City Nat'l Bank v. Commissioner

*624OPINION.

Taxpayer relies upon the decisions of this Board in the Appeals of Cleveland Home Brewing Co., 1 B. T. A. 87; Russell Milling Co., 1 B. T. A. 194; and Ruh-No-More Co., 1 B. T. A. 228. In each of those cases there was evidence that taxpayer had charged off depreciation in prior years and that such depreciation was substantially correct; and, as between the depreciation charged by the taxpayer and that claimed by the Commissioner, this Board considered taxpayer’s contention as more nearly representing the correct facts and refused to disturb the surplus shown on the taxpayer’s books. In this appeal we have an entirely different situation. No *625depreciation whatever was taken on the building, while on furniture and fixtures the depreciation from 1907 to 1918, including additions charged to expense, averaged 8 per cent yearly. Upon its fac,e such depreciation is inadequate, and taxpayer must have realized this fact, for in 1916 it transferred $5,716.43 from furniture and fixtures account to building account, thereby writing down its furniture and fixtures account to $5,000. In this appeal there are also the further considerations that a 10 per cent rate of. depreciation on this same account was claimed by the taxpayer and allowed in the years in-' volved in this appeal and that taxpayer filed claims for refund of taxes paid in prior years on the ground that inadequate depreciation had been charged off in such years and such claims were allowed. These same considerations apply to the building, upon which no depreciation was taken and which was appreciated on the books in 1916 by the transfer of $5,716.43 from furniture and fixtures account. For the years involved in this appeal taxpayer claimed depreciation on the building at the rate of 5 per cent, which was reduced by the Commissioner to 214 per cent, the same rate applied in computing depreciation for prior years. Assuming, as we must, that 10 per cent and 2y2 per cent were proper rates of depreciation on the furniture and fixtures, and on the building, respectively, we must sustain the action of the Commissioner in adjusting the earned surplus of taxpayer to allow for such depreciation.

Taxpayer urges further that if the actual depreciation caused by use is offset by appreciation caused by market conditions, so that the value at which the assets are carried on the books represents their actual value, the surplus of the taxpayer remains unaffected; and that in such case the Commissioner would not be justified in changing taxpayer’s surplus by writing off depreciation. In support of this contention, taxpayer attempted to show that all of its assets had a value from 1919 to 1921, inclusive, equal to that at which they were carried on its books. The evidence offered was indefinite and general in character, consisting mainly of conclusions on the part of the witnesses without any effort to describe the assets in question. But even though we were to consider that the taxpayer had fully proven the value of its furniture, fixtures, and building from 1919 to 1921, inclusive, to be equal to the amount at which they were carried on its books; we do not conceive that taxpayer’s contention is sound.

Invested capital includes earned surplus. Earned surplus is nothing more than the accumulated, undistributed earnings of prior years. For income-tax purposes such earnings do not include unrealized appreciation of assets. But. in computing such earnings, depreciation actually sustained must be taken as a deduction, exactly as all other expenses of the business are taken. Taxpayer seeks to offset such depreciation against unrealized appreciation. *626This can not be done unless unrealized appreciation of assets may be included as earned surplus. It is a well-settled principle of the income tax laws that appreciation of assets is not income until there is a sale or other disposition thereof, and w<? do not conceive that there can be any “ earned ” profit or surplus from such appreciation prior to the time that it becomes income for the purposes of the tax law. La Belle Iron Works v. United States, 256 U. S. 871.