1928 BTA LEXIS 3234">*3234 1. The March 1, 1913, value of depreciable property determined.
2. Additional taxes due for the years 1917, 1918, and 1919 are not barred from assessment and collection by any statutes of limitation.
13 B.T.A. 471">*471 This is a proceeding for the redetermination of deficiencies in income and profits tax for the calendar years 1917, 1918, and 1919 in the respective amounts of $22,337.85, $85,815.59, and $15,609.91. This case was originally heard by the Board on February 2, 1926. The assignments of error in the petition upon which the original hearing was held were:
(1) The Commissioner has used erroneous values for depreciation purposes.
(2) The Commissioner has allowed insufficient depreciation.
(3) The Commissioner has denied deductions for bad debts ascertained to be worthless and written off within the taxable year.
The Board promulgated its findings of fact and opinion therein on 1928 BTA LEXIS 3234">*3235 July 28, 1926, 4 B.T.A. 452">4 B.T.A. 452. In that opinion the Board affirmed the findings of the respondent save that it held that certain bad debts aggregating $33,217.17, which the petitioner deducted from its 1918 income and which the respondent had disallowed altogether, should be deducted from the gross income of 1919. By an order entered November 4, 1926, and amended November 10, 1926, the Board affirmed the respondent's determination of deficiencies for 1917 and 1918, but reduced the deficiency for 1919 from $15,609.91 to $6,309.16. The petitioner took an appeal to the United States Circuit Court of Appeals for the Seventh Circuit. That court stated in its opinion, 20 Fed.(2d) 10:
Three matters are here in issue on the merits; (a) Was the item allowed for bad debts properly transferred from 1918 to 1919? (b) Was there error in fixing the value of depreciable property? (c) Were the rates of depreciation used erroneous?
In the course of its opinion the court stated:
(c) Whether the depreciation rates applied were in any sense erroneous, unless possibly in the single instance of giving the corrugated iron building the same rate as the concrete, is doubtful. 1928 BTA LEXIS 3234">*3236 The witness forward, who knew most about the rates, said the item scheduled as "power" had a normal useful life of 20 years, and machinery of 10 years, and they were given, respectively, at 5 per cent. and a 10 per cent. rate. He agreed to 20 per cent. 13 B.T.A. 471">*472 for the automobiles. Unless there is something to contradict the Forward testimony as to the corrugated iron building, it would appear that should have a depreciation rate of 5 per cent. We do not think there should be an increase of 50 per cent. because of the additional operation of machinery during the years in question.
The mandate of the higher court reads:
It is now here ordered and adjudged by this court that the order of the said United States Board of Tax Appeals entered November 4, 1926 and amended November 10, 1926 be and the same is hereby reserved; and that this cause be, and the same is hereby remanded to the said United States Board of Tax Appeals, with direction to take further evidence, if necessary, on any question, and to fix the market value as of March 1, 1913, and, further, to base the depreciation thereon in accordance herewith, and to allow the charge-off of bad accounts for the year 1918.
1928 BTA LEXIS 3234">*3237 On December 30, 1927, the petitioner filed with the Board a motion for "leave to file a supplemental petition in this cause instanter and to rule upon the Commissioner to answer the same." The supplemental petition accompanied the motion, and is to the effect that the assessment and collection of any deficiencies in tax for the years 1917, 1918, and 1919 are barred by statutes of limitation. The motion was granted by the Board on January 16, 1928, and the supplemental petition was filed as of that date and the respondent was given 45 days within which to file his answer to such petition. The respondent's answer thereto was filed on February 20, 1928.
Rates for depreciation were settled by the prior decision of the Board as modified by the decision of the court. They are:
| Per cent | |
| Brich and concrete buildings | 3 |
| Iron and steel buildings | 5 |
| Power | 5 |
| Machinery and equipment | 10 |
| Automobiles | 20 |
No question was raised as to the correctness of the determination of the respondent with respect to the allowable depreciation on patterns. The only questions relating to depreciation for adjudication at this time are (1) the March 1, 1913, value of depreciable1928 BTA LEXIS 3234">*3238 properties and (2) the correct allocation between (a) power and (b) machinery and equipment at such basic date. The third question for adjudication is whether the assessment and collection of deficiencies for the taxable years are barred by statutes of limitation.
The findings of fact hereinafter stated are only such as are necessary to determine the issues raised by this proceeding.
FINDINGS OF FACT.
The petitioner is an Illinois corporation with its principal office at Chicago. It was organized in 1892 with a paid-up cash capital 13 B.T.A. 471">*473 of $30,000 and succeeded to the business of the National Hollow Brake Beam Co. It acquired a one-story brick building at 4060 Princeton Avenue, Chicago, and gradually increased its plant. No additional capital was ever paid into the company. In 1901 and 1904 it constructed a plant consisting of buildings and machinery in Detroit, Mich. Between the date and 1917 certain additions and replacements were made to that plant. In 1905 it acquired a malleable iron foundry consisting of buildings, machinery, and equipment at Grand Rapids, Mich., at a cost of $62,500. Between that date and 1917 certain additions and replacements were made1928 BTA LEXIS 3234">*3239 thereto. At the time this plant was purchased it was being operated by a creditors' committee. In 1906 it acquired a similar malleable iron foundry which was being operated at Marion, Ind., at a cost of $92,000. The Marion plant was not being operated successfully by its owners and was acquired at a bargain price. Between the date of acquisition and 1917 considerable additions and replacements were made to that plant. In 1907 it constructed what is now its principal office building, a brake beam plant, at 46th and Robey Streets, Chicago, and installed therein certain machinery. In 1908, the petitioner owned plants at Chicago, Grand Rapids and Detroit, Mich., Marion, Ind., and Jersey City, N.J. It had appraisals made of these plants by the American Appraisal Co. on the dates following:
| Jersey City | April 25, 1904 |
| Detroit | Feb. 11, 1907 |
| Grand Rapids, Mich | Dec. 12, 1907 |
| Marion, Ind | Dec. 17, 1908 |
The petitioner's books of account at the beginning of 1908 reflected the actual cost of the construction and acquisition of its various properties. The appraisals made of the properties showed values in excess of cost and the book values of the plants were increased1928 BTA LEXIS 3234">*3240 at December 31, 1908, to accord with the appraisals, the increase in value of the several plants written upon the books at that time being as follows:
| Grand Rapids plant | $80,683.02 |
| Marion, Ind., plant | 70,624.32 |
| Jersey City plant | 12,724.57 |
| Detroit, Mich., plant | 21,765.92 |
| Total increased value of tangible property | 185,797.83 |
The petitioner's books of account were audited annually during the years 1908 to 1913, inclusive, by Price, Waterhouse & Co., and the financial transactions of the petitioner, including acquisitions of new plants and proper amounts for depreciation, are shown in the annual audits made. In 1912, the petitioner acquired a rolling mill 13 B.T.A. 471">*474 plant together with machinery at Franklin, Pa., at a cost of $175,000. The plant at the time was in the hands of a receiver and was acquired at a bargain price. The petitioner had an appraisal made of this property by the American Appraisal Co. in 1912, and the value of the plant at December 31, 1912, was written up on its books of account to the extent of $148,244.09 in excess of cost. The petitioner's balance sheet, as audited by Price, Waterhouse & Co., at December 31, 1912, shows as follows:
1928 BTA LEXIS 3234">*3241 ASSETS
Property account:
Real estate, buildings, machinery - Plant and equipment at Chicago, Marion, Grand Rapids, and Detroit based on Reproductive Values furnished in the years 1907 and 1908 by the American Appraisal Company, with Expenditures added since for all Properties except the Chicago Plant, which is stated at Cost to date - Balance at December 31, 1911
Add - Additional Properties acquired as at June 30, 1912, as valued by American Appraisal Company in 1909, plus Expenditures added since - less Properties sold during the year
Additional Expenditures to all Properties during the year
Good Will and Patents -
Balance at December 31, 1911
Expended on New Patents, etc.
Current assets (at Chicago, Detroit, Grand Rapids, Marion, Franklin and Montreal):
Inventories of Raw Materials, Supplies, and Finished Products
Investments
Accounts and Bills Receivable
Cash on hand, in banks, and on Special Deposit
Total Current Assets
Deferred charges to future operations
LIABILITIES
Capital liabilities:
Capital Stock -
Authorized: 25,000 Shares of $100.00 each
Less -
In Treasury -
140 Shares of $100.00 each
Held1928 BTA LEXIS 3234">*3242 for Exchange for Shares of $10.00 each
1,460 Shares of $10.00 each not yet Exchanged for Shares of $100.00 each
Current liabilities:
Bills Payable
Trade Liabilities and Miscellaneous Accrued Items
Reserves:
For Contingencies
For Possible Shrinkage in Inventory Valuations
For Depreciation and Accruing Renewals -
Balance at Jan. 1, 1912
Add - Depreciation on new Properties accrued to date of Acquisition
Appropriated from Earnings for the year
Other Accretions
Less - Expenditures Charged off
General Reserve transferred from Surplus
Surplus as per Exhibit II-a
| ASSETS | ||
| $1,374,299.23 | ||
| 274,354.62 | ||
| 77,681.52 | ||
| $1,726,335.37 | ||
| $770,351.61 | ||
| 2,690.08 | ||
| 773,041.69 | ||
| $2,499,377.06 | ||
| $804,958.27 | ||
| 19,285.00 | ||
| 543,137.34 | ||
| 190,393.88 | ||
| 1,557,774.49 | ||
| 1,759.21 | ||
| $4,058,910.76 | ||
| LIABILITIES | ||
| $2,500,000.00 | ||
| $14,000.00 | ||
| 14,600.00 | ||
| 28,600.00 | ||
| 2,471,400.00 | ||
| 14,600.00 | ||
| $2,486,000.00 | ||
| 300,000.00 | ||
| 255,537.87 | ||
| 555,537.87 | ||
| $10,000.00 | ||
| 25,000.00 | ||
| $176,950.56 | ||
| 47,618.66 | ||
| 50,000.00 | ||
| 1,716.58 | ||
| 276,285.80 | ||
| 8,116.48 | ||
| 268,169.32 | ||
| 500,000.00 | ||
| $803,169.32 | ||
| 214,203.57 | ||
| 4,058,910.76 |
1928 BTA LEXIS 3234">*3243 13 B.T.A. 471">*475 A detail of this balance sheet shows:
| Buildings | Machinery, plant, and loose equipment | |
| Chicago | $246,163.40 | $138,030.50 |
| Detroit | 46,596.34 | 101,963.26 |
| Marion | 168,290.14 | 103,405.46 |
| Grand Rapids | 113,641.54 | 158,629.16 |
| Franklin | 145,822.23 | 183,357.14 |
| Total | 720,513.65 | 685,385.53 |
In addition to the foregoing, the petitioner had depreciable properties at December 31, 1912, as follows:
| Montreal | $200.00 |
| Automobiles | 3,345.00 |
| Patterns | 43,665.09 |
| Office furniture | 12,821.35 |
Subsequent to March 1, 1913, the petitioner had reproductive appraisals made by Coats & Burchard Co. as follows:
| Date | Amount | |
| Marion Malleable Iron Works | Feb. 1, 1916 | $333,455.38 |
| Grand Rapids Malleable Works plant | Dec. 21, 1915 | 354,814.07 |
| Detroit Forge plant | Jan. 18, 1916 | 156,185.39 |
| Plant Forty-sixty and Robey Streets, Chicago | Dec. 31, 1915 | 344,600.77 |
| Franklin Steel Works plant | Nov. 27, 1915 | 493,885.89 |
| Princeton Avenue plant, Chicago | Dec. 31, 1915 | 37,942.97 |
| Total | 1,720,884.47 |
The basis of said reproductive appraisals was "present current prices, except where otherwise noted, said prices being latest quoted1928 BTA LEXIS 3234">*3244 at the date of making this appraisal." In the making of these appraisals no deduction was made for depreciation from the date of acquisition to the date of the appraisal. The reproductive values represent the estimated cost of reproducing the properties new on 13 B.T.A. 471">*476 the respective dates of the appraisals. For the purpose of determining the insurable value of the Princeton Avenue plant of the petitioner, appraised on December 31, 1915, at $37,942.97, the appraisers determined depreciation amounting to $9,752.67, leaving the insurable value $28,190.30. The main plant had been built for a period of about 22 years and depreciation was computed at the rate of approximately 1 1/7 per cent per annum.
The aggregate book value of petitioner's depreciable assets at December 31, 1912, was as follows:
| Buildings | $720,513.65 |
| Machinery, plant and loose equipment | 685,385.53 |
| Montreal property | 200.00 |
| Automobiles | 3,345.00 |
| Patterns | 43,665.09 |
| Office furniture | 12,821.35 |
| Total | 1,465,830.62 |
| Less depreciation reserve | 268,169.32 |
| Balance | $1,197,761.30 |
The exact amounts as of December 31, 1916, on which depreciation was allowed by the respondent were as follows: 1928 BTA LEXIS 3234">*3245
| Buildings | $547,824.17 |
| Power | 355,054.06 |
| Machinery and tools | 416,330.49 |
| Automobiles | 8,235.79 |
| Patterns | 56,589.60 |
| Total | $1,384,034.11 |
Additions and deductions from depreciable assets between 1913 and 1916 were as follows:
| Additions | |
| 1913 | $64,512.30 |
| 1914 | 246,223.68 |
| 1915 | 15,399.77 |
| 1916 | 59,300.30 |
| Total additions | 385,436.05 |
| Deductions resulting from fire in the Franklin plant in 1913 | 131,276.34 |
| Net additions | 254,159.71 |
The net additions of $254,159.71 subtracted from respondent's value on December 31, 1916, leaves $1,129,884.40 as the respondent's basic value of depreciable assets on March 1, 1913.
The wholesale prices of metals and metal products and building materials in 1907, 1908, and 1912 upon which dates appraisals of petitioner's properties were made by the American Appraisal Co., 13 B.T.A. 471">*477 and the resultant values thereof placed upon the petitioner's books of account were approximately the same or above such prices in 1913. The prices of the same products and materials in 1915 were also substantially the same as such prices in 1907, 1908, 1912, and 1913.
The petitioner's shares of stock were listed on the St. 1928 BTA LEXIS 3234">*3246 Louis Stock Exchange. The records of the exchange show that the stock was sold in 1913 at approximately $85 per share. The book value of the stock at December 31, 1912, after the inclusion in assets of $773,041.69 for good will and patents, was $128.79 per share. Prior to 1916 the shares of stock never sold above $91 per share and in 1910 and again in 1915 sold as low as $75 per share.
The net profits realized by the petitioner from 1908 to 1913 were as follows:
| 1908 | $19,241.91 |
| 1909 | 193,462.27 |
| 1910 | 295,214.02 |
| 1911 | 108,165.60 |
| 1912 | 312,751.42 |
| Total | 928,835.22 |
| Average | 185,767.04 |
| 1913 | 404,717.11 |
Net earnings for subsequent years were:
| 1914 | $88,335.38 |
| 1915 | 216,058.12 |
| 1916 | 628,626.68 |
| 1917 | 812,111.75 |
| 1918 | 622,793.12 |
| 1919 | 843,983.11 |
| 1920 | 991,752.84 |
The Jersey City plant owned by the petitioner was sold in that year for $54,845. The appraised value of that plant was $79,580.75. Expenses incident to that sale were $6,069.38. Machinery to the extent of $6,341 was not included in the sale. If the depreciation applied through 1909, 1910, 1911, and 1912 by the petitioner, approximately 2 per cent on buildings and 6 per cent1928 BTA LEXIS 3234">*3247 on machinery, were to be applied to these assets, the total depreciation was $8,375.78. The computation showing the difference between the appraised value and the price realized is as follows:
| Appraised value at time of sale | $79,580.75 |
| Less machinery removed | 6,341.00 |
| Remaining appraised value | 73,239.75 |
| Less depreciation | 8,375.78 |
| Appraised value of property sold | 64,863.97 |
| Price realized | 54,845.00 |
| Difference | 10,018.97 |
13 B.T.A. 471">*478 The price realized on the sale of this property a short time prior to March 1, 1913, was 15.4 per cent less than the appraised value.
In May, 1913, the Franklin, Pa., plant of the petitioner was about 75 per cent destroyed by fire. The book value of the property destroyed, which was the same as the appraisal value, was $179,599.48. The depreciation on this property was $24,315.74, leaving a net appraisal value of $155,283.74. The book value of the items salvaged was $40,990 leaving the appraisal or book value of the property destroyed $114,293.74. The insurance received from a settlement with the fire insurance companies was $111,342.27. This amount was practically 3 per cent less than the appraisal value shown by the1928 BTA LEXIS 3234">*3248 petitioner's books of account.
The fair market value of the petitioner's depreciable assets at March 1, 1913, was as follows:
| Buildings | $608,498.24 |
| Machinery, plant, and loose equipment | 461,354.72 |
| Montreal property | 200.00 |
| Automobiles | 3,345.00 |
| Patterns | 43,665.09 |
| Office furniture | 12,821.35 |
| Total | 1,129,884.40 |
The respondent used a December 31, 1916, value of depreciable assets referred to as "power" of $355,054.06 and a corresponding value for "machinery and tools" of $416,320.49. The book value of these two classes of assets on December 31, 1912, was $685,385.53 less $186,964.28 depreciation accrued thereon, or a net amount of $498,421.25. The power plant is depreciable at the rate of 5 per cent per annum and the machinery and tools at 10 per cent per annum.
The classifications of assets shown by the Coats & Burchard Co. appraisals covering all properties are as follows:
| Assets | Amount |
| Building materials | $732,078.79 |
| Electric lighting systems | 15,624.69 |
| Pipe and fittings: | |
| Steam | 28,089.41 |
| Water | 22,006.50 |
| Plumbing and sewerage | 14,274.10 |
| Steam mechanical | 23,983.80 |
| Air | 4,533.70 |
| Gas | 1,234.31 |
| Paint | 433.13 |
| Exhaust and blower | 6,298.73 |
| Lubricating oil | 444.11 |
| Fuel oil | 183.11 |
| Electric power circuit | 11,102.81 |
| Benches, etc | 6,594.41 |
| Machinery | 375.072.02 |
| Machinery not in use | 17,956.57 |
| Shafting | $1,202.69 |
| Pulleys | 3,574.70 |
| Belting | 13,219.32 |
| Tools and miscellaneous equipment | 34,613.39 |
| Rolls (Franklin plant) | 54,385.00 |
| Cranes and hoists | 35,870.95 |
| Furnaces and forges | 130,551.21 |
| Railroad tracks inside and outside plants | 31,905.26 |
| Trucks barrows, and scales | 25,839.90 |
| Office and factory furniture | 25,216.82 |
| Foundry equipment | 18,233.78 |
| Core room equipment | 10,411.42 |
| Flasks | 35,092.05 |
| Miscellaneous | 40,857.79 |
| Total | 1,720,884.47 |
1928 BTA LEXIS 3234">*3249 These figures represent the estimated cost of reproducing in a new condition the depreciable assets on hand at the dates of the appraisals 13 B.T.A. 471">*479 in 1915 and 1916. The cost of net additions to these classes of depreciable assets during the years 1913, 1914, and 1915 was $194,859.41 which amount deducted from $1,720,884.47 leaves $1,526,025.06 as the estimated cost of reproducing in a new condition the depreciable assets on hand December 31, 1912.
Petitioner's income-tax return for 1917 was filed on March 28, 1918; that for 1918 on June 16, 1919; and that for 1919 on March 15, 1920. The deficiency notice for the years 1917, 1918, and 1919 was mailed to the petitioner on March 14, 1925, and petitioner's appeal was filed with this Board on May 6, 1925. On December 7, 1925, the Solicitor of Internal Revenue sent the petitioner a letter requesting the execution of a waiver on the form enclosed reading as follows:
It appears from the records of this office that you have filed an appeal with the United States Board of Tax Appeals, protesting the assessment of additional taxes for the years 1917, 1918 and 1919, and as it is impossible at this time to determine whether the case1928 BTA LEXIS 3234">*3250 will be disposed of by the Board prior to the expiration of the period of your waiver, you are requested to execute in duplicate and to return to this office at once the enclosed waiver forms.
If the waiver forms are not executed and returned to this office immediately, the Commissioner may find it necessary to make assessment of the proposed deficiency under the provisions of Section 274(d) of the Revenue Act of 1924. If such action be necessary the collection of the amount of the assessment, or so much thereof as may be in controversy, might thereafter be stayed, pending final determination of your appeal by the Board, upon the filing of a claim for abatement, accompanied by a bond, pursuant to the provisions of Section 279(a) of the Revenue Act of 1924.
In replying to this letter please refer to SOL:A.
Upon receipt of this letter the petitioner executed and forwarded to the Commissioner an "Income and Profits Tax Waiver for the taxable years ended prior to January 1, 1922," dated December 10, 1925, and reading as follows:
CHICAGO, December 10, 1925.
In pursuance of the provisions of existing Internal Revenue Laws Chicago Railway Equipment Co., a taxpayer of 19281928 BTA LEXIS 3234">*3251 West 46th Street, chicago, Ill., and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year (or years) 1917, 1918 and 1919 under existing revenue acts, or under prior revenue acts.
This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.
CHICAGO RAILWAY EQUIPMENT CO.
(Signed) E. T. WALKER, Secretary.
13 B.T.A. 471">*480 This consent was duly executed by the petitioner under its corporate seal and was accepted by the Commissioner, his signature being duly affixed thereto. No subsequent consent1928 BTA LEXIS 3234">*3252 or waiver was filed by the petitioner and no notice of any deficiency for the years 1917, 1918, and 1919, or any of such years, has since the 10th day of December, 1925, been sent to the petitioner.
OPINION.
SMITH: Some of the issues originally raised by the petitioner have been settled by the decision of the Board reported in 4 B.T.A. 452">4 B.T.A. 452, and by the decision of the United States Circuit Court of Appeals for the Seventh Circuit in Chicago Railway Equipment Co. v. Blair, 20 Fed.(2d) 10; Am. Fed. Tax. Rep. 6817. The order of the Board entered November 4, 1926, and amended November 10, 1926, was reversed by the Circuit Court of Appeals and remanded to this Board "with direction to take further evidence, if necessary, on any question, and to fix the market value as of March 1, 1913, and further, to base the depreciation thereon in accordance herewith, and to allow the charge-off of bad accounts for the year 1918." One of the questions originally raised was the proper allowances for depreciation deductible from gross income in the petitioner's tax returns for 1917, 1918, and 1919. The rates at which depreciation should be computed have been settled. 1928 BTA LEXIS 3234">*3253 No question has been raised as to the correctness of the respondent's determination of net additions to depreciable properties for the period subsequent to March 1, 1913. The only issues before the Board relating to depreciation are (1) the March 1, 1913, value of depreciable properties of the petitioner, and (2) the proper segregation of depreciable assets into (a) power and (b) machinery and equipment. By a supplemental petition, allowed to be filed by the Board in an order entered January 6, 1928, the petitioner alleges that the assessment and collection of any deficiencies for the years 1917, 1918, and 1919 are barred by statutes of limitation.
The Board assumes that under the mandate of the Circuit Court of Appeals it has jurisdiction to consider the question raised in the supplemental petition. In Foster on Federal Practice, vol. 4, 6th Ed., sec. 712, it is stated:
* * * Where a decree is reversed with a procedendo or directions that further proceedings be had in a conformity with, or not inconsistent with the opinion of the appellate court, or a new trial is ordered; the court of first instance has plenary authority to allow amendments, consolidation with another case, 1928 BTA LEXIS 3234">*3254 and further proof, except in so far as the opinion or mandate specifically forbids. Although the mandate contains no direction for a new trial, it seems that a new trial may be ordered when there is a provision for a procedendo. The mandate must be interpreted according to its subject-matter, 13 B.T.A. 471">*481 and the decree of the court below as well as that of the appellate court may be taken into consideration in the interpretation thereof. (Numerous cases cited.)
In Rio Grande Dam & Irrigation Co. v. United States,215 U.S. 266">215 U.S. 266, it was held that, where a case is opened, further evidence may be produced, it is also open for the amendment of the original pleadings or for additional pleadings appropriate to the issues; and permission by the lower court to file such supplemental complaint is not inconsistent with the mandate of the Supreme Court remanding the case with directions to grant leave to both sides to adduce further evidence. In Hawkins v. Cleveland, C., C. & St. L. Ry. Co. (C.C.A. 7th Cir.), 99 F. 322, 324, it was held:
* * * In the present case the decree below was reversed, but, instead of a direction for the entry of any particular1928 BTA LEXIS 3234">*3255 decree, the mandate was, as stated, that further proceedings should be had, not inconsistent with the opinion of this court. The effect was to put the case in the same posture as if no decree had ever been entered, and in that situation the court had the same authority to permit an amendment of the petition or bill of the appellee for the purpose of enlarging the issue and of admitting further proofs as it had before the entry of the reversed decree. The case of In re Sanford Fork & Tool Co.,160 U.S. 247">160 U.S. 247, 16 Sup.Ct. 291, 40 L. Ed. 414, affords an apt precedent.
Counsel for the appellant have urged that in this instance it would be inequitable to permit a change in the issues, but in the first instance, at least, that is a question for the circuit court. * * *
1. The main issue relates to the March 1, 1913, value of petitioner's depreciable properties. The exact amounts as of December 31, 1916, on which depreciation was allowed by the respondent have been set forth in the findings of fact and total $1,384,034.11. Between March 1, 1913, and December 31, 1916, additions had been made to the petitioner's depreciable properties in the net amount of $254,159.71. 1928 BTA LEXIS 3234">*3256 This amount subtracted from the respondent's value on December 31, 1916, leaves $1,129,884.40 as the respondent's basic value of depreciable assets on March 1, 1913. The book value of the depreciable assets of the petitioner on December 31, 1912, less the reserve for depreciation chargeable against such book value, was $1,197,761.30. It will thus be seen that the petitioner's book values at March 1, 1913, and the values used by the respondent as a basis for the computation of allowable depreciation for the taxable years were approximately the same. In the former opinion of the Board, 4 B.T.A. 452">4 B.T.A. 452, it was stated that the Commissioner:
* * * Computed the allowance for exhaustion, wear and tear of the buildings, machinery and equipment upon the basis of undepreciated cost on March 1, 1913, plus the cost of additions since that time, as representing, in the absence of better evidence, the fair market price, or values on March 1, 1913. * * *
The basis for this statement was the deficiency notice sent to the petitioner advising it of deficiencies for the years 1917, 1918, and 13 B.T.A. 471">*482 1919. Upon the second hearing of this case evidence was adduced to show that the1928 BTA LEXIS 3234">*3257 March 1, 1913, values used by the respondent were greatly in excess of the cost of the depreciable properties to the petitioner. The petitioner's plants had been appraised at sundry times prior to March 1, 1913, and the book values theretofore carried at cost had been stepped up to accord with the appraisals. The book values of the petitioner's plants located at Grand Rapids and Detroit, Mich., Marion, Ind., and Jersey City, N.J., were stepped up at the close of 1908 to the extent of $185,797.83 to accord with appraisals of properties which had been made. The petitioner's auditor admitted that these increases in book values increased the book value over cost to the amount stated. An appraisal was made of the Franklin plant in 1912, shortly after its acquisition, and the book value was increased over cost to accord with the appraisal to the extent of $148,244.09. The record shows that the costs of petitioner's plants were accurately reflected by the petitioner's books of account except where they had been increased as a result of appraisals. Depreciation had been charged off in amounts approved by the company's auditors.
The petitioner contends that the March 1, 1913, value1928 BTA LEXIS 3234">*3258 of its depreciable assets was $1,536,323 and that they were classified as follows:
| Franklin, Pennsylvania Plant: | |
| Buildings | $78,489.00 |
| Power Plant | 41,920.00 |
| Machinery and Equipment | 251,956.00 |
| Total | $372,365.00 |
| Marion, Indiana Plant: | |
| Buildings | $154,481.00 |
| Power Plant | 3,225.00 |
| Machinery and Equipment | 142,404.00 |
| Total | $300,110.00 |
| Grand Rapids, Michigan Plant: | |
| Buildings | $139,236.00 |
| Power Plant | 16,448.00 |
| Machinery and Equipment | 170,866.00 |
| Total | $326,550.00 |
| Chicago Plant: | |
| Buildings | $217,364.00 |
| Power Plant | 15,916.00 |
| Machinery and Equipment | 147,833.00 |
| Total | $381,113.00 |
| Detroit, Michigan Plant: | |
| Buildings | $49,937.00 |
| Power Plant | 9,857.00 |
| Machinery and Equipment | 96,391.00 |
| Total | $156,185.00 |
13 B.T.A. 471">*483 This amount is exclusive of patterns and automobiles. These are the values claimed by the president of the petitioner to represent the fair market values.
Although based upon the Coats & Burchard Co. appraisals as of 1915 and 1916, the amounts claimed by the petitioner as the fair market values of depreciable assets on March 1, 1913, are in excess of the estimated cost of reproducing the properties new on March 1, 1913, allowance being1928 BTA LEXIS 3234">*3259 made for net additions to depreciable assets during the years 1913, 1914, and 1915. As shown by the findings of fact the cost of reproducing the properties new on December 31, 1912 (based on the Coats & Burchard Co. appraisals) was $1,526,025.06, whereas the petitioner's officers claim that those values were $1,536,323.
That the Coats & Burchard Co. appraisals represent not the fair market values of the petitioner's depreciable assets at the dates of the appraisals but the estimated cost of reproducing the properties in a new condition on those dates, is conclusively proven by the testimony of the petitioner's auditor Forward. Upon the first hearing of this case he was asked:
Q. Is it a fact that the reproductive values which they [Coats & Burchard Co.] found make allowance for depreciation?
A. No, sir; the depreciated values are stated separately.Q. Have you testified heretofore as to the depreciated values which that company found?
A. I gave yesterday - well, to answer your question directly, no, sir.
Q. All the testimony you have given heretofore relates to retroactive [reproductive] values?
A. Yes, sir; and I gave my own opinion of all of what the1928 BTA LEXIS 3234">*3260 depreciation was on those plants on March 1, 1913.
It appears from other testimony of the witness Forward that Coats & Burchard Co. prepared in connection with their reproductive appraisals depreciation schedules which might, if they had been offered in evidence, have afforded a satisfactory basis for determining the fair market values on March 1, 1913. The auditor admitted that such depreciation schedules had been prepared by the Coats & Burchard Co. He testified at the first hearing that he had left the depreciation schedules prepared by the Coats & Burchard Co. "over at the hotel." They have never been offered in evidence. It thus appears that the Coats & Burchard Co. appraisals offered in evidence are incomplete. The protions offered do not purport to give fair market values of assets in their then condition at the dates of the appraisals. Forward estimated that the depreciation which had accrued on brick buildings on March 1, 1913, was, in round numbers, $41,000; on iron and steel buildings, $2,000; on power $11,000; and on equipment $77,000. Nevertheless, in making their estimates of 13 B.T.A. 471">*484 fair market values at the basic date, the petitioner's witnesses took no1928 BTA LEXIS 3234">*3261 account of depreciation which had accrued upon the assets.
Manifestly, the great bulk of the petitioner's assets on hand on March 1, 1913, had suffered depreciation. Some of them had been owned for many years and the depreciation claimed to have been sustained upon them during the taxable years runs to large figures. In the light of the fact that depreciation has not been taken into account by the petitioner's witnesses in determining the fair market value on March 1, 1913, we can not accept the petitioner's estimates of value as reflecting the fair market value. The coats & Burchard Co. appraisals do not support the contentions of the petitioner.
In the second hearing of this case the evidence as to actual market values on March 1, 1913, covered a broader field and was much more complete than the evidence offered at the first hearing. The Board, at this time, in addition to the reproductive appraisals and the general endorsement thereof by corporate officers, now has before it evidence of earnings before and after 1913, of the prices at which shares of stock were sold for a period of years prior to 1916, of reproductive appraisals in existence in 1913, and of a sale of a1928 BTA LEXIS 3234">*3262 portion of a plant in 1912. This additional evidence, as shown by the findings of fact, supports the substantial correctness of the determinations of values of the petitioner's assets made by the respondent at the basic date, March 1, 1913.
The book value of depreciable assets at December 31, 1912, was $1,197,761.30. The fair market value used by the respondent for such assets on March 1, 1913, was $1,129,884.40, or a difference of only $67,876.90. Taking into consideration depreciation from January 1 to February 28, 1913, inclusive, and changes in assets owned during the period, we find from the evidence that the total of the values used by the respondent as the March 1, 1913, value was not understated. They are therefore sustained. The total value has been segregated into classes of depreciable property in our findings of fact as warranted by the evidence.
2. The second question in issue relating to depreciation is the correct allocation between (a) power and (b) machinery and equipment of the March 1, 1913, values. The witness Forward claims that only machines generating power such as boilers, engines, pumps, etc., should be classified as power. He testified that the1928 BTA LEXIS 3234">*3263 March 1, 1913, value of the power plant was $87,366.59, and of machinery and tools $811,040.84. At the second hearing of this case he picked out from the Coats & Burchard Co. appraisals of 1915 and 1916 items in the machinery account, totaling $105,752.42 which he regarded as properly belonging to the power plant. All of the balance of the depreciable assets other than buildings, patterns and automobiles he classified as machinery and equipment subject to a 10 per cent depreciation 13 B.T.A. 471">*485 rate. It is the contention of the respondent that not only the machines generating the power, but also that the apparatus or equipment for the transmission of power should also be classed as power and depreciated at a 5 per cent rate.
The Coats & Burchard Co. appraisals made in 1915 and 1916 show no classification of assets under power. The classifications used are in great detail, as shown by the findings of fact. No evidence has been adduced as to the rates of depreciation properly ascribable to the various classes of assets.
Whether the category "power" should carry anything more than boilers, engines, pumps, etc., it is impossible for us to determine from the evidence. We are1928 BTA LEXIS 3234">*3264 satisfied, however, that there are many items of assets which are not properly to be classed as machinery. We think that the various classifications of pipe and fittings, valued in excess of $118,000 by Coats & Burchard Co. are not properly to be considered as in the same category as machinery, and we are of the opinion that they should not be depreciated at the 10 per cent rate. The 5 per cent rate applied to power should in our opinion cover items connected with the transmission of power. We think that the same holds true with respect to railroad tracks valued at $31,000, cranes and hoists at $35,000, furnaces and forges at $130,000, and numerous other classes of assets. If some or all of these items are not properly to be regarded as power we think it is equally plain that they are not properly to be regarded as machinery. The only purpose of the classification of assets as "power" and "machinery and equipment" is to determine a basis for determining the assets depreciable at a 5 per cent rate and at a 10 per cent rate. The evidence in our opinion proves the substantial correctness of the respondent's allocation.
3. The final point is whether the assessment and collection1928 BTA LEXIS 3234">*3265 of deficiencies determined for the years 1917, 1918, and 1919 are barred by statutes of limitations.
It is submitted on behalf of the petitioner that at the time of the filing of the consent dated December 10, 1925, the power of the respondent to assess any deficiency taxes for the years 1917, 1918, and 1919 had expired and that it was only by virtue of a consent that any right to make future assessment can be exercised; that petitioner is bound only by the terms of the waiver so filed which is that the petitioner consents to the extension of the statute of limitations until the 31st day of December, 1926, and no longer, unless in the meantime a notice of a deficiency tax is sent to the petitioner by registered mail and then if no appeal is taken the time for the making of this assessment shall be extended 60 days, or, if an appeal is filed, then the date shall be extended by the number of days between the date of mailing of the notice of deficiency and the date of the final decision of the 13 B.T.A. 471">*486 Board; that no such deficiency letter was mailed after the filing of the consent and that therefore the sole effect of the consent filed was to extend the time for the making of these1928 BTA LEXIS 3234">*3266 assessments until December 31, 1926, and no further; that prior to the Act of 1926 the statute of limitations was solely a statute of repose; that it in no manner affected the obligation; that in the Act of 1926 it is provided by section 1106 that the statute of limitations against the United States in respect of any internal revenue tax shall not only operate to bar the remedy but shall extinguish the liability. The petitioner therefore contends that since December 31, 1926, no power has existed in the Commissioner to assess any deficiency tax against the petitioner for any of the years 1917, 1918, and 1919.
If the petitioner had filed no consent for the assessment of deficiencies for the years 1917, 1918, and 1919, the right of the Commissioner to make such assessments would have been barred so far as the year 1917 is concerned on March 29, 1923; for 1918 on June 17, 1924; and for 1919 on May 16, 1925. The deficiency notice was mailed to the petitioner on March 14, 1925, and the petitioner's appeal was filed with this Board on May 6, 1925. Clearly, under the provisions of section 277(b) of the Revenue Act of 1924, the assessment of any deficiency for the year 1919 is not barred1928 BTA LEXIS 3234">*3267 from assessment and collection, since the Commissioner notified the petitioner of a deficiency in tax for 1919 within the five-year period of limitation provided by the Act and the appeal was taken to this Board within such period.
It is to be noted, however, that, where a consent for a later determination of assessment is filed by the petitioner with the Commissioner, the assessment may be made within the period as extended by such consent. The letter of the Commissioner sent to the petitioner on December 7, 1925, over the signature of the Solicitor, states that, "as it is impossible at this time to determine whether the case will be disposed of by the Board prior to the expiration of the period of your waiver," a further consent is requested. The necessary implication from this letter is that the Commissioner was in possession of consents extending the period within which assessments might be made for the years 1917, 1918, and 1919. No witness for the petitioner testified that no such consents had been given and the necessary inference is that such consents had been given. Furthermore, the prompt action of the petitioner is filing a consent under date of December 10, 1925, for1928 BTA LEXIS 3234">*3268 the determination of deficiencies for 1917, 1918, and 1919 would imply that such consent had been given. The fact that no such prior consent was offered in evidence by the respondent does not prove that no such timely consent or consents had been given.
But, even if no such consents had been given with respect to deficiencies for the years 1917 and 1918, we are still of the opinion that 13 B.T.A. 471">*487 the consent filed under date of December 10, 1925, is a substantial compliance with the statute giving the Commissioner until December 31, 1926, within which to determine deficiencies for the years 1917, 1918, and 1919. Joy Floral Co.,7 B.T.A. 800">7 B.T.A. 800. It is true that the consent of December 10, 1925, states:
This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date * * * and it was stipulated at the hearing that no notice of deficiency for the years 1917, 1918, and 1919, or any of such years, was sent to the petitioner subsequent to December 10, 1925. But a notice of deficiency had been1928 BTA LEXIS 3234">*3269 sent to the petitioner on March 14, 1925, and we think, therefore, that the petitioner is bound by the consent filed. A second notice of deficiency after the filing of the consent was unnecessary. We therefore are of the opinion that the assessment and collection of any deficiencies due for the years 1917, 1918, and 1919 are not barred by statutes of limitations.
The deficiencies determined for the years 1917, 1918, and 1919 will be determined in accordance with the decision of the Circuit Court of Appeals, Seventh Circuit, above referred to, and in accordance with this opinion. The value of the steel and iron buildings of the petitioner should be depreciated at the rate of 5 per cent per annum from March 1, 1913, in accordance with the decision of the Circuit Court of Appeals.
Reviewed by the Board.
Judgment will be entered under Rule 50.