*4129 1. COMPENSATION OF OFFICERS. - A salary of $25,000 for the services of petitioner's president during the year 1919 held to be reasonable compensation for such services.
2. DEPRECIATION. - Petitioner acquired a brewery building in 1917 which was then 42 years old. Held, that reasonable depreciation upon petitioner's cost of such building is greater than would be allowed upon the same building new. Petitioner also acquired brewing machinery in 1917, the average age of which was 15 years, and upon this machinery is entitled to a greater rate of depreciation than upon similar machinery purchased new.
*374 These two actions by agreement of counsel were consolidated for the purposes of trial and decision. Docket No. 10492 is an appeal from the Commissioner's deficiency letter dated November 4, 1925, asserting a deficiency in income and profits taxes for the calendar year 1918 in the amount of $5,067.75, caused by the disallowance of $21,675.40 of the amount of a deduction for*4130 exhaustion, wear and tear, and obsolescence claimed by the petitioner for that year. Docket No. 10226 is an appeal from the Commissioner's deficiency letter dated October 26, 1925, in which the Commissioner asserted deficiencies for the year 1919 in the amount of $17,482.08 and for the year 1920 in the amount of $484.15, resulting principally from the disallowance by the Commissioner of $15,522.79 of the amount clained by the petitioner as a deduction for exhaustion, wear and tear, and obsolescence for the calendar year 1919 and the disallowance of $25,000 of the amount claimed by the petitioner as compensation paid to its president for that year, and also from adjustments of invested capital made by the Commissioner on account of income and profits *375 taxes for prior years. The alleged deficiency for 1920 is not in dispute.
FINDINGS OF FACT.
For many years prior to 1912, Joseph Gottschalk had owned and operated a brewery property at Baltimore, Md. In the year 1912 he sold this property, taking from the purchaser bonds secured upon the property for the unpaid portion of the purchase price. The buyers did not make a success of operating the property; failed to meet*4131 their payments, and on or about March 3, 1917, this brewery property, by virtue of foreclosure proceedings, was offered for sale at public auction. At this time Gottschalk's secured claim against the property was approximately $170,000. He attended the public sale and bid $125,000 for the property offered as a whole and it was declared sold to him for that sum. He thereupon caused to be organized the petitioner corporation with an authorized capital stock of $125,000 and paid in to that corporation the property acquired at the aforesaid sale in exchange for all of the stock of petitioner except qualifying shares issued to other parties. So far as the record discloses, properties so acquired by petitioner were set up on its books in the following amounts:
| Land | $30,000 |
| Brewery plant buildings | 40,000 |
| Machinery | 22,475 |
| Stationary cooperage | 3,000 |
| Furniture and fixtures | 200 |
| Horses | 1,750 |
| Wagons and harness | 1,250 |
| Auto trucks | $1,600 |
| Floating cooperage | 2,000 |
| Saloon fixtures | 5,000 |
| Tenement houses | 11,900 |
| 119,175 |
For the year 1918 the petitioner made an income and profits-tax return showing a net income in the amount of $993.18, after having deducted*4132 an amount not shown by the record for exhaustion, wear and tear, and obsolescence. Of the deduction so claimed, the Commissioner disallowed $21,675.40 and adjusted the net income in the amount of $22,668.58. Upon this adjusted net income the Commissioner found a total income and profits-tax liability under the provisions of sections 327 and 328 of the Revenue Act of 1918 in the amount of $5,067.75, the deficiency here complained of. For the year 1919 the petitioner made an income and profits-tax return showing a net taxable income in the amount of $63,429.46 after having deducted $50,000 as compensation of petitioner's president and $26,964.40 as a deduction for exhaustion, wear and tear, and obsolescence. The Commissioner disallowed $25,000 of the amount claimed as compensation for petitioner's president, and of the total amount claimed for exhaustion, wear and tear, and obsolescence the Commissioner disallowed $15,522.79, and with other minor adjustments *376 found the net income to be $103,913.53 and the total excess-profits tax to be $32,698.08 and the total income and profits-tax liability to be $39,619.63, of which $22,137.55 had been paid on the basis of petitioner's*4133 original return, resulting in the deficiency here in issue in the amount of $17,482.08. The excess-profits tax for the year 1919 was computed under the provisions of section 301 of the Revenue Act of 1918.
For the years 1917 and 1918 the petitioner paid no salary or compensation to its president.
The main brewery building acquired by the petitioner in 1917 had been constructed in the year 1865 and when acquired by petitioner it was 42 years old. Brewing machinery and equipment acquired at that time was on the average at least 15 years old. During the years 1917, 1918, and 1919, and 1920, the petitioner made various repairs and additions to the plant; the main brewery building was repared and strengthened on the interior; a new bottling house was constructed in 1919 and machinery installed therein; in 1920 ice plant machinery was installed. Improvements and additions to brewery buildings were made as follows:
| 1918 | $12,173.50 |
| 1919 | 49,930.20 |
| 1920 | 10,145.91 |
| 1921 | 2,053.35 |
| 74,302.96 |
Additions to machinery were installed as follows:
| 1917 | $6,467.84 |
| 1918 | 2,755.19 |
| 1919 | 13,872.05 |
| 1920 | 36,537.29 |
| 1921 | 1,036.66 |
| 1922 | 112.00 |
| 60,781.03 |
*4134 During the years 1917, 1918, and 1919 the petitioner produced beer containing 2.75 per cent of alcohol as follows: From March to December, inclusive, 1917, 41,065 barrels; 12 months of 1918, 32,414 barrels; during the months of May to December, inclusive, 1919, 36,090 barrels.
In the year 1920 petitioner sold all its auto trucks at a figure which, after taking account of depreciation, showed a gain of $6,045.55; its horses and mules at a figure which, after making adjustments for accrued depreciation, showed a gain of $218.13; its office furniture and fixtures at a figure which, adjusted for accrued depreciation, showed a gain of 75 cents; its saloon fixtures for $944.25, which, after making adjustments for accrued depreciation, showed neither gain nor loss; its wagons and harness at figure which, after making *377 adjustments for depreciation, showed a loss of $201.75; its floating cooperage at a figure which, after making adjustments for depreciation, showed a gain of $2,726. In the year 1922 it sold machinery costing $16,945.35 at a figure which, after making adjustments for depreciation, showed a loss of $2,332.18.
At a date not given the petitioner also sold the*4135 old brewery bottling house, together with both the old and new machinery therein, for an amount or upon terms not disclosed by the record.
In the year 1919 petitioner sold at a profits seven parcels of unimproved land and in the year 1920 a few small sales of machinery and equipment were made. Petitioner then had left its main brewery building and most of the machinery therein, which has stood idle since some time in 1921.
OPINION.
TRUSSELL: The record of this action contains testimony which was produced with the view of showing the unusual value to the petitioner of the services of its president during the calendar year 1919 in support of its claim for a deduction of $50,000 for compensation for its president. The Commissioner reduced this deduction to $25,000. The testimony concerns the situation which all manufacturers and vendors of intoxicating beverages faced during the year 1919 when the imminence of national prohibition was confronting these businesses. While the record shows that this petitioner, under the guidance of its president, assumed certain risks and was subjected to the necessity of defending itself against indictments for alleged violations of prohibitory*4136 regulations and that petitioner's profits for that year were largely the result of the risks taken under the guidance of petitioner's president, we have given consideration to this testimoney in connection with the form of petitioner's business and profits for the year, and in view of all the circumstances we are convinced that the amount allowed by the Commissioner as a deduction from gross income for the president's salary in the sum of $25,000 is entirely reasonable.
In making its return for income and profits taxes for the years 1918 and 1919 petitioner claimed large deductions from gross income on account of exhaustion, wear and tear, and obsolescence of brewery products, and the Commissioner disallowed part of the claimed deductions. The record does not show the basis upon which petitioner's claimed deductions were computed nor upon what specific properties the computation was made. In making his adjustments of these deductions the Commissioner applied certain definite rates of depreciation to each class of properties owned by the petitioner, applying a rate of 2 1/2 per cent on buildings both old and new, and 10 per cent upon machinery, both old and new. In respect to*4137 this matter we *378 believe that the Commissioner erred in that there should have been a segregation both as to buildings and machinery between the old machinery and buildings acquired by the petitioner in 1917 and the new buildings and machinery purchased and installed by the petitioner during the years 1918 and 1919. It appears from the record that in 1917 the petitioner acquired all the fixed properties of a brewery business for an aggregate amount of $125,000; that $40,000 of this amount was allocated to the brewery buildings and $22,475 was allocated to the brewery machinery; that the buildings were then approximately 42 years old, and that the machinery averaged not less than 15 years old. The rates of depreciation applied by the Commissioner on machinery are the ordinary rates applied upon cost of such properties new. These properties were acquired by the petitioner after they were very old; what their original cost may have been we do not know. It does not seem, however, that a rate of depreciation applicable to the cost of a building new should be applied to the cost of an old building. The testimony in this record in convincing that the brewery buildings were*4138 in a dilapidated condition when acquired by petitioner and that they could not be assumed to have a life from the acquirement date of more than 10 or 12 years; that the machinery was in such worn out condition that it could not be assumed to have a useful life of more than 5 years. We are, therefore, of the opinion and so hold, that in adjusting petitioner's depreciation deduction for the calendar years 1918 and 1919 the rate of depreciation applied to the old brewery buildings should be 8 per cent of their cost to the petitioner in 1917 and that the rate of depreciation applied to the machinery acquired in 1917 should be 20 per cent, and that petitioner's depreciation deductions for those years should be readjusted accordingly.
We have given no consideration to petitioner's claim for obsolescence of brewery properties as distinct from allowance for depreciation, for the reason that during the years 1920 to 1922, inclusive, new building construction was acquired and new machinery installed. The record does not show how much of this construction or new machinery was replacement of old machinery and construction nor does the record definitely show what items of machinery were sold*4139 during the years 1920 to 1922, inclusive. It, therefore, appears to be entirely impracticable to arrive at any basis for allowing that character of obsolescence which we have heretofore held in , might be applied in cases of brewery properties.
The deficiencies for the years 1918 and 1919 should be recomputed in accordance with the foregoing findings of fact and opinion.
Judgment will be entered upon 15 days' notice, pursuant to Rule 50.