Nehring v. Commissioner
| Decision Date | 28 March 1957 |
| Docket Number | Docket No. 54320. |
| Citation | 1957 TC Memo 51,16 TCM (CCH) 224 |
| Parties | Paul M. Nehring v. Commissioner. |
| Court | U.S. Tax Court |
Edward M. Gerrity, Esq., for the petitioner. Andrew Kopperud, Jr., Esq., for the respondent.
The Commissioner determined a deficiency of $15,323.30 in petitioner's income tax for 1950.
The sole issue for decision is whether or not certain 300 ohm television twin lead-in wire purchased and sold by petitioner in 1950 was a capital asset within the meaning of section 117(a)(1) of the Internal Revenue Code of 1939.
Petitioner resides in DeKalb, Illinois, and during the year 1950 his residence address was 335 College Avenue in that city. His Federal income tax return for the year 1950 was timely filed with the collector of internal revenue for the first district of Illinois. The notice of deficiency herein was mailed to petitioner on May 28, 1954.
Petitioner is a college graduate and majored in physics and chemistry and had courses in banking and finance. Since 1935 he has been employed full time by Nehring Electrical Works, a corporation located in DeKalb, Illinois, which has been engaged for more than 30 years and was engaged during the year 1950 in the manufacture and sale of bare and weatherproof textile-insulated copper wire and cable, and steel reinforced cable, primarily for the use of public utilities. During 1950, petitioner was a director, officer, shareholder, and chief production engineer of the corporation and received from it in that year a salary of $20,000 and dividends of $10,000.
Petitioner personally maintained his own financial records and prepared his own tax returns for the years 1949 through 1953 although he had had only limited training in accounting. He did not seek professional advice in connection with the preparation of his returns.
Prior to 1949, petitioner, as a sole proprietorship under the name of DeKalb Electronics Co. (hereinafter referred to as DeKalb), commenced the purchase of an extrusion machine, other equipment, supplies of plastic compounds, and related items. During 1949 and 1950, DeKalb owned the following machine and equipment which on December 31, 1950, were located at 100 Augusta Avenue, DeKalb, Illinois, in a shop maintained by petitioner:
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Cost Acquired Cost Acquired Total Cost
Asset 1948-1949 1950 12/31/50
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Extrusion machine #1 and attachments ...... $7,807.85 $ 455.76 $ 8,263.61
Steam Boiler for processing and heating ... 924.01 ....... 924.01
Dies for extrusion machine ................ 247.32 332.78 580.10
Tools ..................................... 167.94 ....... 167.94
Production Measuring equipment ............ 437.50 2,834.79 3,272.29
Furniture and fixtures .................... 215.25 456.12 671.37
_________ _________ __________
$9,799.87 $4,079.45 $13,879.32
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Petitioner, as DeKalb, purchased the foregoing equipment and the plastic compounds and wire described below for the purpose of doing research and conducting experiments on various plastic compounds to evaluate their usefulness in wire, solids, rounds, tubes, and other uses to which they might be suited. The measuring equipment was for the purpose of testing inductance, capacity, resistance, tensil strength, elongation, and similar characteristics of the compounds. Petitioner was primarily interested in evaluating the commercial usefulness of the various plastic compounds in the production of various forms and shapes of insulated wire. He made test runs in which he produced a sufficient quantity of experimental wire to acquire the particular information he was seeking. The minimum cost of a test run was approximately $100 and, in the course of this experimenting, petitioner produced a number of varieties of television lead-in wire which differed in size, shape, and other characteristics, although some of it approached 300 ohm. During 1949, petitioner did this work himself in his spare time, but in 1950, due to his increased traveling, he hired a part-time assistant to clean the equipment between test runs and to make necessary adjustments.
Printed Schedule C, entitled Profit (or Loss) from Business or Profession, of petitioner's individual Federal income tax return for 1949 was as follows:
(1) Nature of business: Manufacturing Co-axial Cable
(2) Business name: DeKalb Electronics Co
(3) Business address: 417 N. First St
1. Total receipts .......................... None
Cost of Goods Sold
(to be used where inventories are an
income-determining factor)
2. Inventory at beginning of year $1,515.10
3. Merchandise bought for sale.............. 8,030.31
4. Labor.................................... 296.09
5. Material & Supplies...................... 125.44
6. Other costs..............................
7. Total lines 2 to 6 ...................... 9,966.94
8. Less inventory at end of year ........... 6,434.25
9. Net cost of goods sold (line 7 —
line 8) ................................ 3,532.69
10. Gross profit (line 1 less line 9) ....... (3,532.69)
Other Business Deductions
11. Salaries and wages ......................
12. Rent .................................... $1,800.00
13. Interest on business indebtedness .......
14. Taxes on business and business
property ............................... ........
15. Losses................................... ........
16. Bad debts arising from sales or
services ............................... ........
17. Depreciation, obsolescence and
depletion .............................. 1,857.13
18. Repairs ................................. 278.27
19. Other expenses........................... 1,477.21
20. Net operating loss deduction ............ ........
21. Total lines 11 to 20 .................... 5,412.61
22. Total lines 9 & 21 ...................... 8,945.30
23. Net loss ................................ ($8,945.30)
Certain items in the above schedule consisted of the following:
Item Consisted of
Inventory at beginning Plastic materials for
of year tests to be run by DeKalb
Electronics Company
Merchandise bought Approximately 95 per
for sale cent plastic and a
small portion of wire
Inventory at end of Approximately 99 per
year cent plastic and a very
small portion of wire
There were no sales made in 1949 by DeKalb and the item "cost of goods sold" reflected the expenses of getting the equipment into operation, of experimental runs, and of making various tests. No attempt was made to sell the experimental products. Although the nature of the business was described as "manufacturing coaxial cable," none was manufactured in 1949 or thereafter. The business of DeKalb was more accurately described on Schedule C of petitioner's 1950 Federal income tax return as "plastic moulding and extrusion."
During 1950 petitioner purchased plastic compounds of various types and colors from the following suppliers in the aggregate amount of $61,976.92:
Supplier Total Cost
Bakelite Division of Union Carbide
& Carbon Corporation .............. $21,001.50
A. Bamberger Corporation ............ 3,094.30
Freight ............................. 51.20
E. I. Dupont De Nemours &
Company ........................... 6,582.26
Gering Products, Inc. ............... 3,740.70
B. F. Goodrich Chemical Company ..... 27,506.96
__________
Total pounds of plastic compounds
purchased in 1950 —
119,285 pounds
Total cost of plastic compounds
purchased in 1950 ................. $61,976.92
The invoices for the above amounts of plastic compounds were all addressed to Nehring Electrical Works and all material was shipped to it. It had an unloading dock and when petitioner was away this material would be set aside for him to pick up on his return for transfer to 100 Augusta Avenue, where he was conducting his experiments. All payments for the compounds were by checks of Paul M. Nehring or of DeKalb, signed "Paul M. Nehring, Jr."
In addition to the plastic compounds, DeKalb also purchased 22,789¼ pounds of bare wire from Nehring Electrical Works for $11,340.20, making its total purchases for 1950 $73,317.12, which amount was reported on Schedule C of petitioner's 1950 Federal income tax return.
Although the wire produced by DeKalb was produced as a by-product of petitioner's experimental work, such wire in 1950 was in critical demand and petitioner was able to sell the usable plastic-covered wire so produced for $49,858.27, as follows:
Purchaser Amount
Admiral Corporation ..................... $ 4,212.15
Allied Radio Corporation ................ 150.00
B & K Manufacturing Co. ................. 600.00
Central Television Service .............. 650.00
Drake Manufacturing Co. ................. 25,162.33
General Cement Co. ...................... 2,154.00
C. H. Johnson
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