*2511 1. Deduction for obsolescence of tangible property determined as to amounts and years for which deduction is applicable.
2. An allowance for obsolescence based upon the decrease in value of tangible assets retained in use, denied.
*792 This proceeding results from the determination by respondent of a deficiency in income tax for the fiscal year 1919, amounting to $32,712.56.
*793 Petitioners aver error was committed with reference to the following issues:
(1) Respondent has refused to allow the deduction from income of depreciation, obsolescence or loss of good will, trade-brands, trade-names and licenses, the value of which was destroyed by prohibition.
(2) Respondent prorated to the period from January 31, 1918, to January 16, 1920, the deduction of losses aggregating $143,965.97, due to permanently abandoned assets in the fiscal year ended September 30, 1919, whereas the entire loss should be allowed as a deduction from income in the fiscal year 1919; respondent refused to increase the amount of this loss by an amount*2512 of $41,011.54 erroneously reported by petitioner as a part of the salvage value of the abandoned assets.
(3) Failure to allow as a deduction from income, obsolescence in the amount of $150,204.43, being the decrease in value of tangible assets retained in use.
The first issue was abandoned by petitioners at the hearing.
FINDINGS OF FACT.
Petitioner corporation is a Kentucky corporation, organized on May 1, 1890, and dissolved on December 29, 1920. It was engaged in the manufacture and sale of draught and bottled beer and owned an extensive plant located at Newport, Ky., together with distributing facilities located at numerous cities in the central United States.
In compliance with war-time prohibition legislation in 1918, petitioner corporation ceased the manufacture of beer sometime in November, 1918, and discontinued the sale of beer prior to July 1, 1919. Upon the cessation of the beer-manufacturing operations a part of the plant became of small value due to the impossibility of adapting it to other uses or of disposing of it at any price. The storage equipment was of use until sometime in June, 1919, and then became of small value for the reasons stated above. *2513 With the adoption of the Eighteenth Amendment on January 16, 1919, and the continuance of war-time prohibition, it had become definitely certain, by September 30, 1919, that the brewing and sale of lager beer would not be resumed by petitioner corporation, and efforts were made in 1919 and 1920 to adapt its plant and facilities to the production and sale of some form of dealcoholized beer or of cereal beverages. These activities were commercially unsuccessful, and losses were sustained. Denatured alcohol was manufactured in 1920. A portion of the plant and factilities was used in these operations but the remainder was of no use. At the end of 1920, the plant, facilities, and investments of petitioner corporation were turned over for its *794 capital stock to an affiliated corporation, the George Wiedemann Co., formerly called the Wiedemann Quizz Co., and petitioner corporation was dissolved.
In the returns filed by petitioner corporation, deductions for obsolescence due to prohibition legislation, were claimed as follows: fiscal year 1918, $46,163.27; fiscal year 1919, $155,321.70. The deductions were revised and allowed by respondent, as follows: fiscal year 1918, *2514 $48,726.94; fiscal year 1919, $73,493.12. The deduction for 1919 allowed by respondent was based upon the determination of obsolescence amounting to $143,965.97, of which three hundred and sixty-five seven-hundred-and-fifteenths were deemed applicable to 1919, based upon the relation in point of time of the year 1919 to an obsolescence period extending from January 31, 1918, to January 16, 1920. The net book value, after deducting depreciation, and before deducting obsolescence, of the assets, which became useless, amounted to $191,878.75 on September 30, 1919.
A fair and reasonable allowance in 1919 for obsolescence of tangible assets of petitioner corporation rendered useless by prohibition legislation is $122,369.74.
Petitioner corporation filed its return for the fiscal year ended September 30, 1919, on December 17, 1919.
A written agreement with respondent was entered into in 1924, consenting to extend for one year the period prescribed by law for a determination, assessment and collection of the amount of the income, excess-profits and war-profits taxes for the year 1919.
OPINION.
MILLIKEN: Shortly after the appeal was filed, respondent filed motion to dismiss*2515 for the reason that the petitioner corporation was dissolved. This motion was denied on July 31, 1926. At the hearing subsequently, on the merits, petitioner made oral reference to the statutory limitation on the assessment of additional taxes for the year involved, but did not pursue the subject in their brief filed three months later.
This appeal involves a determination of the deductions from income allowable in the fiscal year 1919, to a corporation engaged in the manufacture and sale of lager beer, for obsolescence of assets occasioned by prohibition legislation. We have had occasion to fully consider the development of prohibition legislation and the principles generally applicable to the issues here involved; see Appeal of Manhattan Brewing Co.,6 B.T.A. 952">6 B.T.A. 952. The instant case is broadly similar to the Manhattan Brewing Co. case, but differs in the important particular in that the instant taxable year is a fiscal year ended September 30, 1919, encompassing within its 12-month period an *795 extraordinary number of the changes so disastrous to the breweries, such as the war-time prohibition proclamation of November 1918, the ratification of the*2516 Amendment in January, 1919, the cessation of the sale of beer July 1, 1919, and the certainty at its end (September 30, 1919), that national prohibition was but a few months off.
In the first issue, the petitioners claimed the right to a deduction from income for obsolescence of intangibles, but, making brief reference to Red Wing Malting Co. v. Willcuts, 15 Fed.(2d) 626, they abandoned the issue at the hearing and adduced no evidence relative to the losses claimed. Respondent is sustained.
In the second issue, concerning the obsolescence of tangible assets rendered useless by prohibition, it is not denied by the respondent that a loss was sustained, but the parties are in disagreement as to the amount of the deduction from income properly allowable on this account in the fiscal year 1919. The respondent accepted the depreciated cost, according to the books, of the assets under consideration, and deducted therefrom the amount of the salvage value estimated by the petitioners, considering the remainder the amount of the loss. The petitioners now conclude that their estimate of the salvage value grossly overstated the true amount and consequently the amount*2517 of the loss in value should be increased. The evidence before us in this relation was adduced by the petitioner and indicates little or no remaining value of the assets. The respondent relies on the argument that the estimate of salvage value was made by petitioner in 1923, a time sufficiently late to enable accuracy and to preclude further revision. We do not find respondent's argument persuasive as applied to a mere estimate of the salvage value probably adhering to the assets. We are of opinion, from the evidence before us, that the previous estimate of the petitioners was unduly optimistic and their loss as now claimed, amounting to $184,977.51 is more nearly correct in the aggregate. The parties differ also as to the proper method of allowing the deduction of the obsolescences. The petitioners claim the deduction as a loss through abandonment, which is deductible in its entirety in the fiscal year 1919, being the year in which the abandonment took place. The respondent argues that the amortization period is well established to extend from January, 1918, to January, 1920, and he proposes to prorate on a time basis the deduction of the amount of the obsolescence as follows: *2518 Two hundred and forty-two seven-hundred-and-fifteenths to 1918, three hundred and sixty-five seven-hundred-and-fifteenths to 1919, and one hundred and eight seven-hundred-and-fifteenths to 1920. We are unable to entirely agree with the contentions of either party. We are satisfied that obsolescence actually set in, in January, 1918, and that at the beginning of the fiscal year 1919, the assets under consideration had actually suffered an amount of special obsolescence. Attention has *796 been directed above to the succession of events occurring during the fiscal year of the petitioner, and to the certainty with which it was possible, at the end of that year, to conclude that the manufacture and sale of lager beer by it would not be resumed. It follows that the inclusion of the period subsequent to the fiscal year 1919 is erroneous and that the remainder of the obsolescence is deductible in 1919. Accordingly, a deduction in 1919, for obsolescence of tangible assets rendered useless by prohibition legislation, amounting to $122,369.74, is found reasonable. Respondent reversed. Cf. *2519 Manhattan Brewing Co., supra;Levine Brothers Co.,5 B.T.A. 689">5 B.T.A. 689; Multibestos Co.,6 B.T.A. 1060">6 B.T.A. 1060.
The third issue concerns losses in value of tangible assets, the amounts of which the petitioners have computed by various methods more ingenious than convincing, and which they claim the right to deduct in 1919, although representing decreases in value of assets which were used in subsequent years. We have had occasion, heretofore, to consider similar contentions and have reached the conclusion that the deduction representing the decreasing value in use of assets continued in the same or related business is not allowable. Cf. Yough Brewing Co.,4 B.T.A. 612">4 B.T.A. 612; Rienzi Co.,4 B.T.A. 1011">4 B.T.A. 1011; Star Brewing Co.,7 B.T.A. 377">7 B.T.A. 377. Respondent sustained.
Reviewed by the Board.
Judgment will be entered on 15 days' notice, under Rule 50.
Footnotes
1. This proceeding is filed as Appeal of The George Wiedemann Brewing Co. and Walter B. Weaver, as a stockholder of said company since dissolved, for himself and other stockholders of record of said company at the date of its dissolution. ↩