*1374 1. Held, that petitioner has failed to show that the respondent erred in computing the deduction to which petitioner is entitled on account of depreciation of its machinery.
2. Held, further, that petitioner has failed to prove that it is entitled to special assessment.
*80 This is a proceeding for the redetermination of asserted deficiencies in income and profits taxes for the years 1920 and 1921 in the respective amounts of $9,318 and $7,303.94.
It is alleged that the respondent erred in failing to allow additional depreciation claimed by petitioner on account of overtime operations of its machinery and equipment in the year 1920 and for the first two months in the year 1921, and that he also erred in refusing to allow petitioner special assessment. At the hearing counsel for petitioner abandoned the assignment of error relating to deductions for exhaustion in so far as it applies to the year 1921.
The hearing upon the issue of special assessment was limited to proof as to abnormal conditions affecting petitioner's income or invested capital.
*1375 FINDINGS OF FACT.
The petitioner is a New York corporation, organized in 1902, and its principal office is in Hornell, New York. It is in the business of manufacturing silk and cotton cloth from which gloves are made.
At the time of its organization the total capitalization of petitioner was 500 shares of stock of $100 par value each. The capitalization of petitioner was increased on February 6, 1909, from $50,000 to $300,000, and about $250,000 was taken out of surplus. On January 12, 1914, sanction was given to increase the capitalization of petitioner to $1,000,000, but only $640,000 in stock was issued. This was a stock dividend. *81 When the petitioner was organized, Fredrick P. Merrill was its treasurer and general manager. He and three others constituted the reasurer and general manager. He and three others constituted the board of directors. On September 29, 1902, which was the date of the first meeting of the petitioner, certain by-laws were adopted, which provided in part as follows:
The Treasurer shall have the care and custody of all the funds and securities of the corporation and deposit same in the name of the corporation at such bank or banks*1376 as he may elect. He shall sign all checks, give and approve orders and contracts for the payment of money and all conveyances. The Treasurer shall have authority to make all contracts that the Board of Directors might make for said company, and shall have general power as a committee of one representing the Board of Directors to do any and all acts that they might do in relation to contracts or notes, but he shall report the liabilities created to the Board of Directors at their next annual meeting, whether general or special if required to do so at such meeting by the Board of Directors.
In the absence of the Treasurer he may designate some other person to sign checks temporarily but not to make contracts.
These provisions of the by-laws were not changed from the time of their adoption until Merrill's connection with the company was severed.
By resolution of August 18, 1903, Merrill was voted a salary of $10,000 a year as treasurer and general manager. On July 5, 1906, it was increased to $12,000 and remained at that figure until his death on December 14, 1920. None of the other officers received salaries.
The petitioner declared dividends in the following percentages*1377 of its existing capitalization on the following dates:
| July 5, 1906 | 50 per cent. |
| July 5, 1907 | 50 per cent. |
| Aug. 1, 1907 | 50 per cent, and 20 per cent monthly from Sept. 1, |
| 1907, to June 1, 1908, inclusive. | |
| July 6, 1908 | 50 per cent. |
| Aug. 1, 1908 | 50 per cent, and 20 per cent monthly from Sept. 8, |
| 1908, to June 1, 1909. | |
| Sept. 25, 1910 | 5 per cent. (Petitioner's interest-bearing notes |
| given for the dividends.) | |
| Jan. 22, 1912 | 5 per cent. (Notes.) |
| July 1, 1912 | 5 per cent. (Notes.) |
| Jan. 23, 1913 | 21 per cent. |
| Jan. 12, 1914 | 10 per cent in cash and 100 per cent stock dividend. |
| Jan. 11, 1915 | 16 per cent. |
| Jan. 8, 1917 | 1 1/2 per cent monthly for 12 months. |
| Jan. 8, 1918 | 8 per cent. |
| Feb. 3, 1919 | 18 per cent. |
| Jan. 12, 1920 | 18 per cent. |
Each time that a dividend was declared the amount thereof had been earned. The notes which were given for dividends were always paid at the due dates.
Frederick P. Merrill always had unrestricted authority in the management of petitioner's affairs. On January 10, 1921, the estate of Frederick P. Merrill owned 1,980 shares out of the total of 6,400 shares of petitioner's outstanding stock. His sister, *1378 Inez Merrill, *82 held 1,620 shares and his wife owned 540 shares. W. M. Field owned 600 shares; Wm. M. Geary, 45 shares; Mary Anne Merrill, his daughter, 1 share; D. L. McDowell, 150 shares; and B. C. Dewitt, 60 shares.
About 1920 Frederick P. Merrill defaulted funds of the petitioner in the approximate amount of $173,000. At or about the time of this defalcation some sheets of petitioner's purchase journal records, which showed the allocation to various accounts of amounts disbursed by petitioner, were destroyed. These records which were destroyed contained information which it would have been necessary to refer to in determining how the disbursements were made.
In 1908 the petitioner built an addition to its plant at Dunkirk and charged the cost thereof to expense. This building was practically a duplication of a building which petitioner already had located at Dunkirk, the cost of which had been charged to capital. Petitioner has now no records to support its claim that the cost of the second building at Dunkirk was charged to expense.
In 1907 and 1908 the Hornell Machine Company, which was owned by the petitioner, manufactured knitting machines for the petitioner. *1379 These machines included certain tricot and milanese machines. Those machines are still in use by the petitioner. They have been constantly used when they were in condition to be operated. Prior to 1907 and 1908 the petitioner had about four milanese machines and five tricot machines. After 1908 no new machines were manufactured, but the old machines were rebuilt and repaired. All of the machines in use by the petitioner in 1920 had been in operation since 1908 or longer, except when they were shut down for rebuilding or repairs. In 1917 the tricot machines were rebuilt, changing them from silk machines to cotton machines. Prior to 1917 there were no structural changes in the machines. There were, however, certain repairs and renewals necessary to be made every year on the machines. At one time these machines had individual drives, and then they were changed so as to have a belt drive. Later they were changed from a belt drive to an individual drive and still later from an individual drive to a belt drive again. They were operated by electricity.
The petitioner's factory contains a steam boiler plant for heat, light, and power purposes. The steam boiler plant was put*1380 in after 1907 and is still being used.
In 1917, 1918, 1919, and 1920 petitioner had 14 milanese machines and 25 tricot machines. Four of the tricot and five of the milanese machines had been purchased in 1903 from the Hosiery Machine Company in Nottingham, England. Those machines are still in operation, having been rebuilt.
*83 For a number of years needles and parts were charged to repairs and then petitioner commenced the policy of building and rebuilding and costs of the same were also charged to repairs. When a machine was rebuilt, it was brought up to its first efficiency. A machine so treated has an almost indefinite life.
On petitioner's return for the year 1920, under the heading "deductions," there is an item of $18,193.36, labeled "Repair, including labor, supplies, etc." That represented the cost of changing certain tricot machines from using cotton back to using silk. The changes made in these machines resulted in practically making new machines.
The petitioner had done more or less night work straight through from 1909 to the present time. The extent of such night work was not always the same each year. There was considerable night work during*1381 the war period after 1917. However, there was more night work prior to that time. That night work kept up until and through 1920. The petitioner's normal operation from 1906 through 1920 was during both day and night. Ten hours per day and 12 hours per night constituted the normal operation of the plant.
The petitioner found it necessary to employ borrowed capital in its business. The following shows the monthly balances of the notes payable in 1920, representing such borrowed capital:
| January 1 | $278,917.03 |
| February 1 | 295,650.53 |
| March 1 | 207,745.65 |
| April 1 | 220,616.84 |
| May 1 | 208,208.69 |
| June 1 | 241,656.13 |
| July 1 | 219,585.93 |
| August 1 | 219,585.93 |
| September 1 | 196,772.20 |
| October 1 | 116,179.54 |
| November 1 | 150,000.00 |
| December 1 | 240,097.23 |
| Average per month | $216,251.31 |
The monthly average of borrowed capital was about the same during 1921. The balance at January 1, 1921, of notes payable was $165,097.23; at February 1, 1921, it was $140,097.23, and at March 1, 1921 it was $140,097.23.
The net income reported on the return for 1920 was in the amount of $372,357.96, and was increased to $398,799.96 in the notice of deficiency dated April 20, 1928. *1382 The invested capital reported on the return for 1920 was in the amount of $1,186,950.46 the was adjusted in the notice of deficiency to $1,232,690.93.
The net income reported on the return for 1921 was in the amount of $205,917.05 and was increased to $236,311.44 in the notice of deficiency dated April 20, 1928. The invested capital shown on books for 1921 was in the amount of $1,275,400.62 and was adjusted in the notice of deficiency to $1,329,074.27.
The respondent allowed the petitioner deductions for depreciation upon machinery and tools at the rate of 10 per cent in 1920. In the deficiency letter the respondent disallowed as an additional deduction *84 the amount of $6,953.16, representing 6 per cent additional on machinery claimed by petitioner for overtime work in 1920. The total amount of the depreciation allowed by the respondent as a deduction in 1920 was $34,309.56.
OPINION.
MCMAHON: The respondent has allowed the petitioner a deduction for depreciation of its machinery in the year 1920 at the rate of 10 per cent. Petitioner contends that it is entitled to an additional 6 per cent depreciation because the machinery was operated overtime at night. It*1383 is petitioner's contention that the rate of 10 per cent which respondent has allowed represents the depreciation sustained by the machinery for operation for 10 hours during the daytime. Petitioner contends that its normal operation of machinery was ten hours per day, but that the night operations in 1920 constituted extra operations entitling petitioner to additional depreciation. However, the evidence discloses that from 1906 through 1920 it was normal for petitioner to operate its machinery both day and night and that ten hours per day and twelve hours per night constituted the normal operation of the plant. There is no evidence to show that the respondent did not take into consideration the night operations in arriving at the rate of depreciation, and since the petitioner has not furnished us with any evidence from which we can determine that the respondent's determination is erroneous, such determination must be approved. See , wherein it is held that the burden is upon petitioner to prove all the elements necessary for the Board to determine a reasonable allowance was depreciation. Furthermore, there is considerable*1384 evidence to support the view that the rate of depreciation allowed by the respondent is reasonable.
The petitioner contends that for the years 1920 and 1921, the respondent erred in refusing to compute petitioner's tax in the manner specified in section 328 of the Revenue Acts of 1918 and 1921.
It is the contention of the petitioner that there were four abnormal conditions affecting its income and capital which bring it within the provisions of section 327 of the Revenue Acts of 1918 and 1921 as follows: (1) Petitioner was practically a one-man concern, its treasurer and general manager having complete control and management of its affairs, and he and the members of his immediate family owned the controlling interest in its capital stock; (2) no salaries were paid to any of the petitioner's officers except to the treasurer and general manager, who received as high as $12,000 per year; (3) that an unusually large percentage of petitioner's working capital was borrowed; and (4) that certain of petitioner's records were destroyed *85 which would have shown that amounts were charged to expense which should have been charged to capital account and that now it is unable to prove*1385 this by its records.
There is no proof to show that the first alleged circumstance was abnormal in the type of business in which petitioner was engaged, and there is no basis for holding that petitioner is entitled to special assessment upon this ground.
The second and third points upon which the petitioner relies are not sufficient to entitle petitioner to special assessment because there was no showing that either the salary paid by the petitioner (see ; ; and ), or the amount of borrowed capital which it employed (see ; , and ), was abnormal in the character of business in which the petitioner was engaged.
We turn next to the petitioner's fourth alleged abnormal condition. To entitle it to special assessment, the burden is upon the taxpayer to show that abnormal conditions existed affecting its capital or income. *1386 . Here petitioner is contending that the inability to show such abnormalities is itself an abnormality entitling it to special assessment. We do not consider the contention sound.
D. L. McDowell, secretary of the petitioner, testified that in 1908 the petitioner built an addition to its plant at Dunkirk and that the cost thereof was charged to expense. It has not been shown by the petitioner that the amount paid for this addition can not now be determined and restored to invested capital. In this state of the evidence the petitioner has not shown any right to special assessment upon this ground, ; ; , and ; affirmed in . The case of , cited by petitioner is not in point. In that case it was shown that it was entirely impracticable to determine the amounts that should have been included in invested capital.
*1387 McDowell testified that, if the various items of capital expenditures which were charged to expense had been properly charged to capital account, the petitioner's tax would have been reduced. However, we can not accept this ultimate conclusion of the witness. We do not know from the evidence whether the amounts not reflected in invested capital are substantial or relatively small, or whether their absence from invested capital would work upon petitioner an exceptional *86 hardship evidenced by gross disproportuin between its tax computed in the ordinary manner and that computed by reference to representative corporations. See ; ; and .
Nor does an aggregate of a number of conditions, each enadequate in itself, necessarily constitute a cause for special assessment. .
We hold that petitioner has failed to show that there were abnormalities affecting its income and invested capital within the meaning of the statute, and hence has failed to show its right*1388 to special assessment.
Judgment will be entered for the respondent.