*159 Decision will be entered for the respondent.
In 1937 new interests took over the ownership and management of petitioner, which was at that time carrying on a small manufacturing business. In that year and two subsequent years petitioner made heavy expenditures for the purpose of developing its business. Included in such expenditures were salaries of officers and employees, traveling expenses, rent, and advertising. Petitioner allocated a part of these expenditures to current business expenses, which it deducted as such, and a part to an account called "Business Development Account." In 1941 petitioner began to amortize this account at an annual rate of 20 per cent and deducted on account thereof from its gross income the sum of $ 5,282. Held, that, granting said expenditures carried in this account were capital in nature, they resulted in acquisition of good will, and are not, under the facts, subject to amortization or depreciation. Colonial Ice Cream Co., 7 B. T. A. 154, and F. E. Booth Co., 21 B. T. A. 148, distinguished.
*48 The Commissioner determined deficiencies in petitioner's income and declared value excess profits tax for the calendar year 1941 in the amounts of $ 990.24 and $ 270.37, respectively. The issue presented herein concerns respondent's disallowance of a deduction claimed by petitioner for amortization of an account called "Business Development Expense," representing expenditures made in prior years consisting of salaries, advertising, traveling expenses, and rent, claimed by petitioner to have been capital expenditures.
FINDINGS OF FACT.
Petitioner is a corporation which was organized in 1933 under the laws of the State of *161 New York. It filed its income and declared value excess profits tax returns with the collector of internal revenue for the first district of New York.
*49 Petitioner is engaged in the manufacture and sale of cement and waterproofing compounds produced under patents and secret processes. From 1933 through 1936 its gross sales were in the following amounts:
| 1333 | $ 3,692.60 |
| 1934 | 8,641.61 |
| 1935 | 9,097.57 |
| 1936 | 15,292.23 |
During these years petitioner was owned and operated by John Mano, Sr., and his two sons, in a small store in Long Island City, New York. In 1936 petitioner sold its products to approximately 100 customers. Many of these customers were prominent industrial concerns.
In 1937 one-half of the common and all the preferred stock of petitioner were purchased for cash by outside interests. Its gross sales from 1937 through 1945 were as follows:
| 1937 | $ 20,761.30 |
| 1938 | 24,673.33 |
| 1939 | 33,527.77 |
| 1940 | 50,960.29 |
| 1941 | 64,255.14 |
| 1942 | $ 114,238.48 |
| 1943 | 123,903.51 |
| 1944 | 415,991.61 |
| 1945 (to Nov. 30) | 95,701.37 |
The purchasers of the preferred and half the common stock became the officers of petitioner, and they took over the active management and operation*162 of the business. It was decided that the most profitable method of distributing petitioner's products would be through the channels of organized distributors. Advertising leaflets were printed, and salesmen were employed to call on mill supply houses, plumbing supply houses, hardware supply houses, and similar established distributors in the various communities, and they succeeded in perfecting arrangements to distribute petitioner's products through these companies. They secured, by the end of 1939, 20 distributors for one of petitioner's products, known as the "Pipe Joint Compound," and 27 for another product, known as X-Pandotite. Additional distributors were secured in subsequent years, and by 1946 petitioner had a total of 300 distributors.
Petitioner's new officers felt in 1937 that they were practically starting a new enterprise, and that it was proper to set up in a capital account the initial heavy expenses which were necessary to develop the business in the manner proposed by them, specifically in establishing contact with distributors and securing points of distribution in promising locations, to the extent that benefits were expected to be realized in future years *163 rather than currently. The expenditures consisted of the salaries of officers and employees, traveling expenses of employees engaged in that work, salaries of office and factory employees, rent, and advertising expenses. It was realized that immediate results would be secured as the result of these activities, and the officers therefore *50 attempted to determine the percentage of the various expenditures which they felt was properly attributable to the current year's business, which amount they treated on their books and for income tax purposes as current business expenses. The remainder of each item was charged to an account set up on their books which was called "Business Development Account."
To this account, in 1937, the following items were charged:
| H. K. Weed -- salary (50%) | $ 1,100.00 |
| Traveling expenses (50%) | 296.27 |
| John Mano, Sr. -- salary (50%) | 575.00 |
| Traveling expenses (50%) | 247.37 |
| John Mano, Jr. -- salary (50%) | 1,036.50 |
| Traveling expenses (50%) | 24.00 |
| Geo. T. Wunder -- salary (23.8%) | 500.00 |
| Traveling expenses (50%) | 16.74 |
| Other sales department salary and commissions (44.7%) | 1,915.00 |
| Traveling expenses (50%) | 139.86 |
| Officers' salaries (50%) | 1,418.07 |
| Factory salaries (50%) | 827.65 |
| Factory rent (50%) | 920.00 |
| Advertising (70%) | 3,343.23 |
| Total | 12,359.69 |
*164 Included in the advertising expense was the cost of some plates used in the printing of circulars. These plates were in use through 1945, but neither their cost nor their useful life is shown.
In 1938, pursuant to similar allocations, the following items were charged to the business development account:
| H. K. Weed -- salary (66.66%) | $ 1,475.64 |
| Traveling expenses (80%) | 748.12 |
| John Mano, Sr. -- salary (25%) | 871.89 |
| Traveling expenses (80%) | 495.50 |
| John Mano, Jr. -- salary (25%) | 461.91 |
| Traveling expenses (80%) | 118.96 |
| Other sales department salary and commissions (26.5%) | 1,712.92 |
| Traveling expenses (80%) | 151.73 |
| Office salaries (36.8%) | 785.26 |
| Total | 6,821.93 |
In 1939, for the first four months the following items were charged to the business development account:
| H. K. Weed -- salary (66.66%) | $ 722.50 |
| Traveling expenses (80%) | 227.48 |
| John Mano, Sr. -- salary (25%) | 270.94 |
| Traveling expenses (50%) | 154.71 |
| John Mano, Jr. -- salary (25%) | 144.50 |
| Traveling expenses (80%) | 73.92 |
| Other sales department traveling expenses (80%) | 1.78 |
| Office salaries (34.4%) | 240.54 |
*51 For the remaining eight months of 1939, slightly different allocations were *165 arrived at for this purpose, as follows:
| H. K. Weed -- salary (33.33%) | $ 765.00 |
| Traveling expenses (50%) | 278.26 |
| John Mano, Sr. -- salary (50%) | 1,147.50 |
| Traveling expenses (50%) | 252.02 |
| Other sales department traveling expenses (50%) | 100.29 |
| Office salaries (16.6%) | 429.71 |
| Time of sales -- engineer on bridge at Jones Beach experimental work | 300.00 |
| Time and expenses in connection with Western Electric Co. general | |
| contract | 181.35 |
| Time and expenses in connection with Andrews and N. Y. C. contracts | 191.70 |
| Total for 1939 | 5,482.20 |
Certain charges were also made in 1940, which petitioner now concedes should not have been charged to this account. The total amount charged to this account was $ 24,663.82 at the end of 1939.
In 1941 petitioner began to amortize the balance charged to this account of $ 25,693.82 (including the 1940 charge since waived), on a five-year basis, at the rate of 20 per cent a year. The deduction claimed on account of this amortization by petitioner in its 1941 income tax return was in the amount of $ 5,282.76.
During the recent war petitioner's products were used in Victory ships and Liberty ships.
OPINION.
The only question presented*166 here is whether the respondent erred in disallowing the deduction claimed by the petitioner corporation in amortization of an account to which it had charged certain expenditures in earlier years which, it contends, were in the nature of capital expenditures. Respondent justifies his action on the ground that the items charged to the account were business expenses, deductible only in the year paid or accrued.
The items consisted of salaries, traveling expenses, rent, and advertising expenses. These, of course, are expenses of a type which are ordinarily held to be currently deductible business expenses, under the provisions of section 23 (a) of the Internal Revenue Code, which provides for the deduction of:
* * * All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses * * * and rentals * * *
and of section 43 of the code, which provides:
* * * The deductions and credits * * * provided for in this chapter shall be taken for the taxable year in which "paid or accrued" * * * unless in order to*167 clearly reflect the income the deductions or credits should be taken as of a different period. * * *
*52 Petitioner itself recognized the basic character of the items when it deducted certain percentages of these same expenditures as current expenses during the year made. The balances, which it charged to its business development account, petitioner contends were more in the nature of capital items, because it expected to realize the benefits from that proportion of the expenditures in future years rather than currently.
Petitioner calls our attention to a number of cases in which we have expressed sympathy for the theory urged by the taxpayer, and now adopted by petitioner, that some part of abnormally large expenditures in early years which are expected to produce income in future years might be regarded as capital investments. In all such cases, we found no evidence before us from which we would determine a proper allocation between capital and current expenses.
All of the cases cited by petitioner, except Colonial Ice Cream Co., 7 B. T. A. 154, and F. E. Booth Co., 21 B. T. A. 148, involved the question whether*168 the taxpayers should be allowed to include the amounts of the expenditures in question in their invested capital, and they did not involve the question whether they may be amortized and deducted from gross income in subsequent years. These cases are not, therefore, determinative of the question before us. We expressed the view in each case that the expenditures in question constituted, to some extent, capital investments, so as to be includible in invested capital, but in each case we felt the amount of the investment had not been established. Northwestern Yeast Co., 5 B. T. A. 232; Richmond Hosiery Mills, 6 B. T. A. 1247; affd., 29 Fed. (2d) 262; George W. Caswell Co., 14 B. T. A. 15.
In Colonial Ice Cream Co., supra, the taxpayer paid substantial sums for organization and advertising expenses and for the purchase and installation of ice cream cabinets. It attempted to treat the sum as a deferred expense, to be spread over three years. We held the amount spent for ice cream cabinets to be depreciable over the three-year life of*169 the cabinets, and the organization expenses to be properly capitalized. Of the advertising expense, we said that "it is apparent that the benefits flowing from the advertising campaign of petitioner and the expenditures made therefor in 1920, continued through subsequent years, and to that extent may properly be regarded as a capital investment of more or less indefinite duration." We felt it was impossible to determine from the evidence to what extent the expenditures were capital in nature, and approved the respondent's denial of the deduction for that reason.
In F. E. Booth Co., supra, the deduction of advertising expenses was sought in later years, and was denied on the ground that it was impossible to segregate the capital from the current expenses.
*53 There is language in each of these cases from which one might infer, as petitioner does, that, had it been possible to determine from the record the proper allocation to capital and current expenditures, the capital investment would have been depreciable and the deduction allowed. The actual decisions in those cases do not, however, go so far, and we do not think they can be regarded as authority*170 for that proposition, in spite of the language used therein.
The question before us goes one step further than the cases cited. It concerns not only the question whether the items were capital expenditures, but also, if they were, whether petitioner has a right to deduct, in a later year, a portion of such expenditures. An expenditure may be capital in character (such as an amount paid for good will) so as to be included in invested capital, but it would not follow that any amount would be allowed as a deduction by way of amortization of the expenditure or depreciation of the assets acquired by the expenditure. If we were to admit here petitioner's theory that, because it anticipated no current return on some portion of its expenditures, but expected benefits therefrom in later years, that portion has the quality of a capital investment, and if we were further to admit that petitioner has succeeded, where so many others have failed, in establishing by proof the proper proportion which the capital items bore to the total expenditures, we would still be required to find statutory authority for the deductions in some later years, since deductions are a matter of legislative grace. *171 Assuming, for the moment, that both the fact and the amount of a capital investment had been established, as urged by petitioner, it would be necessary to determine whether the asset so acquired is depreciable under the terms of the Internal Revenue Code.
Petitioner does not name or particularly describe the property or asset which it claims to have acquired by its expenditures, except that it refers to the development of a mechanism, or method, or system of doing business through established distributors. No contention is made that petitioner acquired any tangible property except some plates used in the preparation of advertising circulars, and there is no showing that it acquired any contract rights of any kind as a result of the expenditures. There is evidence that some of the expenditures in question were made "in connection with" certain contracts, but beyond this the record gives us no further information. We are of the opinion that, except for the plates mentioned above, the cost and useful life of which we do not know, the only asset which might in any sense have resulted from the expenditures is something in the nature of good will.
Good will is not subject to depreciation*172 allowances. Bills Bros. Memorial Corporation, 7 B. T. A. 1182; R. Bryson Jones, 17 B. T. A. 1217; U. S. Industrial Alcohol Co., 42 B. T. A. 1323, 1346; affirmed on *54 this issue, 137 Fed. (2d) 511. See also Regulations 111, sec. 29.23 (1)-3, which provides that "No deduction for depreciation, including obsolescence, is allowable in respect of good will." Newspaper subscription lists have likewise been held not to be subject to the allowance for depreciation, on the theory that they have no definite useful life, Toledo Newspaper Co., 2 T. C. 794, 809, although they are held to be capital assets. Rose C. Pickering, 5 B. T. A. 670.
Since the basic theory of the allowance for depreciation is the recovery by annual allowances during the life of exhaustible property of its cost or other basis, it is impossible to see any statutory basis for subjecting to the allowance property of a kind which does not exhaust itself or become less valuable with use. It is obvious from the record that the usefulness *173 of what the petitioner acquired by the expenditures in question was not only not consumed during the five-year period, but that it will continue to serve petitioner as long as petitioner continues to do business by the method so established. This is the reason depreciation allowances have generally been denied for property such as good will, trade names and trade-marks, and the same reason justifies respondent's action in the instant case. Certainly, if assets acquired by expenditures are not depreciable, an equivalent result will not be permitted by the method of amortizing the expenditures for such assets.
The same basic reasoning prevents us from applying to the facts of this case section 43 of the code, since it can not be said that to permit, in effect, the depreciation over a period of five years of capital assets which are not shown to have depreciated at all, will "clearly reflect the income" of petitioner.
Decision will be entered for the respondent.