*1591 Under the Revenue Act of 1921, held, the basis to be used for the fiscal year ended March 31, 1923, in the computation of depreciation on new vessels acquired and paid for in part with a replacement fund, established as a result of the involuntary conversion of certain other vessels, is the depreciated cost of the old vessels on the date of conversion, plus the cost of the new vessels over and above the amount of the replacement fund.
*817 The Commissioner determined a deficiency in income tax of $230.68 for the fiscal year ended March 31, 1923. The petitioner filed a claim for refund for the same period in the amount of $2,743.09, which the Commissioner rejected.
The question in issue is whether the Commissioner erred in his determination of a base for allowable depreciation on certain vessels, there being no dispute as to the rate. The Commissioner insists that *818 the basis to be used in the computation of depreciation on the new vessels is the depreciated cost*1592 of the old vessels on the date of their conversion, plus the sum paid for the new vessels over and above the amount of the replacement fund.
The petitioner contends that the sum to be used as the basis for the determination of depreciation allowances is, under the Revenue Act of 1921, in the case of property acquired after March 1, 1913, as in the instant case, the sum paid for the same (here the new vessels), including the full amount of the replacement fund.
The case is submitted on the pleadings, stipulation and exhibits.
FINDINGS OF FACT.
1. The petitioner is a Massachusetts corporation, with its principal place of business in Taunton, Mass.
2. The petitioner, as the principal reporting company, filed a consolidated return of net income for the fiscal year ended March 31, 1923, reporting its net income and that of the following companies:
Atlantic Coal Company of Massachusetts.
Staples Coal Company of Taunton.
Staples Coal Company of Fall River.
Staples Coal Company of Rhode Island.
Staples Transportation Company.
Staples Transportation Company of Massachusetts.
The petitioner has agreed to pay all tax on the consolidated net income of the said*1593 companies for the said fiscal year, and all refunds are to be made to it, and all additional tax to be paid by it.
3. The Staples Transportation Company purchased certain vessels at the times and for the prices stated below, and owned and operated said vessels during the entire year ended March 31, 1923:
| Vessel | Date put in service | Purchase price |
| Barge Whitehead | November, 1919 | $70,000.00 |
| Barge Barnstable | June, 1921 | 178,606.80 |
| Barge Bourne | July, 1921 | 178,609.10 |
| Tug Wellfleet | December, 1921 | 230,051.56 |
4. The sums so paid for said vessels consisted in part of replacement funds duly established with proceeds of the involuntary conversion of vessels owned by the said Staples Transportation Company, the replacement funds and the additional cost of the new vessels being as follows:
| New vessel | Purchase | From replacement | Additional |
| price | funds | cost | |
| Barge Whitehead | $70,000.00 | $57,429.39 | $12,570.61 |
| Barge Barnstable | 178,606.80 | 177,461.93 | 1,144.87 |
| Barge Bourne | 178,609.10 | 177,461.94 | 1,147.16 |
| Tug Wellfleet | 230,051.56 | 230,051.56 |
*819 5. The consolidated net income of petitioner and said subsidiaries*1594 for the year ended March 31, 1923, has been determined by the Commissioner to be $291,194.87. In computing this net income, deduction of $9,073.23 for depreciation on the said new vessels has been allowed, computed as follows:
| Vessel | Base | Rate | Decreciation |
| Per cent | |||
| Barge Whitehead | $41,934.56 | 5 | $2,096.73 |
| Barge Barnstable | 49,153.78 | 5 | 2,457.69 |
| Barge Bourne | 49,156.08 | 5 | 2,457.80 |
| Tug Wellfleet | 41,220.13 | 5 | 2,061.01 |
| 9,073.23 |
6. The base for depreciation, as stated in five above, was determined by the Commissioner in accordance with G.C.M. 2826, C.B. VII-1, p. 234, by taking, in the case of each vessel, the depreciated cost of the old vessel which it had replaced, as follows:
| Whitehead | ||
| Vessels replaced by Whitehead | Depreciated cost of vessels replaced | Proceeds, replacement fund |
| Foster | $13,337.76 | $17,793.84 |
| Berkley | 12,001.19 | 29,806.55 |
| Dighton | 4,025.00 | 9,829.00 |
| Total | 29,363.95 | 57,429.39 |
| Depreciated cost of replaced vessels at the date of conversion | $29,363.95 |
| Additional cost | 12,570.61 |
| Commissioner's depreciation base (paragraph 5) | 41,934.56 |
| Wellfleet | ||
| Vessels replaced by Wellfleet | Deprediated cost of vessels replaced | Proceeds, replacement fund |
| Concord | $44,853.56 | $250,329.85 |
| Depreciated cost of replaced vessel at date of conversion | $44,853.56 |
| Cost of Wellfleet | 230,051.56 |
| Amount in replacement fund | 250,329.85 |
| Excess used in purchase of Barnstable and Bourne | 20,278.20 |
| Depreciation base used by Commissioner | |
| $230,051.56/250,329.85 X $44,853.56 = | 41,220.13 |
| Barnstable and Bourne | ||
| Vessels replaced by Barnstable and Bourne | Depreciated cost of vessels replaced | Proceeds, replacement fund |
| Balance of Concord | $3,633.43 | $20,278.29 |
| Cuba | 68,893.00 | 259,680.58 |
| Winthrop | 14,594.00 | 40,000.00 |
| Gibson | 8,897.40 | 34,965.00 |
| Total | 96,017.83 | 354,923.87 |
| Depreciated cost of replaced vessels at date of conversion | $96,017.83 | |
| Cost of Barnstable | $178,606.80 | |
| Cost of Bourne | 178,609.10 | |
| Total | 357,215.00 | |
| Amount in replacement fund | 354,923.87 | |
| Excess (additional cost) | 2,292.03 | |
| Total depreciation base for vessels Barnstable and Bourne | 98,309.86 | |
| Depreciation base apportioned on basis of cost - | ||
| Barnstable, $178,606.80/357,215.90$98X,309.86= | 49,153.78 | |
| Bourne, $178,609.10/357,215.90 X $98,309.86 = | 49,156.08 |
*820 The petitioner acquired the vessels Whitehead, Barnstable, Bourne*1596 and Wellfleet as a result of the involuntary conversion of certain other tugs and barges (hereinbefore mentioned), which were disposed of prior to January 1, 1921, due to loss by fire or shipwreck or seizure by the United States Government. In replacing the vessels originally held, the petitioner expended the funds acquired at the time of conversion, plus certain additional amounts.
7. The Staples Transportation Company on May 31, 1923, credited the asset accounts on its books for the said Whitehead, Barnstable, Bourne and Wellfleet with amounts in excess of the depreciation claims for the year ended March 31, 1923, which depreciation claim is af follows:
| Depreciation | |
| Whitehead, 5% of $70,000.00 | $3,500.00 |
| Barnstable, 5% of $178,606.80 | 8,930.34 |
| Bourne, 5% of $178,609.10 | 8,930.46 |
| Wellfleet, 5% of $230,051.56 | 11,502.58 |
| 32,863.38 |
*821 8. It is agreed that each of the said new vessels, namely, the barges Whitehead, Barnstable, and Bourne, and the tug Wellfleet, have a lifeof 20 years and that the proper rate of depreciation of said vessels during the year ended March 31, 1923, is 5 per cent.
9. The tax assessed the*1597 petitioner on account of the consolidated net income of said affiliated corporations for the year ending March 31, 1923, amounted to $36,168.68.
The tax assessed, as indicated, was paid as follows:
| June 15, 1923 | $9,071.81 |
| September 15, 1923 | 9,012.53 |
| December 15, 1923 | 9,042.17 |
| March 11, 1924 | 9,042.17 |
| Total | 36,168.68 |
A claim for refund in the amount of $2,743.09 was filed by the petitioner in June, 1927, and was rejected by the Commissioner in December, 1927.
OPINION.
SEAWALL: It is stipulated that in the instant case the base for depreciation was determined by the Commissioner in accordance with G.C.M. 2826, C.B. VII-1, p. 234, by taking, in the case of each vessel, the depreciated cost of the old vessel which it had replaced, plus the sum paid for the new vessel over and above the amount of the replacement fund. The contention of the petitioner is that the basis should be the entire sum paid for the new vessel, including the full amount of the replacement fund. The fiscal year involved ended March 31, 1923. The applicable law is found in the Revenue Act of 1921, the pertinent provisions of which read as follows:
*1598 SEC. 202. (d)(2) Where property is compulsorily or involuntarily converted into cash or its equivalent in the manner described in paragraph (12) of subdivision (a) of section 214 and paragraph (14) of subdivision (a) of section 234, and the taxpayer proceeds in good faith to expend or set aside theproceeds of such conversion in the form and in the manner therein provided, the property acquired shall, for the purpose of this section, be treated astaking the place of a like proportion of the property converted.
SEC. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
* * *
(7) 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;
* * *
*822 (14) If property is compulsorily or involuntarily converted into cash or its equivalent as a result of (A) its destruction in whole or in part, (B) theft or seizure, or (C) an exercise*1599 of the power of requisition or condemnation, or the threat or imminence thereof; and if the taxpayer proceeds forthwithin good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, to expend the proceeds of such conversion in the acquisition of other property of a character similar or related in service or use to the property so converted, or in the acquisition of 80 per centum or more of the stock or shares of a corporation owning such other property, or in the establishment of a replacement fund, then there shall be allowed as a deduction such portion of the gain derived as the portion of the proceeds so expended bears to the entire proceeds. The provisions of this paragraph prescribing the conditions under which a deduction may be taken in respect of the proceeds or gains derived from the compulsory or involuntary conversion of property into cash or its equivalent, shall apply so far as may be practicable to the exemption or exclusion of such proceeds or gains from gross income under prior income, war-profits and excess-profits tax Acts.
The evidence shows that the petitioner acquired certain vessels as a result of involuntary conversion*1600 of other vessels. To replace the vessels originally held, the petitioner expended the funds acquired at the time of the conversion, plus certain additional amounts, and now contends that the actual cost of the newly acquired vessels should be used as the depreciation base in accordance with the decision in National Grocer Co.,1 B.T.A. 688">1 B.T.A. 688.
There was a question of invested capital involved in the case of National Grocer Co., supra, which distinguishes it from the instant case, and the decision in the former case should not be considered as controlling in the latter.
The petitioner insists that section 202 of the 1921 Revenue Act has no application in the instant case; that it deals solely with the matter of gain derived or loss sustained from sales or other disposition of property and has nothing to do with depreciation as considered in the instant case. It is true section 202(d)(2) of said act provides specifically only for the basis in determining gain or loss, but the provisions of that section may nevertheless be considered in determining what is a reasonable allowance for depreciation, section 234(a)(7) of said act providing that in computing*1601 the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions "a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence."
In its statement of the changes made in the Revenue Act of 1921 by H.R. 6715 and the reasons therefor the Committee on Finance of the United States Senate said, in regard to section 204(c) of the RevenueAct of 1924:
(9) The first part of subdivision (c) of the bill, that is, the part preceding an exception, does not correspond to any provision of the existing law, but is *823 the same as the interpretation placed upon the existing law by the Department. It provides that the basis of computing depreciation and depletion shall be the same as the basis of computing gain or loss from the sale of property, and represents what is obviously the correct rule, since the theory in setting a basis for depreciation and depletion is the same as in setting one for determining gain or loss from the sale; that is, to insure a taxpayer a return of his capital free from tax. [Italics supplied.]
The question we are considering, *1602 it is true, arises under the Revenue Act of 1921 and not under the 1924 Act. The statement made by the Finance Committee, however, and the subsequent enactment by Congress of section 204(c) of the 1924 Act, were a recognition of the correctness and justice of the interpretation placed upon the then existing law by the Treasury Department and such should not be lightly regarded. Ordinarily, the basis for determining gain or loss is cost less depreciation sustained.
In the instant case, the respondent adopted cost less depreciation to date of conversion on the old vessels as the proper basis for depreciation purposes. To said amount was added such sums as were paid for the new vessels over and above the replacement fund. This, in our opinion, is correct and in accord with the principle of the decision in United States v. Ludey,274 U.S. 295">274 U.S. 295.
From the record it seems evident that, had there been no conversion, no issue as to depreciation would have arisen. The petitioner having claimed the benefits of section 202(d)(2), on the basis of no gain or loss from the transactions, should not now claim a new cost basis for depreciation. Having been given the full*1603 benefits of the statute with respect to depreciation prior to converting its property, which effected no material change in its capital structure except by the addition of new capital, to which credit has been given, the petitioner fails to show any error committed by respondent in his determination of the deficiency asserted.
Judgment will be entered for the respondent.