*3198 The acceptance of a return containing a deduction for amortization of war facilities is not the "tentative" allowance of a deduction for amortization so as to make the statute of limitations inoperative.
*672 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the fiscal year ended March 31, 1919, of $156,380. The errors alleged are that (1) the respondent erred in refusing to permit a deduction of $212,906.75 as amortization of war facilities; (2) the deficiency is barred from assessment by the statute of limitations; and (3) the method of computing the deficiency is erroneous.
FINDINGS OF FACT.
The petitioner is a Kentucky corporation with principal office at Greenville, Ky. It is engaged in the production of coal and has mines at Luzerne and Graham, Ky. It keeps its accounts upon the basis of a fiscal year ending March 31st.
When the United States entered into the World War, the United States Fuel Administration was created to have general supervision over the coal*3199 mines of the country. State fuel administrators were appointed by the Federal Fuel Administration and production managers were appointed for the purpose of trying to stimulate the production of coal. The president of petitioner was appointed production manager for Western Kentucky. The following telegram was received by the petitioner from the Fuel Administrator:
On account shortage of coal supply absolutely necessary every effort be made to continue operations during holidays except Christmas day. Advise extent you anticipate production will be curtailed during this period. Earnestly solicit cooperation operators and miners in this connection which is very necessary in this emergency.
Signed: H. A. GARFIELD, Fuel Administrator.
At a special meeting of the board of directors of the petitioner the following minutes were recorded:
The president of the company stated that the purpose of the meeting was to consider the advisability of contracting for a new power plant to be located at the Graham mines of the company. It was further explained that the reason for the desirability of the discussion of this subject was occasioned by the fact that the power plant at present*3200 in use at Graham had gotten to a point where it was considered that a breakdown was apt to occur and serious curtailment *673 of production by reason of suspension of operations during such possible breakdown. The grave crisis now confronting the country by reason of the coal shortage was fully discussed and at this juncture, Mr. C. W. Taylor reported that Mr. C. M. Means, Consulting Engineer for the company, had advised that it would be possible to secure without unreasonable delay equipment for the installation of a new plant. After full discussion of all phases of the matter it was moved, seconded and unanimously carried by the board of directors that the manager be authorized to proceed in the closing of contracts for a new central power plant at Graham at whatever cost might be necessary in order to secure the building and equipment in order to insure continuous power for the operation of the property. It was realized by the board of directors that this called for an unusually heavy expenditure but it was unanimously agreed in the discussion that no chance must be taken in the production of coal in the present National crisis, and that all steps necessary would be taken*3201 by this company in order to guard against any interruptions of operations by reason of a breakdown of any character or shortage of electric current.
Pursuant to this resolution, the petitioner, in February, 1918, started the construction of a new power plant to operate its coal mines. The petitioner's coal mines were operated almost entirely by electric power. The coal was undercut by electric mine machines, was hauled to the surface by electric mine locomotives and the tipple machinery was operated electrically. The new plant was completed early in the year 1920. Prior to acquiring the new power plant the petitioner had used a power plant having generating power units totaling 900 kilowatts.
The new power plant consisted of two units, one of 2,000 kilowatts and one of 1,000 kilowatts.
The total cost of the plant as authorized was $300,000. No attempts were made to bargain in the acquisition of materials and equipment for the plant because of the difficulty to locate equipment that could be purchased. The prices paid for such equipment were more than the usual prices because of the World War then in progress. The actual net cost of the new plant was $305,412.02. On*3202 November 11, 1918, the plant was not completed and could not be used, but some time during 1919, it reached a point of completion where power was generated. On November 11, 1918, the petitioner had contracted for material not yet received in the amount of $35,552.22. The contracts contained no cancellation clauses. On November 11, 1918, equipment costing $131,907.23 had been received and paid for. At that time there had also been received equipment in the amount of $82,538.30 which had not been paid for. In order to complete the plant it was necessary after November 11, 1918, to order more material and equipment, the cost of which was $58,063.76. It was necessary to finish this plant because in its condition at November 11, 1918, it could not be used in generating power, and in order to put it in operating condition it was necessary to couple up the plant as a whole. If construction had been abandoned on November 11, 1918, *674 the only value attached to the plant would have been the salvage value for the sale of part of the machinery. The boilers would have had practically no salvage value. The secondhand market at that time was flooded with such equipment. It would*3203 have been possible, however, to have completed either unit and operated it without completion of the other.
The old power plant could have been kept in good condition indefinitely and was sufficient to meet the demands of the petitioner before 1917 and after 1918.
The coal produced by the petitioner during the years 1914 to 1921 was as follows:
| Tons | |
| 1914 | 483,800.21 |
| 1915 | 495.611.51 |
| 1916 | 443,003.36 |
| 1917 | 713,888.28 |
| 1918 | 741,445.53 |
| 1919 | 425.125.94 |
| 1920 | 586,237.25 |
| 1921 | 375,906.41 |
In its return for the fiscal year ended March 21, 1919, the petitioner claimed as a deduction from its gross income on account of amortization of war facilities the sum of $212,906.75, which was about two-thirds of the cost of construction of the new plant. The respondent has never made any allowance, tentative or otherwise, of this amortization claim.
Between November 11, 1918, and the end of the year 1921, no use was made by the petitioner of the surplus power generated at its new power plant. Finally, efforts were made to salvage a portion of the surplus through the sale thereof. A power contract was entered into with the Kentucky Utilities Co. on June 9, 1921. *3204 The life of the contract was 10 years. The contract provided in part:
1. The Mining Company agrees to furnish to the Utility Company (and the Utility Company agrees to take from the Mining Company) under and in accordance with the terms and conditions of this agreement subject to clause 16 hereof, the following amounts of electrical energy:
(a) 1,000 KW of "Monthly Maximum Demand" between the hours of 7:00 o'clock in the morning and 4:00 o'clock in the afternoon of the same day.
(b) 2,000 KW of "Monthly Maximum Demand" between the hours of 4:00 o'clock in the afternoon and 7:00 o'clock of the following morning, and agrees to furnish to the Utility Company such amounts thereof as set out in Subsections "a" and "b" as the latter may desire to draw and use; and such amounts in addition thereto as the Utility Company may at any time call for, out of any excess that the Mining Company may generate and be able to deliver at substations in excess of and over and above the current and power required or consumed in its mining or other operations or developments, present or future, * * *.
During the period November, 1921, to March 31, 1922, the petitioner furnished the Kentucky Utilities*3205 Co. 401,408 kilowatt hours of power and received therefor $5,945.64. The cost of generating such power was $6,302.10.
*675 From April 1, 1922, to March 31, 1923, 3,265,200 kilowatt hours were furnished. The petitioner received therefor $47,505.71 and the cost of producing the same was $41,141.52.
From April 1, 1923, to March 31, 1924, the petitioner furnished the company 4,848,344 kilowatt hours and received $71,591.17, therefor. The cost of producing this was $51,392. No other income was received by the petitioner from the power plant.
Units in the old power plant had been built in 1903, 1907, 1910, and 1924, and had been in operation ever since installation.
The petitioner had an agreement with the St. Bernard Mining Co. which provided that in case the latter had a breakdown the petitioner would furnish power to it. By the same agreement the petitioner was to be furnished power by the St. Bernard Mining Co. in case it had a breakdown in its power plant. Before 1917 and after 1918, the petitioner operated only about half of the time and it would have made no material difference to it which days of the week it operated. During 1917 and 1918 the petitioner*3206 operated all the time and a breakdown, whereby electric power could not have been furnished to the mines, would have caused the cessation of the production of coal until repairs were made. During 1917 the petitioner was furnishing coal to the Illinois Central Railroad Co. and also furnished some coal to Camp Knox, which is situated between Greenville and Louisville, and to Camp Taylor, at Louisville, Ky.
The mines of the petitioner operated from 7.30 a.m. until 4 p.m., and the purpose of the provision in the contract with the Kentucky Utilities Co. limiting the amount of power which the company might receive from 7 a.m. until 4 p.m. was to safeguard the petitioner in its own requirements for power as well as to provide for the requirements of both the St. Bernard Mining Co. and the Kentucky Utilities Co.
Neither before nor after the war period did the petitioner's mining operation require more than a 1,000 kilowatt power plant. The kilowatt hours consumed during any period would indicate an average far below the peak load, and it was necessary to have a minimum capacity equal to the maximum load at any instant of time.
A coal mine load is divided into two parts, a small*3207 load which operates 24 hours a day, 30 days a month, and consists principally of fan load; and an operating load which consists of the power required to undercut the coal, haul it, and operate the tipple. The fan load also requires only a very small part of the total capacity of the plant and on account of its continuous operation consumes a large per cent of the total kilowatt hours required for the month. The undercutting and hauling load accounts for a large per cent of *676 the total capacity required to operate the mine, but on account of the small number of hours that this load is operated during the month it requires a much smaller per cent of the total kilowatt hours consumed. In other words, a fan runs on 100 per cent load factor and mines on low load factor.
The constant load factor was a little larger in 1921 and 1924 than it was in 1917 because in 1917 one of the fans was operated by steam.
To obtain the contract with the Kentucky Utilities Co., the petitioner had to provide an additional water supply which cost about $46,700, and a tie line at a cost of about $26,700.
The petitioner filed income and profits-tax returns for the fiscal year ended March 31, 1919, in*3208 June, 1919. The tax shown by said returns was paid in full. No waivers were ever filed by the petitioner with respect to such year. No assessment of any part of the deficiency involved in this proceeding has been made.
In the returns filed by the petitioner it claimed a deduction of $212,906.75 for amortization of war facilities. This deduction was tentatively disallowed in a 30-day letter sent to the petitioner and was finally disallowed in the deficiency letter as to which this proceeding was filed. The deficiency letter was mailed January 18, 1926.
OPINION.
SIEFKIN: Our view of the question as to the statute of limitations involved in this case is such that we do not deem it necessary to enter into a discussion of the merits of the controversy. Except for the provisions of section 278(b) of the Revenue Acts of 1924 and 1926, which are similar to a portion of section 250(d) of the Revenue Act of 1921, the assessment and collection of the deficiency would be barred. Section 278(b) of the Revenue Acts of 1924 and 1926 provides:
Any deficiency attributable to a change in a deduction tentatively allowed under paragraph (9) of subdivision (a) of section 214, or paragraph*3209 (8) of subdivision (a) of section 234, of the Revenue Act of 1918 or the Revenue Act of 1921, may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.
Sections 214(a)(9) and 234(a)(8) relate to the deduction for amortization of war facilities.
The respondent argues that when the returns of the petitioner containing the deduction of $212,906.75 for amortization of war facilities were received by the collector of internal revenue, there was a tentative allowance of the deduction. We can not agree with this argument. The responsibility for the return is that of the taxpayer. The fact is, in this proceeding, that the first time this deduction came before the Bureau of Internal Revenue for allowance or disallowance *677 it was tentatively disallowed, and the petitioner was so notified in the so-called 30-day letter which, in the procedure of the Bureau, is the tentative action. That letter states:
Amortization as shown by schedule herein has been disallowed, subject to review by Department.
The disallowance was of the entire amount claimed by the petitioner. It is our opinion that the deduction was not*3210 tentatively allowed so as to make the statute of lititations inoperative. A contrary holding would have the effect of holding that there was no statute of limitations operative where the deduction for amortization was being considered. The language of 278(b) above negatives such a conclusion. In view of the proceeding, it is unnecessary to discuss other aspects of the case.
Reviewed by the Board.
Judgment of no deficiency will be entered.
LOVE concurs in the result.
SMITH, ARUNDELL, MILLIKEN, and VAN FOSSAN, dissent.