Plymouth Brewing & Malting Co. v. COMMISSIONER OF INTERNAL REVENUE
| Citation | 16 BTA 123 |
| Decision Date | 23 April 1929 |
| Docket Number | Docket No. 20310. |
| Parties | PLYMOUTH BREWING & MALTING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Maurice Weinstein, Esq., for the petitioner.
J. F. Greaney, Esq., for the respondent.
This proceeding results from the determination of a deficiency in income and profits taxes for the year 1921, amounting to $21,973.50.
The petitioner alleges error with reference to the following issues: (1) a failure to allow the deduction from income of cash expenditures by the president for business purposes amounting to $12,992.06; (2) a failure to allow the deduction from income of the cost of bottles, cases and kegs amounting to $4,535.12; and (3) a failure to allow a claimed deduction from income of an allowance for obsolescence in the amount of $42,687.71.
FINDINGS OF FACT.
The petitioner is a Wisconsin corporation with its principal place of business at Plymouth. In 1921, the petitioner was engaged in the manufacture and sale of a beverage popularly known as "near beer." This beverage was produced by a process which first brewed real beer and then dealcoholized the product to conform to the prohibition laws. Manufacturing operations ceased in August, 1921, when the petitioner received from the County District Attorney the following communication:
SHEBOYGAN, WIS., August 22, 1921.
PLYMOUTH BREWING COMPANY,
Plymouth, Wisconsin.
GENTLEMEN: At the request of State Prohibition Commissioner, Mr. W. Stanley Smith, you are hereby notified to discontinue operating a de-alcoholizing plant until you have complied with existing laws in regard to obtaining a state permit. I have information that you have been selling beverages containing more alcohol than is allowed by law.
Yours truly (Signed) CHARLES VOIGT District Attorney.
Thereafter, during the taxable year, the product of another brewery was purchased and sold.
Upon the cessation of manufacturing, there were left on hand at the brewery of the petitioner about 1,400 barrels of beer, unfinished in that the alcohol content was too high for vending. The petitioner endeavored to secure a special permit for the dealcoholizing of this material but without success. In all, five applications were made at different times for various kinds of permits, two of them, made under dates of October 11, 1922, and November 20, 1922, were filed under the National Prohibition Act and requested permission to operate a dealcoholizing plant "for the production of cereal beverages and to use intoxicating liquor in the operation of the same for nonbeverage purposes, to wit, in accordance with the provisions of sections 45 and 49, article 6, Regulations 60." One of the five applications, under date of February 22, 1923, requested permission to "dealcoholize and reduce to less than one-half of one per cent twenty-one thousand seven hundred and thirty-five gallons of cereal beverage now on hand containing more than one-half of one per cent of alcohol and disposing of the same." The petitioner never succeeded in obtaining permission to resume manufacturing.
During 1922 experiments were conducted with part of the plant of petitioner, consisting of the brew kettle, the engine, and one or two vats, in the endeavor to develop a satisfactory process for the manufacture of near beer by arresting fermentation. These experiments were unsuccessful. About one-tenth of the machinery plant was used in the experiments. The ice plant machine was operated to enable the carrying over of the product on hand in five or six vats pending efforts to secure permission to dealcoholize this product. Ultimately, when it became evident that permission could not be secured, the product was destroyed. The petitioner has endeavored to sell the plant property but without success.
The plant of the petitioner was located at Plymouth, Wis., a town of about 4,500 inhabitants. The site was located at the corner of Milwaukee and Main Streets, a few blocks away from the general business district of the town, and had a frontage of 154 feet on Main Street. The plant buildings included a one-story and basement brick bottling house; a three-story and basement brick veneer house for brewing and malt storage; a one-story brick boiler house with stack; a one-story frame coal storage and pump house; a one-story frame garage; a two-story and basement layer house and wash room; a one-story brick veneer ice house and a one-story frame lean-to.
The remaining cost, at the end of the taxable year, of the brewery assets of the petitioner which were subject to depreciation and obsolescence, is determined by stipulation of the parties to be as follows:
----------------------------------------------------------------------------------------------
| | Accumulated | Remaining
Asset | Cost | depreciation | cost
------------------------------------------------------|------------|--------------|-----------
Brewery buildings ___________________________________ | $33,275.85 | $11,463.87 | $21,811.98
Boilers and boiler machinery ________________________ | 13.269.73 | 8,523.92 | 4,745.81
Sundry machinery ____________________________________ | 17,187.49 | 14,757.56 | 2,429.93
Tanks and vats ______________________________________ | 6,543.25 | 2,786.70 | 3,756.55
Tools _______________________________________________ | 270.77 | 101.89 | 168.88
Livestock and implements ____________________________ | 2,722.32 | 1,111.30 | 1,611.02
Saloon furniture and fixtures _______________________ | 1,126.83 | 849.77 | 277.06
Office furniture and fixtures _______________________ | 1,203.75 | 976.85 | 226.90
Automobiles _________________________________________ | 8,774.50 | 5,031.06 | 3,743.44
Sidetrack ___________________________________________ | 1,469.46 | 332.73 | 1,136.73
| __________ | ____________ | __________
Total _________________________________________ | 85,843.95 | 45,935.65 | 39,908.30
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The railroad siding had a total length of about 700 feet, of which a length of 100 feet has been kept in good condition by the railroad company and is in use. The remainder has not been maintained, and is badly deteriorated.
At the end of 1921 a scrap value not in excess of $200 was assignable to the bottling machinery, other machinery, boiler plant, tanks and vats, the low value being due to the probable cost of dismantling. The value of the railroad siding was at least $500. The land at the plant had a value of at least $50 per front foot. The brewery buildings were worth $10,000.
The cost which was lost to the petitioner at the end of 1921 through obsolescence was as follows:
Buildings, remaining cost __________________________ $21,811.98
Less remaining value _______________________________ 10,000.00
___________
Loss _____________________________________________________ $11,811.98
Machinery, tanks and vats, remaining cost __________ $10,932.29
Less remaining value _______________________________ 200.00
___________
Loss _____________________________________________________ 10,732.29
Sidetrack, remaining cost __________________________ $1,136.73
Less remaining value _______________________________ 500.00
___________
Loss _____________________________________________________ 636.73
___________
Total ____________________________________________________ 23,181.00
Manufacturing operations have never been resumed by the petitioner. To enable it to use the buildings for other purposes would require extensive reconstruction of them.
The president of the petitioner was also general manager, and he was in charge of sales and collections. His experience in the brewing business began in 1902. It was necessary for him to be away from home about one-half of the time in connection with the affairs of the petitioner. His gross sales in 1921 amounted to $227,163.63. During 1921 the petitioner sold to customers in Milwaukee, Sheboygan, and Fond du Lac. The only salesman, other than the president, was employed solely in selling soft drinks and he was also used in collecting. The president made five trips to Madison in the endeavor to secure a permit to operate. During the taxable year the petitioner expended cash in the amount of $12,992.06 for traveling expenses of the president of petitioner; cash rebates to customers; expenses of collecting accounts receivable, and in the ordinary and necessary entertainment, by the president of petitioner, of customers, incident to sales in the business of the petitioner. On the books of account this cash was originally charged to the personal account of the president of petitioner and the charges were transferred to profit and loss account in closing the accounts for the taxable year. Respondent has disallowed the deduction.
Containers in the form of bottles, cases, and kegs, were used by the petitioner in the distribution of its product. It was customary to include a charge for the containers when deliveries were made to customers. The amounts of such charges are included in the aggregate of gross sales reported. Subsequently, if and when the empty containers were returned, the customer was given credit for them. An inventory value for the bottles, cases, and kegs on hand at the end of the taxable year was entered...
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