*3692 Where on account of prohibition laws, a brewery is forced to abandon the making of beer and for that reason a part of its machinery and equipment is discarded and another part is diverted to and used in another business, obsolescence is not allowable on the part so used, in the year in which the change of business occurred, even though such new business, on trial, proves unprofitable.
*884 This proceeding is for the redetermination of a deficiency in income and profits tax for the year 1918 in the amount of $3,667.49.
There were two errors assigned in the petition, but at the hearing it was agreed and stipulated that the second error assigned resulted from a confusion and the wrong complained of had, in fact, been adjusted, and hence that assignment was withdrawn.
The first assignment of error in substance is that the Commissioner erred in disallowing for the taxable year, obsolescence on buildings partially used in years subsequent to 1918.
FINDINGS OF FACT.
The petitioner is a Montana corporation with its principal office in Butte. Its*3693 business, prior to 1919, was brewing and selling beer. It was affiliated with the Castle Mountain Livestock Co., but no question involving such affiliation is involved herein.
By constitutional amendment, prohibition was adopted by the State of Montana in 1916, to take effect December 31, 1918. From the date of the adoption of that amendment petitioner's officers knew that on December 31, 1918, it would have to cease its business of making and selling beer. They decided that they would convert so much of their plant as was suitable and was so needed to the manufacture of non-intoxicating beverages.
On December 31, 1918, the manufacture of beer ceased, and after that date a large part of the physical assets became useless, of no value, and were discarded. Some of the buildings, machinery and other equipment were converted into a plant for the manufacture of non-intoxicating beverages, which business was pursued for some time but at all times at a loss to petitioner. The real estate values, as shown by the company's books on January 1, 1913, including land and buildings, was $108,896.90.
*885 In 1914 a new brew house was constructed at a cost, as shown by the books, *3694 of $34,377.65.
In its return for 1918, petitioner claimed obsolescence of physical assets on account of prohibition in the amount of $184,396.31. The Commissioner allowed obsolescence of all buildings, the use of which was abandoned at the end of 1918, in the amount of $88,497.17, and disallowed any obsolescence of assets, the use of which was continued in later years in the soft-drink business. The amount so disallowed was $92,439.73. (Just where the discrepancy of $3,942.56 arises is not evidenced.) Later an additional allowance was made to $8,992.23 which occasioned the withdrawal of assignment of error No. 2 by petitioner.
The buildings on which the Commissioner refused to allow obsolesence because the same were used by petitioner in subsequent years, and the loss of value claimed as of December 31, 1918, were as follows:
| Brewery building (the part in use) | $18,532.10 |
| Boiler house and engine room | 5,194.75 |
| Bottling department, building | 4,284.49 |
| New brew house | 33,208.35 |
| Stable building | 991.43 |
| 62,211.12 |
Petitioner's brewery plant was located in a part of the City of Butte which had no railroad facilities and was not frequented by the public. By*3695 reason of the special construction of the buildings, they were not suited for any other line of manufacture or other business than a brewery. They had no salvage value.
OPINION.
LOVE: In this case we are asked to decide that the Commissioner erred in refusing to allow obsolescence of $62,211.12 on petitioner's buildings that were used in years subsequent to the taxable years. The Commissioner did allow obsolescence to a satisfactory amount on buildings the use of which ceased on advent of prohibition. It may be pointed out that obsolescence to be allowable in 1918, must be determined and computed in the light of conditions and reasonable prospects as they then existed, and not in the light of subsequent history and experience. At the close of 1918 petitioner's officers knew they would be compelled to cease making beer, and that the profits that had been made in that business would cease. They at once embarked in a new industry, using a part of their equipment. It is reasonable to assume that they expected the new line of business to prove profitable, perhaps not as profitable as the former business, but nevertheless profitable. If subsequent history had *886 brought*3696 about a realization of such hopes and expectations, no obsolescence would have been allowable for those buildings so used. Those officers knew in 1918, and even in 1917, that some of their buildings would become useless at the end of 1918. The Commissioner has allowed obsolescence on those buildings. They did not, however, know that the other buildings would so become useless, or even unprofitable. They did not then anticipate the non-usage of those buildings. It took subsequent history and experience to ascertain the fact of their worthlessness. The loss of those buildings, if deductible at all, is allocable to some year subsequent to 1918.
This decision would necessarily be adverse to petitioner on another ground.
We have in the record only the book value of the buildings as of January 1, 1913 (which may be accepted as book value as of March 1, 1913). We do not know that such values are the market values as of the date named. We do not know costs or rates of depreciation applicable. We might concede that on December 31, 1918, those buildings became, and were known to be, worthless, and yet we have no basis to determine the amount of loss sustained.
It is true that*3697 petitioner in its brief made a computation based on testimony of one witness as to his conclusions that the aggregate value of those buildings as a result of prohibition was $62,211.12 less, after prohibition became effective, than prior thereto, but such testimony is not the kind of evidence required to determine the measure of the deduction for obsolescence, nor is it persuasive that these particular buildings would become obsolete at some date in the future at a time capable of being fairly definitely determined.
The deficiency is redetermined in the amount of $3,667.49. Order will be entered accordingly.