*4088 The amount deducted by the petitioner on account of the exhaustion, wear and tear, including obsolescence, of its physical assets, held to be reasonable.
*508 This is a proceeding for the redetermination of a deficiency in income and profits taxes for 1920 in the amount of $4,700.19. The deficiency arises on account of the action of the respondent in disallowing a portion of the amount claimed by the petitioner on account of exhaustion, wear and tear, including obsolescence, of its depreciable assets.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the State of New York in June, 1914. Its principal place of business is at Buffalo. It is engaged primarily in the wholesale and retail lumber and planing mill business. It is also engaged in the manufacture of aeroplanes. The petitioner is the successor to a copartnership *509 of like name organized in 1881. The entire assets, liabilities, and business of the predecessor copartnership were taken over by the petitioner upon its organization in 1914*4089 and the business has occupied the same location since 1892.
The plant, lumber yards, planing mill, etc., of the petitioner are joined on the south and west by the plants of the National Aniline & Chemical Co. and of the General Chemical Co.
During 1918 and 1919 the petitioner expanded its facilities to meet the needs of war production. The buildings were hurriedly erected for the purpose of use and occupancy as early as possible. Subsequent to this period the expanded facilities exceeded the normal needs of the petitioner and were employed for purposes for which they were not intended or fitted, that is, the manufacture of aeroplanes and furniture.
The petitioner has consistently followed the custom, wherever possible, of acquiring used machinery and equipment instead of purchasing such facilities new.
Corrosive gases escaping from the chemical plants adjoining its property to the west and south had a deteriorative effect thereon and caused accelerated physical exhaustion or depreciation thereof. This was particularly noticeable since the war-time expansion of the chemical industries. The buildings of the petitioner were erected of frame, or brick and frame, construction. *4090 The fumes from the chemical plants ate out the nails and other metal parts, causing boards to fall off, doors to drop, and otherwise seriously affected the property, causing it to have a shorter life. The acid fumes also affected the machinery and other equipment.
The petitioner's experience is that a large part of its machinery and equipment becomes obsolete in from five to seven years due to changes in method of production, changes in demand for articles produced or other causes. The petitioner acquired machinery often when not immediately or directly needed. It sometimes acquired duplicates of machines in use and installed the same in order to be prepared to meet emergencies. Such machinery frequently stood idle.
The petitioner in its return deducted the amount of $41,311.86 on account of exhaustion, wear and tear, including obsolescence, of its buildings, machinery and equipment. The petitioner determined the life of its buildings at 10 years, thus fixing a rate of 10 per cent thereon, and on its machinery and equipment it used approximately a 15 per cent rate.
The respondent reduced the deduction to a flat rate of 10 per cent upon buildings machinery and equipment, *4091 thus disallowing as excessive the deduction claimed to the extent of $13,016.49.
*510 OPINION.
TRAMMELL: While the petition purports to involve the year 1921 as well as the year 1920, it appears from the record that no deficiency has been asserted for 1921. The petition, in so far as it relates to 1921, is, therefore, dismissed.
Witnesses in behalf of the petitioner testified that the deduction claimed was based upon the best judgment and experience of responsible officials of the corporation and represented the actual experience of the petitioner with respect to depreciation of its assets. There was no controversy as to the cost of assets upon which the deduction was based.
Considering all the evidence in the case, the fact that the machinery and equipment were acquired second-hand and had been used, that the subsequent additions for the most part constituted used machinery, and considering the injurious effect of the acid fumes from the chemical plants, the experience of the petitioner with respect to obsolescence, and other facts with respect to the machinery, buildings and equipment, it is our opinion that the amount claimed by the petitioner constitutes a*4092 reasonable deduction on account of exhaustion, wear and tear, including obsolescence, of its physical assets.
Judgment will be entered on 15 days' notice, under Rule 50.