were owned by the Atlantic Export Co. Upon these representations and the representation that he held options for the purchase of all of the common and preferred stock held by others, the petitioner advanced him $6,300 for the sole purpose of acquiring those 76 and 25 shares, respectively, in consideration, however, of covenants on the part of Shepard that he deposit with the petitioner the 74 shares of common stock owned by him as collateral for said advance; that should Shepard purchase the said 76 shares of common and 25 shares of preferred stocks they should be immediately deposited, endorsed in blank to the petitioner, which together with the 74 shares of stock belonging to Shepard, would be held as security for the payment of the $6,300. As a further inducement for the advance so made, Shepard covenanted to procure, immediately upon the purchase by him of the outstanding shares of the Atlantic Drier Co., a contract from the said company granting the petitioner the sole and exclusive right and license during the life of certain patents, hereafter named, covering improvements in driers, that should Shepard fail to procure the execution of said contract by the said Atlantic Drier Co. as stated, in that event, he thereby agreed to sell the said 76 shares of common stock, and 25 shares preferred stock, together with the 74 shares of common stock then owned by him in consideration of the $6,300 advanced by the petitioner. Shepard further covenanted that he would neither directly nor indirectly, for a period of 25 years, use, manufacture, sell, lease, license, construct, or in any way dispose of within the territory of Greater New York, comprising the Boroughs hereinbefore mentioned, with respect to other contracts, and in the County of Hudson, State of New Jersey, driers, drying machines, or parts thereof, whether patented or unpatented, and, furthermore, that during said period of 25 years he would not, either directly or indirectly, become interested in the business of manufacturing, drying, buying or selling wet or dried brewers' or distillers' grains within the territory aforesaid.

Pursuant to the Shepard agreement hereinabove, a contract was entered into between the petitioner and the Atlantic Drier Co. on July 11, 1910, whereby it acquired the territorial right in Patent No. 921,011, granted May 11, 1909; No. 928,706, granted July 20, 1909; No. 939,175, granted November 2, 1909, covering improvements in driers, in substantially the same territory as specified in the several preceding agreements. The usual covenants restricting the manufacture and sale of machines covered by those patents and prohibiting the vendor from engaging in a competing business during the unexpired term of said patents were inserted in that agreement.

The petitioner entered into a further agreement with said Shepard under date of April 15, 1911, for the purchase of 150 shares of common stock and 25 shares of preferred stock, all of the shares outstanding, of the Atlantic Drier Co., referred to in agreement of July 11, 1910, in consideration of the $6,478.80 advanced to said Shepard and the payment of a further sum of $250. Shepard covenanted that the said Atlantic Drier Co. owned and controlled certain other valuable patents on presses and other machinery, and furthermore, that he would procure the written resignation of all of the then officers and directors of that company, and would cause the election of such other directors and officers in the said company as might be designated by the petitioner.

The petitioner entered into an agreement on January 13, 1911, with John Lockwood whereby it purchased the sole and exclusive right and license during the unexpired term of certain letters patent owned by said Lockwood and registered in the German Patent Office, covering improvements in grain-drying machinery, said license to extend to the territory hereinabove mentioned in the case of other contracts of a similar nature and also the State of Pennsylvania, in consideration of the payment of $2,500. That agreement contained covenants restricting the manufacture and sale of machinery and prohibiting the grantor from entering into a competing business for 25 years substantially the same as in similar contracts heretofore discussed.

Petitioner entered into an agreement with Louis Soest & Co., M. B. H. and H. H. Freund, for the purchase of territorial rights in German Letters Patent Nos. 180,686, 185,927, and 192,896, covering certain improvements in drying machinery, in the territory prescribed in other and similar contracts hereinabove, in consideration of the payment of $16,500. Those inventions were patented March 19, 1905, December 28, 1905, and December 29, 1909, and letters patent were issued January 28, 1907, June 6, 1907, and November 22, 1907, respectively. The customary covenants restricting the manufacture and sale of machines covered by those patents and prohibiting the covenantor from entering into a competing business for 25 years were inserted in that agreement.

On March 2, 1911, the petitioner entered into an agreement with the Herr Automatic Press Co., H. A. Herr, and Walter J. Kaufman, for the purpose of acquiring two hydraulic automatic presses with improvements covered by Letters Patent No. 801,872, granted October 17, 1905; No. 819,996, granted May 8, 1906; No. 968,153, granted October 23, 1910, and for the further purpose of acquiring a territorial license in said patents in the territory of Greater New York and New Jersey, hereinbefore provided in similar contracts, except in the Borough of Richmond, State of New York. The presses were acquired at a total cost of $10,500 and the territorial license for the unexpired term of said patents for an additional sum of $4,000. This contract contained the usual restriction upon the sale of machines manufactured under those patents and a covenant prohibiting the vendors from entering into a competitive business for a period of not less than 25 years.

On February 21, 1911, Dr. Carl Rach entered into an agreement with Richard Simon & Sons, Ltd., a corporation existing under the laws of the Kingdom of Great Britain and Ireland, for the acquisition of the sole and exclusive territorial license in United States Letters Patent No. 655,586, granted August 7, 1900, covering improvement in drying machines, in the territory of the State of New York, in consideration of the payment by said Rach of 400 pounds sterling. The grantor covenanted, as in the numerous other contracts hereinbefore mentioned, that it would not engage in the sale, lease or manufacturer of any grain driers or parts thereof under said letters patent within the State of New York, and, furthermore, that it would not, during the unexpired term of said letters patent, either directly or indirectly, engage in or become associated with the business of manufacturing, purchasing or selling machines for drying grains of any kind whatsoever. Under date of March 6, 1911, Dr. Carl Rach duly assigned his rights under and to the foregoing contract to the petitioner.

By an assignment duly executed by Henry Freund under date of April 8, 1912, the petitioner acquired the rights of said Freund in and to a contract entered into by him on June 9, 1911, with I. Sperber of Vienna, Austria, which provided for the acquisition of the exclusive right and privilege, during the unexpired term, in and to Austrian Letters Patent No. 14,500, and United States Letters Patent No. 609,824, granted August 30, 1898, and No. 742,337, granted October 27, 1903, covering improvements in methods of obtaining cattle food and improvement in apparatus for drying industrial wastes, in consideration of the payment of $3,500 cash. The customary restrictions upon the manufacture and sale of the machines manufactured under those patents and a covenant prohibiting the grantor from engaging in a competitive business for a period of 25 years are found in this agreement.

By an assignment duly executed by Henry Freund on April 8, 1912, the petitioner acquired the rights of said Freund under a contract which he entered into on June 17, 1911, for the acquisition of territorial rights in German Letters Patent No. 34,164, for and in consideration of the payment of $2,400 cash. The territory covered by that contract was substantially the same as in the several preceding contracts hereinabove, and the usual covenants restricting the manufacture and sale of machinery covered by said patent, and prohibiting the grantor from engaging in a competitive business for 25 years were present in that contract.

The petitioner entered into an agreement with Adolph, Alfred and Ludwig Baer of Mannheim, Germany, on July 7, 1913, for the purchase of the exclusive territorial rights to manufacture improvements in malt or grape husks drying apparatus covered by United States Letters Patent No. 1,052,845, granted February 11, 1913, during the unexpired term of said patent, in consideration of the payment of $1,650. The covenants with respect to the territory granted by said agreement and with respect to the manufacture and sale of machinery covered by that patent are substantially the same as similar covenants in the contracts hereinbefore described, except that the period of restriction was for not less than 15 years. The purchase of these territorial rights was recorded in the petitioner's books of account at a cost of $1,650 in July and September of 1913, and according to the books of account $72 thereof was refunded in July of 1913, and in October of 1913 an amount of $1,577 was charged to profit and loss, leaving a nominal balance in said account of $1.

The consideration specified in each of the foregoing contracts was actually paid by the petitioner. It was the policy of the petitioner to maintain the recorded value of its assets at as low a figure as possible, therefore, the amounts paid under said contracts were written down on the books of account to a nominal value of $1 each, as shown in detail tabulations hereinafter, but said contracts were not of any less value when so written down than when acquired.

All of the above mentioned contracts were entered into or acquired by the petitioner for the purpose of eliminating competiton from the field in New York City and vicinity, and, while there may have been one or two exceptions, the rights acquired thereunder proved an effective measure and the petitioner acquired, and continued to hold, control of the business in that vicinity. None of the patents under those contracts were disposed of, nor were any of the contracting parties released from their covenants.

Under date of June 6, 1910, the petitioner entered into an agreement with the Atlantic Export Co. and Max Hottelet, owners of 500 shares, or the entire capital stock, of the Eastern Feed Co., a corporation, engaged in the drying of wet grains in Brooklyn, N.Y., for the purpose of acquiring the stock of the latter company, which it did, for the total purchase price of $45,000. The tangible assets owned by said Eastern Feed Co., which the petitioner acquired under that agreement were 1 large tank on roof, 1 Atlantic drying machine, 1 continuous feed press, 1 bag steam packer, 1 enging, 2 boilers, shafting, pulleys, conveyors, elevators, fan, foundations incident and appurtenant to the above machinery, 1 Fairbanks platform scale, 8 horses, 4 large grain wagons, harness, blankets, halters, various tools, and any and all other machinery, tools, fixtures, appurtenances, office furniture, books, stationery and any other personal property used in connection with the business of the company. That company was also the owner of, and the petitioner acquired, the following contracts and lease:

Agreement made the 24th day of December, 1909, between John F. Trommer, of Brooklyn, N.Y., and the Hottelet Co., of Milwaukee, Wis.

Agreement made the 16th day of December, 1909, between the William Ulmer Brewing Co., a domestic corporation, and the Hottelet Co., of Milwaukee, Wis.

Contract made the 16th day of December, 1909, by Katharina Eppig as executrix of and trustee under the last will and testament of Joseph Eppig, deceased, and the Hottelet Co., of Milwaukee, Wis.

Agreement made the 14th day of December, 1909, between H. B. Scharmann & Sons, of Brooklyn, N.Y., and the Hottelet Co., of Milwaukee, Wis.

Agreement made the 14th day of December, 1909, between the Congress Brewing Co., Ltd., of Brooklyn, N.Y., and the Hottelet Co., of Milwaukee, Wis.

Agreement made the 14th day of December, 1909, between the Joseph Fallert Brewing Co., of Brooklyn, N.Y., and the Hottelet Co., of Milwaukee, Wis.

Lease made and entered into between Charles H. Reynolds, Mortimer L. Reynolds and Eugene B. Reynolds, copartners, to the Eastern Feed Co., dated the 15th day of January, 1910, and recorded in the office of the Register of the County of Kings, in liber 3205, page 83, block 2946 of Conveyances at 48 minutes past 1 p.m. on the 4th day of February, 1910, and covering the premises in the said lease particularly described.

Agreement dated the 31st day of March, 1910, between the Eastern Feed Co. of New York and John H. Hilliker of New York, providing for the sale of wet brewers' grains to the said Hilliker upon certain terms and conditions in the said agreement specifically mentioned.

The vendor there agreed to deliver to the petitioner the resignation in writing of the then officers and directors of the Eastern Feed Co. and to elect in place thereof such officers as may be designated by the petitioner. On the same day and date as that agreement, various assignments were duly executed by Max Hottelet, Ernst Hottelet, and the Hottelet Co., vesting title to the several agreements hereinabove referred to in the Eastern Feed Co.

The items of tangible assets acquired under the agreement hereinabove with the Atlantic Export Co. et al. were what the company had in its plant at that time. The principal items actuating the petitioner to purchase the stock of the Eastern Feed Co. were discontinuance of business by people connected with that organization and the acquisition of the contracts which that company had with brewers for the purchase of wet grain. While the petitioner wrote off the consideration paid for that contract in the same year in which it was acquired, the rights acquired thereunder were no less valuable when written off than when acquired. The petitioner continued to receive the output of grains of the various brewers whose contracts it acquired and Hottelet and the Atlantic Export Co. continued to remain out of the competitive field. Of the tangible assets listed in that agreement, the petitioner took possession of the horses and wagons, which were about all. The remainder, because of the excessive cost of moving them from the building, were scrapped. Petitioner was released from the lease set forth in that agreement by the payment of $1,000.

The fair value of the horses and wagons taken over under the contract aforesaid was $100 each, and the amount recovered by way of salvage from the assets which were scrapped was $1,000.

On January 5, 1910, the petitioner entered into an agreement with H. W. Peterson, who was instrumental in procuring the contracts held by the Eastern Feed Co. with various brewers, and who was well acquainted and on friendly terms with the brewers throughout the territory in which the petitioner was negaged, whereby it employed Peterson for a period of 10 years, in consideration of the payment of $5,000 in full for all services to be rendered for that period, payable, $2,500 upon the execution of the agreement, and the remainder in annual installments over the period of 10 years. Peterson covenanted not to engage in nor become interested in any other employment prejudicial to the interests of the petitioner during the tenure of his contract. This contract also contained the customary covenant restricting the manufacture and sale of machinery used in the petitioner's business.

The petitioner entered into a contract with the Central Feed Co., engaged in the business of buying, selling, and dealing in the manufacture of wet and dried brewers' grains in the City of New York, under date of April 7, 1917, for the purchase of that company's business, located at 70th Street in that city, together with its good will, machinery and equipment, horses, wagons, carts, harness, tools, bags, safes, and office furniture, used or employed in connection with said business, and a contract with the Central Brewing Co. for the purchase of wet grains, for and in consideration of the sum of $75,000, which the petitioner actually paid. The vendor covenanted not to again engage in the buying, selling or manufacturing of wet or dried brewers' or distillers' grains in any place or territory east of the Mississippi River for a period of 25 years, nor to engage in the manufacture of any driers to be used within said territory for said period. It further covenanted that it would dissolve and cease its corporate existence within 60 days following the execution of that agreement.

William Lowe, a stockholder and director of the Central Feed Co., also covenanted not to engage in the business of buying, selling, and dealing in the manufacture of wet or dried grains or the machinery used therefor in any place or territory east of the Mississippi River for a period of 25 years.

The Central Feed Co. purchase was recorded in the petitioner's books of account at a cost of $75,000 in April, 1917, and in October, 1917, $74,999 of the purchase price was charged to profit and loss, leaving a nominal balance in the "Central Feed Co. purchase" account of $1.

Of the tangible assets acquired in the Central Feed Co. transaction hereinabove, the petitioner took possession of 4 driers, 2 presses, 3 or 4 horses and 2 trucks. The driers had a value of $1,500 apiece, and the presses, $500. The value of all of the tangible assets which it took possession of did not exceed $10,000.

At the time the petitioner acquired the assets of the Central Feed Co., that company had a contract with the Central Brewing Co., which had an output of 250,000 to 300,000 barrels per annum. Subsequently to the acquisition of its assets the petitioner received the wet grains of the Central Brewing Co. and continued to receive them from the time of acquisition until it discontinued business. The Central Feed Co. was never released from its covenant to refrain from engaging in a competing business.

The Lembeck & Betz Eagle Brewing Co., one of the largest brewers in New Jersey, had always sold the output of its wet grains to the petitioner until it decided to install, and did in fact install, a Caspar Drying plant for the purpose of drying its own wet grains, which threatened the petitioner with a permanent loss of its supply of grain from that source and the further possibility that that company might become its competitor. The petitioner began negotiations with that company in an effort to cause it to abandon the plan of drying its own grains and as a result a contract was entered into in which it covenanted that it would not go into the drying of brewers' grains or the selling of wet brewers' grains for a period of at least 10 years. The officers of that company also entered into a similar covenant. The petitioner acquired the drier installed by that company, which it turned over to Caspar, the inventor, at a valuation of $10,000 in addition to paying him $2,000 in cash. The petitioner's journal entry of June, 1909, recording the Lembeck & Betz transaction, charged profit and loss with $20,000 and credited that company with a similar amount, which entry states that the amount represents "abandonment of grain drying by Lembeck & Betz Eagle Brewing Company." A further entry is made charging profit and loss with $45,000 and crediting Lembeck & Betz, bills payable, with a like amount, which entry bears the same explanation as the preceding one.

Notwithstanding the fact that the payments growing out of the Lembeck & Betz transaction hereinabove referred to were written off to profit and loss, the agreements entered into with that company were no less valuable immediately after they were made than at the time they were made.

The petitioner's books of account contain entries showing the cost of acquisition, the years in which acquired, the years in which written off and the amounts so written off against various patent accounts between October 1, 1905, and September 30, 1916, as shown in the following tabulations:

Year	Cost	Write offs
BUSH MACHINE PATENT RIGHTS
Oct. 1, 1905 (original book cost)	$39,000.00
1908		$33,000.00
1909		999.00
Total cost	39,000.00
Total write offs		38,999.00
GRUPE PATENT RIGHT
1908	15,000.00
1909		14,999.00
Total cost	15,000.00
Total write offs		14,999.00
HERSEY DRIER PATENT
1909	10,000.00	9,999.00
Total cost	10,000.00
Total write offs		9,999.00
CASPAR PATENT RIGHTS
1909	2,000.00	1,999.00
1910	700.00	700.00
Total cost	2,700.00
Total write offs		2,699.00
BILES DRIER PATENT
1909	$6,042.00
1910		$6,041.00
Total cost	6,042.00
Total write offs		6,041.00
VERSTEN PATENT
1910	6,000.00	5,999.00
Total cost	6,000.00
Total write offs		5,999.00
GALLAND HENNING GIESLER CO. PATENT
1910	6,136.00	6,135.00
Total cost	6,136.00
Total write offs		6,135.00
PHOENIX WERK-BAER PATENT
1910	2,000.00	1,999.00
Total cost	2,000.00
Total write offs		1,999.00
SHEPARD ATLANTIC DRIER
1910	6,300.00	6,299.00
Total cost	6,300.00
Total write offs		6,299.00
JOHN LOCKWOOD PATENT
1911	2,606.00	2,605.00
Total cost	2,606.00
Total write offs		2,605.00
HERBERT SHEPARD PATENT
1911	3,818.91	3,817.91
1912	adj. -3,300.00	adj. -3,300.00
Total cost	518.91
Total write offs		517.91
SOEST DRIER PATENT
1911	17,500.00	17,499.00
Total cost	17,500.00
Total write offs		17,499.00
HERR PRESS
1911	4,000.00	3,999.00
Total cost	4,000.00
Total write offs		3,999.00
RICHARD SIMON & SON
1911	1,952.00	1,951.00
Total cost	1,952.00
Total write offs		1,951.00
J. SPERBER PATENT
1911	3,500.00	3,499.00
Total cost	3,500.00
Total write offs		3,499.00
ALBERT GERLOCK PATENT
1911	2,400.00	2,399.00
Total cost	2,400.00
Total write offs		2,399.00

The following is a summary of the foregoing amounts taken from the books of account at September 30, 1916, showing the total amount written off in the patent accounts between October 1, 1905, and September 30, 1916, and also the amount restored by the respondent in his determination of the deficiencies:

Account	Balance per books	Total write offs	Write offs restored by commissioner
Bush machine	$1.00	$38,999.00	$38,000.00
Grupe	1.00	14,999.00	None.
Hersey	1.00	9,999.00	None.
Caspar	1.00	2,699.00	None.
Biles	1.00	6,041.00	None.
Vernston	1.00	5,999.00	None.
G.H.G	1.00	6,135.00	None.
Phonix (Baer)	1.00	1,999.00	None.
Atlantic	1.00	6,299.00	None.
Lockwood	$1.00	$2,605.00	None.
Shepard (net)	1.00	517.91	None.
Soest	1.00	17,499.00	None.
Herr Press	1.00	3,999.00	None.
Simons	1.00	1,951.00	None.
Sperber	1.00	3,499.00	None.
Gerlach	1.00	2,399.00	None.
Total	16.00	125,638.91	$38,000.00

The petitioner's books of account contain entries recording the cost of acquisition, the year in which acquired, the years in which written off and the amounts so written off against various contract accounts, as shown in the following tabulations:

Year	Cost	Write offs
Oct. 1, 1905 (original book cost)	$106,768.75
1908		$66,768.75
1910		40,000.00
Total cost	106,768.75
Total write offs		106,768.75

Year	Cost	Write offs per books
PETERSON AGREEMENT
1910	$2,750.00	$2,750.00
1911	1,250.00	1,250.00
Total cost	4,000.00
Total write offs		4,000.00
EASTERN FEED CO.
1910	45,000.00	44,360.00
	-640.00
Total cost	44,360.00
Total write offs		44,360.00

None of the amounts so written off by the petitioner were restored by the respondent in his determination of the deficiencies. With proper allowance for exhaustion, the patents and contracts acquired by the petitioner were just as valuable during the taxable year as when acquired.

The wet grain purchased from brewers was delivered by trucks to the petitioner's wet grain elevators; from there it was conveyed to a press room and the water pressed out to a great extent and then dropped into a conveyor and conveyed to a bin. It was then passed through chutes and openings to drying machines, which are large cylinders 6 feet in diameter and 25 or 26 feet in length, and there dried and discharged into a conveyor and conveyed to the cooling rooms and permitted to cool before being placed in dry grain storage bins.

Petitioner operated plants in New York City, Buffalo, Newark, and Brooklyn, and another known as its Melrose plant.

Although the New York plant operated two buildings, they were for all practical purposes one building in the shape of a T with two extensions. The main building, 6 stories in height, 99 feet 6 inches fronting on two streets, 204 feet 4 inches deep, was used principally for drying and storing grains and repairing machinery. It was what is known as a bearing wall structure, that is, the outer walls support the girders and floor beams of the five stories and roof overhead. There was an 11-foot driveway running through the center of this building, in which teams were driven for the collection of shipments of grains. The walls of the building were between 2 and 3 feet thick and the floors were of steel beams with concrete arches. On the west side of the building on the ground floor there was a pipefitting and storage room, on the second floor a machine shop and storage room, on the third floor a harness-storage room, and the fifth floor was used as a bag-storage room. The sixth floor of this wing of the building contained the motor for horizontal conveyors running from the north side through the narrow portion of the building. The second floor of the main building was for stock storage, the third floor a bagging room, where the bottom of a large dry grain storage bin, extending almost the entire length of the building and through two of the upper floors, tapered to a V shape so that the grain could slide toward the center at the lower part of the bin. There were three rows of outlets with slides where bags of dry grains fell through to the stock room. On the top floor of the building were 20 spaces in the floor, containing movable shutters, 6 by 10 feet, through which the grain, after having cooled, was passed to the storage bin. On the ground floor the walls were supported by steel or cast-iron columns. There were steel coumns in the walls made of channel iron, back to back. The interior was of cast-iron columns from the first floor to the under side of the roof. On the second and third floors were steel beams with contrete arches. This building was especially designed and constructed for drying grains. It contained a series of grain elevators, screw type conveyors, bins, and all of the specially designed machinery necessary for carrying out the process of drying wet brewers' and distillers' grain. In the front of the building was an elevator, built in such a position that it was of no use; the staircase cut part of the building off, interfering with natural light. The staircase ran in the rear of the building and there were small boiler flues in the corner reducing the inside measurement of the building to 22 feet in width. The portion of the building occupied by the grain storage bin was a narrow strip 51 by 175 feet, and the driveway running through the center of the building was 4 feet from the level of the first floor, the sixth floor was perforated with slat openings, the storage bin projected down in a V shape on the third floor and the floor below was punctured with holes where grain bags were dropped through. Because of the peculiar construction of the building it could not have been readily converted to any other use; furthermore, it would have cost more to alter it for other uses than it would to erect a new one. It would have cost $20,000 to demolish the building, from which there would have been no salvage.

At the Buffalo plant there were three buildings, one of frame construction, four stories in height, with a foundation of stone, and a dividing wall through the center of the basement. The exterior walls of the building were of brick. There were very few windows in the building. The first floor was divided by a brick wall the entire length of the building, the flooring of which was of concrete and steel beams, and the second floor of wood construction with wood post supports, and the structure above that to the roof was wood. From the second floor level to the roof there were no intermediate floors. There was another building, similar in size to the one just described, which had a very heavy stone foundation - this foundation was especially heavy under one-half of the building. Immediately under a drive way, extending the entire length of the building at the first floor level, there was a solid stone foundation the entire width of the building. This building also had brick exterior walls. The second floor extended, as just stated, two stories, without any intermediate flooring and the floor above, which was really the third floor, was at a level with the bottom members of trusses which spanned crossways of the building and the space on that floor was, therefore, cut up by said trusses. There was a large grain bin, of wood construction, occupying a portion of this top floor and extending down through the point just above the floor below. The third building in this group was of brick construction and was used for a boiler room. Because of the fact that the business of the petitioner was what may be termed a process, that is, putting wet grain through a process of drying and turning out a finished product, with machinery in sequence, the buildings could not be put to any other use without entering into a very costly operation, if at all. There were elevators, conveyors, presses, and driers, and the buildings must be of a peculiar and special design to accommodate such a procedure of operation.

The Buffalo plant was formerly operated by a brewery. The petitioner learned that a number of brewers in and about Buffalo were contemplating the erection of grain-drying machinery to care for their output of wet grains, and, pursuing its usual policy, it negotiated with them and succeeded in taking over their grains, under an agreement whereby the petitioner would purchase the abandoned brewery plant and operate it. The plant was acquired and $60,000 was spent in altering the building, exclusive of the cost of the building and equipment. It would have been an expense to the petitioner to demolish the buildings at the Buffalo plant in January, 1920.

The Newark plant, located at Chapel Street and Passaic Avenue, was a cellar and one-story building, the cellar walls and floor of which were of concrete, and there were wood posts and girders supporting the first story. There were a number of windows in the east and west walls and there were stairs leading to the first story. From the first story upward it was of frame construction. The outer wall on one side and at the rear had joists covered with galvanized corrugated sheet iron with wood sheathing on the inside. The north side of the building, or Passaic Avenue wall, and the wall toward the yard, were of wood construction. The outer walls were clapboard and the inner walls wood sheathing. In the rear of this there were three dry storage bins built of wood with spouts and chutes for emptying grain into bags. From Building No. 2, which was a one-story building with various platforms overhead for access to the different conveyors and other overhead apparatus and which had a concrete floor, there was an overhead conveying system from 15 to 20 feet or more above the ground, where the dry grain was delivered by a spiral conveyor to the bins in Building No. 1. Located in this building were the driers, a hot-air stocker, and a conveyor which raised the wet grains from a pit in the yard to the overhead apparatus that delivered grain to the driers. There was also a bucket conveyor that raised the dry grain for feeding the bins on the opposite side. The west wall of this building was of wood construction and the wall facing the street of brick. Passing the driers in an easterly direction was located the steam engine, in the back of which there were hot water and feed water tanks and a boiler flue, constructed of brick, and back of these there were two boilers filled with coal, supplied from a bunker in the yard. There was a brick wall separating the drying plant, including the boilers, engines, etc., from the main building, heretofore described. There was a third building, two stories in height, having no cellar, which had a number of windows and large doors. This building was constructed of joists with sheathing on both sides, the interior of which contained a number of posts, supporting beams, and girders on the second story. There was a mezzanine floor in the northeast corner and stairs on the south side leading to the second floor. The first floor was of concrete and the second floor of wood. The roof was also of wood construction.

The Newark plant, as described hereinabove, was specially designed and constructed for grain-drying and malting purposes and is not convertible to any other purpose. In fact, the petitioner still owns, and has had this plant on the market for some time, but has not succeeded in selling it. This plant ceased operations in 1919 or 1920 and it has been idle for several years. As in the case of the Buffalo plant, the petitioner would have incurred expense in January, 1920, had it attempted to salvage the buildings.

No use was made by the petitioner after 1920 of the Brooklyn plant, which was sold in 1926 for use in a charcoal business. Although the petitioner made continuous attempts to sell four drying machines used in that plant, it was unsuccessful until 1927, when they were sold to a secondhand dealer for $2,100. There is still one other machine on the premises which it has been unable to dispose of at any price. One of the boilers in the building was retained by the purchaser of the building. Petitioner attempted to have a secondhand dealer remove another boiler from the premises, but was informed that it was not of sufficient value to compensate for the removal, therefore, the owner of the building permitted the boiler to remain on the premises. The petitioner's Brooklyn plant was, as in the case of its other plants, specially designed and constructed so that it could not be profitably converted to any other use except at prohibitive expense. That plant had no salvage value in January, 1920.

The machinery used by the petitioner in all of its plants was specially constructed and could not be converted to any other use. It did attempt to convert its machinery to the manufacture of cocoanut oil, and built another plant in New Jersey, but found it unprofitable and dissolved the company. There were such items as motors which, while standard, were of the slow speed type not in demand. The boilers were standard, but in 1920, after the close of the World War, there was so much machinery on the market, especially boilers and machine tools, that there was no market for them.

The petitioner's Melrose plant was a building 45 feet wide, 120 feet deep, and 25 feet in height. That building was of brick construction with exception of the portion which housed a storage bin 24 feet square, on top of the roof, which was constructed of frame and corrugated iron. This plant ceased to operate and was sold in 1920 to the Coca-Cola Co. Two driers were moved from that plant to the New York plant and the other machinery, which it was not considered feasible to move, was left in the building.

The petitioner's books of account contain entries showing the cost of acquisition, the year in which acquired, and the years and amounts written off for various asset accounts, which are set forth in the following tabulations:

Year ended Sept. 30	Cost and net	Write offs	Revised
	additions	on books	depreciation
REAL ESTATE - NEW YORK FACTORY
Oct. 1, 1905 (original book cost)	1906			$3,474.93
1907			3,474.89
1908	-4.00		3,474.85
1909			3,474.85
1910			3,474.85
1911	2 $7,604.96	3,600.75
1912		2 4,985.41	3,726.66
1913			3,726.66
1914			3,726.66
1915			3,726.66
1916			3,726.66
Total to Sept. 30, 1916	231,332.87
Total write off		12,590.37
Total reserve Sept. 30, 1916			39,608.42
REAL ESTATE - NEW YORK POWER PLANT
Oct. 1, 1905 (original book cost)	1906	11,200.00		112.00
1907	45,077.30		674.77
1908	16,838.60		1,293.93
1909			1,462.32
1910			1,462.32
1911			1,462.32
1912			1,462.32
1913			1,462.32
1914			1,462.32
1915			1,462.32
1916			1,462.32
Total to Sept. 30, 1916	130,115.90
Total write off
Total reserve Sept. 30, 1916			13,779.26
REAL ESTATE - BROOKLYN
Oct. 1, 1905 (original book cost)	1906	150.00		591.50
1907			593.00
1908			593.00
1909			593.00
1910	2 17,073.19	2 7,812.00	763.73
1911		2 3,681.19	934.46
1912		2 5,580.00	934.46
1913			934.46
1914			934.46
1915			934.46
1916			934.46
Total to Sept. 30, 1916	57,223.19
Total write-off		17,073.19
Total reserve Sept. 30, 1916			8,740.99
REAL ESTATE - JOHNSON AVENUE AND
BOGART, BROOKLYN
1906		$110.12
1907	90.00		221.14
1908			222.04
1909			222.04
1910			222.04
1911			222.04
1912			222.04
1913			222.04
1914			222.04
1915			222.04
1916			222.04
Total Sept 30, 1916	28,102.00
Total write offs
Total reserve Sept. 30, 1916			2,329.62
REAL ESTATE - BRONX FACTORY
1909	$16,833.59	203.34
1910	4,500.00		451.67
1911			496.67
1912	2 13,746.94	2 13,746.94	634.14
1913			771.61
1914			771.61
1915			771.61
1916			771.61
Total to Sept. 30, 1916	45,580.53
Total write offs		30,580.53
Total reserve Sept. 30, 1916			4,872.26
STABLE PROPERTIES - BRONX
	8,000.00		60.73
1909	5,072.84
1910			121.46
1911	1,000.00		131.46
1912	9,556.65		167.02
1913			192.59
1914			192.59
1915			192.59
1916			192.59
Total to Sept. 30, 1916	Total write off
Total reserve Sept. 30, 1916			1,251.03
REAL ESTATE - NEWARK
1911		203.00
1912	6,184.80		467.85
1913	2 2,335.13	2 2,335.13	553.05
1914			576.40
1915			576.40
1916			576.40
Total, Sept. 30, 1916	33,519.93
Total write off		2,335.13
Total reserve Sept. 30, 1916			2,953.10
REAL ESTATE - BUFFALO
	1912	2 46,936.09	2 46,936.09	454.36
1913			908.72
1914			908.72
1915			908.72
1916			908.72
Total to Sept. 30, 1916	68,936.09
Total write off		46,936.09
Total reserve Sept. 30, 1916			4,089.24
REAL ESTATE, GRANT STREET AND
NEWTON CREEK
Cost and net additions
1907	5,000.00
1908	90,366.50
Total to Sept. 30, 1916	95,366.50
Land only. Therefore no deprec-
iation.

The following is a summary as shown by the books of account at September 30, 1916, of the total write-off against the foregoing accounts between October 1, 1905, and September 30, 1916, and of the write-offs which were restored by the respondent in his determination of the deficiency:

	Books	Write off restored	As revised
N.Y. Factory	$218,742.50	$12,590.37	$231,332.87
N.Y. Power Plant	130,115.90		130,115.90
Brooklyn	40,150.00	17,073.19	57,223.19
Johnson Avenue	28,102.00		28,102.00
Bronx Factory	15,000.00	30,580.53	45,580.53
Bronx Stable	23,629.49		23,629.49
Newark	31,184.80	2,335.13	33,519.93
Buffalo	22,000.00	46,936.09	68,936.09
Grand Street	95,366.50		95,366.50
Total	604,291.19	109,515.31	713,806.50
Total shown by comparative balance sheet in 60-day letter	604,291.19	713,806.50

The petitioner's books of account contain entries showing the cost of acquisition, the year in which acquired, and the year and amounts of write-offs for various asset accounts, as set forth in the following tabulations:

Year ended Sept. 30	Cost and net additions	Write offs	Revised depreciation
MACHINERY AND FIXTURES - NEW YORK
Oct. 1, 1905 (original book cost)	$30,000.00
1906	38,835.58		$3,459.25
1907	-235.00	$8,600.58	4,810,27
1908	34,364.82	9,436.48	6,004.81
1909	1,279.77	28,208.11	7,252.37
1910	-251.18	17,000.00	7,288.37
1911	1911	10,402.99	10,000.00	7,821.34
1911		1 3,061.18
1912	-653.82	15,497.99	8,340.21
1912		1 2,014.59
1913		15,000.00	8,327.33
1914	1 13,601.02	1 13,601.02	9,088.21
1914	8,424.14	8,424.14
1915	-100.00	4,900.00	9,855.59
1916	345.00		9,864.16
Total to Sept. 30, 1916	141,089.09
Total write offs		135,744.09
Total reserve to Sept. 30, 1916			82,111.91
DRIER PLANT - BUSH MACHINES
Oct. 1, 1905 (original book cost)
1906	40,000.00		2,800.00
1907		8,000.00	2,800.00
1908		16,000.00	2,800.00
1909		10,000.00	2,800.00
1910		5,000.00	2,800.00
1911			2,800.00
1912		500.00	2,800.00
1913		499.00	2,800.00
1914			2,800.00
1915			2,800.00
1916			2,800.00
Total to Sept. 30, 1916	40,000.00
Total write offs		39,999.00
Total reserve to Sept. 30, 1916			30,800.00
LOUISVILLE DRYING MACHINES - NEW YORK PLANT
1907	$18,533.33		$648.67
1908	22,370.05	$4,090.34	2,080.28
1909	2,883.32	2,883.32	2,964.15
1910	10,358.80	14,000.00	3,427.63
1911		8,171.84	3,790.19
1912		10,000.00	3,790.19
1913		6,000.00	3,790.19
1914		3,000.00	3,790.19
1915			3,790.19
1916			3,790.19
Total to Sept. 30, 1916	54,145.50
Total write offs		48,145.50
Total reserve to Sept. 30, 1916			31,861.87
MACHINERY AND FIXTURES - BROOKLYN
Oct. 1, 1905 (original book cost)	20,591.78
1906	30,281.10		2,501.26
1907	7,558.59	8,431.47	3,825.65
1908	9,436.58	5,943.66	4,420.48
1909	11,909.34	14,402.26	5,167.59
1910	1 13,528.71	1 6,188.00
1910	3,371.59	19,000.00	6,175.93
1911		1 2,920.71
1911	944.89	5,000.00	6,800.51
1912		1912	-53.91	11,262.57	6,831.69
1913	700.00	10,700.00	6,854.31
1914		1 4,849.60
1914	1 4,849.60	5,000.00	7,048.54
1915		2,500.00	7,218.28
1916			7,218.28
Total to Sept. 30, 1916	103,118.27
Total write offs		100,618.27
Total reserve to Sept. 30, 1916			64,062.52
LOUISVILLE DRYING MACHINES - BROOKLYN PLANT
1909	8,650.00		302.75
1910	10,524.90	4,000.00	973.87
1911		5,174.90	1,342.24
1912		5,000.00	1,342.24
1913		1,000.00	1,342.24
1914		2,000.00	1,342.24
1915			1,342.24
1916			1,342.24
Total to Sept. 30, 1916	19,174.90
Total write offs		17,174.90
Total reserve to Sept. 30, 1916			9,330.06
MACHINERY AND FIXTURES - MELROSE
1909	15,000.00	5,000.00	525.00
1910	270.75		1,058.44
1911	-29.64	5,241.11	1,066.88
1912	9,228.50	4,228.50	1,389.88
1913		1 1,192.20
1913	1 1,192.20	5,000.00	1,754.60
1914		5,000.00	1,796.33
1915			1,796.33
1916			1,796.33
Total to Sept. 30, 1916	25,661.81
Total write offs		25,661.81
Total reserve to Sept. 30, 1916			11,183.79
MACHINERY AND FIXTURES - NEWARK
1912	750.00		26.25
1913	1 8,705.95	1 8,705.95
1913	2,490.00	240.00	444.36
1914	1 360.00	1 360.00
1914	1,535.66	1,535.66	902.56
1915	200.00	2,200.00	975.91
1916			982.91
Total to Sept. 30, 1916	14,041.61
Total write offs		13,041.61
Total reserve to Sept. 30, 1916			3,331.99

Year ended Sept. 30	Cost and net additions	Write offs	Revised depreciation
MACHINERY AND FIXTURES - BUFFALO
	1 $6,447.90	1 $6,447.90
1912	17,990.00	7,990.00	$855.33
1913	1 5,646.79	1 5,646.69
1913	2,300.00	7,300.00	1,988.79
1914	1 273.00	1 273.00
1914	1,771.86	1,771.86	2,338.49
1915		2,500.00	2,410.06
1916	735.00		2,861.24
Total to Sept. 30, 1916	35,164.45
Total write offs		31,929.45
Total reserve Sept. 30, 1916			10,453.91
OFFICE FURNITURE AND FIXTURES
Oct. 1, 1905 (original book cost)	2,000.00
1906			100.00
1907			100.00
1908			100.00
1909		1,000.00	100.00
1910			100.00
1911			100.00
1912			100.00
1913		500.00	100.00
1914		400.00	100.00
1915			100.00
1916			100.00
Total to Sept. 30, 1916	2,000.00
Total write offs		1,900.00
Total reserve Sept. 30, 1916			1,100.00

Year ended Sept. 30	Cost and net additions		Write offs	Revised depreciation, 5 per cent
MARINE EQUIPMENT
Oct. 1, 1905 (original book cost)	$15,000.00
1906	9,752.03			$993.80
1907	14,100.67		$3,000.00	1,590.12
	15,700.00		8,100.00	2,335.14
1908			2 -1,125.00
1909	7,000.00			2,527.64
1910	200.00		12,000.00	2,697.64
1911			5,000.00	2,692.64
1912	2,500.00		8,252.70	2,755.14
1913			10,000.00	2,817.64
1914			4,000.00	2,817.64
1915				2,817.64
1916				2,817.64
Total to Sept. 30, 1916	56,352.70
Total write offs			50,352.70
Total reserve Sept. 30, 1916				25,737.68

Year ended Sept. 30	Cost and net additions	Write offs	Revised depreciation, 15 per cent
AUTO TRUCKS
1912	$475.00		$35.63
1913	15,800.00	$8,275.00	1,256.25
1914	5,675.00	10,675.00	2,866.88
1915	6,075.75	5,575.75	3,748.18
1916			4,203.86
Total to Sept. 30, 1916	28,025.75
Total write offs		24,525.75
Total reserve Sept. 30, 1916			12,110.80
TRUCKS - BUFFALO
1912	$4,311.25	$1,611.25	$323.34
1913	894.00	2,594.00	713.74
1914		535.00	780.79
1915	135.00		787.91
1916			801.04
Total to Sept. 30, 1916	5,340.25
Total write offs		4,740.25
Total reserve Sept. 30, 1916			3,406.82
AUTOMOBILE ACCOUNT (INCLUDING BUFFALO)
1911	1,215.00	615.00	91.13
1912	500.00	900.00	219.75
1913	1,089.00	1,288.00	338.93
1914		801.00	420.60
1915	1,150.00	350.00	506.85
1916			593.10
Total to Sept. 1916	3,954.00
Total write offs		3,954.00
Total reserve Sept. 30, 1916			2,170.36

Year ended Sept. 30	Cost and net additions	Depreciation per books
HORSES
Oct. 1, 1905 (original book cost)	$75,000.00
1906	3,768.95
1907	2,995.97
	$6,576.90
1908	769.00
1909	16,465.00	16,115.00
1910	8,260.00	11,935.00
1911	16,348.50	14,845.00
1912	14,600.00	7,725.00
	1913	-6,140.00	27,555.60
1914	3,075.00	2,925.00
1915	-3,500.00	8,400.00
1916	-3,485.50
Total to Sept. 30, 1916	116,692.00
Total reserve Sept. 30, 1916		96,077.50
TRUCKS AND HARNESS
1908	16,764.92	1,670.28
1909	-62.12
1910
1911
1912
1913		7,532.52
1914	150.00	2,650.00
1916
Total to Sept. 30, 1916	16,852.80
Total reserve Sept. 30, 1916		11,852.80
HARNESS AND EQUIPMENT - BUFFALO
1912	807.79	307.79
1913	54.49	254.49
Total to Sept. 30, 1916	862.28
Total reserve Sept. 30, 1916		562.28

IMPROVEMENT ACCOUNTS
Division between Buildings and Machinery
	Total	Buildings	Machinery
New York:
1911	$17,666.14	$12,590.37	$5,075.77
1914	13,601.02		13,601.02
Brooklyn:
1910	30,601.90	17,073.19	13,528.71
1914	4,849.60		4,849.60
Melrose (Bronx):
1912	13,746.94	13,746.94
1913	1,192.20		1,192.20
Newark:
1913	11,041.08	2,335.13	8,705.95
1914	360.00		360.00
Buffalo:
1912	46,936.09	46,936.09
1912	6,447.90		6,447.90
1913	5,646.69		5,646.69
1914	273.00	273.00

The amounts shown in the foregoing schedule have been consolidated with the various accounts to which the improvements pertain as shown by the preceding schedules.

The following is a summary of the balances as shown by the books at September 30, 1916, and of the total write-offs against the foregoing accounts between October 1, 1905, and September 30, 1916, and of the write-offs which were restored by the respondent in his determination of the deficiency:

MACHINERY AND EQUIPMENT
	Books	Write off restored	As revised
New York	$5,345.00	$135,744.09	$141,089.09
Bush machines	1.00	39,999.00	40,000.00
Louisville drying machines - New York	6,000.00	48,145.50	54,145.50
Brooklyn	2,500.00	100,618.27	103,118.27
Louisville drying machines - Brooklyn	2,000.00	17,174.90	19,174.90
Melrose		25,661.81	25,661.81
Newark	1,000.00	13,041.61	14,041.61
Buffalo	3,235.00	31,929.45	35,164.45
Furniture	100.00	1,900.00	2,000.00
Marine equipment	6,000.00	50,352.70	56,352.70
Auto trucks	3,500.00	24,525.75	28,025.75
Trucks - Buffalo	600.00	4,740.25	5,340.25
Autos		3,954.00	3,954.00
Horses	20,614.50	96,077.50	116,692.00
Trucks and harness	5,000.00	11,852.80	16,852.80
Harness - Buffalo	300.00	562.28	862.28
	56,195.50	606,279.91	662,475.41
Totals as shown by comparative balance sheet in 60-day letter	56,195.50	618,435.74	674,631.24
Overstatement in 60-day letter		12,155.83	12,155.83
Total machinery	20,181.00	414,214.63	434,395.63
Other equipment	36,014.50	192,065.28	228,079.78
Aggregate as above	56,195.50	606,279.91	662,475.41

The petitioner's books of account contain entries recording additions to machinery and fixtures at the Buffalo plant during the fiscal year 1917 at a net cost of $12,155.83. The balance sheet as of September 30, 1916, attached to the respondent's notice of deficiency, contains an overstatement of asset and surplus account as of the date of that balance sheet amounting to $12,155.83, which overstatement is carried in petitioner's surplus for the fiscal years 1918, 1919, and 1920 as set forth in said notice of deficiency.

The following summaries are taken from the books of account, which show the amounts charged to expense by the petitioner between October 1, 1905, and September 30, 1916, which amounts were restored to the respective asset accounts by the respondent in his determination of the deficiency:

Buildings (additions charged to expense and restored to assets)
N.Y	$16,583.21
Brooklyn	2,633.16
Melrose	4,428.90
Buffalo	608.00
Total	24,253.27
Total shown by comparative balance sheet in 60-day letter	24,253.27
Machinery (additions charged to expense and restored to assets)
New York	$47,939.59
Brooklyn	21,030.78
Melrose	3,275.63
Newark	655.66
Buffalo	4,202.51
Total	77,104.17
Total shown by comparative balance sheet in 60-day letter	77,104.17

The amounts of $24,253.27 and $77,104.17 are the totals shown by comparative balance sheet in the notice of deficiency.

The summaries of "Buildings (Additions charged to expense and restored to assets)" and "Machinery (Additions charged to expense and restored to assets)," hereinabove, together with the supporting details taken from the petitioner's books, were stipulated as facts by counsel and have been accepted by us as such, but are not included herein because of the excessive space required for tabulation. They are, therefore, by reference made a part of the findings of fact herein.

The allowances made by the respondent for depreciation of buildings and machinery were based on 50 years and 14-2/7 years life, respectively. Depreciation as computed and allowed by the respondent in the computation of the petitioner's net income is shown in the following tabulations:

Depreciation
Real estate, Oct. 1, 1916, cost	$713,806.50
Building additions charged off in prior years	24,253.27
Oct. 1, 1916, total cost as corrected	738,059.77

(Rate, 2 per cent)
Made up of -
Land at New York factory	$45,000.00
Land at New York power plant	57,000.00
Land at Brooklyn	10,500.00
Land at Brooklyn (Johnson Avenue)	17,000.00
Land at Bronx	7,000.00
Land at Bronx	14,000.00
Land at Newark	4,700.00
Land at Buffalo	11,750.00
Land at Newton Creek	95,366.50
		262,316.50

Oct. 1, 1917, cost of buildings				475,743.27
1917 additions				None.
October 1, 1918, cost		$475,743.27	1917	9,514.87
1918, additions		None.	1918	9,514.87
1919, additions		None.	1919	9,514.87
1920, sale land and buildings	$21,000.00
		52,638.92
Oct. 1, 1920, remaining cost		423,104.35	1920	8,462.09
1921, sale land and building	17,000.00
		11,102.00
Oct. 1, 1921, remaining cost	224,316.50	412,002.35	1921	8,240.05
Machinery and equipment (rate, 7 per cent):
Actual cost of machinery capitalized				674,631.24
Cost equipment restored from expenses				77,104.17
Oct. 1, 1917, total cost				751,735.41
Made up of -
Machinery and equipment				521,655.63
Office furniture				2,000.00
Marine equipment				56,352.70
Automobiles and trucks				37,320.00
Horses, harness, and equipment				134,407.08
Total as above				751,735.41

Machinery and equipment:
Cost to Oct. 1, 1917	$521,655.63
1917, additions	28,498.82
Oct. 1, 1917, total cost	550,154.45
1918, additions	376.50
Oct. 1, 1918, total cost	550,530.95
1919, additions	None.
Oct. 1, 1919, total cost	550,530.95
1920, additions	None.
Oct. 1, 1920, total cost	550,530.95
1921, additions	None.
Oct. 1 1921, total cost	550,530.95
Marine equipment (rate, 5 per cent):
Oct. 1, 1916, cost	56,352.70
1917, additions	None.
Oct. 1, 1917, cost	56,352.70
1918, additions	None.
1919, additions	None.
1920, additions	None.
1921, additions	None.
Office furniture (rate, 5 per cent):
Oct. 1, 1916, cost	$2,000.00
1917, additions	0
Oct. 1, 1917, cost	2,000.00
1918, additions	None.
1919, additions	None.
1920, additions	None.
1921, additions	None.

Machinery and equipment:
Cost to Oct. 1, 1917	7 per cent on cost.	Oct. 1 plus.
1917, additions	1/2 of additions.
Oct. 1, 1917, total cost	1917	$37,513.35
1918, additions
Oct. 1, 1918, total cost	1918	38,523.98
1919, additions
Oct. 1, 1919, total cost	1919	38,537.17
1920, additions
Oct. 1, 1920, total cost	1920	38,537.17
1921, additions
Oct. 1 1921, total cost	1921	38,537.17
Marine equipment (rate, 5 per cent):
Oct. 1, 1916, cost
1917, additions
Oct. 1, 1917, cost	1917	2,817.64
1918, additions	1918	2,817.64
1919, additions	1919	2,817.64
1920, additions	1920	2,817.64
1921, additions	1920	2,817.64
Office furniture (rate, 5 per cent):
Oct. 1, 1916, cost
1917, additions	1917	$100.00
Oct. 1, 1917, cost
1918, additions	1918	100.00
1919, additions	1919	100.00
1920, additions	1920	100.00
1921, additions	1921	100.00

Automobiles and trucks rate, 15 per cent on undepreciated cost Oct. 1, plus one-half of additions:

Oct. 1, 1916, cost		37,320.00
1917, additions		3,155.00
Oct. 1, 1917, cost		40,475.00	1917	5,834.25
1918, additions		1,494.46
Oct. 1, 1918		41,969.46	1918	6,001.09
Eliminate 1911 additions	$1,215.00
1919, additions		None.	1919	5,320.23
Eliminate 1911 and 1912 additions	6,501.25
1920, additions		None.	1920	2,652.78
Eliminate 1911 to 1913 additions	24,284.25
1921, additions		10,350.00	1921	2,577.80
Eliminate 1911 to 1914 additions	29,959.25	52,319.46

Horses, harness and equipment 10 per cent on horses, 15 per cent on trucks and harness:

Oct. 1, 1916, cost	134,407.08
Less exhausted by depreciation	74,144.11
Oct. 1, 1916, undepreciated cost	60,262.97	1917	6,305.04
1917, additions	None.
1918, credits upon death and sale	21,884.80
	38,378.17
1907, purchases eliminated	2,995.97	1918	4,911.21
Oct. 1, 1918, undepreciated cost	35,382.20
1919, credits upon death and sale	15,235.00
Oct. 1, 1919, undepreciated cost	20,147.20	1919	4,149.46
1920, credits upon death and sale	12,770.00
Oct. 1, 1920, undepreciated cost	7,377.20	1920	3,510.96
1921, credits upon death and sale	3,855.00
Oct. 1, 1921, balance	3,522.20	1921	3,318.21

The following is a summary of depreciation allowed as taken from the foregoing tabulation:

	Sept. 30, 1917	Sept. 30, 1918	Sept. 30, 1919
Buildings	$9,514.87	$9,514.87	$9,514.87
Machinery and equipment	37,513.35	38,523.98	38,537.17
Marine equipment	2,817.64	2,817.64	2,817.64
Office furniture	100.00	100.00	100.00
Automobiles and trucks	5,834.25	6,001.09	5,320.23
Horses, wagons, and harness	6,305.04	4,911.21	4,149.46
Total to be allowed	62,085.15	61,868.79	60,439.37
Total claimed	90,591.80	169,673.89	243,427.58
Excess disallowed	28,506.65	107,805.10	182,988.21
Additional allowance

	Sept. 30, 1920	Sept. 30, 1921
Buildings	$8,462.09	$8,240.05
Machinery and equipment	38,537.17	38,537.17
Marine equipment	2,817.64	2,817.64
Office furniture	100.00	100.00
Automobiles and trucks	2,652.78	2,577.80
Horses, wagons, and harness	3,510.96	3,318.21
Total to be allowed	56,080.64	55,590.87
Total claimed	239,708.01	47,073.58
Excess disallowed	183,627.37
Additional allowance		8,517.29

The following is a summary of depreciation reserve summarized from the tabulation of depreciation hereinabove:

Oct. 1, 1916, reserve originally		None.
Adjustment upon restorations		$499,355.70
Allowance for 1917		62,085.15
Oct. 1, 1917, reserve as adjusted		561,440.85
Allowance for 1918		61,868.79
		623,309.64
Less depreciation on horses sold and dead		3,720.00
Oct. 1, 1918, reserve as adjusted		619,589.64
Allowance for 1919		60,439.37
		680,029.01
Less depreciation on horses sold and dead		2,580.00
Oct. 1, 1919, reserve as adjusted		677,449.01
Allowance for 1920		56,080.64
		733,529.65
Less depreciation on horses	$1,495.20
Less depreciation on real estate sold	9,758.14
		11,253.34
Oct. 1, 1920, reserve as adjusted		722,276.31
Allowance 1921		55,590.87
		777,867.18
Less depreciation on horses	$1,039.50
Less depreciation on property sold	3,217.78
		4,257.28
		773,609.90

The depreciation reserve at September 30, 1916, amounting to $499,355.70, which includes the reserves for the several property accounts, is as follows:

Depreciation reserves on buildings, machinery, and equipment
[Computed at 2 per cent of cost on buildings and 7 per cent of cost on machinery]
	Reserve at Sept. 30, 1916
Real estate:
New York factory	$39,608.42
New York power plant	13,779.26
Brooklyn	8,740.99
Johnson Avenue and Bogart	2,329.62
Bronx factory	4,872.26
Bronx stable	1,251.03
Newark	2,953.10
Buffalo	4,089.24
Machinery:
New York	$82,111.91
Bush plant	30,800.00
Louisville drying, New York	31,861.87
Brooklyn	64,062.52
Louisville drying, Brooklyn	9,330.06
Melrose	11,183.79
Newark	3,331.99
Buffalo	10,453.91
Office furniture and fixtures	1,100.00
Marine equipment	25,737.68
Auto trucks	12,110.80
Auto trucks - Buffalo	3,406.82
Autos (including Buffalo)	2,170.36
Horses	96,077.50
Trucks and harness	11,852.80
Harness equipment, Buffalo	562.28
Additions charged to expense:
Real estate -
New York	2,100.33
Brooklyn	391.78
Melrose	476.51
Buffalo	54.72
Machinery -
New York	12,112.96
Brooklyn	8,647.48
Melrose	776.75
Newark	142.35
Buffalo	874.61
Total	499,355.70
Total shown by comparative balance sheet in 60-day letter	499,355.70

The petitioner's earnings for the period 1908 to 1912, after adding the amounts of patents and contracts written off, were:

1908	$261,699.85
1909	278,889.54
1910	250,624.08
1911	163,021.33
1912	217,571.48

The balance sheets of the petitioner for the years 1908 to 1912, both inclusive, on the basis of adjustments made by the respondent as disclosed in the notice of deficiency, are as follows:

	1908	1909	1910	1911	1912
		$2,104.44
Cash	$44,269.65	33,707.97	$48,587.81	$76,594.78	$53,837.56
Accounts receivable	18,197.63	34,596.02	49,577.73	72,333.44	91,647.65
Bills receivable	600.00	166.52	1,509.25	800.00
Stock, other companies	1,900.00	2,900.00	1,900.00	1,900.00	1,900.00
			31,249.00
Miscellaneous	38,425.00	31,249.00	10,400.00	7,808.52	12,000.00
			40,000.00
Inventory	1,475.45	2,046.13	1,324.52	556.66
Real estate	512,476.90	552,883.33	574,456.52	613,046.89	711,471.37
Real estate additions	4,846.70	7,665.03	14,935.22	19,552.59	21,585.62
Machinery	253,736.83	293,459.26	331,262.83	347,656.84	381,365.51
Machinery additions	12,664.93	22,202.94	23,956.36	30,808.87	39,423.43
Other equipment	129,524.50	152,989.50	161,049.50	178,613.00	207,107.04
Patents	54,000.00	44,046.00	38,009.00	38,016.00	38,016.00
Contracts	40,000.00	40,000.00
Total	1,112,117.59	1,220,016.14	1,328,217.74	1,387,687.59	1,558,354.18
Accounts payable	21,314.72	26,220.13	37,586.13	40,293.27	4,446.46
Bills payable	87,516.67	37,000.00	12,700.00	2,000.00	58,161.23
Bonds payable	124,000.00	124,000.00	136,500.00	124,000.00	124,000.00
Mortgages payable	85,000.00	75,500.00
Reserve for depreciation
Real estate	14,836.17	20,852.45	27,348.52	34,399.22	42,468.07
Real estate additions	132.46	257.58	483.57	827.45	1,238.83
Machinery	36,450.67	55,562.53	77,386.77	101,107.93	126,583.72
Machinery additions	963.47	2,183.84	3,799.42	5,716.20	8,174.22
Other equipment	12,041.24	30,683.88	45,316.52	62,945.29	74,311.04
Capital stock	500,000.00	500,000.00	500,000.00	500,000.00	500,000.00
Surplus	229,862.19	350,755.73	487,096.81	516,398.23	618,970.61
Total	1,112,117.59	1,220,016.14	1,328,217.74	1,387,687.59	1,558,354.18

During 1918 the Government restricted the quantity of grain used in the brewing of beer. Therefore, the output of beer was materially lessened, resulting in a decrease in the quantity of wet grain received from brewers by the petitioner. The supply of wet grain received during that year was less than one-half the normal amount. There was a slight increase in 1919 over the quantity in 1918, but national prohibition became effective in January, 1920, causing a further decrease to 10 to 15 per cent of the normal supply, which condition has existed since 1920.

Prior to prohibition the output of beer in the Metropolitan District of New York was 12,000,000 barrels annually, whereas in the years following, the output was from 1,500,000 to 2,000,000 barrels of so-called near-beer.

During the busy season from April to October the New York plant was formerly operated continuously, day and night, throughout the entire week without shutdown. During the slack season from November to March the plant operated for three 24-hour days consecutively. The reason for operating three 24-hour days instead of six days for 12 hours each was in order to derive the maximum production from driers, which consumed considerable time before they reached their maximum of efficiency. During the busy months since January, 1920, this plant has operated from five to six days a week of 8 hours duration, and during the winter months from two to three days a week.

At the close of 1917 the New York plant operated 18 driers, 9 presses, 8 boilers, 3 generators, 4 bucket elevators for wet grains, and 2 dry-grain elevators. Since January, 1920, it has operated 8 driers, 7 presses, which are operated for 2 or 3 hours a day when the plant is in operation, 2 boilers, 1 generator, 1 bucket elevator for wet grains and 1 dry-grain elevator. If this plant were operated the same number of hours since January, 1920, as during the busy season in 1917, only 4 driers and 2 presses would be required to produce the maximum output of the plant.

The Newark, Buffalo, and Brooklyn plants operated day and night in 1917 and prior thereto, as did the New York plant. Since January, 1920, the Buffalo plant has also operated for 8-hour periods three or four days a week.

The following tabulation shows the total tons of dry grains produced in the New York plant and at the Buffalo plant for the years 1912 to 1927:

Year	New York plant	Buffalo plant
	Tons	Tons
1912	32,342	3,361
1913	37,337	12,891
1914	29,834	8,692
1915	30,263	7,696
1916	31,479	8,949
1917	27,341	7,953
1918	13,081	5,838
1919	22,501	2,191
1920	6,212	1,403
1921	8,342	2,160
1922	7,069	2,433
1923	5,106	2,904
1924	6,249	2,026
1925	6,047	2,823
1926	7,230	3,273
1927	8,582	3,771

As the result of prohibition the petitioner discontinued the use of the Melrose plant, the Newark plant and the Brooklyn plant in or about 1920. The New York plant and the Buffalo plant were continued in operation because of the contractual relationship already established between the petitioner and the brewers extending over a period of years. Wet grains are perishable and can be shipped only within a radius of about 150 miles, therefore, since they could not be transported from Buffalo to the New York plant, both of these plants were necessary.

In the spring of 1917, when the Central Feed Co. contract was entered into, there was no thought in the minds of the officers of the petitioner that prohibition would ever affect the brewery business. The matter of prohibition was discussed late in 1917 or early in 1918, and although some were very pessimistic, it was still thought that the constitutional amendment would fail of enactment. It was not until January 1, 1919, when a sufficient number of States had ratified the amendment, that it was definitely known by petitioner's officers and directors that brewers would be given one year to operate and that prohibition would become effective in 1920.

The petitioner entered into several employment contracts with members of its executive and managerial staff, describing in general terms the duties to be performed, the term of service and the compensation to be paid therefor. The contracts of Gustave Hafer, Joseph Stehlin, Lewis C. Gehring, and Bruce K. Conover, entered into on August 15, 1911, were for a period of five years from September 1, 1911, at a salary of $10,000 per annum each. These contracts were, on December 9, 1915, by mutual consent of the parties, extended to December 9, 1920, it being agreed, however, "that the term of said agreement may at the option of the company be terminated if a prohibition statute prohibiting the manufacture and sale of beer is enacted either by the Federal Government or by the State of New York." Further extension agreements were entered into by the parties under date of April 4, 1917, extending the period of their employment to April 4, 1922, terminable at the option of the company in the event of national or local prohibition.

The contract of William H. Gehring was entered into on August 15, 1911, and was for a period of two years, beginning September 1, 1911, at an annual salary of $2,500. That agreement was, in August, 1913, extended for a period of three years to September 1, 1916, and was later, on December 9, 1915, extended to December 9, 1920, at a salary of $4,000 per annum, subject, however, to the conditions with respect to national or state prohibition as mentioned hereinabove. A further extension agreement was entered into on April 4, 1917, extending the term of employment to April 4, 1922, subject to the company's option to terminate as already stated.

The agreement of Charles F. Stehlin, entered into on August 15, 1911, was for a period of five years from September 1, 1911, at an annual salary of $5,000. That agreement was extended by mutual consent on December 9, 1915, to December 9, 1920, and again on April 4, 1917, to April 4, 1922, subject to the option of the company to terminate in the event of prohibition.

The contract of George E. Todd, entered into on September 23, 1912, was for a period of four years, commencing with September 1, 1912, at an annual salary of $5,000. That agreement was on September 9, 1915, extended to December 9, 1920, subject to the option of the company to terminate in the event of prohibition.

The agreement of Louis J. Henes, entered into on April 4, 1917, was for a period of five years from that date, at an annual salary of $10,000.

Prior to the close of the fiscal year 1917, the matter of increases in salaries was discussed among the officers and managers and certain of them were selected to receive additional compensation, and there was a tentative understanding as to the amounts to be paid. The board of directors met in January of 1918 to consider the offer of Messrs. Gustave Hafer, Bruce K. Conover, Lewis C. Gehring, Charles F. Stehlin, Louis J. Henes, George E. Todd, and William H. Gehring to cancel their employment contract and to enter into new ones for a period of two years from January 1, 1918, conditioned upon the payment of additional compensation and upon the further condition that for additional services, time and effort devoted by each of those men to the business during 1917, due to the unusual conditions in the petitioner's business, each of them should receive further additional sums. Upon consideration of the matter the Board adopted the following resolution:

NOW, THEREFORE, It is upon motion of Mr. Bruce K. Conover, seconded by Mr. Charles F. Stehlin, RESOLVED, that the offer of Messrs. Gustave Hafer, Bruce K. Conover, Lewis C. Gehring, Charles F. Stehlin, William H. Gehring, Louis J. Henes, and George E. Todd be and the same hereby is accepted, and that contracts of employment now existing between the company and each of them be cancelled and that new contracts of employment be entered into with each of them for a period of two (2) years from January 1, 1918, providing for the payment to each of them during the said period of two years of the salary per annum set opposite his respective name, as follows:

Gustave Hafer	$20,000
Lewis C. Gehring	20,000
Bruce K. Conover	20,000
Charles F. Stehlin	20,000
Louis J. Henes	15,000
George E. Todd	10,000
Wm. H. Gehring	9,000

That for the additional services, time and effort devoted by each of the aforesaid gentlemen to the business of the Company during the year 1917, each of them receive the additional compensation set opposite his respective name, as follows:

Gustave Hafer	$10,000
Lewis C. Gehring	10,000
Bruce K. Conover	10,000
Charles F. Stehlin	15,000
Louis J. Henes	5,000
George E. Todd	5,000
Wm. H. Gehring	5,000

That all the other terms, covenants and conditions appearing in the existing contracts of employment with the aforesaid gentlemen be incorporated in the new contracts of employment.

The resolution of the board of directors was considered by the stockholders of the petitioner in February, 1918, and was approved as drafted by the board.

The additional compensation was paid because it was the opinion of the executives of the company that those who received it were inadequately paid. The matter was discussed at some length during the calendar year 1917 and there were some informal discussions among the stockholders prior to September 30, 1917, who expressed the desire to pay additional compensation, but no definite agreement had been reached. While the matter had been discussed and a tentative understanding reached, nothing officially was done toward awarding additional compensation until the action of the directors and stockholders in January and February of 1918. Additional salaries were paid by the petitioner immediately after ratification by the stockholders in February, 1918.

All of the men to whom additional compensation was paid devoted their entire time to the business of the petitioner.

The books and records of the petitioner were kept, and its tax returns were filed on the accrual basis of accounting.

The petitioner claimed the $60,000 voted to the officers and employees in 1918, for services performed in 1917, as a deduction in the computation of its net income for the fiscal year ended September 30, 1917, all of which the respondent disallowed.

OPINION.

MORRIS: The first question raised by the pleadings relates to the disallowance of additional salaries of $60,000 for 1917 or, in the alternative, for 1918. The petitioner entered the amount of the additional salaries and credited the several officers and employees affected by the increase upon its books prior to the closing thereof for the fiscal year 1917, and claimed the deduction in the return for that year. As the year 1917 was disposed of by our prior opinion, the only question with which we are here concerned is whether the additional salary is deductible for the year 1918. Although it be admitted that the informal agreement that additional compensation was to be paid, to whom, and a tentative understanding as to the amounts prior to the close of the fiscal year 1917 was insufficient authorization to permit the deduction of the additional compensation for that year, we are of the opinion that the amount thereof may not be deducted for 1918. The board of directors specifically voted the additional compensation for services performed during 1917. Section 234(a)(1) of the Revenue Act of 1918 permits the deduction in any taxable year, by a taxpayer on the accrual basis, of only the salary incurred during such year in carrying on the trade or business. Consequently, a payment during the year 1918 of an amount specifically as salary for prior years, unrelated to the compensation for services for the year in which paid, is not within the allowable deductions for 1918. Green Oil Soap Co.,3 B.T.A. 467">3 B.T.A. 467; Vaughan & Barnes, Inc.,6 B.T.A. 1279">6 B.T.A. 1279.

We hesitate to disturb a taxpayer's determination of what constitutes a reasonable compensation to its officers and employees. The additional compensation in question was not awarded for services actually performed during the taxable year 1918, but specifically for their additional services, time and effort devoted to the business during 1917. By the same resolution which awarded the additional salaries in question, compensation was fixed by the directors for the year 1918, and it must be presumed that the amount decided upon was, in their opinions, reasonable compensation for that year. In any event, we have no evidence to support the reasonableness of the sum of the additional salary in question and the regular salary voted for 1918 for the services actually rendered during 1918.

The third allegation of error urged by the petitioner is that the respondent erroneously excluded from its invested capital for the years 1917 to 1920 the cost of patents and rights relating to patents and the cost of certain contracts amounting to $88,216.91 and $220,628.75, respectively. The deficiency for 1917 having already been disposed of, we will concern ourselves only with the years subsequent thereto.

The respondent's counsel directs attention to the fact that the question involved is not a positive exclusion from invested capital by the respondent, but his refusal to increase invested capital by restoring thereto certain items charged to expense in prior years. He contends that because those amounts were charged off to expense, and the assets acquired were not patent rights but permanent intangible assets, either as or in the nature of good will, the petitioner should not be permitted at this time to restore the amounts written off to its invested capital in toto. We can not agree with the position taken by the respondent. It makes no difference in our opinion that the petitioner erroneously charged those amounts off or that it exercised no rights under the patents acquired or that its purpose in securing said patents was the creation and maintenance of a monopoly in the grain-drying business, the fact remains that the patent rights were acquired and paid for and it appears to our satisfaction that they were of inestimable value in the conduct of the business and that the acquisition thereof was responsible in a great measure for the growing success of the business up to the advent of national prohibition. The patent values, therefore, which have been heretofore charged off, should be restored to invested capital during the taxable years in controversy to the extent of the proven costs less any amounts of normal exhaustion thereon ascertained from the life thereof as shown in our findings of fact herein. Goodell-Pratt Co.,3 B.T.A. 30">3 B.T.A. 30; American Seating Co.,4 B.T.A. 649">4 B.T.A. 649. In the case of those patents which have expired prior to the taxable years and those which have no proven life no amount should be included in invested capital. As to those contracts where the petitioner acquired patents, together with the covenants of the vendor to refrain from entering into a competitive business, and the patents have expired prior to the expiration of the covenant to refrain from a competitive business and said covenants are still in force during taxable years, there being no segregation of the consideration paid for the patent, on the one hand, and the said covenants, on the other, no value can be set apart for invested capital purposes.

Of the numerous contracts placed in issue by allegation of error numbered three, we shall first consider those acquired at the date of organization and recorded in the petitioner's books of account at $106,768.75. The original book cost of those contracts was, as in the case of the patents hereinbefore discussed, written off to expense, $66,768.75 in 1908 and $40,000 in 1910. It is, therefore, the amount of the charge-off, or a portion thereof at least, which the petitioner seeks to restore to its invested capital.

The assets of the New Jersey Company were acquired by the petitioner in October, 1905, for its entire authorized capital stock of $500,000, and included in those assets were certain contracts entered into by the New Jersey Company which had been theretofor carried on its books of account at a cost of $176,000, which amount, however, was reduced to $106,768.75 when taken into the books of the petitioner. Those contracts will be discussed briefly in the order in which they have been set forth in our findings of fact herein.

The so-called Wigand contract, entered into between the New Jersey Company and Wigand, owner of the entire capital stock of the Brewers Grain & Feed Co., was for the purchase of said capital stock for the payment of $19,000, in consideration of the covenant of Wigand that he would, for a period of 25 years, refrain from engaging in or becoming associated with the business of manufacturing, drying, buying or selling wet brewers' grain, or machinery appertaining to the drying and treatment thereof, in a certain restricted area, and in further consideration of the exclusive right and license to use a certain patent mentioned in said contract. That contract also provided for the purchase of certain presses specified therein or at the election of the said Todd to pay the sum of $5,000 in lieu thereof. The option was exercised and the $5,000 was paid in addition to the $19,000 provided for the purchase of the capital stock owned by Wigand, making the total consideration $24,000. Of the tangible assets acquired by the New Jersey Company in the transaction with Wigand, those which were usable had a value at that time of $2,500, exclusive of the value of the contract itself, and the remainder of the assets not usable were scrapped.

In 1904 William S. Gordon, counsel for the New Jersey Company, entered into several agreements with parties named Schutte, Kern, Demmert, and Schmidt, by which the sums of $5,000, $145, $145, and $40,000, respectively, were paid to those parties for their covenants to refrain from engaging or becoming interested in or associated with the business of manufacturing, drying, buying or selling brewer's or other wet or dried grains in a certain restricted territory.

The respondent contends, among other things, that no evidence of value at the date of acquisition of the contracts entered in the petitioner's books of account at $106,768.75 is disclosed by the record. It is true that insufficient evidence was offered with respect to the National Feed Co. and Empire Dairy Feed contracts to justify the determination of value for invested capital purposes, but as to those contracts which we have discussed briefly in the opinion hereinabove, we disagree with the respondent. The Wigand transaction was consummated in March, 1905, and the Schutte, Kern, Demmert, and Schmidt contracts were consummated in March, 1904, and the various sums of consideration were then paid. The petitioner was organized and incorporated in October, 1905, at which time it issued its capital stock for the assets of said New Jersey Company. These contracts had formerly been carried on the books of the New Jersey Company at a cost of $176,000 and stock of the petitioner was issued therefor to the extent of only $106,768.75. The proximity of time when these various cash expenditures were made by the New Jersey Company to the organization of the petitioner and its acquisition of those contracts for its capital stock convinces us that the cost to it was not less than the amounts paid therefor by the New Jersey Company.

Having considered allegation of error numbered three herein with respect to patents and also contracts entered into by the petitioner's predecessor, there remains for consideration the contracts entered into by the petitioner itself subsequently to organization.

In 1910 the petitioner entered into an agreement which resulted in the acquisition of stock of the Eastern Feed Co. in consideration of $45,000. Although the principal items contracted for in the acquition of the Eastern Feed Co. were the discontinuance of business by people connected with that company and the contracts which that company had entered into with brewers, it also acquired various tangible assets, consisting of certain items of machinery and equipment and eight horses, four wagons, harness, tools and equipment, etc., also a certain lease dated January 15, 1910. Of those tangible assets the petitioner took possession of and used the eight horses and four wagons, having a value of $100 each. The petitioner was released from the lease acquired by it in consideration of the payment of $1,000, and it recovered $1,000 by way of salvage in scrapping the remaining assets acquired.

In 1910 the petitioner entered into an employment agreement with one Peterson for a period of 10 years, in consideration of the payment of $5,000 in full, for all services rendered for that period, in which Peterson covenanted not to engage in a competing business during the tenure of his contract. The petitioner's books of account show, however, that only $4,000 was paid on account of this contract, $2,750 in 1910 and $1,250 in 1911. The record does not explain the difference of $1,000.

In April, 1917, the petitioner entered into a contract with Central Feed Co., a competitor, for the purchase of that company's business in New York City, including its good will, contracts, machinery and equipment, horses and wagons, and a contract with the Central Brewing Co. for the purchase of wet grain, in consideration of the payment of $75,000. The said Central Feed Co. covenanted not to again engage in a competing business in a certain restricted territory for a period of 25 years, and, furthermore, that it would dissolve and cease its corporate existence. It obtained the covenant of William Lowe, a stockholder and director of that company, not to engage in a competing business for a period of 25 years. Of the tangible assets acquired in that transaction the petitioner took possession of 4 driers, 2 presses, 3 or 4 horses and 2 trucks, all of which had a value of not to exceed $10,000.

At some time in 1909 the petitioner, having been threatened with serious competition from the Lembeck & Betz Eagle Brewing Co., one of the largest brewers in New Jersey, entered into a contract with that company, by which it covenanted that it would refrain from a competing business for a period of at least ten years, and the officers of that company also made similar covenants. The petitioner acquired a drier, installed by that company, which it tured over to one Caspar at a valuation of $10,000, in addition to paying the said Caspar $2,000 in cash. The entry recording the $65,000 consideration paid in the Lembeck & Betz Eagle Brewing Co. transaction was made in the petitioner's books in June, 1909. Said entry bore an explanation stating "Abandonment of grain drying by Lembeck & Betz Eagle Brewing Company."

The record shows very clearly that the motivating cause for the acquisition of all of the contracts hereinbefore discussed, either by the petitioner or its predecessor, was not to acquire additional tangible assets or to broaden the field of its manufacturing activities, but to stifle and render impossible the recurrence of competition in the manufacture of feed from brewers' grains, and it shows further that, notwithstanding that the amounts paid as consideration for those various contracts were written off to profit and loss, the values remained the same as when they were entered into. That they were of immense value to the petitioner can not be doubted. We are, therefore, of the opinion that the proven costs of those various contracts, less normal exhaustion thereon, and the amounts of salvage or recovery from assets received therewith, should be restored to invested capital for the taxable years in controversy. Goodell-Pratt Co., supra , and American Seating Co., supra.Since the contract entered into in 1910 with Peterson was for his services for a period of 10 years, no value can be assigned thereto for invested capital purposes.

The petitioner contends that all of these contracts were of such a nature as to make them assets of permanent value, and, therefore, that they were not subject to exhaustion by lapse of time, for the reason that they removed competition from the field for such a period of time as to enable it so completely to entrench itself as to make the return of any competition from those sources exceedingly remote, if not impossible, and it requests that we apply the rule in Market Supply Co.,3 B.T.A. 841">3 B.T.A. 841, to sustain this contention. The language used in that case was not intended as a general rule for all cases, and it can not be adopted as authority for the proposition urged by the petitioner. In that case the taxpayer by bill of sale acquired the right to occupy the store of one of its competitors as a tenant at will, the merchandise of the vendor, his contractors, the good will of his business, the right to use the vendor's name for a period of two years, and his abstention from engaging in a like business for a period of 10 years, for which the taxpayer paid the sum of $6,000 in addition to the amount paid for the value of the inventory, which amount it claimed as a business expense for the taxable year 1918. The Board there was dissatisfied with the evidence adduced in substantiation of the claim for a loss and disallowed the same, declaring that the amount should be regarded as a "capital expenditure of such indefinite duration that it can not properly be said to exhaust over any particular period." The petitioner's business was protected by the various contracts and agreement which it entered into for the periods of years specified therein. As each year passed the protection afforded by those contracts was diminished, and as the expiring date drew nearer the value became less because then, and only then, could the covenantors to the contracts proceed safely into the field of competition with the petitioner again. Of course some of the parties to these various contracts may predecease the duration thereof because of the lengthy period for which they are made, and in which event the petitioner is, of course, afforded permanent protection from their competition. But simply because they are long-lived contracts and there is a possibility of death or other causes intervening which may render competition impossible, is no reason for saying that they have everlasting value. It might just as forcibly be argued that upon the death of a contracting party the contract itself ceases to be of any value whatsoever, for the reason that it ceases to be useful as a protective measure. These contracts are made for specified periods of time and we can attach no value to them beyond the period of specified and we, therefore, see no reason why they should not be exhausted in the normally accepted manner.

Having held that the foregoing patents and contracts are exhaustible assets, the petitioner is entitled to normal exhaustion thereon for the taxable years in controversy as contended for in allegation of error numbered four herein.

The fifth allegation of error urged by the petitioner is the failure or refusal of the respondent to allow a reasonable allowance for exhaustion, wear and tear, including a reasonable allowance for obsolescence of machinery and buildings during the taxable years 1918, 1919, and 1920. What the petitioner in fact seeks is a deduction from its gross income for obsolescence of its tangible assets due to prohibition. Section 234(a)(8) of the Revenue Act of 1918 provides:

(a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deduction:

* * *

(8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.

We have described the tangible assets owned and operated by the petitioner during the taxable years in controversy in considerable detail in our findings of fact; therefore, a repetition here will serve no beneficial purpose. From the testimony adduced we are convinced that the buildings and machinery used by the petitioner were of such peculiar and special design as to render them unsuitable for other than the business of manufacturing feed from brewers' grain, and, furthermore, that they could not and were not in fact readily converted to any other use except as indicated in the findings of fact. One witness characterized the business of the petitioner as a "process," that is, it took wet grain and put it through a process of drying, turning out a finished produce and the machinery which it used was in sequence. That witnesses said in his testimony, "There are elevators, conveyors, presses, and driers, more conveyors and bins and chutes, and the buildings have to be of a peculiar and special design to accommodate such a procedure of operation. Consequently, the buildings are not standard or regular in shape so that they could lend themselves to any other use."

During 1918 the Government restricted the quantity of grain used in the brewing of beer and, therefore, the output was materially reduced, resulting in a considerable decrease in the quantity of wet grain received by the petitioner from brewers. The supply of wet grain received during that year was less than one-half the amount normally received. There was a slight increase in 1919 over the quantity received in 1918, but after the advent of national prohibition, which became effective in January, 1920, there was a further decrease to 10 to 15 per cent, which condition has existed since that time. Prior to prohibition the output of beer in the Metropolitan District was 12,000,000 barrels annually, as compared with 1,500,000 to 2,000,000 barrels of so-called near-beer produced after prohibition. During the busy season from April to October, the petitioner's New York plant, prior to prohibition, operated continuously day and night throughout the entire week, without shutdown, and during the slack season from November to March it operated for three 24-hour days consecutively. During the busy months since January, 1920, it has operated from five to six days a week of 8 hours duration and during the dull months from two to three days a week. The total tonnage of dry grains produced in the New York and Buffalo plants declined from 37,337 tons and 12,891 tons, respectively, in 1913, to 8,582 tons and 3,771 tons respectively, in 1927. In fact, the tonnage at the New York plant was reduced in 1920 to 6,212 tons, from 22,501 tons in 1919.

While the petitioner was not directly legislated out of business because of national prohibition, there can be no possible doubt but that its business was unquestionably dependent upon the brewing industry, which was in fact legislated out of business in so far as the manufacture of beer containing more than one-half of one per cent alcoholic content was concerned. Had the brewers not continued to manufacture so-called near-beer the petitioner's business would no doubt have been compelled to cease operation entirely.

In Manhattan Brewing Co.,6 B.T.A. 952">6 B.T.A. 952, where the question of obsolescence of both tangible and intangible assets, caused through the passage of the prohibition laws, was considered, the Board said:

It must be conceded that legislation prohibiting the sale or use of certain manufactured products after a certain date may cause obsolescence of the asset used in such production. There being no further market for the product, the machinery and equipment for its manufacture, although in good physical condition, may become useless and obsolete. On the other hand, the machinery and equipment may be adaptable for the manufacture of some other product and still retain a part of even all of their useful value.

Let us see just what the situation was in 1918 and 1919 in respect to prohibition. On December 18, 1917, Congress passed a resolution submitting the prohibition constitutional amendment to the States. At that time thirty-three States, only three less than the number required for the ratification of an amendment to the Constitution, had state-wide prohibition, and large areas of the other States had prohibition by local option. It was then practically certain, therefore, that the amendment would be adopted. As early as January, 1918, some States that had been considered doubtful ratified the amendment, and, by January 15, 1919, the requisite number of States to make prohibition the law of the land had so acted. National prohibition was effective January 16, 1920. In the meantime war-time prohibition was in effect. On November 21, 1918, the manufacture of beer from cereals was prohibited and the sale thereof prohibited after June 30, 1919, except for export. "Food Control" acts were in force during the year 1918, restricting the use and transportation of cereals and other food products for beverage purposes.

The petitioner foresaw the doom of the brewing industry. * * *

The respondent's counsel contends that there is no definite evidence of record that the petitioner reasonably knew or believed prior to the fiscal year 1920 that any of its machinery or buildings would become obsolete in advance of their ordinary useful life, and that therefore it is not entitled to a deduction for obsolescence because of the enactment of the prohibition law. While the evidence adduced in an attempt to prove the state of mind of the officers and directors of the petitioner prior to and during the years 1917, 1918, and 1919 is not the most convincing, we find other evidence of record offered, however, with respect to another issue in the case which conclusively shows, in our opinion, that the company's officers and directors had a reasonable belief that prohibition in some form was just in the offing. In December, 1915, certain employment contracts were extended, by mutual consent of the parties, to December 9, 1920, with the understanding, however, "that the term of said agreement may at the option of the company be terminated if a prohibition statute prohibiting the manufacture and sale of beer is enacted either by the Federal Government or by the State of New York." Therefore, the evidence to the effect that in the spring of 1917 there was no thought in the minds of the officers of the petitioner that prohibition would ever affect the brewery business is clearly and unmistakably in error. Of course there was no definite knowledge until in or about January, 1919, just how brewers might be affected by the enactment of the prohibition law, nor indeed is a definite knowledge necessary. In December, 1917, Congress passed a resolution submitting the prohibition amendment to the Constitution to the States, at which time thirty-three States had already enacted state-wide prohibition laws and certain portions of other States had passed local option laws, and as we said in Manhattan Brewing Co., supra, "it was then practically certain, therefore, that the amendment would be adopted." Naturally, all brewers hoped until the last that the business of brewing beer would not be affected, but many business men were of the opinion that the manufacture of beer was ultimately doomed. We are satisfied, therefore, that this test has been adequately met by the evidence of record.

The petitioner alleges in its petition and the respondent admits in his answer that the period during which obsolescence was in progress on account of the prohibition legislation was from January 1, 1918, to January 16, 1920.

We are of the opinion, therefore, that the petitioner is entitled to deduct obsolescence upon its buildings, machinery and equipment at those plants, the use of which was discontinued as a result of prohibition, namely, the Melrose, Newark, and Brooklyn plants. In computing said obsolescence, depreciation should be taken into consideration, and there should be deducted therefrom any and all amounts received by way of salvage or recoveries from the sale or disposition of machinery and equipment or buildings. No obsolescence should be allowed, however, with respect to the New York and Buffalo plants for the reason that they were not abandoned, nor were operations suspended thereat upon the advent of national prohibition, but those plants were continued in use and operation for the receipt of grains from brewers engaged in the manufacture of near-beer. While it is no doubt true that the earning power of those two plants was somewhat lessened because of prohibition, there is no showing that they became obsolete or valuless within the taxable years in controversy. See TennesseeFibre Co.,15 B.T.A. 133">15 B.T.A. 133; City Park Brewing Co.,10 B.T.A. 925">10 B.T.A. 925; and George Wiedemann Brewing Co.,9 B.T.A. 792">9 B.T.A. 792.

The sixth allegation of error herein pertains to the failure and refusal of the respondent to allow any amount for the exhaustion, wear and tear, including a reasonable allowance for obsolescence of patents, contracts, good will and other intangible assets. We have already decided that the patents and contracts in controversy were exhaustible assets and that the petitioner is entitled to normal exhaustion thereon for the taxable years in controversy and, therefore, the only remaining question for us to determine is whether the respondent erred in disallowing obsolescence of these three types of assets, namely, patents, contracts, and good will. The petitioner's counsel, mindful of the decisions in Manhattan Brewing Co., supra, and Red Wing Malting Co. v. Willcuts, 15 Fed.(2d) 626, in which it was held that good will was not the subject of obsolescence and, therefore, not deductible in the computation of net taxable income, has expressed the hope that the Board, if convinced by his argument, would reverse itself. We have considered the arguments presented in the light of the testimony adduced, and are constrained to say that we can find no justification for a reversal of our former decision in the matter.

With respect to the obsolescence of patents and contracts we fully realize that the values thereof were reduced to some extent because of the advent of prohibition, but diminution in value while the asset continues in use is not a proper basis for obsolescence. We said in the Yough Brewing Co. case, 4 B.T.A. 612">4 B.T.A. 612, speaking of the petitioner's plant there, "The fact that it was not operated to full capacity is not sufficient evidence that it was then obsolete," and in City Park Brewing Co., supra, we said "If the facilities are being put to any use at all the very opposite of the state of obsoleteness is indicated." Had all of the petitioner's plants ceased operation because of the enactment of prohibition laws, it would be comparatively simple, all other factors being present, to say that the contracts at least became worthless for the reason that all protection sought thereby would then have become absolutely useless. As to the patents, however, it would not be so simple as in the case of the contracts, in the absence of a showing on the part of the petitioner, which it has not done, that those patents had no salable value outside of the industry in which the petitioner was engaged. The petitioner has shown to our satisfaction that the machines used by it were of such a peculiar design and style that they were not readily adaptable to other uses, but the patents acquired by the petitioner cover such a wide field of invention that there may be some which might be converted to other fields of industry. Or, on the other hand, had the petitioner attempted to show that those brewers with which it contracted to supply it with grain had been forced out of business because of national prohibition and that they themselves had ceased operation, proper segregation might be made of those contracts and a deduction for obsolescence determined. As the matter now stands, we have a great number of contracts, some of which we are reasonably positive are still in force and effect, while others we have a reasonable belief are not in effect, but which are and which are not, we can not determine from the record. The petitioner's New York and Buffalo plants continued in operation after the prohibition law, and we presume are still in operation; therefore, while the patents and contracts have been reduced in value, because the same amount of protection was not required after the closing of the other three plants, they, except as to those which have expired by their limitations, were still in force during the taxable years and just as effective as ever, and were affording the same protection originally sought through the acquisition thereof except in a lesser degree. We must, therefore, conclude that a basis for a determination of obsolescence has not been established and that the findings of the respondent in this particular are sustained.

The seventh issue herein was raised by motion of the respondent's counsel at the hearing, which is that the deficiency should be increased because of the erroneous overstatement of the Buffalo assets by $12,155.83, and a consequent overstatement of invested capital. We have found from the record that there was an overstatement of the petitioner's surplus for the fiscal years 1918, 1919, and 1920 by the amount of $12,155.83. Therefore, the error complained of should be corrected and the deficiency adjusted accordingly.

Issue numbered eight herein, affirmative allegation of the respondent, is that he should exclude from invested capital 12/17 of $38,000 for the fiscal year ended September 30, 1918, and 13/17 of that amount for the ensuing fiscal year representing that portion of the so-called Bush patent rights which had already expired during those years. It appears from the record that the Bush patent rights were acquired with the original assets taken over by the petitioner from the New Jersey Company in October, 1905, and that they were thereupon entered upon the petitioner's books of account at a cost of $39,000. In 1908 the petitioner charged $38,000 and in 1909, $999 of that amount to expense, leaving $1 as the nominal cost of said patent rights on the books of account. In the respondent's determination of the deficiencies in controversy he restored $38,000 of the amount so written off to the petitioner's assets, and accordingly increased its invested capital by that amount, which was clearly an error. The patent having been acquired in 1905, at least 12 years of its life had been spent in 1917 and likewise 13 years in 1918. Consequently the amount restored by the respondent should have been reduced by the exhaustion occurring during those 12 and 13 years, respectively.

The petitioner agreed to the foregoing adjustment provided it be entitled to deduct exhaustion for the fiscal years ended September 30, 1918, and 1919, based upon the valuation of $38,000, and moved to amend its petition as set forth in allegation of error numbered nine herein. Whether the petitioner is entitled to any exhaustion thereon at all during the fiscal years 1918 and 1919 we do not know, for the reason that the record is absolutely silent as to the year in which the Bush patent rights were granted and, consequently, the true life thereof can not be determined for the purpose of exhaustion. For all we know the patent may have expired prior to one, or possibly both of the taxable years, in which event no exhaustion would be allowable. Having alleged that it was entitled to deduct exhaustion for the years in question, it was incumbent upon the petitioner to prove the basis upon which such exhaustion might be computed, and having failed to do so it has not sustained the burden of proof.

Reviewed by the Board.

Judgment will be entered under Rule 50.

TRAMMELL (Dissenting in part)

TRAMMELL, dissenting in part: Since this case arises in the Second Circuit, I think we should follow the Circuit Court of Appeals of that Circuit in the case of Haberle Crystal Springs Brewing Co. v. Clarke, 30 Fed.(2d) 219, which is contrary to the view herein expressed on the question of obsolescence.

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Footnotes

• 1. Includes land, $45,000. ↩

• 2. From improvement accounts.

  ↩

• 3. Includes land, $57,000. ↩

• 4. Includes land, $10,500. ↩

• 5. Includes land, $17,000. ↩

• 6. Excludes $15,000 representing value of machinery which was transferred to machinery account, and includes land, $7,000. ↩

• 7. Above figures include land, $14,000 (2 lots, at $7,000 each). ↩

• 8. Includes land, $4,700. ↩

• 9. Includes land of $11,750. ↩

• 1. From improvement accounts. ↩

• 1. From improvement accounts. ↩

• 1. From improvement accounts. ↩

• 2.

  Barge lost in 1908, cost 1905	$7,500.00
  Depreciation 3 years, at 5 per cent	1,125.00
  Depreciation 3 years, at 5 per cent	1,125.00
  Loss	6,375.00

  Original cost of lost barge, $7,500, excluded from depreciation in years subsequent to 1908. ↩

• 1. Transfer to truck and harness account. Prior to 1907 this account included horses, wagons, harness, bags, etc., but on Oct. 1, 1907, the account was separated, $65,000 being charged to horse account and $16,764.92 being charged to trucks and harness account. ↩

• 2. Transfer from Buffalo. ↩