*2505 1. On the evidence respondent's determination of the original cost of property sold by the petitioner in 1923 approved.
2. Amount expended by the petitioner for extensions and additions to property determined.
3. From 1914 through 1923, the petitioner took in its returns for the respective years depreciation deductions totaling $5,050. The petitioner's net income for some of the years was so small as to render the petitioner not subject to tax. Held, in determining profit or loss from the sale of the property upon which depreciation was taken no reduction should be made in the amount of depreciation on account of the fact that for some years the petitioner did not have sufficient income after proper allowances and deductions to require the payment of tax.
*1207 This proceeding is for the redetermination of a deficiency in income tax of $500.30 for 1923, and which has already been assessed. The deficiency results in part from the respondent's action in increasing by $4,000 the profit of $4,000 reported by the petitioner in its return*2506 as having been realized from the sale of its electric light plant and lines which were constructed in 1912 and subsequent years. In an amended answer, the respondent alleged that he erred in not increasing the profit from the sale of the property by an additional amount of $5,050 representing the amount of depreciation deducted by the petitioner in its returns for the years 1914 through 1923 on account of depreciation sustained on the property.
FINDINGS OF FACT.
The petitioner, a North Carolina corporation, was organized in March, 1912, and has its principal office at Franklinton. About the *1208 time of incorporation the petitioner acquired at a value of $4,000 a plant for the manufacture of lumber for which it paid $1,500 in cash and $2,500 par value of its capital stock of $8,000.
During 1912 the petitioner constructed an electric light plant which contained a dynamo and other generating equipment. Contracts were obtained for lighting residences and the streets of the town. After testing out the equipment and remedying defects in connections and elsewhere, the petitioner began uninterrupted service to its customers about September 1, 1912. The surplus shavings*2507 and trimmings from the petitioner's lumber plant served as fuel for generating power for the electric light plant at night. Up to the time uninterrupted service began the petitioner had expended for the electric light plant, including lines and distributing equipment, the amount of $5,000 which it had borrowed from one of its stockholders, and certain money received from the sale of its capital stock.
After operating for a little more than a year the petitioner in 1913 sold the lumber-manufacturing plant and certain steam equipment used in connection with its electric light plant. The sale price was $3,000. The petitioner also sold its generating equipment. It discontinued the generation of electricity and thereafter obtained its current from a company which had a hydro-electric line nearby. In making the change to the new method of obtaining electric current the petitioner bought certain transforming equipment and built a substation.
With the exception of the payment of dividends of $800 a year beginning in 1917 and continuing through 1922, a portion of the profits from 1912 to 1923 were retained in the business. A portion of the profits of some years was used in other*2508 years for operating expenses. One thousand dollars of the profits was used to purchase additional poles, wires, transformers and other necessary appliances for extending the petitioner's lines into the surrounding territory. When the petitioner began the operation of its electric light plant in 1912 it had about 57 customers and by 1923 the number had increased to 263.
The net income shown by the petitioner's returns for the years 1912 through 1922 was as follows:
| 1912 | $735.64 |
| 1913 | (loss) 852.50 |
| 1914 | 1,124.93 |
| 1915 | 599.37 |
| 1916 | 1,053.30 |
| 1917 | 1,161.61 |
| 1918 | $829.03 |
| 1919 | 1,630.00 |
| 1920 | 1,798.88 |
| 1921 | 992.08 |
| 1922 | 1,147.29 |
*1209 The petitioner's interest-bearing indebtedness of $5,000 at December 31, 1912, was entirely eliminated between that date and December 31, 1915.
In its returns for 1914 through 1923 the petitioner deducted and was allowed depreciation in the total amount of $5,050.
In 1923 the petitioner sold its electric light plant, including its distribution system, for $17,500. The expenses incident to the sale amounted to $500. In its income-tax return for 1923 the petitioner reported a profit from the transaction of $4,000*2509 which it computed as follows:
| Amount received | $17,500 |
| Expenses of sale | 500 |
| 17,000 | |
| Value March 1, 1913 | 13,000 |
| Net profit | 4,000 |
In determining the deficiency here involved, the respondent increased the amount of profit reported in the return by $4,000. He computed the profit on the transaction in the following manner:
| Cost of plant January 1, 1913, according to minute book, p. 35 | $13,000 |
| Cost of lumber department sold in June, 1913 | 4,000 |
| Value of plant sold in 1923 | 9,000 |
| Sale price | 17,500 |
| Gross profit | 8,500 |
| Less: Commission paid | 500 |
| Net profit from sale of assets | 8,000 |
| Net profit reported | 4,000 |
| Increase in profit | 4,000 |
In computing the amount of profit from the sale neither the petitioner nor the respondent took into consideration the amount of depreciation deducted and allowed on the property in the return for 1923 or prior years, nor did the respondent take into consideration any expenditures made for additions or extensions to the property. Before the hearing the respondent amended his answer to increase the deficiency asserted due to his failure to take into consideration the amount of the depreciation allowable in*2510 determining the profit on the sale.
OPINION.
TRAMMELL: In this proceeding we are called upon to determine the amount of the profit or loss resulting from the sale by the petitioner *1210 of its electric light plant and transmission equipment. The amount received for the property in 1923 and the amount of allowable depreciation taken by the petitioner in its returns are not in controversy. While counsel for the petitioner stated at the hearing that there was no question as to what the property cost in 1912, his brief does not indicate that he has acquiesced in the cost. Both parties, however, have accepted the cost of the property in 1912 as being the March 1, 1913, value thereof.
The petitioner's secretary and treasurer, who was also the general manager of operations, testified that in 1912 the petitioner put into the electric light plant "$8,000 of capital," money raised from the sale of $8,000 par value of capital stock and $5,000 borrowed from a stockholder. Only $8,000 par value of capital stock was ever issued. Other testimony of the witness shows that the petitioner acquired the lumber plant at a cost of $4,000, of which $1,500 was paid in cash and the remainder*2511 was paid by the issuance of $2,500 par value of the petitioner's capital stock. As the lumber-manufacturing plant was acquired about the time of organization, and as there is nothing in the record to show that the petitioner had a paid-in surplus, it would appear that the $1,500 represented money obtained from the sale of capital stock.
The petitioner was just beginning business in 1912 and had to have working capital or money to defray operating expenses. The return for 1912 shows expenses, losses, interest and taxes totaling $3,024.36. Whether all or any portion of this amount was paid from the proceeds obtained from the sale of capital stock the record does not show. We think the $5,000 of borrowed money and a portion of the proceeds from the sale of the capital stock was expended in the construction of the electric light plant, but in view of the state of the record we are unable to determine what amount from the sale of capital stock was expended for such purpose. Inasmuch as the respondent determined a cost or a March 1, 1913, value, considering them the same, of $9,000 in computing the profit on the sale of the property, we are unable to find anything in the record to*2512 warrant an increase in said amount over that found by the respondent. His determination in this respect is accordingly approved.
The petitioner contends that the total amount of net income shown on its returns from 1912 to 1922 less the dividends paid during the years 1917 through 1922 was expended in extensions or additions to its lines. The total net income shown for the period 1912 through 1922 was $11,072.13. The return for 1913 shows a loss of $852.50. Reducing the $11,072.13 by $852.50 leaves the amount of $10,219.63 as the net income for the 11-year period. Dividends of $800 a year for six years amount to $4,800. Deducting this amount from the *1211 $10,219.63 leaves a remainder of $5,419.63, which, if the petitioner's contention is correct, was expended for additions or extensions to its electric light property. We have found from the evidence that some of the profits of previous years were used for operating expenses in other years and part of them were used to purchase additional equipment for the extension of the petitioner's lines into the surrounding territory. The testimony respecting the expenditures for additions and extensions is indefinite and uncertain. *2513 While it indicates that a part of the profits was used for extensions and additions, there was no testimony as to any definite amount being expended for such purposes. We are unable to find that more than $1,000 was so used.
The petitioner's returns from 1914 through 1923 show that the petitioner took as deductions for the respective years depreciation totaling $5,050. These were allowed by the respondent. At the hearing counsel for the petitioner admitted that there was no question as to the depreciation. However, in his brief he states the amount was $3,550 and contends that in determining the profit or loss on the sale of the property that amount should be reduced by $2,150 representing the total amount of depreciation taken by the petitioner in its returns for the years 1915, 1919, 1921, and 1922, when it did not have sufficient income to be subject to tax.
The evidence is clear that the petitioner's allowable deductions for depreciation amounted to $5,050. We think the contention that in determining the profit from the sale of the property the total depreciation taken should be reduced by the amount taken on the returns for the years when the petitioner did not have*2514 sufficient income to be subject to tax must be denied. ; affd., ; certiorari denied, . See also ; . The total amount of the depreciation should therefore be taken into consideration in computing the profit or loss from the sale.
From the evidence in the case, we think the petitioner realized from the sale of its property in 1923 a net profit of $12,050, which is computed as follows:
| March 1, 1913, value of property acquired in 1912 which value is not less than cost | $9,000 | |
| Additions and extensions | 1,000 | |
| Total | 10,000 | |
| Depreciation 1914 through 1923 | 5,050 | |
| Depreciated cost of property | 4,950 | |
| Selling price in 1923 | 17,500 | |
| Less: | ||
| Expenses of sale | $500 | |
| Depreciated cost of property | 4,950 | |
| 5,450 | ||
| 12,050 |
*1212 Judgment will be entered under Rule 50.