1931 BTA LEXIS 1640">*1640 1. Petitioner has failed to establish that the fair market value of assets acquired prior to March 1, 1913, was higher than the figure used by the respondent in computing depreciation under the Revenue Act of 1921, and the respondent's determination is sustained.
2. Under the Revenue Act of 1924 the basis for depreciation is cost or fair market value of March 1, 1913, whichever is greater, and where the petitioner establishes cost, it is entitled to have that figure used as a basis in computing depreciation for 1924.
24 B.T.A. 425">*426 These proceedings, which were consolidated for hearing and decision, involve the redetermination of deficiencies in income taxes for 1922, 1923 and 1924 in the respective amounts of $20,028.85, $16,149.86 and $4,979.42. All of the alleged errors, except one, were settled by stipulation or waived by petitioner. The matters so settled will be given effect in the computations to be filed under Rule 50. The single issue remaining is the disallowance of exhaustion on retail stores and factory fixtures, 1931 BTA LEXIS 1640">*1641 machinery and equipment for the taxable years in the respective amounts of $37,887.77, $38,492.05 and $34,150.40
The same petitioner was before us in proceedings involving prior years, which are reported at . One of the questions in those proceedings was the amount of depreciation allowable. We approved the respondent's determination as having been based on petitioner's own figures, which were not shown to have been erroneous. In the present proceedings our report on the previous cases was received in evidence and our findings herein are taken from that report, the stipulation, and other evidence produced at the hearing.
FINDINGS OF FACT.
Petitioner, a New York corporation, was organized in 1881. Petitioner manufactured a part of its furniture, fixtures, and equipment and purchased a part from outside sources. In the case of items that it manufactured only the bare cost of labor and material used was capitalized on the books of account, nothing being included to cover the overhead burden properly allocable thereto. In the case of such items as were purchased from outside sources, the actual purchase price thereof was capitalized. The cost of installing1931 BTA LEXIS 1640">*1642 all such items was consistently charged to expense, notwithstanding that in a great many instances the installation cost exceeded the actual purchase price or manufacturing cost of the item installed. Replacements and renewals were always charged to expense. At the close of each accounting period, an inventory was made of additional items of equipment, fixtures, furniture, and machinery acquired during the period, the inventory values being the amounts 24 B.T.A. 425">*427 at which such items were capitalized on the books of account, and 75 per cent of the total inventory value was charged to expense. No depreciation of these assets had been taken into account on the books of the company. Thus the equipment, fixtures, furniture, and machinery were consistently carried on the books of account at a value representing 25 per cent of the amounts originally capitalized.
On May 31, 1912, the book value of petitioner's retail stores and factory fixtures, machinery and equipment was $234,728.60. On May 31, 1913, as of May 31, 1912, petitioner increased the book value of fixtures, machinery, and equipment to the total sum of $938,914.40, a net increase of $704,185.80. This increase represented1931 BTA LEXIS 1640">*1643 the 75 per cent of cost which, as explained above, had previously been charged to expense at the close of each accounting period. After so writing up book value, petitioner claimed deductions for depreciation on the increased figure at the rate of 7 1/2 per cent per year.
Petitioner claimed deduction from income on account of depreciation of retail stores and factory fixtures, equipment and machinery for the years 1922, 1923 and 1924 as follows:
| 1922 | $92,693.76 |
| 1923 | 98,979.69 |
| 1924 | 93,377.54 |
The respondent refused to recognize the addition of $704,185.80 made May 31, 1913, as of May 31, 1912, and reconstructed the account using cost as shown by petitioner's books as the basis. Both the petitioner and respondent used the depreciation rate of 7 1/2 per cent per annum.
The respondent allowed depreciation on retail stores and factory fixtures, equipment and machinery as follows:
| 1922 | $54,805.99 |
| 1923 | 60,487.64 |
| 1924 | 59,227.14 |
The respondent disallowed depreciation on retail stores and factory fixtures, machinery and equipment claimed by petitioner as follows:
| 1922 | $37,887.77 |
| 1923 | 38,492.05 |
| 1924 | 34,150.40 |
Petitioner1931 BTA LEXIS 1640">*1644 maintained a well equipped machine shop and had facilities for repairing most of its machinery. Petitioner's practice was to have its machinery inspected frequently and repairs made so as to keep it in perfect operating condition. At March 1, 1913, the operating condition of the machinery was equal to that of new machinery.
24 B.T.A. 425">*428 OPINION.
ARUNDELL: Petitioner claims that its fixtures had a March 1, 1913, value of not less than $938,914.40 and that that figure is the proper basis for computing depreciation allowances. That figure, as explained in the findings of fact, represents the original cost of the fixtures. Undoubtedly, March 1, 1913, value is the proper basis under the Revenue Act of 1921, which must govern the years 1922 and 1923. In support of its claim that March 1, 1913, value was equal to cost, petitioner offered evidence as to the condition of the equipment here involved. Witnesses were called who were thoroughly familiar with the machinery and fixtures at that date and who testified to the high state of efficiency in which equipment was maintained. The substance of their testimony was that through constant inspection and repairs the equipment was as1931 BTA LEXIS 1640">*1645 good as new. Giving entire credence to this evidence, it still does not establish March 1, 1913, value. Fair market value and state of operating efficiency are not synonomous terms. On the evidence we must hold that petitioner has failed to establish fair market value at March 1, 1913, to be the amount claimed.
It is stipulated that respondent, in computing the depreciation deductions allowed, reconstructed fixtures, equipment and machinery account and used cost as shown by petitioner's books as the basis. That is to say, that, in view of petitioner's practice of writing down this account, respondent used 25 per cent of cost as the basis. We have consistently held that with respect to property acquired prior to March 1, 1913, the value at that date is the proper basis under the 1918 and 1921 Acts. ; ; . So, taking the stipulation literally, it appears that the respondent used an erroneous basis. But whether his basis was too low or too high is not established. The real question here is whether the respondent has allowed1931 BTA LEXIS 1640">*1646 adequate depreciation deductions, and as the case stands we can not say that he did not, even though he used a basis other than the proper one. The burden of showing the amount of the deductions to which it was entitled is on the petitioner, and through lack of proof it has failed to meet it. Cf. .
With respect to 1924 the situation is somewhat different, because of the change of basis contained in the Revenue Act of 1924. Section 204 of that act, in subsections (b) and (c), provides that the basis for depreciation of property acquired prior to March 1, 1913, shall be either the cost of such property or its fair market value as of March 1, 1913, whichever is greater. Under these provisions it is necessary for a taxpayer to establish only one of the two elements 24 B.T.A. 425">*429 prescribed, i.e., either cost or March 1, 1913, value. If the other element is greater than the one established the taxpayer is the loser and must stand the consequences of his failure of proof. In this case petitioner has been able to establish the cost, as of May 31, 1912, of the property on which it seeks depreciation deductions and that is the proper1931 BTA LEXIS 1640">*1647 starting point for computing depreciation allowances. As we understand the real point in issue, it is only the basis for depreciation purposes, and there is no dispute as to the rate or subsequent additions to or disposition of depreciable property. Stated another way, the issue is whether the basis is the $234,728.60 appearing as cost on petitioner's books at the basic date, or the sum of $938,914.40, which represents actual cost. As we have pointed out above, cost is the proper basis to be used in this case, and accordingly the amount of $938,914.40 should be used as a starting point in computing depreciation for the year 1924.
Decision will be entered under Rule 50.