Southland Coal Co. v. Commissioner

SOUTHLAND COAL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Southland Coal Co. v. Commissioner

Docket No. 26481.

United States Board of Tax Appeals

16 B.T.A. 50; 1929 BTA LEXIS 2656;

April 17, 1929, Promulgated

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1. Determination of the Commissioner approved due to failure of petitioner to submit proof to the contrary in respect to (1) depreciation on mining equipment; (2) depletion on coal; (3) adjustment of a fire loss.

2. Disallowance by the Commissioner of a deduction of $30,000 for the fiscal year ending July 31, 1922, claimed as a bonus paid to officers, approved.

3. Assessment of taxes for the fiscal years ending July 31, 1920, and July 31, 1921, was not barred by the statute of limitations.

M. D. Cohen, C.P.A., and L. M. Cohen, C.P.A., for the petitioner.

Orris Bennett, Esq., for the respondent.

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TRAMMELL

In this proceeding the petitioner seeks a redetermination of the income and profits taxes for the fiscal years ending July 31, 1920, July 31, 1921, and July 31, 1922, for which the Commissioner has determined deficiencies of $11,713.17, $39,243.01, and $13,723.46, respectively.

Petitioner alleges error on the part of the Commissioner (a) in allowing a depreciation rate of only 10 per cent on mining equipment instead of a rate based upon a life of six years; (b) in allowing the "depreciation rate" of 2.2 cents per ton on coal, and .27 cents per ton on development; (c) in failing to allow a fire loss amounting to $26,037.60 as a deduction for the fiscal year ending July 31, 1921, and in holding that petitioner realized income of $14,530.66 due to the insurance received on account of the fire; (d) in failing to allow a bonus of $30,000 as a deduction for the fiscal year ending July 31, 1922; (e) in proposing to assess additional taxes for the fiscal years ending May 31, 1920, and May 31, 1921, after the collection of such taxes was barred by the statute of limitations.

FINDINGS OF FACT.

Petitioner is a corporation with its office at 312 Third Avenue North, Nashville, Tenn. It was engaged in coal mining, and during the years 1920, 1921, and 1922, had coal mines in Henderson County and Union County, Kentucky.

The mining conditions at mines Nos. 1 and 3 owned by the petitioner were very bad on account of the thinness of the seam and roof conditions which resulted in squeezes and falls. The mining conditions at mine No. 2 were also bad on account of the smallness of the shaft and mine cars. As a result of these conditions the cost of mining coal from petitioner's properties was approximately 25 per cent higher than the average of several other mines in that district. On account of falls and squeezes petitioner occasionally lost part of its rails and mine cars. Taking into account the losses of cars and rails in this manner, the average life of underground equipment as a whole in the petitioner's properties was six years. The revenue agent determined a composite rate of 7 1/2 per cent for depreciation on equipment as a whole and made no separation of underground and surface equipment. The only change made by the Commissioner in computing depreciation on equipment was to change the composite rate from 7 1/2 per cent to 10 per cent.

The petitioner acquired mine No. 1 at Henderson, and mine No. 2 in Uniontown in 1918, and mine No. 3 at Henderson in 1920. Mines Nos. 1 and 3 at Henderson consisted of 2,300 acres, of which 550 acres had been worked out at the time the properties were acquired by the petitioner. Of this area, 150 acres on the south end of the property were afterwards abandoned due to the presence of a fault known as the Kleiderer Fault, and 1,000 acres were not profitably minable from the openings as they existed during the taxable years. This left 600 acres which could be profitably extracted from such openings. On account of the conditions existing at Henderson there were about 3,660 tons per acre recoverable from mines Nos. 1 and 3.

Mine No. 2 was acquired in 1918, and consisted of 1,612 acres of coal rights. Of this acreage 395 acres had been mined out at the date of acquisition, and 215 acres had been abandoned as faulty coal. Of the remaining acreage, 780 acres could not be profitably mined from shaft and openings in the property during the taxable years, which left 220 acres which could be profitably mined from such openings. There were 4,000 tons per acre recoverable from this property.

While the 1,000 acres of mines Nos. 1 and 3 could not be profitably mined from the openings existing during the taxable years, this acreage had a very definite value in 1920, and could have been profitably exploited during that year.

In 1921 a fire occurred at mine No. 3 which burned a portion of the equipment, and the petitioner received as insurance the sum of $50,249.78. Before the fire occurred the records of the petitioner showed an amount of $22,000 as representing the cost of structures at mine No. 3, and $75,700 as representing the cost of equipment at mine No. 3. After the fire the bookkeeper changed the entries so that the value of structures was entered at $54,000, and the value of equipment, $64,340. With these revised figures as a basis, the petitioner determined the loss occasioned by the fire to have been as follows:

Structures	$41,516.70
Equipment	30,475.02
Cost of cleaning up	4,295.66

Deducting from the sum of these items the insurance received, left $26,037.60, which was the amount the petitioner claimed as a loss from the fire.

The Commissioner of Internal Revenue adopted the determination of the revenue agent on this point, which was set forth in the following statement:

The following amounts were expended by this company for reconstruction and replacing the machinery damaged by the fire: Structure:

Fan house reconstruction	$620.23
Boiler and Engine room reconstruction	2,396.54
Tipple and screen reconstruction	18,518.23
Barn reconstruction	819.07
Lumber reconstruction	1,480.81
Equipment reconstruction	7,488.58
Total cost of replacement	31,423.46
Labor, cleaning up after fire	4,295.66
Total cost of reconstruction	35,719.12
Insurance collected	50,249.78
Gain from fire	14,530.66

As it was not possible to determine just what was destroyed by the fire, I have allowed the structure and equipment account to remain as before the fire and taken the difference between the amount expended for replacing the structure and equipment and the amount of insurance collected as profit from the fire.

The respondent, in the 60-day letter; adopted the basis used by the revenue agent for determining the invested capital for the fiscal year ending July 31, 1921, making adjustments thereto only on account of income taxes for the prior year's depreciation and depletion for a prior year. In the revenue agent's report structures are shown at mine No. 3 amounting to $38,071.29 and equipment is shown in an amount of $54,261.33.

At a meeting of the board of directors held July 15, 1922, the following resolution was passed:

In view of the substantial reduction made the early part of this year in salaries of the officers and certain employees of this company;

RESOLVED that the president be authorized in his discretion to pay to the officers and such employees as he may think proper 25% of the net profits above $100,000 out of the company's earnings for the year 1922, as additional compensation for their services, the amount to be paid to each of the several officers and such employees to be determined by the president; this disbursement to be made at such time as the president may consider the condition of the company will warrant, and a dividend of 12% or more paid the common shareholders.

The year referred to in the above resolution was the calendar year 1922.

In October, 1922, an amount of $30,000 was debited to profit and loss, and a similar amount credited to A. E. Potter, trustee, with the following notation:

An estimated amount of net earnings over $100,000 during the calendar year 1922 to be apportioned at end of year as per resolution of Board of Directors of the company.

The $30,000 was made payable $10,000, each, to A. E. Potter president, who owned 276 shares of capital stock, W. L. Hughes, vice president and general manager, who owned 75 shares of capital stock, and Edward Potter, secretary and treasurer, who owned 3 shares of capital stock. The total amount of authorized capital stock consisted of 3,000 shares of common stock, of which 2,967 were issued. The shares of the bonus allotted to Hughes were assigned by him to another party or other parties. There appears the following record from the minutes of a stockholders' meeting held on September 6, 1922:

The attention of the stockholders was then called to the resolution passed by the directors at the meeting of July 15, 1922, referring to additional compensation to be paid to certain officers and employees, and then upon motion from Mr. Hughes, seconded by Mr. Edward Potter, Jr., the minutes of said meetings of the stockholders held on January 22 and February 28, 1922, and the minutes of the meeting of the directors held July 15, 1922, and President Potter's compromise settlement with Mehard were each and all ratified and approved.

The petitioner filed an income and profits-tax return for the fiscal year ending July 31, 1920, which was sworn and subscribed to on October 12, 1920. Petitioner also filed an income and profits-tax return for the fiscal year ending July 31, 1921, which was sworn and subscribed to on October 13, 1921. On April 18, 1925, petitioner filed the following agreement extending the statute of limitations to December 31, 1925:

In pursuance of the provisions of existing Internal Revenue Laws Southland Coal Company, a taxpayer of Henderson, Kentucky, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the fiscal year 1920 and 1921, under existing revenue acts, or under prior revenue acts.

This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1925, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.

(Signed) SOUTHLAND COAL CO.

Taxpayer.

(Signed) BY EDWARD POTTER, JR.,

Secy Treas.

(Signed) D. H. BLAIR

Commissioner.

On December 14, 1925, petitioner filed a second agreement extending the time for the assessment of taxes to December 31, 1926, as follows:

In sursuance of the provisions of existing Internal Revenue Laws Southland Coal Company, a taxpayer of Nashville, Tennessee, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year (or years) 1920 and 1921, under existing revenue acts, or under prior revenue acts.

This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.

(Signed) SOUTHLAND COAL CO.

Taxpayer.

(Signed) BY EDWARD POTTER, JR.,

Secy Treas.

(Signed) D. H. BLAIR

Commissioner.

On November 16, 1926, petitioner filed the following agreement extending the time for making assessment of taxes until December 31, 1927.

In pursuance of the provisions of existing Internal Revenue Laws Southland Coal Company, a taxpayer of Nashville, Tennessee, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year (or years) 1920, 1921, 1922, under existing revenue acts, or under prior revenue acts.

This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1927, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.

(Signed) SOUTHLAND COAL CO.

Taxpayer.

(Signed) BY EDWARD POTTER JR.,

Secy. Treas.

(Signed) D. H. BLAIR

Commissioner.

OPINION.

TRAMMELL: Petitioner alleges that the depreciation allowed by the Commissioner on its equipment is inadequate and has endeavored to prove that it is entitled to depreciation based upon a 6-year life instead of depreciation based upon a 10-year life as allowed by the Commissioner. The only evidence introduced at the hearing was in reference to underground equipment, and in making an estimate of a 6-year life for underground equipment the witness stated that cars and rails had a life of from 6 to 8 years because some of the cars and rails were lost in the operation of the mine by falls of rock and squeezes. Losses of this character are not to be recovered in the form of depreciation, and have no relation to deductions allowed on account thereof. Since the 6-year life is determined by this factor it is in error, but aside from this fact, the Commissioner determined a composite rate of depreciation. In other words the assets above and under ground were grouped together. Even if it be shown that some of the assets had a shorter life than the average life of the group of assets, that would not be proof that the composite rate of depreciation determined by the respondent was erroneous, or that the petitioner is entitled to a greater deduction than that allowed.

Petitioner further claims that the depletion allowed by the Commissioner was inadequate, and has endeavored to show that depletion should be based upon a smaller tonnage than that used by the Commissioner, on the theory that certain large tracts of land could not be exploited from the opening existing in the property during the years in question. It does not dispute the fact that the coal existed in these tracts, nor has it shown by any testimony that the coal lands thus excluded from its estimate had no value. In fact, a witness for the petitioner admitted that these lands had value. The testimony merely showed that a portion of the coal could not be recovered from the existing openings. Furthermore, petitioner has failed to prove what the costs of these coal lands were, and has made no allocation of any cost to the lands containing coal which it contends was not recoverable.

The petitioner introduced in evidence a report by the Coal Valuation Section of the Income Tax Unit, and a report of a revenue agent which set forth various amounts representing costs of the properties and certain tonnages and a rate of depletion. The Commissioner, however, did not adopt the depletion rates or the depletion deduction used by the revenue agent or those shown in the coal valuation report submitted. Neither the revenue agent's report nor the Coal Valuation Section's report agree with the determination of the Commissioner. The determination of the Commissioner is presumed to be correct and this presumption is not overcome by reports of his subordinates which he does not adopt. Whether the Commissioner adopted the cost or the tonnage used by the revenue agent or in the Coal Valuation Section's report is not shown. For lack of sufficient evidence to the contrary we are unable to find that the Commissioner erred in the determination of the depletion deduction for any of the years involved.

An examination of the record in regard to the fire loss claimed by the petitioner discloses a similar lack of evidence. There is nothing in the record which proves the cost of the total structures and equipment at mine No. 3 or the cost of the structures and equipment destroyed by fire. Petitioner showed that certain entries were made on the books before the fire but did not prove that such entries represented the actual cost of the properties. These entries were subsequently changed and the petitioner offered no proof that the changed figures represent the actual cost of the structures and equipment at mine No. 3.

In view of these conditions we are unable to determine that the Commissioner erred in disallowing the loss of $26,037.60 and in adding to net income an additional amount of $14,530.66, representing a gain from the fire.

Petitioner claimed a deduction of $30,000 as bonuses paid to its officers and employees for the fiscal year ending July 31, 1922. It is shown that on July 16, 1922, the directors authorized a payment at some future time of an undetermined amount to be based upon the earnings for the calendar year 1922 in excess of $100,000. It is further noted that it was not until October, 1922, after the close of the fiscal year that any entry was made on the books representing a payment pursuant to this resolution, and that on that date the entry specified that such payment was to be apportioned at the end of the year. Since the amount of $30,000 was not determined or determinable, and was not intended to be determined during the fiscal year ending July 31, 1922, and was not paid during such fiscal year, it is not an allowable deduction for the fiscal year ending July 31, 1922.

We are, therefore, of the opinion that the Commissioner was justified in refusing to permit a deduction of $30,000 during the fiscal year ending July 31, 1922.

In presenting to the Board the issue relating to the running of the statute of limitations it is apparent that the petitioner overlooked the waiver dated April 18, 1925. This waiver was filed prior to the running of the statute of limitations for the fiscal year ending July 31, 1920, or for the fiscal year ending July 31, 1921, since it was less than five years after the 1920 return was filed, and less than four years after the 1921 return was filed. The subsequent waivers dated December 14, 1925, and November 16, 1926, further extended the time in which assessment could be made up to December 31, 1925, which was beyond the time when the petition was filed with the Board. We, therefore, hold that the Commissioner is not barred by the statute of limitations from assessing taxes for the fiscal years ending July 31, 1920, and July 31, 1921.

Judgment will be entered for the respondent.