*2634 1. BUSINESS EXPENSES, SEC. 234(a)(1), REVENUE ACT OF 1921. - An amount of $12,992.06, expenses of traveling, entertaining, collecting, and cash rebates to customers, held to be ordinary and necessary expense properly allowable as a deduction from income.
2. METHOD OF COMPUTING INCOME. - In a choice of methods of accounting for containers, that of the petitioner is approved as attaining greater clarity under the peculiar circumstances of the instant case.
3. LOSS ON ASSETS WHICH BECAME USELESS AND VALUELESS DURING THE TAXABLE YEAR. - Deduction allowed and amount determined upon buildings and machinery; deduction denied for loss on land.
*124 This proceeding results from the determination of a deficiency in income and profits taxes for the year 1921, amounting to $21,973.50.
The petitioner alleges error with reference to the following issues: (1) a failure to allow the deduction from income of cash expenditures by the president for business purposes amounting to $12,992.06; (2) a failure to allow the deduction from income of the cost*2635 of bottles, cases and kegs amounting to $4,535.12; and (3) a failure to allow a claimed deduction from income of an allowance for obsolescence in the amount of $42,687.71.
FINDINGS OF FACT.
The petitioner is a Wisconsin corporation with its principal place of business at Plymouth. In 1921, the petitioner was engaged in the manufacture and sale of a beverage popularly known as "near beer." This beverage was produced by a process which first brewed real beer and then dealcoholized the product to conform to the prohibition laws. Manufacturing operations ceased in August, 1921, when the petitioner received from the County District Attorney the following communication:
SHEBOYGAN, WIS., August 22, 1921.
PLYMOUTH BREWING COMPANY,
Plymouth, Wisconsin.
GENTLEMEN: At the request of State Prohibition Commissioner, Mr. W. Stanley Smith, you are hereby notified to discontinue operating a de-alcoholizing plant until you have complied with existing laws in regard to obtaining a state permit. It have information that you have been selling beverages containing more alcohol than is allowed by law.
Yours truly,
(Signed) CHARLES VOIGT,
District Attorney.
Thereafter, *2636 during the taxable year, the product of another brewery was purchased and sold.
Upon the cessation of manufacturing, there were left on hand at the brewery of the petitioner about 1,400 barrels of beer, unfinished in that the alcohol content was too high for vending. The petitioner endeavored to secure a special permit for the dealcoholizing of this material but without success. In all, five applications were made at different times for various kinds of permits, two of them, made under dates of October 11, 1922, and November 20, 1922, were filed under the National Prohibition Act and requested permission to operate a dealcoholizing plant "for the production of cereal beverages and to use intoxicating liquor in the operation of the same for nonbeverage purposes, to wit, in accordance with the provisions of sections 45 and 49, article 6, Regulations 60." One of the five applications, under date of February 22, 1923, requested permission *125 to "dealcoholize and reduce to less than one-half of one per cent twenty-one thousand seven hundred and thirty-five gallons of cereal beverage now on hand containing more than one-half of one per cent of alcohol and disposing of the same. *2637 " The petitioner never succeeded in obtaining permission to resume manufacturing.
During 1922 experiments were conducted with part of the plant of petitioner, consisting of the brew kettle, the engine, and one or two vats, in the endeavor to develop a satisfactory process for the manufacture of near beer by arresting fermentation. These experiments were unsuccessful. About one-tenth of the machinery plant was used in the experiments. The ice plant machine was operated to enable the carrying over to the product on hand in five or six vats pending efforts to secure permission to dealcoholize this product. Ultimately, when it became evident that permission could not be secured, the product was destroyed. The petitioner has endeavored to sell the plant property but without success.
The plant of the petitioner was located at Plymouth, Wis., a town of about 4,500 inhabitants. The site was located at the corner of Milwaukee and Main Streets, a few blocks away from the general business district of the town, and had a frontage of 154 feet on Main Street. The plant buildings included a one-story and basement brick bottling house; a three-story and basement brick veneer house for*2638 brewing and malt storage; a one-story brick boiler house with stack; a one-story frame coal storage and pump house; a one-story frame garage; a two-story and basement layer house and wash room; a one-story brick veneer ice house and a one-story frame lean-to.
The remaining cost, at the end of the taxable year, of the brewery assets of the petitioner which were subject to depreciation and obsolescence, is determined by stipulation of the parties to be as follows:
| Asset | Cost | Accumulated depreciation | Remaining cost |
| Brewery buildings | $33,275.85 | $11,463.87 | $21,811.98 |
| Boilers and boiler machinery | 13,269.73 | 8,523.92 | 4,745.81 |
| Sundry machinery | 17,187.49 | 14,757.56 | 2,429.93 |
| Tanks and vats | 6,543.25 | 2,786.70 | 3,756.55 |
| Tools | 270.77 | 101.89 | 168.88 |
| Livestock and implements | 2,722.32 | 1,111.30 | 1,611.02 |
| Saloon furniture and fixtures | 1,126.83 | 849.77 | 277.06 |
| Office furniture and fixtures | 1,203.75 | 976.85 | 226.90 |
| Automobiles | 8,774.50 | 5,031.06 | 3,743.44 |
| Sidetrack | 1,469.46 | 332.73 | 1,136.73 |
| Total | 85,843.95 | 45,935.65 | 39,908.30 |
The railroad siding had a total length of about 700 feet, of which a length of 100 feet has been kept in good condition*2639 by the railroad company and is in use. The remainder has not been maintained, and is badly deteriorated.
*126 At the end of 1921 a scrap value not in excess of $200 was assignable to the bottling machinery, other machinery, boiler plant, tanks and vats, the low value being due to the probable cost of dismantling. The value of the railroad siding was at least $500. The land at the plant had a value of at least $50 per front foot. The brewery buildings were worth $10,000.
The cost which was lost to the petitioner at the end of 1921 through obsolescence was as follows:
| Buildings, remaining cost | $21,811.98 | |
| Less remaining value | 10,000.00 | |
| Loss | $11,811.98 | |
| Machinery, tanks and vats, remaining cost | $10,932.29 | |
| Less remaining value | 200.00 | |
| Loss | 10,732.29 | |
| Sidetrack, remaining cost | $1,136.73 | |
| Less remaining value | 500.00 | |
| Loss | 636.73 | |
| Total | 23,181.00 |
Manufacturing operations have never been resumed by the petitioner. To enable it to use the buildings for other purposes would require extensive reconstruction of them.
The president of the petitioner was also general manager, and he was in charge of sales and collections. His experience*2640 in the brewing business began in 1902. It was necessary for him to be away from home about one-half of the time in connection with the affairs of the petitioner. His gross sales in 1921 amounted to $227,163.63. During 1921 the petitioner sold to customers in Milwaukee, Sheboygan, and Fond du Lac. The only salesman, other than the president, was employed solely in selling soft drinks and he was also used in collecting. The president made five trips to Madison in the endeavor to secure a permit to operate. During the taxable year the petitioner expended cash in the amount of $12,992.06 for traveling expenses of the president of petitioner; cash rebates to customers; expenses of collecting accounts receivable, and in the ordinary and necessary entertainment, by the president of petitioner, of customers, incident to sales in the business of the petitioner. On the books of account this cash was originally charged to the personal account of the president of petitioner and the charges were transferred to profit and loss account in closing the accounts for the taxable year. Respondent has disallowed the deduction.
Containers in the form of bottles, cases, and kegs, were used by*2641 the petitioner in the distribution of its product. It was customary to include a charge for the containers when deliveries were made *127 to customers. The amounts of such charges are included in the aggregate of gross sales reported. Subsequently, if and when the empty containers were returned, the customer was given credit for them. An inventory value for the bottles, cases, and kegs on hand at the end of the taxable year was entered upon the journal. In determining the deficiency the respondent has capitalized an additional capital value attributed to the kegs, cases, and bottles and has computed an amount of deductible depreciation thereof for the taxable year.
In the return filed by the petitioner the deductions from income claimed included the following:
| Exhaustion, wear and tear (including obsolescence): | ||
| Depreciation of buildings | $2,532.15 | |
| Depreciation of machinery | 1,960.96 | |
| Depreciation of tanks and vats | 1,642.78 | |
| $6,135.89 | ||
| Obsolescence of machinery | 5,543.23 | |
| Obsolescence of tanks and vats | 4,000.00 | |
| Obsolescence of buildings | 20,312.64 | |
| Obsolescence of real estate | 12,831.84 | |
| 42,687.71 | ||
| Total | 48,823.60 | |
| Ordinary and necessary expenses: | ||
| Collector's expense and cash rebates | 12,181.05 | |
| Kegs | $4,688.09 | |
| Cases and bottles | 6,726.76 | |
| 11,414.85 | ||
| Various other items (detailed in the return) | 59,193.23 | |
| Total | 82,789.13 |
*2642 In determining the deficiency, the respondent has increased the amount of net income reported on the return by the following disallowed deductions:
| Deduction claimed for depreciation | $6,135.89 | |
| Deduction allowed | 3,959.83 | |
| Deduction disallowed | $2,176.06 | |
| Deduction claimed for obsolescence, disallowed | ||
| in its entirety | 42,687.71 | |
| Deduction claimed for kegs, cases, and bottles | $11,414.85 | |
| Deduction allowed | 9,055.79 | |
| Deduction disallowed | 2,359.06 | |
| Amount of expenses disallowed (no detail) | 12,992.06 |
OPINION.
TRUSSELL: That first issue is a question of fact relating to the ordinary and necessary expenses of the petitioner which are allowable as deductions. In the return filed by the petitioner expenses aggregating $82,789.13 were reported; included therein was an item of *128 "collector's expense and cash rebates $12,181.05." The respondent has disallowed an amount of $12,992.06 expenses. It appears that the amount disallowed by the respondent was expended for such ordinary and necessary business purposes as rebates to customers, expenses of collecting accounts receivable, and expenses of traveling and entertaining by the president, who was*2643 also the general manager, chief salesman, and collector. We are of opinion that they are allowable and the disallowance of $12,992.06 should be reversed.
The second issue offers for decision a choice of methods in computing the net income of the petitioner. Containers in the form of bottles, cases, and kegs, were employed to distribute the product of the petitioner to its customers. The petitioner charged the containers to the customers at a fixed price when the product was delivered. These charges are included in the amount of the gross sales. If and when the containers were returned, the customers were given credit or were paid cash for them. At the end of the year an inventory value of the containers on hand with the petitioner was reflected on the books by a journal entry. In determining the deficiency the respondent has revised this procedure in that he has capitalized the containers and allowed as a deduction an amount computed as representing exhaustion, wear and tear of the capital value, popularly referred to as "depreciation." Thus the containers are considered by the respondent to be at all times the property of the petitioner. There are many angles to the question. *2644 Usually at the end of any year, containers are outstanding in the hands of the customers and income for the year includes charges for the outstanding containers; in the end, the charges will be nullified by credits for such of the containers as are returned. Although there is intended ultimately no gain in the transactions, the tide of "income" ebbs and flows over the dividing lines between the statutory taxable years. We have decided that a reserve is unallowable by way of excluding from income the charges for containers expected to be returned. . In the instant case the petitioner is extraordinarily handicapped in that it was practically put out of business during the taxable year. On the whole and solely with reference to the instant case, we think that the adjustment of the respondent has not simplified the situation, and of the two methods that of the petitioner reflects income with greater clarity. We, therefore, sustain the petitioner. It is entitled to an additional deduction amounting to $2,359.06.
The remaining issue relates to a deduction from income in the return by way of allowance for a loss which the petitioner*2645 claims to have suffered during the taxable year. Respondent has disallowed the deduction.
*129 Until August of the taxable year the petitioner was engaged in the manufacture and sale of "near beer" by a process which first manufactured a product containing an unlawful proportion of alcohol and then by dealcholizing the beer converted it into vendible "near beer." In August the petitioner received notice from an authoritative source to cease operations of the dealcoholizing plant until a permit to operate was obtained from the State of Wisconsin authorities. Accordingly, the operation of the entire plant was abruptly suspended and has never been resumed. In our view, no significance is to be attached to the fact that the refrigerating machinery was kept going for the preservation of the quantity of the product on hand, which had not been dealcoholized and, in addition, the engine, brew kettle and a few vats were used for experimentation in the following year in the futile endeavor to develop a process of manufacture which would arrest fermentation and thus avoid the necessity of dealcoholizing. No further productive use was found for the plant. The petitioner was not*2646 successful in obtaining a permit of any kind and the operation of the plant has never been resumed.
The loss claimed is that of obsoleteness as distinguished from progressive obsolesence culminating at some future date. We think the facts afford a substantial basis for the claim of the petitioner. We are not deterred in this opinion by the efforts of the petitioner to obtain a permit. In affirming our decision in , the , had this to say in reply to a contention that the assets there at issue might have been revived in usefulness at any moment upon securing a new permit to operate:
This contention is purely hypothetical, is based upon possibilities and presumptions and assumptions up to this time contrary to the fact and may never in the life of the taxpayer become a fact.
We think the abortive experiments of the petitioner in the following year are demonstrative of the uselessness of the assets rather than of their usefulness. In our view the petitioner was, at the end of the taxable year, face to face with a loss for the present recognition of which*2647 there certainly were as good grounds as in ; or in
In , the court was of opinion that:
The fact that further experiments were afterward made with a view to making the oil system effective, although to no purpose, does not prove that the expenditure was not a complete loss in the year it was made, and the new system shown by test not to be a success.
*130 The court then cites , as follows:
* * * A loss may become complete enough for deduction without the taxpayers establishing that there is no possibility of eventual recoupment * * *. The taxing act does not require that the taxpayer be an incorrigible optimist.
Taking up in detail the assets upon which obsoleteness is claimed we find included therein tools, livestock and implements, automobiles, and saloon fixtures. There is no evidence relative to any of these and we can not find that a loss is attributable to them.
*2648 With respect to the land included in the plant property, we think a loss is unallowable. Title was retained; the evidence shows that the land had a substantial remaining value; the absence of a ready market is not determinative. We, therefore, sustain the respondent in this respect.
On the other hand, we are satisfied that the brewery buildings, boilers and boiler machinery, sundry machinery, tanks and vats, and the sidetrack, were rendered useless and, to the extent indicated in the findings, valueless, during the taxable year, so that the petitioner is entitled to a deduction of $23,181. Cf. ; ;; ; ; .
Judgment will be entered pursuant to Rule 50.