*3813 1. After starting operation of a sulphuric acid manufacturing plant, purchased as a secondhand plant as a whole, some of its units were destroyed by excessive corrosion from subjection to unusual action of sulphur gases. Held, that under the circumstances, a deduction for loss rather than depreciation is allowable.
2. Under the circumstances of this case, the method of determining the amount of the loss of the destroyed units, determined.
*390 This proceeding is for the redetermination of deficiencies in income and profits tax for the years 1920 and 1921 in the total amount of $14,432.78. The deficiency notice asserted deficiencies as follows:
| For the year 1919 | $10.81 |
| For the year 1920 | 6,465.98 |
| For the year 1921 | 23,683.34 |
The deficiency for 1919 is not contested; the deficiency for 1920 and 1921 is contested only to the extent of $14,432.78.
The amended petition assigns as errors:
1. The Commissioner erred in disallowing in the year 1920 an amount of $11,000 expended for repairs in said*3814 year.
2. The Commissioner erred in disallowing the sum of $23,512.50 as repairs for the year 1921.
And, in the alternative:
3. The Commissioner erred in refusing to allow the sum of $12,517.40 as a deduction from gross income for the year 1920 on account of a loss due to replacing parts of the plant which loss had not theretofore been written off in depreciation.
4. The Commissioner erred in refusing to allow the sum of $21,534.25 as a deduction from gross income for the year 1921 on account of loss due to replacing parts of the plant, which loss had not theretofore been written off in depreciation.
5. The Commissioner erred in refusing to allow depreciation in the sum of $937.50 for the year 1921, on a capital expenditure of $12,500 made in the latter part of 1920 as an addition to the plant.
*391 FINDINGS OF FACT.
The petitioner is a Texas corporation with its principal office in Houston.
The petitioner owns and operates a manufacturing plant, the main product of which is sulphuric acid. In 1919 petitioner purchased from the Dupont Chemical Co. (and designated as Dupont purchase) a secondhand plant for the manufacture of sulphuric acid. Some*3815 of the parts or items of that plant, had been used and some of them had not been used. All were in good condition. The plant was purchased as a whole and was entered upon the books of petitioner as a unit purchase. There was no allocation of cost to separate items composing the plant as a whole. The following is a list of the several items comprising the Dupont purchase, the weight of the several parts, and the market price, new, at the date of purchase:
| Weight | Cost new delivered | ||
| 1 | Tank, 8 X 30 | 20,700 | $2,070.00 |
| 1 | Tank, 6 X 24 | 11,000 | 1,320.00 |
| Castings | 20,400 | 1,224.00 | |
| 1 | Tank, 6 X 24 | 11,000 | 1,320.00 |
| Pipe and fittings | 19,800 | 1,188.00 | |
| 1 | Tank, 6 X 24 | 11,000 | 1,320.00 |
| 3 | Acid pumps | 3,600 | 1,440.00 |
| Absorber parts | 8,400 | 840.00 | |
| Castings - sold as junk | 88,100 | ||
| 4 | Mineral wool filters | 25,100 | 2,510.00 |
| Spray catchers | 22,000 | 2,200.00 | |
| 1 | Filler and fittings | 9,500 | 760.00 |
| 2 | Coke filters | 16,000 | 1,600.00 |
| 1 | Pressure filters | 15,400 | 1,540.00 |
| Castings 1,500 pounds - sold as junk | 32,200 | 1,932.00 | |
| Pipe and fittings | 69,300 | 4,158.00 | |
| Preheater furnace castings | 96,500 | 5,790.00 | |
| Pipe and fittings | 60,700 | 3,642.00 | |
| Cooler castings, pipe and fittings | 91,020 | 5,461.20 | |
| Scale parts | 10,000 | 2,000.00 | |
| 1 | Sulphur burner complete, with elevators and transmission machinery, cooler parts and absorber fittings | 20,600 | 4,120.00 |
| Scrubbing towers and fittings | 123,700 | 9,100.00 | |
| 1 | Tank, 6 X 24 | 11,000 | 1,320.00 |
| 1 | Blow case, 3 X 6 | 800 | 96.00 |
| Absorbent parts | 22,800 | 2,280.00 | |
| 1 | Tank, 6 X 24 | 13,900 | 1,668.00 |
| 1 | Exhauster - Connersville | ||
| 1 | Engine, steam, 11 X 12 | 28,600 | 5,720.00 |
| 1 | Combustion chamber | 4,000 | 800.00 |
| 4 | Acid pumps with pulleys | 4,800 | 1,920.00 |
| Pyrameler and parts | 500.00 | ||
| Pipe and fittings | 28,600 | 1,716.00 | |
| 2 | Smoke stacks complete | 18,000 | 1,440.00 |
| Burner parts | 500 | 100.00 | |
| Filter plates | 16,500 | 1,650.00 | |
| 1 | Process tank, 7 X 36 | 21,020 | 2,102.00 |
| 1 | Traveling crane | 19,400 | 1,552.00 |
| Castings | 65,400 | 3,924.00 | |
| Scrubbing towers, parts and fittings | 95,260 | 6,752.20 | |
| 1 | Tank, 7 X 36 | 19,200 | 1,920.00 |
| 1 | Tank, 7 X 36 | 20,400 | 2,040.00 |
| 1 | Tank, 12 X 20, knocked down | 23,300 | 1,398.00 |
| Absorbers | 63,300 | 5,908.00 | |
| 4,548.00 | |||
| 6 | Converters, 40 screens, 1,528 square feet | 75,800 | 1,528.00 |
| Total | 106,417.40 |
| Freight paid, including amount paid at Houston | $17,747.32 |
| Pro rata labor on Dupont purchase | 11,974.83 |
| Price paid Dupont Chemical Co | 27,479.99 |
| 57,202.14 |
*392 The cost of the Dupont machinery as a whole was:
| Price paid Dupont Chemical Co | 27,479.99 |
| Freight | 15,033.96 |
| Delivering at Houston | 2,713.36 |
| 45,227.31 |
In addition to the Dupont purchase, petitioner purchased other parts or items which entered into the completed plant and which cost $22,265.56, making the total cost of all material in the plant $67,492.87. The cost of labor in constructing the plant which included the $22,265.56 of material not included in the DuPont purchase was $17,869.90.
In 1920, the following parts were burnt out, that is, were destroyed, and had to be replaced:
| Cost. | ||
| Sulphur burner shell with flanges; trunions with boxing | ||
| shafts | $1,258.00 | |
| Labor | 333.08 | |
| $1,591.08 | ||
| Two scrubbing towers | ||
| 4 tower bases; 4 tower intermediate sections; 4 tower | ||
| tops; 4 tower grids; 2 tower inlet manifolds; 2 tower | ||
| outlet manifolds; 4 tower lantern boxes; 8 24" cast iron | ||
| pipes 6' long; 2 24" side outlet tees; 8 16" std. cast | ||
| iron ells; 2 16" std. cast iron tees; 4 distributor | ||
| plates; 128 sections cast iron packing grids; various | ||
| run-off pipes and fittings, also acid inlet pipe and | ||
| fittings | $3,867.50 | |
| Labor | 1,024.00 | |
| 4,891.50 | ||
| Acid pumps | ||
| 5 acid pumps with pulleys, bearings and manhole covers | 1,020.00 | |
| Labor | 270.06 | |
| 1,290.06 | ||
| Pre-Heater | ||
| 48 U tubes; 2 manifolds; 96 collars | 1,866.60 | |
| Labor | 494.22 | |
| 2,360.82 | ||
| SO(3) gas cooler | ||
| 2 16" steel headers with flanges; 28 6" steel return | ||
| bends; 35 lengths 6" steel pipe 18' long at $2.00 per | ||
| foot; 70 C. steel 6" flanges at $2.50; 50 steel supports | 1,884.88 | |
| Labor | 499.06 | |
| 2,383.94 | ||
| Total for 1920 | 12,517.40 |
*3817 *393 In 1921 the following parts were "burnt out," that is, destroyed and had to be replaced:
| Combustion chamber | ||
| 1 combustion chamber, steel plate and castings; 6 24" | ||
| cast iron pipes 16' long; 3 24" cast iron fittings; 1 | ||
| 32" nozzle; 1 24" nozzle | $1,818.15 | |
| Labor | 481.39 | |
| $2,299.54 | ||
| SO(2) gas cooler | ||
| 12 24" cast iron pipe 16' long; 24 24" cast iron ells | 3,814.80 | |
| Labor | 1,010.04 | |
| 4,824.84 | ||
| Pipe fittings and valves | ||
| Miscellaneous pipe 3", 4", 6", 8", and 16"; 3", 4", and | ||
| 6" valves; 3", 4", 6", and 16" fittings | 1,011.50 | |
| Labor | 267.81 | |
| 1,279.31 | ||
| Cast iron acid cooler | ||
| 72 pieces 6" cast iron flanged pipe 10 ft. long; 12 steel | ||
| supports; 36 6" return bends; 900 machine batts; miscel- | ||
| laneous tees and ells | 1,522.01 | |
| Labor | 402.98 | |
| 1,924.99 | ||
| Gas exhauster | ||
| 1 245 cu. ft. Connersville exhauster; 2 16" cast iron | ||
| ells; 1 16" cast iron pipe | 1,241.00 | |
| Labor | 328.58 | |
| 1,569.58 | ||
| Acid pumps | ||
| 5 4" acid pumps with pulleys and accessories | 637.50 | |
| Labor | 168.79 | |
| 806.29 | ||
| Converters | ||
| 20 special screen mats 1 X 1 each; 20 special screens | 323.00 | |
| Labor | 85.52 | |
| 408.52 | ||
| Mineral wool filters | ||
| 3 mineral wool filters with tops and center supports; 8 | ||
| cast-iron tees; eight 8" ells; miscellaneous 2" piping | 1,040.83 | |
| Labor | 275.58 | |
| 1,316.41 | ||
| Three process tanks | ||
| 1 6' X 24' 1/2 steel plate tank with manholes, out | ||
| nozzles, pump nozzles, etc.; one 17' X 36' 1/2" steel | ||
| plates with fittings, etc.; one 7 X 36 1/2" steel plate | ||
| with pump fittings, etc | 2,321.35 | |
| Labor | 614.63 | |
| 2,935.98 | ||
| Two absorption towers | ||
| 4 tower bases; 4 steel tops; 4 steel intermediate | ||
| sections; 4 steel cast iron grids; 2 steel outlet mani- | ||
| folds; 2 steel inlet manifolds; 4 latern boxes; 8 steel | ||
| ells 16"; 2 steel tees 16"; 4 cast iron distributor | ||
| plates, packing plates, 112 sections; 3" and 4" piping; | ||
| 3" and 4" fittings | 3,322.65 | |
| Labor | 879.74 | |
| $4,202.39 | ||
| Acid runoff pipes to storage | ||
| 1 blow case, 3 X 6; 800 ft., 3" extra heavy pipe; valves | ||
| and fittings | 508.30 | |
| Labor | 134.58 | |
| 642.88 | ||
| Exit stack | ||
| 150 feet 16" steel pipe; 2 16" ells; hangers | 361.25 | |
| Labor | 95.65 | |
| 456.90 | ||
| Total cost of lost parts | 22,667.63 | |
| Less 5 per cent depreciation | 1,133.38 | |
| 21,534.25 |
*3818 *394 Petitioner's manufacturing plant is one of the largest sulphuric acid plants in the South. It was established, that is, began operations, in May, 1920.
Sulphuric acid, H(2)SO(4), is made of sulphur as a base, which is chemically combined with oxygen and hydrogen. In the process of manufacture the sulphur is injected into a long cylinder which slowly revolves, thus keeping the sulphur in it in constant motion and stirred. In that process it comes in contact with air and by its own generated heat the air is decomposed and the oxygen liberated from the air enters in chemical compound with the sulphur, forming a gas known as dioxide. This gas is then conducted through pipes into other reservoirs where it comes in contact with water which is decomposed and another atom of oxygen combines with the dioxide forming a trioxide SO(3). It is then subjected to water H(2)O, which forms the sulphuric acid H(2)SO(4).
Sulphur, as well as each and all its compounds, is a highly corrosive substance. It is a peculiar characteristic of its compounds that as they come in contact with iron, the greater strength, that is, the higher the test, the less it affects iron. If it gets*3819 below 75 test, it is very destructive to iron. When it is below 75 test, its effect on lead pipes or containers is slight, while if above that test it is destructive to lead.
In these processes, when carried on by means of iron containers, great caution has to be observed at all times to prevent too much *395 moisture coming in contact either from the atmosphere on damp rainy days, or from other sources and thus reducing the test below the "dead line," 75. Should the gas in its course through the several stages, by any means be reduced in test strength materially below 75, the result is rapid corrosive action on the iron containers, "eating" holes in them. By reason of the fact that the process of manufacture is a continuing process, no unit in that process may be shut down for repairs without shutting down the whole plant. Also, when this corrosive action attacks any unit and one or more holes show up in that unit, it is practically an assured fact that the whole unit has been affected and is in imminent danger of giving away at other points. Hence the economical, practical thing to do is to shut down, remove that unit and install another. Accidents of this character*3820 happened to petitioner's plant in 1920 and 1921. The units so destroyed in each of the years are listed hereinbefore.
The parts removed had a small junk value. By reason of the fact that those parts were badly corroded, sometimes almost eaten up, and some of them saturated with those sulphuric gases were injurious to laborers handling them, they had no readily realizable market value and when sold, sometimes brought less than the cost of loading on cars and were disposed of more for the purpose of cleaning up the yard, than otherwise. At the time those parts were removed, their then weight was approximately 50 per cent their original weight, and the scrap was worth $6 per ton. One-half of the original weight of material removed in 1920 is 116,200 pounds, and at $6 per ton, is $348.60. One-half the original weight of material removed in 1921 is 207,740 pounds, at $6 per ton, is $623.10.
OPINION.
LOVE: In its returns for the years in question, petitioner took deductions as a repair expense, of replacing the units of its plant in the circumstances recited in the findings of fact. The Commissioner disallowed such deduction. Before the Board the petitioner claimed the deduction*3821 as a loss, measured by the cost of the old units to it, less depreciation in one of the years. Hence the amount of the deficiency in contest is less than the amount asserted by the Commissioner.
Clearly, we think the loss if deductible, is deductible as a loss, and not as a repair expense. In this case the cost value of a plant such as the one in question here, new, has been satisfactorily shown. H. M. Wall qualified as a competent witness to testify as to such value, and so valued each item in the make-up of the plant. The proof is also satisfactory as to the actual cost of the secondhand *396 plant to petitioner. The cost of the plant, as a whole, was entered on petitioner's books, with no attempt to allocate the cost of each separate item as to either purchase price or cost of construction. Not until this controversy arose was any such allocation attempted. As a fair and reasonable means of so allocating such costs, petitioner used the total cost of such a plant, new, $106,417.40, as the denominator of a fraction and the cost to petitioner of the secondhand plant purchased, $45,227.31, as the numerator and thus obtained the per cent that the plant erected bore to*3822 the cost of a plant, new. That is, the plant purchased cost petitioner 42 1/2 per cent of the cost price of the same machinery, new. The cost of constructing the whole plant, that is the labor bill, was 26.477 per cent of the cost of the machinery delivered. Using the 42 1/2 per cent and using the cost, new of each item as a base, it computed the cost to it of each item actually purchased and then using that cost as a base and the 26.477 per cent, it computed the labor cost on each such item in construction.
While it may be conceded that the method employed is not absolutely accurate when applied to each item separately, yet we believe it is fair, and arrives at a conclusion that any court of equity would accept. In the tabulated lists of parts burned out in the several years, as given in the findings of fact, the cost column of figures represents costs computed as above indicated.
The case was submitted on the theory involved in assignments of error Nos. 3 and 4, hence assignments Nos. 1 and 2 passed out and are not considered.
There was no evidence submitted relative to assignment of error No. 5, and counsel in his brief does not discuss the matter. Hence, as to that*3823 item, we approve the action of the Commissioner.
The deficiency asserted for the year 1919 was not appealed from, hence the Board has no jurisdiction over that amount.
Petitioner suffered deductible losses as follows:
| Total cost of items lost in 1920 | $12,517.40 | |
| Less salvage value of scrap | 348.60 | |
| Loss | 12,168.80 | |
| Total cost of items lost in 1921 | 22,667.63 | |
| Less depreciation at 5 per cent | $1,133.38 | |
| Salvage value of scrap | 623.10 | |
| 1,756.48 | ||
| Loss | 20,911.15 |
Reviewed by the Board.
Judgment will be entered on 15 days' notice, under Rule 50.