American 3 Way Luxfer Prism Co. v. Commissioner

*572 This proceeding results from the respondent's determination of a deficiency in the income and profits taxes of this petitioner in the amount of $2,733.80 for the calendar year 1919.

The petition sets forth the following allegations of error by respondent.

That net taxable income has been increased by -

The first and seventh items above represent two different matters and*2559 are the issues here involved, the other alleged errors having been waived at the hearing on this proceeding.

FINDINGS OF FACT.

The petitioner is an Illinois corporation with its principal place of business at Cicero, and was during 1919, and prior and subsequent thereto, engaged in the business of manufacturing, selling, jobbing, and contracting for the installation of sidewalk light prisms, steel sidewalk doors, prism glass for transoms and general daylighting purposes, and ventilators and skylights of glass and concrete or steel.

In the manufacture of its products the petitioner employs a great many items of equipment and small tools. Petitioner supplies the molds to glass manufacturers for the production of its glass prisms and such molds have a very short useful life due to breakage in the process of casting, and also due to the fact that different types and styles of prisms have to be made to order for particular jobs. Such special styles of prisms require molds which are usually of no further use after casting those special prisms. In the production of concrete work, petitioner uses slate-top tables and iron molds to form the concrete. A great many of these iron*2560 molds are broken or damaged in being removed after the concrete has been cast.

In performing its contracts for the installation of glass prisms, sidewalk doors, skylights, etc., it was necessary for petitioner to send out to and leave on the jobs, supplies and equipment such as iron molds, canvas covers and jigs, and various small tools. In such instances there was always a loss of supplies, equipment or tools, either through breakage or theft, and also some jobs required special equipment which became practically worthless after serving its special *573 purpose. About 25 per cent of the small tools purchased which were known to be actual replacements were charged to expense and carried under a classification of "General Tools."

In the spring of 1918 petitioner moved to Cicero, Ill., and found it necessary to store a quantity of its furniture and office fixtures in its plant. Due to a badly leaking skylight, the furniture was damaged to such an extent that, when the floor space was needed for production purposes, most of the furniture was destroyed in the latter part of 1919 so as to get rid of it.

Petitioner's machinery for its general line of production consisted*2561 of punch presses, brakes, shears, bending machines, etc. In the spring of 1918, when the business was moved from La Porte, Ind., to Cicero, new machinery, such as turret lathes, large planers, etc., were purchased for the production of parts for trucks for war purposes. During 1919, after petitioner ceased producing truck parts, it sold at a loss the machinery used in that production.

Due to the fact that petitioner did business in all parts of the country, that its supplies and equipment were scattered, and that it sustained a considerable loss of equipment and tools each year, the petitioner, since about 1904, has consistently followed the practice of keeping no itemized account of all its various fixed assets as to date of acquisition and depreciation as applied to separate items and not setting up on its books the assets when purchased; of taking a physical inventory at cost or value on prior inventory of all its supplies, equipment, tools, furniture, fixtures, and machinery at the end of each year; and of charging or crediting to profit and loss any decrease or increase of the inventory from the value of the assets as shown on the books.

The physical inventory taken for*2562 the year 1919 was destroyed by a fire which occurred in petitioner's office early in 1920, or else it was otherwise lost or destroyed for it has not been found since that time. The petitioner's general ledger shows, inter alia, the following accounts for the year 1919 as a result of its inventory:

*574 The amount of $7,260.90 charged to profit and loss at the close of the year 1919, represents an actual reduction in petitioner's inventory of supplies, equipment, tools, furniture, fixtures and machinery during that year*2563 due to breakage and/or otherwise lost.

On or as of December 31, 1919, petitioner charged $807.51 to profit and loss account and credited that amount to depreciation reserve.

The respondent, in auditing petitioner's return, disallowed $4,686.06 of the deduction for decrease in inventory which seems to have been termed depreciation and also, a deduction of $207.37 for depreciation. Petitioner's taxes have been computed under the provisions of sections 327 and 328 of the Revenue Act of 1918.

OPINION.

TRUSSELL: We are presented with two questions of fact, one as to the deduction for the loss of assets during the year as shown by petitioner's closing inventory and termed in the petition as depreciation, and the other as to the amount of depreciation.

The facts established that petitioner sustained a loss during 1919 through reduction of its inventory, caused by breakage and/or loss of physical assets, and that loss amounted to $7,260.90, of which amount the respondent has disallowed a deduction of $4,686.06. The amount of $4,686.06 should be allowed as a deduction in computing petitioner's net income for the year 1919 as provided for in section 234(a) of the Revenue Act*2564 of 1918.

As to the question of whether the respondent erred in disallowing $207.37 of the $807.51 claimed by petitioner for depreciation, we have before us no facts upon which to base any conclusion.

With reference to the recomputation of petitioner's tax liability on the reduced net income, in accordance with this decision and the provisions of sections 327 and 328 of the Revenue Act of 1918, the respondent should use the same comparatives and rates as were used when the deficiency here involved was computed. Counsel for the petitioner stated in his closing statement at the hearing on this proceeding, that such comparatives and rates would be perfectly satisfactory.

Judgment will be entered upon 15 days' notice, pursuant to Rule 50.

Considered by LITTLETON, SMITH, and LOVE.