*1593 1. Held that petitioner has failed to show that the respondent erred in refusing to allow depreciation deductions upon certain claimed additions to depreciable property.
2. Upon the evidence, held that a rate of depreciation of 10 per cent instead of 5 per cent should be allowed upon certain assets.
*793 This is a proceeding for the redetermination of an asserted deficiency in income taxes for the taxable period November 1, 1924, to December 31, 1924, in the amount of $2,040.25.
It is alleged that the respondent erred in failing to allow to the petitioner, which is the successor to the Harvey Coal Company, depreciation in the amount of $20,000 upon additions made by the lessee of the Harvey Coal Company to certain assets, it being claimed that such additions became the property of the Harvey Coal Company upon the cancellation of the lease and that they were later acquired by the petitioner. It is also alleged that petitioner is entitled to depreciation upon buildings, tipples, and furniture and fixtures at*1594 the rate of 10 per cent instead of 5 per cent as allowed by the respondent.
FINDINGS OF FACT.
The petitioner is a corporation organized and existing under the laws of the State of Tennessee, with its principal office in Knoxville. It was formed about November 1, 1924, as successor to the Harvey Coal Company.
*794 On October 30, 1917, the Harvey Coal Company was the owner of a leasehold estate in certain coal lands located in perry County, Kentucky. On that date, the Harvey Coal Company entered into an agreement with the Hazard-Jellico Coal Company whereby it agreed to lease such premises to the latter company for a term of two years from November 1, 1917, at a yearly rental of $27,000, with the privilege of renewal. The Harvey Coal Company executed the lease with the consent of the Kentucky River Coal Corporation, which company had leased the premises to the Harvey Coal Company. The Hazard-Jellico Coal Company agreed in the lease to operate and conduct the coal operations on the leased premises in a skillful and workmanlike manner, to keep the mine and all appurtenances thereto in good condition, and not to permit any damages to the premises other than such as might*1595 be necessary in the proper conduct of the mining operations. The Hazard-Jellico Coal Company agreed, at its own expense, to make necessary repairs to buildings, houses, tipples, erections, machinery and equipment and to surrender the premises to the Harvey Coal Company at the termination of the lease in as good condition as the same were when received, reasonable wear and tear excepted. The Hazard-Jellico Coal Company further agreed that at the expiration or termination of the lease it would surrender to the Harvey Coal Company the leased premises with all the mines, entries, openings, tramways, chutes, tracks, switches, rails, inclines, tipples, houses, buildings and other appurtenances in good working order and condition, the same to be and remain the property of the Harvey Coal Company.
The above lease was renewed once or twice, but in 1923 the Hazard-Jellico Coal Company defaulted in the payment of rent. The Harvey Coal Company thereupon took action to recover the property and the back payments and the Hazard-Jellico Coal Company then went into the hands of a receiver. The United States District Court for the Eastern District of Kentucky, which was the court in which the*1596 receivership proceedings were had, ordered that the leased premises together with improvements thereon be returned to the Harvey Coal Company, provided that company assumed and paid the liabilities outstanding against such property, which amounted to at least $50,000.
During the time that the Hazard-Jellico Coal Company occupied the leased premises it installed certain additional assets. The following is a list of such assets, showing the time of installation and their cost to the Hazard-Jellico Company:
| Item | 1921 | 1922 | 1923 |
| Cincinnati furniture and fixtures | $5,322.37 | $110.25 | |
| Cincinnati laboratory equipment | 154.73 | ||
| Store furniture and fixtures | |||
| Mine office furniture and fixtures | 71.41 | 100.00 | |
| Boarding house | 134.00 | 57.57 | |
| Engineering department furniture and fixtures | 2.50 | ||
| Bridges and culverts | 201.74 | 94.54 | |
| Dwellings | $6,807.33 | 165.00 | 225.99 |
| Buildings | 791.77 | 497.22 | |
| Gasoline tanks | 169.87 | ||
| Refrigerating equipment | |||
| Haulage equipment | 269.95 | ||
| Locomotives | 2,854.87 | 7,064.90 | 664.00 |
| Mine cars | 3,274.65 | 20,759.56 | |
| Mine tracks | 9,281.33 | 3,293.64 | |
| Mining machines | 5,375.10 | 707.50 | |
| Rock drills | |||
| Sawmill | |||
| Trolley lines | 206.15 | 578.88 | |
| Substation and other electric equipment | 39.25 | ||
| Tipple equipment | 646.56 | 906.65 | |
| Drainage equipment | |||
| Ventilation equipment | |||
| Power equipment | |||
| Pump and pump lines | |||
| Shooting equipment | |||
| Small tools | |||
| Miscellaneous equipment | |||
| Total | 27,593.28 | 19,199.59 | 24,036.41 |
*1597 *795 The Harvey Coal Company took over the premises in 1924, upon which were located these additional assets. It thereafter continued to use all of such assets. The value of the additions to the plant at the time the leased premises were turned back to the Harvey Coal Company was as shown in the above tabulation, less ordinary depreciation.
Due to the need for more capital it was decided by the Harvey Coal Company to organize a new corporation. Thereupon, petitioner was formed. Petitioner issued stock to the Harvey Coal Company was exchange for all the assets of that company. Some additional capital was also paid in to the petitioner. The Harvey Coal Company was then dissolved.
The assets taken over by the petitioner on November 1, 1924, included the additional assets which had been installed by the Hazard-Jellico Coal Company. In setting up its books, the petitioner failed to make any entries of these assets which had been installed by the Hazard-Jellico Coal Company. No depreciation was ever claimed by the Harvey Coal Company on the property which was installed by the Hazard-Jellico Coal Company during the term of the lease.
No deduction for depreciation*1598 was claimed by petitioner on its books or in its return for the period November 1 to December 31, 1924. The respondent allowed a deduction in the amount of $2,023.13 for depreciation upon the assets appearing upon the books of the petitioner. The amount of this deduction was arrived at by taking two-twelfths of $12,138.76, the depreciation which respondent calculated for the entire year 1924. The figure $12,138.76 includes an *796 amount of $2,667.57, representing depreciation on buildings at a rate of 5 per cent, $907.50 representing depreciation on tipple at 5 per cent, and $1.18 representing depreciation on furniture and fixtures at a rate of 5 per cent.
The respondent's computation does not allow the petitioner any deduction for depreciation upon the assets installed by the Hazard-Jellico Coal Company.
OPINION.
McMAHON: It is the contention of the petitioner that it is entitled to a deduction for depreciation in an amount larger than that allowed by the respondent, for the reason that the respondent's computation does not allow depreciation upon the assets which had been installed upon the leased premises by the Hazard-Jellico Coal Company. The evidence discloses*1599 that these assets did not appear on petitioner's books at any figure and that respondent did, in fact, fail to take these assets into consideration in computing the deduction for depreciation.
Section 204(a) and (c) of the Revenue Act of 1924 provides that the basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property acquired after February 28, 1913, shall be the cost of such property, with certain exceptions. One of those exceptions is where one corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities of another corporation a party to the reorganization. Petitioner's witnesses refer to the transaction between the petitioner and the Harvey Coal Company as a reorganization. However, from the evidence it does not appear that it was a reorganization or that the petitioner comes within any of the exceptions to the rule that the depreciation to which it is entitled must be based upon the cost of the assets to the petitioner. The evidence discloses that the assets of the Harvey Coal Company were transferred to the petitioner for stock.
*1600 To establish its right to a deduction for depreciation a taxpayer must show that it owns the property and must also show the amount of its capital investment in such property. ; ; and ; affd., ; certiorari denied by Supreme Court, .
We have been furnished with evidence as to the cost of certain assets to the Hazard-Jellico Coal Company and witnesses for petitioner testified that the value of these assets, when they were turned *797 over to the Harvey Coal Company, was their cost to the Hazard-Jellico Coal Company less ordinary depreciation. However, there is no evidence to show how much stock petitioner issued for such assets, the value of the stock issued therefor, or the value of the assets at the time they were acquired by petitioner. We are thus unable to determine the cost of the assets to petitioner. Furthermore, the lease whereby Harvey Coal Company originally acquired possession of the mine in question*1601 is not in evidence and we can not determine whether or not, under the terms of that lease, the Harvey Coal Company acquired title to any additional assets installed by the Hazard-Jellico Coal Company. It is possible that title to such assets vested in the owner of the premises, that under the order of the receivership court the Harvey Coal Company simply reacquired the lease and that there was no sale of the additional assets in question to this petitioner. In such a situation we are precluded from allowing petitioner any deduction for depreciation upon such assets.
It is also contended by the petitioner that the respondent, in computing the deduction to which the petitioner is entitled on account of depreciation on buildings, tipples, and furniture and fixtures, erred in using a rate of 5 per cent instead of 10 per cent.
Section 234(a)(7) of the Revenue Act of 1924 provides as follows:
(a) In computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
* * *
(7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.
*1602 The rate of depreciation is the only question presented by this allegation of error. The respondent has calculated depreciation upon the assets in question for the entire year 1924 to be $3,576.25, by using a rate of 5 per cent and for the taxable period in question has allowed petitioner two-twelfths of that amount as a deduction. Two well qualified witnesses for the petitioner testified that at the time petitioner acquired such assets their useful life was 10 years. This evidence was not controverted in any way and we therefore hold that the petitioner is entitled to depreciation upon such assets at the rate of 10 per cent, resulting in a deduction for depreciation on such assets in the amount of two-twelfths of $7,152.50, instead of two-twelfths of $3,576.25. Adjustment will accordingly be made under Rule 50. See , and .
Judgment will be entered under Rule 50.