*990 Petitioner purchased seven sets of abstract books in 1918. Three were discarded and four were placed in its workroom. None was actually kept up to date by daily postings, but all were used for reference. A new set of books was started in 1918 in which all subsequent transactions affecting real estate titles were posted. The cost per annum of keeping a set of abstract books up to date is $5,000. In 1922 one of the sets was removed from petitioner's workroom and $5,000 per annum was deducted as obsolescence for the 11 years between that date and 1933. In 1933 petitioner discarded another set of books and claims the right to deduct obsolescence at the rate of $5,000 per year until its total cost has been recovered. Held, that inasmuch as no postings had been made to the set discarded in 1933 since the date it was acquired in 1918 and it was not used in petitioner's business subsequent to 1933, no deduction for obsolescence may be allowed in 1934 and subsequent years.
*729 The Commissioner made several adjustments to*991 the net income shown by petitioner's returns and determined deficiencies as follows:
| Income tax, calendar year 1934 | $624.09 |
| Excess profits tax, calendar year 1934 | 226.94 |
| Income tax, calendar year 1935 | 691.95 |
| Income tax, calendar year 1936 | 542.94 |
The sole question for determination is whether or not he erred in disallowing in each of the years a deduction of $5,000 as obsolescence on abstract books and records.
*730 FINDINGS OF FACT.
Petitioner is corporation, duly organized and existing under the laws of the State of Iowa. It was originally incorporated early in 1918 under the name "Abstract & Land Title Co." Its authorized capital stock was $50,000. Forty-seven thousand five hundred dollars of its initial capital was expended in the purchase of a set of abstract books, business, and good will from one of its stockholders.
On May 20, 1918, a resolution of the stockholders was adopted changing the name of the corporation to "Des Moines Title Co." and changing the amount of the authorized capital stock from $50,000 to $250,000. Subscriptions to capital stock aggregating $200,000 were received. Thereafter appropriate resolutions were adopted*992 for the issuance of $130,000 first mortgage gold bonds and for the purchase of the abstract books, maps, plats, records, daily reports, and good will of certain persons, corpornerships, and corporations.
Petitioner, through the issuance of capital stock and bonds pursuant to proper resolutions of its stockholders and directors, on or about May 25, 1918, acquired the abstract books, plats, etc., of the following persons, partnerships, and corporations for the consideration shown:
| 1. Abstract and Land Title Co. | |
| Cash $47,500 | |
| Bonds None | $47,500 |
| 2. J. W. Hillis | |
| Cash 22,500 | |
| Bonds 22,500 | 45,000 |
| 3. Hastie-Carrell Abstract Co. | |
| Cash 22,500 | |
| Bonds 30,000 | 52,500 |
| 4. Polk County Abstract Co. | |
| Cash 2,500 | |
| Bonds 42,500 | 45,000 |
| 5. Bankers Abstract & Title Guarantee Co. | |
| Cash 21,000 | |
| Bonds 19,000 | 40,000 |
| 6. Des Moines Abstract and Title Co. | |
| Cash 50,000 | |
| Bonds None | 50,000 |
| 7. Pioneer Abstract Co. | |
| Cash 34,000 | |
| Bonds 11,000 | 45,000 |
| Kennedy reports | 5,000 |
| 330,000 |
When petitioner was first organized there were seven distinct offices in which some abstract or title work was being carried on. Each of the individuals or companies whose asstets petitioner had*993 acquired *731 had a lease on the premises occupied by it, though some of the leases had expired. For a short time four offices were in each of the three two of the sets of books acquired by it being used in each of the three offices other than its main place of business. After the leases expired, and before 1922, all of the books were taken under one roof and all of the abstract and title business was conducted from one office.
Each set of books was complete and contained a record of the land titles in the Des Moines area from the date of the patents until the date the books were purchased. Three sets were discarded by petitioner about the time it began to conduct all of its activities in the one office, four sets only being taken into its vaults for reference. Since that date petitioner has daily "taken off every instrument that affects real estate" from the records in the court house and assembled them in a new set of books.
About 1922 petitioner's officers felt that one of the four sets of books was superfluous and not needed, so the set purchased from the Hastie-Carrell Abstract Co. was abandoned. In 1933 the set of books purchased from J. W. Hillis was discarded*994 and "stored in a safe place." This set was selected to be discarded because the officers felt that it was not as efficient as the sets acquired from the Polk County Abstract Co. and from the Des Moines Abstract & Title Co. Since 1933 the two last mentioned sets are the only ones which have been used by petitioner in its business.
The major part of petitioner's business - between 80 and 90 percent - is in connection with continuations or bringing abstracts down to date by including in them transactions occurring subsequent to the date of petitioner's incorporation. In making such continuations the set of books started by petitioner after its incorporation is the only set used, the books and records acquired from the other companies being required only when it is necessary to make a complete abstract of title or to continue one from a date antecedent to petitioner's organization.
It costs approximately $5,000 a year to keep a set of abstract books up to date in Des Moines. Sometimes there are several hundred transactions in a day in the courts or public offices involving or affecting titles, all of which must be posted to the lots or parcels affected.
The J. W. Hillis books*995 had a cost to petitioner of $45,000. They were in use up to 1933. The information contained in them was correct and just as good when the books were discarded as when they were purchased. They were never used after 1933.
In 1918 petitioner opened an account on its books styled "Plant (Abstract Books and Records, Furniture & Fixtures, Good Will, etc.)." The initial debit to that account was $325,000. Prior to 1920 credits had been made to the account aggregating $42,651, leaving *732 a debit balance of $282,349. Beginning in 1922 the account was credited annually with $5,000 representing obsolescence on the set of books purchased from the Hastie-Carrell Abstract Co. The total amount charged off in the eleven years 1922 to 1932, inclusive, aggregated $55,000. These ammounts were deducted by petitioner from its gross income during such years, were allowed by the Commissioner, and are not in issue in this proceeding.
The debit balance in said account on December 31, 1932, was $227,349. Credits of $5,000 were made to the account on December 31, 1933, 1934, 1935, and 1936 and, for each of the three years before us, deductions were claimed in petitioner's returns of income*996 in the amount of $5,000 for obsolescence. The notation on the return for 1935 explains the deduction in this language: "Maintenance of set of books costing $45,000 during 1933, estimated will become entirely obsolete in 9 yrs. unless maintenance resumed", while the explanation contained in the return for 1936 is as follows: "Obsolescence abstract books. Date acquired 1918. Cost $45,000. Maintenance discontinued in 1933 - will become obsolete in 9 years without maintenance."
The disallowance of the deductions of $5,000 for each of the years resulted in the deficiencies in tax.
OPINION.
MELLOTT: Section 23 of the Revenue Act of 1934 provides that in computing net income there shall be allowed as a deduction, (l) "A reasonable allowance for the exhaustion, wear and tear of property used in a trade or business, including a reasonable allowance for obsolescence." A similar provision is contained in the Revenue Act of 1936 (49 Stat. 1648, ch. 690). The question for determination is whether or not a deduction of $5,000 per year may be allowed for obsolescence of the J. W. Hillis books.
It has been held, and we believe correctly, that an abstract plant may be a proper subject*997 of a claim for obsolescence. This was the early ruling of the department (cf. I.T. 1775, C.B. II-2, p. 45); the view of the District Court for the Western District of Missouri as expressed in Kansas City Title & Trust Co. v. Crooks, 35 Fed.(2d) 351; and the holding of the Circuit Court of Appeals for the Eighth Circuit in affirming the decision of the District Court in Crooks v. Kansas City Title & Trust Co., 46 Fed.(2d) 928. A similar holding was made by the District Court for the Eastern District of Pennsylvania in Real Estate-Land Title & Trust Co. v.United States (March 13, 1937), which the Circuit Court of Appeals for the Third Circuit reversed (United States v. Real Estate-Land Title & Trust Co., 102 Fed.(2d) 582).
*733 In Rodeo-Vallejo Ferry Co.,24 B.T.A. 936">24 B.T.A. 936, 940, it was said that there is nothing mysterious about obsolescence; that it is a factor widely present in all business; and that its existence is a fact to be established by evidence. It is a "state of becoming obsolete", a more or less gradual process. Cf. *998 Conley Tin Foil Corporation,17 B.T.A. 65">17 B.T.A. 65, 73.
No rule of thumb may, or should be, laid down for the allowance of obsolescence. V. Loewers Gambrinus Brewery Co. v. Anderson,282 U.S. 638">282 U.S. 638; Burnet v. Niagara Falls Brewing Co.,282 U.S. 648">282 U.S. 648. The statute authorizes "a reasonable allowance" - such an amount as will, together with depreciation previously claimed and probable salvage value, be sufficient to replace at its original cost, the property which is becoming obsolete. Cf. City of Knoxville v. Knoxville Water Co.,212 U.S. 1">212 U.S. 1; United States v. Ludey,274 U.S. 295">274 U.S. 295. Inasmuch as obsolescence is usually a more or less gradual process, it is proper that the allowance be spread over the years from the time the process begins until it is complete, Columbia Malting Co.,1 B.T.A. 999">1 B.T.A. 999; Corsicana Gas & Electric Co.,6 B.T.A. 565">6 B.T.A. 565. Complete obsolescence occurs when the property is no longer economically useful for the purpose for which it was acquired and can not be used for any other purpose. *999 Frederick C. Renziehausen,8 B.T.A. 87">8 B.T.A. 87; affd., 31 Fed.(2d) 675; affd., 280 U.S. 387">280 U.S. 387; TennesseeFibre Co.,15 B.T.A. 133">15 B.T.A. 133, 140.
The statute limits the deduction to "property used in the trade or business." Neither depreciation nor obsolescence may be allowed if the plant, or the portion of the plant upon which the allowance is being claimed, has been abandoned. Gertrude D. Walker,20 B.T.A. 937">20 B.T.A. 937; affd., 63 Fed.(2d) 351; certiorari denied, 289 U.S. 746">289 U.S. 746; Alexander Brothers Lumber Co.,22 B.T.A. 153">22 B.T.A. 153; Buck v. Commissioner, 83 Fed.(2d) 627. United States v. Real Estate-Land Title & Trust Co., supra.In other words, if obsolescence is complete at the beginning of the taxable year, no allowance may be made under section 23(1) supra, though it may be that a deduction in some amount may be allowed under some other section - e.g., section 23(e), as a loss; but that question is not before us. Cf. *1000 Red Wing Malting Co. v. Willcuts, 15 Fed.(2d) 626; certiorari denied, 273 U.S. 763">273 U.S. 763; Charles E. Kaltenbach v. United States,66 Ct.Cls. 570.
At the hearing and upon brief petitioner relied solely upon Crooks v. Kansas City Title & Trust Co., supra. In that case the taxpayer, in 1914, had acquired several abstract plants. Four were found to be inefficient. Taxpayer's officers, experienced abstract men, determined in 1921 that the four plants could not economically be kept up to date by making the daily postings and that by reason thereof the four plants would become obsolete within nine or ten years. Accordingly it deducted annually such a percentage of the cost of the plants as, spread *734 over the years up to complete obsolescence, would amount to the total cost of the four plants. The holding of the court that this was proper accorded with the ruling of the department, quoted in the opinion (I.T. 1775, supra ) and is clearly sound.
But the facts in the instant proceeding are not analogous to those in the Kansas City Title & Trust Co. case. This petitioner in 1918 acquired seven sets*1001 of abstract books. Three of them were immediately discarded and petitioner charged off $42,651. In 1922 it took the Hastie-Carrell set out of its workroom and during the years intervening between that date and 1933 charged off $55,000. It charged off another $5,000 on its books for the year 1933, making a total charge-off of $102,651 for obsolescence for the years 1918 to 1933, inclusive. No opinion is expressed as to whether any or all of the charge-offs were proper. Our duty is merely to determine whether or not the deductions claimed in the taxable years are proper. We hold that they are not.
The president and secretary of petitioner, both experienced abstracters, were called as witnesses. The former when asked what was done with the J. W. Hillis books in 1933, stated that "they were stored in a safe place." When asked whether they had been kept up to date by daily postings he responded: "We have the material there in the office to make them current." He testified, however, that the continuances were kept in a separate set of books and that no additions were made to the old ones. The secretary of the company - J. W. Hillis, from whom the particular set of books was acquired*1002 - testified that prior to 1933 they had been left "where we could have used them if we had wanted to." When asked whether they had been in use during that time he said: "To a certain extent." The testimony of all of the witnesses indicates, and it has been found as a fact, that the J. W. Hillis books were never used after, but were discarded in, 1933.
The ruling of the Department (I.T. 1775, supra ), applied and followed in Crooks v. Kansas City Title & Trust Co., supra, is that the allowance for obsolescence "should be spread equally over the period from the date the permanent abandonment of the plant was foreseen to the date of the permanent abandonment." The Supreme Court adopted the essence of this construction in Burnet v. Niagara Falls Brewing Co., supra, quoting with approval the definition of obsolescence as "the condition or process by which units gradually cease to be useful or profitable as a part of the property, on account of changed conditions," and holding that a brewery was warranted "in concluding that the period of obsolescence [of its plant] commenced about 1918 [when prohibition was imminent] and would end upon*1003 the taking effect of prohibition."
*735 But petitioner is not claiming an allowance to be spread over the remaining useful life of a portion of its property. It merely determined that certain books, in which no postings had been made for approximately fifteen years, were no longer useful in its business. Accordingly it directed that they be "stored in a safe place." The petition alleges that the books had been "kept up to date by daily postings"; but the evidence does not support this allegation. The evidence indicates that a set of books which has not been kept up to date by daily postings soon becomes worthless. Inasmuch as no postings had been made to the Hillis books for fifteen years and inasmuch as they were discarded prior to the taxable years and were not thereafter used in petitioner's business, we are of the opinion and hold that the claimed deductions were properly disallowed.
Reviewed by the Board.
Judgment will be entered for the respondent.
LEECH, TURNER, and ARNOLD concur only in the result.