*2817 1. In the absence of any agreement as to the basis upon which the total tax due from affiliated corporations is to be apportioned, such tax is to be assessed upon the respective corporations on the basis of the net income properly assignable to each. Section 240, Revenue Acts of 1918 and 1921.
2. Where the consolidated returns show the amount to be paid by each corporation, and such amounts are arrived at by apportioning the total tax shown upon the return upon the basis of the net income of each corporation, the Commissioner is not justified in assessing the whole of any deficiency against the corporation which he designates as the "parent."
3. The cost of mining equipment having a life of several years may not be deducted as an expense in the year of purchase.
4. The cost of a filter system and of a theatre building, the useful life of both of which extended beyond the year of erection, may not be deducted as an expense of such year or as a loss sustained in such year.
*601 The Commissioner determined*2818 deficiencies of $34,790.83 and $28,633.57 in income and profits tax of petitioner for the calendar years 1918 and 1919, respectively. The petitioner instituted the proceeding known as Docket No. 14518 for a redetermination of such deficiencies. The Commissioner also determined a deficiency of $1,282.10 in income tax for 1922 and an overassessment of income tax for 1923 of $85.89. Petitioner filed its petition for a redetermination of its tax liability for those years, such proceeding being known as Docket No. 31305. Upon motion of the respondent this proceeding was dismissed, so far as it related to the year 1923, for want of jurisdiction.
It is alleged that the Commissioner erred in the following respects:
(a) As to all years involved, there were erroneous determinations of depletion allowances.
(b) As to the years 1918 and 1922 in disallowing as deductions certain expenditures made by petitioner and classified by it as expenses of maintenance.
(c) As to the years 1918, 1919, and 1922, in the computation of consolidated net income, by disallowing as deductions certain expenditures made by an affiliated company, Crystal Block Mining Company, classified by it as expenses*2819 of maintenance.
(d) In computing consolidated invested capital for 1919 in failing to use the correct 1918 tax in making the statutory pro rata adjustment.
(e) In computing net income for 1919 in computing profit from the sale and disposal of a subsidiary.
(f) In computing net income for 1922 in not allowing proper deductions for depreciation, due to errors made in like deductions for prior years.
(g) For 1918, 1919, and 1922 in determining and asserting against petitioner the whole of the deficiencies alleged to be due in those years upon the consolidated taxable net income of an affiliated group of which petitioner was a member, instead of the proportionate part thereof allocable to petitioner upon the basis of its own taxable net income for such years.
FINDINGS OF FACT.
Petitioner is a West Virginia corporation with its principal office in Welch. During the years 1918 to 1922, inclusive, it was engaged in coal mining. For 1918 it filed a consolidated income and profitstax *602 return on which was inserted, under the words "Print plainly corporation's name and principal place of business," the following:
CONSOLIDATED RETURNS.
Crystal Block Coal & Coke*2820 Company.
Crystal Block Mining Company.
Crystal Supply Company.
Tug River Electric Company.
Pocahontas & Crystal Block Coal Sales Co., Welch. West Virginia.
Attached to the return were schedules which set out the income and deductions of each of such companies, showing taxable income as follows:
| Crystal Block Coal & Coke Co | $38,245.17 |
| Crystal Block Mining Co | 36,972.53 |
| Crystal Supply Co | 3,167.77 |
| Pocahontas & Crystal Block Coal Sales Co | .30 |
| Tug River Electric Co | (Loss) 27,880.85 |
On such schedules there also appeared the following:
| DISTRIBUTION OF PAYMENT OF TAXES. | |||
| Earnings | Per cent | Proportion of tax | |
| Crystal Block Coal & Coke Co | $38,243.17 | 48.8 | $2,840.31 |
| Crystal Block Mining Co | 36,972.53 | 47.1 | 2,741.37 |
| Crystal Supply Co | 3,167.77 | 4.1 | 238.63 |
| 78,383.47 | 5,820.31 |
The tax computed as due upon the return was $5,820.31.
For 1918 information returns of Form 1122 were filed by the corporations affiliated with the petitioner showing the tax to be allocated to the respective companies as follows:
| Crystal Block Mining Co | $2,741.37 |
| Crystal Supply Co | 238.68 |
| Tug River Electric Co | None. |
*2821 For 1919 the petitioner filed a consolidated income and profits-tax return on which was inserted, under the words "Print Plainly Corporation's Name and Principal Place of Business," the following:
CRYSTAL BLOCK COAL & COKE COMPANY
CRYSTAL BLOCK MINING COMPANY
CRYSTAL SUPPLY COMPANY
TUG RIVER ELECTRIC COMPANY
POCAHONTAS & CRYSTAL BLOCK COAL SALES COMPANY,
Welch, W. Va.
Attached to the return were schedules which set out the income and deductions of each of such companies, showing taxable income as follows:
| Crystal Block Coal & Coke Co | $40,616.04 | |
| Crystal Block Mining Co | 22,016.17 | |
| Crystal Supply Co | (Loss) | 1,116.71 |
| Tug River Electric Company | (Loss) | 48.19 |
| Pocahontas & Crystal Block Coal Sales Co | (Not in business.) |
*603 On such return the tax was computed as $6,165.62.
For 1919 information returns on Form 1122 were filed by the corporations which were subsidiaries of the petitioner, showing the tax to be allocated to the respective companies as follows:
| Crystal Block Mining Co | $2,170.30 |
| Tug River Electric Co | None. |
| Crystal Supply Co | None. |
| Pocahontas & Crystal Block Coal Sales Co | None. |
For 1922 petitioner*2822 filed a consolidated income-tax return on which was inserted, under the words "Print Plainly Corporation's Name and Business Address," the following:
Crystal Block Coal and Coke Co. and Affiliated Companies
Crystal Block Mining Company
Crystal Supply Company
Tug River Electric Company
Pocahontas and Crystal Block Coal Sales Company
Welch, West Virginia.
Such return set out the computation of the consolidated gross income, deductions and net income in the form provided upon such return. Attached thereto were schedules which set out an analysis of such computation and showing with the exception of two items entering into the computation of the consolidated net income, the allocation of all income and deductions between the various corporations. The tabulation showing the computation of the consolidated net income includes items of "inventory at the beginning of the year, $44,103.46"; "merchandise bought for sale $121,711.61." At no place on the return or schedules annexed thereto is it shown to which of the companies these two items pertain. It is not possible from the information shown upon the return to compute separately the net income of each of the affiliated corporations. *2823 The return for 1922 contained a statement reading as follows:
| Taxes to be prorated among Companies as follows: | |
| Crystal Block Coal and Coke Company | $11,201.00 |
| Crystal Block Mining Company | 19,206.56 |
| $30,407.56 |
No information returns were filed by any of the affiliated corporations, as was done for the years 1918 and 1919.
During each of the taxable years in question the total tax as computed upon the consolidated return was prorated among the various companies in proportion to the net earnings of each company included *604 in such consolidated return. In none of these years was there any other arrangement between the companies, nor was any notice given to the Commissioner of any other arrangement.
The Commissioner determined the net income of each company, the consolidated net income and the total tax for 1918 and 1919 as follows:
| 1918 | 1919 | |
| Crystal Block Coal & Coke Co | $84,451.71 | $67,860.95 |
| Crystal Block Mining Co | 46,861.09 | 36,560.57 |
| Crystal Supply Co | 3,738.94 | 1,178.95 |
| Pocahontas & Crystal Block Coal Sales Co | 200.00 | |
| Tug River Electric Co | (Loss) 30,302.18 | 45,741.44 |
| Consolidated net income | 104,948.86 | 151,341.91 |
| Total tax | 40,611.14 | 34,799.19 |
*2824 The deficiencies now asserted against the petitioner represent the difference between the tax computed to be due upon the consolidated net income of the affiliated companies and the amount shown upon the consolidated return. No deficiency was asserted against any other of the affiliated corporations.
The petitioner began operating its mines in 1912 and reached the highest average of daily production, known as the peak of production, in 1917. The Crystal Block Mining Co. began operating its mines in 1915 and reached the highest average of daily production in 1919. The daily production has since been on the decrease. In the mines mules are used to gather the coal from working places and deliver it to the main haulages to be carried out in mine cars by locomotives to the pit mouth. As the coal workings advance the locomotive haul becomes longer. Mining machines are used for undercutting the coal so it may be more readily shot down by the miner, and as the mine progresses and working places become more scattered the workings cover more territory and require more mining machines and cars to maintain an equal production.
The tonnages mined and locomotives and mining machines*2825 purchased were as follows:
| CRYSTAL BLOCK COAL & COKE CO. | |||||
| Year | Days worked | Total tonnage | Average tonnage | Motors purchased | Mining machines |
| pre day | purchased | ||||
| 1913 | 258 | 82,045 | 314 | 1 | |
| 1914 | 254 | 109,642 | 431 | 1 | |
| 1915 | 244 | 150,007 | 614 | 2 | 1 |
| 1916 | 270 | 171,131 | 633 | 1 | 2 |
| 1917 | 265 | 183,513 | 693 | 2 | 3 |
| 1918 | 282 | 193,010 | 684 | 3 | 3 |
| 1919 | 241 | 153,214 | 635 | 1 | |
| 1920 | 227 | 132,921 | 585 |
| CRYSTAL BLOCK MINING CO. | |||||
| Year | Days | Total | Average | Motors | Mining |
| worked | tonnage | tonnage | purchased | machines | |
| per day | purchased | ||||
| Began operation in October, 1915 | 1 | 2 | |||
| 1916 | 210 | 83,151 | 400 | 2 | |
| 1917 | 284 | 135,910 | 478 | 2 | 1 |
| 1918 | 257 | 104,897 | 408 | 1 | 2 |
| 1919 | 268 | 130,671 | 487 | 1 | |
| 1920 1 | 145 | 80,733 | 557 |
*605 During the years 1918, 1919, and 1922 the affiliated corporations purchased equipment as follows:
| CRYSTAL BLOCK COAL & COKE CO. | ||
| Year | Equipment purchased | Cost |
| 1918 | New electric locomotive | $20,009.19 |
| 1919 | New mining machine | 9,600.00 |
| 1922 | Mine cars | 2,306.57 |
| CRYSTAL BLOCK MINING CO. | ||
| 1918 | New 6-ton locomotive | $5,138.30 |
| 1919 | Power machine and sets | 1,308.80 |
| 1922 | Mine cars | 7,589.21 |
*2826 Locomotives and mining machines have a useful life with careful usage of about 10 years and mine cars of 2 to 3 years.
In computing the net income the Commissioner refused to allow the cost of such equipment to be deducted in the year of purchase, but allowed depreciation thereon at the rate of 7 1/2 per cent per annum.
In 1918 additional water was required by petitioner because of its employment of more men and the partial failure of a camp well. Efforts to drill another well produced only salt water and petitioner made use of river water by installing a filter and tank at a cost of $1,480 and petitioner charged same to expense. The filter was used intermittently for four or five years to augment the well supply. The Commissioner refused to allow the petitioner to deduct the cost of the filter system as an expense in 1918 but did allow depreciation.
In 1919 the Crystal Block Mining Co. maintained its Loboto Camp of 600 people, about 11 miles from Williamson. The roads were impassible and labor, particularly returned soldiers, was restless and hard to hold, and a general strike came early in the following year. To improve the morale and to provide contentment through*2827 amusement and recreation, which was otherwise entirely lacking, a theatre was erected and equipped with a power machine at a cost of $7,711.59 *606 by the Crystal Block Mining Co. The admission charge covered the cost of film rentals and did not show a profit. During 1919 and until a strike occurred in May, 1920, the theatre was well attended. With the strike in 1920 the operation of the theatre was abandoned. When erected it was not known how long the theatre would be useful. The Commissioner refused to allow the deduction of the cost of the theatre building as an expense in 1919 but did allow depreciation.
During 1916 and 1917 the Tug River Electric Co. was engaged in the erection of a power plant on the Tug River. During a part of 1917 it had one unit in operation. Upon its 1917 income-tax return it claimed a deduction of $10,000 for depreciation. At the beginning of 1917 it had expended $71,925.77 on construction and at the end of 1917, $363,817.06. In 1919 it sold its plant. In computing the gain resulting from the sale, the Commissioner reduced the cost by depreciation sustained to the date of sale. As a part of his computation of such depreciation he included*2828 $10,100 for 1917.
OPINION.
PHILLIPS: The petitioner complains that the Commissioner has asserted against it the entire deficiency computed upon the consolidated net income, contrary to section 240(a) of the Revenue Act of 1918 and 240(b) of the Revenue Act of 1921, providing:
In any case in which a tax is assessed upon the basis of a consolidated return, the total tax shall be computed in the first instance as a unit and shall then be assessed upon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any such agreement, then on the basis of the net income properly assignable to each. * * *
The testimony is that there was no agreement between the affiliated companies for any apportionment of the tax other than on the basis of the net income properly assignable to each. This is substantiated by the apportionment shown on the returns filed. There is nothing in the returns or in the record before us which would justify a conclusion that there was an agreement on the part of this petitioner to assume the whole of any additional tax found to be due, such as existed in *2829 , and .
Counsel for respondent argues that, since the returns showed a fixed amount to be paid by the companies other than petitioner, which he designates as the "parent" corporation, the "parent" was liable for the balance. The fallacy here is that these returns likewise stated a fixed amount to be paid by petitioner. There is no greater justification for assuming from these returns that only a specified amount was to be paid by the others than for assuming that only a specified amount was to be paid by petitioner. The tax should *607 have been apportioned on the basis of the net income of each of the affiliated corporations and the deficiencies due from this petitioner should be recomputed on that basis. ; ; .
Petitioner contends that it is entitled to deduct as an expense the cost of certain equipment which has a life of from three to ten years. *2830 There is nothing to indicate that the life of the mine is less than that of this equipment. Apparently it will be used in mining the coal which will be taken out in these future years. We see no reason why such costs should be charged to the coal mined in the year of purchase rather than to the coal with the goverment will be used to mine. ; ; .
Petitioner argues that in mine accounting expenditures for equipment should be capitalized until the operation has reached the peak of daily production, after which all equipment must be charged to expense when purchased. In this manner the greater part of the expense for equipment is thrown against the earlier years of operation, when other costs are less and during the later years the cost of equipment is less then other costs are greater. In this manner an attempt is made to make the expense of mining in the later years as small as possible. Yet it is recognized that in the later years more equipment is required than in the earlier years. This can only mean that it costs more to mine such*2831 coal in the later years and such fact can not be escaped by charging equipment off as purchased, even though such may be the conservative accounting insisted upon by those who do business with mining companies as bankers, bondholders or creditors. We have had occasion to point out that what may be proper accounting for certain business purposes is not always proper under the tax law. . So long as petitioner is permitted to deduct the cost of this equipment over the years in which it is used, the tax law has been met. The action of the Commissioner is sustained.
Error is assigned in that the Commissioner refused to allow petitioner to deduct the cost of a filter system installed in 1918 and refused, in computing consolidated net income, to allow a deduction for the cost of a theatre building erected in 1919. Neither of these represented an expense of the year when erected; both continued to be used in a subsequent year or years. The Commissioner properly treated these as capital expenditures and allowed their cost to be recovered by way of depreciation deductions.
It is alleged that the Commissioner erred in his computation*2832 of gain on the sale of the property of the Tug River Electric Co. in that he improperly reduced the cost by $10,100 for depreciation *608 alleged to have been sustained in 1917. On the one hand we have testimony that the property was under construction in 1917 and no depreciation was sustained. On the other hand, the same witness testified that one unit was operating for at least a part of 1917. There is the further fact that depreciation was claimed on the return filed for 1917 and was allowed. In such circumstances the action of the Commissioner must be sustained.
The issue respecting depletion was settled by stipulation. The remaining errors will involve only adjustments in the computation of the deficiencies, since they are dependent upon issues decided above.
Decision will be entered under Rule 50.
Footnotes
1. Miners strike during year. ↩