*1624 1. Deductions allowable from income for the taxable years on account of expenses and bad debts determined from the evidence.
2. Factors for computing depreciation and depletion deductions in the taxable years by unit-of-production method, determined.
3. On the facts, held that, for purposes of depreciation and depletion, timber purchased by the petitioner during the taxable years became available only on dates of actual purchase.
*542 These are proceedings for the redetermination of deficiencies determined by the respondent as follows:
| Docket No. | Year | Amount | |
| 33076 | Income and profits taxes | 1920 | $5,196.29 |
| Income and profits taxes | 1921 | 3,652.03 | |
| Income taxes | 1922 | 8,970.71 | |
| Income taxes | 1923 | 10,942.31 | |
| Income taxes | 1924 | 11,163.22 | |
| 51012 | Income taxes | 1925 | 1,249.94 |
| Income taxes | 1926 | 392.57 | |
| 9,985.46 |
The issues remaining for decision are: (1) The correct amounts allowable as deductions from income for the taxable years on account of depreciation and depletion; (2) deductions*1625 disallowed on certain items claimed as expenses; and (3) deductions disallowed on account of two alleged bad debts. The proceedings were consolidated for hearing.
*543 FINDINGS OF FACT.
The petitioner is a Florida corporation, organized about 1914, with its principal office at DeFuniak Springs. Petitioner is engaged in the business of manufacturing and selling lumber, and in the operation of hotels. In connection with its business, it owns and operates sawmills, planing mills, drying kilns, railroads, logging equipment, sawmill buildings, dwellings and hotels. It also owns, buys and sells timber and timber lands.
The petitioner corporation was organized by W. B. Harbeson, a practical lumber manufacturer, and the business was operated by him and his son, Walter W. Harbeson. The capital stock of the corporation was $1,000,000, and it had a surplus of approximately $1,000,000. Upon organization of the corporation, W. B. Harbeson owned 9,998 out of a total of 10,000 shares of stock, 80 per cent of which was afterwards transferred to trustees.
The timber involved in this case was located in Walton, Okalusa and Holmes Counties, Florida. The Louisville & Nashville*1626 Railroad runs east and west through this section of the country, approximately parallel to the Gulf coast. The best timber in the territory lies north of the railroad. The timber closer to the salt water is weaker and poorer than the timber farther away. The timber closer to the Gulf coast is not so tall or so large and there are not so many trees per acre as the timber farther north. Also the timber south of the railroad has been turpentioned by the old method, which was to cut boxes into the trees, instead of according to the new Government specifications. Any method of turpentining hurts timber to a certain extent, but the old method is much more injurious. Fire had gotten into this timber which had been turpentined, and thus the timber south of the railroad was generally in poor condition. However, there were a few stands of good timber south of the railroad.
In 1920 there were several lumber companies in business south of the railroad, including the Geneva Lumber Company of Freeport, the Beech & Rogers Lumber Company of DeFuniak Springs, the Maxwell Company of Freeport, a plant at Pensacola, and the McCaskill Company of Freeport. Other companies operating in this territory, *1627 but notth of the railroad, were the Britten Lumber Company and the Johnson Lumber Company. The Geneva, the Johnson, the Britten and the McCaskill Companies were as large or larger than the Harbeson Company.
The petitioner owned two plants, one at DeFuniak Springs, and the other at Paxton, Fla. Both of these plants were built by the Harbesons and were located north of the railroad. The Paxton plant was cut out in 1927, while the DeFuniak plant is still operating
*544 When these two plants were built, the Harbeasons owned two tracts of timber (the Gross Tatum and the Yawkey tracts), both of which were located north of the railroad. These two tracts originally contained about 350,000,000 feet of timber, and the said two plants were built to cut those two tracts. If the petitioner had quit cutting timber and had gone out of business when it cut the timber north of the railroad and had charged off the cost of both plants against the cost of that timber, it would have been a profitable venture.
At the time the petitioner's plants were built, the cutting of timber south of the railroad was not contemplated, for the reason that it was not thought to be profitable on account*1628 of the inferior quality of the timber. Furthermore, it was a matter of difficulty to cross the railroad, it being necessary to get a special permit from the railroad, and involved large expenditures for building an overpass or underpass across the railroad tracks. In such cases the railroad company retains complete supervision of the crossing and may condemn or change it at any time, the lumber company, however, paying all expenses and furnishing a fund for the carrying out of the agreement.
To the knowledge of the Harbesons, there were no tracts of timber in this region on the market for sale in 1920, and none were for sale in 1921 or 1922, except the small tracts which were purchased by them. In 1922 the petitioner purchased one tract of about 100 acres south of the railroad.
The timber owned by the petitioner at the beginning of 1920 and the tracts purchased by it during the period from 1920 to 1928, inclusive, together with the amounts paid therefor and the footage as entered upon its books, were as follows:
(Table omitted)
| Total | 255,991,556 | |
| Less | 12,500,000 | Russ & Wickersham tract |
| 243,491,556 | ||
| Less | 22,105,600 | "Exchange" duplications |
| Correct total | 221,385,956 |
*1629 *545 The principal tracts thus acquired were the Walton Land & Lumber Company tract, the Geneva Mill & Lumber Company tract, the Sellars tract and the Russ & Wickersham tract, the latter also known as the McClymond tract. All of these tracts were for cutting by the DeFuniak plant.
The first large tract purchased sought of the railroad by petitioner was the Walton Land & Lumber Company tract purchased in 1923. This tract contained 8,640 acres, and was owned by the Walton Company, a naval stores operator at DeFuniak Springs, which company had turpentined the timber and thereafter for the first time put it on the market for sale.
The DeFuniak Lumber Company tract consisted of approximately 9,010 acres and was originally owned by one Green, who was in the turpentine business. The Harbesons attempted to purchase this tract in 1923, but failed to arrange terms. Thereafter, the DeFuniak Lumber Company bought the tract from Green, intending to build a mill to manufacture the lumber, but later the plans were changed *546 and the Harbesons bought the timber and the land. This tract had not been on the market for sale prior to that time.
The Geneva Mill tract contained*1630 about 29,560 acres and was originally owned by the Geneva Mill Company. This company was in the lumber-manufacturing business, having three plants. Both that company and the Harbesons were interested in a tract of timber known as the Black Creek tract, east of Freeport. By arrangement, the Geneva Company purchased the Black Creek tract and sold the other tract to the Harbesons. The tract thus sold had not been on the market for sale prior to that time.
The Russ & Wickersham, or McClymond, tract contained four sections of 640 acres each, or a total of 2,560 acres. It was originally owned by the McClymond heirs in New York and had not been for sale. The McClymond heirs desired to keep the timber, but finally sold the tract to Russ & Wickersham, who purchased it for turpentine purposes. After completing the turpentine operations, they negotiated with the Harbesons to sell them the timber. After negotiations extending over a period of about a year, the price of $125,000 for the timber was agreed upon. Russ & Wickersham retained the turpentine privileges, which concession will not expire until the end of 1931. No timber has as yet been cut on that tract.
The Sellars tract*1631 was owned by a man of that name who was in the turpentine business at DeFuniak Springs. The tract had not been on the market for sale prior to the purchase by the Harbesons. They tried unsuccessfully to make the purchase in 1923, when they bought the Walton tract. Finally Sellars agreed to sell to the Harbesons, retaining the turpentine privileges.
None of the former owners of these various properties was in any way connected with the petitioner corporation.
The Walton tract became available to the petitioner in 1923, the DeFuniak tract in 1925, the Geneva tract in 1926, and the Sellars and the Russ & Wickersham tracts in 1928. The small tracts acquired between 1920 and 1928 became available as they were purchased.
The total lumber cut by the petitioner up to the end of 1930 at its DeFuniak plant was 184.045,193 feet and the timber remaining at the end of 1930 (excluding the Russ & Wickersham tract, on which cutting operations had not been commenced) totaled 16,393,000 feet. The actual total footage acquired by the petitioner to the end of 1930 for the DeFuniak plant, excluding the Russ & Wickersham tract was 200,438,193 feet. The estimated total timber acquired for*1632 the DeFuniak plant as reflected by the books, to the end of 1928 was 221,385,956 feet. None was acquired thereafter to the end of 1930. Therefore, the book figures were 20,947,763 feet in excess of the correct footage acquired to the end of 1930. The footage entered on *547 the books was an arbitrary amount computed by dividing the cost by $5 per thousand feet, no actual cruise being made of the Walton, DeFuniak, and Geneva tracts. The correct amount of timber on these three tracts when purchased was as follows:
| Feet | |
| Walton tract | 12,117,812 |
| DeFuniak tract | 12,636,763 |
| Geneva tract | 34,795,662 |
| Total | 59,550,237 |
The correct footage figures on all other tracts were as shown by the books.
Both plants of the petitioner were acquired after March 1, 1913.
The depreciated cost of the petitioner's plants at January 1, 1920, before deducting salvage, and the salvage values, were:
| Plant | Depreciated cost | Salvage value |
| DeFuniak | $260,896.55 | $15,000 |
| Paxton | 400,138.15 | 33,000 |
Additions were made to the petitioner's plants as follows:
| Year | DeFuniak plant | Paxton plant |
| 1920 | 70,803.14 | 13,388.74 |
| 1921 | 4,697.10 | 1,377.71 |
| 1922 | 34,259.69 | |
| 1923 | 6,018.53 | 233.74 |
| 1924 | 24,371.76 | |
| 1925 | 14,649.57 | 7,034.18 |
| 1926 | 1 13,087.31 | 1 22.40 |
| 1927 | 19,322.19 | 1 2,978.35 |
| 1928 | 4,142.31 |
Timber was cut at the mills of the petitioner as follows:
| Year | De Funiak plant | Paxton plant |
| B.m. | B.m. | |
| 1920 | 20,231,174 | 9,560,678 |
| 1921 | 19,798,181 | 13,651,089 |
| 1922 | 18,589,955 | 16,114,238 |
| 1923 | 18,623,902 | 13,930,135 |
| 1924 | 18,730,291 | 18,467,063 |
| 1925 | 17,072,945 | 17,459,528 |
| 1926 | 16,461,951 | 14,643,188 |
| 1927 | 11,563,729 | 767,366 |
| 1928 | 15,822,320 | |
| 1929 | 14,612,816 | |
| 1930 | 12,537,929 | |
| Total | 184,045,193 | 104,593,285 |
*548 In accordance with the stipulation of the parties, we find the facts to be that the petitioner made expenditures and sustained losses on account of which it is entitled to additional deductions from income in the respective taxable years as computed by respondent in determining the deficiencies, as follows:
| Year | Item | Amount | |
| 1921 | Expense Camp Walton Cottage | $1,355.78 | |
| 1922 | Expense Camp Walton Cottage | 1,538.72 | |
| 1923 | Expense Camp Walton Cottage | 1,391.24 | |
| Expense Boiler tubes | 2,767.20 | ||
| Loss of Hotel Cherokee | $8,491.16 | ||
| Less income of Harbeson Hotel | 328.24 | 8,162.92 | |
| 1924 | Loss on sale of boats | 4,548.10 | |
| Expense tracks, trucks, boxes | 1,072.39 | ||
| Expense two steam traps | 813.39 | ||
| Expense Camp Walton Cottage | 1,542.70 | ||
| Loss of hotels | 18,354.86 | ||
| 1927 | Loss on Croesus Oil Co. stock | 7,500.00 |
*1634 In 1921 the petitioner purchased two Ford automobiles at a cost of $1,060.50, one of which was used by the land man who looked after all the logs and the other was used by the logging superintendent in the woods. They were worn out and discarded in approximately six months, or in less than a year from the date of purchase. These cars were not sold, but were abandoned or junked.
In 1921 the petitioner expended $820.96 for repairs to its track scales used in weighing cars of lumber that went out to the railroad. The tracks and scales were under the supervision of the weighing and inspection division of the railroad, and that division made frequent inspection of the scales. Repairs found necessary by the railroad's inspector were required to be made before the railroad would accept the petitioner's weights. These scales were part of the plant at the time it was purchased by the petitioner and they were not rebuilt, but merely repaired.
In 1926 the petitioner expended $750 for advertising through a chamber of commerce advertising fund, and in the same year the petitioner expended the amount of $801.69 for the personal comfort of an officer of the company in connection with*1635 his residence.
All the foregoing items were claimed by the petitioner as deductions in the respective returns, which deductions were denied by the respondent.
The petitioner also claimed deductions from its income for 1927 on account of two alleged bad debts in the total amount of $4,881.05, which deductions were disallowed by the respondent.
Prior to 1927 the Maxwell Lumber Company, operating a lumber yard at St. Petersburg, Fla., became indebted to the petitioner in the amount of $3,181.05 for lumber, and the Hall Lumber Company, a *549 corporation operating a retail lumber business at Auburndale, Fla., became indebted to the petitioner for lumber in the amount of $1,700. The petitioner made numerous efforts to collect these debts, one of its officers personally making several trips to St. Petersburg in that connection. The matter was turned over to the petitioner's lawyers, who also made unsuccessful efforts to collect from the debtors. Both companies got into financial difficulties, and finally went out of existence. In April, 1927, in an effort to recover on its claim against the Maxwell Lumber Company, the petitioner took a deed to a piece of real property*1636 in St. Petersburg, against which there was a mortgage of $2,950. Thereafter the petitioner tried unsuccessfully to sell the property for any amount in excess of the mortgage. The mortgage was finally foreclosed in 1929 and the property sold to the highest bidder for $1,500. The petitioner charged the Maxwell debt off its books in 1927 as worthless, after determining that there was no realizable equity in the St. Petersburg property.
The petitioner also charged off the Hall Company debt as worthless in 1927 when the only asset it was able to find belonging to the debtor corporation was five acres of land lying outside the city of Auburndale, to which the petitioner received a deed. This occurred after the boom broke. Said land was not city property, but ordinary Florida land. Taxes were in arrears on this land to the amount of $41.39, and its total assessed valuation was $50.
OPINION.
TRAMMELL: Numerous issues were raised by the petitioner in its pleadings respecting deductions claimed by it from income for the taxable years and disallowed by the respondent. At the hearing petitioner conceded the correctness of the respondent's action as to certain of the said deductions, *1637 thus abandoning in effect its contentions to that extent. It results from these concessions of the petitioner that the respondent's determinations on those points now stand unchallenged, and further detailed reference thereto is unnecessary here.
Also, at the hearing respondent conceded that the petitioner is entitled to certain claimed deductions in addition to those theretofore allowed. These additional deductions now conceded by the respondent are set out in our findings of fact hereinabove, and will be given effect in redetermining the deficiency.
The issues remaining for consideration may be briefly stated as follows: (1) Disallowance by the respondent of a deduction in 1923 of $250 claimed on account of alleged loss on the Camp Walton News; (2) disallowance by the respondent of a deduction claimed from *550 income for 1921 on account of the cost of two Ford automobiles in the amount of $1,060.50; (3) disallowance by the respondent of a claimed deduction from income for 1921 on account of repairs to track scales in the amount of $820.96; (4) disallowance by the respondent of a deduction from 1926 income claimed as an advertising expense paid through a chamber of*1638 commerce; (5) disallowance by the respondent of a deduction from 1926 income of the amount of $801.69 expended in said year by the petitioner for the personal comforts of an officer of the company in connection with his residence; (6) disallowance by the respondent of deductions in 1927 on account of two alleged bad debts in the total amount of $4,881.05; and (7) the correct allowance for depreciation and depletion in each of the taxable years. These issues will be discussed in the order above set out.
Issue (1). The petitioner made no reference to this issue in its brief, nor offered any evidence thereon at the hearing. For lack of proof to show error, the action of the respondent is, therefore, approved.
Issue (2). The petitioner claimed a deduction from income for 1921 in the amount of $1,060.50 representing the cost of two Ford automobiles. The evidence shows that one of the automobiles was used by the petitioner's land man who looked after all of its logs, and the other was used by the logging superintendent in the woods. It is further shown that these automobiles were completely worn out and junked in approximately six months from the date of purchase. Respondent*1639 disallowed the claimed deduction on the ground that these automobiles were capital expenditures.
Capital expenditures ordinarily result in the acquisition of assets having periods of useful life in excess of one year, and in such cases the cost is returnable through deductions for depreciation spread over such periods, as the assets are worn out or consumed in the process of earning income. Where the period of useful life is one year or less, that is, where the asset is worn out and discarded within one year of its purchase, the entire cost is deductible from the income of that year, whether the expenditure be designated as expense or capital. We think the amount here in question constituted an allowable deduction from the petitioner's income for 1921. On this issue the respondent's action is reversed.
Issue (3). The petitioner also claimed, and respondent disallowed on the same ground as assigned in the preceding issue, a deduction from its 1921 income in the amount of $820.96 representing cost of repairs to its track scales. These scales were a part of one of the petitioner's sawmill plants at the time acquired by the petitioner, and were subject to inspection of the*1640 railroad company, which required *551 that the scales be properly maintained in order for the petitioner's weights to be accepted. It is shown that these scales were not rebuilt in 1921, but were merely repaired. We think the evidence establishes that the expenditure in question represents maintenance expense, and is an allowable deduction. The respondent's action on this issue is reversed.
Issue (4). The petitioner claimed a deduction of $750 for alleged advertising expense, from its income for 1926, which deduction was disallowed by the respondent with the following explanatory statement.
Advertising $750.00. Chamber of Commerce advertising fund. Amounts expended for advertising other than trade advertising are not deductible from income.
The petitioner offered no evidence on this issue, but stated its position thereon at the hearing as follows:
The petitioner concedes the fact stated in the sixty-day letter in regard to that item that this was the Chamber of Commerce Advertising Fund but claims that the adjustment is erroneous upon the face of the sixty-day letter and it is unnecessary for us to submit any proof or any argument in regard to it, resting*1641 our contention on that item on the face of the sixty-day letter.
The petitioner in its brief argues that if it is established that a given item is in fact an advertising expenditure, it is an ordinary and necessary business expense, and its deductibility necessarily follows. The facts admitted are so meager as to throw no light on the circumstances surrounding the alleged expenditure, nor is it clearly shown that the amount in question constituted a business expenditure rather than a donation. While it was claimed by the petitioner as an advertising expense, it was disallowed by the respondent as such, and the explanatory statement of the latter merely contains the ambiguous words "Chamber of Commerce advertising fund." We do not know to what chamber of commerce the amount was contributed, where it was located, what relation it bore to the petitioner's business, nor when or in what manner the fund was expended, if in fact it was expended. These facts were undoubtedly within the knowledge of the petitioner's officers, and apparently could have been easily established, since one of its principal executives was present and testified at the hearing. However, the petitioner offered*1642 no explanatory testimony, but contented itself with admitting the bare facts stated by the respondent in his deficiency notice. From the very meager facts so stated and admitted, we can not say that error is shown on the face of the record. Respondent's action on this issue is therefore approved.
Issue (5). This issue is in substantially the same situation in respect of proof of error as the preceding one. The respondent disallowed *552 a deduction from the petitioner's 1926 income in the following language:
Residence expense $801.69. Expenditures incurred for the personal comforts of an officer of the company and form no part of the corporate expense.
At the hearing, petitioner's counsel stated in this connection:
The petitioner concedes the fact stated in that sixty-day letter in regard to that item, that is, that these were expenditures incurred for the personal comfort of an officer, but claimes on the face of that statement the deduction is a proper one and the disallowance is improper upon the face of the sixty-day letter, since, if these were expenditures incurred for the personal comforts of an officer they must necessarily be and form an additional*1643 compensation, and therefore they are deductible to the corporation.
In addition to what we have said in connection with the preceding issue, so far as applicable here, it may be pointed out that section 234(a)(1) of the Revenue Act of 1926 provides for the deduction of all ordinary and necessary corporate expenses, including a reasonable allowance for salaries or other compensation for personal services actually rendered. No evidence was offered on the present issue, other than as above indicated. We do not know the nature and extent of the services rendered by the petitioner's officers in the taxable year, nor what salaries or other compensation were paid to them for such services. Even if it be conceded that the expenditure in question constituted additional compensation for services rendered, we can not say that the disputed item, in connection with the other amounts paid to the officers, if any, represented reasonable compensation for personal services actually rendered. For lack of proof to show error, the action of the respondent on this point is approved.
Issue (6). In 1927 the petitioner charged off its books as worthless a debt owing to it by the Maxwell*1644 Lumber Company of St. Petersburg, Fla., in the amount of $3,181.05, and also charged off as worthless in the same year a debt owing to it by the Hall Lumber Company of Auburndale, Fla., in the amount of $1,700. The petitioner claimed a deduction from its 1927 income on that account in the aggregate amount of $4,881.05, which deduction respondent disallowed. We think the record establishes that the petitioner made reasonable efforts to collect these two debts, and was justified in charging them off as worthless in 1927. The respondent's action on this issue is reversed.
Issue (7). Depreciation and depletion are the major issue in these cases, and relate to all of the taxable years. Deductions allowable for both depreciation and depletion can be computed from the same factors; hence the separate consideration of depletion is unnecessary.
The parties have agreed that the deductions in question shall be computed for all years by the unit-of-production method. To that *553 end, they have also stipulated(1) the depreciated cost of the petitioner's sawmill plants at January 1, 1920, the beginning of the first taxable year, and the salvage values; (2) the cost of additions*1645 made to the plants during the taxable years; (3) that the plants were acquired subsequent to March 1, 1913, and hence no question of value at that date is involved; and (4) the amount of timber cut by the petitioner's plants during each of the years from 1920 to 1930, both inclusive. All the factors have thus been stipulated, except two. The parties are in disagreement only as to the amount of the timber acquired by the petitioner during the taxable years, and as to when the timber so acquired became available for the purpose of computing the deductions.
The parties stipulated that 184,045,193 feet were cut at the DeFuniak plant during the years 1920 to 1930, both inclusive. At the end of 1930 the evidence establishes that an accurate cruise was made of the timber remaining, which disclosed 16,393,000 feet. The actual total acquired to the end of 1930 was, therefore, 200,438,193 feet. Our next problem is to determine when this timber became available and this can be done only by reference to the petitioner's record of purchases as shown by its books. No difficulty would be presented if the books showed the above figures, but they disclosed an apparent total of 255,991,556*1646 feet. However, there were included in this book total 11,052,800 feet designated "exchanges" which the petitioner now concedes were not additional acquisitions but were in fact reductions. Since this amount was added in the above mentioned total and treated as an acquisition instead of as a reduction, the apparent total of 255,991,556 feet must be reduced by 22,105,600 feet, or twice 11,052,800 feet, leaving 233,885,956 feet. This latter amount must be further reduced by 12,500,000 feet, representing the Russ & Wickersham tract, which was purchased in 1928, has not yet been cut, and was not included in the cruise estimate of 1930. This leaves 221,385,956 feet as the total acquisitions shown by the books. Since the total actual acquisitions, as above pointed out, amounted only to 200,438,193 feet, it is evident that the book figures were excessive to the extent of 20,947,763 feet.
We must next determine from the record where this excess occurrred. The evidence affirmatively shows that all tracts were correctly entered on the books and actually cut out substantially according to the book figures, except the Walton, DeFuniak, and Geneva tracts. No cruise was made of these tracts*1647 at the time of purchase, but the timber content was estimated by dividing the purchase price by $5 per thousand feet. A shortage from the book figures was physically demonstrated when these tracts were cut. We are satisfied from the evidence and have so found that these three tracts were entered *554 on the books as containing 20,947,763 feet in excess of the actual timber contained thereon. It merely remains therefore to allocate the excess in the book figures to these three tracts, which we have done on the basis of estimates made from the cruise of contiguous tracts in 1930. The results are set out in our findings of fact hereinabove.
We have also found as a fact that the timber purchased by the petitioner in the taxable years did not become available until the respective dates of purchase. Much evidence was offered by the petitioner on this point, which we think clearly justifies the finding made. It is shown that these tracts were previously owned by other lumber companies, or by turpentine operators or others, under such circumstances that the petitioner could not reasonably have anticipated, prior to actual purchase, that it would ever be able to acquire such*1648 timber for cutting. The situation here is similar to that discussed by us in , and in . See also .
Judgment will be entered under Rule 50.
Footnotes
1. Net reductions. ↩