1931 BTA LEXIS 2120">*2120 1. Held, that petitioner's activities did not result in the "production of an article contributing to the prosecution of the war" and accordingly petitioner is not entitled to amortization of war facilities under section 234(a)(8) of the Revenue Acts of 1918 and 1921.
2. Possession of a production capacity in excess of normal requirements does not establish obsolescense.
22 B.T.A. 415">*415 This proceeding was brought to redetermine deficiencies in income and profits taxes of the petitioner for the fiscal years ending April 30, 1920, and April 30, 1921, in the sums of $3,941.56 and $14,962.15, respectively.
The issues are:
1. Whether or not the petitioner is entitled to deduct from its gross income during each of the fiscal years ending April 30, 1920, and April 30, 1921, the sum of $15,000 as amortization of war facilities or as obsolescence.
2. Whether or not the assessment and collection of the deficiencies in controversy are barred by the statute1931 BTA LEXIS 2120">*2121 of limitations.
3. Whether or not the petitioner is entitled to special assessment On the motion of the petitioner the hearing relating to the third issue was continued until after the determination of the first two issues by the Board.
22 B.T.A. 415">*416 FINDINGS OF FACT.
The petitioner is a corporation located in Fall River, Mass., and engaged in the business of selling anthracite and bituminous coal at wholesale and retail. It conducted that business prior to 1913 and subsequent to 1924. During the years under consideration it sold coal chiefly to mills and other manufacturing concerns in the city of Fall River, Mass., and vicinity. Approximately two-thirds of the coal it sold was bituminous and one-third anthracite.
The petitioner received the coal directly from the producing mines. It was shipped over the wharf and, from 1915, was unloaded by means of discharging towers. A tower erected in 1915 had a discharging capacity of 7,500 tons a month. On account of the increased demand for coal created by the war the petitioner, in May, 1918, entered into a contract for the erection of an additional coal-discharging tower with suitable equipment therefor, having a capacity1931 BTA LEXIS 2120">*2122 of approximately 15,000 tons a month. That tower was completed in February, 1919, at a cost of $75,000. Upon its completion the new tower was put into constant use by the petitioner but discharged only a maximum of 8,000 tons per month, while at the same time the old tower discharged about 3,500 tons per month. From 1915 to the middle of 1918 the old tower was adequate for the needs of the petitioner's business. During the latter part of 1918 the old tower was overloaded, at times as much as 100 per cent.
The petitioner sold to various textile mills a portion of the coal which they used for producing heat and power to operate their plants. Those mills were manufacturing cotton cloth and other textiles, part of which they sold to the Government. The petitioner sold its product also to other concerns engaged in trade not connected with Government contracts. It also supplied coal for domestic use. Following the Armistice the textile mills ceased delivering cloth to the Government and consequently their requirements for coal purchased from the petitioner decreased to the normal level.
During the war period and for some time thereafter the sale of coal by the petitioner was1931 BTA LEXIS 2120">*2123 subject to control by the United States Fuel Administrator and other governmental agencies.
Both the anthracite and bituminous coal received by the petitioner was "run-of-mine," the trade name for coal as it is produced at the mouth of the mine. The coal was received by barge and was unloaded by the discharging towers. The bituminous coal was unloaded in the yard. The largest lumps of bituminous coal were extracted and sold for family use. The smaller sizes were screened and mixed with 5 per cent of buckwheat anthracite and called "modified run-of-mine." The resultant product was sold also as "mill coal."
22 B.T.A. 415">*417 The anthracite coal was discharged from the barge by the discharging towers and run on a conveyor to the storage pockets. It was then placed in a hopper, conveyed by elevator to a height of seventy feet and dumped on to a cylindrical revolving screen. That screen, through its various sized meshes, separated the coal into six sizes - buckwheat, pea, nut, stove, egg, and broken, ranging from three-eights inch to four inches and over. It was necessary to separate the anthracite coal into sizes in order to make it salable. The run-of-mine bituminous coal could1931 BTA LEXIS 2120">*2124 have been sold to certain customers but the petitioner removed the large lumps and screened the remainder because it received higher prices by "processing" the coal in that manner. The "mill coal" was in great demand during the war and was sold at a good profit.
The following are the amounts of anthracite and bituminous coal in gross tons sold by the petitioner during the periods indicated. Column No. 1 represents all anthracite sold to the trade in general, column No. 2 all bituminous so sold, column No. 3 a total of columns Nos. 1 and 2, while column No. 4 represents the "mill coal" sold to factories and mills.
| Average monthly sales (averaged annually) | ||||
| Fiscal year ended Apr. 30 | No. 1 Hard | No. 2 Bituminous | No. 3 Total | No. 4 Mill bitu minous modified mine run |
| 1913 | 3,216 | 4,293 | 7,509 | 3,920 |
| 1914 | 3,671 | 4,591 | 8,263 | 4,148 |
| 1915 | 2,580 | 4,805 | 7,385 | 4,359 |
| 1916 | 2,547 | 6,157 | 8,705 | 5,725 |
| 1917 | 2,611 | 5,579 | 8,191 | 4,986 |
| 1918 | 2,668 | 6,771 | 9,439 | 5,986 |
| 1919 | 2,665 | 7,299 | 9,964 | 6,972 |
| 1920 | 2,589 | 7,725 | 10,315 | 7,179 |
| 1921 | 2,098 | 6,953 | 9,051 | 6,409 |
| 1922 | 2,598 | 5,783 | 8,381 | 5,222 |
| 1923 | 3,463 | 7,322 | 10,785 | 6,309 |
| 1924 | 2,594 | 5,345 | 7,939 | 4,509 |
| January, 1918 | 218 | 5,429 | 5,647 | 2,221 |
| February, 1918 | 2,459 | 8,453 | 10,912 | 6,798 |
| March, 1918 | 1,644 | 15,277 | 16,921 | 13,994 |
| April, 1918 | 2,968 | 11,171 | 14,139 | 10,775 |
| May, 1918 | 3,174 | 13,211 | 16,385 | 13,044 |
| June, 1918 | 2,110 | 12,520 | 14,630 | 11,925 |
| July, 1918 | 3,791 | 11,759 | 15,550 | 11,556 |
| August, 1918 | 3,798 | 12,981 | 16,779 | 12,506 |
| September, 1918 | 3,779 | 10,258 | 14,037 | 9,950 |
| October, 1918 | 3,855 | 9,393 | 13,248 | 8,799 |
| November, 1918 | 2,219 | 6,661 | 8,880 | 6,039 |
| December, 1918 | 2,312 | 4,760 | 7,022 | 4,084 |
| January, 1919 | 2,411 | 2,629 | 5,040 | 1,876 |
| February, 1919 | 1,691 | 1,173 | 2,864 | 619 |
| March, 1919 | 960 | 839 | 1,799 | 362 |
| April, 1919 | 1,987 | 1,406 | 3,293 | 1,068 |
1931 BTA LEXIS 2120">*2125 During the period from January 1, 1919, to March 30, 1924, a discharging tower with a capacity of 7,500 tons per month could have been built for $26,550, with the exception of the year 1922, 22 B.T.A. 415">*418 when such a tower could have been built for $2,000 less. The salvage value of the discharging tower completed in February, 1919, did not at any time exceed $1,500 during the period from that date to March 3, 1924. That tower was equipped with unusual machinery. The hoisting engine was the only one of its kind in the United States, there being one similar to it in a cement tower in Montreal.
The petitioner filed its income tax returns for the years ending April 30, 1920, and April 30, 1921, on July 16, 1920, and July 2, 1921, respectively. It filed an amended return for the fiscal year ending April 30, 1921, on January 26, 1922. Consents in writing extending the periods for assessing and collecting the petitioner's taxes were entered into by petitioner and respondent as follows:
| Fiscal year ended Apr. 30, 1920 | |
| Date | Expiration date |
| May 11, 1925 | Dec. 31, 1925 |
| Aug. 18, 1925 | Dec. 31, 1926 |
| Oct. 8, 1925 | Dec. 31, 1926 |
| Aug. 26, 1926 | Dec. 31, 1927 |
| June 16, 1925 | Dec. 31, 1926 |
| Aug. 19, 1925 | Dec. 31, 1926 |
| Oct. 8, 1925 | Dec. 31, 1926 |
| Aug. 26, 1926 | Dec. 31, 1927 |
1931 BTA LEXIS 2120">*2126 The waiver dated June 16, 1925, covering the fiscal year ending April 30, 1921, was not signed by the Commissioner until April 1, 1930. The deficiency letter was dated March 11, 1927.
OPINION.
VAN FOSSAN: Petitioner's contention as to the statute of limitations is entirely disposed of by the case of .
The second issue is whether or not the petitioner is entitled to deduct from its gross income during each of the years under consideration the sum of $15,000 as amortization of war facilities or as obsolescence. Section 234(a)(8) of the Revenue Act of 1918 is as follows:
(a) That in computing the net income of a corporation subject to the tax imposed by section 200 there shall be allowed as deductions:
* * *
(8) In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of the present war, there shall be1931 BTA LEXIS 2120">*2127 allowed a reasonable deduction for the amortization of such part of the cost of such facilities or vesels as has been borne by the 22 B.T.A. 415">*419 taxpayer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income.
* * *
Section 234(a)(8) of the Revenue Act of 1921 is identical in effect and provides that the claim for amortization must be made at the time of filing the return for the taxable year.
The petitioner contends that the "processing" of coal as described in the findings of fact constituted the "production" contemplated by the statute and that coal itself was an article contributing to the prosecution of the World War. The handling or treatment of run-of-mine coal received by the petitioner was merely a physical operation of segregating and mixing sizes and grades. The process in no wise altered the form or character of the coal. The coal was the same article when it was sold to consumers as it was when it was delivered to the petitioner. Not every phase in the handling or treatment of an article which, in its original or transformed state, ultimately may have contributed to the prosecution1931 BTA LEXIS 2120">*2128 of the war may be said to be a "production" of that article. In , we held that the mining of coal is, in the economic sense, production. That decision was based on the theory that the bringing of the coal from the ground and making it fit for use by mining operations is the production of an article. In the case at bar the coal was merely a commodity transported, sorted, graded, combined and resold as a commercial venture. The activities of the petitioner may be termed a phase of distribution rather than a production.
In the Roden Coal Co. case the facts are quite different from those of the case at bar. The United States Fuel Administration ordered the Roden Coal Company to furnish large quantities of coal to the Southern Railway Company and the Louisville & Nashville Railroad System. The War Department placed orders for coal to be furnished to various military cantonments and camps. The coal company also furnished coal to steamship companies under orders of the United States Fuel Administration. From 75 to 85 per cent of its entire output was so distributed. Under these circumstances we held that coal used for the purposes1931 BTA LEXIS 2120">*2129 for which the Roden Coal Company output was used was an article which contributed to the prosecution of the war.
The petitioner in this case did not so dispose of its coal. It sold in the open market at the best prices obtainable. It had no contract with any branch of the Government nor was it ordered to sell its coal or any of the various sizes and grades thereof to consumers manufacturing war materials or engaged in war activities. It is 22 B.T.A. 415">*420 true that some of its sales were made to factories engaged, in part at least, in manufacturing war materials, such as hospital supplies, army equipment, etc., but the petitioner had no specific contracts with them for supplying their fuel. Those purchasers offered the best price for the commodity and petitioner supplied them just as a wholesaler sells its goods in the usual course of trade. In the record no distinction is drawn between war contractors and Government contractors, although the terms are far from synonymous. One of petitioner's customers had a Government contract for furnishing cotton cloth used for cleaning plates in the Bureau of Printing and Engraving. Such a use would not automatically be stamped as one contributing1931 BTA LEXIS 2120">*2130 to the prosecution of the war.
As indicated, the petitioner itself made no direct use of the coal for war purposes and we are unable to determine to what extent any of its customers were so engaged. The impression is created by the evidence that much the larger part of the coal sold by petitioner was not even remotely connected with the prosecution of the war. Nowhere does it appear what proportion of sales made during the war period or thereafter were utilized directly or indirectly for war materials or contributed to the prosecution of the war. The petitioner sold more graded and sized coal, both bituminous and anthracite, than it did "mill coal," and apparently had no trouble in disposing of it profitably. During the early summer months of 1918 the sales of all classes of coal increased, but in August and September, 1918, it is observed that the sales lessened materially. The record is so confused and indefinite that it is impossible to determine what proportion of petitioner's business was normal commercial business and what related to the so-called war business.
The discharging tower completed in February, 1919, was erected to facilitate the handling of the petitioner's1931 BTA LEXIS 2120">*2131 current business and for the anticipated future demands for all forms and grades of coal and not to provide specially for the sale of "mill coal" to factories manufacturing war materials. There is no evidence or indication that the petitioner was concerned in contributing to the prosecution of the war, in producing articles relating thereto, or in erecting a facility for the production of such articles.
In view of our decision it is unnecessary to determine the postwar value of the "facility" (the discharging tower) as a current asset utilized by a commercial concern.
The petitioner claims in the alternative that it is entitled to a deduction for the obsolescence of the discharging tower completed in February, 1919. This claim is made on the unique theory that obsolescence exists in a case "where the property turned out to be more 22 B.T.A. 415">*421 than adequate for the needs of the business and it is foreseen that its value to the taxpayer is less than the balance of the cost less ordinary depreciation resulting from wear and tear spread over the actual physical life of the property." In Tennessee1931 BTA LEXIS 2120">*2132 , we discussed at length the subject of obsolescence and held there that "obsolescence," as used in the statute, is the state or process of becoming obsolete and the provision allowing a deduction therefor is intended to care for losses of capital which take place over a longer period than the taxable year.
In the case at bar the element of obsolescence was not shown to have been present. We assume that the usual allowances were made for depreciation, wear and tear. No new or more modern machinery was being invented or used to replace its equipment. Only the ordinary repairs were necessary to insure its continued use as a modern and up-to-date facility such as would conform to the petitioner's present and future needs. Though the additional tower may have given petitioner an excess capacity, this fact does not establish obsolescence. We are of the opinion that petitioner is entitled to no deduction on the ground of obsolescence.
Reviewed by the Board.
Judgment will be entered under Rule 50.
TRAMMELL: In my opinion, after reaching the conclusion that the petitioner was in effect engaged in a phase of distribution1931 BTA LEXIS 2120">*2133 rather than "production" of an article, the remaining discussion as to articles contributing to the prosecution of the war is dictum and not necessary for the decision. I think this discussion takes an entirely too narrow view and I am unable to concur in the reasoning.