Planters Gin Company v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 46299.
| Decision Date | 04 May 1933 |
| Docket Number | Docket No. 46299. |
| Citation | 28 BTA 22 |
| Parties | PLANTERS GIN COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
H. A. Mihills, C.P.A., for the petitioner.
F. A. Schlosser, Esq., for the respondent.
The respondent has determined deficiencies in income tax for the fiscal years ended June 30, 1926 and 1927, in the respective amounts of $1,103.10 and $1,454.79. For its causes of action the petitioner alleges (1) that the respondent has erroneously reduced the basis for the computation of its allowable deductions for depreciation for the taxable years and (2) that an inadequate rate of depreciation was used in such computation. On brief its counsel abandoned the second issue. The parties have filed a stipulation, from which we have formed the following findings of fact.
FINDINGS OF FACT.
The petitioner is a Texas corporation, with its principal office at Sweetwater. It was chartered on June 29, 1925, and began its operation as of July 1 of that year, with authorized capital stock of $100,000, all of which was issued in exchange for the assets of a preexisting partnership of the same name and engaged in the same business. The assets so acquired were taken into the accounts of the petitioner at the cost reflected on the books of the partnership. The stock so issued was received by R. K. Wooten, J. W. Simmons and R. M. Simmons in the respective amounts of 375, 375 and 250 shares, which were in exact proportion to their interests in the partnership.
During the years 1918, 1919, 1920, 1921, 1922, and 1923 and until February 24, 1924, the members of the partnership were F. J. Phillips, R. K. Wooten, J. W. Simmons and R. M. Simmons, each of whom was owner of a 25 percent interest in the enterprise during the entire period. On February 24, 1924, Phillips died and shortly thereafter two of the surviving partners, Wooten and J. W. Simmons, acquired his interest in the enterprise, which had a book value at December 31, 1925, in the amount of $154,985.06, for $92,000.
A decline in commodity prices began about 1920, due to which from time to time until the death of Phillips, the partners, except R. M. Simmons, advanced money to the partnership for its business and received its notes endorsed by the partners in evidence thereof. At the date of his death the advances made by Phillips amounted to $141,423.30, with $5,615.21 accrued in interest.
In its accounting and on its return for the taxable year the petitioner, in computing depreciation, used the basis to which the original partnership was entitled, which was cost at dates of acquisition. Upon audit of such returns the respondent reduced the rate of depreciation on gin buildings from 10 to 5 percent and the basis for computing depreciation by the amount of $62,985.06, which represents the difference between the book value of the Phillips interest in the partnership and the purchase price paid therefor by Wooten and J. W. Simmons, two of the surviving partners.
The single question here is whether the correct basis for computing allowances for depreciation of the physical assets used by the petitioner in its business in the taxable year is the cost of such property to the original partnership, or such basis reduced proportionately by the purchase of the Phillips interest by Wooten and J. W. Simmons at a cost to them which was less than the book value thereof in the amount of $62,985.06. While the records indicate that the advances made as set out in our findings of fact may have been loans, there is no proof that repayment except by distribution was contemplated or that the whole amount thereof was not represented in the assets of the partnership. Accordingly, though probably not material to any issue pleaded, we shall regard such advances as capital contributions.
On the record it is clear that the petitioner may use the basis for computing depreciation to which the partnership was entitled upon the reorganization which followed the acquisition of the Phillips interest by Wooten and J. W. Simmons. After the incorporation all the shareholders of the petitioner owned stock exactly in proportion to their several interests in the second or reorganized partnership at June 29, 1925. In such circumstances it follows under the provisions of section 203 (b) (4) and 204 (a) (7)1 of the Revenue Act of 1926 that the exchange of the partnership assets for the stock of the petitioner was a transaction which resulted in neither gain nor loss to the members of the partnership and that the petitioner, after incorporation, should use the basis for computing depreciation to which the partnership was entitled at the date of the transfer of its assets to the petitioner.
Under the laws of Texas, in the absence of any agreement to the contrary, the original four-party partnership was terminated some time in February 1924, when Phillips died. Morris v. Owen, 143 S.W. 227; Stern v. Fenelon, 24 S.W. (2d) 1111; Johnson v. Smith, 35 S.W. (2d) 798. The records disclose no agreement that such partnership was to continue regardless of the death or withdrawal of one or more members. It follows, therefore, that on February 24, 1924, the assets of the old partnership became distributable to the estate of Phillips and the three surviving partners in proportion to their respective interests and that either by agreement or operation of law a new...
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