1928 BTA LEXIS 2985">*2985 1. March 1, 1913, value of petitioner's buildings, determined.
2. Rates for computing allowances for the exhaustion, wear and tear of petitioner's buildings, machinery, and equipment determined.
14 B.T.A. 345">*345 This proceeding is for the redetermination of a deficiency in income and profits taxes asserted by the respondent for the year 1921 in the 14 B.T.A. 345">*346 amount of $1,153.83. The deficiency arises from the disallowance by the respondent of deductions claimed by the petitioner for the exhaustion, wear and tear of its buildings, machinery, and equipment.
FINDINGS OF FACT.
The petitioner is a Pennsylvania corporation located at Shamokin. It began business in the year 1906, taking over the existing plant and business of a small meat-packing concern. The plant acquired consisted of seven buildings, four of which were frame and three of "brickskin-wood frame" construction. These buildings had been constructed a number of years prior to 1906. In 1907 the petitioner erected its main building, which is of brick construction, and in the years1928 BTA LEXIS 2985">*2986 1909 and 1910 it erected two other buildings, one of which was of frame and the other of frame and concrete. The petitioner's plant is located adjacent to a railroad track over which a number of freight trains pass each day. The vibration due to the passing of the trains had some effect tending to shorten the life of the building.
A large part of the petitioner's product was delivered by auto trucks. The territory covered extended about 60 miles each way from Shamokin. The larger part of the trucking was in the mountains where the grades were such as to require constant use of the engine, descending as well as ascending.
Until some time subsequent to the year 1921, little change was made in the layout of the petitioner's plant or in the machinery, although better machinery had been designed and was on the market and a better arrangement of the buildings was possible.
On account of the demand of the coal mines at and near Shamokin for high-grade labor, and the high wages and short hours offered for such labor, the petitioner was forced to employ unskilled lowgrade labor. This resulted in much harder use of the petitioner's machinery and delivery trucks and less care for1928 BTA LEXIS 2985">*2987 their upkeep than would have been the case if better workmen were obtainable. The petitioner's plant was operated two or three shifts per day; chemicals were used in its refrigeration supply, and its water supply contained a large amount of sulphur. These factors combined to shorten the life of the machinery and equipment.
The fair market value of the petitioner's buildings on March 1, 1913, was $129,000, and their useful life on that date was not to exceed 20 years. The average useful life of the petitioner's trucks and automobiles was 3 years. The useful life of the machinery and equipment, including furniture and fixtures, was 10 years.
The respondent upon audit of the petitioner's income and profits-tax return for the year 1921 determined that the March 1, 1913, fair 14 B.T.A. 345">*347 market value of the petitioner's buildings was $91,597.51, and that their useful life on that date was 40 years, and he allowed the petitioner a deduction for the exhaustion, wear and tear of the buildings computed at the rate of 2 1/2 per cent on said value. He also allowed deductions for exhaustion, wear and tear of machinery, equipment, furniture and fixtures, and auto trucks computed at the1928 BTA LEXIS 2985">*2988 rate of 8 per cent on machinery and equipment, 8 per cent on furniture and fixtures, and 25 per cent on auto trucks.
OPINION.
MARQUETTE: Section 234(a)(7) of the Revenue Act of 1921 provides that in computing the net income of a corporation there shall be allowed as a deduction "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."
The evidence in this proceeding shows that all of the petitioner's buildings were constructed or acquired by it prior to March 1, 1913; that their ages varied from 3 to 20 years at that date; and that by the year 1921 they had greatly deteriorated and were more or less obsolete for the packing business. The evidence also shows that on March 1, 1913, these buildings had a fair market value of at least $129,000, and that they had a useful life of not to exceed 20 years from that date. It is not necessary to go into a detailed discussion of the evidence on which we base our conclusion as to1928 BTA LEXIS 2985">*2989 the fair market value of the buildings, further than to say that the value we have found is established by the testimony of several witnesses, three of whom are builders or real estate men who are familiar with the buildings and with other buildings and real estate values in Shamokin. The allowance for the exhaustion, wear and tear of the buildings in question should be computed at the rate of 5 per cent on $129,000.
With regard to the depreciation on the other property used in the petitioner's business, we think the rates claimed by the petitioner are not unreasonable and should be allowed. The evidence relative to the other property used in the petitioner's business satisfies us that the useful life of the petitioner's machinery, equipment, furniture and fixtures was not to exceed 10 years, and that the useful life of its auto trucks was not to exceed 3 years. The allowance for exhaustion, wear and tear of machinery, equipment, furniture and fixtures should, therefore, be computed at the rate of 10 per cent. The allowance for the exhaustion, wear and tear of auto trucks 14 B.T.A. 345">*348 should be computed at the rate of 33 1/3 per cent. There appears to be no dispute between the1928 BTA LEXIS 2985">*2990 parties hereto as to the basis for computing the allowances for these items.
Judgment will be entered under Rule 50.