McWilliams v. Commissioner of Internal Revenue, Docket No. 14977
| Decision Date | 12 February 1929 |
| Docket Number | Docket No. 14977,25979. |
| Parties | J. W. McWILLIAMS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
George E. H. Goodner, Esq., and Walter K. Smith, C. P. A., for the petitioner.
Harold Allen, Esq., and W. R. Lansford, Esq., for the respondent.
Under Docket No. 14977, petitioner appeals from deficiencies in income taxes determined and advised of by respondent on April 22, 1926, and under Docket No. 25979, from deficiencies for additional years determined and advised of by respondent on February 4, 1927. The two proceedings are consolidated for hearing and decision. The deficiencies are for calendar years and in amounts as follows:
1920 ___________________________________ $6,566.12
1921 ___________________________________ 63,277.86
1922 ___________________________________ 12,903.02
1923 ___________________________________ 7,145.80
1924 ___________________________________ 454.65
Petitioner assigns error on the part of respondent in determining the deficiencies appealed from as follows:
First. The increasing of the net income for 1920 and 1921 of a partnership in which petitioner owned an interest by disallowance of:
(a) Depletion taken on timber in 1920 and 1921.
(b) A portion of the total amount deducted as repair expense in 1920.
(c) Expense incurred in 1921 for use of an automobile.
(d) Failure to allow depreciation upon its plant for 1920 and 1921.
Second. The inclusion in his income for 1921 of the total profits of the partnership.
Third. The increasing of the amount reported by him as profit upon the sale in 1921 of the partnership assets.
Fourth. The refusal to permit the profit upon that sale to be returned on the installment basis.
Fifth. Failure of respondent to compute under section 206 of the Revenue Act of 1921 the tax due upon profit represented in installments paid upon the purchase price of partnership assets.
Sixth. Disallowance of certain amounts deducted in 1922 and 1923 as depreciation on automobiles used by him in his individual business.
Seventh. The disallowance of deductions representing travel expenses for the years 1922, 1923, and 1924 of petitioner and certain employees in connection with an individual lumber business carried on by him in those years.
FINDINGS OF FACT.
Petitioner is a resident of Ft. Myers, Fla. Prior to 1924 he was for ten years a resident of Mobile, Ala. Since 1906 he has been engaged in the lumber business.
In the year 1918 there was organized the partnership of McWilliams, Wells & Pearson, composed of petitioner, who contributed $25,000; Zed W. Wells, who contributed $10,000; and F. S. Pearson, who contributed $5,000, the interests of the three partners in profits being five-eighths, one-fourth and one-eighth, respectively.
Petitioner and Zed W. Wells, for this partnership, on February 18, 1918, entered into a contract with John W. Blodgett for the purchase for the consideration of $160,000 of certain lands and timber in Green County, Miss. The purchase price of this property was computed on the basis of $6 per thousand feet for the timber on the land, this being estimated by Lemieux Bros., timber cruisers, of New Orleans, La., to be 26,667,000 feet. This contract provided for the purchase price to be paid in certain installments and for the release by Blodgett of sections of the tract for purposes of cutting timber as these payments were made.
On July 1, 1919, the petitioner and the said Wells entered into another contract with the said Blodgett for the purchase of another tract of timber land in Green County, Miss., upon which the timber had been similarly estimated to be 40,000,000 feet. The agreed purchase price under this contract was $280,000, the timber being estimated at a value of $7 per thousand feet. Under the second contract the terms as to payments and release of acreage were substantially similar to those of the first contract.
Under both of these contracts it was provided that deeds to the properties should be delivered by Blodgett upon completion of the payments of the purchase price. In the case of both tracts of land involved the value was considered as represented by the timber alone, no value being attached to the land.
In 1920 the partnership bought 87,223 feet of standing timber consisting of various small parcels for the total sum of $916.34 and in 1921 it bought 28,701 feet of standing timber for $455.92.
Shortly after July, 1919, petitioner acquired from Wells his interest in the partnership for the sum of $34,274.84. At this time Wells had, in addition to his original capital investment of $10,000, accumulated profits undrawn in the sum of $11,239.47. These profits had been credited on the books to his personal account and upon the sale of his interest these were transferred on the books to the personal account of petitioner.
On November 30, 1921, petitioner acquired the partnership interest of Pearson for the sum of $21,000. Since the partnership was first organized petitioner had each year left in the business a large portion of his distributive share of the profits. Pearson had each year drawn substantially all of the profits accruing to him. For the year 1920 and up until November 30, 1921, petitioner had been entitled to seven-eighths of the profits and Pearson the remaining one-eighth of same. In addition each was paid $500 a month as salaries, which were charged on the books as general expense. Subsequent to November 30, 1921, the books of the partnership were closed as of December 31, 1921. On November 30, 1921, Pearson, in addition to his salary of $500 per month, had drawn for that year $2,223.63, and when the books were closed this amount was charged off as of November 30, 1921, to profit and loss. Petitioner's personal account on the books as of December 31, 1921, representing undrawn salary and profits of prior years and money advanced by him to the partnership and exclusive of profits for the year 1921, was the sum of $143,863.07. This amount did not include petitioner's original capital contribution to the partnership nor capital contributions of partners whose interests he had purchased.
Shortly after organization in 1918 the partnership began the construction of a saw mill and lumber plant, and the cutting of timber began in 1919, in which year 10,849,547 feet were cut. In 1920 there were cut 9,092,651 feet. All of the timber cut in these two years was from the first tract purchased at $6 per thousand feet.
In 1921 the partnership cut 9,179,519 feet from all of these timber tracts purchased.
The cost of timber was set up on the books in the total amount paid and depletion was deducted by the partnership on account of timber cut as follows:
1919 ___________________________________ $93,410.99
1920 ___________________________________ 67,505.35
1921 ___________________________________ 87,160.00
The book balance in the timber account as of December, 1921, was $192,295.92.
In computing this allowance for depletion petitioner did not use the figure of original cost of the timber, but charged depletion at various rates upon an estimated replacement cost or present value of the timber cut.
The reasonable physical life of the entire plant was 10 years. If an average rate of consumption of the timber for the years 1919 to 1921, inclusive, was continued, the supply would be exhausted in 6½ years, at the end of which time there would be a salvage value in the plant of 10 per cent of its cost.
No depreciation was taken by the partnership for the years 1920 and 1921.
The partnership kept its asset accounts upon a diminishing-balance system, the depreciation and depletion charged off in each year being deducted from the prior balances. These balances for the various asset accounts were in December, 1921, as follows:
Depreciable assets
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| Balance | Depreciation | Actual | Cost of | Cost of
Name of asset | per books, | written off | cost to | additions, | additions
| December, | in 1919 | Jan. 1, 1920 | 1920 | 1921
| 1921 | | | |
--------------------------------|------------|--------------|--------------|------------|-----------
Buildings _____________________ | $7,778.76 | $6,168.75 | $12,760.56 | __________ | $1,186.93
Planing mill __________________ | 12,970.00 | 6,484.71 | 19,454.71 | __________ | __________
R. R. machinery _______________ | 14,093.81 | 5,032.77 | 15,532.77 | $3,593.81 | __________
Sawmill _______________________ | 50,850.00 | 21,540.15 | 64,740.15 | 7,650.00 | __________
Furniture and fixtures ________ | 500.00 | ____________ | 500.00 | __________ | __________
Teams _________________________ | 6,000.00 | ____________ | 6,000.00 | __________ | __________
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Standing timber
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| Feet | Amount
----------------------------------------------------------------|-------------|-------------
Feb. 18, 1918, purchase at $6 per M feet ______________________ | 26,667,000 | $160,000.00
July 1, 1919, purchase at $7 per M feet _______________________ | 40,000,000 | 280,000.00
| ___________ | ____________
Total to Dec. 31, 1919 ___________________________________ | 66,667,000 | 440,000.00
Depletion deducted, 1919 ______________________________________ | 10,849,547 | 93,410.99
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