*2244 1. DEPRECIATION. - The value, solely for the purpose of serving as a basis for computing allowances for depreciation, of certain plant buildings of petitioner as of March 1, 1913, determined from the evidence.
2. SPECIAL ASSESSMENT. - The respondent has determined invested capital in a substantial amount and considerably in excess of the amount of invested capital claimed in the return; the cost of claimed additions to plant and of the development of a process of enameling were currently expensed and so commingled with the expenses as to be now unascertainable; it does not appear with respect to the cost remaining undepreciated, physically or usefully, after a long useful life that the probable adjustment of earned surplus involved is a major item; there is no evidence to show that the process of enameling even though in use only by the petitioner, is a valuable monopoly; nor does it appear that the officers' salaries were unreasonably or unusually low; held, there is no basis for a claim for special assessment.
*1130 This is a proceeding for*2245 the redetermination of a deficiency in income and profits taxes for 1919, amounting, as proposed by the respondent, to $17,767.84.
An original and three amended petitions have been filed in this case. The issues, as amended, are as follows: Petitioner alleges (1) that invested capital for the taxable year has been understated due to the deduction of the average of the profits tax as assessed for 1918 under section 328 of the Revenue Act of 1918, said tax being claimed by the petitioner to be in excess of the true profits-tax liability for 1918; (2) that invested capital for the taxable year has been understated due to the deduction for a dividend declared in the taxable year and paid out of current earnings; (3) that net income *1131 has been overstated due to an inadequate allowance for depreciation of the plant buildings located at Boyertown; (4) that it is impossible now to ascertain the true invested capital and also there are abnormalities of capital and income; therefore, petitioner should be allowed special assessment as provided in sections 327 and 328 of the Revenue Act of 1918.
The first issue was determined after a hearing. See our opinion promulgated *2246 September 19, 1929, . The present hearing results from the restoration of the appeal to the calendar for hearing upon the remaining issues, as provided in Rule 62(a) and (b).
FINDINGS OF FACT.
The petitioner is a Pennsylvania corporation with its principal office at Boyertown, and is engaged in the manufacture and sale of burial garments, related dry goods and burial caskets made of wood, copper and steel.
Starting with 1893 the business of the petitioner steadily expanded, necessitating a steady growth of its plant. In constructing its additional buildings and facilities the petitioner employed contractors for portions of the work, and it made use of its own employees and of its own stock of lumber and other materials. The cost of the work done by the contractors was capitalized and included mainly the construction of the outside walls and of the roofs. The work done by its own employees included the inside finish and the construction and mounting of various facilities. The wages paid to its own employees engaged on the construction work, and the cost of the lumber and other materials drawn from stock for the construction work were not capitalized*2247 upon the books, being charged off to expense. The accounts were so kept that it is impossible now to determine the amount of these costs.
Additions to the plant buildings at Boyertown included the following: in 1896, a two-story brick-and-wood wing to the original building in size 31 feet by 78 feet; in 1897, a frame dry kiln, in size 87 feet by 37 feet; in 1898, a two-story brick-and-wood wing to the original building, in size 46 feet by 78 feet; in 1900, part of the original building and both wings were raised one story; in 1902 was erected a three-story brick-and-wood building, in size 40 feet by 92 feet; in 1904, the original building was again extended, a third story being added to that part which had not been previously extended to a third story; in 1904 was erected a four-story brick-and-wood building, in size 52 feet by 102 feet; in 1905 was erected a four-story brick-and-wood building, 30 feet by 92 feet; this building was located as an addition to the building erected in 1902, and at the same time an additional story was added to the building erected in 1902. A 40,000-gallon-capacity tank and tower were *1132 erected. In 1906 was erected a two-story brick-and-wood*2248 building, known as the embossing building, in size 32 feet by 18 feet; in 1907 was erected a four-story brick-and-wood building in the form of an ell, the dimensions being 90 feet by 102 feet by 50 feet. In the same year was erected a frame lumber shed 100 feet by 28 feet. In 1911 was erected a four-story brick-and-wood building in the form of an ell, with dimensions of 32 feet by 102 feet by 72 feet, this addition being connected as an addition to the ell-shaped building erected in 1907. There was also erected a fourstory brick-and-wood building, know as the dry goods building, with dimensions of 99 feet by 50 feet, and an additional frame dry kiln, with dimensions of 85 feet by 18 feet.
All of the above buildings were in use on March 1, 1913, and, with the exception of the dry kilns, were in good condition. The dry kilns were not in good condition and they were later repaired.
The value of the buildings at Boyertown on March 1, 1913, amounted to $330,000.
Prior to 1917 the petitioner developed a process known as "Boyertown Casco enamel," which was used in applying an enamel finish to the outside surfaces of various caskets. The cost of developing this process was charged*2249 off to profit and loss, and has never been capitalized upon the books. The cost was not segregated in the accounts, and can not now be determined. The process is still in use in the business and is not used by competitioner of the petitioner.
At the end of 1918 the book values of the plant and equipment were reflected in a composite account called "Real Estate and Equipment," the balance of which amounted to $1,286,306.71, appearing in the balance sheet filed with the return as real estate, $1,219,978.15; boiler and engine, $16,650; electric machinery, $10,182.42; machinery, $39,496.14. At the end of 1919 the composite account had been closed out and accounts opened for segregations of land, buildings, boiler and engines, electrical machinery, other machinery, etc.
Depreciation of the Boyertown plant was claimed in the return filed by the petitioner for the taxable year, as follows: book value December 31, 1912, $90,000; book value December 31, 1918, $150,343.11; additions in 1919, $83,086.93; depreciation claimed $9,337.20.
A footnote under the depreciation schedule in the return reported as follows:
In submitting valuations per attached schedule, we are handicapped*2250 in regards to meeting your requirements for detail as asked for, by reason of always having absorbed each building operation into a composite Real Estate account. Starting with a single building in 1893, we have steadily added to same, besides our requirements of separate buildings, dry-kilns, together with all the constant changes required by our growing industry. This has been our basis of accounting at all our plants, which include Boyertown, Topton, & *1133 East Greenville, Pa. The 10 story building occupied at Phila, Pa., was built by ourselves and is occupied in part as storage, ware and salesrooms for the distribution of our product. The balance of building is rented to outside business tenants. Likewise the garage property used for housing our delivery outfit, which property also partly consists of dwelling houses, which are rented. The 6 story building in New York City was purchased in four story form, 75 X 100, together with an unimproved property in the rear of same 25 X 100 ft. We built up the rear property over the entire space, thus making a building 100 X 100, and moreover, changed the entire proposition to six stories instead of 4 stories as purchased.
*2251 Finally, we wish to state that our depreciation charges are based each year on the finding of a committee of our stockholders, basing same on a common sense view of the actual conditions applying, and thus determing the holding price at end of year. We have always figured our valuations as reflecting as nearly real cost as possible.
Depreciation on the plant buildings at Boyertown has been computed and allowed by the respondent as follows: book value, December 31, 1918, $138,640.61; restore depreciation credited on the books to the asset account; allowance from 1897 to 1912, inclusive, $30,836.07; allowances 1913 to 1918 inclusive, $42,216.24; amended book value, $211,692.92; additions in 1919, $7,714.08. Allowance at 2 per cent per annum (current additions averaged one-half) $4,311.
Invested capital for the taxable year was reported in the return filed by the petitioner as follows:
| Capital stock | $1,000,000.00 | |
| Earned surplus and undivided profits | 1,968,963.78 | |
| $2,968,963.78 | ||
| Less: | ||
| Dividend paid Jan. 15, 1919 (averaged) | 76,712.33 | |
| Income tax for 1918 (averaged) | 170,449.35 | |
| 247,161.68 | ||
| Invested capital for taxable period | 2,721,802.10 |
*2252 Invested capital has been determined by the respondent as follows:
| Capital stock | $1,000,000.00 | ||
| Surplus according to the books | $1,968,963.78 | ||
| Add: | |||
| Adjustment of depreciation, reserve | |||
| on buildings and equipment | 22,467.56 | ||
| Restore value of trucks | 25,710.66 | ||
| Restore improvement at N.Y. | 6,876.05 | ||
| 2,024,018.05 | |||
| Deduct: | |||
| Additional salary liability | $1,978.76 | ||
| Dividend Jan. 15, 1919 | 76,931.51 | ||
| Additional tax 1917, etc. | 4,111.76 | ||
| Amended 1918 tax averaged | 194,056.23 | ||
| 277,078.26 | |||
| 1,746,939.79 | |||
| Invested capital | 2,746,939.79 |
*1134 During the taxable year the officers' salaries were as follows: Morey, president of the corporation and also the general manager of the Philadelphia branch, at the rate of $150 per month, plus 2 1/2 per cent of the net profits of the business; Gabel, sales manager at Boyertown, $5,500 per annum; Leaver, secretary and treasurer, $6,000 per annum. All of these officers were also stockholders.
OPINION.
TRUSSELL: The first issue was decided after a prior hearing as reported in *2253 .
No evidence was offered relative to the second issue concerning a reduction of invested capital on account of a dividend paid during the taxable year, and the adjustment is, therefore, presumed to be correct.
The third issue is a question of the amount of deduction allowable for depreciation upon the plant buildings at Boyertown. The petitioner acquiesces in the rate of annual depreciation used by the respondent in his computation but alleges that the respondent has used the book values of the assets, which are far below the actual cost and/or values with relation to the plant buildings acquired prior to March 1, 1913. The book values were net after deducting whatever allowances for depreciation were entered upon the books in prior years. In arriving at base values for the computation the respondent has restored this depreciation in the amounts set out in the findings. Whatever of evidence of value as of March 1, 1913, there is in the record is uncontroverted and we have accepted it, finding a value for the Boyertown buildings on March 1, 1913, of $330,000. This includes the appearance on the stand of Warren M. Leaver, secretary-treasurer of the*2254 petitioner, who has been continuously with the concern since 1896, serving in various capacities with station at Boyertown, who testified in detail to the building of the various plant structures, to his own knowledge of their physical condition on March 1, 1913, and to their value in his opinion, on that date. The petitioner is entitled to a deduction from income of an allowance for depreciation of the Boyertown buildings computed upon said value together with subsequent additions valued at cost.
The fourth issue presents a claim for special assessment under sections 327 and 328 of the Revenue Act of 1918. The respondent has determined a substantial amount of invested capital, considerably in excess of that claimed in the return. The petitioner has failed to show certain costs of plant additions and of a process of enameling which were currently expensed years age, and it admits the impossibility of now adjusting earned surplus and undivided *1135 profits to restore so much of the cost as remains undepreciated physically or usefully after a long useful life. In our opinion, the evidence in this respect does not justify the claims of the petitioner that "invested capital*2255 can not be determined" and/or that the probable amount involved constitutes an abnormality of capital or of income - assuredly not of income in view of the depreciation allowance authorized in this decision based upon the full fair market value as of March 1, 1913. There is no satisfactory evidence to show that the process of enameling, even though in use only by the petitioner, is a valuable monopoly or was not successfully imitated by competitors, or that the officers' salaries were unreasonably or unusually low. We are of opinion that a careful consideration of the record leads to the conclusion that there is no basis for the allowance of special assessment.
Judgment will be entered pursuant to Rule 50.