*3826 1. Under the circumstances herein, it is held that the sale in 1920 of certain of petitioner's assets, comprising both realty and personalty, for $1,500,000, constituted a lump-sum sale rather than a separate sale of personalty and realty.
2. The Commissioner's determination of a "reasonable allowance" for depreciation and obsolescence for the years 1918 and 1919 on machinery and equipment is, in the absence of evidence as to March 1, 1913, value of machinery and equipment acquired prior thereto, and cost or machinery and equipment acquired subsequent thereto, and as to the depreciated cost of certain equipment erroneously charged off in 1918 and 1919 as obsolete, approved.
3. The Commissioner's action in excluding from invested capital for 1918 the amount of $2,800, representing a "Reserve for 1917 Federal Income and Profits Taxes," is, on error admitted, reversed.
*319 The proceeding instituted by the Buckeye Engine Co. is for the redetermination of deficiencies in income and profits*3827 tax for the calendar years 1918, 1919, and 1920, in the amounts of $114,467.92, $152,859.22, and $2,762.11, respectively. The proceeding by the Cleveland Machine & Manufacturing Co. is for the redetermination of a deficiency in income and profits tax for the calendar year 1920 in the amount of $51,662.19.
The Buckeye Engine Co. alleges that, in determining the deficiencies asserted against it, the respondent erred in the following particulars:
1. In determining that the sale in 1920 of certain of its capital assets, comprising both realty and personalty, for $1,500,000, was a lump-sum sale thereof on an installment basis, rather than a cash sale of the personalty for $300,000 and an installment sale of the realty for $1,200,000, as claimed by the petitioner.
2. In disallowing as deductions from gross income for the years 1918 and 1919 amounts for amortization of war-time facilities.
3. In failing to include in the cost of personalty sold in 1920, which, it is alleged, was sold separately for $300,000, the amount of $12,190.05, representing small tools and factory supplies which had been erroneously included in the land and buildings account.
4. In failing to allow*3828 for the years 1918, 1919, and 1920, adequate deductions for accelerated depreciation.
5. In excluding from invested capital for 1918, the amount of $2,800 representing a "Reserve for 1917 Federal Income and Profits Tax."
The Cleveland Machine & Manufacturing Co. alleges that, in determining the deficiency with respect to it for the year 1920, the respondent erred in determining that the sale in 1920 of certain of its capital assets, comprising both realty and personalty, for $1,000,000 was a lump-sum sale thereof on an installment basis, rather than a cash sale of the personalty for $200,000 and an installment sale of the realty for $800,000, as claimed by it.
Both petitioners sold their assets to the same buyer pursuant to the same contract and in view of that fact, the respective parties hereto have agreed that the decision of the Board with respect to the Buckeye Engine Co. shall be decisive of the issue in the proceeding of the Cleveland Machine & Manufacturing Co.
FINDINGS OF FACT.
The Buckeye Engine Co. is a corporation organized and existing under the laws of the State of Ohio. Its principal office and place of business is at Salem, Ohio.
The Cleveland Machine*3829 & Manufacturing Co. is an Ohio corporation with its principal office and place of business at Cleveland.
*320 Prior to July 16, 1920, the petitioners and the E. W. Bliss Co. had been negotiating relative to the sale of the assets of the petitioners to the Bliss Company. The preliminary negotiations related to the price to be paid for the assets of the two petitioners and to the terms and method of payment therefor. The officers representing the Bliss Company were shortly leaving for Europe so that it was necessary that the preliminary negotiations be hurriedly closed. These negotiations were emplicated by reason of the fact that there were three plants involved in the proposed sale belonging to different companies, and with respect to each plant certain reservations were to be made by the vendors with respect to time of possession, retention of some of the equipment and machinery, and otherwise. The result of the negotiations was to agree on the outlines of the sale and the general mode of procedure. The agreement was reached on July 16, 1920, and was as follows:
E. W. BLISS COMPANY,Brooklyn, New York.
GENTLEMEN:
Permit me herewith to submit, as president*3830 of the Cleveland Machine & Manufacturing Company of Cleveland, Ohio, and the Buckeye Engine Company of Salem, Ohio, both companies being corporations organized and doing business under the laws of the State of Ohio, the following proposition for sale of certain property of said companies
I. Property to be conveyed:(a) The Cleveland Machine & Manufacturing Company will convey to E. W. Bliss Company by good and marketable title, free of all encumbrances, its property located upon Bliss Road in the village of Euclid, Cuyahoga County, Ohio, consisting of about thirty-eight acres of land, as shown on the blueprint hitherto submitted to E. W. Bliss Company, together with the factory building located on said land, and all equipment therein; also the machinery, tools and equipment at its Hamilton Avenue plant shown on the list compiled by the Manufacturers Appraisal Company and dated July 7, 1920, together with all small tools used in said plant, and its drawings and patterns relating to the manufacture of power presses and steam hammers and the good will of the business in the manufacture of power presses, steam hammers and sheet metal working machinery now manufactured by E. W. Bliss*3831 Company and all its other property therein except as hereafter expressly excepted.
The sale will not include the Hamilton Avenue land and buildings nor the equipment and fixtures for operating the buildings consisting of the cranes, heat, light and power plant, one wagon scale and two power presses used on the Bishop and Babcock Company's work; neither will it include the name of the Company, its liquid assets, its raw and finished materials, or its materials in process, nor its drawings and patterns relating to other lines of machinery than power presses, steam hammers and sheet metal working machinery and the right to manufacture such other lines.
(b) The Buckeye Engine Company will convey to E. W. Bliss Company by good and marketable title, free from all encumbrances, all its real estate located in Salem as shown on the blueprint hitherto furnished, together with all buildings and their equipment and all machinery and small tools excepting four*321 special machines only suitable for engine work, all as shown on a copy of the inventory compiled by the Manufacturers Appraisal Company, together with the good will of the Company in the manufacture of power presses,*3832 steam hammers and sheet metal working machinery now manufactured by E. W. Bliss Company, and its drawings and patterns relating to the same and all its other property therein except as hereinafter expressly excepted.
The sale will not include the name of the Buckeye Engine Company, its liquid assets, its raw and finished materials, or materials in process, its drawings, patterns, jigs, tools and dies especially relating to the engine business and the blueprint machine business, and the right to manufacture lines other than power presses, steam hammers and sheet metal working machinery now manufactured by E. W. Bliss Company.
II. The terms of the sale:The total consideration of all of the property to be conveyed by both companies shall be the sum of Two Million Five Hundred Thousand ($2,500,000) Dollars, to be divided between the respective companies as hereafter directed by E. S. Griffiths, the total payments to be as follows:
Five Hundred Thousand ($500,000) Dollars in cash on delivery of possession of the Bliss Road property to E. W. Bliss Company.
Three Hundred Thousand ($300,000) Dollars in cash on April 1, 1921, the same to be evidenced by the promissory note*3833 of E. W. Bliss Company, bearing interest at six per cent per annum, and to be delivered when the Bliss Company receives possession of all of the property it is to receive under this contract.
Two Hundred Thousand ($200,000) Dollars in one year from date of approval by Stockholders of The Cleveland Machine & Manufacturing Company and the Buckeye Engine Company.
Two Hundred Thousand ($200,000) Dollars in two years thereafter.
Two Hundred and Fifty Thousand ($250,000) Dollars in three years thereafter.
Two Hundred Fifty Thousand ($250,000) Dollars in four years thereafter.
Eight Hundred Thousand ($800,000) Dollars in five years thereafter.
All deferred payments to bear interest at the rate of six per cent per annum, payable semi-annually from the date of delivery of possession of all of the property.
III. Conditions of sale:This proposal is make subject to ratification by the Stockholders of both companies in conformity with the laws of the State of Ohio applicable to such sales and to the completion of all necessary legal steps to give full legal effect to such sale within sixty days from the date hereof.
This proposition is also made upon the understanding*3834 that the Bliss Road property and the Salem property shall be turned over at the earliest moment consistent with the completion of the contracts of the respective companies for the completion of work in the said plants; also that both parties shall cooperate to the end that the purchaser may secure possession of the purchased property at the earliest possible date, and that the vendors may complete their existing contracts and make proper disposition of their property not included in the sale as conveniently and expeditiously as possible.
Conveyance of the real property, satisfactory in form to E. W. Bliss Company, shall be executed and delivered to Equitable Trust Company of New York as trustee, to be held by the trustee for delivery to the purchaser when the purchaser has completed payment for same in accordance with the contract of sale, and the terms of the escrow agreement hereto attached. Land contracts for the conveyance of the real property, satisfactory in form, to E. W. Bliss *322 Company and proper for filing in the respective Counties, shall be delivered at the time of making the first payment.
Pending completion of payments for the property, E. W. Bliss*3835 Company will pay all real estate and personal property taxes and assessments levied thereon, and the taxes for 1920 shall be prorated between the parties so that each will pay the proportion falling upon that part of the year during which it had possession.
THE CLEVELAND MACHINE & MANUFACTURING COMPANY.
(Signed) E. S. Griffiths, President
By H. H. Pinney, Vice-President.
Accepted
July 19, 1920.
E. W. Bliss Co.F. C. B. Page, Vice-P.THE BUCKEYE ENGINE COMPANY
E. S. Griffiths, President. H. H. Pinney, Vice President.(Italics supplied.)
The Bliss Company and the petitioners had been dealing with each other over a long period of years and in view of this fact it was understood by the parties thereto at the time of signing this agreement that the details relative to the consummation of the agreement would be worked out later.
At the time of reaching the agreement in New York City on July 16, 1920, it was impossible to determine the exact dates on which petitioners' properties could be turned over to the purchaser. The inability to determine the dates for giving possession was due to the fact that petitioners had existing contracts to manufacture presses*3836 for different companies, including the Bliss Company, the purchaser. It was necessary that petitioner and the Bliss Company arrange for the completion of these existing contracts.
In addition petitioners had outstanding orders for raw materials, coke, and pig iron. Arrangements had to be made with the Bliss Company to take over these orders. Such were some of the details which, it had been agreed, would be worked out later.
On August 2, 1920, E. S. Griffiths, president of both petitioners, wrote as follows:
E. W. Bliss Company,Brooklyn, N.Y.
Gentlemen:
In accordance with the first paragraph of Section II of our agreement of July 16th, 1920, fixing the terms of the sale to you of part of the property of The Cleveland Machine & Manufacturing Company and the Buckeye Engine Company, I hereby request and direct you to divide all of the payments mentioned in said Section II between the two companies in the proportion of 40 per cent to The Cleveland Machine & Manufacturing Company and 60 per cent to The Buckeye Engine Company, making the payments in detail as follows:
| The Cleveland Machine & | The Buckeye Engine Co. | ||
| Manufacturing Co. | |||
| First payment | $500,000 | $200,000 | $300,000 |
| Second payment | 300,000 | 120,000 | 180,000 |
| Third payment | 200,000 | 80,000 | 120,000 |
| Fourth payment | 200,000 | 80,000 | 120,000 |
| Fifth payment | 250,000 | 100,000 | 150,000 |
| Sixth payment | 250,000 | 100,000 | 150,000 |
| Seventh payment | 800,000 | 320,000 | 480,000 |
*3837 *323 Very truly yours,
(Signed) E. S. Griffiths
Between July 19, 1920, and August 10, 1920, representatives of the companies concerned worked out the details relative to the transfer of the assets.
It was agreed that the purchaser should on September 15, 1920, be given possession of the property described in the agreement of July 16, 1920, and it was further agreed between the parties that at the time of making the first payment of $500,000, the petitioners should deliver to the purchaser a bill of sale covering the personalty, to wit, the machines and tools, not passing under the land contract, or expressly reserved to the petitioners.
The agreement of July 16, 1920, having been ratified by the stockholders, there were executed by the Buckeye Engine Co. on August 10, 1920, a bill of sale of its personal property, a land contract covering the real property described in the agreement of July 16, 1920, and at the same time a deed was executed covering the same real property.
On August 13, 1920, the representatives of the companies met in New York City and at that time the deed conveying the real property to the Bliss Company was placed in escrow with the Equitable*3838 Trust Co. pending completion of the purchase price set forth in the agreement of July 16, 1920. A letter of instruction was also given to the escrow agent and was as follows:
Cleveland, Ohio, July 16, 1920.
To the Equitable Trust Company of New York:
Sirs:
There is herewith delivered to you two deeds, one executed by The Cleveland Machine & Manufacturing Company to the E. W. Bliss Company, and the other executed by the Buckeye Engine Company to the E. W. Bliss Company. Attached hereto are copies of two agreements entered into between Mr. E. S. Griffiths and the E. W. Bliss Company dated July 16, 1920. By the terms of these agreements payments are to be made by the E. W. Bliss Company as therein indicated. When the E. W. Bliss Company shall have made all the payments required on its part to be made, pursuant to terms of said agreements, you are to deliver said deeds to the E. W. Bliss Company. You may receive *324 as proof of such payments cancelled checks of the E. W. Bliss Company made to the order of the two companies above referred to, or other evidence of payment, aggregating the amounts due pursuant to said agreements. If the E. W. Bliss Company shall fail*3839 to make such payments and Mr. E. S. Griffiths or his assigns shall demand from you the return of such deeds, upon evidence of such failure on the part of the E. W. Bliss Company satisfactory to you, you are after thirty days notice to the E. W. Bliss Company, to return the deeds to Mr. E. S. Griffiths or his assigns.
THE CLEVELAND MACHINE & MANUFACTURING COMPANY
(Signed) E. S. Griffiths, President
By H. H. Pinney, Vice President.
THE BUCKEYE ENGINE COMPANY
(Signed) E. S. Griffiths, President
By H. H. Pinney, Vice President
On the same day, August 13, 1920, there was delivered to the Bliss Company by the Buckeye Engine Co., the land contract above described and also the bill of sale covering the personal property. (At the same time similar documents which had been executed by the Cleveland Machine & Manufacturing Co. were delivered to the escrow agent and the Bliss Company in the same manner as by the Buckeye Engine Co.) Upon receipt of the bill of sale and land contract the Bliss Company paid the representatives of the petitioners the sum of $300,000 and $200,000 as directed in the letter of August 2, 1920.
The provisions of the bill of sale and land contract were*3840 in accord with the provisions of the agreement of July 16, 1920. In the bill of sale the Buckeye Engine Co. expressly reserved to itself its name, its liquid assets, its materials, whether raw, finished or in process of manufacture, four special machines then located in its plant and suitable for the manufacture of engines, and the drawings, patterns, and tools relating to the engine business and the blueprint business, and the right to manufacture and sell machines and machinery other than power presses, steam hammers, and sheet-metal-working machinery. The bill of sale contained the following recitals:
KNOW ALL MEN BY THESE PRESENTS, That the BUCKEYE ENGINE COMPANY a corporation duly organized and existing under the laws of the State of Ohio, the Grantor, for and in consideration of the sum of Ten Dollars ($10.00), and other valuable considerations, received to its full satisfaction of the E. W. BLISS COMPANY, a corporation duly organized and existing under the laws of the State of West Virginia, the Grantee, has given, granted, bargained, sold, conveyed, assigned, transferred and set over, and by these presents doth give, grant, bargain, sell, convey, assign, transfer and set*3841 over to the said Grantee, its successors and assigns, all and singular the following assets and property now situated in the City of Salem, in the County of Columbiana and State of Ohio, namely:
All and singular the machinery, machines, tools and equipment of the Grantor, of every nature, kind and description whatsoever, except as hereinafter expressly excepted, now located in, upon or about those certain premises situated *325 in said City of Salem, Columbiana County, Ohio, that are described in a land contract of even date herewith between the parties hereto, including all and singular the machines, machinery, tools and equipment shown in an inventory list thereof compiled by the Manufacturers Appraisal Company, a copy of which marked "Exhibit A" is hereto attached and made a part hereof, and including also all of the business and good will of the Grantor as a going concern in so far as the same relates to the manufacture and sale of power presses, steam hammers and sheet metal working machinery, and all drawings and patterns relating to the manufacture of power presses, steam hammers and sheet metal working machinery, and all other assets and property of the Grantor except*3842 as hereinafter expressly excepted.
It is, however, expressly understood and agreed that this conveyance does not include, and that the Grantor expressly excepts and reserves to itself the use of its name the "Buckeye Engine Company", its liquid assets, its raw and finished material and materials in process of manufacture, four special machines now located in said plant which are suitable only for the manufacture of engines, and its drawings, patterns, jigs, tools and dies especially relating to the engine business and blue print machine business, and the right to manufacture and sell machines and machinery other than power presses, steam hammers and sheet metal working machinery.
It is further understood and agreed that by the foregoing enumeration of certain general classes of property conveyed hereunder, it is not intended, by implication, to exclude any other property or assets of the Grantor that may not be aptly or accurately described or referred to, the purpose, agreement and intention of the parties being by the said land contract of even date between the parties hereinbefore referred to, to include and cover all lands, buildings, improvements and fixtures of the Grantor,*3843 and by this bill of sale to convey to and vest in the Grantee, its successors and assigns, all and singular the business, assets, machinery, tools, equipment and other property of the Grantor, of every nature, kind and description whatsoever, other than as expressly excepted, and also to include and convey to and vest in the Grantee, its successors and assigns, all of the business and good will of the Grantor as a going concern, so far as the same relates in any way to the manufacture of power presses, steam hammers and sheet metal working machinery. (Italics supplied.)
By the terms of the land contract of August 10, 1920, the Bliss Company was to be given possession of the real estate on or before September 15, 1920, and all taxes and assessments upon said real estate for years subsequent to 1920 were to be paid by the Bliss Company, it being agreed that the Buckeye Engine Co. should be responsible for seven-tenths of the tax for 1920.
In November, 1920, after taking possession of the property of the Buckeye Engine Co., the Bliss Company proceeded to treat the personalty described in the bill of sale as its own property. In the interest of business, some of it was sold or*3844 scrapped. On some of it the Bliss Company placed name plates. This was done for the purpose of distinguishing the machinery covered by the bill of sale from the equipment covered by the land contract, as under the land contract title to such equipment would not pass until all of the installments due thereunder were paid.
*326 The personalty delivered to the purchaser had at the time of delivery a depreciated cost of $206,398.89. However, at the time of the delivery of the bill of sale, the depreciated cost of the personalty had been erroneously computed to be $194,208.84. This was due to an error in bookkeeping whereby the amount of $12,190.05 was improperly charged to land and buildings.
In closing its books for the year 1920, the petitioner entered as of December 31, 1920, the amount of $1,200,000 as "Land Contract Receivable" and entered the amount of $300,000 as the sale price of the machinery delivered to the Bliss Company under the bill of sale.
During the years 1918 and 1919, the petitioners' manufacturing plant and equipment was engaged, as contemplated by the contract, in the production of articles contributing to the prosecution of the war with Germany, *3845 commonly known and called the World War. Such activity was continued after the signing of the Armistice, as the plant was engaged in the production of marine engines for the United States Shipping Board.
In order to provide adequate facilities for the manufacture of marine engines, a type which it had not theretofore produced, the petitioners, after April 6, 1917, erected additional buildings and purchased machinery and equipment designed and suitable for work on marine engines. The total cost of the buildings, machinery, and equipment was $230,267.36, of which amount $134,498.09 represented the depreciated cost as of December 31, 1918, of the machinery purchased for marine engine work, which passed, together with machinery acquired prior to April 6, 1917, under the bill of sale to the Bliss Company on August 13, 1920.
In its returns for the years 1918 and 1919 petitioner claimed amortization deductions of $57,566.84 for each year as it had determined that 50 per cent, or $115,133.68, of the cost of additional facilities purchased after April 6, 1917, should be amortized over these two years.
In its return for the year 1920 petitioner reported that it had sold machinery, *3846 in which that acquired for marine engine work and which had as of December 31, 1918, a depreciated cost of $134,498.09 was included, for $300,000, and it also reported that it had sold its plant and fixtures for $1,200,000.
Upon audit of the returns for the years 1918, 1919, and 1920 the Commissioner determined that the sale of its plant, equipment, and machinery, under the circumstances above described, was a lump-sum sale thereof for $1,500,000 on an installment basis, and accordingly he computed the profit derived on the basis so determined, and inasmuch as the selling price so determined exceeded the total cost *327 of all facilities sold, the deductions for amortization claimed for the years 1918 and 1919 were disallowed.
Prior to the year 1918, petitioner's plant was operated on a basis of 55 hours per week; 10 hours a day for 5 days and 5 hours on Saturday. During the first 6 months of 1918, the plant was operated 125 hours a week and during the last 6 months of that year and all of the year 1919 it was operated on the basis of 150 hours per week. On this basis the plant was in almost continuous operation for 7 days a week.
Due to labor conditions which existed*3847 during 1918 and 1919, skilled labor was difficult, and at many times impossible, to obtain even at the high rate of pay offered. As a result of this condition less competent labor was employed. The persons thus employed were lacking in knowledge and skill in the operation and repair of the machinery and equipment which they were handling.
In the manufacture of marine engines much heavier materials were used than formerly were used in the production of other types of engines and by reason thereof the machinery and equipment were subjected to greater strain, wear and tear. The wear and tear on the machines was also increased by inefficient operation.
Because of the almost constant operation of the machinery and equipment only such repairs as were sufficient to keep the machines operating were made. The repairs were made at a greater cost than had formerly been the case because of the high rate of wages and the comparative incompetency of those who could be found to do the work.
The petitioner's depreciable assets were carried in three accounts, to-wit, buildings, machinery, and equipment, with an estimated normal life of 50 years, 20 years, and 10 years, respectively.
*3848 For the year 1918, the petitioner deducted from its taxable income the sum of $187,297.74 for exhaustion, wear and tear, and obsolescence on machinery, equipment, and buildings, and of that amount $6,751.00 was for buildings, $33,797.11 was for machinery, and $146,648.91 was for equipment. However, as the result of an appraisal made in 1918, appreciation more than doubling the value of machinery and equipment was placed on the books in that year and the dedections so taken were computed on the appreciated value of the assets at approximate rates of 2 per cent on buildings, 6 per cent on equipment, and 5 per cent on machinery.
The petitioner had on hand in 1918 a great many patterns and drawings which were appraised in that year at $600,000 but which were carried on the books at $300,000. During the period that petitioner was engaged in producing marine engines it stored the patterns and drawings for the engines formerly manufactured by it. *328 However, during this time some of the patterns were used by other manufacturers for making repairs for engines which petitioner had formerly manufactured.
In 1919 and 1920, some of the patterns were destroyed. They were largely*3849 for gas engines for which there was no demand although they were not of an obsolete type. The others that were destroyed were for old type engine frames. Patterns, other than those destroyed in 1919 and 1920, were again used by petitioner.
Patterns and drawings were carried in equipment account and for the year 1918 the depreciation deduction was "raised quite largely" on account of patterns charged off as obsolete.
For the year 1918 petitioner deducted and the Commissioner allowed as expenses, machinery, $13,609.11; equipment, $41,809.92.
Upon audit of the return for 1918, the Commissioner determined that the proper rate of depreciation was 15 per cent on machinery and equipment and accordingly, reduced the amount of the deduction taken.
For the year 1919, the petitioner deducted from taxable income the sum of $127,731.08 for exhaustion, wear and tear, and obsolescence on machinery, equipment and buildings and of that amount $11,343.41 was for buildings, and $116,387.67 was for machinery and equipment.
For the year 1919, petitioner deducted and the Commissioner allowed as expenses, machinery, $16,713.76; equipment, $61,516.21.
The deduction taken in 1919 was less*3850 than in 1918 for the reason that a smaller amount of patterns in the equipment account was charged off as obsolete.
As to the year 1919, the Commissioner determined that 15 per cent was the proper rate on machinery and equipment and computed the deduction accordingly.
In determining petitioner's tax liability for 1918, the Commissioner excluded from its invested capital the amount of $2,800 representing a "Reserve for 1917 Federal Income Tax."
OPINION.
LOVE: The first contention advanced by the petitioner, the Buckeye Engine Co., is that, in the year 1920, it sold to the E. W. Bliss Co. by separate and distinct sales, certain personal property, by bill of sale, for the sum of $300,000 paid in cash in that year, and certain real estate for $1,200,000 by land contract with payments to be made on the installment basis. It is further contended that the sales of the personal and real property having been made separately, the profit on such sales should be computed accordingly, and in this respect petitioner urges that in computing the profit derived from the *329 sale of the personalty the amount of $12,190.05 should be added to the cost thereof as that amount was erroneously*3851 excluded therefrom.
The Commissioner, on the other hand, denies that the property, both real and personal, was sold by separate and distinct sales, the personalty being sold for $300,000 and the realty for $1,200,000. On his behalf, it is contended that the property, both real and personal, was sold as a whole, at one time and by the same transaction, or in other words, there was a lump-sum sale of all of the property, real and personal, for $1,500,000.
In support of its contention as to the distinct and separate sale of realty and personalty, the petitioner advances the following grounds, any one of which, it is urged, is sufficient to sustain the contention made:
First. All of the property, real and personal, subject to the sales in question, was located in the State of Ohio, and the parties were contracting in contemplation of the laws of Ohio and that under the statutes thereof and the decisions of the courts therein, the sales did not take place until the actual delivery of the bill of sale and land contract.
Second. The parties to the agreement of July 16, 1920, did not expect or intend that it should be the full and final agreement between them and that the agreement*3852 indicated on its face that the conditions and terms not covered thereby could be worked out later.
Third. Admitting that the agreement of July 16, 1920, constituted an instrument of sale and that the parties so intended it to be, then, nevertheless, the parties entirely abandoned the plan set forth in that agreement and consummated the sale of the property in an entirely different manner, to wit, separate and distinct sales of realty and personalty, as alleged by petitioner.
Although there is nothing in the record indicative of the intention of the parties with respect to the laws of the State under which they were contracting, and while the formalities of the contract are usually governed by the law where the contract is made, and the rights and obligations of the parties thereto depend to some extent upon the subject matter thereof, whether movables or immovables, in the instant case whether the contract is governed by the law where the contract was made or the law where the property is situated, we are not concerned with these considerations. There has been no question raised as to the validity or nature of the agreement of July 16, 1920, that is, whether it was a contract*3853 of sale or for sale. It is apparent, and we so hold, that the agreement reached on July 16, 1920, constituted a contract for sale and not one of sale as there was no present intention to vest title in the subject matter thereof in the purchaser. *330 This we take to be true irrespective of any question as to a conflict of laws.
It is urged by petitioner that he sales, alleged to be separate, did not take place until the actual delivery of the bill of sale and the land contract on August 13, 1920, and that on that day the personal property was sold for $300,000 because of the delivery of the bill of sale. In support of this argument, section 8381, General Code of Ohio, is cited. This section defines a sale of goods as follows:
A sale of goods is an agreement whereby the seller transfers the property in goods to the buyer for a consideration called the price.
We agree that the sale herein in question took place on August 13, 1920, at which time the petitioner devested itself of title to the property, both real and personal, but we are unable to state that the mere fact that a delivery of the bill of sale for the personalty was made is conclusive evidence that*3854 the consideration thereof was $300,000, the amount paid on that day.
The second ground in support of its contention as to separate sales of realty and personalty, advanced by petitioner is that the parties to the agreement reached on July 16, 1920, did not intend that it should be the full and final agreement but, on the contrary, it was agreed that terms and conditions not covered thereby would be worked out.
We agree that such was the case and we have found it to be a fact. Some of the details later agreed upon are set forth in the findings of fact herein. However, that brings us squarely to the point at issue, did the parties before August 10, 1920, the time of executing the bill of sale covering the personalty, agree that the personalty covered thereby was to be transferred in consideration of $300,000 and did the parties on August 13, 1920, consider and intend that the amount of $300,000 be the consideration or the price for the personalty conveyed by the bill of sale?
A consideration of petitioner's third ground will, in our opinion, answer the question just asked. The third ground is that before the sale on August 13, 1920, the parties entirely abandoned the plan*3855 described in the agreement of July 16, 1920, and consummated the sale in an entirely different manner. Briefly restated, it is the petitioner's position that between July 16, 1920, and August 13, 1920, an agreement was reached whereby the realty was transferred in escrow for $1,200,000 and a separate sale was made of the personalty for $300,000. We must, therefore, look to the agreement of July 16, 1920, the circumstances and conditions surrounding its execution, and the subsequent action of the parties, as disclosed by the record, in order to ascertain the manifest intention of the parties, as the question as to whether the contract for sale was severed is a question *331 of intent, which intent may be indicated but not determined by the measuring of the consideration by units.
It will be observed that, under the agreement of July 16, 1920, the petitioner covenanted to convey to E. W. Bliss Co. "all of its real estate located in Salem * * * together with all buildings and their equipment, and all machinery and small tools excepting four special machines * * * together with the good will of the Company in the manufacture of power presses * * * now manufactured by E. W. *3856 Bliss Company * * *," for a total consideration of $2,500,000, payable in installments, the first of which was to be $500,000. It will be further observed that the agreement provided for the conveyance in escrow of the real property only.
By his letter of August 2, 1920, petitioner's president provided that the first payment of $500,000 should be apportioned $300,000 to the Buckeye Engine Co. and $200,000 to the Cleveland Machine & Manufacturing Co. All future payments were to be apportioned in the same ratio of 60 per cent and 40 per cent between the two companies.
On August 13, 1920, the realty was conveyed in escrow and the bill of sale covering the personalty was delivered and payment of $500,000, divided as directed, was made. In the underscored portion of the bill of sale set out in the findings of fact, the petitioner evinced an intention to sell all of its realty and personalty and "all of the business and good will of the grantor as a going concern, so far as the same relates in any way to the manufacture of power presses, steam hammers, and sheet metal working machinery."
After careful consideration of all of the evidence adduced, the Board is of the opinion that*3857 the petitioner intended to sell and the Bliss Company intended to buy the real and personal property as a whole, at one time and by the same transaction. The agreement of June 16, 1920, expresses no intention to sell personalty and good will as separate things. The first payment of $500,000, divided as directed, was determined without reference to the different assets sold. There is nothing in the record to indicate that any attempt was made to segregate the different assets sold and to place a price on each, or even to segregate the first payment as between realty and personalty. The bill of sale did not evince an intention to sell personalty, tangible and intangible, separately and for $300,000. The opinion of the parties as to how many contracts they have made, or whether they have made any, is immaterial, as we believe the uncontroverted facts show clearly that there was a single offer and assent to the agreement of July 16, 1920, which remained unmodified. In this connection we consider of no importance the bookkeeping entry made some time subsequent to the transaction. Accordingly, *332 we approve the Commissioner's determination that petitioner's assets, real and*3858 personal, were sold pursuant to one contract for $1,500,000 on an installment basis.
Our decision in respect of the issue just presented disposes of petitioner's second and third contentions, namely, that it is entitled to deductions for amortization for the years 1918 and 1919 and that it failed to include the amount of $12,190.05 in the cost of the personalty sold. Inasmuch as the amount of $12,190.05 was reflected in another account it was also properly reflected in determining the gain from the lump-sum sale of the assets sold and having held that petitioner's assets, real and personal, were sold in a lump-sum sale and not separately, it can not be said that any given portion of the consideration was paid for realty and the remainder for personalty. Being unable to allocate any given portion of the purchase price to personal property, which included amortizable as well as nonamortizable assets, it logically follows that it can not be said that the amortizable property was not sold for an amount in excess of its cost since the selling price of all of the assets exceeded their cost.
The fourth contention advanced by the petitioner is that the Commissioner failed to allow*3859 adequate deductions for depreciation and obsolescence on machinery and equipment for the years 1918, 1919, and 1920. No evidence, however, was adduced in support of this contention as to the year 1920, and accordingly, the Commissioner's determination in regard thereto is approved.
Normally the petitioner's machinery and equipment was operated 55 hours a week, machinery depreciating at the rate of 5 per cent annually, and equipment at 10 per cent annually.
During the first 6 months of 1918 the plant was operated 125 hours per week and during the last 6 months thereof and during all of 1919 it was operated 150 hours per week. During these years, while the plant was operated almost continuously, due to labor conditions, unskilled and inefficient employees were handling the machinery and equipment on materials for which to some extent, it was not suited. Breakdowns were numerous and only such repairs were made as kept the plant in operation and the repairs so made were costly by reason of high wages.
In computing the allowance for depreciation for the years 1918 and 1919, the petitioner used as a basis for its computations the appreciated value of its machinery and equipment*3860 which it had in 1918 placed on its books. In addition, it charged off in each of the years 1918 and 1919 an amount for obsolescence of drawings and patterns. The Commissioner, upon audit of the returns, allowed depreciation at the rate of 10 per cent normal and 5 per cent additional depreciation for overtime operation, a total of 15 per cent on Machinery and equipment for 1918 and 1919, the basis for computing *333 the deductions, that is, whether on appreciated value or otherwise, not being disclosed. However, the deductions so computed by the Commissioner were less than those computed by petitioner and accordingly the amount thereof for the respective years was reduced in accordance with the Commissioner's determination.
The evidence adduced fails to establish that any of petitioner's patterns and drawings became obsolete in 1918 or that it was entitled to any deduction for obsolescence in that year. However, the record discloses that the deduction for depreciation and obsolescence for 1918 was "raised quite largely" on account of patterns charged off as obsolete. As to the amount of the deduction so taken or the basis thereof, the record is silent.
For the year*3861 1919, petitioner took a deduction for obsolescence of patterns and drawings, the amount of which is not disclosed. During that year, however, some of the patterns and drawings were actually destroyed, the depreciated cost thereof being, of course, a proper deduction. But, on the record as made, it is impossible to tell how much, if any, of the deduction for obsolescence was erroneously taken or the depreciated cost of the patterns and drawings actually destroyed.
The Commissioner's determination of a "reasonable allowance" for depreciation and obsolescence for the years 1918 and 1919 carries with it the prima facie presumption of correctness, and in order that we may disturb his determination in regard thereto, the burden is on the petitioner to rebut the presumption of the correctness of that determination. .
There was no evidence adduced as to the cost or March 1, 1913, value of machinery and equipment acquired prior thereto, or as to the cost of machinery and equipment acquired subsequent thereto. There is not one word in the record concerning the basis or amount of the deductions taken for obsolescence, which, at least, *3862 as to 1918 was clearly erroneous. There is evidence, however, conclusively establishing the fact that the petitioner, in computing the deductions for depreciation for 1918 and 1919, used an improper basis therefor, namely, an appreciated value of machinery and equipment. We do not know the basis used in determining the deductions for obsolesence.
It is obvious, therefore, that because of the lack of evidence as to the essential elements upon which the deductions for depreciation and obsolesence must be computed, we are unable to determine the proper allowance therefor for the years in question. On the record, we can only approve the Commissioner's determination, which, as before stated, is prima facie correct. Consequently, it is approved.
Petitioner's remaining contention is that the Commissioner improperly excluded from invested capital for the year 1918 the *334 amount of $2,800 representing a reserve for 1917 Federal income and profits taxes. The Commissioner concedes error in this respect and, accordingly invested capital for 1918 should be increased by the amount erroneously excluded.
Reviewed by the Board.
As to the Buckeye Engine Co., judgment*3863 will be entered on 15 days' notice, under Rule 50. As to the Cleveland Machine & Manufacturing Co., the deficiency for the year 1920 is $51,662.19.
ARUNDELL and VAN FOSSAN did not participate.