1928 BTA LEXIS 3575">*3575 1. Held, that the deficiency for 1919 is barred by the expiration of the period of limitations prescribed by law.
2. Method of computing depreciation on sawmill machinery and equipment for 1920, determined.
12 B.T.A. 256">*256 This is a proceeding for the redetermination of deficiencies in income and profits taxes of $9,549.67 and $17,950.10 for 1919 and 1920, respectively. The matters in controversy are: (1) Whether the assessment and collection of the deficiency for 1919 is barred by the expiration of the period of limitations prescribed by law, 12 B.T.A. 256">*257 and if the Board finds that it is not barred, then whether the petitioner is entitled to a deduction of $6,390 representing a loss sustained on the sale of certain turpentine rights during that year. and (2) whether the respondent allowed a sufficient deduction for depreciation for 1920.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of Mississippi in 1918 with its principal office at Moss Point.
The cost to the petitioner of its mill property subject to depreciation, 1928 BTA LEXIS 3575">*3576 the years in which acquired and the amount by which the cost should be reduced on account of salvage were agreed to at the hearing as follows:
| Year acquired | Cost | Salvage | Net cost to be depreciated |
| 1918 | $37,432.90 | $3,743.29 | $33,689.61 |
| 1919 | 45,447.00 | 4,545.00 | 40,902.00 |
| 1920 | 14,799.73 | 1,479.97 | 13,319.76 |
It was also stipulated that the timber purchased and the timber cut by the petitioner was as follows:
| Year | Timber purchased | Timber cut |
| Feet | Feet | |
| 1918 | 18,464,425 | 835,000 |
| 1919 | 2,750,000 | 8,535,743 |
| 1920 | 2,679,488 | 7,075,995 |
| 1921 | 1,305,108 | 2,769,969 |
| 1922 | 31,492,840 | 15,331,360 |
| 1923 | 2,705,000 | 18,408,077 |
| 1924 | 5,446,101 | |
| 1925 | 1,094,606 | |
| Total | 59,396,861 | 59,496,851 |
The depreciable property referred to above consisted of a mill used in the cutting of timber from 1918 to 1925. This mill and the additions thereto in later years was, with the exception of an engine and boiler sold in 1925 after the final cut of timber. The engine and boiler are still being used in other operations. In addition to the above mentioned mill, the petitioner acquired another mill in 1922 as a part of the purchase in that1928 BTA LEXIS 3575">*3577 year of a tract of timber containing 31,492,840 feet. This mill was disposed of after cutting out the timber on the tract in 1923.
The timber purchased in each of the years was in the general vicinity of the petitioner's mill. However, that acquired in 1922 was from 16 to 18 miles away.
Purchases of timber were made as it was offered for sale to the petitioner. The petitioner's officers gave no thought to the purchasing of timber until it was offered to them for sale, and they made no 12 B.T.A. 256">*258 attempts or offers to buy until it was so offered to them. If the timber purchased in 1922 had been offered for sale to the petitioner in 1921, it possibly would have been able to finance the purchase. However, it would have been unable to do so in any prior year.
For the year 1919, the petitioner claimed a deduction of $21,591.34 for depreciation. In a letter dated January 17, 1925, in which the petitioner was advised of a deficiency in tax which was subsequently assessed and paid, the petitioner was informed that the depreciation claimed was allowed to the extent of $12,563.67.
The petitioner in preparing its 1918 return computed depreciation on the basis that it owned1928 BTA LEXIS 3575">*3578 18,464,425 feet of timber, which it estimated would be cut out in three years. About 1919, when it was found that other timber was available, the petitioner decided to change the basis for depreciation, as it was found that operations would continue longer than the three years originally estimated. The useful life of such property under average operations when kept in repair is 10 or 15 years.
In the notice of deficiency, which is the basis of this proceeding. the amount allowed for depreciation for 1919 is shown to be $15,571.08. This amount is arrived at through a computation based on production and on the premise that in 1918 when the petitioner began operations there were available to it 30,000,000 feet of timber. The amount allowed for depreciation in 1920 is $22,189.73, which is also determined through a computation based on the same premise.
The following letter from the secretary of both the Colmer-Green Lumber Co. and the McIntosh Lumber Co. was addressed to and received by the collector of internal revenue at Jackson, Miss., on March 15, 1920:
I am enclosing N.Y. Exchange for $1579.50 which is 25% of Excess Profits and Income Tax due by McIntosh Lumber Co., and1928 BTA LEXIS 3575">*3579 Colmer-Green Lumber Co., according to law as I understand it and as shown by books for the year 1919.
I submit the following tentative statement, consolidated, for the two above named Companies.
| Invested Capital for 1919 | $96,850.02 | ||
| Net earnings for 1919 | 25,954.82 | ||
| 20% of Invested Capital | $19,370.00 | ||
| Less: | |||
| 8% of Invested Capital | $7748.00 | ||
| Specific Exemption | 3000.00 | ||
| 10,748.00 | |||
| Balance at 20% | 8,622.00 | 1,724.40 | |
| Net Earnings | 25,954.82 | ||
| Less 20% of Invested Capital | 19,370.00 | ||
| Balance at 40% | 6,584.82 | 2,633.92 | |
| Total Excess Profits Tax | 4,358.32 | ||
| Add Income Tax: | |||
| Net Earnings | $25,954.82 | ||
| Less Excess Profits Tax as above | $4,358.32 | ||
| Specific Exemption | 2,000.00 | ||
| 6,358.32 | |||
| Income Tax at 10% on | $19,596.50 | 1,959.65 | |
| Total Excess profits and Income Tax | $6,317.97 |
Of which I enclose 25% or $1,579.50 as stated.
12 B.T.A. 256">*259 The collector made the following reply:
Answering yours of the 13th Inst., you are advised that it is necessary for you to file a tentative return on the enclosed 1120, together with letter setting forth your reason for desiring an extension.
When this has been forwarded to me I will be1928 BTA LEXIS 3575">*3580 glad to grant you an extension of sixty days, but this return must be forwarded to this office promptly, properly signed and executed.
On March 22, 1920, the collector received a "tentative" return accompanied by the following letter dated March 20, 1920:
Referring to my statement of the 13th enclosing Exch. for $1,579.50 as first payment for quarter for McIntosh Lumber Co. and Colmer-Green Lumber Co., I am enclosing herewith as requested tentative report, and I respectfully ask for 60 days further time, because I am anxious to give further study to the question of Capital Stock, and its effect on Excess Profits Tax.
This "tentative" return discloses on its face that it is a consolidated return for the McIntosh Lumber Co. and the Colmer-Green Lumber Co., Moss Point, Miss., and McClain, Miss. It does not, however, contain information showing specifically the separate items of gross income and deductions of either company, nor does it contain information as to the amount of the separate net income of the two corporations. Accompanying the return are Schedules K and L, described as a consolidated balance sheet and an analysis of surplus, respectively. Neither of the schedules1928 BTA LEXIS 3575">*3581 show the items thereof separately for each of the companies.
On May 15, 1920, there was filed with the collector of internal revenue for the district of Mississippi a consolidated return for the McIntosh Lumber Co. and the Colmer-Green Lumber Co. for the calendar year 1919. Attached to the return was a copy of the collector's letter granting an extension until May 15, 1920, for filing the return. There were also attached to the return the following schedules K and L designated as consolidated balance sheet and analysis of surplus account consolidated:
SCHEDULE K.
Consolidated Balance Sheet, McIntosh Lumber Co. and Colmer-Green Lumber Co., as of date Dec. 31st, 1919:
| ASSETS | ||
| Cash on hand and in Banks | $2,632.06 | |
| Accounts Receivable | 30,516.20 | |
| Inventories | $54,838.28 | |
| U.S. Bonds | 2,300.00 | |
| Stock other Corporations | 4,500.00 | |
| Lands | 86,122.87 | |
| Buildings | 18,462.67 | |
| Mills & Machinery | 60,424.54 | |
| Barge, Launch, Artesian Well | 2,561.72 | |
| Live Stock & Vehicles | 9,164.64 | $271,522.98 |
| LIABILITIES | ||
| Bills Payable Banks | 39,900.00 | |
| Bills Payable Others | 58,062.74 | |
| Accounts Payable, Trade | 17,544.21 | |
| Accounts Payable, Others | 9,888.53 | |
| Capital Stock | 120,000.00 | |
| Undivided Profits | 26,127.50 | $271,522.98 |
| SCHEDULE L. | ||
| Undivided Profits Jan. 1st, 1919 | 1,850.02 | |
| Net earnings 1919 | 49,277.48 | |
| 51,127.50 | ||
| Stock Dividend, Colmer-Green Lumber Co. | ||
| From earnings 1918 | $1,677.34 | |
| From earnings 1919 | 23,322.66 | 25,000.00 |
| Undivided Profits Jan. 1st, 1920 | $26,127.50 |
| Assets | McIntosh Lumber Co. | Colmer-Green Lumber Co. | |
| SCHEDULE K | |||
| Cash in Banks | $843.40 | $1,788.66 | |
| A/cs Receivable | 6,903.37 | 23,612.83 | |
| Inventories | 43,400.00 | 11,438.28 | |
| U.S. Bonds | 2,300.00 | ||
| Stock Other Corp | 4,500.00 | ||
| Lands | 2,685.00 | 83,437.87 | |
| Buildings | 3,762.67 | 14,700.00 | |
| Mill & Machinery | 23,000.00 | 37,424.54 | |
| Barge, Launch &c | 2,561.72 | ||
| Live Stock &c | 9,164.64 | ||
| Total | 89,956.16 | 181,566.82 | |
| LIABILITIES | |||
| Bills Payable Banks | 34,900.00 | 5,000.00 | |
| Bills Payable others | 3,822.74 | 54,240.00 | |
| A/cs Pay. Trade | 6,033.97 | 11,510.24 | |
| A/cs Pay. Others | 9,888.53 | ||
| Capital Stock | 45,000.00 | 75,000.00 | |
| Und. Profits | 199.45 | 25,928.05 | |
| Total | 89,956.16 | 181,566.82 | |
| SCHEDULE L | |||
| Surplus Jan. 1st 1919 | 172.68 | 1,677.34 | |
| Net earnings 1919 | 26.77 | 49,250.71 | |
| Total | 199.45 | 50,928.05 | |
| Stock Dividend: | |||
| From earnings 1918 | $1,677.34 | ||
| From earnings 1919 | 23,322.66 | ||
| 25,000.00 | |||
| Undivided Profits Jan | 199.45 | 25,928.05 |
12 B.T.A. 256">*261 The return filed on May 15, 1920, does not contain any statement showing separately the items or amounts of gross income and deductions of the corporations, but the entries on the face of1928 BTA LEXIS 3575">*3583 the return indicate that they are the combined items of the two companies. Nothing contained in the return or the statements attached thereto indicate the portions of the income and deductions reported that pertain to the separate companies. The tentative return and also the consolidated return contained the question, "Is over 50% of your outstanding voting capital stock as well as over 50 per cent of the outstanding voting capital stock of another corporation or other corporations owned or controlled by the same individual or partnership or by the same individuals or partnerships?" It was answered in the affirmative.
In November, 1921, the respondent advised the petitioner that it should file a separate return for the year 1919 and on December 15, 1921, there was filed by the petitioner with the collector for the district of Mississippi a separate return executed under date of December 9, 1921, by F. Colmer and J. J. McIntosh as president and treasurer, respectively, of the petitioner. No balance sheets and no analysis of surplus account were attached to the return as required by the instructions contained therein. The space provided in the return for listing the schedules1928 BTA LEXIS 3575">*3584 accompanying it is left blank.
The following instrument was filed by the petitioner and later signed by the respondent:
Nov. 21, 1924.
(Date)
IT: CA-2339-7
INCOME AND PROFITS TAX WAIVER
In pursuance of the provisions of existing Internal Revenue Laws, Colmer-Green Lumber Company, a taxpayer, of McLain, Mississippi, and the Commissioner of Internal Revenue, hereby consent to extend the period prescribed by law for a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the years 1919 under the Revenue Act of 1924, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes", approved August 5, 1909. This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation within which assessments of taxes may be made for the year or years mentioned, or the statutory period of limitation as extended1928 BTA LEXIS 3575">*3585 by Section 277(b) of the Revenue Act of 1924, or by any waivers already on file with the Bureau.
COLMER-GREEN LUMBER CO.,
Taxpayer
By (Signed) J. J. MCINTOSH Sec'y & Treas.
(Signed) D. H. BLAIR,
Commissioner.
12 B.T.A. 256">*262 In this proceeding, the petitioner does not claim that it was ever affiliated with any other corporation.
The notice of deficiency upon which this proceeding is based was mailed to the petitioner on September 2, 1926.
OPINION.
TRAMMELL: The issues involved in this proceeding are: (1) Whether the assessment and collection of the deficiency for 1919 are barred by the running of the period of limitations provided in the statute, (2) if in the event the deficiency for 1919 is not found to be barred whether the petitioner is entitled to a deduction of $6,390 as the result of a loss sustained on the sale of certain turpentine rights, and (3) whether the petitioner is entitled to an additional allowance for depreciation for 1920.
With respect to the first issue, the petitioner contends that the return filed on May 15, 1920, was the required return, and that the running of the period of limitations began from that date. The respondent1928 BTA LEXIS 3575">*3586 contends that the return filed on May 15, 1920, was not the return required by law and that the period of limitations did not begin to run until the filing of the separate return on December 15, 1921.
The schedules showing the balance sheet and analysis of surplus attached to the return filed on May 15, 1920, show separately assets and liabilities of each of the corporations for which the consolidated return was being made, but did not show separately the items of income and deductions applicable to each.
Was that return the return required by statute for the purpose of starting the running of the period of limitations? The respondent contends that it was not, since it was a consolidated return which did not show separately the items of income and deductions and the information required by the printed instructions appearing on the return and that a consolidated return was not required by statute for the two corporations.
In , we said:
Where a consolidated return has been prepared and filed in good faith, and the names of the companies included in the consolidation are made clear to the respondent, and all of the "items of1928 BTA LEXIS 3575">*3587 gross income and the deductions" are included therein, although said items of income and deductions may not be in sufficient detail to enable the respondent to accurately compute the tax against each of the companies, there is a "substantial" compliance with the statute.
The return indicated on its face that more than 50 per cent of the voting capital stock of two corporations was owned or controlled by the same interests. In view of the regulations and rulings of the 12 B.T.A. 256">*263 Treasury Department with respect to consolidated returns and the uncertainty as to a definite basis for such returns, and the fact that the respondent raises no question as to the petitioner's good faith in filing a consolidated return, we think that such return was filed in good faith.
On the return appear the names of the two corporations with their respective addresses, and a statement that it is a consolidated return. Although the items of income and deductions for the respective companies were not segregated as to each company, all items of income and deductions were included in the returns. We think that the consolidated return under the facts and circumstances was sufficient to start the running1928 BTA LEXIS 3575">*3588 of the period of limitations. The statute does not require that such a return include the separate income and deductions of each corporation. The regulations of the Commissioner, approved by the Secretary, however, do provide that statements and schedules shall be filed giving details of the items of gross income and deductions. Whether the regulations were complied with, the Commissioner had the opportunity to determine. The respondent had an opportunity to audit the return and to determine whether it set forth the data and information in sufficient detail and to determine whether a consolidated or separate returns should have been filed, as he subsequently did. The period of limitation prescribed by statute is one of repose and it should not lightly be construed to permit the respondent to reopen cases upon the ground that the return filed in good faith was not the return required by statute. We held in the Stetson & Ellison case, supra, that under a similar state of facts the consolidated return was sufficient to start the running of the period of limitation.
As the period prescribed by law for making assessment and collection of tax expired on May 15, 1925, and1928 BTA LEXIS 3575">*3589 as the consent or agreement between the petitioner and the respondent dated November 21, 1924, extended the period for only one year from the expiration of that period, or until May 15, 1926, we think the assessment and collection of the deficiency for 1919 was barred at the time of the mailing of the notice of deficiency on September 2, 1926.
In the above view we have taken of the deficiency for 1919, it becomes unnecessary to consider the alternative issue as to whether the petitioner is entitled to a deduction on account of loss sustained on the sale of the turpentine rights.
The remaining issue, which relates to the deficiency for 1920, involves the question as to whether the petitioner is entitled to any greater deduction for depreciation on its sawmill machinery and equipment than $22,189.73, the amount allowed by the respondent in determining the deficiency.
12 B.T.A. 256">*264 The petitioner admits that the unit of production method as used by the respondent is the proper method for determining depreciation in this case. There being no controversy over the method of determining the deduction, the issue in this respect is limited as to what was the amount of timber available1928 BTA LEXIS 3575">*3590 during the taxable years. The respondent contends that 30,000,000 feet of timber was available to the petitioner in 1918. The petitioner contends that only 18,464,425 feet were available. That was all the timber owned by the petitioner in 1918. The respondent's position is that notwithstanding the fact that the petitioner actually owned less than the 30,000,000 feet, that quantity was available to it.
The petitioner began business in 1918 and in that year purchased 18,464,425 feet of timber. While it acquired other timber during subsequent years down through 1923, this fact is not sufficient to convince us that during 1918 other timber was a available to the petitioner. The fact that there was other timber in the vicinity of petitioner's operations is not alone determinative of whether such timber was available. Although the petitioner purchased a large amount of timber in 1922, it would have been unable to have financed the purchase of it in 1918, 1919, or 1920. The evidence shows that other mills were operating near the petitioner, and that prior to the time timber was offered for sale to it there would have been no basis for assuming that it instead of the other mills1928 BTA LEXIS 3575">*3591 would be able to acquire the additional timber of any part thereof. The other timber was apparently no more available to the petitioner than any of the other mills. There is no more reason in determining the timber available to the petitioner to add the difference between what it owned and the 30,000,000 feet, than for determining that the other timber not owned by petitioner was available to each of the other mills. This manifestly would have been unreasonable. The availability of the timber supply should be considered in the light of facts known during the taxable years and those which could reasonably have been anticipated. Whether the petitioner would or could acquire other timber depended on facts and circumstances not known during the taxable years. It knew what its timber supply was in the taxable years, but it did not know and we can not find that it could have reasonably anticipated that it could have acquired an additional supply. That depended on future conditions, market prices and the contingency that others might or might not acquire any other timber in the vicinity of its operations. In view of the facts in the case, we do not think it fairly can be said that1928 BTA LEXIS 3575">*3592 in 1918 there were 30,000,000 feet of timber available to the petitioner as the respondent has determined.
In our opinion, for 1920 the petitioner is entitled to a deduction for depreciation computed on the basis of an available timber supply 12 B.T.A. 256">*265 in 1918 of 18,464,425 feet and depreciable property having a cost of $37,432.90 at the beginning of operations in 1918. In computing depreciation for 1920 effect should be given to the amount of additional timber purchased during 1919 and 1920 as well as to the additions made to the physical property during those years. Effect should also be given in the computation to the salvage value of depreciable property acquired in 1918 and the additions thereto in 1919 and 1920 as set out in the findings of fact.
Reviewed by the Board.
Judgment will be entered under Rule 50.