Heath v. Commissioner

OPINION.

Lansdon :

In computing the gain resulting from the sale in 1919 of the properties involved in this proceeding, the respondent relies for value at March 1, 1913, (1) on the price paid the Spring Valley Water Co. for the lease and herd on Pleasanton Dairy, Eanch No. 1, prior to March 1, 1913; (2) on the price at which certain interests in the two properties were sold to Wipfli and Gwerder in 1912,1914, and 1916, and (3) on his theory that the dairy herds were subject to depreciation from 1913 for animals acquired before that date and from date of acquisition for animals acquired subsequent thereto. We shall discuss these contentions in the order set forth.

The evidence is conclusive that the Spring Valley Water Co. purchased the property known as Pleasanton Dairy Eanch No. 1, solely for the purpose of securing the water thereon and the water rights pertaining thereto. This company is engaged in the business of selling water to the people and City of San Francisco. It sold the dairy herd and dairy appurtenances which it purchased from the Davises at a price that we can not regard, in all the circumstances, as a true measure of the fair market value of such property at the date of sale.

The petitioner was engaged in the dairy business on a large scale. The properties in question represented only a part of his interests in such industry. He testified that he did not have time to give proper personal attention to all his properties and that he sold the interests to Wipfli and Gwerder, his employees at the time, for a price much below actual value for the purpose of securing the interested services of reliable men in the operation of the property. It is not unusual for men with large business interests to dispose of shares of their property to trusted employees at less than actual value for the purpose alleged here. We are convinced that the prices received from the sale of the several interests to Wipfli and Gwerder did not accurately reflect the fair market value of the properties at the dates of such sales.

Section 202 of the Eevenue Act of 1918 provides as follows:

Sec. 202. (a) That for the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, the basis shall he—

(1) In the case of property acquired before March 1, 1913, the fair market price or value of such property as of that date; and

(2) In the case of property acquired on or after that date, the cost thereof; or the inventory value, if the inventory is made in accordance with section 203.

Section 214 of the Act is in part as follows:

Sec. 214. (a) That in computing net income there shall be allowed as deductions :

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

The petitioner has proved that there was no diminution and that on the contrary there was a continuous and very appreciable increase in the actual productive capacity of the herd from year to year during the whole period of his ownership, and contends that this clearly evidences that the respondent erred in including accrued depreciation of such herd as a factor in computing gain from the sale thereof.

The facts here indicate an accounting procedure by the petitioner that is equivalent to making annual additions to a reserve for depreciation and simultaneously charging all the cost of maintaining the standard of the herd against such reserve. The effect' was the measurement of annual depreciation by the cost of replacements for each year. There was, therefore, no accrued depreciation at date of sale and the respondent erred in making such deduction from the basic cost of the property. Compare the result reached here with Haugh & Keenan Storage & Transfer Co. v. Heiner, 20 Fed. (2d) 921, and with our decisions, Appeal of Cleveland Home Brewing Co., 1 B. T. A. 87; Appeal of Russell Milling Co., 1 B. T. A. 194; Appeal of Rub-No-More Co., 1. B. T. A. 228; Appeal of Hamilton Manufacturing Co., 3 B. T. A. 1045; Appeal of Western Star Milling Co., 5 B. T. A. 109.

From the evidence adduced at the hearing, we are not able to make any definite findings of fact as to the cost, the useful life, or the value at the date of sale of the plant assets and irrigation facilities of the petitioner. Subject to certain stipulations of the parties which we have incorporated in our findings of fact, we approve the action of the Commissioner in computing depreciation on the property, other than the dairy herd, involved in this transaction and in including such depreciation as a factor in his determination of gain realized from the sale of an interest in such property in the year 1919.

It is alleged in the petition that under the laws of California the gain involved was a part of the income of a marital community, one-half of which should be taxed to Laura Heath, wife of the petitioner. The Commissioner denied this allegation in his answer to such petition. At the hearing neither party referred to this point or adduced any evidence in respect thereof. The entire deficiency is determinable against the petitioner. United States v. Robbins, 269 U. S. 315; Appeal of D. Cerruti, 4 B. T. A. 682.

Judgment will be entered on BO days’ notice, pnder Bule 50.