Co-operative Foundry Co. v. Commissioner

*891OPINION.

The taxpayer claims invested capital upon molds, flasks, and fallow boards in the amount of $100,000, invested capital upon other tangible assets in excess of original book value in the amount of $79,629.78, and a loss on account of the destruction of molds, flasks, and fallow boards of $32,395.16.

It is manifest, and is practically conceded by the taxpayer, that the item of $79,629.78 can hot, under the facts available, be included in invested capital. The taxpayer claims, and it may be a fact, that substantial items of betterments in the years prior to 1911 were charged to expense, and that this practice resulted in the understatement of the assets of the taxpayer. There is no evidence as to costs of such asssets nor as to their depreciation after- acquisition. The appraisal of 1911, while useful for the purpose of determining the actual assets on hand and accepted by the Commissioner for that purpose, is wholly useless for the purpose of determining invested capital.

In respect of the item of $100,000 as entered upon the books of the taxpayer, or $100,645.20, a somewhat different situation is presented. The taxpayer has introduced evidence to the effect that on January 1, 1917, an actual examination of its records disclosed that the molds, flasks, and fallow boards then on hand had cost the amount stated. Standing alone this would indicate that expenses in earlier years had been understated by this amount, and that earnings were actually to January 1, 1917, in excess of the amounts previously computed, thus giving rise to an earned surplus properly to be included in invested capital. But the taxpayer contented itself with submitting merely evidence of one witness to the ultimate fact as above set forth. We are not advised as to the manner in which the computation was made, nor the age of the articles in question. We do know that all of Kennedy’s department was engaged continuously in the pattern work. We do know that the taxpayer continuously before 1917, and with a minor departure in 1919, and continuously since that time, has charged all of that work to expense. No evidence was introduced as to the actual life of a pattern, a mold, a flask, or a fallow board. The taxpayer contents itself with the mere argument that these articles are the subject of constant replacement and repair, and are at all times kept in an efficient condition. Such an argument would apply equally to any other tangible property, no matter how ephemeral its life *892in the business. It would apply to the pencils of the stenographer as well as to her typewriter, although one is a well-recognized expense, and the other a capital asset. If the taxpayer had an actual capital asset with an appreciable life as it claims, and had records extending back to 1909 of the actual construction of such assets and their cost, it was in a position to set up records showing construction from year to year, to estimate the life of the molds, flasks, and fallow boards constructed, to depreciate them over that life, and to set up the replacements if any from time to time. The taxpayer has done none of these things, but asks the Board to accept a mere conclusion that these assets had a substantial life based on a mere argumentative Claim that they are constantly replaced and kept in an efficient working condition. We consider that the evidence is insufficient to establish that the assets so claimed were of such a substantial character as to require capitalization in view of the consistent policy followed by the taxpayer both before and after 1911. The Commissioner must, therefore, be sustained upon this point.

As to the claimed deduction of $32,395.16, it was conceded by both the taxpayer and the Commissioner that, if the item of $100,645.20 were excluded from invested capital, the deduction should also be disallowed, both parties overlooking the fact that if the taxpayer had on March 1, 1913, property of that value which was scrapped subsequent to that date, a deductible loss would arise. The taxpayer, as above set forth, produced no testimony as to the time when the molds, flasks, and fallow boards scrapped in 1919 were made, nor the cost when so made. We do not know whether they were deducted as an expense in years prior to 1919, but, in the light of the other evidence, the presumption is that this occurred. Such being the case, we are of the opinion that the Commissioner was correct in disallowing this deduction, and his determination in that respect is also approved.