H. T. Cushman Mfg. Co. v. Commissioner

OPINION.

Littleton:

The taxpayer contends that the Commissioner erred in determining its invested capital for the years 1919 and 1920, in increasing its income for the year 1920 by $750.15, and in refusing to allow as a deduction from gross income for the year 1919 the amount of $3,800, paid to its officers in that year as additional compensation. The taxpayer also contends that because of the fact that no records are available to establish the exact amount spent in improving and enlarging its factory facilities prior to 1910, its invested capital for 1919 and 1920 can not be correctly determined, and that, therefore, 'it is entitled to have its taxes computed under section 328 of the Revenue Act of 1918.

The Commissioner admitted by his answer that the item of $780.15 was improperly added to the taxpayer’s income for the year 1920, and that invested capital for that year, as computed, should be increased by $5,800. This leaves for consideration only the question as to whether or not the additional salaries claimed for the year 1919 should be allowed, and the issues arising from the exclusion from invested capital for the years 1919 and 1920 of the amount of $57,158.30.

A taxpayer acquiring assets for cash is not entitled to include them for purposes of invested capital at more than their cost. Appreciation in value of such assets occurring after they are acquired may not be reflected in invested capital. La Belle Iron Works v. United States, 256 U. S. 377. The taxpayer under its option acquired the mill and appurtenances involved herein at a cost of $18,200, which, however, was not intended by the parties to the conveyance to include the improvements made on the property by the taxpayer, or by H. T. Cushman. The evidence in this appeal .convinces us that Cushman and the taxpayer prior to 1910 spent large amounts of money in adding to and improving the mill, the tenement houses, machinery, etc., connected therewith; also, that the property had in 1910 a fair value $57,158.30 greater than w*as reflected by the books of the corporation. What part of this increased value was due to expenditures made by the taxpayer and Cushman and what part to other causes we are unable to determine from the evidence. The taxpayer’s records for the years prior to 1910 are, unfortunately, few and incomplete, and from them it is possible to establish expenditures of only $10,300 for the purposes named. That amount was spent for improvements clearly of a capital nature, between the years 1892 and 1910, and was charged to expenses, but there is no evidence to show in what particular years the expenditures were actually made, or what amount was spent in any one year. If it were possible to fix the dates of the various expenditures which make up the total amount of $10,300, we think that the taxpayer should be allowed to include in invested capital for 1919 and 1920 the depreciated cost as of those years of the assets acquired for the $10,300, but from the evidence submitted there is nothing from which the Board can determine any amount that should be so included. The taxpayer, however, since the appraisal of its assets, has computed deductions for exhaustion, wear and tear upon the appreciated values established by the appraisal, and has established depreciation reserves upon that basis. It has therefore actually realized through the depreciation deductions and reserves a part of the aj)preciation set up on its books. It accordingly follows that the Commissioner should not have excluded from the taxpayer’s invested capital for 1919 and 1920 the entire amount of the appreciation, but only that part thereof which had not been actually realized through deductions for depreciation.

. With reference to the extra compensation in the amount of $1,800 paid by the taxpayer to its officers on September 25,1919, and claimed as a deduction from gross income in that year, the evidence shows that this amount was paid for services rendered in the year 1918 and was in no- respect compensation for the year 1919. The Commissioner therefore correctly disallowed the amount as a deduction for 1919. The $2,000 additional salary voted on December 30,1919, was clearly for services rendered during the taxable year. It appears from the evidence that the additional salaries authprized for 1919, together with the regular salaries, were reasonable in amount, in view of the services rendered by the officers to whom they were paid. We consider, therefore, that the taxpayer should be allowed to deduct the amount of such additional salaries as an expense in that year.

The taxpayer claims that because the amounts spent by it and by H. T. Cushman on the mill property during the period 1892 to 1910 can not now be established and accurately reflected in invested capital, it is entitled to special assessment for the years 1919 and 1920 under section 328 of the Revenue Act of 1918. Taxpayer has shown to the satisfaction of the Board that the property acquired had at that time and subsequently an actual value greatly in excess of the amount reflected by its books but, due to the absence of records, it is imposr sible to determine accurately the amount of expenditures made by the taxpayer and Cushman of a capital nature but which were not capitalized. We are of the opinion from the evidence in this appeal that the taxpayer has brought itself within the provisions of section 327 of the Revenue Act of 1918 and is, therefore, entitled to have its profits tax computed under the provisions of section 328 of that Act.

The deficiency will be finally determined by the Board upon re-computation by the Commissioner in accordance with the foregoing. The determination of the Commissioner under the provisions of section 328 will be adopted as final, no evidence of comparatives having been submitted by the taxpayer.