Chicago Railway Equipment Co. v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 24 September 1928 |
| Docket Number | Docket No. 3964. |
| Citation | 13 BTA 471 |
| Parties | CHICAGO RAILWAY EQUIPMENT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
William S. Oppenheimer, Esq., and Henry W. Price, Esq., for the petitioner.
L. C. Mitchell, Esq., for the respondent.
This is a proceeding for the redetermination of deficiencies in income and profits tax for the calendar years 1917, 1918, and 1919 in the respective amounts of $22,337.85, $85,815.59, and $15,609.91. This case was originally heard by the Board on February 2, 1926. The assignments of error in the petition upon which the original hearing was held were:
(1) The Commissioner has used erroneous values for depreciation purposes.
(2) The Commissioner has allowed insufficient depreciation.
(3) The Commissioner has denied deductions for bad debts ascertained to be worthless and written off within the taxable year.
The Board promulgated its findings of fact and opinion therein on July 28, 1926, 4 B. T. A. 452. In that opinion the Board affirmed the findings of the respondent save that it held that certain bad debts aggregating $33,217.17, which the petitioner deducted from its 1918 income and which the respondent had disallowed altogether, should be deducted from the gross income of 1919. By an order entered November 4, 1926, and amended November 10, 1926, the Board affirmed the respondent's determination of deficiencies for 1917 and 1918, but reduced the deficiency for 1919 from $15,609.91 to $6,309.16. The petitioner took an appeal to the United States Circuit Court of Appeals for the Seventh Circuit. That court stated in its opinion, 20 Fed. (2d) 10:
Three matters are here in issue on the merits; (a) Was the item allowed for bad debts properly transferred from 1918 to 1919? (b) Was there error in fixing the value of depreciable property? (c) Were the rates of depreciation used erroneous?
In the course of its opinion the court stated:
(c) Whether the depreciation rates applied were in any sense erroneous, unless possibly in the single instance of giving the corrugated iron building the same rate as the concrete, is doubtful. The witness Forward, who knew most about the rates, said the item scheduled as "power" had a normal useful life of 20 years, and machinery of 10 years, and they were given, respectively, at 5 per cent. and a 10 per cent. rate. He agreed to 20 per cent. for the automobiles. Unless there is something to contradict the Forward testimony as to the corrugated iron building, it would appear that should have a depreciation rate of 5 per cent. We do not think there should be an increase of 50 per cent. because of the additional operation of machinery during the years in question.
The mandate of the higher court reads:
It is now here ordered and adjudged by this court that the order of the said United States Board of Tax Appeals entered November 4, 1926 and amended November 10, 1926 be and the same is hereby reversed; and that this cause be, and the same is hereby remanded to the said United States Board of Tax Appeals, with direction to take further evidence, if necessary, on any question, and to fix the market value as of March 1, 1913, and, further, to base the depreciation thereon in accordance herewith, and to allow the charge-off of bad accounts for the year 1918.
On December 30, 1927, the petitioner filed with the Board a motion for "leave to file a supplemental petition in this cause instanter and to rule upon the Commissioner to answer the same." The supplemental petition accompanied the motion, and is to the effect that the assessment and collection of any deficiencies in tax for the years 1917, 1918, and 1919 are barred by statutes of limitation. The motion was granted by the Board on January 16, 1928, and the supplemental petition was filed as of that date and the respondent was given 45 days within which to file his answer to such petition. The respondent's answer thereto was filed on February 20, 1928.
Rates for depreciation were settled by the prior decision of the Board as modified by the decision of the court. They are:
Per cent
Brick and concrete buildings _________________________ 3
Iron and steel buildings _____________________________ 5
Power ________________________________________________ 5
Machinery and equipment ______________________________ 10
Automobiles __________________________________________ 20
No question was raised as to the correctness of the determination of the respondent with respect to the allowable depreciation on patterns. The only questions relating to depreciation for adjudication at this time are (1) the March 1, 1913, value of depreciable properties and (2) the correct allocation between (a) power and (b) machinery and equipment at such basic date. The third question for adjudication is whether the assessment and collection of deficiencies for the taxable years are barred by statutes of limitation.
The findings of fact hereinafter stated are only such as are necessary to determine the issues raised by this proceeding.
FINDINGS OF FACT.
The petitioner is an Illinois corporation with its principal office at Chicago. It was organized in 1892 with a paid-up cash capital of $30,000 and succeeded to the business of the National Hollow Brake Beam Co. It acquired a one-story brick building at 4060 Princeton Avenue, Chicago, and gradually increased its plant. No additional capital was ever paid into the company. In 1901 and 1904 it constructed a plant consisting of buildings and machinery in Detroit, Mich. Between that date and 1917 certain additions and replacements were made to that plant. In 1905 it acquired a malleable iron foundry consisting of buildings, machinery, and equipment at Grand Rapids, Mich., at a cost of $62,500. Between that date and 1917 certain additions and replacements were made thereto. At the time this plant was purchased it was being operated by a creditors' committee. In 1906 it acquired a similar malleable iron foundry which was being operated at Marion, Ind., at a cost of $92,000. The Marion plant was not being operated successfully by its owners and was acquired at a bargain price. Between the date of acquisition and 1917 considerable additions and replacements were made to that plant. In 1907 it constructed what is now its principal office building, a brake beam plant, at 46th and Robey Streets, Chicago, and installed therein certain machinery. In 1908, the petitioner owned plants at Chicago, Grand Rapids and Detroit, Mich., Marion, Ind., and Jersey City, N. J. It had appraisals made of these plants by the American Appraisal Co. on the dates following:
Jersey City _____________________________ April 25, 1904
Detroit _________________________________ Feb. 11, 1907
Grand Rapids, Mich ______________________ Dec. 12, 1907
Marion, Ind _____________________________ Dec. 17, 1908
The petitioner's books of account at the beginning of 1908 reflected the actual cost of the construction and acquisition of its various properties. The appraisals made of the properties showed values in excess of cost and the book values of the plants were increased at December 31, 1908, to accord with the appraisals, the increase in value of the several plants written upon the books at that time being as follows:
Grand Rapids plant _____________________________ $80,683.02
Marion, Ind., plant ____________________________ 70,624.32
Jersey City plant ______________________________ 12,724.57
Detroit, Mich., plant __________________________ 21,765.92
__________
Total increased value of tangible property _____ 185,797.83
The petitioner's books of account were audited annually during the years 1908 to 1913, inclusive, by Price, Waterhouse & Co., and the financial transactions of the petitioner, including acquisitions of new plants and proper amounts for depreciation, are shown in the annual audits made. In 1912, the petitioner acquired a rolling mill plant together with machinery at Franklin, Pa., at a cost of $175,000. The plant at the time was in the hands of a receiver and was acquired it a bargain price. The petitioner had an appraisal made of this property by the American Appraisal Co. in 1912, and the value of the plant at December 31, 1912, was written up on its books of account to the extent of $148,244.09 in excess of cost. The petitioner's balance sheet, as audited by Price, Waterhouse & Co., at December 31, 1912, shows as follows:
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