Washburn Wire Co. v. Commissioner of Internal Revenue

• Decision Date: 21 November 1933
• Docket Number: No. 2834.,2834.
• Citation: 67 F.2d 658
• Parties: WASHBURN WIRE CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — First Circuit

67 F.2d 658 (1933)

WASHBURN WIRE CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 2834.

Circuit Court of Appeals, First Circuit.

November 21, 1933.

Harry W. Stelle, Jr., of New York City (Albert R. Palmer, of New York City, on the brief), for petitioner for review.

Carlton Fox, Sp. Asst. to Atty. Gen. (Pat Malloy, Asst. Atty. Gen., and Sewall Key and J. Louis Monarch, Sp. Assts. to Atty. Gen., on the brief), for Commissioner of Internal Revenue.

Before WILSON and MORTON, Circuit Judges, and HALE, District Judge.

MORTON, Circuit Judge.

This is an appeal by the taxpayer from an adverse decision by the Board of Tax Appeals with respect to income taxes for 1922 and 1923. 26 B. T. A. 464 and 1146. Several different and unrelated questions are presented.

The first question concerns the denial of allowances for depreciation on machinery of the American Electrical Works, a subsidiary of the petitioner, for the years in question. The Electrical Works is an old concern. Prior to 1912 it did not charge off depreciation of its machinery in any regular way. As machines wore out they were repaired or replaced, and the cost thereof was charged to current expense — a method which was followed by many conservatively managed companies until the advent of the income tax rendered more scientific accounting methods necessary. As of January 1, 1912, the book value of this company's machines was set up at $652,000. For 1912 and 1913 it charged off in each year depreciation of 5 per cent. of that amount, with allowances for changes in its machinery during the year. In 1914 the amount was somewhat larger. In 1915 it was raised to 10 per cent. of the book value, and was continued at that amount.

The Commissioner held that as the taxpayer had, by implication at least, claimed a useful life for its machinery of only ten years, the machinery in use on January 1, 1912, had become fully depreciated by the end of 1921. He therefore declined to allow depreciation on the 1912 machinery after that year. His view was that the depreciation occurred year by year in equal amounts, and that the taxpayer must take it year by year, and could not postpone it from one year to another, nor choose when to take it. The machinery was not in fact worn out at the end of 1921; it was still in use during the years in question.

Depreciation, as the word is used in this proceeding, includes two different factors: (1) Wearing out by use, and (2) obsolescence. Change of style or later inventions may make a machine useless for business purposes long before it is worn out; and, on the other hand, a machine which is well cared for and serviced may last much beyond its calculated life. Depreciation or obsolescence is always a question of fact. "Straight line depreciation," so called, which the Commissioner used in this case, is an artificial and conventional method of getting at the loss of value in a manufacturing plant during a prescribed period. It undoubtedly has its place, but it must yield to the facts in any particular case. This was explicitly held in Geuder, etc., Co. v. Commissioner, 41 F.(2d) 308 (C. C. A. 7th) where it was said: "No rule or rate can in all instances accurately measure depreciation. While it may form a safe basis for a prima facie case, it must give way to the facts in each particular case if those facts are presented and are inconsistent with the rate." Sparks, J., page 310 of 41 F.(2d). That case presented a situation not dissimilar to the present one, and it was held that the taxpayer's claim of actual depreciation in the years in question must prevail over the conventional depreciation allowed by the Commissioner and approved by the Board of Tax Appeals. In Jewett & Co. v. Commissioner, 61 F.(2d) 471, the Court of Appeals for the Second Circuit dealt with a similar situation in the same way. Burnet v. Thompson Oil & Gas Co., 283 U. S. 301, 51 S. Ct. 418, 75 L. Ed. 1049, was the converse of these cases. There the amount of depletion during the earlier period (1913-1915) was absolutely fixed — the oil had been pumped and sold. The law at that time allowed only 5 per cent. for such depletion, which was insufficient. It was held that the rest of the depletion could not be transferred to a later year, when the law had been so changed as to allow it.

We think the taxpayer was justified in extending the period of depreciation to accord with the facts under article 166 of Treasury Regulation 62, which provides as follows:

"If it develops that an error was made in estimating the useful life of the property, the plan of computing depreciation should be modified and the balance of the cost of the property, or its fair market value of March 1, 1913, not already provided for through a depreciation reserve or deducted from book value, should be spread over the estimated remaining life of the property."

The evidence on this point in the present case is not very satisfactory. It amounts, in substance, to the judgment of the taxpayer as evidenced by its entries on its books in 1912, 1913, and 1914, on the one side, and the Commissioner's formula, based on later book entries by the taxpayer, on the other side. There is nothing to indicate that the taxpayer's entries were not made in good faith, or not based on honest judgment. It does not appear to what extent the machinery in question was operated during the different years, nor as to whether advances in the art, or new inventions, affected its usefulness or value. It does not follow, we think, that, because in the later years the petitioner took an annual depreciation of 10 per cent. on its machinery, the actual depreciation in each of the years 1912-1914 was that amount. It is common knowledge that metal working industries were pressed with business during the War. Neither the Commissioner nor the Board of Tax Appeals appears to have inquired into the actual depreciation for the different years; and their decisions are not based upon findings that the petitioner's claim is unfounded in fact.

A contemporaneous estimate of depreciation, made by a manufacturer with respect to his own machinery, and entered on his books, is some evidence of its correctness. In Appeal of Kansas Milling Co., 3 B. T. A. 709, it was...