1927 BTA LEXIS 2621">*2621 1. Deduction claimed on account of compensation disallowed for lack of evidence.
2. In 1920 the petitioner built a road and turned it over to the county with the understanding that the latter would maintain the road. Held, that no loss was sustained when the road was thus turned over.
3. Amounts deductible as expenses of road repairs determined.
9 B.T.A. 347">*347 This proceeding is for the redetermination of deficiencies in income and profits taxes for the calendar years 1920, 1921, and 1922, in the respective amounts of $14,464.11, $5,055.80, and $4,033.16. The petitioner alleged that the Commissioner erred as to 1920 in not allowing $2,400 as a salary deduction and $8,799.20 as a loss sustained in the sale of a road, and as to 1921 and 1922, in not allowing one-half of the total expenditures of each year for the construction and maintenance of its village streets and sidewalks to be deducted as ordinary and necessary expenses.
FINDINGS OF FACT.
The petitioner is a North Carolina corporation, 1927 BTA LEXIS 2621">*2622 with its principal office at Forest City, N.C. It was organized during, or just prior to the year 1918, to engage in the manufacture of cotton products. It began the construction of a mill village, including factory buildings and houses for the employees, soon after it was organized.
At about the time the company was organized, several of the directors had a conversation with J. R. Moore as a result of which he became a stockholder and was elected secretary and treasurer of 9 B.T.A. 347">*348 the corporation. He held this office throughout the years in question. In the above-mentioned conversation it was agreed that Moore should receive a salary of $3,600 a year until manufacturing operations were begun. A salary of $6,000 a year thereafter was mentioned, but was not agreed upon. Moore had general charge of building construction. The first factory built was completed and placed in operation about December of 1918. During 1918 and 1919, no agreement was made supplementing or superseding the early conversations as to his salary and he drew $3,600 in each year. He was dissatisfied with his salary during 1919, but did not demand an increase, although his suggestions as to salaries1927 BTA LEXIS 2621">*2623 had always been approved by the directors. On May 10, 1920, the board of directors passed a resolution fixing his salary at $6,000 a year to start from January 1, 1919. The additional salary of $2,400 thus authorized for 1919 was originally claimed by the petitioner and disallowed by the Commissioner as a deduction for the year 1919. At the hearing the petitioner was given permission to amend this one allegation of the petitioner to claim that the $2,400 became an accrued obligation during 1920 and an allowable deduction for that year. The amount was not paid until the year 1925.
Freight in carload lots could be loaded or unloaded at a railroad siding at the petitioner's mill, but freight in less than carload lots had to be loaded and unloaded at the nearest railway station, which was at Forest City, about two miles away. This town also provided the nearest market where the mill villagers, numbering about two hundred and consisting of employees and their families, could do their shopping. The nearest county road to Forest City was at least one-half mile from the mill village and was inaccessible for use either by the petitioner or by the villagers. Other mills provided roads1927 BTA LEXIS 2621">*2624 for the use of their employees in going to and from the town nearest to their mills. During the year 1920, the petitioner, for the use and convenience of itself and its employees, constructed a road about two miles in length, running from the nearest street of Forest City through the mill village and on a short distance to a point on a railroad. The road was 30 feet wide, of a graded dirt type, and was constructed at a cost of $8,799.55. Part of the road was built on land owned by the petitioner, but much the larger part was built upon land of others, who had orally consented to allow the petitioner to build the road. Upon the solicitation of the board of commissioners of Rutherford County, North Carolina, the road was turned over, during 1920, to the county, in consideration of an agreement on the part of the board of commissioners that the county would permanently maintain the road and that the petitioner should have access to and use of it at all times. Since that date the road has been 9 B.T.A. 347">*349 open to the public and has been maintained either by the State or by the county.
In March, 1921, the petitioner began to improve the roads and footpaths in its mill village in1927 BTA LEXIS 2621">*2625 accordance with a landscape architect's plans. The land in the village was rough and hilly. The soil and subsoils consisted of sand and clay. In building the roads, trees were cleared off and the roadway was smoothed out by scooping the dirt from the high places onto the low places. The road was given a slight crown. At certain intersections terra cotta pipes were installed underneath the surface of the road. Paths were made a little higher than the roads and a few of them were made of concrete. During 1921, hard rains occurred in this section about once a month. Each rain washed the soft roads to such an extent that they had to be considerably rebuilt and repaired. Some sections were entirely rebuilt several times during the year. After every rain dirt and debris had to be removed to make the roads passable. No improvements took place in 1921. The roads were merely restored to their original condition. During the first four months of 1922, the rains were unusually heavy and destructive. In the late spring of that year the petitioner began certain permanent improvements designed to prevent the recurrence of the damage occasioned by the storms. Some retaining walls were1927 BTA LEXIS 2621">*2626 built. At the worst places gutters were constructed of stone and concrete rubble masonry. At others, pipes and culverts were put in and head walls were built where the pipes emptied. No new roads were built in this year. During 1922, both before and after these permanent improvements, the petitioner was forced to clear the roads after every hard rain and to repair them somewhat, in order to restore them to their original condition.
All of the work on the roads and paths was done by the petitioner's employees. Ten thousand dollars was thus expended in 1921 and $13,300 in 1922. These amounts were originally charged to expense in the respective years and no account was ever set up allocating a portion of the amounts to capital expenditure and a portion to expense.
In October, 1926, the petitioner employed a civil engineer, experienced in highway construction, to make estimates of the cost as of the respective years of the original roads and pavements and the permanent improvements made at later times. This man was taken over the ground by the petitioner's officers, who were familiar with the work which had been done in each of the years, and they pointed out to the engineer1927 BTA LEXIS 2621">*2627 the extent of the original roadways constructed in 1921, the concrete and terra cotta put in at that time, and also the permanent improvements of 1922. Thereafter the engineer made actual measurements and estimated that on the basis of his records 9 B.T.A. 347">*350 of the cost of similar work in the years in question, the original work of 1921 should have cost $4,464.05 and the permanent improvements of 1922 should have cost $8,151.80.
OPINION.
MURDOCK: At the hearing the petitioner moved to dismiss that portion of its petition which related to and claimed a salary deduction of $2,400 for the year 1919, and also to amend the petition to allege that the deduction was a proper one for the year 1920. The motion was granted and the taxpayer was given permission to file an amended petition at the conclusion of the case, setting forth this change. At the request of the counsel for the Commissioner, it was also ordered that the amendments would be considered to have been answered by a general denial on the part of the Commissioner. Thereafter the petitioner tendered an amended petition which included not only the proposed changes but also others not mentioned in any motion to amend. This1927 BTA LEXIS 2621">*2628 paper was therefore never filed and is not considered as a part of the record in this case.
The petitioner has not produced sufficient evidence to justify the salary deduction claimed for 1920. The method of bookkeeping and of reporting income used has not been shown. If the cash receipts and disbursements method was used, clearly the petitioner is entitled to no deduction since the $2,400 was not paid until 1925. And even if some other method was used whereby the additional salary was incurred we can not say that the deduction should be taken inasmuch as there was no satisfactory showing that Moore's total salary for 1920 was reasonable compensation for services rendered. About the only evidence on this point was the statement of one of the directors that Moore was a valuable man. ; .
The allegations of the petition which relate to the road built in 1920 at a cost of $8,799.50 and turned over to the county in the same year claim the amount as a loss sustained from the sale of a capital asset. Disregarding the solution of many interesting1927 BTA LEXIS 2621">*2629 questions which might arise had some other contention been made on account of this transaction and confining ourselves to the issue raised, we are satisfied that no loss was sustained within the meaning of the loss provisions of section 234(a) of the Revenue Act of 1918. The transfer was purely voluntary on the part of the petitioner. It was not without consideration, since the petitioner was to be relieved of the expense of maintaining the road. We have no reason to believe 9 B.T.A. 347">*351 that the promise of the county commissioners to keep the road in repair did not fully compensate the petitioner for whatever it parted with. The net result of the transfer would seem to have been that the petitioner, although retaining all the advantages which it desired, was relieved of an expensive burden. If the transaction was a gift or a dedication to public uses the petitioner would not be entitled ipso facto to deduct anything from its income as a loss.
The remaining contention of the petitioner is that it should be allowed to deduct as an ordinary and necessary expense a portion of the money spent in each year on the roads and sidewalks of its mill village. It admits that some of1927 BTA LEXIS 2621">*2630 the money was spent in the acquisition of capital assets and the Commissioner admits that a part of the total expenditures of each year was deductible as an ordinary and necessary expense of that year. The difficulty has been to properly divide the total amounts between the two classes of expenditures.
To prove the amount to be allocated to expense the petitioner asks us to adopt an engineer's estimates of the amounts which should have been spent in acquiring capital assets and then to subtract these amounts from the known totals spent in each year to arrive at the proper deductions. We do not know why such a roundabout method proper deductions. We do not know why such a roundabout method of proof was employed, but we are not primarily concerned with the method of proof. Our problem is to decide what facts have been proven and what follows as a matter of law from the facts.
In this case we are asked to infer the ultimate fact, the amount actually spent for repair, from an opinion as to how much of the total should not have been so spent. We are satisfied that the amount given in this opinion approximates the amount spent for the original road system and permanent improvements1927 BTA LEXIS 2621">*2631 to it. But the engineer admitted on cross-examination that during 1921 it would have cost from $5 to $6 a day to hire a team of horses for this kind of work and that he had used $5 in his estimates. It was also brought out that the ground had to be cleared of trees, as fact which the engineer does not seem to have considered.
In view of the circumstances we have serious doubts about onehalf of the total expended in each year representing expense. We think that the petitioner spent at least $4,000 in 1921, and $4,000 in 1922, for repairs, which amounts it is entitled to deduct from its income of the respective years as ordinary and necessary expenses.
Judgment will be entered in accordance with the foregoing opinion on notice of 15 days, under Rule 50.
Considered by MORRIS and TRAMMELL.