Benjamin Booth & Co. v. Commissioner, Docket No. 3400.

Docket No. 3400. | B.T.A. | Jun 28, 1926

Lead Opinion

OPINION.

Teammell :

There is no serious dispute between the taxpayer and the Commissioner with respect to the rate of depreciation based upon wear, tear and exhaustion of assets, or the cost or March 1, 1913, value of assets upon which the deduction is based. While the machines do heavy work and are subject to much vibration, the wearing parts are constantly replaced, such replacements being charged to repair and serving to keep the machines in good condition. The increased rate claimed by the taxpayer is based principally upon obsolescence. The taxpayer contends that experimentation in improved machinery for manufacturing card clothing has progressed to such a degree that in the near future there is a likelihood that the present machinery will become out of date and need to be replaced before the expiration of its life. There is no evidence, however, that the art had progressed to such an extent during the years involved in this appeal that the taxpayer could foretell that it would have to abandon its machinery and install the new and more modern machinery before the expiration of its useful life. The evidence relates more to what was known or discovered after the taxable years involved.

The deduction allowable for obsolescence is not to be based upon an expectation that progress in the art would be made in the future to such an extent that assets in use could not be profitably used in the future notwithstanding the workable condition, but is to be based on knowledge of conditions and the progress actually being made during the years when the deduction is claimed, which would lead to the conclusion that on account of such progress the assets are actually becoming obsolete. The state of becoming obsolete must be proven. What occurred after the taxable years is not sufficient to prove conditions existing during those years. There is no evidence that during the taxable years it was known that the machinery was in the process of becoming obsolete. As an illustration of the indefiniteness and uncertainty of the knowledge at that time, one of the principal witnesses for the taxpayer, when asked about conditions known in 1919, 1920 and 1922, said “ I did not hear much talk then but I knew what they were working on, but whether they had gotten them — they don’t tell us what they are doing * *

In view of the lack of evidence to sustain the taxpayer’s contention with respect to obsolescence, we must hold that it is not entitled to such a deduction. The evidence that the taxpayer was entitled to a greater deduction on account of exhaustion, wear and tear than that allowed by the Commissioner is very meager and insufficient. It was not seriously contended that a greater deduction was allowable unless it was on account of obsolescence.

With respect to the deduction claimed on account of the prospective abandonment of certain assets on account of moving to new quarters due to the expiration of the lease, we find no evidence in the record which would warrant it. The taxpayer had a two-year lease, but the lease provided that the lessee could remain in the possession of the property on the terms provided in the lease, if neither party gave notice to the other that it would not continue. No such notice was given, the taxpayer has remained as lessee under the terms of the lease, and there is no evidence as to when it is expected to give up the premises. The mere probability that within a few years the premises will be given up, which will necessitate abandoning certain assets, is not sufficient to entitle the taxpayer to an obsolescence deduction with respect to such assets. It does not appear that any plans for giving up the possession of the property had been formulated or contemplated in the years involved.

For the foregoing reasons we must sustain the action of the Commissioner.

Order of redeterm,ination will be entered on 15 days’ notice, under Rule 50.