Difco Labs., Inc. v. Comm'r of Internal Revenue

• Decision Date: 20 April 1948
• Docket Number: Docket No. 12168.
• Citation: 10 T.C. 660
• Parties: DIFCO LABORATORIES, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

10 T.C. 660

DIFCO LABORATORIES, INC., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 12168.

Tax Court of the United States.

Promulgated April 20, 1948.

1. The Commissioner determined a deficiency in excess profits tax and an overassessment in income tax in a deficiency notice covering 1942. Held, the Tax Court has no jurisdiction to redetermine the income tax liability.

2. Held, on the facts, that expenditures made for certain alterations and changes in a building were not for repairs, but for replacements, and were capital expenditures.

3. Petitioner exchanged certain of its stock for notes. Held, the petitioner is entitled to a net capital addition under section 713(a), I.R.C., in the computation of its excess profits credit, to the extent of the value of the stock, as the unadjusted cost basis of the notes. Value of stock determined. John M. Hudson, Esq., for the petitioner.

Wesley A. Dierberger, Esq., for the respondent.

This proceeding involves a deficiency in excess profits tax for 1942 in the amount of $12,829.19, and an overassessment in income tax for the same year in the amount of $1,873.07.

At the hearing counsel for the respondent filed a motion for dismissal of the proceeding, in so far as it relates to income tax for 1942, for lack of jurisdiction. For that year the respondent determined an overassessment in income tax and a deficiency in excess profits tax. Error is alleged in the petition with respect to respondent's determination of both the income tax overassessment and the excess profits tax deficiency for the year. The motion to dismiss was taken under advisement by the Tax Court and will be disposed of below.

The issues to be determined on the merits are:

(1) Were expenditures made for alterations and changes in a building used in petitioner's business deductible for Federal tax purposes as a business expense, or were they capital expenditures?

(2) Did the respondent err in determining that the petitioner had no capital addition, but a net capital reduction of its excess profits credit based on income during the year 1942 because of sale of stock?¹

A stipulation of facts was filed. We adopt same by reference and find the facts therein set froth. Such part thereof as it is considered necessary to set froth is included with other facts found from evidence adduced in our findings of fact.

FINDINGS OF FACT.

Petitioner is a Michigan corporation, with its principal office and place of business at 920 Henry Street, Detroit, Michigan. It filed its income and excess profits tax returns for the year 1942 with the collector of internal revenue for the district of Michigan, at Detroit, Michigan. Petitioner reported on the returns excess profits taxes in the amount of $308,322.17 and income taxes in the amount of $94,237.58. The taxes were paid in installments on March 12, June 14, September 14, and December 9, 1943. No part of the taxes has been credited or refunded to petitioner.

Pursuant to renegotiation of its contracts for the calendar year 1942, under the Renegotiation Act, petitioner on or about August 27, 1943, refunded to the United States the sum of $1,499.99, the balance of alleged excessive profits of 1942 in the amount of $15,000 after crediting thereto the tax upon such alleged excessive profits, which amount of alleged excessive profits was included in the computation of petitioner's taxable net income for 1942 upon which the taxes were paid.

Petitioner is engaged in the business of manufacturing chemicals. The manufacturing plant consists of six separately constructed buildings of from three to four stories in height, adjoining each other, which have been consolidated or integrated into a single operating unit. Prior to 1942 the basement level or floor of building No. 2 was about 22 inches lower than the basement level or floor of the adjoining building, No. 5. The shaft of the elevator serving both these buildings was located in building No. 5 and terminated at the basement level of that building.

Prior to 1941 petitioner conducted in the basement of building No. 2 an operation which was isolated from the rest of the plant and involved special equipment. The material manufactured there was very light and was easily handled from one level to another. The entrance to the basement of building No. 2 was through the basement of building No. 5. Prior to 1939 the basement of building No. 5 was used for storage.

In 1939 the petitioner had started in the basement of building No. 5 an operation involving the use of acid, and in such operation acid unavoidably was spilled on the floor. This resulted in the corrosion of the concrete floor so that, at two or three year intervals, the floor had to be replaced.

In 1942 petitioner obtained orders from the Government which so increased its volume of work that the space in the basements of buildings Nos. 2 and 5 had to be used. The materials produced were quite heavy and could not be readily handled by hand over the difference in the basement levels. There was equipment in t e basement rooms of such buildings which could not be moved to other parts of the buildings and petitioner wished to make use of such equipment in order to have the fullest possible capacity with available facilities.

For more efficient operation and utilization of the basement rooms of buildings Nos. 2 and 5, petitioner in 1942 determined to lower the basement floor of building No. 5 to the same level as that of building No. 2 and to extend the elevator shaft to the new level so that the material produced therein could be taken in wheeled-trucks in the elevator and moved to the third floor to process them further.

On or about July 23, 1942, petitioner entered into a cost-plus contract with C. A. Johnson & Son, as the prime contractor, for the performance of the work necessary to level the basement floors of the two buildings. All work pertaining to the plumbing, heating, and sprinkler systems was performed by subcontractors, also upon a cost-plus basis.

The work to be performed as described in the prime contract was as follows:

Provide all labor, material and equipment for demolishing the present basement floor in the westerly section of Building #5 (about 21' x 45') and constructing a new floor approximately 22‘ below the present floor level of that section, or at the same level as the adjoining Stock Room floor. This work will include (among other items) breaking, excavating and hauling away all materials which are not to be used in the work, a new concrete floor 6‘ thick plus a separate topping of 1 to 2 cement and fine aggregate (minimum 1‘ thick) and approved steel mesh reinforcement, underpinning all walls, beams and foundations to the depth and thickness required, new steel columns in place of old columns, the lowering of underground drains where necessary, the cutting off of old foundation projections into the room, the making of a new elevator pit and a new drainage sump, the extension of the present stairway to the new floor level (at the west of the elevator instead of the north), and all of the shoring required to complete the work.

Provide temporary walkways so that we may have access at all times from the stairway to our basement rooms * * * All of the work described in the prime contract quoted above was performed in accordance with the contract. The work was completed in December 1942 at a total cost to petitioner of $15,011.37.

The total cost to petitioner of the work performed by the prime contractor was $10,523.16, of which $1,009.26 was for materials, $3,450.31 was for rental of equipment, $4,237.28 was for labor, and $1,826.31 was for overhead and profit.

The cost to petitioner of changing the location of the drainage sumps, the drainage pumps, and the draining piping was $2,347.38, of which $452.11 was for materials, $1,235.71 was for labor, and $659.56 was for contractor's overhead and profit. The cost to petitioner for dropping the sprinkler piping below the basement floor at the new level was $1,162.19 of which $443.29 was for materials, $590.75 was for labor, $22.50 was for engineering and $105.65 was for contractor's profit. The cost to petitioner for services of architects and engineers in connection with this job was $978.64. The notation on the statement for services rendered was: ‘Services in connection with alterations to Basement of Building, Detroit, Michigan.‘

The excavating on this job was expensive, because of its location. The basement of the building No. 5, as originally constructed, had been provided by lowering the floor, but not the entire area, below the bottoms of the original footings or base of the wall supports. The floor, before the 1942 job, was set back about 30 inches from the walls, so as to avoid endangering the stability of the supports in the original excavation of the basement. In carrying out the 1942 work, it was necessary to underpin or provide supports for the old footings or enclosing walls to extend them down to the new level of the lowered basement floor. This work was done in sections. Because of the nature of the building No. 5 basement, the earth removed by excavation had to be taken out through a basement window. The new columns were installed to furnish the support, at the lowered basement level, for the floor above, since the old columns extended only to the former base of the walls.

All the drainage pipe was replaced in connection with the lowering of the floor. The sprinkler system pipe was reused to a large extent. Incident to the lowering of the basement floor of building No. 5, new steel columns were put in to support properly the floor above.

Because of the corrosion resulting from the use of acids in the operations conducted in the basement of building No. 5, the new floor, installed in 1942, was replaced by an entirely new floor in 1945 at a cost of $805.90.

For the year 1942 petitioner computed its excess profits net income and its excess profits credit on...