*1839 Depreciation allowed by the Commissioner on cotton mill machinery and buildings sustained.
*705 These proceedings, which were consolidated for hearing, involve deficiencies in income and profits taxes as determined by the Commissioner as follows:
| 1920 | $17,265.58 |
| 1921 | 6,057.97 |
| 1922 | 2,570.20 |
| 1923 | 4,159.78 |
The one question involved is the deduction allowable on account of depreciation sustained by the petitioner on buildings and machinery.
FINDINGS OF FACT.
The petitioner is a North Carolina corporation with its principal office and place of business at Hillsboro, where it is engaged in the manufacture of cotton goods. Its original plant was built about 1894 and 1895 and it started operating in 1896. The original building was of brick construction and 5,000 spindles were first installed. About a year later the number of spindles was increased to 10,000. In 1904 a weave shed was built and equipped with 400 looms. In 1908, 232 additional looms were added. Further increases in spindle capacity have been made as follows: *1840 1905, 9,000 spindles; 1920, 1,200 spindles; and in 1923, 6,800 spindles, making a total capacity at the present time of approximately 27,000 spindles.
Petitioner's depreciable assets were carried in two principal accounts, namely, a construction account which included brick buildings, warehouses of brick and frame construction, and tenements of wood construction, and a machinery account which referred to mill machinery. In addition, the petitioner had a small account for office furniture of less than $1,000. The balance in the construction *706 account at December 31, 1916, was $166,644.48 and that in the machinery account on the same date was $458,081.06. The reserve for depreciation on all fixed assets as shown by petitioner's books at December 31, 1916, was $187,888.14. No depreciation reserve was shown on petitioner's books prior to 1912, when an attempt was made to reflect the depreciation sustained prior to that time. Prior to December 31, 1916, only one item, an amount of $2,859.45 for card clothing, was charged against the depreciation reserve, and prior to the same date approximately $129,000 had been charged to expense for loom parts, parts for frames and spinning*1841 machinery, carding machinery and general machinery around the mill.
In 1919, 160 secondhand looms were acquired by the petitioner, the cost of which, together with cost of installation, was $41,202.03. These looms were approximately 11 years old when acquired and they were not discarded until in or subsequent to 1929, though the use of them after 1924 or 1926 was experimental to determine whether they could be used in the manufacture of a character of goods different from that for which they were acquired. In 1918 certain attachments were acquired for looms at a cost of $31,558, which were discarded in 1924 or 1925. The chemical dyes used by the petitioner during the war period were of an inferior quality and tended to shorten the life of spinning machinery. In 1924 petitioner quit using 401 of the looms which had been acquired in 1904, and in 1929 they were scrapped and shipped as junk. The remaining 231 looms which were acquired in 1908 are now standing idle in the plant. The spindles which were first installed in 1896 and 1905 were still in the plant in 1930 and some of them were still being used. The original building, constructed in 1895, and all buildings subsequently*1842 constructed except a small number of tenement houses which were burned, were still in use at the date of the hearing in 1930. A part of the spinning and slashing machinery which was in use in 1916 was still in use at the date of the hearing in these proceedings in 1930. Some carding machinery which had been acquired in 1895 was discarded about 1918. Both prior and subsequent to the war years the petitioner ran its plant overtime when business required such operation, and during the war period the overtime operations were somewhat greater than in other periods. Further, during the war period the best mechanics could not be obtained and the labor then used was not up to the standard used in other years. During the greater part of the years now before the Board competent labor was used.
The cost of spindles in 1896 and 1905 was approximately $2 to $2.25 per spindle, whereas the cost had increased to approximately $6.25 per spindle by 1919. The cost of similar types of tenement houses increased from $450 in 1908 to $1,075 in 1920.
*707 The petitioner's sales from 1917 to 1927, inclusive, were approximately as follows:
| Year | Yards |
| 1917 | 9,206,000 |
| 1918 | 7,701,705 |
| 1919 | 10,128,544 |
| 1920 | 8,234,656 |
| 1921 | 12,542,402 |
| 1922 | 10,814,395 |
| 1923 | 10,494,803 |
| 1924 | 7,670,043 |
| 1925 | 7,850,761 |
| 1926 | 8,527,126 |
| 1927 | 12,241,382 |
*1843 The average price per yard of goods sold from 1921 to 1927, inclusive, was as follows:
| Year | Cents per yard |
| 1921 | 11.14 |
| 1922 | 13.22 |
| 1923 | 14.35 |
| 1924 | 12.51 |
| 1925 | 11.70 |
| 1926 | 10.76 |
| 1927 | 8.00 |
The Commissioner in his determination used the following cost values as a base, to which he applied the rates indicated in arriving at the deduction considered allowable for 1920 and 1921:
| 1920 | 1921 | |||||
| Value for depreciation | Rate | Allowed | Value for depreciation | Rate | Allowed | |
| Per cent | Per cent | |||||
| Brick buildings (70 per cent) | 1 $159,887.93 | 3 | $4,796.64 | 1 $164,702.68 | 3 | $4,941.08 |
| Frame buildings (30 per cent) | 1 72,273.39 | 4 | 2,890.94 | 1 78,337.38 | 4 | 3,133.50 |
| Office furniture | 104.16 | 10.41 | 208.32 | 10 | 20.83 | |
| Machinery | 168,901.30 | 2 5 1/2 | 37,134.08 | 633,251.73 | 5 1/2 | 35,048.85 |
| Total | 851,073.03 | 44,832.07 | 880,500.11 | 43,144.26 |
*1844 For 1922 and 1923 the Commissioner used the following rates and determined depreciation allowable as follows:
| Rate | Allowed 1922 | Allowed 1923 | |
| Per cent | |||
| Machinery | 7 | $48,069.10 | $56,495.22 |
| Brick buildings (old) | 3 | 5,109.10 | 5,109.10 |
| Tenements (old) | 5 | 3,649.36 | 3,649.36 |
| Brick buildings (new) | 2 | 454.04 | 2,015.81 |
| Tenements (new) | 5 | 655.23 | 2,054.84 |
| Furniture and fixtures | 10 | 25.33 | 46.76 |
| Total | 57,962.16 | 69,371.09 |
*708 The petitioner claimed deductions in its returns for depreciation in the following amounts, which it now contends are the correct amounts allowable:
| 1920 | $73,547.71 |
| 1921 | 63,798.72 |
| 1922 | 78,523.84 |
| 1923 | 102,649.36 |
| 318,519.63 |
For 1918 and 1919 the petitioner's profits taxes were determined under the provisions of sections 327 and 328 of the Revenue Act of 1918.
OPINION.
SEAWELL: All errors assigned in the petitions were abandoned by the petitioner except the one relating to the deduction allowable on account of the exhaustion, wear and tear of depreciable assets. The assets in question are divided into two general classes, namely, buildings and machinery, and for the purpose of this*1845 opinion we will discuss each class separately.
With respect to buildings, no evidence was furnished as to the cost of the buildings acquired prior to 1917 other than that, as of December 31, 1916, the Commissioner determined a cost as shown by the petitioner's records in a certain amount and made an allocation of such amount as between brick and frame construction on the basis of 70 per cent and 30 per cent, respectively. Some of the assets were acquired prior to March 1, 1913, but no evidence was furnished as to their value on March 1, 1913. Evidence was submitted as to additions made subsequent to December 31, 1916, though we have made no finding in this respect, since counsel for the petitioner stated that the Commissioner had made satisfactory additions in this respect. All buildings originally constructed - some as early as 1895 - were still in use at the date of the hearing in 1930. The greater part of the frame buildings were apparently tenements, and, while we have no evidence as to the exact dates when they were constructed, apparently some of them were erected during the early history of the corporation, and the evidence is that all were still in use in 1930, except*1846 a few that were burned. For 1920 and 1921 the Commissioner allowed deductions for depreciation based upon a 3 per cent rate for brick buildings and 4 per cent for those of frame construction and for 1922 and 1923, a rate of 3 per cent on old brick buildings, 5 per cent on frame buildings, and 2 per cent on new brick buildings. Aside from objections which might be made as to lack of evidence as to cost, March 1, 1913, value, or date of acquisition of individual buildings, it is difficult to see how the evidence can be said to justify an increase in the allowance made by the *709 Commissioner. Brick buildings constructed in 1895 would now be 35 years old whereas the rate allowed by the Commissioner is predicated on a life of 33 1/3 years. A small part of the depreciation allowance on brick buildings for 1922 and 1923 was based upon a 2 per cent rate or 50-year life for new buildings, but we have no evidence upon which we can say that this allowance was inadequate. The allowances for frame construction are based upon a life of 25 and 20 years, and certainly the evidence would not justify disturbing even the lower rate, since apparently tenement buildings of an approximate*1847 age of 25 years are still in use.
And much that has been said about buildings applies with equal force to machinery. Instead of furnishing the cost of machinery that was acquired prior to December 31, 1916, or its March 1, 1913, value (when acquired prior to that date), with evidence as to definite life from date of acquirement or March 1, 1913, the petitioner takes the December 31, 1916, book value as fixed by the Commissioner, with additions since that time, and seeks to justify a greater allowance than that granted by the Commissioner mainly on the ground "that at the beginning of the year 1924 the taxpayer's plant as it existed in 1916 was exhausted, in so far as its useful life was concerned." But again, without taking into consideration many other objectionable features as to the very general and fragmentary evidence presented, we are far from satisfied that the useful life of the plant as it existed in 1916 was ended by January 1, 1924. Certainly, with only minor exceptions, there were no abandonments of machinery during that period; on the contrary, as late as 1929 some machinery acquired in 1896 or 1905 was still in use. Of course, it may well be that some use made of*1848 machinery from 1924 to 1929 was experimental in the sense that the petitioner was seeking to turn it into more profitable lines, but under such conditions it could hardly be said that its useful life was ended when it was being used in this way. Further, the sales of the petitioner for 1927 were the largest for any year since 1916 except 1921, which were only slightly larger. Of course, sales may not be the same as production in a given year, though the opinion of the bookkeeper was that production was "keeping pretty close up with orders in those years." It is also true that additions were made to the plant capacity in those years, but it certainly does not indicate that the production came alone from new machinery. On the contrary, the testimony was that both the old and new machinery have been operated part of the time since 1923.
The question of a reasonable rate of depreciation on cotton mill machinery has been before the Board on many occasions and we have found rates varying from 3 1/2 to 7 1/2 per cent. ; *1849 ; Nokomis*710 ; ; ; and . In the case at bar the Commissioner allowed a rate of 5 1/2 per cent for 1920 and 1921 and 7 per cent for 1922 and 1923. Witnesses for respondent, who testified as to cotton mill machinery in general, but who were unfamiliar with petitioner's plant, stated that in their opinion 3 per cent was a fair rate. The petitioner's superintendent, who was its chief witness as to the life of the machinery in question, was asked the following question and gave the following reply:
Q. What is the composite or average rate that should be used on the machinery of a cotton textile plant?
* * *
A. My opinion would be formed on a general thing about what the general people believe. On the colored goods mill the real life of machinery, I mean by that when it is up and doing its work, it's certainly shorter than it is on a grey goods mill. In other words, say we are running denim mill, you allow a general*1850 average of 15 to 20 years, and then on a drill machine it ought to be a longer period of time. Does that answer your question?
Of course, the amount of depreciation allowable in a given case is a question of fact to be determined upon the particular facts surrounding the use of a given depreciable asset and what may be the life of a given class of assets under general conditions is not conclusive, but we certainly have no evidence of unusual conditions in this case which would justify an allowance greater than that allowed by the Commissioner.
Judgment will be entered for the respondent.