Ray v. Commissioner

*454 This is a proceeding for the redetermination of a deficiency in income tax for 1923 and 1924 in the amounts of $561.76 and $405.13, respectively.

It is alleged that the respondent erroneously computed the depreciation deduction for the years involved.

FINDINGS OF FACT.

The petitioner is an individual residing at Mobile, Ala. He was engaged in the lumber-manufacturing business. On March 30, 1922, petitioner entered into a contract with the Vredenburgh Saw Mill Co. for cutting certain timber situated in Monroe County, Alabama. By the terms of the contract the petitioner agreed to erect a sawmill plant suitable for cutting said timber and capable of producing a minimum output of 12,000,000 feet per year; to pay for said lumber as cut, the prices per thousand feet set out in the contract, and to cut and remove all of said timber*2128 by December 31, 1929. In addition to the fixed prices per thousand feet to be paid for said timber, the contract specified further payments to be determined by apportioning to the Vredenburgh Saw Mill Co. half of certain bookkeeping profits as therein provided. Finally, said contract provided that at the conclusion of the said operation the Vredenburgh Saw Mill Co. should be entitled to half of the plant, or half of the proceeds from the sale thereof.

Petitioner entered upon the performance of said contract and carried it out according to its terms. He operated the sawmill which he built from November, 1922, to the middle of 1927, when all the timber was cut. Thereafter he sold the mill plant for junk.

In arriving at the net income for 1923 and 1924 the respondent allowed depreciation deductions in respect of said sawmill plant computed on the unit-of-production basis. The unit per thousand feet of timber cut was arrived at for each year by dividing the total quantity of available timber at the beginning of the year into the total remaining cost of plant at the end of the year, after eliminating 10 per cent of said cost as salvage. Respondent thus arrived at and allowed*2129 depreciation deductions for 1923 and 1924 of $41,130.36 and $38,345.05, respectively. The total cost of said plant, the cost of additions in 1923 and 1924, the total available timber supply, and the timber cut through 1924, were as follows:

*455 OPINION.

TRAMMELL: The only controversy in this case is the amount of salvage value allowable to the petitioner or the cost of the timber, the two propositions being in the alternative.

The respondent has determined that the residual value of the plant was 10 per cent of its cost and there is no dispute as to this. The only dispute between the parties arises from the fact that in computing the depreciation deduction on the unit-of-production basis respondent has reduced the cost of the plant by 10 per cent for salvage and allows the petitioner a return of only 90 per cent of his cost. The petitioner concedes that this would be correct if he were entitled to the 10 per cent salvage*2130 at the end of the operation, but contends that since one-half of this 10 per cent salvage, under the contract, went to the Vredenburgh Saw Mill Co. as further payment for timber, the petitioner would never receive a return of more than 5 per cent of the cost or one-half the salvage.

The contract provided that at the end of the operation one-half of the plant would go to the Vredenburgh Saw Mill Co. as further payment for timber, or that one-half the proceeds from the sale thereof would go to that company at the end of the operation.

In our opinion, one-half of the salvage value of the plant at the end of the operation is as much a part of the cost of the timber as the stipulated price per thousand feet. This cost should be spread over the operation in the same way as the remaining cost of the timber. While this is not an allowance as exhaustion, wear and tear of the plant by a reduction of the salvage or residual value, the result is substantially the same and the taxpayer is given the benefit of the additional cost of the timber. The pleadings as amended include a claim in the alternative that the cost of the timber should be so increased. We agree with the petitioner in*2131 this respect.

Judgment will be entered under Rule 50.