Evangeline Gravel Co., Inc. v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 12806.
| Decision Date | 27 July 1928 |
| Docket Number | Docket No. 12806. |
| Citation | 13 BTA 101 |
| Parties | EVANGELINE GRAVEL CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
W. O. Rainey, for the petitioner.
Granville S. Borden, Esq., for the respondent.
This is a proceeding for the redetermination of a deficiency in income and excess-profits taxes asserted by the respondent for the year 1920. The amount of the deficiency is $5,315.48, which arises from the disallowance by the respondent of claimed deductions for depreciation, depletion and charge-off.
FINDINGS OF FACT.
The petitioner is a corporation, and during the year 1921 was engaged in the business of extracting sand and gravel at Alexandria, La.
The petitioner was incorporated October 16, 1919, and acquired from one G. K. Force, lessee, a lease and option to purchase an 80-acre tract of land containing gravel deposit. Prior thereto, Force had sunk six test wells for the purpose of ascertaining the quality and quantity of gravel. This was necessary because no gravel showed on the surface, and a surface examination of the land would not determine the gravel content. Various other leases were made by others, and later taken over by the petitioner; but none were worked except the first, the 80-acre tract.
In February, 1920, the petitioner exercised its option and purchased the 80 acres for the sum of $24,351.90. The petitioner had to pay to Force and four other original lessees, a royalty of 5 cents per ton for all sand and gravel removed from the land so acquired.
The gravel content of the 80-acre tract, at the beginning of operations, was estimated by an experienced man to be 1,000,000 tons. This proved to be approximately correct.
In order to work the dredges, it was found necessary to build a wooden dam in 1920. By 1921 this dam was no longer needed and was removed by pumping toward it, thus undermining it and washing it away. The plant and equipment of the petitioner were of new materials, except the rails and locomotives. There was a power plant, railway and its equipment, two dredges, a washing plant, and a gravel plant. During the year 1921 the petitioner operated one dredge 24 hours per day.
No depreciation was taken by the petitioner with reference to the dam, but in 1921 the original cost was charged off as a loss. The respondent now concedes this to be a proper deduction.
In its tax return for the year 1921 the petitioner claimed a deduction for depreciation with respect to its dredge, gravel plant, power plant and equipment, railway, and railway equipment, computed at the rate of 20 per cent. The respondent allowed a deduction computed at the rate of 10 per cent. The petitioner based its 20 per cent deduction upon an estimated removal of all the gravel in 5 years' time. The plant was still in use in February, 1928. There is no evidence as to its salvage value.
The petitioner also claimed deduction for depletion based on discovery value under section 214 (a) (10) of the Revenue Act of 1921. This deduction, also based upon an estimated 5-year economic life of the gravel deposit, was computed at 20.89 cents per ton on 99,116.31 tons, which was the tonnage removed in 1921. The respondent allowed a depletion deduction at the rate of 2.4 cents per ton on 104,031.59 tons, which was the tonnage removed during 1920 and 1921. This was based upon the engineer's report.
Two questions are to be determined in this proceeding, viz: (1) The proper rate of depreciation to be allowed for the year 1921 with respect to five items of the petitioner's assets, and (2) the proper rate of depletion deduction to be allowed for exhaustion of a gravel deposit for the same year.
The pleadings indicate a third question relating to the total loss of the useful life of a dam; but that is now conceded by the respondent in his brief.
The sections of the 1921 Revenue Act which are applicable here provide:
SEC. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
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(7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. In the case of such property acquired before March 1, 1913, this deduction shall be computed upon the basis of its fair market price or value as of March 1, 1913;
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(9) In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and...
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