*3074 1. The amount of allowable deduction for depreciation during the taxable years of a factory building, machinery and equipment determined.
2. Where a corporation received from its former principal stockholder an amount sufficient to reimburse it for income taxes of a previous year paid in the taxable year and the amount of such payment was not deducted as an expense on the return, the Commissioner was in error in adding such amount to reported net income.
*1296 This is a proceeding for the redetermination of deficiencies in income and profits taxes for the calendar year 1920 in the amount of $620.22 and in income tax for the calendar year 1921 in the amount to $91.74. It is alleged that the Commissioner erred in the following particulars:
(1) In disallowing a deduction for depreciation for the year 1920 in the amount of $1,151.26.
(2) In disallowing as an expense for the year 1920 an amount of $594 alleged by the petitioner to have been paid for services and determined by the Commissioner to have been paid for stock.
*3075 (3) In adding to income for the year 1921 an amount of $1,512.19, representing income tax for the year 1918 paid in 1921, and in disallowing *1297 a deduction for depreciation for the year 1921 in the amount of $621.31.
Other allegations of error contained in the petitioner were abandoned at the hearing.
FINDINGS OF FACT.
The petitioner is a Pennsylvania corporation with its principal office at Elkland. During the years 1920 and 1921 and for some years prior thereto it operated a general wood-working plant, manufacturing hardwood flooring, flagpoles and numerous other wooden articles. In 1913 it purchased some land and certain frame factory buildings for use in its business. These buildings had been constructed to be used in the manufacture of toy furniture and had been so used for some time. Subsequent to this use they were sold at sheriff's sale and had been unoccupied between the time of this sale and the date of the purchase by the petitioner. During the taxable years the petitioner's operations were conducted in one building known as the factory building. This was of frame construction having a foundation of wooden sills resting upon flat stones laid on*3076 top of the ground and having a composition tar roof. No steel or concrete was used in its construction.
The petitioner replaced the machinery contained in the factory building at the time of its purchase by heavier and more numerous machines. The new machinery was babbitt high-speed machinery running from 3,500 to 5,000 revolutions per minute, and occupied all three floors of the building. The more numerous and heavier machines so installed operated with more vibration than the former ones and caused the building to sag. The heavy loads carried into the building were an increased strain on the floors which had to be replaced every three years. It was also necessary to replace the roof within the same periods of time. A sprinkler system and a heating system in use in the building had been installed by the previous owners and after the petitioner acquired the building both systems needed frequent repairs due to the effects of cold weather.
The machinery used in manufacturing was replaced at various times as it became worn out, and at the time of the destruction of the building by fire in 1926 all of the machinery then being used had been installed since the acquisition of*3077 the building as replacements for worn-out machinery. It was the custom of the petitioner to add to acpital the cost of all replacements and not to deduct such cost as expense.
In addition to the machinery and sprinkling and heating systems, a lighting system, a natural gas system, a water system, and other additional equipment were used in the factory.
*1298 In its return for the year 1920 the petitioner deducted for depreciation upon its building, machinery, and other equipment, the amount of $3,766.77, and in its return for the year 1921 deducted for the same purposes the amount of $3,317.96, schedule A-18 contained in the return for the latter year being as follows:
| SCHEDULE A-18. - Depreciation - Buildings and equipment | ||||||
| Item | Cost | Acquired | Life | Previous year | Deducted 1921 | Remainder |
| Frame factory | $20,000.00 | 1914 | 20 years | $3,000.00 | $1,000.00 | $16,000.00 |
| Land | 4,000.00 | 1914 | 20 years | 4,000.00 | ||
| Sprinkler system | 2,308.60 | 1914 | 10 years | 692.58 | 230.86 | 1,385.16 |
| Blowers | 1,333.75 | 1914 | 10 years | 400.13 | 133.38 | 800.24 |
| Heating apparatus | 992.74 | 1914 | 10 years | 297.81 | 99.27 | 595.66 |
| Lighting equipment | 630.50 | 1914 | 10 years | 189.15 | 63.05 | 378.30 |
| Gas equipment | 242.50 | 1914 | 10 years | 72.75 | 24.25 | 145.50 |
| Water equipment | 48.50 | 1914 | 10 years | 14.55 | 4.85 | 29.10 |
| Machinery | 11,204.45 | 12-31-20 | 10 years | 1,120.45 | 10,084.00 | |
| Sawmill | 721.27 | 1914 | 10 years | 216.47 | 72.13 | 432.67 |
| Shafting | 481.70 | 1914 | 10 years | 144.51 | 48.17 | 289.02 |
| Equipment | 5,215.48 | 12-31-20 | 10 years | 521.55 | 4,693.87 | |
| Totals | 47,179.49 | 5,027.95 | 3,317.96 | 38,833.28 | ||
| Machinery added in 1921 | 400.00 | |||||
| 12-21-21 land, factory, machinery, and equipment | 39,233.28 | |||||
| Total depreciation deducted in 1921 | 3,317.96 |
*3078 The Commissioner determined that the allowable deductions for depreciation were for 1920, $2,615.51, and for 1921, $2,696.65, computed as follows:
| Gross value | Depreciation deductible | ||||
| January 1, 1920 | January 1, 1921 | January 1, 1922 | 1920 | 1921 | |
| Land | $4,000.00 | $4,000.00 | $4,000.00 | ||
| Buildings | 20,000.00 | 20,000.00 | 20,000.00 | $600.00 | $600.00 |
| Sprinkler system | 2,308.60 | 2,308.60 | 2,308.60 | 115.43 | 115.43 |
| Blowers | 1,436.75 | 1,436.75 | 1,436.75 | 71.84 | 71.84 |
| Heating system | 992.74 | 992.74 | 992.74 | 49.64 | 49.64 |
| Lighting system | 630.50 | 630.50 | 630.50 | 63.05 | 63.05 |
| Natural gas system | 242.50 | 242.50 | 242.50 | 12.13 | 12.13 |
| Water system | 48.50 | 48.50 | 48.50 | 2.43 | 2.43 |
| Stationery sawmill | 721.59 | 721.59 | 721.59 | 36.08 | 36.08 |
| Shafting | 481.70 | 481.70 | 481.70 | 24.09 | 24.09 |
| Tent stake machines | 1,530.91 | 1,530.91 | 1,530.91 | 76.55 | 76.55 |
| Machinery | 14,455.22 | 14,455.22 | 14,855.22 | 1,084.15 | 1,099.15 |
| Hangers | 202.07 | 202.07 | 202.07 | 10.10 | 10.10 |
| Pulleys | 924.21 | 924.21 | 924.21 | 46.21 | 46.21 |
| Belting | 1,899.17 | 1,899.17 | 1,899.17 | 189.91 | 189.91 |
| Equipment | 2,236.95 | 3,867.15 | 3,867.15 | 233.90 | 300.04 |
| Total | 2,615.51 | 2,696.65 |
The Commissioner*3079 added to income for the year 1920 the amount of $594, stating in his deficiency letter that this amount represented stock purchased and that it should be restored to net income.
On February 19, 1921, the petitioner received from O. H. Braman, a check in the amount of $1,512.19, which was deposited to the petitioner's *1299 credit. Braman had formerly owned the petitioner company and paid this amount to the petitioner in order to reimburse it for 1918 income tax paid by the petitioner in 1921. The amount of the tax so paid was not deducted by the petitioner as an expense in its return for that year.
OPINION.
MURDOCK: The petitioner has alleged that the Commissioner erred in adding to income for 1920 the amount of $1,151.26 and for 1921 the amount of $621.31, determined by the latter to be excessive depreciation deducted in the returns for those years. It has offered in evidence the computation of depreciation made by the examining revenue agent, which it was admitted was adopted by the Commissioner in his determination. This computation we have set forth in our findings of fact. It has also offered in evidence its return for 1921 but has neglected to offer the 1920*3080 return and we do not know the amounts upon which it calculated depreciation for 1920, nor the rates it applied to the different items. We are of the opinion, however, that a proper rate of depreciation upon the factory building for each of the two years in question should be 5 per cent, and that this rate should be applied upon the amount of $20,000 which is designated as "gross value" in the revenue agent's report and "cost" in the petitioner's return.
However, we are of the opinion that the Commissioner's determination as to the allowable depreciation on the machinery and other equipment should not be disturbed. As we have pointed out above, the 1920 return is not before us and we do not know what items are contained therein, nor what were the amounts of depreciation allocated to the various kinds of machinery and equipment. An examination of the petitioner's return for 1921 shows that the values it has therein assigned to its machinery and equipment do not agree with those contained in the Commissioner's determination, and we can not find from a comparison of the two what would be a proper basis upon which the rate or rates should be applied. Certain of the articles such*3081 as pulleys and hangers, set forth in the Commissioner's computation, are not itemized or identified in the return and the petitioner has offered no testimony as to certain other items contained in the computation. In the opinion of the petitioner's one witness a depreciation rate of 10 per cent should be applied to all of the items under machinery, equipment, sprinkler system, etc., and he stated that in his opinion the useful life of none of these things would exceed 10 years. However, his testimony discloses that certain of the items such as sprinkler system, heating system and water system were in existence and being used in 1926, the year in which the building was destroyed by fire, more than 10 years after these *1300 systems had been installed. This the witness admitted, but stated that if the systems had not been repaired they would not have lasted 10 years. The fact that parts of these systems had to be replaced or repaired from time to time due to the action of the weather does not warrant us in finding that their life should be reduced to a period of 10 years.
It seems apparent that as to these systems the witness has based his idea of exhaustion on an erroneous*3082 understanding of the nature of an allowable deduction of this kind, and it may be that as to the remaining items his opinion has been based upon the same erroneous understanding.
The Commissioner has presumably made an intelligent and careful examination of all these items in his computation of depreciation, and we do not think that in the light of the above facts the petitioner by its testimony as to a blanket rate of 10 per cent has made out a case sufficiently strong to overcome the Commissioner's determination. Cf. .
In the absence of competent evidence from the petitioner concerning the second assignment of error, the determination of the Commissioner in this respect must be approved.
We are unable to determine from the pleadings what the Commissioner's position is in regard to the amount of $1,512.19 received by the petitioner from O. H. Braman, to reimburse it for 1918 income taxes which it paid in 1921. The Commissioner in his deficiency letter in regard to this particular item stated that "Income Tax has been disallowed as an expense in accordance with Article 561, Regulations 62." From an examination of the*3083 petitioner's return for 1921 and the revenue agent's report which was adopted by the Commissioner, we are satisfied that the petitioner has never deducted this amount from income. We, therefore, find that the Commissioner was in error in his determination in this respect.
Judgment will be entered under Rule 50.