Neisler v. Commissioner

*184 In this proceeding the petitioner seeks a redetermination of his income-tax liability for the calendar year 1921, for which year the respondent has determined a deficiency in the amount of $11,488.20, of which there is in controversy only $6,175.20.

The question at issue is the proper rates for depreciation of cotton mill machinery located at three different mills owned by the petitioner.

FINDINGS OF FACT.

The petitioner is an individual residing at King's Mountain, N.C.

From January 1, 1921, to July 21, 1921, the petitioner owned and operated three cotton mills located at King's Mountain, N.C., known as the Pauline, Margrace, and Patricia*2104 Mills. On July 21, 1921, the three mills were transferred to corporations.

The Pauline Mill was equipped with 156 Jacquard heads. A Jacquard head is a complicated device for weaving figured goods installed above the plain loom to which it is connected by means of a harness. It has from 400 to 2,600 hooks and as the head rises and falls the pattern of the fabric is determined. It differs from the plain loom in that it produces cloth having a pattern or design. About 65 per cent of the investment in machinery at the Pauline Mill consisted of the Jacquard looms. A part of the looms was purchased new in 1910, and a part later. Of the 156 original looms, 24 have been replaced. None of the machinery at the Pauline Mill was *185 operated overtime during the year 1921. The respondent determined that the machinery at this mill had a useful life of 20 years and allowed the petitioner a depreciation rate thereon of 5 per cent.

The Margrace Mill was equipped with 92 Darby attachments for making patterns less complicated than those made by the Jacquard. The Darby looms were from 72 to 90 inches in width. About 50 per cent of the investment in machinery at the Margrace Mill*2105 consisted of looms with Darby attachments. The spinning machinery at the Margrace Mill ran double time for 2 1/2 months during the first 6 months of the year 1921, and for 5 months during the last 6 months of the year. During this same period, none of the weaving machinery at this mill was operated overtime. The respondent determined that the spinning machinery depreciated at the rate of 7 1/2 per cent per annum during the months it was operated double time and at the rate of 5 per cent per annum during the remaining months of the year. He also determined that the useful life of the weaving machinery at the Margrace Mill was 20 years and allowed the petitioner a depreciation rate thereon of 5 per cent.

The machinery of Patricia Mill consisted entirely, with the exception of a few clothing inspecting machines, of 170 narrow Jacquard looms, which were purchased secondhand from the Farwell Mills at Lisbon, Me. There was no spinning or opening machinery at this mill. At the time these looms were purchased, they were very old and their life practically over. The looms at the Patricia Mill were operated double time during 4 months of the period from January 1, 1921, to June 30, 1921, and*2106 3 months during the remaining one-half of the year 1921. The respondent determined that the machinery at this mill depreciated at the rate of 7 1/2 per cent per annum during the months it was operated double time and at the rate of 5 per cent per annum during the remaining months of the year. The average useful life of the machinery at the Patricia Mll was 4 years.

OPINION.

GREEN: In this proceeding we are asked to find that the respondent erred in determining the rate of exhaustion, wear and tear (elsewhere referred to as the rate of depreciation) of machinery used in the petitioner's cotton-mill business during a portion of the year 1921. The applicable section of the statute is section 214(a)(8) of the Revenue Act of 1921. There is no dispute between the parties as to the proper base against which the rates are to apply. The respondent allowed a rate of 5 per cent per annum on all machinery during the period of ordinary operations and a rate of 7 1/2 per cent per annum on all machinery during the period it was operated overtime. *186 The petitioner contends it should be allowed a flat rate of 10 per cent per annum on all its machinery.

The machinery in question*2107 was located in three different mills known as the Pauline, Margrace, and Patricia Mills.

The evidence introduced consisted entirely of the petitioner's own testimony with the exception of a revenue agent's report, which was admitted in evidence solely for the purpose of showing two factors about which there was no dispute, namely, the basic values and the amount of overtime.

The petitioner is an experienced cotton manufacturer, having engaged in the cotton-mill business since the year 1888. On direct examination, he testified that in his opinion a reasonable rate of depreciation on the machinery located at the Pauline and Margrace Mills was 10 per cent per annum, or, in other words, that the useful life of the machinery at these two mills was 10 years. On cross-examination, however, he testified that the useful life of the spinning machinery at these two mills was from 20 to 25 years; that the useful life of the spinning frames was something lke 15 years; that the clothing on cards had a useful life of 10 to 12 years; and that the average useful life of a Jacquard attachment was 12 or 15 years. Towards the close of the hearing, the petitioner testified as follows:

Q. On*2108 the average, what would you say was the life of the machinery in your mills, averaging it all together?

Q. Well, if it is a thing you do not want to undertake, or have some doubt about the accuracy of your answer, when you give it, you need not answer. I do not want you to express an opinion on anything that you are not fairly certain about.

A. Well, in some instances, a machine would be in pretty good shape for 25 years. In other instances the machine would be pretty badly used up in 10 or 12 years. Just what the average would be, I wouldn't want to say definitely.

Upon consideration of all the evidence, we are of the opinion that the record does not establish that the respondent erred in his determination of the rates for depreciation of the machinery located in the Pauline and Margrace Mills. His determination as to those two mills is, therefore, sustained.

The evidence with respect to the Patricia Mill proves that the machinery there was purchased second hand and that its useful life was not more than four years. From such a finding, it follows that the deficiency should be recomputed on the basis of an allowance for depreciation*2109 on the machinery at the Patricia Plant computed at the rate of 25 per cent per annum.

Judgment will be entered underRule 50.