Fidelity Storage Corp. v. Commissioner

FIDELITY STORAGE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Fidelity Storage Corp. v. Commissioner

Docket Nos. 18390, 24221, 40787.

United States Board of Tax Appeals

18 B.T.A. 517; 1929 BTA LEXIS 2026;

December 16, 1929, Promulgated

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1. Held that a waiver signed by the petitioner as the Fidelity Storage Co., to which was affixed the corporate seal of the petitioner, extended the period for assessment for the year 1918, and that the defect in the deficiency letter was not so material as to deprive the Board of jurisdiction.

2. From the evidence, held that the $9,000 additional salary authorized and paid to the petitioner's president in the year 1918 was compensation for services performed in prior years, and not properly deductible from gross income in the year 1918.

3. From the evidence, held that the sum of $1,050 paid to James L. Karrick in 1918 represented liquidation of a liability properly accruable in prior years, and was not a proper deduction from gross income in the year 1918.

4. From the evidence, held that the loss in connection with the Sealed Package Ice Co. was sustained in 1913, when the claims against the said company were released to the trustee in bankruptcy, and the loss is not deductible in subsequent years.

5. From the evidence, held that the respondent's determination of value and rate, for purposes of depreciation and obsolescence in connection with the petitioner's warehouse, were adequate.

6. Respondent's determination as to certain deductions claimed as ordinary and necessary expenses sustained for lack of proof.

7. Respondent's determination that certain sums expended on betterments to petitioner's warehouse should be capitalized rather than charged to expense sustained for lack of proof.

8. Respondent's determination in regard to loss sustained on account of the abandonment of electric car-charging equipment sustained for lack of proof.

Ben Jenkins, Esq., E. W. Wallick, Esq., and D. J. Shorb, Esq., for the petitioner.

C. H. Curl, Esq., for the respondent.

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GREEN

In these proceedings, which have been consolidated for hearing and decision, the petitioner seeks a redetermination of its income and profits taxes for the years 1918 to 1920, inclusive, and its income taxes for the years 1921 to 1925, inclusive, for which years the respondent has determined deficiencies as follows:

1918	$16,109.08
1919	4,980.49
1920	5,646.82
1921	4,945.08
1922	$651.20
1923	1,744.40
1924	1,930.85
1925	2,216.06

making a total deficiency for the eight years in the amount of $38,223.98.

The petitions allege that the respondent made the following errors:

1. That the proposed taxes for the years 1918 and 1919 are barred by the statute of limitations.

2. In failing to allow as a deduction from gross income in the year 1918 the sum of $9,000, alleged to represent duly authorized salary, which was credited upon the books of the petitioner to the personal account of its president.

3. In failing to allow as a deduction from gross income for the year 1918 the sum of $1,050 credited to the account of James L. Karrick and alleged to represent interest on advances made by him on behalf of the petitioner.

4. In failing to allow as a deduction from gross income, either in the year 1918 or in the year 1920, an alleged loss of $13,307.62 arising through transactions with the Sealed Package Ice Co.

5. In failing to allow as a deduction from gross income for the years under consideration depreciation and obsolescence based upon the fair market value as of March 1, 1913, of the petitioner's building and equipment therein, at rates sufficient to return to the petitioner these values over the remaining useful life of the assets.

6. In failing to allow as deduction as ordinary and necessary business expenses the sum of $1,702.85 in the year 1918 and the sums of $7,482.18 and $93.39 in the year 1920.

7. In failing to allow as a deduction from gross income for the year 1918 a loss of $4,948.90 on account of the abandonment of certain electric car-charging equipment.

8. In failing to allow as a deduction from gross income in the year 1919 the amount expended for material and labor upon the petitioner's building, as follows:

Iron grills	$877.23
Skylights	2,800.00
Roof	3,000.00

9. In failing to allow as a deduction from gross income for the year 1919 an alleged loss in the amount of $4,830.10, sustained on tearing out the fixtures and equipment that had been installed for the use of the Northwest Packing Co., and the failure to allow depreciation on this equipment for the years 1918 and 1919.

10. In failing to include in invested capital the sum of $9,253 expended in 1912 upon the construction of a safe-deposit vault and the sum of $10,800 expended in the same year in arranging office space, and also in failing to allow depreciation on this equipment for the years under consideration.

11. In determining the war-profits credit of the petitioner for the year 1918 by excluding from the average prewar net income one-third of $13,120.12 by charging the amount of the loss in connection with the Sealed Package Ice Co. to expense in 1913.

12. In failing to correctly determine the value of the elevators and machinery in the petitioner's building, whereby the invested capital was erroneously reduced, and, thereby, the depreciation deduction for each of the years under consideration.

No evidence was introduced in connection with exception No. 9, and at the hearing, petitioner withdrew its contentions in regard to paid-in surplus, as set out in exceptions Nos. 10, 11, and 12, as above stated.

FINDINGS OF FACT.

The petitioner is a corporation organized under the laws of the State of Virginia, with its principal place of business at 1420 U Street, N.W., Washington, D.C., where it operates a storage warehouse.

Its charter provides that the name of the corporation shall be "The Fidelity Storage Corporation." On or about April 22, 1924, the petitioner filed an amended return for the year 1918, which was signed "The Fidelity Storage Company, By J. L. Karrick, President." On December 10, 1925, a waiver executed on the usual form and covering the years 1918 to 1921, inclusive, signed by the Fidelity Storage Co., by James L. Karrick, president, and having the corporate seal of the petitioner affixed, was received in the special adjustment section. This waiver was to remain in effect until December 31, 1926.

The petitioner advertised under the name of "The Fidelity Storage Company," but there was no corporation of that name in existence in Washington, D.C. On May 12, 1926, the respondent addressed a 60-day letter to the Fidelity Storage Co., 1420 U Street, N.W., Washington, D.C., which letter is the basis for the petitioner's appeal in these proceedings.

The revenue agent, during his investigation of the petitioner's books, criticized an item of $9,000 purported to be paid by the petitioner in 1918 to its president for additional salary in the years 1906 to 1908. The payment in question was authorized by a resolution of the board of directors and was credited to the personal account of the president. Prior to the revenue agent's investigation Karrick, the petitioner's president, had reported $4,000 as the salary received from the petitioner during the year 1918. At a meeting of the board of directors of the petitioner held on January 2, 1924, and subsequent to the revenue agent's investigation, the following was incorporated in its minutes:

Attention is called to the incorrect wording of the minutes of the meeting of Directors July 2, 1918; the following resolution was adopted:

Whereas, the records of the Directors' meeting of July 2, 1918, were incorrect and did not express clearly all of the facts or the meaning of the Directors, the said minutes are corrected to read as follows:

Whereas, the shortage of help caused by war conditions has put great extra burden on the president, together with the fact that no salary was paid to him for some years, it is now resolved that the treasurer be directed to pay to James L. Karrick the sum of $9,000.00 as a matter of justice and as a bonus or extra pay, to be charged to labor.

Also the treasurer is directed to pay James L. Karrick the sum of $1,050.00 as reimbursement for interest paid by him for the benefit of the company, which is to be charged to interest.

The secretary is further directed to remove from the record the erroneously worded minutes above referred to.

The secretary, in accordance with the resolution, destroyed the minutes of the 1918 meeting.

During the years 1906 to 1908, and 1918, Karrick, the petitioner's president, in addition to his duties with the petitioner, was engaged in building construction and also ran a real estate agency.

The petitioner kept its books of account on the accrual basis.

The respondent disallowed the $9,000 as a deduction for the year 1918, on the ground that it represented the payment of salaries for the years 1906 to 1908.

At the time of the organization of the petitioner, James L. Karrick, who was one of the organizers, advanced petitioner certain monies. A note for $11,500 was given on June 12, 1905. The last endorsement of interest appearing on this note was December 31, 1915. In 1918 the petitioner, pursuant to a resolution of its board of directors, credited Karrick with $1,050 on account of interest. In the revised minutes above referred to this $1,050 was again mentioned and, pursuant to this resolution, the original minutes were destroyed.

The respondent disallowed this item, stating that its payment was the liquidation of a liability and not an operating expense.

Some time prior to 1911 the petitioner leased a two-story brick and concrete addition to its warehouse to the Sealed Package Ice Co., which installed an ice plant in the leased premises and operated the same for six weeks during the year 1911. After this short period of operation the Sealed Package Ice Co. experienced financial difficulties and was forced into bankruptcy on October 9, 1911. The trustee had difficulty in disposing of the assets of the bankrupt and finally effected a sale to Karrick, the president of the petitioner, on the following terms: By the payment of all the expenses of the bankruptcy proceedings, the payment of $1,479 in cash to cover 10 per cent of all open and unsecured accounts, the delivery of a release of his own claim in the amount of $11,120.74, and that of the petitioner in the amount of $9,365.42, and by giving a bond to exonerate the trustee from any liability arising through claims which were then in litigation. On August 22, 1913, the petitioner executed and delivered a release to the trustee in bankruptcy of all claims or demands of whatsoever description, preferred or unpreferred, and discharged and released the trustee from all liability. Karrick continued the litigation, for which he was to hold the trustee harmless until 1920. The petitioner's claim against the Sealed Package Ice Co. was for rent, and it continued to charge rent at the rate of $375 per month after the trustee had sold the assets to Karrick. During the year 1916 the sum of $3,000, part of the accumulated rent, was charged off as a bad debt.

The respondent determined that the transactions with the Sealed Package Ice Co. were closed in 1913 and that no loss arising therefrom was deductible in either 1918 or 1920.

The petitioner conducts its storage business in a nine-story, semifireproof building, located at 1420 U Street, N.W., Washington, D.C. The lot on which the building stands has a frontage of slightly over 100 feet on U Street, and is 200 feet deep, making a total area of approximately 20,500 feet. The cube of the building is approximately two million feet. The warehouse building, as it now stands, was erected in two units. In 1905 and 1906, on the east 60 feet of the property, was erected the first unit, with foundations and floors of concrete and brick, bearing walls 26 inches in thickness at the base gradually diminishing to the top. In 1910 and 1911, on the west 40 feet, a concrete, brick and steel building was erected and leased to the Sealed Package Ice Co. Sometime prior to March 1, 1913, this unit was carried up to the full nine stories with a brick and steel I-beam and concrete construction, and the entire building was divided into 1,500 storage rooms by 4-inch brick walls. At that time the building was equipped with two freight and one passenger elevator, two vaults for the storage of valuables, and a carpet-cleaning plant.

Estimates of the replacement cost of the building as of March 1, 1913, were made on the basis of 25 cents per cubic foot, resulting in an estimated replacement cost as of that date of $450,000. The replacement cost of the elevators was put at $25,000, and the vaults at $20,000.

There was no market for warehouse property in Washington on March 1, 1913.

The petitioner, in connection with the real estate assessment of the property, on May 29, 1914, wrote the taxing authorities of the District of Columbia that the value of the building on that date was $100,000, and that the building was for sale at that price. Karrick, the president of the petitioner, on November 4, 1924, in a sworn affidavit, presented to the Treasury Department, valued the building as of March 1, 1913, at $303,109.30. The petitioner carried this building on its books at $278,595.32, and the respondent determined its value to be the same amount.

The property, when erected, was situated in a most desirable white residential district, which has since become an area largely populated by colored people. Immediately opposite the petitioner's property is situated a moving-picture theatre used exclusively by colored patrons.

The useful life of the petitioner's warehouse, on March 1, 1913, was at least 40 years, and its value on that date was $278,595.32.

The respondent in determining the proposed deficiency allowed the petitioner as a deduction from net income for depreciation on this building a rate of 2 1/2 per cent, based upon a book value of $278,595.32. The petitioner is contending for a rate of 3 1/2 per cent on a valuation of $450,000.

The respondent disallowed as a deduction from gross income, as ordinary and necessary business expenses, the amounts of $1,702.85 in the year 1918 and $7,482.18 and $93.39 in the year 1920. No testimony was offered in regard to the $1,702.85 or the $93.39.

Karrick, the president of the petitioner, conducted a real estate business, with offices on the petitioner's premises. The real estate agency, as a means of collecting delinquent rents, was in the habit of purchasing from its tenants certain needed supplies for the petitioner. The $7,482.18 was credited on the books of the petitioner to Karrick's real estate agency. The evidence is so vague and uncertain as to what purchases entered into this total that it is impossible to make any finding as to the facts.

By March 4, 1913, the petitioner had installed and in operation, on the upper floors of its warehouse, equipment for the charging of electric automobiles. By 1916 electric automobiles had become so uncommon that there was no demand for charging service, and the petitioner abandoned the charging equipment. In the year 1916 the petitioner charged the sum of $3,000 to profit and loss. In 1918 the equipment was dismanted and sold for scrap for $186.50, and in this year the petitioner charged to profit and loss the sum of $956.11. The petitioner contends that it sustained a loss of $4,948.90 through the abandonment of the electric car-charging equipment, while the respondent has held that the books of account did not support the contention as to the loss sustained.

The petitioner's building as originally constructed had iron grills across the front windows. In 1919 the cornice at the top of the building fell and damaged the original grills, which were replaced by new grills of a heavier design at a cost of $877.23.

The building as originally constructed had seventeen skylights, which were raised above the roof level by parapets. By the year 1919 all these skylights had become so effected by the elements that they had to be reconstructed. The parapets were removed and the skylights reset and reflashed in a different manner, at a cost of $2,800.

In the same year $3,000 was spent on material and labor on the roof of the petitioner's building. The roof was of concrete construction. Over the concrete roof were layers of roofing felt affixed with pitch or asphalt, and on the surface, a layer of slag. The original felt was not removed in 1919, but the extent of replacements of felt and slag is not shown. An entirely new felt and slag roof would have cost approximately $4,500. The records of the petitioner show roof repairs in other years at not to exceed $700.

The respondent in his determination held that the money expended on grills, skylights, and roof was not in the nature of repairs, and should be capitalized.

The petitioner offered no evidence relating to the alleged loss sustained by reason of the removal of the fixtures used by the Northwest Packing Co., which was a corporation organized in connection with the Sealed Package Ice Co., for cold storage, from which we are able to make a findings of fact.

OPINION.

GREEN: Before considering the errors assigned in these proceedings, we feel constrained to mention some of the difficulties with which we were confronted in making findings of fact.

The trial of the case consumed over three days, during which time the several witnesses were called and recalled as many as eight times. For reasons immediately apparent to anyone who reads the record, and particularly to one who saw them on the witness stand, the testimony of the witnesses, Karrick and Plager, is entitled to little weight, except where corroborated by other witnesses. They testified to many matters as to which, we, for the above reason, can make no findings of fact. Subsequent to the revenue agent's investigation pertinent records were destroyed at the direction of the petitioner's board of directors. Little direct evidence was offered relative to the March 1, 1913, value of the petitioner's warehouse, but an attempt was made to establish, through estimates of replacement costs, a March 1, 1913, value for purposes of depreciation and obsolescence, which value was greatly in excess of the value previously used by the petitioner before the District of Columbia taxing authorities, as well as the Income Tax Unit, and also in excess of the value shown on the petitioner's books. These difficulties are in no wise to be attributed to counsel for the parties.

We now take up the errors assigned, in the order in which they have been previously stated.

1. The question of the statute of limitations was decided adversely to the petitioner at the hearing. The petitioner was incorporated under the laws of the State of Virginia, under the name of the Fidelity Storage Corporation. It advertised as the Fidelity Storage Co. The two names were synonymous in Washington, where it was the only Fidelity Storage concern dealing with the public and there was no corporate entity in existence known as the Fidelity Storage Co. The two designations were used indiscriminately by the petitioner in making tax returns. We are of the opinion that the fact that the waiver in question was signed "The Fidelity Storage Company," by the petitioner's president, and had the petitioner's corporate seal affixed, is not such a defect as to prevent the extension of the period of assessment for the years 1918 and 1919.

2. The petitioner, at all times, kept its books of account on the accrual basis. In 1918, by a resolution of the board of directors, it voted to pay Karrick, its president, $9,000, as salary for the years 1906 to 1908, inclusive. When the revenue agent was investigating the petitioner's books for the year 1918 he criticized this item as not being a proper deduction for the year 1918. After this investigation, in order to overcome the objection, the resolutions were rewritten and the secretary directed to destroy the original minutes. We have before us the testimony of the revenue agent and the reconstructed record. Karrick, in his original return for 1918, failed to report the $9,000 as additional salary for that year, which may indicate that he considered it as compensation for services performed in prior years. The evidence fails to support the contention of the petitioner that $13,000 was a reasonable salary for its president in the year 1918. We are of the opinion that the respondent's determination that the $9,000 was compensation for prior years and not a proper deduction for the year 1918 should be sustained.

3. As to the matter of $1,050 paid to Karrick in 1918 on account of interest, the facts in regard to this are meager and also confused by reason of the destruction of the original records. From the facts presented, we are unable to find any error in the respondent's determination, and, accordingly, it is approved.

4. In 1910 the petitioner leased a portion of its premises to the Sealed Package Ice Co., which began the manufacture of ice in 1911 and after being in operation for six weeks went into bankruptcy. Karrick in 1913 purchased the assets from the trustee for 10 per cent of the unsecured claims and by surrendering his own claims and the claims of the petitioner. The petitioner is contending that it had an agreement with Karrick by which it was to participate with him in proportion to its preferred claim after he had been reimbursed for the cash expended. The record does not support any such contention, and we are of the opinion that the respondent's determination that the transaction with the Sealed Package Ice Co., as far as the petitioner was concerned, was entirely closed in 1913, when it surrendered its claims to the trustee in bankruptcy.

5. The respondent has determined a March 1, 1913, value on the petitioner's building of $278,595.32, and has allowed depreciation on this amount at the rate of 2 1/2 per cent for the years in question. The petitioner claims a valuation of $450,000 and a life of 30 years, or a depreciation rate of 3 1/2 per cent.

Such evidence as we have is not sufficient to overcome the presumption of correctness of the determination of value made by the respondent, and his determination is sustained. The petitioner contends that the increase in colored population has decreased the useful life of the building and that the rate of depreciation should be increased from 2 1/2 to 3 1/2 per cent. The warehouse is centrally located in the City of Washington. We have found its life to be 40 years, and, from the evidence presented, we are unable to find that the change in population has affected the useful life of the building.

6. The next error relates to the respondent's refusal to allow deductions as ordinary and necessary business expenses, from gross income in the years 1918 and 1920 for certain sums that were paid by Karrick through his real estate office. No books were offered in connection with these transactions. It is astonishing that the petitioner with a bookkeeping force at hand, and that Karrick, the president of a bank and operating a real estate office, had no record available to substantiate the verbal statements of an employee of Karrick's real estate agency. On account of lack of proof, the respondent's determination should be sustained.

7. As to the assignment of error relating to the loss sustained by reason of the abandonment of the electrical charging equipment, the petitioner has failed to show the March 1, 1913, value of this equipment or the rate of depreciation sustained. It appears from the record that the electrical charging equipment was in fact abandoned some time in the year 1916. Accordingly, the respondent; s determination should be affirmed.

8. The next assignment of error relates to the expenditures in connection with grills, skylights, and roof on the petitioner's warehouse, which are claimed as ordinary and necessary repairs and not betterments.

As to these three major expenditures no attempt was made to show any of the details of the cost of the work. The petitioner's books show a credit of $15,500 to Karrick, which it is contended, represents these items. The original grills were damaged by the falling of the cornice. No attempt was made to show the depreciated value of the grills which were removed. New and heavier grills were installed at an expense of $877.23. Seventeen skylights were rebuilt, at a cost of $2,800. These were installed on the roof in a manner which was more effective than the original installation. Three thousand dollars was spent on the roof. It is apparent from the record that this expenditure represents more than the cost of the usual annual repairs, and represents about two-thirds of the cost of a new roof. As to these three expenditures, the record contains nothing that would disprove the respondent's determination that they were in the nature of betterments and should be capitalized.

9. No evidence was offered relative to the alleged loss resulting from the removal of the fixtures and equipment installed for the Northwest Packing Co., and as to this issue the respondent will be sustained.

The petitioner, at the hearing, abandoned the issues set up in paragraphs 10, 11, and 12.

Judgment will be entered for the respondent.