*2765 In the determination of a value in use of amortizable facilities by a comparison of the maximum capacity of facilities on hand at the close of the amortization period with production during the postwar period for the purpose of arriving at the reasonable allowance for an amortization deduction under the provisions of section 234(a)(8) of the Revenue Act of 1918, held that the production to be used in this case is the maximum production attained during any one of the years of the post-war period. Manville Jenckes Co.,4 B.T.A. 765">4 B.T.A. 765.
*918 This proceeding involves a deficiency in income and profits tax for the fiscal year ended April 30, 1918, in the amount of $11,657.49. The question at issue involves an allowance on account of the amortization of certain war facilities which were continued in use by the petitioner after the close of the war. The facts were stipulated from which we make the following findings.
FINDINGS OF FACT.
The petitioner is a Wisconsin corporation with its principal office lacated at 1110 Fifth Street, *2766 Milwaukee, Wis., and was organized on January 21, 1912.
The product of petitioner since incorporation has always been confined to men's shoes and a small quantity of boys' shoes, manufactured in a plant located in Milwaukee. At various times prior to 1917 the output included army shoes furnished to the United States Government in accordance with army specifications.
During the war between the United States and Germany, petitioner was engaged in manufacturing army shoes for the United States Government and others, which were essential for the prosecution of the war.
For the production of such shoes petitioner increased its plant capacity through the acquisition of buildings, machinery and equipment, representing an expenditure of $185,442.28 during the period from April 6, 1917, to the end of the amortization period, summarized as follows:
| Cost | ||
| Class (1) (as defined by article 184, | ||
| Treasury Regulations 45) Machinery | $8,407.80 | |
| Class (2) (as defined by article 184, | ||
| Treasury Regulations 45) | ||
| Cost | ||
| Buildings | $136,642.69 | |
| Machinery | 19,546.10 | |
| Factory fixtures | 15,001.84 | |
| Shafts, pulleys and belting | 5,843.85 | |
| 177,034.48 | ||
| Total | 185,442.28 |
*2767 *919 Within the purview of section 234(a)(8) of the Revenue Act of 1918, the cost of facilities subject to amortization as agreed upon between the parties aggregates $185,442.28.
Only such costs as represent facilities acquired on or after April 6, 1917, for the production of articles contributing to the prosecution of the war are included in the above amount of $185,442.28, and no contractual amortization was received on such facilities from any contracting department of the Government or from any other contractor.
Petitioner continued to manufacture shoes for the United States Government during the years immediately following the war, this production, however, not being designated or considered as war work. The date of cessation of operation as a war facility was December 31, 1918, and is agreed to be the end of the amortization period.
The main plant of the petitioner is a "U" shaped building, six and seven stories high, including basement. The two main wings are 48 by 150 feet. The north wing, referred to as the seven-story building, and the two-story building adjacent thereto were erected during the war period and comprise that portion of the buildings upon*2768 which amortization is claimed. The prewar buildings, comprising the six-story main wing, together with that portion of the prewar "L" which faces on Fifth Street, are of brick, concrete, steel and mill construction. The buildings on which amortization is claimed are of brick and reinforced concrete construction.
The machinery and equipment on which amortization is claimed comprise additions in the various production departments, representing machines added where needed to increase capacity. Some special machinery was added for production of army shoes during the war, which, being no longer required for commercial work, has been discarded or sold and is accordingly treated as class (1) in the enumeration of costs shown above. All such items as might be used in normal post-war operations are retained for use and are included as class (2) facilities in the same enumeration.
*920 The proper allowance as a deduction for amortization of the class (1) facilities is $4,706.34.
The cost of the class (2) facilities, the depreciation sustained thereon in 1917 and their depreciated cost at the close of 1917, are shown by the following schedule:
| Cost | 1917 depreciation | Depreciated cost | |
| Building | $136,642.69 | None. | $136,642.69 |
| Machinery | 19,546.10 | $301.80 | 19,244.30 |
| Factory fixtures | 15,001.84 | 213.67 | 14,788.17 |
| Shafts, pulleys, and belting | 5,843.85 | 58.50 | 5,785.35 |
| Total | 177,034.48 | 573.97 | 176,460.51 |
*2769 The petitioner's production is terms of pairs of shoes for the years indicated below was as follows:
| Year | Production |
| 1917 | 709,003 |
| 1918 | 1,002,631 |
| 1919 | 1,007,910 |
| 1920 | 688,754 |
| 1921 | 390,354 |
| 1922 | 671,546 |
| 1923 | 813,051 |
| 1924 | 760,161 |
| 1925 | 752,559 |
| 1926 | 700,559 |
| 1927 (Jan. 1 to Sept. 30, incl.) | 494,590 |
It was agreed and stipulated that for the purpose of computing the useful value of the class (2) amortizable facilities, the annual capacity of the plant at the end of the amortization period was 1,150,000 pairs of shoes.
Based on a comparison of the agreed annual war-time capacity of 1,150,000 pairs of shoes with the average production of the various years indicated below, the following results are shown, depending upon which years are selected, as to the value in use of the class (2) amortizable facilities in terms of the percentage of use or employment in the petitioner's post-war business:
| 1920 | $688,754 | |
| 1921 | 390,354 | |
| 1922 | 671,546 | |
| 1923 | 813,051 | |
| Total | $2,563,705 | |
| Average from 1920 to 1923, inclusive | 640,926 | |
| Value in use | per cent | 55.7 |
| 1921 | $390,354 | |
| 1922 | 671,546 | |
| 1923 | 813,051 | |
| Total | $1,874,951 | |
| Average from 1921 to 1923, inclusive | 624,984 | |
| Value in use | Per cent | 54.3 |
| 1922 | $671,546 | |
| 1923 | 813,051 | |
| Total | $1,484,597 | |
| Average for 1922 and 1923 | 742,299 | |
| Value in use | per cent | 64.3 |
| Production for 1923 | $813,051 | |
| Value in use | per cent | 70.7 |
*2770 *921 The post-war replacement costs of the class (2) facilities here in issue were not less than the depreciated costs of these facilities hereinbefore stated, and the post-war sale or salvage value of said facilities was in any event less than any residual value in use computed by the application of the percentages set out above.
The production of petitioner for the year 1919 included an output for the United States Government of thousands of pairs of shoes to be used by soldiers not discharged, and normal post-war sales of shoes were greatly increased by return to civilian life of the soldiers who had been absent for several years.
In anticipation of continued demand for its product petitioner proceeded early in 1920 to produce shoes at a greatly increased rate, but upon finding an abnormal accumulation of its finished product on hand was compelled in the latter part of 1920 to put in effect a rigid curtailment program of production. Early in 1921 it closed its plant and ceased operations entirely for approximately three months, resuming operations in June, 1921, on a reduced schedule which was in force until October, 1921, when the inventory had reached normal quantities. *2771 The following quantities of shoes were contained in its closing inventories at the respective dates:
| Pairs | |
| April 30, 1918 | 65,984 |
| April 30, 1919 | 158,157 |
| April 30, 1920 | 200,458 |
| April 30, 1921 | 58,488 |
| Dec. 31, 1921 | 39,300 |
| Dec. 31, 1922 | 47,058 |
| Dec. 31, 1923 | 47,941 |
| Dec. 31, 1924 | 62,455 |
In 1923 a heavy demand for shoes was made by merchants in the shoe industry for replenishment of their inventories which have become depleted, and production of petitioner was correspondingly increased to meet the sudden, though temporary demand. Production of men's shoes for the years 1921 to 1925, inclusive, has been reported for the industry by the Department of Commerce pamphlet "The Leather Industries," in Census of Manufacturers, 1925, p. 16, as follows:
| Pairs | |
| 1921 | 69,457,535 |
| 1922 | 89,984,065 |
| 1923 | 100,282,892 |
| 1924 | 84,662,857 |
| 1925 | 86,546,464 |
*922 Af far as both buildings and machinery are concerned, there were no radical improvements or changes in nature or operation in the post-war period as compared with the amortization period.
The petitioner reported its income during the years 1918 and 1919 for Federal income and profits-tax*2772 purposes on a fiscal year basis, ending April 30. No claim for amortization was made in its original return for the fiscal year ended April 30, 1918, but an amount of $21,881.34 was claimed upon costs of $132,949.21 in its original return for the fiscal year ended April 30, 1919, as amortization of war facilities.
Subsequently, on September 10, 1924, an amended claim accompanied by detailed schedules of costs and particulars was filed by petitioner with the Commissioner, setting forth an amount of $81,290.21, amortization claimed upon costs of $184,695.82, after deduction of depreciation sustained prior to 1918.
In June, 1925, a field examination in respect of this claim for amortization was made at the petitioner's plant by an engineer of the Income Tax Unit, but prior to completion of this report the deficiency notice here under consideration was issued as a final determination of the tax liability for the fiscal year ended April 30, 1918. No allowance for amortization of war facilities was made by the Commissioner in this final letter.
The parties have further stipulated that they are in agreement that the petitioner is entitled to an amortization deduction on account*2773 of the class (2) facilities enumerated above and are in disagreement only as to which of the post-war years' production should be used as a comparison with the war-time capacity of the petitioner's plant in order to determine the value in use of these facilities.
OPINION.
LITTLETON: In the deficiency notice which forms the basis of this appeal no deduction was allowed on account of the amortization of war facilities, and in the petition as filed error was assigned because of the failure of the Commissioner to make this allowance. However, at that time, full consideration had not been given by the Commissioner to the report of one of his engineers on the claim in question, and on further consideration the Commissioner now admits that some amortization is allowable as a deduction. The petinent facts, in so far as the parties considered them essential, have been stipulated and it only remains to make a determination on the basis of these agreed facts. An examination of the record presented shows that the property on which amortization is claimed is divided into two classes, namely, that which was useful only during the period of its operation as a war facility and that which*2774 was retained by the petitioner for *923 use or employment in its going business. With respect to the first class, the parties have stipulated the amortization allowable, and even as to the second class the parties are in agreement that amortization is allowable on account thereof, but differ as to the amount. It appears further that they are in agreement as to the costs to be amortized, the capacity of the petitioner's plant at the close of the amortization period and the production for all years from 1917 to 1927, inclusive. They are also in agreement on the fundamental proposition that in a determination of a "value in use," which is our precise issue here, capacity at the close of the amortization period must be compared with production subsequent to this time. Their disagreement relates to the proper production which is to be compared with the agreed capacity, the Commissioner contending that peak production during the post-war period is proper and the petitioner asking that we use average production from 1920 to 1923, inclusive, or, in the alternative, that we use the average production from 1921 to 1923, inclusive.
*2775 A similar situation arose in , where the Board was likewise requested to find a value in use and the parties were in agreement that this could be determined by a comparison of war capacity with post-war production. While in the case at bar we have the capacity at the close of the amortization period fixed by agreement and it is only necessary to fix the production comparative, in , it was necessary to determine both the capacity and the production. In arriving at capacity in the Manville Jenckes case, it was stated that, "we believe that it is entirely within reason that the maximum results actually obtained in any one of the years referred to (1916 to 1919) for any one of the taxpayer's mills should be fixed as the measure of the capacity of that mill, and we so decide," and from these maximum results as a measure, the Board found the capacity of the facilities which were on hand at the close of the amortization period. It will be noted that this was not maximum production attained in any one of the years considered, but rather the maximum production which might reasonably be expected*2776 from the facilities on hand at the close of the amortization period, basing such expectation on maximum results attained by the various units over the period considered. Likewise, in the case at bar, capacity is not stipulated at the maximum production reached prior to the end of the amortization period, but something in excess of this amount, which we interpret to mean the maximum production which might reasonably be expected from all facilities which were on hand at the close of the amortization period.
This brings us to the real issue or disagreement between the parties: Considering that the parties are agreed that value in use *924 may be determined by comparing capacity at the close of the amortization period with production subsequent to this time, what production is to be used? This was likewise before us in the Manville Jenckes case, wherein the Board said:
We have fixed the capacity of each of the taxpayer's mills on the basis of the maximum results obtained in any one of the years 1916 to 1919. We believe that the available post-war production should be fixed at a figure representing the total of the maximum production of each of the mills in any one of*2777 the years of the post-war period; for, after all, this is the full measure of the actual use of the facilities in the taxpayer's post-war business, and if maximum capacity is to be used the comparison should be with maximum production.
The argument of the petitioner against the application of this method is that the peak year in its case (1923) shows an abnormally high production because of the unusual demand for its product at that time, and attention is further called to statistics compiled by the Department of Commerce for "The Leather Industries" in which a similar high production is shown for 1923 as compared with prior and subsequent years. The petitioner might well have carried the comparison one step further to include the Manville Jenckes case, where a similar condition is shown to exist. In fact, when we compare the facts in the two cases (Manville Jenckes and case at bar), it is difficult to see how a different conclusion can be reached in the two instances. The petitioner's argument for average production seems to overlook the fact that it is not average capacity with which it is to be compared, but maximum capacity. If we are to use maximum capacity, it*2778 seems only reasonable that we should likewise use what represents the maximum use made of this capacity during the post-war period. We do not understand that this employment in its business was dictated other than by the needs of its business, nor do we understand that the petitioner did not profit from this use of its facilities. On the whole, we are satisfied that no facts or consideration have been presented in this case which would justify the application of a different rule from that applied in the Manville Jenckes case. By this we do not decide, as requested by petitioner, that there may not be situations where it is not proper to use one year's production during the post-war period as the basis of comparison with maximum capacity for the purpose of determining a deduction of the character in question. What is a reasonable allowance as an amortization deduction is a question of fact to be determined in the light of the circumstances and conditions peculiar to a given case.
Judgment will be entered under Rule 50.