*2069 DEDUCTIONS. - The use and benefit of dredging petitioner's water front lasts for a period of three years. Held that the actual cost thereof should be spread over the three-year period in computing the deductions on account of such improvements.
*385 Petitioner's appeal alleges the determination by respondent of deficiencies in income and profits taxes in the amount of $1,558.98 for the years 1920 and 1921. Respondent has entered a special plea bar of the appeal as to the year 1920, averring that the deficiency letter appealed from shows no deficiency asserted for 1920. The 60-day deficiency letter appealed from and attached to the petition asserts a deficiency in the amount of $1,558.98 in this petitioner's income and profits taxes for the year 1921. The record discloses no deficiency for the year 1920, and the Board being without jurisdiction to hear and determine petitioner's tax liability for that year, the appeal is dismissed in so far as the year 1920 is concerned.
As to the year 1921 petitioner assigns*2070 as error the respondent's (1) disallowance of the proper and reasonable amount of depreciation; (2) inclusion in income of the amount of $800 as rents; and *386 (3) disallowance of the proration over three years of the cost of dredging a channel along its water front. Respondent has admitted the first and second assignments of error and also the facts relevant thereto as alleged in the petition.
FINDINGS OF FACT.
Petitioner is a Florida corporation engaged in the business of operating storage and terminal facilities in the harbor of Jacksonville.
During 1916 petitioner purchased a tract of land known as Commodore's Point, situated on the St. Johns River and adjacent to the City of Jacksonville. During 1916 and until April, 1917, petitioner was engaged in developing that site for storate and terminal purposes. The developments consisted of the construction of bulkheads of steel and concrete; the dredging of the river to a depth of about 30 feet or more for a distance of about 5,788 feet along the bulkheads and out to the channel of river and dumping the dredted silt, sand, and mud behind the bulkheads as a filling; the construction of paved roads and runways, storage*2071 sheds, tanks, warehouses; the laying of railroad tracks and the installation of water, drainage and sewerage systems. Petitioner capitalized the perment improvements made and in the income-tax return for the year 1921 claimed as a deduction the following depreciation on the property in use and occupancy during that year at reasonable rates based upon the character, construction, use and life of the property;
| Property | Dec. 31, 1920 - cost | Rate | Amount |
| Per cent | |||
| Bulkheads | $275,859.70 | 4 | $11,034.39 |
| Sewers and water mains | 3,935.69 | 4 | 146.78 |
| Payings and roads | 6,616.19 | 4 | 264.05 |
| Drainage system | 4,208.59 | 10 | 412.66 |
| Railroad tracks | 66,670.15 | 2 1/2 | 1,464.97 |
| Naval stores yard | 111,547.28 | 4 | 4,147.66 |
| Storage tanks | 38.629.04 | 2 1/2 | 827.46 |
| Electric trucks | 17,887.89 | 10 | 1,609.87 |
| Office building | 8.284.38 | 2 1/2 | 205.81 |
| Grain elevator | 21,013.66 | 6 | 1,260.82 |
| Grain warehouse | 17,250.70 | 5 | 431.27 |
| Garage | 920.23 | 5 | 45.10 |
| Storehouse | 717.01 | 5 | 30.26 |
| Office equipment | 2,027.27 | 10 | 177.18 |
| Warehouse No. 2 | 40,665.94 | 5 | 2,016.81 |
| Warehouse No. 3 | 32,155.46 | 5 | 1,153.18 |
| Warehouse equipment | 231.24 | 10 | 11.56 |
| Automobile | 694.44 | 25 | 86.80 |
| Additional to balance | 22,081.19 | 377.70 | |
| 671,396.05 | 25,694.93 |
*2072 Respondent disallowed $6,273.67 of the amount of claimed depreciation in determining the deficiency in question, but now admits that the rates and the amount of depreciation are correct as claimed by petitioner for the year 1921.
*387 Petitioner leased certain property and the improvements placed thereon by the lessee were, under the terms of the lease, subject to removal by the lessee at the expiration of the lease. Petitioner paid the amount of $800 to the lessee for the improvements placed on its property by the lessee and remaining thereon at the expiration of the lease. The said amount was set up on petitioner's books as a capital expense, being distributed as follows:
| Railroad tracks | $500 |
| Sewers and water mains | 500 |
| Warehouse No. 4 | 100 |
In determining the deficiency here in question, respondent has included in petitioner's income for the year 1921 the above $800 as representing an adjustment of rent received, but now admits that such amount represents a capital expenditure, which has been properly capitalized and which should not be included in income for the year 1921.
The action of the slow current of the St. Johns River, the tides from*2073 the ocean and the movements of ocean-going vessels in the river, cause a gradual but constitu deposit of silt and mud in the harbor of Jacksonville. The Federal Government maintains a 30-foot channel in the river by dredging at various periods of time, but it is necessary for the abutting property owners to maintain a sufficient depth of water for docking purposes. The silt deposit accumulates at a fairly regular rate of about a foot a year. Dock owners in Jacksonville harbor have found it both impractical and costly to attempt to remove each year a thin layer of silt which is soft and easily stirred up. They follow the practice of allowing the silt to accumulate until it is necessary to dredge to provide a sufficient depth of water for ships to tie up alongside the docks. The silt accumulates more rapidly alongside the docks than it does in the channel. Dredging operations have to be repeated regularly every three years to preserve the usefulness of the docks.
Petitioner's docks extended along the river bank for 5,788 feet in 1917 when completed, and that entire length of water front was dredged to a depth about 30 feet at that time. Without further dredging these docking*2074 facilities were used by petitioner until the summer of 1920, when dredging became necessary. The draft of most of the vessels using petitioner's docking facilities was 25 or 26 feet. The silt began accumulating as soon as the original dredging operations were completed in April, 1917, but the deposit did not hamper shipping until the summer of 1920. At that time soundings showed the fill to average a depth of 2 feet 8 inches over an area of 100 feet from the docks and a depth of about 3 1/2 feet alongside of the docks. Petitioner's engineer estimated that about 160,000 *388 cubic yards of silt and mud would have to be removed and that the cost thereof would be approximately $47,000. Petitioner further estimated that it would require about three years to complete the dredging of its entire water front, for a continuous operation of the dredges would seriously interfere with shipping.
The first contract for dredging was let to the Seaboard Dredging Co., which commenced work in September and completed the removal of 72,999 cubic yards of mud in November of 1920. The cost of those operations amounted to $23,083.40, which included $22,626.48 paid to the dredging company*2075 and $456.92 paid by petitioner for labor, teams and lumber used by it in connection with the dredging operations. That work covered only one portion of the petitioner's water front, but that same portion would not need dredging again for a period of three years.
In 1921 a second contract was let to P. Sanford Ross, Inc., which commenced dredging in July and completed the removal of about 35,000 cubic yards of mud in September of 1921. The total cost of those operations amounted to $15,981.15, which included $15,881.16 paid to the dredging company and $99.99 paid by petitioner for labor and blue prints for dredging. That work covered a second portion of petitioner's water front, which portion would not need dredging again for a period of three years.
In 1922 a third contract was let to P. Sanford Ross, Inc., which commenced work in April and completed the removal of about 42,787 cubic yards of mud in May of 1922. The total cost of those operations amounted to $15,811.77, which included $15,636.47 paid to the dredging company and $175.30 paid by petitioner for labor and blue prints. That work covered the third and last portion of petitioner's water front which portion would*2076 not need dredging again for a period of three years.
In November, 1920, petitioner set up a "Dredging Reserve" account based upon the estimated cost of dredging the entire water front over a period of three years and endeavored to prorate the cost over 1920, 1921, and 1922 by charging off proportionate parts of the cost against the reserve. The reserve account was closed out in April, 1923, and any balance remaining was carried into profit and loss.
The respondent has disallowed the deductions claimed by petitioner on account of its reserve and proration of the cost for dredging and has deducted the actual amount spent in each year for dredging as an ordinary and necessary business expense of such year.
OPINION.
TRUSSELL: In accordance with the pleadings it has been found that petitioner is entitled to a deduction in the amount of $25,694.93 on *389 account of depreciation on its various fixed assets, which is $6,273.67 more than that allowed by respondent for the year 1921.
Also, in accordance with the pleadings it has been found that the amount of $800 should be eliminated from petitioner's taxable income for 1921 as determined by respondent, such amount representing*2077 a capital expenditure and not income.
The only question in issue in the proceeding at bar is with respect to the proper deduction for the year 1921 on account of dredging petitioner's water front. The evidence establishes that the use and benefit derived from the dredging operations lasts for a period of three years and we are of the opinion that the result of the dredging operations is in the nature of a capital improvement having a useful life of three years and that the actual cost thereof should be charged off over that period. Petitioner has used the estimated cost as the basis for its claimed deductions and respondent has allowed a deduction of the actual amount spent in each year as an expense. We believe both parties are wrong. Petitioner expended $23,083.40 in 1920 and $15,981.15 in 1921 for dredging, which cost should be spread over a period of three years, the life of the improvement. It is our opinion that for the year 1921 petitioner is entitled to deduct on account of dredging, one-third of $23,083.40, or $7,671.13, and one-third of $15,981.15, or $5,327.05, making a total deduction of $12,998.18.
Judgment will be entered pursuant to Rule 50.