Commissioner of Internal Rev. v. American Seating Co., 4257.

• Decision Date: 27 June 1931
• Docket Number: No. 4257.,4257.
• Citation: 50 F.2d 681
• Parties: COMMISSIONER OF INTERNAL REVENUE v. AMERICAN SEATING CO.
• Court: U.S. Court of Appeals — Seventh Circuit

50 F.2d 681 (1931)

COMMISSIONER OF INTERNAL REVENUE v. AMERICAN SEATING CO.

No. 4257.

Circuit Court of Appeals, Seventh Circuit.

June 27, 1931.

G. A. Youngquist, Asst. Atty. Gen., and J. Louis Monarch and Andrew D. Sharpe, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Allin H. Pierce, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for petitioner.

Laurence Graves, of Washington, D. C., for respondent.

Before ALSCHULER, EVANS, and SPARKS, Circuit Judges.

ALSCHULER, Circuit Judge.

The Commissioner of Internal Revenue brings this proceeding, wherein he complains of the action of the Board of Tax Appeals in determining the deficiency in respondent's federal income and profits taxes for the year 1921 at $9,117.03, instead of $21,467.50 as determined by the Commissioner. The difference arises out of the amount of taxpayer's invested capital for that year, the Commissioner denying the propriety of several items which taxpayer claimed, and which the board allowed, as taxpayer's invested capital.

The Board found as facts (14 B. T. A. 328) that since 1906 taxpayer had been in the business of manufacturing and selling desks and seats for schools and other places of public assembly; that the framework of their product had been made of cast iron, and that in about 1909 taxpayer concluded it was advisable to substitute steel for cast iron, and in 1910 began work to this end, incurring expense in changing equipment and in experimentation of $55,296.55 in 1911 and $110,180.05 in 1912, all of which it then charged to its capital investment account; that in 1915 taxpayer purchased for $25,000 certain inventions deemed necessary in the successful production of the steel parts of its products, which amount was likewise charged to invested capital; that its first contract for its steel product was with the St. Louis school board, to which it shipped a large consignment of school equipment, which after installation proved so defective that it was returned to taxpayer and replaced at loss to taxpayer of $33,239.77, and this loss it also then charged to invested capital.

The Commissioner allowed as invested capital a portion of the expense items of 1911 and 1912, but disallowed the items of purchase of inventions, and of loss on defective St. Louis equipment. The Board allowed further so much of the 1911 and 1912 expense items as the Commissioner had disallowed, and allowed also the items of invention purchase and St. Louis contract loss.

Respecting the 1911 and 1912 expense items, we perceive no substantial objection to their inclusion in invested capital. It was deemed advisable to substitute steel for cast iron, which involved a new venture, at least for this concern. The innovation evidently required very substantial structural changes, which in turn involved engineering assistance and experimental operations before ultimate success was achieved. The cost as reported by taxpayer does not appear to be challenged, nor its good faith in including this in its invested capital. In such matters no inflexible rule can be laid down for determining how much of the cost of experimenting and changing may properly be included in the item of invested capital, and we would not be warranted in setting aside the judgment of the Board respecting what is essentially this question of fact.

Respecting the item of loss on the St. Louis contract, we are inclined to the belief that under the facts it should not have been allowed as invested capital. When taxpayer entered into this large contract presumably the experimental stage had been passed. If before making and shipping this large amount of product it was not satisfied that the experimental period had in fact passed, it was at least improvident to make the shipment. If the experimental stage had been passed, the defects in the product shipped would indicate faulty workmanship or materials rather than immaturity in the plan and scheme for perfecting the change from cast iron to steel. In such case loss...