*2881 1. Prior to 1913 certain capital assets and expenditures were charged off to expense and to profit and loss. Held, that none of such capital assets and expenditures can be restored to invested capital for the taxable years in the absence of proof that the assets (those charged off and those for which the expenditures were made) existed and were owned by petitioner during the taxable year, and that the capital account at the beginning of the taxable year, as shown on the books of the company, was erroneous.
2. Assessment under sections 327 and 328 of the Revenue Act of 1918 denied for lack of proof of abnormal conditions affecting capital or income.
*322 In this proceeding the petitioner seeks a redetermination of income and profits taxes for the calendar years 1919 and 1920 for which the Commissioner has determined deficiencies of $2,664.51 and $28,325.79, respectively. Petitioner alleges error on the part of the Commissioner (1) in failing to allow adequate depreciation; (2) in failing to allow adequate depletion; (3) in failing to*2882 restore to invested capital certain capital assets and expenditures which were written off the books prior to 1913; (4) in failing to include in invested capital a paid-in surplus arising out of the acquisition of the Cleveland Mine; (5) in failing to include in invested capital an amount of $60,000 representing additional cost of the Cleveland Mine; and (6) in failing to assess the profits tax of the petitioner for the year 1920 under sections 327 and 328 of the Revenue Act of 1918.
*323 FINDINGS OF FACT.
Petitioner is a corporation organized September 30, 1897, under the laws of the State of Ohio with an authorized capital stock of $100,000 par value which was increased in 1900 to $200,000 par value. The petitioner was engaged in the mining of coal in Guernsey County, Ohio.
Prior to 1913 the petitioner charged off its books assets and expenditures as follows:
| King and Old Orchard Mines | |
| 1901, 50 acres, coal lands | $1,750.00 |
| 1903, 377 acres, coal lands | 10,140.00 |
| 1910, coal lands | 1,207.43 |
| Total coal lands charged off to expense | 13,097.43 |
| January 1, 1901, construction items | 9,211.38 |
| January 1, 1901, real estate | 7,819.86 |
| January 1, 1901, houses | 1,922.47 |
| Total charged to profit and loss | 18,953.71 |
| Black Top Mine | |
| October 28, 1907, copper wire | $1,179.26 |
| February 12, 1908, electric locomotive | 1,925.00 |
| 1907, steel rails | 2,106.08 |
| 1908, steel rails | 2,073.53 |
| January 24, 1910, one 15-ton locomotive | 2,750.00 |
| September 14, 1910, one 10-ton locomotive | 1,000.00 |
| September 14, 1910, two Morgan Gardner Mining machines | 1,000.00 |
| September 14, 1910, copper wire | 754.00 |
| September 14, 1910, railroad equipment | 53.07 |
| September 14, 1910, two No. 6 pumps | 125.00 |
| June 8, 1910, railroad ties | 679.00 |
| January 27, 1910, copper wire | 980.24 |
| January 27, 1910, 43 pit cars | 537.50 |
| January 27, 1910, horses and mules | 1,983.65 |
| October 27, 1911, one 5-ton locomotive | 1,600.50 |
| March 1, 1912, three locomotives | 4,745.55 |
| Total machinery and equipment at Black Top Mine | |
| charged to expense | 23,491.88 |
| Cleveland Mine | |
| February 25, 1907, copper wire | $687.32 |
| March 8, 1907, rails | 620.34 |
| March 30, 1907, mining machines | 1,800.00 |
| April 10, 1907, rails | 900.00 |
| August 17, 1908, generator | 1,307.50 |
| February 24, 1908, mine cars | 851.00 |
| March 10, 1908, mine cars | $888.00 |
| March 10, 1908, rails | 642.85 |
| August 11, 1908, rails | 503.00 |
| January 20, 1909, pump and motor | 746.11 |
| January 27, 1910, copper wire | 784.02 |
| March 7, 1910, rails | 592.29 |
| March 7, 1910, horses and mules | 2,913.00 |
| July 13, 1910, locomotive | 2,400.20 |
| September 14, 1910, rails | 1,955.55 |
| September 14, 1910, two mining machines | 1,000.00 |
| September 14, 1910, 100 tons of iron | 1,500.00 |
| September 14, 1910, trolley wire | 311.75 |
| September 14, 1910, copper wire | 290.00 |
| September 14, 1910, Morgan Gardener Mining machine | 500.00 |
| October 10, 1910, lumber | 683.62 |
| December 3, 1910, electric pump | 125.00 |
| December 3, 1910, wheels and axles | 717.32 |
| December 31, 1910, cars | 1,037.50 |
| October 27, 1911, two locomotives | 4,010.00 |
| December 17, 1911, two locomotives | 3,116.00 |
| Total machinery and equipment at the Cleveland Mine | |
| charged to expense | 30,882.37 |
| Grand Total | 86,425.39 |
*2883 *324 Prior to the taxable years petitioner did not follow a definite rule in writing off depreciation, but charged off depreciation according to the production each year. In the years of large production it charged off a large amount for depreciation, and in years of small production a small amount was charged off for depreciation. When the mine was idle no depreciation was taken.
On February 1, 1905, the petitioner purchased one-half of the capital stock of the Morris Mining Co. for $60,000, the other half being held by J. H. Somers & Co. At that time the Morris Mining Co. was operating the Black Top and Cleveland Mines, the latter under a lease for two years, subject to purchase.
By agreement dated January 30, 1907, C. W. Somers agreed to sell and convey to Calvary Morris (president of petitioner) 500 shares of the capital stock of the Morris Mining Company and the Somers-Cambridge Co. sold and agreed to convey to the petitioner all the coal property of the Somers-Cambridge Co., known as the Cleveland Mine. The agreement was as follows:
WITNESSETH: That the said C. W. Somers, one of the vendors, does hereby agree and bind himself to sell and convey unto Calvary*2884 Morris, one of the vendees, his heirs and assigns, five hundred (500) shares of the capital stock of The Morris Mining Company, of the par value of fifty thousand dollars ($50,000.00) free from any incumbrances or other liability.
That, the Somers-Cambridge Company, one of the vendors, doth hereby bargain, sell and agree to convey unto The Morris Coal Company, one of the *325 vendees herein, all of the coal property of The Somers-Cambridge Company, a corporation organized and existing under and by virtue of the laws of the State of Ohio. Said property consisting of 3885 acres, more or less, of coal in fee, and 30 acres of surface land, together with the railway tracks, mining plant, equipment, supplies and property of every description of the said Somers-Cambridge Company.
It is hereby mutually agreed and understood that possession of all of said stock and all of aforesaid property of The Somers-Cambridge Company shall be delivered as of the first day of February, A.D., 1907, and that the said C. W. Somers shall transfer, assign and deliver the said shares of the capital stock of The Morris Mining Company on said date, or as soon thereafter as possible, free from any*2885 and all incumbrances and liabilities, and that the said The Somers-Cambridge Company, as soon after the first day of February as practicable, shall and will convey by a good and sufficient deed with covenant of general warranty, free from all incumbrances, the aforesaid property of The Somers-Cambridge Company, except, as to a mortgage thereon made by The Somers-Cambridge Company to The Guardian Savings & Trust Company, as Trustee, securing one hundred and twenty-five thousand dollars ($125,000.) first mortgage bonds, the said, The Morris Coal Company agreeing to assume the balance now due on said bonds, which it is estimated amounts, with interest paid to the first day of February, 1907, to the sum of ninety-nine thousand dollars ($99,000.); and the said The Morris Coal Company further agrees that it will pay to The Somers-Cambridge Company the amount deposited to the credit of The Somers-Cambridge Company at The Guardian Savings & Trust Company as of the first day of February, 1907, as a sinking fund for the redemption of said bonds in accordance with the provisions of the mortgage by the said Trust Company as Trustee, it being estimated that the amount in said fund deposited with*2886 the said Trust Company as of the first day of February, 1907, after payment of six per cent (6%) interest on said ninety-nine thousand dollars ($99,000.00) of unpaid bonds for the month of January, 1907, is the sum of ten thousand four hundred and fifty-five dollars and eighty-seven cents ($10,455.87).
It is further agreed, that the said The Morris Coal Company will pay for the said capital stock of The Morris Mining Company of the par value of fifty thousand dollars ($50,000.) and for the aforesaid property of The Somers-Cambridge Company the agreed sum of two hundred and eighty-five thousand dollars ($285,000.) from which, however, shall be deducted the balance due on said mortgage indebtedness secured by mortgage to The Guardian Savings & Trust Company as of the first day of February, 1907, being the sum of ninetynine thousand dollars ($99,000.) and the balance of said sum of two hundred and eighty-five thousand dollars ($285,000.), with interest thereon from the first day of February, 1907, shall be paid by the execution and delivery of the promissory notes of The Morris Coal Company, indorsed by Calvary Morris, said notes to bear interest at rate of six per cent (6%) per annum, *2887 payable semiannually, and to become due and payable at various dates hereafter, to be determined by Calvary Morris and C. W. Somers, between the first day of February, 1907, and the first day of February, 1909.
At a meeting of the stockholders of the Morris Coal Co. held on February 13, 1907 -
Mr. C. Morris reported to the meeting that The Morris Mining Company which is operating what is known as The Black Top Mine in Guernsey County, Ohio, will convey, transfer and assign all of its property, real and personal to The *326 Morris Coal Company in consideration of the extinguishment of the liability of said Company or any of its stockholders to the Morris Coal Company, and the assumption by The Morris Coal Company of all the unpaid debts and liabilities of The Morris Mining Company, the Morris Coal Company assuming also the performance of the convenants contained in the lease from The Monarch Mining Company bearing date June 14, 1901.
Thereupon the following resolution was adopted:
Resolved that the Morris Coal Company acquire from the Morris Mining Company all of the property and assets, real and personal, of the Morris Mining Company, on the terms above set forth, *2888 and that the Board of Directors be authorized to take such action as is necessary to carry into effect this resolution.
On March 16, 1907, the properties so acquired by petitioner were entered upon its books of account as follows:
| Debits | |||
| Black Top construction account: | |||
| Coal lands - 317 acres | $35,035.00 | ||
| Construction | 6,062.44 | ||
| Mine plant and equipment | 30,189.16 | ||
| Mine cars - 286 cars | 11,329.80 | ||
| Mine rails | 12,760.02 | ||
| Horses and mules | 2,940.40 | ||
| Timber purchase | 4,100.00 | ||
| Miners houses - 28 houses | 13,734.86 | ||
| Mine building | 1,170.22 | ||
| Shop | 328.74 | ||
| $120,000.00 | |||
| Cleveland construction: | |||
| Mine plant and equipment | 30,285.19 | ||
| Construction and development | 56,221.16 | ||
| Mine tracks | 9,024.31 | ||
| Horses and mules | 2,030.00 | ||
| Mine rails | 5,104.16 | ||
| Mine cars | 4,407.00 | ||
| Real estate - 30 acres timber | 2,750.00 | ||
| Coal lands - 3974.64 acres of coal | 115,178.18 | ||
| 225,000.00 | |||
| $345,000.00 | |||
| Credits | |||
| Morris Mining Co. stock account | $60,000.00 | ||
| Bond account | 99,000.00 | ||
| Bills payable | 186,000.00 | ||
| 345,000.00 |
In 1920 petitioner paid salaries in the amount of $7,633.50 to its officers and a like amount was paid to the same individuals by the Morris-Poston*2889 Coal Co.
The National Coal Co. operated the same vein of coal as petitioner upon property adjacent to it. For the year 1920 the National Coal Co. tax returns showed gross sales of $2,350,292.70, net income of $370,012.99, invested capital of $972,243.30, semiannual average borrowed *327 capital of $424,075.65, profits tax of $109,356.55, total tax of $139,298.44, and aggregate officers' salaries of $25,500.
For the taxable years 1919 and 1920 the allowable deductions from gross income for depreciation of physical assets of the petitioner are the respective amounts determined by applying an 8 per cent composite rate to the values of such assets used by the respondent in the determination of the deficiencies.
The correct deductions from gross income for depletion of coal properties are $14,609.05 for the year 1919, and $14,341.34 for the year 1920.
The total cost price of the Cleveland Mine to the petitioner was $225,000.
There were no abnormal conditions affecting petitioner's capital or income in the year 1920.
OPINION.
VAN FOSSAN: The issues regarding the deductions for deprecivation and depletion are settled by stipulation in the manner set forth in the*2890 findings of fact. Petitioner has waived the assignment of error respecting paid-in surplus.
Prior to 1913 petitioner charged off certain capital assets and capital expenditures, which it now seeks to restore to invested capital. Obviously, many of the items written off are of a capital nature and, under proper conditions, might be included in invested capital. The mere fact, however, that capital assets and expenditures have been charged off in prior years is not sufficient to warrant the restoration of such items to invested capital in a later year. It may be that the assets have been consumed or disposed of prior to the later year. There is no evidence that the assets charged off were still in existence and were the property of petitioner during the taxable years or that the capital account at the beginning of the taxable years, as shown by the books, did not accurately reflect the true invested capital. It does not appear that the expenditures were made in connection with assets still in existence, owned and in use by the petitioner during the taxable years. There is no evidence of the amount of depreciation actually suffered in any of the years prior to 1919, nor does*2891 it appear what the capital account would have been if all capital assets had been properly included and proper deductions had been taken for depreciation. In the absence of such material facts it can not be said that the assets and expenditures written off should be restored to invested capital. Petitioner has failed to establish that the assets and expenditures charged off prior to 1913 should be restored to invested capital for the taxable years. See ; and .
*328 Petitioner claims that $60,000 should be added to invested capital as additional cost of the Cleveland Mine. The agreement of sale provided that the petitioner would pay $285,000 for the Cleveland Mine and the 500 shares of capital stock of the Morris Mining Co. This was the total amount to be paid to the vendors for both the mine and the stock, and was to be paid by petitioner. No segregation of the total consideration of $285,000 to the two classes of property, stock and mine, is made in the agreement, nor does it appear why the petitioner should pay for stock to be sold and conveyed to Morris. In*2892 the light of the minutes of the stockholders' meeting relating to the acquisition by petitioner of the assets of the Morris Mining Co., however, it appears that petitioner paid $60,000, or the equivalent, for the stock on behalf of Morris, charging his account therewith, and that later, upon transfer of the assets of the Morris Mining Co. to it, the liability was canceled. The record of these transactions made by petitioner upon its books of account in March, 1907, is the most reliable evidence we have of the amount paid for the Cleveland Mine. The Black Top Mine was entered upon the books in the amount of $120,000 and the Cleveland Mine in the amount of $225,000. Against these asset charges there was credited $60,000 on account of Morris Mining Company stock, $99,000 on account of bond issue and $186,000 on account of bills payable. In the light of these facts, it seems clear that the total cost of the Cleveland Mine to petitioner was only $225,000, and accordingly we hold that respondent did not err in refusing to include in invested capital $60,000 as additional cost of the mine.
Petitioner claims that there were abnormal conditions affecting its capital and income for 1920*2893 and that its profits tax should be assessed under sections 327 and 328 of the Revenue Act of 1918. Practically the only evidence offered in support of this claim was the amount of the salaries paid to officers of the company, which were claimed to have been inadequate. The salaries paid by the petitioner to its officers aggregated $7,633.50, and a like amount was paid as salaries to these officers by the Morris-Poston Coal Co., to which they devoted a part of their time. The relation, if any, between the latter company and petitioner does not appear. For purposes of comparison, evidence was also introduced of the gross sales, invested capital, net income, profits tax and officers' salaries of one other coal company operating the same vein of coal on property adjacent to petitioner, but it was not established that such company was typical or was operating under normal conditions or that its capital, income and officers' salaries were normal. No evidence was offered of petitioner's gross sales or of its invested capital, taxable income and excess-profits tax, as determined by respondent. There is no evidence in this record of abnormal conditions affecting petitioner's *329 *2894 capital or income which entitle it to special assessment of its profits tax. Accordingly, we hold that respondent did not err in refusing to assess petitioner's profits tax under sections 327 and 328 of the Revenue Act of 1918.
Judgment will be entered under Rule 50.