*1763 1. The statute of limitations held not to have expired at the time an assessment for the calendar year 1918 was made on June 5, 1925.
2. Respondent disallowed as deductions from gross income seven items consisting of contributions made by petitioner to various organizations. Upon the record respondent's determination is approved as to one item and disapproved as to the remaining six.
3, 4. Upon the evidence, held, respondent erred in restoring to petitioner's opening and closing inventories for the years 1918, 1919, and 1920, a deduction of 10 per cent made by petitioner to allow for the goods that were sold during the period the inventory was being taken.
5. Respondent admits that he erred in reducing the amount of current earnings available for payment of dividends by a tentative tax.
6. The inclusion in invested capital for the years 1918 to 1921, inclusive, of a part of the income and profits taxes for the preceding years was in accordance with the respondent's regulations in force in respect of such taxable years, and, under section 1207 of the Revenue Act of 1926, "shall be considered as having been correctly made."
7. Amount of depreciation allowable*1764 for the years 1918 to 1921, inclusive, determined.
8 and 13. Upon the evidence, held that the amount of depreciation written off by petitioner and substantially allowed by the respondent was not excessive.
9, 10. An item of $6,579.55 expended by petitioner for a new building held to constitute a capital expenditure.
11. Respondent admits that he erred in reducing petitioner's invested capital for the years 1918 to 1921, inclusive, by a certain amount representing a contingent reserve.
12. Upon the evidence, held, petitioner is not entitled to any deduction on account of alleged losses due to the obsoleteness of standing type and forms.
15. During 1919 and 1920 petitioner sold to certain of its employees a portion of its own capital stock, at par, to be paid for by deducting from the employees' weekly salary a certain percentage of the total amount of stock sold, and by crediting to the purchase price of such stock all dividends declared and paid thereon. Held, petitioner is not entitled to deduct from its gross income such dividends as additional compensation.
17. Petitioner held not entitled to deduct from its gross income an amount paid*1765 its president for the purpose of reimbursing him for a loss he sustained in connection with an investment amde by him in his individual capacity.
*917 These proceedings, which were consolidated, are for the redetermination of deficiencies in income and profits taxes for the calendar years 1918 to 1921, inclusive, in the following amounts:
| Year | Docket No. | Deficiency |
| 1918 | 15004 | $6,605.59 |
| 1919 | 15003 | 3,236.16 |
| 1920 | 15003 | 4,461.83 |
| 1921 | 14932 | 4,086.83 |
The entire amount of the above deficiencies is in controversy, and, in addition thereto, petitioner asks that the Board find that it has made an overpayment of taxes for the three years 1918, 1919, and 1920.
The petitions, as amended, allege that the respondent committed errors as follows:
(1) In assessing an additional tax for the year 1918 after the statutory period of limitation for assessment had run;
(2) In disallowing as deductions from gross income for the years 1918, 1919, and 1920, certain donations alleged by petitioner to be in the form of advertising or ordinary*1766 and necessary business expenses;
(3) In refusing to allow petitioner to decrease its opening and closing inventories for the years 1918, 1919, and 1920 by a flat rate of 10 per cent;
(4) In increasing petitioner's invested capital for the years 1918, 1919, and 1920 by $7,932.43, $10,420.92, and $11,727.07, respectively, on account of inventory adjustments;
(5) In reducing petitioner's invested capital for the year 1918 by $705.48, on account of dividends paid;
(6) In reducing petitioner's invested capital for the years 1918 to 1921, inclusive, by alleged erroneous amounts on account of Federal income and profits taxes for prior years;
(7) In disallowing as deductions from gross income for the years 1918 to 1921, inclusive, a portion of the depreciation claimed by petitioner for those years;
(8) In not increasing the prewar income and invested capital in arriving at the deficiency for the year 1918 by all of the excessive depreciation charged off during the prewar period and prior thereto;
(9) In not increasing the prewar income and invested capital in arriving at the deficiency for the year 1918 by certain capital items alleged to have been improperly charged to expense*1767 by petitioner during the year 1913;
(10) In not increasing the invested capital for the years 1918 to 1921, inclusive, by certain capital items alleged to have been improperly charged to expense by petitioner during the year 1913;
*918 (11) In reducing invested capital for the years 1918 to 1921, inclusive, by a contingent reserve of $3,945.97;
(12) In not allowing, as deductions from gross income for the years 1918, 1919, and 1920, losses alleged to have been sustained in those years due to the obsoleteness of standing type and forms;
(13) In refusing to further increase petitioner's invested capital for the years 1918 to 1921, inclusive, by an alleged excessive depreciation charged off by petitioner in years prior to the respective taxable year in question;
(14) In refusing to determine petitioner's profits-tax liability for the years 1918 to 1921, inclusive, under the provisions of sections 327 and 328 of the Revenue Acts of 1918 and 1921, respectively;
(15) In refusing to allow, as deductions from gross income for the years 1919, 1920, and 1921, certain alleged additional compensation paid to petitioner's employees in the form of dividends on petitioner's capital*1768 stock not fully paid for by the employees;
(16) In increasing petitioner's contingent reserve by an excessive amount in arriving at the deficiency for the year 1920;
(17) In refusing to allow as a deduction from gross income for the year 1921, or any other year, an amount of $500 paid to petitioner's president during the year 1921; and
(18) In not finding refunds due petitioner for the years 1918, 1919, and 1920.
The respondent admits that he committed the above alleged errors numbered 5 and 11, and petitioner waives the alleged error numbered 16.
In connection with the alleged error numbered 14 a motion was granted to confine the hearing 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.
Petitioner is a corporation organized and existing under the laws of the State of Tennessee, with its principal office at Memphis.
1. On March 13, 1919, petitioner filed with the collector of internal revenue at Nashville, Tenn., on Form 1031-T, a "Tentative Return and Estimate of Corporation Income and Profits Taxes and Request for extension of Time for Filing Return," for the calendar year 1918. *1769 In this tentative return petitioner requested an extension of 45 days in which to file a completed return. The tentative return also shows that at that time petitioner estimated its tax liability for the year 1918 to be $28,639.27, of which $8,000 was remitted by petitioner at the time of filing the return.
*919 On June 6, 1919, petitioner filed its completed corporation income and profits-tax return for the calendar year 1918.
On February 5, 1924, petitioner duly filed a waiver coverivg the calendar year 1918. The waiver by its own limitation expired "one year after the expiration of the statutory period of limitation."
On June 5, 1925, the respondent made a jeopardy assessment, under the provisions of section 274(d) of the Revenue Act of 1924, of a deficiency of $6,605.59 for the year 1918. The collector served a notice of demand for the payment of the deficiency, and, within the time provided for in section 279(a) of the Revenue Act of 1924, petitioner duly filed a claim for abatement, accompanied by a bond as prescribed in the statute. On January 30, 1926, the respondent rejected petitioner's claim for the full amount of the deficiency, and issued the deficiency*1770 letter, from which petitioner duly filed with this Board a petition for the redetermination of the deficiency.
2. During the years 1918, 1919, and 1920 petitioner contributed certain amounts to certain organizations, as follows:
| Name | 1918 | 1919 | 1920 |
| Tri State Fair Association | $150 | ||
| Baptist Hospital | 100 | $100 | |
| Citizens League | $100 | ||
| Methodist Hospital | 100 | ||
| Presbyterian College | 250 | ||
| Chamber of Commerce | 100 |
The Tri State Fair Association was a fair organized about 20 years ago to exhibit the products of the three States of Tennessee, Mississippi, and Arkansas. During 1918 it operated at a deficit and the different business houses of Memphis, showing a civic spirit, subscribed to a fund to cover this deficit. The association did an annual business with petitioner amounting to several thousands of dollars, and in order to retain this business, petitioner contributed the amount of $150.
The Baptist Hospital was also a very good customer of petitioner. They ordered a steady line of work all of the time and were paying their bills promptly. Petitioner considered it a very good business proposition to subscribe $100 in 1918 and $100*1771 in 1920 toward a building program then being conducted by the hospital.
Petitioner is receiving a great deal of business from the Methodist Hospital.
The Presbyterian College was operating at Clarksville, Tenn., and decided to move to Memphis, and had a campaign on for funds. The campaign committee spent a great deal of money with petitioner for printing, and the contribution of $250 was made to maintain that business.
*920 The subscription of $100 to the chamber of commerce was to meet a part of the budget of that organization, and entitled petitioner to a membership therein. Petitioner received considerable business from this source.
The various individuals interested in the campaigns for funds for the above organizations (except Citizens League) were also good patrons of the petitioner, and in making the contributions in question, petitioner also retained the good will of the individuals.
It was the opinion of the treasurer and office manager of petitioner that had the contributions in question (except those to the Citizens League) not been made, petitioner would have lost considerable of the business then being enjoyed from those organizations.
Petitioner's*1772 reputation in printing, bookbinding, commercial lithographing and steel engraving was not confined to the city of Memphis. It was represented at the International Convention of Lithographers in London, and also at the St. Louis Exposition. There was no other plant at Memphis that was as large as petitioner's.
The above items were deducted by petitioner on its returns for the respective years as advertising expenses. The respondent disallowed the claimed deductions on the ground that they constituted donations rather than ordinary and necessary business expenses.
3. Prior to 1916 and every year thereafter, beginning about December 20 of each year and lasting from about 10 to 14 days, petitioner has consistently taken a physical inventory of its merchandise and manufactured stock on hand at that time. It valued its inventories upon the basis of "cost or market, whichever was lower."
Petitioner continued to make sales throughout each inventory period, but did not deduct the cost or market value (whichever might have been lower) of the goods sold during this period from the total cost or market value of the inventory then being taken until the inventory had been completed, *1773 at which time petitioner would then deduct a flat rate of 10 per cent from the total inventory. These 10 per cent deductions were explained on petitioner's inventory work sheets as "Less errors & omissions and sales after stock taking," and for the close of the years 1917, 1918, 1919, and 1920 amounted to $7,677.55, $10,420.92, $11,727.07, and $12,840.88, respectively.
Petitioner's business was seasonable, with the busy months from September to April, inclusive, and the dull months from May to August, inclusive. Usually December was its best month of the year. The number of inventory turnovers in petitioner's business during the years 1917 to 1920, inclusive, was as follows:
| Year | Number of |
| inventory | |
| turnovers | |
| 1917 | 4.33 |
| 1918 | 3.32 |
| 1919 | 3.53 |
| 1920 | 4.02 |
| Total during 4-year period | 15.20 |
| Average annual turnover (1/4 of 15.20) | 3.80 |
| Average turnover every 10 days (10/365 of 3.80) | .104+ |
*921 During the years 1917 to 1920, inclusive, the average sales and average cost of sales over a 10-day period in the month of December, were as follows:
| For a 10-day | Average | Average cost |
| period in | sales | of sales |
| Decem,ber | ||
| 1917 | $15,715.80 | $11,752.51 |
| 1918 | 17,774.30 | 11,499.97 |
| 1919 | 23,524.50 | 14,573.38 |
| 1920 | 24,549.20 | 17,037.14 |
*1774 The respondent restored the above 10 per cent reductions to petitioner's opening and closing inventories for the years 1918, 1919, and 1920, which resulted in increasing petitioner's net income for each of the years, as follows:
| Year | Restored to opening | Restored to closing | Increase in net income |
| 1918 | $7,677.55 | $10,420.92 | $2,743.37 |
| 1919 | 10,420.92 | 11,727.07 | 1,306.15 |
| 1920 | 11,727.07 | 12,840.88 | 1,113.81 |
4. The restoration by the respondent of the above 10 per cent deductions to petitioner's opening inventories for the years 1918, 1919, and 1920 also resulted in increasing petitioner's invested capital for those years by the amounts so restored, namely, $7,677.55, $10,420.92, and $11,727.07 for the years 1918, 1919, and 1920, respectively.
5. Petitioner's invested capital for the year 1918 was reduced by the respondent in the amount of $705.48, on account of dividends paid March 18, 1918, by petitioner in the amount of $9,000. The respondent made this deduction on the finding that $891.01 of the dividends paid was paid out of surplus and not from current earnings. This finding was obtained by respondent by reducing current earnings to the date*1775 the dividend was paid by a so-called "tentative" tax theoretically set aside out of 1918 earnings pro rata over the year 1918. *922 The earnings from January 1, 1918, to March 18, 1918, were greater than $9,000.
6. The respondent decreased petitioner's invested capital for the years 1918 to 1921, inclusive, on account of Federal taxes for prior years. The principle there employed was in accordance with respondent's regulations in force in respect of such taxable years.
For the year 1918 invested capital was reduced by $732.23 on account of Federal taxes in the amount of $1,336.32, based upon the income for the year 1917.
For the year 1919, the reduction was the amount of $14,780.47 on account of Federal taxes in the amount of $34,974.86, based on the income for 1918 as originally reported by petitioner and as increased by respondent.
For the year 1920 the reduction was the amount of $16,677.83 on account of Federal taxes in the amount of $39,573.45, based on the income for 1919 as originally reported by petitioner and as increased by respondent. For the year 1920 the invested capital was also reduced by the amount of $6,602.23 on account of additional taxes for*1776 the year 1918.
For the year 1921 the reduction was the amount of $22,004, on account of Federal taxes in the amount of $52,068.16, based on the income of 1920 as originally reported by petitioner and as increased by respondent. The deficiency letter for the year 1920 shows the total tax liability for that year to be $51,583.84 instead of $52,068.16. For the year 1921 the invested capital was also reduced by the amounts of $1,888.52, $6,762.84, and $3,350.51 on account of additional taxes for the years 1917, 1918, and 1919, respectively.
For the year 1917 respondent has never proposed or assessed any additional taxes against petitioner, nor has he ever commenced any suit or proceeding for additional tax for that year.
For the year 1918 respondent has proposed and assessed a deficiency of $6,605.59, with respect to which a claim for abatement was duly filed and disallowed by respondent in his deficiency letter dated January 30, 1926.
For the year 1919 respondent has proposed a deficiency of $3,236.16, as set forth in his notice of deficiency dated January 30, 1926.
For the year 1920 respondent has proposed a deficiency of $4,461.83, as set forth in his notice of deficiency*1777 dated January 30, 1926.
7. Petitioner was incorporated during October, 1899, for the purpose of taking over the business then being conducted by a partnership composed of S. C. Toof and W. H. Bates, trading under the firm name of S. C. Toof & Co. The partnership began business in *923 the year 1864. Petitioner began actual operation on January 1, 1900. The authorized capital stock of petitioner was $100,000, consisting of 1,000 shares of the par value of $100 each.
The cost of "equipment" (exclusive of metals) together with the additions and reductions thereto, as shown on petitioner's books from January 1, 1900, to December 31, 1921, is as follows:
| Year ended Dec. 31 | Additions | Reductions | Net additions | Accumulated |
| total | ||||
| Balance Jan. 1, 1900 | $54,788.02 | |||
| 1900 | $2,899.56 | $145.00 | $2,744.56 | 57,532.58 |
| 1901 | 876.99 | 876.99 | 58,409.57 | |
| 1902 | 4,208.03 | 4,208.03 | 62,617.60 | |
| 1903 | 6,299.12 | 300.00 | 5,999.12 | 68,616.72 |
| 1904 | 6,817.56 | 6,817.56 | 75,414.28 | |
| 1905 | 4,903.53 | 1,519.69 | 3,383.84 | 78,818.12 |
| 1906 | 6,467.62 | 185.30 | 6,282.32 | 85,100.44 |
| 1907 | 4,364.55 | 4,364.55 | 89,464.99 | |
| 1908 | 5,211.34 | 5,211.34 | 94,676.33 | |
| 1909 | 7,012.89 | 7,012.89 | 101,689.22 | |
| 1910 | 8,917.69 | 8,917.69 | 110,606.91 | |
| 1911 | 9,413.25 | 9,413.25 | 120,020.16 | |
| 1912 | 3,248.27 | 891.25 | 2,357.02 | 122,377.18 |
| Jan. 1, 1913 | ||||
| to Mar. 1, 1913 | 287.85 | 450.00 | (162.15) | 122,215.03 |
| Total to Mar. 1, 1913 | 70,918.25 | 3,491.24 | 67,427.01 | 122,215.03 |
| Mar. 1, 1913, to | ||||
| Dec. 31, 1913 | 27,954.09 | 439.65 | 27,514.44 | 149,729.47 |
| Mar. 1, 1913, | ||||
| to Dec. 31, 1913 | 6,579.55 | 6,579.55 | 156,309.02 | |
| Total, Dec. 31, 1913 | 105,451.89 | 3,930.89 | 101,521.00 | 156,309.02 |
| 1914 | 13,253.13 | 25.00 | 13,228.13 | 169,537.15 |
| 1915 | 3,320.42 | 221.07 | 3,099.35 | 172,636.50 |
| 1916 | 4,107.40 | 225.00 | 3,882.40 | 176,518.90 |
| 1917 | 4,467.51 | 586.00 | 3,881.51 | 180,400.41 |
| Total | 130,600.35 | 4,987.96 | 125,612.39 | 180,400.41 |
| 1918 | 3,822.38 | 765.00 | 3,057.38 | 183,457.79 |
| 1919 | 13,400.78 | 1,079.57 | 12,321.21 | 195,779.00 |
| 1920 | 22,658.36 | 7,332.29 | 15,326.07 | 211,105.07 |
| 1921 | 9,726.56 | 312.50 | 9,414.06 | 220,519.13 |
| Total, Dec. 31, 1921 | 180,208.43 | 14,477.32 | 165,731.11 | 220,519.13 |
*1778 The parties have stipulated that the proper annual rate for depreciation of all of petitioner's assets during the years 1918 to 1921, both inclusive, is a composite rate of 10 per cent.
The amount of depreciation written off the books by petitioner, the amount allowed by the respondent, and the amount disallowed by the respondent, for the years 1918 to 1921, inclusive, are as follows:
| Year | Written off | Allowed by | Disallowed by |
| by | respondent | respondent | |
| petitioner | |||
| 1918 | $10,215.73 | $7,149.43 | $3,066.30 |
| 1919 | 12,093.20 | 8,727.35 | 3,365.85 |
| 1920 | 13,940.80 | 10,555.69 | 3,385.11 |
| 1921 | 15,164.51 | 11,470.75 | 3,693.76 |
*924 For the years 1918, 1919, and 1920 respondent arrived at the amount of depreciation allowed by him as follows:
CALENDAR YEAR 1918
| Equipment | 5 per cent | 10 per cent | 15 per cent | Depreciation |
| of cost | of cost | of cost | allowable | |
| Office | $4,221.96 | $422.20 | ||
| Composing room | $16,008.91 | 800.45 | ||
| Motor room | 2,634.63 | 263.46 | ||
| Cylinder | 11,309.80 | 1,130.98 | ||
| Ruling machines | 1,561.26 | 156.13 | ||
| Platen press | 3,238.55 | 323.86 | ||
| Monotype | 6,164.90 | 616.49 | ||
| Linotype | 5,021.50 | 502.15 | ||
| Stock-room | ||||
| fixtures | 360.00 | 36.00 | ||
| Shipping room | 838.63 | 83.87 | ||
| Steel dies, etc | 3,154.30 | $331.04 | 365.08 | |
| Lithograph | 8,212.04 | 600.00 | 911.20 | |
| Bindery cutting K | 547.00 | 1,221.56 | 237.93 | |
| Bindery folding F | 2,209.50 | 479.30 | 292.85 | |
| Bindery hand B. | ||||
| & A | 113.38 | 192.10 | 40.15 | |
| Bindery D | 2,339.62 | 2,639.54 | 629.89 | |
| Metals, linotype | 1,751.68 | 175.17 | ||
| Metals, monotype | 1,615.78 | 161.57 | ||
| Total | 16,008.91 | 55,294.58 | 5,463.54 | 7,149.43 |
| CALENDAR YEAR 1919 | ||||
| Office | $4,675.21 | $467.52 | ||
| Composing room | $16,008.91 | $506.69 | 876.45 | |
| Motor room | 2,634.63 | 263.46 | ||
| Cylinder | 11,329.80 | 1,132.98 | ||
| Ruling machines | 1,667.46 | 166.75 | ||
| Platen press | 4,512.15 | 451.22 | ||
| Monotype machine | 6,164.99 | 616.50 | ||
| Linotype machine | 5,021.50 | 502.15 | ||
| Stock-room | ||||
| fixtures | 477.23 | 47.72 | ||
| Intertype machine | 3,598.88 | 359.89 | ||
| Shipping room | 838.68 | 858.05 | 212.58 | |
| Steel dies, etc | 3,006.75 | 457.31 | 369.27 | |
| Lithograph | 8,212.04 | 600.00 | 911.20 | |
| Bindery cutting K | 547.00 | 3,001.52 | 504.93 | |
| Bindery folding F | 2,209.50 | 479.30 | 292.85 | |
| Bindery hand B. | ||||
| & A | 91.73 | 9.17 | ||
| Bindery D | 2,339.62 | 6,480.12 | 1,205.98 | |
| Metals, linotype | 1,751.68 | 175.16 | ||
| Metals, monotype | 1,615.78 | 161.57 | ||
| Total | 16,008.91 | 60,694.63 | 12,382.99 | 8,727.35 |
| CALENDAR YEAR 1920 | ||||
| Autos, | ||||
| $1,285.95, | ||||
| at 25 per cent | $321.49 | |||
| Office | $4,835.51 | 483.55 | ||
| Composing room | $16,008.91 | $1,430.03 | 1,014.95 | |
| Motor room | 2,634.63 | 263.46 | ||
| Cylinder | 13,386.80 | 1,338.68 | ||
| Ruling machines | 3,174.96 | 317.50 | ||
| Platen press | 7,399.02 | 739.91 | ||
| Monotype machine | 7,137.40 | 713.74 | ||
| Linotype machine | 5,021.50 | 502.15 | ||
| Stock-room | ||||
| fixtures | 477.23 | 47.72 | ||
| Shipping room | 838.68 | 756.22 | 197.30 | |
| Steel dies, etc | 4,001.94 | 457.31 | 468.79 | |
| Lithograph | 9,022.04 | 600.00 | 1,052.20 | |
| Bindery cutting K | 547.00 | 3,001.52 | 504.93 | |
| Bindery folding F | 4,894.50 | 479.30 | 561.35 | |
| Bindery hand B. | ||||
| & A | 325.63 | 32.56 | ||
| Bindery D | 5,013.76 | 7,715.21 | 1,658.66 | |
| Metals, linotype | 1,751.68 | 175.17 | ||
| Metals, monotype | 1,615.78 | 161.58 | ||
| Total | 16,008.91 | 72,678.06 | 14,439.59 | 10,555.69 |
*1779 *925 The total cost on which respondent allowed depreciation for the years 1918, 1919, and 1920 was as follows:
| 1918 | $76,767.03 |
| 1919 | 89,086.53 |
| 1920 | 104,412.51 |
8 and 13. From the time of incorporation until January 1, 1922, petitioner wrote off on its books the following amounts as depreciation in the following years:
| Year | Depreciation |
| written off | |
| 1902 | $2,250.00 |
| 1906 | 25,000.00 |
| 1908 | 20,000.00 |
| 1909 | 5,000.00 |
| 1910 | 6,000.00 |
| 1911 | 10,000.00 |
| 1912 | 10,000.00 |
| 1913 | 21,218.62 |
| Subtotal | 99,468.62 |
| 1914 | $7,645.49 |
| 1915 | 7,984.02 |
| 1916 | 8,175.05 |
| 1917 | 9,960.87 |
| Subtotal | 133,234.05 |
| 1918 | $10,215.73 |
| 1919 | 12,093.20 |
| 1920 | 13,940.80 |
| 1921 | 15,164.51 |
| Grand | |
| total | 184,648.29 |
The respondent, in determining the income of petitioner for the prewar period (calendar years 1911, 1912, and 1913), increased such prewar income on account of excessive depreciation charged off during those years as follows:
| Prewar years | Income increased |
| 1911 | $3,807.11 |
| 1912 | 4,117.45 |
| 1913 | 1,954.73 |
In determining the income of petitioner for the prewar period, the respondent also increased such prewar income by the amount of $11,218.62, *1780 and made the following explanation for so doing:
The amount of $11,218.62 written off in 1913 should be restored, inasmuch as it was an entry made to reduce assets to their actual value.
In determining the invested capital of petitioner for the prewar period, the respondent increased such invested capital on account of excessive depreciation charged off during prewar years as follows:
| Increase in invested capital for excessive depreciation | ||
| Prewar years | Years charged off | Amount |
| 1911 | 1909-1910 | $214.78 |
| 1912 | 1909-1911 | 4,021.89 |
| 1913 | 1909-1912 | 8,139.34 |
*926 The prewar income and invested capital as determined by the respondent for each of the prewar years were as follows:
| Year | Prewar income | Prewar invested capital |
| 1911 | $36,802.12 | $127,832.14 |
| 1912 | 39,699.37 | 146,444.51 |
| 1913 | 9,973.15 | 155,981.12 |
| Average | 28,824.88 | 143,419.26 |
The net income, invested capital, and excess-profits credits as determined by the respondent for the years 1918 to 1921, inclusive, were as follows:
| Year | Net income | Invested capital | Excess-profits credit |
| 1918 | $74,462.46 | $196,508.70 | $18,720.70 |
| 1919 | 113,029.38 | 230,188.61 | 21,415.09 |
| 1920 | 143,143.81 | 265,409.76 | 24,232.78 |
| 1921 | 100,242.19 | 337,204.43 | 29,976.36 |
*1781 In determining the deficiency for the year 1918, the respondent determined the war-profits credit provided for under section 311(a) of the Revenue Act of 1918 to be the amount of $37,133.82, which he computed as follows:
| Average net income for prewar period | $28,824.88 |
| Plus 10% of increase in invested capital | 5,308.94 |
| 34,133.82 | |
| Exemption | 3,000.00 |
| War-profits credit as determined by the respondent | 37,133.82 |
The respondent in determining the invested capital of petitioner for the years 1918 to 1921, inclusive, included therein certain amounts which he determined to be excessive depreciation charged off by petitioner in prior years, as follows:
| 1918 | 1,279.83 |
| 1919 | 4,346.13 |
| 1920 | 7,711.98 |
| 1921 | None. |
9 and 10. In a schedule set out under issue No. 7 above, showing the cost of equipment, together with the additions and reductions thereto, appears an item of $6,579.55 in the column headed "Additions" from March 1, 1913, to December 31, 1913. Petitioner charged this item to expense in 1913. The item was recorded on petitioner's *927 books in a separate account styled "New Building Expense" and consisted of expenditures for the following*1782 items:
| Electrical and plumbing | $1,026.25 |
| Steam heat and connections | 346.96 |
| Sheet metal work | 224.00 |
| Lumber and building material | 308.21 |
| Machine work, hardware, etc | 148.28 |
| Erectors material and expense | 470.21 |
| Freight and drayage | 981.11 |
| Labor and petty cash disbursements | 859.40 |
| Contractors, consulting engineers and architects | 2,098.74 |
| Miscellaneous | 116.39 |
| 6,579.55 |
The total amount of $6,579.55 was expended by petitioner during 1913 in erecting a new building on leased premises on which petitioner had a 10-year lease expiring August 31, 1923.
The respondent refused to permit petitioner to restore this item of $6,579.55 to its capital account.
11. The parties have stipulated that the respondent reduced petitioner's invested capital for each of the years 1918 to 1921, inclusive, by $3,945.97, and that "This item represents a contingent reserve created by charges to the surplus account, also charges against income in years prior to 1918."
12. On March 1, 1913, petitioner owned certain assets referred to in the record as "Standing Type and Forms." During the latter part of 1917, or early in 1918, petitioner discontinued to use such assets in*1783 its business on account of the Railroad Administration printing standard tariff forms. The assets became worthless either in 1917 or 1918.
15. During the years 1919 and 1920, petitioner entered into written agreements with certain of its employees wherein petitioner sold to such employees certain shares of its capital stock, at par, payment to be made by deducting one-fourth of 1 per cent of the total amount of stock so purchased from the respective employee's weekly salary, and by crediting to the purchase price of such stock all dividends declared and paid. A copy of the standard contract employed in each of the several agreements referred to above is as follows:
THIS CONTRACT, made and entered into this the day of , 192 , by and between S. C.Toof and Company, a corporation chartered and existing under the laws of the State of Tennessee, as party of the first part, and of Memphis, Tennessee, as party of the second part,
WITNESSETH:
WHEREAS, as the party of the second part is now in the employ of the party of the first part, and the party of the first part is desirous of having the said party of the second part interested in its business as a stockholder therein, *1784 to *928 the end that he may receive in the form of dividends on his stock, a share in the earnings of the party of the first part, which he helped to produce;
Now, THEREFORE, the party of the first part has this day sold to the party of the second part shares of stock, at par, upon the following terms and conditions, to-wit;
1. The party of the second part is to pay weekly on the purchase of said stock, one fourth (1/4) of one (1) per cent of the total amount of stock purchased, the same to be deducted from the weekly salary of the party of the second part, and credited on said stock; said deferred payments to be without interest.
2. All dividends declared by the party of the first part from time to time shall be credited on the purchase of said stock.
3. The stock certificate covering the aforesaid stock has this day been issued to and in the name of the party of the second part, and he has indorsed the same in blank and deposited it with the Treasurer of the party of the first part, to be held by him as security for the full performance of this contract and until said stock has been paid for in full, in the manner and form as herein recited, and not otherwise.
*1785 4. Should the connection of the party of the second part with the party of the first part be severed, either by resignation, dismissal or death, the party of the first part shall promptly repay the party of the second part, his heirs, personal representatives or assigns, all payments made hereunder, together with all dividends declared on the stock hereby purchased and credited to the purchase of same, and thereupon all further right, title or interest of the party of the second part in, to and under this contract shall terminate, and the stock certificate or certificates issued hereunder shall be returned to the Treasury of the party of the first part.
5. The party of the second part does hereby grant unto the President of the party of the first part, whomsoever he may be, the irrevocable proxy of voting the stock covered hereby, at any and all stockholders meetings, until said stock is fully paid for in the manner and form as herein recited, whereupon said proxy shall automatically terminate, and the power to vote said stock be restored to the holder or owner of the same, and the party of the second part does hereby name, constitute and appoint the President of the party*1786 of the first part as his attorney-in-fact, with full, complete and absolute power to act for the party of the second part in all matters affecting the stockholders of the party of the first part, with complete authority to act therein according to his own judgment and discretion, and this power of attorney to be absolute and irrevocable, for the valuable consideration aforesaid, until the stock issued hereunder has been fully paid for and delivered to the party of the second part, whereupon this power of attorney shall automatically become null and void.
6. This contract is non-negotiable and non-assignable, and is personal to the party of the second part.
7. If after the stock purchased hereunder has been fully paid for and delivered to the party of the second part, he should desire to pledge or sell same, the party of the first part shall be given the option of accepting the pledge of said stock or of purchasing the same.
IN WITNESS WHEREOF, said parties of the first and second part have hereunto set their names and seals the day and year above written.
*929 The date, name of employee (party of the second part), number of shares purchased, together with the amount*1787 of the purchase price, of all such contracts entered into during the years 1919 and 1920, are as follows:
| Date | Employee | Number of shares | Purchase price |
| July 2, 1919 | A. J. Taylor | 30 | $3,000 |
| Do | J. R. Curtis | 31 | 3,100 |
| Do | N. B. Hamilton | 25 | 2,500 |
| Do | W. H. Adams | 50 | 5,000 |
| Do | Chas. Holder | 10 | 1,000 |
| Do | R. E. Linn | 20 | 2,000 |
| 166 | 16,600 | ||
| Feb. 12, 1920 | R. E. Linn | 20 | 2,000 |
| 186 | 18,600 |
Petitioner declared dividends which were credited to the employee's stock purchase accounts as follows:
| Date of dividend | Percentage | Amount of dividend |
| credited to account of | ||
| employees | ||
| 1919 | ||
| Dec. 15 | 15 | $2,490 |
| 1920 | ||
| Mar. 16 | 6 | 1,116 |
| July 7 | 4 | 904 |
| Dec. 27 | 6 | 1,116 |
| 3,136 | ||
| 1921 | ||
| Mar. 15 | 6 | $1,116 |
| June 20 | 6 | 1,116 |
| Sept. 12 | 6 | 1,116 |
| Dec. 15 | 6 | 1,116 |
| 4,464 |
All the terms and conditions of the contract with each of the above mentioned employees were performed without any variation. The book value of petitioner's stock at the time the contracts were entered into was from about $200 to $250 per share.
The respondent refused to allow as deductions from gross income for the years 1919, 1920, and 1921, as additional*1788 compensation, the various amounts of the above dividends which were credited to the stock purchase account of the several employees, totaling $2,490, $3,136, and $4,464, respectively.
17. The Memphis Terminal Corporation was one of petitioner's customers with whom petitioner did an annual business of several thousand dollars. About 1916, W. G. Turner, who was president of the Memphis Terminal Association, was promoting a new corporation called the Safety-Light Co. Turner approached Otto Zahn, who was then the president of petitioner, with a view of selling Zahn some stock in the Safety-Light Co. Zahn, in order to retain the business of the Memphis Terminal Corporation for petitioner, *930 purchased in his individual capacity stock in the Safety-Light Co. at a cost of $500. The Safety-Light Co. never operated and its stock became worthless in the year 1918. During the period from 1916 to and through the year 1921, petitioner kept and maintained its books of account on an accrual basis. At either a directors' or stockholders' meeting held in 1921, either the directors or stockholders of petitioner unanimously decided to reimburse Zahn for the full amount of his loss*1789 in connection with his investment in the Safety-Light Co. In accordance with that decision, petitioner during 1921 paid Zahn $500 and deducted the amount paid from its gross income for the year 1921 as an ordinary and necessary business expense.
The respondent determined that the amount of $500 paid to Zahn was a gift to Zahn, and accordingly disallowed such payment as a deduction from gross income.
18. Petitioner duly filed its income and profits-tax returns for the calendar years 1918, 1919, 1920, and 1921, pursuant to the provisions of the Revenue Acts of 1918 and 1921, respectively.
The taxes originally assessed and paid are set forth in the following schedule:
| Year involved | Assessment | Amount of | Amount | Date paid |
| date | assessment | paid | ||
| 1918 | Feb. 10, 1920 | $28,372.63 | $8,000.00 | Mar. 13, 1919 |
| 6,186.32 | June 16, 1919 | |||
| 7,093.16 | Sept. 13, 1919 | |||
| 7,093.15 | Dec. 11, 1919 | |||
| 1918 | June 5, 1925 | 6,605.59 | ||
| 1919 | June 22, 1920 | 36,337.29 | 9,084.33 | Mar. 15, 1920 |
| 9,084.32 | June 9, 1920 | |||
| 9,084.32 | Sept. 14, 1920 | |||
| 9,083.32 | Dec. 15, 1920 | |||
| 1.00 | Jan. 20, 1921 | |||
| 1920 | May 12, 1921 | 47,122.01 | 11,780.51 | Mar. 15, 1921 |
| 11,780.50 | June 13, 1921 | |||
| 11,780.50 | Sept. 13, 1921 | |||
| 11,780.50 | Dec. 13, 1921 | |||
| 1921 | Dec. 18, 1922 | 24,489.47 | 6,122.37 | Mar. 14, 1922 |
| 6,122.37 | June 14, 1922 | |||
| 6,122.37 | Sept. 13, 1922 | |||
| 6,122.36 | Dec. 13, 1922 |
*1790 The returns for the calendar years 1919, 1920, and 1921 were filed on March 12, 1920, March 14, 1921, and March 14, 1922, respectively.
On January 26, 1925, both petitioner and respondent executed an agreement whereby "in pursuance of the provisions of existing internal revenue laws" petitioner and respondent "hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf" of petitioner for the year 1919. The agreement then provided:
* * * This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1925, and shall then expire except that if notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.
On September 23, 1925, a similar agreement was executed between the same*1791 parties except that the years involved were the "Calendar Years Begun January 1, 1919 and Ended Dec. 31, 1920," and the waiver was to remain in effect until December 31, 1926, instead of December 31, 1925. All the other provisions were the same.
On April 1, 1926, both petitioner and respondent entered into the following agreement:
In pursuance of the provisions of existing Internal Revenue Laws S. C.Toof & Company, taxpayer, of Memphis, Tennessee, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income and excess profits, or war profits taxes due under any returns made by or on behalf of said taxpayer for the year 1921 under existing revenue acts, or under prior revenue acts. This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a *931 notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended one hundred and twenty days, or (2) if an appeal is filed with said*1792 Board this waiver shall remain in effect until the expiration of sixty days after final decision by said Board.
Petitioner has filed with the respondent claims for refund as follows:
| Year | Date filed | Amount of |
| claim | ||
| 1918 | Feb. 29, 1924 | $16,121.83 |
| 1919 | do | 21,034.23 |
| 1920 | do | 27,236.61 |
| 1918 | Mar. 14, 1925 | $5,973.72 |
| 1919 | do | 8,265.49 |
| 1920 | do | 6,974.41 |
On January 30, 1926, the respondent mailed petitioner a deficiency letter for the years 1919 and 1920. On February 6, 1926, he mailed petitioner a deficiency letter for the year 1921. Petitioner duly appealed to this Board from both notices of deficiencies.
OPINION.
LOVE: The issues will be discussed in the order previously mentioned.
The first issue is whether the assessment made by the respondent on June 5, 1925, for the year 1918, in the amount of $6,605.59 was barred by the statute of limitations. Section 277(a)(2) of the Revenue Act of 1924, and section 277(a)(3) of the Revenue Act of *932 1926 provide that, except as provided in section 278, the amount of income and profits taxes imposed by the Revenue Act of 1918 "shall be assessed within 5 years after the return was filed. *1793 " Petitioner filed a tentative return on March 13, 1919, and a completed return on June 6, 1919. The statute commences to run from the date of filing the latter return. ; and . Sections 278(c) of both the Revenue Acts of 1924 and 1926 provide:
Where both the Commissioner and the taxpayer have consented in writing to the assessment of the tax after the time prescribed in section 277 for its assessment the tax may be assessed at any time prior to the expiration of the period agreed upon.
In its brief petitioner contends that "the record contains no evidence of a consent between the Commissioner and petitioner extending the time within which to make assessments." In its petition, however, petitioner alleges that:
On February 5, 1924, the taxpayer duly filed a waiver covering the calendar year 1918. Said waiver by its own limitations expired "one year after the expiration of the statutory period of limitation," to-wit, March 13, 1925.
In his answer to the petition, the respondent "denies that the taxpayer filed its return on March 13, 1919, but*1794 admits that on February 5, 1924, the taxpayer duly filed a waiver covering the calendar year 1918." It is apparent from the petition that at the time it was filed, petitioner was relying on the filing of the tentative return as being the time from which the statute began to run, which position has been overruled by the United States Supreme Court in the two cases cited above.
In its reply brief petitioner maintains that:
No evidence was introduced to show, nor is it stipulated, that the Commissioner or a duly authorized agent ever accepted said waiver. The burden is upon the Commissioner to prove an extension upon the limitation period and to prove the validity of the waiver.
We see no merit in the above contention. The petition alleges and the answer admits that the consent in question was "duly filed," and that it expired "one year after the expiration of the statutory period of limitation." The statutory period of limitation was "five years after the return was filed," or June 6, 1924. One year thereafter would be June 6, 1925. The assessment made the day before was, therefore, within the period provided by law.
*1795 The second issue is whether petitioner is entitled to deduct from its gross income for the years 1918, 1919, and 1920, the contributions to the various organizations listed in our findings. As a general proposition corporations are not entitled to deduct donations as *933 such. It is only when the so-called donation is in fact an "ordinary and necessary expense" of doing business that authority is found for allowing it as a deduction from gross income. See section 234(a)(1) of the Revenue Act of 1918, and , and cases cited therein. See also . The question of allowing corporations to deduct contributions was recently before the United States Circuit Court of Appeals for the Sixth Circuit in the case of . In the course of its opinion the court said:
* * * The question always is whether, balancing the outlay against the benefits to be reasonably expected, the business interest of the taxpayer will be advanced. * * *
We cannot accept the contention that to permit the petitioner to make this contribution*1796 would give to a corporation the right to make donations to charity which is given exclusively to individuals by Section 214(a) 11 of the Act of 1918. The contention entirely overlooks the distinction that the contribution was not a philanthropy, but was a business expenditure to be reflected in increased earnings. The right to make such expenditure is not confined to corporations but is also given to individuals. The individual has the additional right, under the statutes, to make gifts to charity that have no relation to business expenses. * * *
The evidence in the instant case, with the exception of the $100 contributed to the Citizens League in 1919, shows that the amounts expended were so directly related to petitioner's current business as to warrant their deduction from gross income as ordinary and necessary business expenses. The evidence pertaining to the Citizens League item is too indefinite to support the same conclusion reached with respect to the other items, and the respondent's determination as to that item is, therefore, approved.
The third and fourth issues will be discussed together. The disposition of both depends upon whether the respondent was justified*1797 in restoring to petitioner's opening and closing inventories for the years 1918, 1919, and 1920, the 10 per cent deduction made by petitioner to allow for the sales made during the time the inventory was being taken which lasted from 10 to 14 days from about December 20 of each year. At the outset, it is noted from the record that petitioner has treated these issues as if they also pertained to the year 1921. But the pleadings in Docket No. 14932 raise no such issues, and the question will, therefore, be limited to the years 1918, 1919, and 1920.
Section 203 of the Revenue Act of 1918 provides:
That whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with *934 the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.
Petitioner took its inventories upon the basis of cost or market, whichever was lower, which basis has always been recognized by the respondent as a proper basis. One*1798 of the purposes of the inventories was to show the amount of goods on hand as of December 31 of each year. It took from 10 to 14 days to complete the inventories and for that reason petitioner always commenced taking inventories about December 20. It, however, continued to make sales during the inventory period. The merchandise sold during this period was included by petitioner as a part of the inventory before making the 10 per cent deduction. It is, therefore, quite obvious that the inventories as determined by the respondent are erroneous, since they include all of the goods that were sold during the period the inventory was being taken. The 10 per cent deduction made by petitioner was made for the purpose of taking out of the inventory as of December 31 the goods sold between the period from about December 20 to December 31. We think that some such an adjustment may properly be made, and that it only remains to be determined whether the 10 per cent deducted by petitioner was reasonable under all the circumstances. We think it was. The evidence shows that the month of December was petitioner's busiest time; that the inventory turnover during a 10-day period in December was*1799 greater than 10 per cent; that the average cost of sales during a 10-day period in the month of December of each of the years 1918, 1919, and 1920 was greater in every instance than the amount of the 10 per cent deduction made by petitioner; and that this method of taking inventory has been consistently used by petitioner since prior to the year 1916.
In , we said:
The sole purpose of inventory valuation is to reflect income as clearly as possible. * * * However faulty the taxpayer's method was, we believe that greater weight should be given to consistency than to any particular method of inventorying or basis of valuation so long as the method or basis used substantially reflects the income. This rule has been given great weight both by the Commissioner and the Board. , and .
To the same effect see also ; *1800 ; ; ; and .
The consistent practice must reflect income as clearly as possible. Otherwise, little weight can be given to consistency. .
*935 In the instant case it might be said that both parties are consistent in the method contended for by each, in that petitioner contends it was justified in reducing the inventory, as taken, by the 10 per cent in question, and respondent contends he was justified in restoring the percentage deducted by petitioner. The problem narrows down to a determination of which of the two inventories more clearly reflects petitioner's income. The trouble with the inventories as used by the respondent is that such inventories include all of the goods that were sold during the periods of taking inventory, or in other words, that the inventories as used by him were inventories of goods on hand on December 20 of each year instead of December 31. *1801 Petitioner reported its income on the calendar year basis and the inventories to be used in arriving at such income should be those of goods on hand on December 31 of each year. The petitioner has attempted to ascertain what the latter inventories were and we think the result obtained is as nearly correct as could be had under the circumstances and more clearly reflects petitioner's income. We hold, therefore, that the respondent erred in restoring the 10 per cent deduction made by the petitioner. Similar results have been reached in ; ; ; and .
It follows that the net income as determined by the respondent for the years 1918, 1919, and 1920 should be reduced by the amounts of $2,743.37, $1,306.15, and $1,113.81, respectively; and that the invested capital as determined by him for the same years should be reduced by the respective amounts of $7,677.55, $10,420.92, and $11,727.07.
The fifth issue is the same as the one involved in *1802 , and was conceded by the respondent at the hearing. Petitioner's invested capital as determined by the respondent should, therefore, be increased by the amount of $705.48.
With respect to the sixth issue, petitioner contends, first, that the respondent erred in principle, in that he should not have reduced invested capital at all on account of taxes for prior years, and, second, if the reduction should have been made, the amounts used by the respondent were erroneous. Petitioner's first contention relative to this issue is denied. .
The seventh issue is whether the respondent erred in disallowing a portion of the depreciation claimed by petitioner for the years 1918 to 1921, inclusive. For the years 1918, 1919, and 1920 the respondent computed the depreciation on total cost of $76,767.03, $89,086.53, and $104,412.51, respectively, and at rates on different assets of 5, 10, 15, and 25 per cent. He now concedes that he should have used a composite *936 rate on all assets of 10 per cent, and the parties have stipulated that the cost of the assets is as set forth*1803 in the findings of fact. The amount of depreciation for the years 1918, 1919, and 1920 should be recomputed in accordance with the present agreement of the parties. For the year 1921 we do not know upon what basis the respondent computed the allowance of $11,470.75. Neither do we know the rate used by him in his determination for this year. In a statement attached to the deficiency letter the respondent says, "Excessive depreciation is in accordance with the revenue agent's report." The report is not before us. Since the parties have stipulated that a composite rate of 10 per cent should be used for all the years 1918 to 1921, inclusive, the respondent should apply this rate, if he has used a different one, to whatever basis was used by him in his deficiency letter. The petitioner contends that, in computing the depreciation for the year 1921, the composite rate of 10 per cent should be applied to the cost of the assets set out in our findings. A large portion of petitioner's assets were acquired prior to March 1, 1913. Section 234(a)(7) of the Revenue Act of 1921 provides in part that: "In the case of such property acquired before March 1, 1913, this deduction shall be*1804 computed upon the basis of its fair market price or value as of March 1, 1913." No evidence was offered as to the fair market price or value of the property in question as of March 1, 1913, and in the absence of such evidence the basis used by the respondent must stand.
The eighth and thirteenth issues will be discussed together. Their solution depends upon the single question of whether petitioner charged off excessive depreciation in years prior to 1914 and in years prior to 1918. The parties have stipulated that prior to the year 1914, petitioner charged off depreciation in the amount of $99,468.62, and prior to the year 1918, petitioner charged off depreciation in the amount of $133,234.05. The parties have also stipulated that the respondent determined that petitioner charged off excessive depreciation as follows:
| Prior to the year | Amount |
| 1911 | $214.78 |
| 1912 | 4,021.89 |
| 1913 | 8,139.34 |
| 1914 | $10,094.07 |
| 1918 | 1,279.83 |
| 1919 | 4,346.13 |
| 1920 | $7,711.98 |
| 1921 | None. |
The parties have also stipulated that the proper annual rate for depreciation of all of petitioner's assets during the years 1918 to 1921, inclusive, is a composite rate of 10 per cent.
Petitioner, *1805 in attempting to show that it charged off too much depreciation in years prior to 1918, offered the testimony of four witnesses for the purpose of showing that a proper composite rate *937 for depreciation for the years 1900 to 1913, inclusive, was 2 1/2 per cent, and that a proper composite rate for depreciation for the years 1914 to 1917, inclusive, was 5 per cent. The first witness, J. R. Curtis, was a certified public accountant. He was employed by petitioner as office manager and auditor from January 1, 1913, to January 1, 1919, at which time he became treasurer of petitioner and retained that office until he resigned in May, 1922. He testified that he was familiar with petitioner's assets from 1913, to a certain extent; that "as far as the operation of the machines was concerned, a great many pieces of machinery would last a great many years, but new improvements were coming out and would make them obsolete, and consequently the depreciation would be greater than if the new machines had not come out"; that "some of the machines would have a life of 25 or 30 years, but new improvements made them obsolete"; that "taking into consideration the conditions that existed during*1806 the War period, the wear on the machinery was greater than it was before that, for the reason that the plant was working overtime a good deal, and the help we had was inefficient as compared to our regular help"; and that in his opinion, if 10 per cent were a proper rate for the years 1918 to 1921, inclusive, 5 per cent would be a proper rate for the years 1914 to 1917, inclusive.
The second witness, L. R. Zeimer, was an appraiser with 29 years of experience in appraising manufacturing plants. During this period he had appraised between 250 and 300 plants similar to petitioner's. He testified that he was familiar with the machinery used by petitioner and plants similar to petitioner's for about 12 years prior to 1913, and that in his opinion, the fair composite annual rate of depreciation of petitioner's assets for the years 1900 to 1913, inclusive, was about 2 1/2 per cent, and for the years 1914 to 1917, inclusive, was about 5 per cent, and for the years 1918 to 1921, inclusive, was about 10 per cent. His reasons for having such an opinion were that prior to 1914, a great deal of the machinery was hand and foot power, which, on account of its slow movement did not wear out*1807 so fast; that, beginning about 1913 or 1914, automatic feed attachments came in which accelerated the speed of the machines and wore them out much faster than formerly; and that, beginning about 1918, the machines were run overtime, and with inefficient help.
The third witness, W. H. Carr, was petitioner's factory superintendent, who has been with petitioner since its incorporation in 1889. He testified to a rate of 3 per cent for the period prior to 1914, and 5 per cent for the years 1914 to 1917, inclusive. Upon cross-examination, when asked how he arrived at those percentages, he said: "Well, I am basing it on 10 per cent, the correct percentage *938 at this time, just to take the 10 per cent as a basis to get the basis for the other."
The fourth witness, J. K. Neel, was petitioner's foreman of its pressroom. He has been with petitioner since September, 1918, and also during the period from 1911 to 1913. He testified that he "understood" depreciation had always been figured at 2 1/2 per cent or 3 per cent prior to March 1, 1913, and that from 1913 to 1918 "it is generally understood it is about 5 per cent for that period of time." Neel was asked upon cross-examination*1808 to tell in detail how he arrived at the percentages mentioned in his direct testimony, and his answer was: "Well, it is not customary for me to do that figuring, but it is generally understood that a machine has so much life-time, and it has to be taken care of some way, and it is generally understood around a printing plant that the depreciation is so much."
Petitioner is contending that the depreciation which it wrote off its books during the years 1900 to 1917, inclusive, was excessive. It has not explained how it arrived at the amounts written off or the circumstances which caused it to write off the depreciation in question. It asks us, however, to find that the amounts so written off were erroneous. The only evidence offered in support of such a contention is the testimony of the four witnesses outlined above. With all due regard to the sincerity of the testimony of these witnesses, we do not think that such evidence, standing alone, is sufficient to overcome the burden which was upon petitioner to prove that the practical judgment exercised by its officers 12 to 28 years ago was inferior to the more or less theoretical judgment of the witnesses who testified at the recent*1809 hearing of this case. In fact, the testimony of some of the witnesses even strengthened the action taken by petitioner's officers during the years 1902 to 1917, inclusive, in that the testimony showed that the old machines were becoming obsolete and had to be replaced by more modern machinery, and it is not unreasonable, under such circumstances, to believe that petitioner's officers made allowance for this fact in arriving at the amounts written off by them. Furthermore, it is quite significant to note from the following schedule that the additions made by petitioner to its equipment account were substantially the same as the amounts written off, which would indicate that petitioner was maintaining its plant at a certain standard throughout. The schedule showing the additions and amounts written off over the three periods for which petitioner is now contending that three different rates for depreciation should apply, is as follows:
| Period | Additions | Depreciation |
| written off | ||
| 1900 to 1913 | $105,451.89 | $99,468.62 |
| 1914 to 1917 | 25,148.46 | 33,765.43 |
| 1918 to 1921 | 49,608.08 | 51,414.24 |
| Total | 180,208.43 | 184,648.29 |
*939 We are, therefore, of opinion*1810 that respondent's determination in connection with the eighth and thirteenth issues should be approved.
The ninth and tenth issues will be treated together. The question is whether respondent erred in refusing to permit petitioner to restore to its capital account an amount of $6,579.55 which it expended in 1913 for a new building. The building was erected on premises leased until August 31, 1923, the petitioner being the lessee. Petitioner charged this item to expense in 1913, but now contends that it erred in so doing. We think the item in question was a capital expenditure, and that the respondent erred in not permitting petitioner to so treat it. Exhaustion should be computed in accordance with the stipulated composite rate.
With respect to the eleventh issue, the respondent conceded at the hearing that the invested capital as determined by him for the years 1918 to 1921, inclusive, should be increased by the amount of $3,945.97.
The twelfth issue was raised by petitioner for the first time at the hearing in the form of amendments to the petitions, alleging that respondent had erred in not reducing the income of petitioner for the calendar years 1918, 1919, and 1920*1811 "by the loss sustained due to the obsoleteness of standing type and forms." Counsel for the respondent objected very strenuously to the granting of petitioner's motion to amend its petition in this respect, on account of being taken entirely by surprise and having had no opportunity to prepare to meet such an issue. The respondent's objection was sustained with this reservation, that petitioner be given permission to introduce all of its evidence relative to its contention that it sustained losses as alleged, and, if in the discretion of the Board, the former ruling should be vacated, it would be done. But this will not be necessary for the reason that even if the respondent's objection were overruled and petitioner be given permission to amend its petition in this respect, the evidence is entirely insufficient to allow the alleged losses as claimed. In the first place, the evidence is very much confused as to whether the alleged loss was sustained in 1917 or 1918. The only years before us are the years 1918 to 1921, inclusive, and if the loss were sustained in 1917, it would not constitute a deduction in the latter years. In the second place, there is no evidence as to the cost*1812 of *940 the assets in question, and without evidence as to cost, no deduction for a loss is warranted. See ; and .
The fourteenth issue was reserved for further hearing under Rule 62 of our rules of practice.
The question involved in the fifteenth issue is whether petitioner is entitled to deduct from its gross income for the years 1919, 1920, and 1921 the dividends which were credited to the stock purchase accounts of certain of petitioner's employees in the amounts of $2,490, $3,136, and $4,464, respectively. Petitioner contends that until the stock in question was fully paid for by the employees, the latter were not stockholders and the so-called dividends were, therefore, not dividends, but amounts paid as additional compensation.
In , a corporation taxpayer reissued certain shares of its treasury stock to certain of its employees, charged the book value of such shares to the personal accounts of the recipients, and credited against such accounts the amounts of dividends declared on such*1813 stock. In that case we denied the corporation's contentions that the amounts so credited constituted additional compensation, rather than dividends. To the same effect see .
We believe that, from a reading of the contracts in the instant case, the unescapable conclusion to be reached is that the employees or parties of the second part became stockholders of petitioner from the date the respective contracts were entered into, and that the amounts in question which were credited to the stock purchase accounts of such employees were dividends within the meaning of that term as defined in section 201(a) of the Revenue Act of 1918. The respondent's determination with respect to this issue is approved.
The seventeenth issue is whether the respondent erred in disallowing as a deduction from gross income the $500 paid by petitioner in 1921 to its president for the purpose of reimbursing the latter for a loss which the latter sustained in a personal investment. It appears that about the year 1916, petitioner's president purchased some stock in the Safety-Light Co. at a total cost of $500, which stock became worthless during*1814 the year 1918. It also appears that Zahn's motive in purchasing the stock was to retain certain business which petitioner was then enjoying from the Memphis Terminal Corporation, whose president was then promoting the Safety-Light Co., and had called upon Zahn to purchase stock in the new corporation. The evidence does not show that Zahn purchased the stock in question for anyone's account but his own, or that petitioner had anything whatever to do with the transaction until the year 1921, at which time either its directors or stockholders discussed the matter and decided *941 to reimburse Zahn for his loss, which petitioner did in 1921. The question is whether the amount paid Zahn in 1921 by petitioner was an "ordinary and necessary" business expense within the provisions of section 234(a)(1) of the Revenue Act of 1921. We think it was not. The stock was not purchased for petitioner, but was purchased for and by Zahn in his individual capacity. The loss resulting therefrom was Zahn's loss, and not petitioner's. The fact that petitioner later decided to reimburse Zahn for his loss was a pure grantuity on the part of petitioner which it was under no obligation to make. *1815 The respondent's determination on this issue is approved.
The eighteenth issue is whether petitioner has made overpayments of taxes in respect of the taxable years 1918, 1919, and 1920. Decision relative thereto will be reserved until after the parties have submitted their computations in accordance with Rule 50.
Reviewed by the Board.
Further proceeding will be conducted under Rule 62(a) and (b).
STERNHAGEN did not participate in the consideration of this report.
MURDOCK, dissenting: I dissent from that part of the opinion which under the third and fourth issues approves the inventory method used by the petitioner. This method was inadequate and inaccurate, and so far as we know there was no justification or excuse for its use. It is not in accordance with the best accounting principles and it is not authorized by the Commissioner's regulations or the revenue acts. Consequently, the petitioner should have no relief from such adjustments as were here made until it changes its method of taking inventory. Otherwise, I concur in the result reached in the prevailing opinion.