*2543 Excess depreciation taken in prior years but later disallowed and added to income, should be restored to surplus and included in invested capital.
*601 This proceeding is to redetermine deficiencies in income and profits tax amounting to $2,606 for 1919, and $11,964.30 for 1920.
The petitioner alleges the Commissioner erred (1) in not restoring to invested capital an amount of $7,522.13, representing cost of capital assets previously charged to expenses; and (2) in not restoring to invested capital the amount of depreciation charged off in prior years in excess of the depreciation actually sustained. The first mentioned assignment of error was abandoned by petitioner at the hearing.
The respondent's answer denied generally the allegations of the petition except those relating to jurisdiction. Later, upon motion duly granted, respondent filed a supplemental answer alleging (1) the Commissioner determined that the value on January 1, 1919, and *602 on January 1, 1920, of the depreciable property (viz, *2544 the cost plus all additions and betterments less all depreciation) was not in excess of the book value on those dates, respectively; (2) that the sound value on the dates mentioned was not in excess of the book value; (3) that the excessive depreciation, if any, written off in the years 1909 to 1916, inclusive, was less than the amount of depreciation sustained prior to 1909, and not written off.
FINDINGS OF FACT.
The petitioner is a New York corporation, organized in 1884, and has its principal office at Lockport. It is engaged in manufacturing roofing felt and other paper and composition roofing and shingles.
Beginning with 1909 and extending through the year 1916, petitioner charged off its books and claimed in its excise and income-tax returns depreciation at the rate of 8 per cent on all its depreciable assets. The Commissioner after an audit of the returns for those years, determined the following rates to be proper and recomputed depreciation accordingly: mill buildings, 1 1/2 per cent; machinery, 4 per cent; stockhouse buildings, 2 per cent; office furniture and fixtures, 5 per cent. The amounts charged off by petitioner and the parts thereof disallowed by the Commissioner*2545 are as follows:
| Year | Charged off | Disallowed |
| 1909 | $29,818.38 | $17,331.22 |
| 1910 | 27,209.88 | 14,732.92 |
| 1911 | 25,737.73 | 12,960.11 |
| 1912 | 23,985.34 | 11,127.33 |
| 1913 | 22,226.49 | 9,297.20 |
| 1914 | 20,598.31 | 7,669.02 |
| 1915 | 19,138.88 | 6,210.58 |
| 1916 | 17,952.23 | 4,191.13 |
The total amount disallowed is $83,519.51, which was added to income in the respective years and taxes assessed accordingly.
Prior to 1909, the petitioner did not charge off depreciation. It did, however, have the practice of charging to expenses the cost of small additions and betterments, and all replacements. The former were charged to a special account called "Permanent Improvements," from which the charges were closed out to expenses at the end of each year. Replacements were charged directly to expenses in a "Repairs Account," except that this account did not include overhead and labor connected with installing replacements. In the period prior to 1909, the additions and betterments charged to expenses by the method above described totaled $24,110.98.
All charges to the "Repairs Account" in this period were as follows:
| Year | Amount |
| 1887 | $4,983.61 |
| 1888 | 3,609.27 |
| 1889 | 3,222.01 |
| 1890 | 3,459.43 |
| 1891 | 3,500.91 |
| 1892 | 4,013.95 |
| 1893 | 6,595.45 |
| 1894 | 5,898.51 |
| 1895 | 4,822.28 |
| 1896 | 7,315.25 |
| 1897 | 3,751.61 |
| 1898 | $7,294.61 |
| 1899 | |
| 1900 | 16,118.44 |
| 1901 | 10,097.90 |
| 1902 | 14,411.70 |
| 1903 | 22,464.35 |
| 1904 | 16,746.38 |
| 1905 | 13,331.09 |
| 1906 | 21,477.06 |
| 1907 | 12,983.87 |
| 1908 | 19,193.25 |
*2546 *603 The above figures include the ordinary repairs as well as replacements. It is impracticable at this time to segregate the replacement items from those which were ordinary repairs. From 1909 on, when only expenditures that were properly for repairs appear in this account, the amounts charged thereto were as follows:
| Year | Amount |
| 1909 | $8,689.49 |
| 1909 (4 months) | 3,365.11 |
| 1910 | 10,717.00 |
| 1911 | 9,007.80 |
| 1912 | 12,250.61 |
| 1913 | $13,888.84 |
| 1914 | 9,782.52 |
| 1915 | 6,181.20 |
| 1916 | 12,179.62 |
In the period prior to 1909, the overhead and labor expended in installing replacements or renewals amounted to at least $50,000. These expenditures were on the regular pay rolls and can not be segregated. If petitioner had accrued depreciation on its books in the years prior to 1909 at the rates determined by the Commissioner for the years from 1909 to 1916, the total amount thereof would have been $99,784.32.
OPINION.
LOVE: The evidence is clear and uncontroverted that the Commissioner reduced by the aggregate amount of $83,519.51 the depreciation originally claimed by the petitioner in the years 1909 to 1916, inclusive, and that this sum was added to income*2547 and taxes assessed thereon. The petitioner's claim is, that it should be restored to surplus and invested capital thereby increased in the years now under consideration.
Upon the facts thus far stated, that contention appears to be sound. The respondent, however, alleges in his supplemental answer that the total depreciated value of petitioner's property was not in excess of the book value on January 1, of each of the years here under consideration, respectively, and that the excessive depreciation taken in the years from 1909 to 1916, was less than the depreciation sustained and not written off prior to 1909. The petitioner *604 contends that these are affirmative defenses, the burden of proving which is on the respondent.
It is unnecessary to pass upon this claim of petitioner. The evidence offered by petitioner in depositions shows that prior to 1909 the depreciation of its property was made good by charging renewals and certain additions and betterments to expenses. This evidence is sufficient to satisfy us that the cost of such renewals, and additions and betterments, was at least equal to the depreciation that occurred in that period.
Judgment will be entered*2548 on 15 dyas' notice, under Rule 50.
Considered by TRUSSELL, SMITH, and LITTLETON.