Southern Press Cloth Mfg. Co. v. Commissioner

*304 This proceeding is for the redetermination of a deficiency in income and profits taxes for the fiscal year ended May 31, 1919, which is less than $10,000. The respondent originally determined a deficiency of $6,880.43 but reduced this amount after considering petitioner's claim in abatement to $5,497.40. The petitioner alleges that the deficiency should be further reduced because respondent has erred in the disallowance of a deduction of $5,120.15 covering alleged supplies and repair parts.

FINDINGS OF FACT.

The petitioner was incorporated in 1916 for the purpose of manufacturing press cloth from human hair. It is one of the few concerns in this country engaged in the manufacture of human hair yarn and human hair press cloth. The press cloth is used in the cottonseed oil industry in the pressing of oil from the cottonseed meal. The process of development in the petitioner's plant in manufacturing its products*4143 is as follows: The human hair is first put through a cleansing process, after which it is put through the preparing department. Thereafter, it goes successively through the drawing, spinning, twisting and sizing departments. By the time the latter department is reached the hair has become yarn which is sent to the weaving department. After the yarn has been woven into cloth it is inspected and put into rolls preparatory to shipment.

Upon incorporation in 1916 the petitioner took over the machinery and business which prior thereto had been conducted by W. A. Lee, as a sole proprietorship. Practically all of the machinery which was taken over was secondhand, some of it being 20 years old. The machinery was of the heavy high-speed type so that replacements and repairs were constantly being made to continue operations. Unsettled labor conditions and the fact that most of the employees were negroes, unskilled and inexperienced in operating such machinery, resulted in frequent breakdowns, large repair bills, and loss of time. In order to maintain production, petitioner operated a day and night shift, using the more experienced help in the day time and the less experienced labor*4144 at night.

The petitioner carried on its books during the fiscal year a machinery, supply and repair account, to which it charged its numerous purchases. The total purchases for the fiscal year, including cashbook items, amounted to $20,537.17. This amount was reduced by $1,087.37 for sales, a railroad claim, and inventory, leaving a so-called general ledger balance of $19,449.80, which was deducted on petitioner's return as ordinary and necessary repairs. An analysis of the machinery, supply and repair account was offered and admitted in evidence. This analysis shows the dates, amounts, and concerns *305 from whom purchases were made, and consisted of a large number of purchases for repair items, for drayage on repair parts, and for welding.

A revenue agent, after auditing the petitioner's books, reduced the deduction for ordinary and necessary repairs by $5,120.15. The agent disallowed the items making up the latter amount because from his experience and observation in the cotton mill industry such items were, in his opinion, in the nature of capital additions rather than repair parts. At the time the revenue agent audited the petitioner's books he checked the entries*4145 in the machinery, supply and repair account with the invoices showing purchases of repair parts and freight and drayage on such parts. The respondent sustained the action of the agent with respect to this disallowance.

OPINION.

MORRIS: Only that portion of the deficiency resulting from the disallowance of $5,120.15 is in controversy, which amount is included in the $19,449.80 deduction taken by the petitioner in its return as an ordinary and necessary expense. The petitioner was unable to segregate the particular items disallowed but alleges that all the items making up the deduction claimed were properly deducted.

In proof thereof the petitioner called upon its superintendent, a man who had been engaged in manufacturing human hair press cloth for a period of 20 years, who testified with respect to the various purchases shown in the machinery, supply and repair account. We are satisfied from his testimony that these purchases were for ordinary and necessary repairs and were not in the nature of capital additions. He testified item by item as to the parts and repair work purchased from the numerous concerns making up the total expenditure of $19,449.80. His detailed testimony*4146 showed the character of the purchases which were made and charged to the machinery, supply and repair account to be as follows: Drayage, welding, castings, heddle wires, spinning supplies, belting, weaving supplies, leather aprons, supply parts for machine shops, sprockets, wheel chains, canvas aprons, conveying aprons, loom supply parts, parts for automatic feed box, leather sectional roller supplies, reeds for use in looms, pipes or tubes for creels to wind yarn on, parts for spinning frames such as flyers, wipers, weights, and gears, bolts, screws, pulleys, electrical equipment such as fuses for motors, supply parts for copper winding machine, supplies for retwisting department, window repairs, bushings, shuttle and bobbin head repairs, and supply parts for the sizing machine. Due to the high speed type of machinery used, a 24-hour operation and the character of labor available, such purchases and repairs were of frequent occurrence.

*306 As to come few items the superintendent was unable to recall the character of the purchase, but the evidence shows that when additions were made, they were charged to some permanent investment account and not to the account in question. *4147 We are of the opinion that the entire amount of $19,449.80 constitutes an allowable deduction.

Judgment will be entered on 10 days' notice, under Rule 50.