APPEAL OF LEVINE BROTHERS CO., INC.
| Decision Date | 30 November 1926 |
| Docket Number | Docket No. 6832. |
| Citation | 5 BTA 689 |
| Parties | APPEAL OF LEVINE BROTHERS CO., INC. |
| Court | U.S. Board of Tax Appeals |
Benjamin Mahler, Esq., for the petitioner.
M. N. Fisher, Esq., for the Commissioner.
This is an appeal from the determination of a deficiency of $1,972.08 in income and profits tax for 1918. The deficiency arises from the Commissioner's refusal to allow more than a 10 per cent rate of depreciation on machinery, and from adjustments in invested capital which petitioner contends were erroneous. The petitioner presents in addition the question of loss of useful value as to certain machines.
FINDINGS OF FACT.
The petitioner is a New York corporation, located at 32 South 9th Street, Brooklyn, and is engaged in the manufacture and sale of candy.
Levine Brothers Co., Inc., was incorporated in July, 1908, succeeding a partnership operating under the trade name of Levine Bros. The entire capital stock of the corporation, amounting to $25,000, was issued for the assets of the partnership. Up to and including June 30, 1912, the corporate accounts were kept on a fiscal year basis. In 1912 the petitioner changed to a calendar year basis, the books being closed on June 30 and also on December 31. Thereafter the books were kept on a calendar year basis.
In June, 1913, the corporation increased the capital stock outstanding from $25,000 to $200,000 by the declaration of a dividend of $39,000, by subscription of additional stock amounting to $16,000, and by setting up a value for good will of $120,000.
Prior to March 1, 1918, the petitioner manufactured and sold its own products. On that date, the Elbee Chocolate Co. was organized to take over the manufacturing part of the petitioner's business. Practically all of the assets of the petitioner were transferred to the Elbee Company for stock, the petitioner thereafter handling only the selling and distribution. On or about April 1, 1918, the Sterling Chocolate Co. was organized to manufacture solid chocolate for the Elbee Company. Prior to the organization of the latter company, the petitioner bought solid chocolate on the open market. The stock of all three companies was owned by the same stockholders and in the same proportion.
At the incorporation of the Elbee Company, the petitioner turned over the machinery to the former. The petitioner's machinery account on December 31, 1917, was $61,806.45; on March 1, 1918, it was $63,300.35; and on December 31, 1918, the machinery account of the Elbee Company was $75,567.33. The machinery purchased for the Sterling Company to manufacture solid chocolate was almost all new. The machinery account of the Sterling Company at December 31, 1918, was $33,582.47.
Included in the new machines purchased for the Sterling Company was a Woodburn Cocoa Mill costing $1,200, a Bausman Disc Reducer and Refiner costing $3,960, and a cocoa press costing $5,500. These machines were purchased to make powdered cocoa. A chocolate wrapper costing $2,800, which was used to wrap chocolate almond bars, was also purchased.
After the signing of the Armistice, the price of cocoa dropped from about 30 cents to 3 cents per pound. The petitioner could not produce powdered cocoa at such prices in competition with larger concerns, so it discontinued the manufacture thereof and the use of the above machines in the latter part of 1918. The manufacture of the chocolate almond bar also had to be dropped in 1918 because of competition and the machine for wrapping it was no longer used. These four machines were offered for sale in 1918 and have been repeatedly offered since, but without success. The machines, as of December 31, 1918, were worth but 10 per cent of their cost.
During 1918 the Elbee Company worked a double shift until some time in November. The regular shift worked 48 hours per week. The extra shift worked until 10:30 p. m., the total overtime amounting to 30 hours per week. The daily operation of the machinery continued without interruption upon the transfer of assets from the petitioner to the Elbee Company. Beginning in April the Sterling Company operated the same hours and shifts as the Elbee Company.
Labor conditions during 1918 necessitated the employment of unskilled and inexperienced help. The machinery did not receive the proper care for the most efficient operation. The employees were shifting constantly and conditions were unsettled. Cases of sabotage resulted in gears, spokes and other parts of the machinery being broken.
The machinery was made to handle powdered sugar but, due to war conditions, brown sugar was substituted and substitutes for other ingredients had to be used. The additional strain resulted in excessive depreciation of the machinery. The rate of depreciation of the machinery for 1918 was 15 per cent.
During 1917 or prior thereto the petitioner, in order to secure a distributor for its products, made certain advances to A. Strauch & Co., amounting to about $10,000. These advances were secured by shares of stock of Strauch & Company, which were later exchanged for notes. The date of this exchange is unknown, but it occurred prior to January 1, 1918. On that date $5,100 was still due and unpaid on the notes. By March 1, 1918, the notes had been satisfied. The Commissioner adjusted invested capital on the theory that the petitioner held stock of Strauch & Company which was an inadmissible asset.
For 1911, 1912 and 1913, Levine Brothers, Inc., returned income as follows:
1911 _______________________________________ $3,507.59
1912 _______________________________________ 13,594.81
1913 _______________________________________ 24,973.70
The Commissioner reduced the income for 1911 and 1912 by $447.60 and $467.60, respectively.
In 1921 the petitioner paid an additional tax of $1,235.33 for the year 1917, as a result of which the Commissioner reduced surplus in computing invested capital for the year 1918.
On March 1, 1918, the petitioner retired $150,000 of its capital stock. The...
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