*2922 EXHAUSTION, WEAR AND TEAR OF CONSTRUCTION EQUIPMENT. - Upon the facts, an allowance for exhaustion, wear and tear of certain construction equipment is determined to be reasonable in the amount claimed by the petitioner.
*102 This proceeding results from the determination of a deficiency in income and profits taxes for 1921 amounting to $6,936.36.
The petitioner alleges error in the failure to allow a deduction from income of an allowance for exhaustion, wear and tear of contracting equipment in a reasonable amount.
FINDINGS OF FACT.
The petitioner is a Georgia corporation organized in 1909 and its principal office is at Atlanta. The petitioner maintains a small repair shop at Atlanta, where at least part of the field equipment is customarily repaired and reconditioned. The field equipment is subject to exhaustion, wear and tear in varying degrees of rapidity, according to the nature of the work encountered. It is customary, in a contracting business of this kind, to make minor repairs to the equipment at the location of operations, the expense*2923 of which is charged to profit *103 and loss. Major repairs and replacements, however, are made in some repair shop and when so made result in a comparative reconditioning of the equipment, practically restoring its value in use. Ordinarily this renewal expense is deferred until a contract is secured where the equipment will be used, in order that the equipment, when sent for use on the new job, will be in first class condition for the work. The expense of the reconditioning is capitalized by a charge to the equipment account. Reconditioning expense in the amount of $9,000 was charged to the equipment account in 1920.
The petitioner entered into a contract with the Louisville & Nashville Railroad for the construction of a second track on the Cumberland Valley Division near Emanuel, Ky. The work was started about September, 1920, and was completed about the end of 1921. The excavating was largely through rock known as "sand rock," which is not as hard as granite, and the rock was encountered in nearly horizontal strata having a dip of about 2 feet in 100 feet. The strata varied in thickness, up to a greatest thickness of 30 inches. The railroad company designated to*2924 the work a grade of 80 per cent rock excavation. The length of the principal cut was about 3,000 feet and its greatest depth was about 80 feet. It was necessary to loosen and break up the rock by blasting. Steam shovels were then used to load trains of small dump cars hauled by dinky engines over 70 or 80-pound rails to the dumps. In all, about four miles of roadbed were constructed by the petitioner under this contract. The petitioner encountered physical difficulties in that a supply of water suitable for use in the boilers was not always available, due to lack of rainfall or of snowfall. In times of drought it was necessary to obtain water from an old mine. This supply was found to be very unsatisfactory because of the foaming of the water in the boilers, interfering with the accurate gauging of the supply contained in the boilers and resulting in the burning out of some of the boilers. Due to the active antagonism of the natives of the locality, it was very difficult to maintain a satisfactory force of negro workmen. The personnel of the force was constantly shifting and often the men were not experienced in the handling of the equipment. Also the equipment was handled*2925 roughly. The length of the working days in summer was 11 hours, in winter 10 hours. Some drilling was done at night.
During 1921 the petitioner had a small amount of work in the vicinity of Atlanta. The only large contract in that year was the railroad construction in Kentucky. About 75 per cent of the petitioner's equipment was used in Kentucky. No charges were capitalized during the year for the repair or reconstruction of equipment. At the Kentucky job a carpenter was employed for the repair of wooden parts of the equipment which were damaged in the work. *104 During 1921 a boom was replaced on a steam shovel and the cost thereof was charged to the contract expense account.
The dinky engines employed on the work in Kentucky, although designed for hauling dump cars, were not adapted to the long hauls necessary in this contract, where they were overburdened in the number of cars per train hauled, and over-speeded in the endeavor to cover the mileage in time to avoid idle time of the steam shovels in waiting for cars. About 60,000 yards of rock were hauled 3 miles, a complete round trip being 6 miles. A majority of the hauls, however, were not over 1 mile.
*2926 The dump cars used in the work in Kentucky were small cars of 6 yards capacity, of light construction, with wooden bodies which suffered severely in the rock handling.
The petitioner purchased 21 dump cars in 1912 and a part of this purchase is still owned. A purchase of dump cars was made in 1916 by the petitioner, the cars were used on the Kentucky job and are still owned by the petitioner. The dump cars were returned to Atlanta upon completion of the Kentucky job and some of them have been used since.
The petitioner purchased a steam shovel in 1913, and it was used on the Kentucky job in 1921. A steam shovel was sold in 1918 and a secondhand steam shovel was purchased in that year. Four steam shovels were used in Kentucky in 1921, three are still owned by the petitioner and are on hand at Atlanta.
A purchase of dinky engines was made by the petitioner in 1913. They were used on the Kentucky job and are still owned. Four standard-gauge and two narrow-gauge dinky engines were used in 1921 in Kentucky; they were later returned to, Atlanta and are on hand there.
The equipment of the petitioner used on the contract work for the L. & N.R.R. in Kentucky in 1921 was subjected*2927 to exhaustion, wear and tear to the following extent: steam shovels 33 1/3 per cent of cost; dinky engines 40 per cent of cost; dump cars 50 per cent of cost; steam drills 25 per cent of cost; concrete mixers 30 per cent of cost; steam boilers 33 1/3 per cent of cost; miscellaneous equipment, not including automobiles and motor trucks, rock crushers, road rollers or wheelers, 50 per cent of cost.
In 1920 the petitioner computed depreciation at a rate of 10 per cent of the amount of the equipment account.
Under date of December 31, 1920, appreciation of the book value of the equipment was entered upon the books of the petitioner in the amount of $55,420.03. The equipment account on the books of the petitioner showed a debit balance on December 31, 1921, amounting to $150,043.84, which was inclusive of the appreciation, $55,420.03, entered in 1920. The reserve account for depreciation on the books *105 of the petitioner showed a credit balance on December 31, 1921, amounting to $98,751.76.
In determining the deficiency for 1921, depreciation has been allowed or disallowed by the respondent as follows:
| Item | Cost | Rate per | Amount of depreciation |
| cent | allowable | ||
| Steam shovels | $ 17,748.18 | 15 | $ 2,662.23 |
| Dinkey engines | 8,843.17 | 15 | 1,326.48 |
| Dump cars | 8,956.00 | 15 | 1,343.40 |
| Steam drills | 841.83 | 20 | 168.37 |
| Concrete mixers | 2,327.00 | 15 | 349.05 |
| Rock crushers | 1,053.20 | 20 | 210.64 |
| Road rollers | 2,956.25 | 15 | 443.44 |
| Portable steam boilers | 1,284.00 | 10 | 128.40 |
| Wheelers | 3,629.20 | 20 | 725.84 |
| Dump wagons - wagons | 3,123.76 | 20 | 624.75 |
| Automobiles and trucks | 11,495.00 | 33 1/3 | 3,831.67 |
| Miscellaneous equipment and tools | 8,645.36 | 50 | 4,322.68 |
| Total depreciation on general equipment | 16,136.75 | ||
| Depreciation on Kentucky equipment account | 1,559.19 | ||
| Depreciation on Valdosta equipment account | 4,966.81 | ||
| Total | 22,662.75 | ||
| Depreciation per books, total | 33,797.78 | ||
| Depreciation allowed | 22,662.75 | ||
| Depreciation disallowed | 11,135.03 |
*2928 An allowance in the amount of $21,270.86 is reasonable for exhaustion, wear and tear during 1921 on the equipment designated "general equipment" in the deficiency letter, the aggregate cost of which amounted to $70,902.95, and upon which the respondent has computed an allowance amounting to $16,136.75.
OPINION.
TRUSSELL: On certain construction equipment of the petitioner the respondent has allowed a deduction of an amount of $16,136.75 from income by way of allowance for exhaustion, wear and tear. The petitioner contends that the allowance for this equipment should amount to $21,270.86. The cost of the assets is not in dispute. The question for decision is purely one of fact. The facts adduced are set out in the findings in full. They need not be repeated here. It is in evidence and uncontroverted that the equipment under consideration was subjected to severe operating conditions which will necessitate extraordinary repairs and renewals, for which it is entirely customary in this business, and reasonable, to make adequate provision. It may be that the relatively large amount of a reserve for depreciation, entered upon the books, has significance in this connection, *2929 but, under the peculiar facts in this case and in the entire absence of evidence relative to the reserve, we can not assume such to be a fact. We are satisfied that the amount of $21,270.86 claimed *106 by petitioner is a reasonable allowance for the exhaustion, wear and tear of this equipment and we are of the opinion that it should be allowed as a deduction in addition to the deductions allowed by the respondent for wear and tear of other equipment not here at issue
Judgment will be entered under Rule 50.