Dilling Cotton Mills v. Commissioner

OPINION.

Smith:

The sole question presented by this appeal is the right of the taxpayer to deduct from gross income, in its tax return for 1918, $20,196.95 as a loss upon the discarding of 322 looms, 228 of which were equipped with Darby attachments, 4 warpers, 2 engines, and 4 boilers. After making an allowance for salvage value, the taxpayer claims that the loss actually sustained on the junking and discarding of the above-mentioned assets was $20,196.95, and of this amount the Commissioner has disallowed the deduction of $13,274.

That the taxpayer is entitled under the law to deduct from gross income in its 1918 tax return an amount for the junking and discarding of machinery and equipment is admitted by the Commissioner. He contends that the amount allowable as a deduction must be claimed under section 234(a)(4) of the Revenue Act of 1918, while the taxpayer claims that it is entitled to' the deduction under section 214(a)(8). Inasmuch as section 214(a)(8) has application to individuals and not to corporations, it is apparent that the taxpayer intended to claim the deduction under section 234(a) (7) of the Revenue Act of 1918, which permits a corporation to deduct from gross income in its tax return “ a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.”

We think the taxpayer is entitled to claim the deduction under section 234(a) (7) of the Revenue Act of 1918. By reason of the development of hydro-electric power in the territory in which its. plant was located, it became more profitable for it to operate by electricity than by steam. The boilers and engines which the taxpayer owned became to a large extent obsolete. The evidence is to the effect that numerous other plants in the locality likewise changed from steam power to electric power, and as a result thereof there was very little demand for boilers and engines such as the taxpayer owned. By reason of this change in business conditions the taxpayer is entitled' to claim a deduction for obsolescence in respect of the boilers and engines.

It also appears that it became more profitable for the taxpayer to operate a yarn mill than to operate a combined weave and spinning mill, which it had operated up to 1918. It therefore discarded its looms and warpers. The evidence shows that the looms were in fair condition and were doing good work. The books of account of the corporation for years prior to 1910 or 1912 had been lost or destroyed, and it was impossible for the taxpayer accurately to learn the original cost of the machinery and equipment discarded. It is in evidence, however, that loom frames depreciate very slowly, and that if looms are kept in proper repair and the attachments or parts of attachments are renewed as required the life of a loom is in many cases more than 40 years.

The estimate of the taxpayer as to the loss sustained by it upon the discarding of machinery and equipment in 1918 appears to have been made after a careful attempt to reach the depreciated cost of the assets discarded. We are disposed to give much weight to the evidence adduced relative to the estimate of value made by the officers of the taxpayer. The evidence supports the taxpayer’s position that the depreciated cost of the assets discarded, less salvage value, was approximately $20,000. We think that the claim of the taxpayer to a deduction of $20,196.25 is not excessive, and it is allowed.