*1325 Special assessment denied.
*349 This is a proceeding for a redetermination of a deficiency in income and profits tax for the fiscal year ended August 31, 1918, in the *350 amount of $281.86. The only error alleged is the failure of the respondent to find that the net income and invested capital of the petitioner are affected by abnormal conditions which would justify computation of the tax under the provisions of section 328 of the Revenue Act of 1918.
The hearing was upon motion confined in the first instance to the issues defined in subdivisions (a) and (b) of Rule 62 of the Board's rules of practice.
FINDINGS OF FACT.
The petitioner is a Georgia corporation, organized in 1900 for the purpose of operating a cotton mill, with its principal place of business at Monroe, Georgia. Its business consists of the manufacture of drilling, sheeting twill and grey goods. The capacity of the mill was 5,000 spindles when it was first organized. In 1906 and 1907 its capacity was increased to 10,416 spindles.
E. S. Tichenor was secretary-treasurer*1326 of the petitioner when it was first organized. In 1907 he became president and has retained that position. During the taxable year he had entire charge of the operation of the mill, determined the type of cloth to be manufactured, looked after the sale of merchandise, employed the superintendent and all the clerical force, bought cotton, and made contracts for sale of merchandise. During this time there was only one other person in the office force, Arthur C. Mobley, a relative of Tichenor by marriage. He was secretary and had entire charge of the bookkeeping and of attending to the pay rolls.
During the fiscal year ended August 31, 1918, Tichenor received $5,669.95 as compensation for services rendered, and Mobley, $1,800.
During this same period the petitioner had 1,400 shares of stock outstanding. Of these, approximately 952 were owned by Tichenor, his relatives, Mobley and Mobley's father.
During the calendar year 1911 the mill was closed for 61 working days, from July 20 through September 14, on account of lack of orders. There are 312 working days ordinarily in a year. Some time was also lost during the years 1911, 1912 and 1913 by reason of breakdowns.
Due*1327 to the desire of the officers of the petitioner to keep the capitalization as low as possible, the cost of repairs to machinery was charged to expense. It was always the policy to keep the machinery in good repair. The cost of installing improved devices on cards in the amounts of $1,650 on July 9, 1915; $61.14 on August 10, 1915; $4,350 on August 31, 1915; and $328.55 on December 31, 1915, was charged to the supplies account, which was an expense account.
The petitioner had an account on its books entitled "plant account," to which there was charged in the first entry the cost of its mill *351 building, amounting to $219,255.87. It also had an improvement account on its books. During the earlier years depreciation was charged to the plant account and no reserve for depreciation was kept. There were no additions to the plant account during 1911, 1912 or 1913, but an amount of $3,000 was debited to this account in 1916 for real estate.
On February 29, 1908, depreciation in the amount of $77,153.24 was credited to the plant account, reducing it to $200,223.89.
The minutes of the meeting of the directors held December 28, 1910, show that it was directed that $11,923.89*1328 be written off the plant account for depreciation, reducing the account to $190,000. On December 13, 1911, the minutes show that $10,000 was written off the plant account for depreciation; on December 11, 1912, that $10,000 was written off for depreciation.
The minutes of the directors for December, 10, 1913, are in part as follows:
After a discussion of the affairs of the mill, the matter of depreciation for the year was taken up and it was voted that the amount of $8,569.15 be written off the plant account as an allowance for depreciation. This amount having been spent in improvements during the fiscal year.
The minutes of the directors for December 9, 1914, show that $5,000 was directed to be written off the plant account for depreciation, and the minutes for June 4, 1916, show that $8,909.70, as depreciation, was ordered written off the plant account, reducing it to $155,000.
In the fiscal year 1911 the petitioner expended $1,125.65 which was charged to the improvement account; in the fiscal year 1912, $652.50; and in the fiscal year 1913, $8,569.75.
On September 15, 1916, a reserve account for depreciation was opened by debiting plant account $138,280.49 and crediting*1329 reserve for depreciation in the same amount.
The following table shows the amount of capital stock and profit and loss for each of the years 1902 to 1918:
| Year | Capital stock | Profits |
| 1901 | $100,000 | 1 $4,031.32 |
| 1902 | 100,000 | 7,210.78 |
| 1903 | 100,000 | 6,436.39 |
| 1904 | 100,000 | 12,390.04 |
| 1905 | 100,000 | 21,005.63 |
| 1906 | 100,000 | 35,520.54 |
| 1907 | 140,000 | 30,961.18 |
| 1908 | 140,000 | 30,434.55 |
| 1909 | 140,000 | 33,493.64 |
| 1910 | $140,000 | $4,933.78 |
| 1911 | 140,000 | 1,290.10 |
| 1912 | 140,000 | 47,858.84 |
| 1913 | 140,000 | 25,945.45 |
| 1914 | 140,000 | 14,793.09 |
| 1915 | 140,000 | 35,931.13 |
| 1916 | 140,000 | 44,656.52 |
| 1917 | 140,000 | 100,747.45 |
| 1918 | 140,000 | 189,986.74 |
The increase of capital stock in 1906 from $100,000 to $140,000 represented actual cash paid in.
*352 The petitioner's cotton account for the fiscal year in question showed a profit on futures and hedging in the amount of $10,311.29.
The petitioner did not at any time have any contracts with the Government on a cost-plus basis.
The respondent, in determining the deficiency herein, determined that the invested capital under the 1917 law was $350,738.13 and under the 1918 law, $347,044.82. *1330 The net income was $215,470.74 and the total tax liability, $131,951.42.
OPINION.
MATTHEWS: In the instant proceeding the petitioner is claiming special assessment upon the grounds that invested capital can not be determined, due to the fact that capital expenditures had been charged to expense; that the petitioner had built up a valuable good will which was not reflected in its invested capital; that petitioner received substantial income from hedging contracts; that the net income for the pre-war period was abnormally low, thereby reducing the war-profits credit; and that salaries paid were abnormally low.
We are of the opinion that upon all the evidence presented the petitioner has failed to establish that its invested capital can not be determined, or that there were any abnormalities affecting its income or invested capital for the year in question. With regard to the claim that invested capital could not be determined, it was shown that certain capital items had been charged to expense. The bookkeeper testified that there were other items of the same nature charged to expense; however, the books were not introduced in evidence and the petitioner has not shown that*1331 the amounts so charged to expense can not be determined. See ; and ; affirmed in . The same situation exists with respect to the question of depreciation. Counsel for the petitioner contends that since the minutes show that depreciation was charged off the plant account in arbitrary amounts, a part of such amounts represented capital which should have been reflected on the petitioner's books. However, there is no showing as to what was a proper amount of depreciation or that the correct amount could not be determined. If it could, the petitioner should have sought to have it restored to its capital account. See Moreover, we have no way of knowing how the respondent arrived at the figure used by him as the amount of invested capital. The thirty-day letter upon which the notice of deficiency is based shows the total amount allowed by the respondent, but does not show the items of invested capital entering into his computation.
*353 In *1332 , we said:
In any event the record is wholly insufficient to enable us to hold that the respondent is unable satisfactorily to determine petitioner's invested capital. No proof was submitted of the amount of invested capital allowed by respondent nor of the items or basis used in his computation. For aught that appears the respondent may have made due and proper allowance for the alleged infirmities of petitioner's accounting methods and records.
Such matters are essential items of proof and can not be left to inference or conjecture. The presumption of correctness attaching to the respondent's finding must be overcome by proof of such a character as will enable us definitely to say that respondent has erred. * * *
So, in the instant proceeding, for aught we know the respondent may have made allowance for the "infirmity" of the petitioner's bookkeeping and may have included some, if not all, of these amounts in his computation.
With regard to the good will, the petitioner introduced a public accountant as a witness, who, by using a formula, found a good will value of $68,631.13. The petitioner claims that since*1333 this good will was built up in the business and could not be included in its invested capital, an abnormality existed. In regard to such a situation, we said in :
* * * The first point it makes is that under the determination of the tax liability by the Commissioner there is not reflected in invested capital the appreciation in the value of its assets, principally good will. We have no doubt from the evidence that by 1912, and also by 1917, a valuable good will had been built up. We are of the opinion, however, that this is not an abnormal condition in the case of any prosperous, well managed corporation, especially one engaged in a business of the character of that conducted by the petitioner. The invested capital of the petitioner was not abnormal by reason thereof.
With regard to the other contentions of the petitioner, the facts are fully set forth in our findings of fact. There is some evidence that the salary paid to Tichenor was inadequate, but we are of the opinion that this does not constitute an abnormality under the circumstances in this case. *1334 . We are unable to find any abnormality affecting either the income or invested capital of the petitioner upon the evidence presented, and in view of this we do not consider it necessary to discuss further the other contentions of the petitioner.
Judgment will be entered for the respondent.
Footnotes
1. Loss. ↩