Kurtz v. Commissioner

1927 BTA LEXIS 2807 | B.T.A. | 1927

Lead Opinion

OPINION.

Littleton:

Petitioners contend that the allowance for exhaustion, wear and tear, as determined by the Commissioner by the use of a composite annual rate of 10 per cent, is inadequate, and that the allowance should be computed on each item making up the machinery and equipment account at the rates hereinbefore set forth.

From a consideration of all the evidence we believe the allowance made by the Commissioner for exhaustion, wear and tear of plant and equipment at a composite rate of 10 per cent is reasonable. Max Kurtz, who was the only witness testifying in this regard, undertook to give his opinion as to the probable life and the rate of depreciation of the various items of the plant and equipment, but his testimony was equivocal and is not convincing. A consideration of Ms testimony convinces us that, in making his claim for a larger allowance for exhaustion, wear and tear, he was interested more in the benefit which would be derived in the matter of reduction of taxes to be paid for the years involved than in the actual depreciation sustained by the property. It might be that, when considered separately, some few items of equipment, such as trays, etc., listed as miscellaneous equipment and dies and parts, constituting a very small portion of the total equipment, depreciated at a rate slightly greater than 10 per cent per annum, but when we consider the entire machinery and equipment account, we are satisfied that the actual exhaustion, wear and tear of a considerable portion thereof was less than 10 per cent. On the whole, we are of the opinion that the allowance made by the Commissioner through the use of a composite rate of 10 per cent per annum on the entire machinery and equipment account was reasonable, and his action in this regard is approved.

It appears that the Commissioner through a misunderstanding of the facts capitalized the amount of $1,419.43 as representing an amount paid to a superintendent in connection with the construction of an addition to the plant of the partnership. The evidence shows that this represented wages paid to employees engaged in the manufacture of macaroni and was, therefore, a proper deduction from gross income as an ordinary and necessary business expense for the year 1920.

We are satisfied from the evidence that the sale by the partnership of 436,000 Italian lire to Joseph Binenstock in the year 1920 for $15,129.20 was a boom fide transaction, and the loss claimed should be allowed.

The Board is of the opinion that, upon consideration of all the evidence, the Commissioner’s allowance for exhaustion, wear and tear of automobiles at the rate of 20 per cent per annum was reasonable. The witness who testified in this regard merely stated that he thought the automobiles used by the partnership had a useful life of only four years. He apparently knew very little about the matter. He testified that the partnership had only Ford automobiles and that after they had been in use for about four years they were abandoned and discarded. There is other evidence which shows that the partnership had three different makes' of passenger automobiles which were used by salesmen in the City of Philadelphia, and that in addition, certain automobile trucks Avere used for delivery purposes. There is evidence that these automobiles were traded in from time to time at substantial amounts for new automobiles. The evidence on this point is not sufficient to warrant us in disturbing the allowance made by the Commissioner for depreciation on automobiles.

The partnership employed the accrual method of accounting in keeping its books. Some time in the year 1921 a fire occurred in the plant and destroyed certain merchandise which was fully covered by insurance. The insurance company admitted liability for the loss, but when the year 1921 ended, the amount of the fire loss had not been completely adjusted and the partnership and the insurance company were not in agreement as to the amount of the loss sustained as a result of the fire, and as to the total amount of money that the insurance company should pay. The insurance company had conceded the larger portion of the loss claimed by the partnership. Subsequently, in the years 1922 and 1923, the insurance company paid the full amount of the loss claimed by the partnership. The Commissioner allowed the total loss claimed by the partnership in the year 1921 and applied against the same in that year the amount of the insurance received thereon. We think that the Commissioner’s action in this regard was correct. The partnership was compensated by insurance for the total loss sustained in the year 1921. The insurance due petitioners for the loss sustained, accrued in the year 1921 and was properly applied in that year against the amount of the loss by fire.

Petitioners claim that one-half of the amounts of $886.25 and $2,007.74, hereinbefore mentioned, expended in connection with plumbing and heating equipment, should be allowed as a deduction in the year 1923 as an ordinary and necessary expense upon the ground that that portion represented the cost of rearranging the plumbing and heating equipment in the old building so as to make it conform to the equipment in the new addition. The evidence in support of this claim is not convincing. There is testimony from petitioners’ witness who testified on this point, that these amounts represented the cost of additional plumbing and heating equipment installed in the old as well as in the new building. The evidence is insufficient to show that the Commissioner erred in restoring these items to capital account.

The item of $520 expended for whitewashing the old building in order to make it conform in appearance to the new addition, appears to have been a minor item of expense and was, therefore, a proper deduction from gross income for the year 1923. The whitewash applied to the building had a useful life of only about six months.

Judgment will be entered on 16 days' notice-under rule 60.

Considered by Smith and Love.