*2629 DEPLETION AND DEPRECIATION. - A composite depletion and depreciation unit per ton of coal mined each year determined as a basis for deduction for exhaustion, wear and tear.
LIABILITY FOR DAMAGES. - Petitioner admitted liability for damages resulting from a wreck of railroad cars in 1921 and accrued the amount of such admitted damages as an expense for said year. The claims were settled in the following year for an amount less than the accrual. Held, that the difference between the amount accrued and the amount of settlement should be restored to income for the year in which the accrual was claimed.
REPAIR EXPENSE. - That portion of an accrued reserve for incidental expenses which was actually expended during the year for repairs and repair parts determined and allowed as a deduction.
*281 In this proceeding the petitioner seeks a redetermination of its income-tax liability for the years 1921 and 1922 for which the Commissioner has determined deficiencies of $192.39 and $1,071.30, respectively. The petitioner alleges error on the part of the*2630 Commissioner (1) in failing to allow adequate deduction for depreciation and depletion, (2) in charging to income in 1922 the sum of $1,875.60, (3) in disallowing a deduction of $5,531.45 as expense in the year 1922.
FINDINGS OF FACT.
The petitioner is a corporation organized in 1918 under the laws of the State of Ohio with its principal place of business in the City of Steubenville. During the years 1919 to 1924, inclusive, it was engaged in the business of producing coal by what is known as the "stripping process."
The following schedule shows the dates and amounts paid for property and equipment acquired.
| Year | Land | Machinery | Houses | Furniture |
| 1918 | $80,035.25 | $60,081.52 | $5,204.73 | $361.03 |
| 1919 | 172,440.18 | 164.50 | ||
| 1920 | 5,329.00 | 8,951.64 | 3,752.16 | 584.30 |
| 1921 | 731.75 | |||
| 1922 | 14,050.00 | 14,708.87 | ||
| 1923 | 1,217.70 | 43.20 | ||
| 99,414.25 | 258,131.66 | 8,956.89 | 1,153.03 |
Total of all classes, $367,655.83.
Coal was produced from the property as follows:
| Year | Tons |
| 1918 | None. |
| 1919 | 40,208 |
| 1920 | 108,512 |
| 1921 | 83,196 |
| 1922 | 97,634 |
| 1923 | 64,920 |
| 1924 | 242 |
| Total | 394,712 |
In April, 1922, the petitioner in conference*2631 with the Engineering Division of the Income Tax Unit of the Bureau of Internal Revenue, estimated a total recoverable tonnage of 350,000 tons and agreed upon a combined depletion and depreciation rate of 70 cents a ton. This rate was allowed for the years 1919 and 1920.
*282 The coal land purchased in 1922 was estimated at the time to contain 53,000 tons of recoverable coal.
In the earlier years of the operation of the petitioner an estimate of salvage upon its property and equipment was made in the amount of $60,000. Later, and after mining operations had ceased, the actual salvage was found to be $40,950,63 and the total number of tons of coal actually mined during all the years of operation was 394,712 tons.
The combined depreciation and depletion rate for the year 1921 is 95.672 cents a ton and the total allowable deduction is $79,601.27.
The combined depreciation and depletion rate for the year 1922 is 87.066 cents a ton and the total allowable deduction is $85,005.91.
On May 19, 1921, a wreck occurred on the petitioner's property, in which several railroad cars were damaged. The petitioner was liable for such damage under its contract with the railroad*2632 company. The petitioner admitted the liability in 1921, and placed upon its books as an accrued liability for the damage an amount of $4,158.39, of which amount $3,800 represented an estimate of the cost of repairing the cars, and $358.39 represented the charge for the use of a wrecking crew provided by the railroad company. On February 6, 1922, a payment was made of $1,924.40 on the car repair account and on April 9, 1923, a payment in final settlement was made of $1,212.30, a total of $3,136.70. The entire amount of $4,158.39 was taken as a deduction in 1921.
The petitioner's practice was to set up a contingent reserve of 10 cents a ton each year to take care of various extraordinary expenses. For the year 1922 an amount of $9,762.48 was included in this reserve. Of this amount $5,531.45 was spent during the year 1922 for various repairs and repair parts.
The amount of $5,531.45 is an ordinary and necessary expense for the year 1922 and allowable as a deduction for that year.
OPINION.
TRUSSELL: The record of this action shows that during the year 1922 the petitioner in accord with its usual custom accrued upon its books an amount equivalent to 10 cents per ton of*2633 coal mined as a reserve to take care of expenses which could not be anticipated in advance. During that same year it charged against this fund $5,531.45 actually expended for labor and material used in making repairs and purchasing repair parts for its mining equipment. This amount of $5,531.45 is an allowable deduction for the year 1922.
The sum of $4,158.39 was accrued upon the petitioner's books in the year 1921 as the probable amount of expense and damage resulting from the wrecking of several railroad cars and was a proper *283 accruable expense of operations during that year. Of this amount $358.59 was paid during the year for the use of a wrecking crew furnished by the railroad company. On February 6, 1922, a further payment on account of damages to the railroad cars in the amount of $1,924.40 was made and on April 9 the whole matter was adjusted and settled with the additional payment of $1,212.30, thus all the cost and expenses borne by the petitioner on account of the first mentioned accrual was settled for $3,495.09. The difference between this amount and the original accrual, $663.30, should be restored to income for the year 1921 and no amount growing out*2634 of this situation should be reflected in the petitioner's accounts for the year 1922.
Up to the close of the year 1920, petitioner had acquired mining properties and equipment at a cost of $336,904.31. It had estimated that the original coal content of its lands was 350,000 tons and that when mining operations would cease the salvage of its properties would be $60,000. Mining operations began in the year 1919 and for that year and the year 1920 its income and profits-tax returns have been settled and are not here in question. During those years it mined 148,720 tons of coal, and was allowed combined depletion and depreciation deductions for the two years in the amount of $104,104. In arriving at its adjustment for depletion and depreciation for the years 1919 and 1920, it had reduced the cost of its mining properties and equipment by the amount of the estimated salvage, $60,000. Later it developed that this estimated salvage was excessive, and that the true salvage was $40,950.63. On January 1, 1921, after having made adjustments for corrected estimate of salvage the unexhausted cost of mining properties and equipment was $192.581.43. The estimated recoverable coal remaining*2635 in the ground on that date was 201,280 tons. The unit for a composite depletion and depreciation deduction for the year 1921 was therefore found to be 95.672 cents, and the allowable deduction found by applying that unit to the 83,196 tons of coal mined is $79,601.27.
During the year 1922, the petitioner acquired additional coal lands costing $14,050, and additional machinery equipment costing $14,708.87. The new lands acquired were estimated to have a coal content of 53,000 tons. The unexhausted cost of property and equipment for the year 1922 is $141,739.03; the amount of recoverable coal on January 1, 1922, found by adding the 53,000 tons contained in the new land acquired and adjusted to correct the estimate in accordance with the actual tons mined resulted in a then coal content of 162,796 tons. The combined unit for depletion and depreciation for the year 1922 is thus found to be 87.066 cents and this unit applied to 97,634 tons of coal mined in that year produces an allowable deduction of $85,005.91.
*284 Carrying this computation through to the close of the petitioner's business when its mine was exhausted, we find that the allowance for exhaustion for the*2636 year 1923, when 64,920 tons of coal were mined, would be $57,778.15, and for the year 1924 when 242 tons of coal were mined and mining operations ceased the deduction for depletion and depreciation would be $215.87, and summarizing the entire operations of this petitioner, it appears that the total cost of its properties and equipment throughout the period of its operations was $367,655.83; that the petitioner recovered through salvage $40,950.63; that the amount recoverable through depletion and depreciation exhaustion is $326,705.20; that the amount recovered by depletion and depreciation deductions will appear as follows:
| For the two years of 1919 and 1920 | $104,104.00 |
| For the year 1921 | 79,501.27 |
| For the year 1922 | 85,005.91 |
| For the year 1923 | 57,778.15 |
| For the year 1924 | 215.87 |
| Total | 326,705.20 |
The petitioner's liability to income and profits taxes for the years 1921 and 1922 should be recomputed in accordance with the foregoing findings of fact and opinion.
Reviewed by the Board.
Judgment will be entered upon 15 days' notice, pursuant to Rule 50.