American Brick & Tile Corp. v. Commissioner

*1122 The respondent has asserted a deficiency in income and profits taxes for the calendar year 1921 in the amount of $36,127.84. The single issue raised is whether, under the provisions of section 327 of the Revenue Act of 1921, the petitioner is entitled to have its tax liability recomputed under section 328 of that act because its invested capital can not be determined.

Pursuant to an order of the Board the hearing was limited in the first instance to the issues set out in subdivisions (a) and (b) of Rule 62 of the Board's rules of practice.

FINDINGS OF FACT.

The petitioner is an Oklahoma corporation organized in 1901 to engage in the manufacture and sale of brick and tile. It maintains its principal office at Oklahoma City.

During the period from 1909 to 1914, the petitioner built a new plant of brick to replace one of wooden construction then in operation. The new*2015 plant consisted of a main building, factory building, dry houses, kilns, machinery rooms and foundations, and several dwellings. Practically all of the construction was of brick manufactured by the petitioner. Work on the new plant, which was carried on during slack periods largely with petitioner's regular employees, did not interfere with the regular operation of petitioner's plant. Brick needed for the new plant was taken direct from the kilns without any charge therefor on petitioner's books, except a small amount in the first part of 1909, which was charged to capital. There was no record kept of the time devoted by regular employees to work on the new plant. The regular pay-roll accounts were closed into profit and loss as current expenses. In addition to its regular working force, the petitioner employed a number of carpenters and bricklayers whose wages, together with the cost of materials other than brick used on the new plant, were charged to capital in the approximate amount of $65,000, as a cost of the new plant.

About 1913, the petitioner opened a clay pit by removing the overburden of earth, which varied in thickness from 3 to 15 feet. All of such work was done*2016 by petitioner's regular employees whose wages were charged to expense. No record was kept of the time devoted by such employees to the work of removing the overburden from the clay land.

During the period from 1917 to 1920, A. W. Kenyon and C. R. McKee developed an oil burner which was installed in petitioner's plant during the latter part of 1920. Kenyon was paid $2,000 in *1123 cash for certain patent rights and McKee was reimbursed for expenses in connection with development of the oil burner in an amount of $1,323.95. These items were charged to expense.

The respondent has computed the petitioner's income, invested capital, and income and profits tax as follows:

No amount has been included in invested capital by the respondent on account of that portion of the cost of petitioner's plant which was charged to expense.

OPINION.

LANSDON: We have heretofore allowed special assessment where a sizable portion of a taxpayer's capital expenditures was improperly charged to expense, the amount of which could not thereafter be determined. *2017 ; ; ; ; ; ; ; and .

In the instant case the petitioner built a new plant, using brick of its own manufacture and labor from its regular pay rolls. No record was kept of the number of brick used and no charge was made therefor on the books. Wages of the men carried on the regular pay rolls were charged to expense without regard to time spent at work on the new plant. Only the cost of skilled labor employed and material purchased was charged to capital, which totaled approximately $65,000. Petitioner's regular labor was also employed in removing the overburden from clay lands without any charge therefor to capital. We think both of these items are clearly capital expenditures and if the amounts thereof could now be determined they should be included in invested capital. *2018 It is, however, impossible to make any segregation of that portion which should have been charged to capital from that properly charged to expense.

We conclude that since invested capital can not be determined, the petitioner's tax liability should be computed under the provisions of section 328 of the Revenue Act of 1921.

Further proceedings may be had under Rule 62(c).