*3066 Denial of obsolescence deduction approved where depreciated cost of assets abandoned is not segregated from that of assets not abandoned.
*1268 This is a proceeding for the redetermination of deficiencies in income tax for the calendar years 1919 and 1920 amounting to $181.20 for 1919 and $4,152.74 for the year 1920. The petitioner alleged that the Commissioner erred in failing to allow its claim for obsolescence of plant and equipment.
*1269 FINDINGS OF FACT.
The petitioner is a corporation organized in 1900 under the laws of the State of Indiana. Its plant was located at Vincennes, Ind. During the years in question the output of its factory was the result of hand methods. These methods were gradually supplanted by a process which did away with the necessity for hand labor in the various intermediate processes involved in the manufacture of window glass and produced absolutely flat uniform glass. The process in question had its origin in various Belgian inventions which were being worked on as early*3067 as 1913. There was also an American patent which was sold at a receiver's sale in 1914. The American patent was only partially successful but was brought to complete success during 1915 and 1916, and operations under such patent started in the fall of 1917. The petitioner withstood the extraordinary competition due to the introduction of the new processes for a considerable period of time, but in 1920 Bastin, its secretary, treasurer and general manager, realized that the hand-blown method of producing window glass was doomed to extinction. In September, 1921, the petitioner acquired the rights to use the Belgian machines and in 1922 it commenced building new units for the use of the improved machines. Its actual production of glass under the new process commenced in the spring of 1924. The hand-blown plant ceased to operate in 1922. The sale of hand-blown glass, however, had started to decrease in 1920.
Since 1922 the main building which housed the old plant has ceased to be used. After the installation of the new units the old machinery was still housed in the building but the salvage value of this machinery was so slight that it was not sufficient to offset the cost of*3068 removal. The main building in which such machinery remained, however, was not allowed to go to destruction but its roof was painted and kept in condition. Another one of the old buildings was used for the storage of the hand-blown glass which the petitioner had been unable to dispose of.
The taxpayer took no deduction on account of obsolescence for the calendar year 1918 and no decision was reached to charge off obsolescence at that time. The same condition prevails for the calendar year 1919. In the 1920 return, however, obsolescence was charged at the rate of 15 per cent.
Counsel for the petitioner and the general counsel entered into a stipulation of which the following is a copy:
1. The depreciated cost of the old buildings and equipment constituting the old plant of the appellant which it used in the producing of window glass by the hand blown method, at January 1, 1918, was $58,552.62.
*1270 2. The said $58,552.62 does not include the cost of a new brick building erected by the appellant during the years 1917 and 1918, which was built for a warehouse, and on which appellant is not claiming obsolescence.
3. The cost of said brick warehouse building*3069 was $16,557.95, of which $14,430.05 was expended in 1917 and $2,127.90 in 1918. The rate of 2% per annum for depreciation on this new building is agreed upon by the parties and is not in dispute.
4. The Commissioner, in determining the tax liability of the petitioner for the years 1919-1920, allowed depreciation of 5% on the buildings comprising the old plant and 10% on the equipment therein resulting in the following allowances for depreciation:
For 1919, on buildings, $934.77, on equipment, $4,673.84
Total $5,608.61
For 1920, on buildings, $1,067.74, on equipment, $5,338.70
Total $6,406.44
5. The following represents the cost of additions to equipment since January 1, 1918:
| 1919 | $923.06 |
| 1920 | 13,297.07 |
| 1921 | 106.32 |
6. The parties further agree that the Board does not have jurisdiction over the 1918 year, as an overassessment is disclosed by the deficiency letter forming the basis of this appeal.
OPINION.
MURDOCK: The only issue in this proceeding involves the right of the petitioner to take an allowance for the years 1919 and 1920 by reason of the obsolescence of its plant. There is no question from the evidence that revolutionary changes*3070 in the window glass business to which the petitioner was exclusively devoting itself were gradually taking place over a long period of years.
It is also clear that the machinery utilized in the manufacture of hand-blown glass had been entirely abandoned and that any salvage value which it might have would be offset by the cost of removal. The petitioner, however, has not shown what the depreciated cost of the abandoned machinery was. The main building of the old plant, which contained the blowing room, had evidently not been abandoned by the petitioner, since it is shown that the roof had been kept in repair. This indicates to our minds that the building was regarded by the petitioner as having some potential value in the future although it ceased to be used when the new plant was erected. Had it been the petitioner's intention entirely to abandon the building in question it would have been allowed to lapse into a state of complete disrepair. As we said in the case of , "Until the investment is converted into terms of money by sale or other disposition or its worthlessness otherwise *1271 demonstrated, there is*3071 neither loss nor gain and income is neither greater nor less." See also .
In the instant case we are confronted with the impossibility of separating assets obviously abandoned form those clearly not yet abandoned. The petitioner has not separated the depreciated cost of machinery from that of the buildings and since the latter must be held to be assets upon which no obsolescence can be allowed, we are not in a position to allow obsolescence for the machinery, the depreciated cost of which is unknown to us.
Judgment will be entered under Rule 50.