[668]*668OPINION.
MaRquette:
The first issue concerns the Commissioner’s action in twice adding to the net income for the year 1917 the net increase for that year of $958.53 in the reserve for past due and doubtful accounts. The manner in which this net increase in the reserve was made is set out in the findings of fact and need not be repeated here. The revenue agent, in computing taxable net income, used book net income as a starting point and added thereto the sum of $958.53, the amount by which the increase in the reserve which had been taken as a deduction exceeded the total debts ascertained to be worthless and charged off during the year, less total collections on accounts previously charged off as worthless. The Commissioner in computing net income in the deficiency letter, used the net income as computed by the revenue agent as the starting point and again added thereto the net increase in the reserve of $958.53. The Commissioner’s action resulted in a duplicate adjustment of income in respect of the same item and was,, therefore, erroneous. The net income determined by the Commissioner in the deficiency letter should be reduced by the amount of $958.53.
During all of the years involved in the appeal, the petitioner capitalized the cost of labor, materials,’ and overhead used in assembling cabinets and filters and in the installation thereof in customers’ premises, by charging such cost on its books to cabinet and filter property accounts. The Commissioner held that only the cost of the materials (cabinet and filter parts) used in assembling and installation should be capitalized and that the cost of labor and overhead should be deducted as expense. In accordance with this ruling the [669]*669Commissioner reduced the income of the years 1917 and 1918 by the amounts expended in those years for labor and overhead used in assembling and installation. The petitioner, while agreeing with the Commissioner as to the proper accounting treatment of the costs of assembling and installation, complains that the Commissioner has not uniformly applied the same rule in all years, in that he failed to allow as deductions from income of the years 1919, 1920, and 1921, the costs of labor and overhead incurred in those years in assembling and installation. We think the point which the petitioner raises is well taken. If the costs of labor and overhead incurred in assembling and installation are to be treated as deductible expenses, as the parties agree they should be, which,.all circumstances considered, we think is in accord with sound accounting principles, they should be uniformly so treated for all years. For the years 1919, 1920, and 1921, the costs of labor and overhead incurred in assembling and installation were $20,109.68, $23,525.17, and $33,385.55, respectively. The Commissioner reduced the income of the years 1920 and 1921 by the amounts of $10,217.40 and $41,353.78, respectively, which he determined to be the amounts capitalized on the books of account by charges to cabinet and filter property accounts in excess of the actual cost of the materials used in making installations in those years. Thus it appears that the Commissioner has allowed a deduction for a part of the cost of labor and overhead incurred in 1920, and for the year 1921 has allowed a deduction for labor and overhead in excess of the actual cost of labor and overhead incurred in that year. The net income determined by the Commissioner for the years 1919 and 1920 should be reduced by the amounts of $20,109.68, and $13,307.77, respectively, and the net income determined by the Commissioner for the year 1921 should be increased by the amount of $7,968.23.
The third issue concerns the Commissioner’s action in adding to the income of the years 1917 and 1918 the amounts of $22,424.50 and $29,108.16, respectively, which he held the petitioner had deducted from income as losses sustained through removals of cabinets and filters from customers’ premises. The accounting procedure adopted by the petitioner in maintaining the books of account, as it related to removals of cabinets and filters, is set out in detail in the findings of fact. When cabinets and filters were removed from customers’ premises, the cabinet and filter property accounts were credited with the original costs of installation. One-half of the credits so made to the cabinet and filter property accounts were charged to filter material account, a capital account, and the other one-half to cabinet and filter operating expense accounts. These charges to cabinet and filter operating expense accounts were, at the [670]*670close of the year, transferred to and charged against surplus. No part of the charge made against surplus in 1917 was deducted in arriving at book net income which the revenue agent used as the starting point in computing taxable net income. Of the charge made against surplus in 1918, one-third, or $5,173.89, was deducted by the petitioner in its return. The net income determined by the Commissioner for the years 1917 and 1918 should be reduced by the amounts of $22,424.50 and $23,934.27, respectively.
The fourth issue is that the Commissioner failed to allow as deductions from income, for all of the years involved in the appeal, the losses alleged to have resulted from removals of cabinets and filters from customers’ premises. The fact of the matter is that the Commissioner has allowed as deductions from income of the years 1917 and 1918, the amounts of $12,970.19 and $15,521.67, respectively, which are the amounts charged against surplus in those years as losses occasioned by removals. As outlined in our discussion of the third issue, these charges against surplus represented one-half of the cost of installation of the removed cabinets and filters. It is apparent that these charges to surplus represent either the cost of labor and overhead used in installation, or the cost of labor and overhead plus the difference between the cost of the materials and the value at which they were charged back to the filter material account. We have already held, in agreement with the parties, that the cost of labor and overhead used in installation should be charged to expense and not capitalized; hence, no loss is sustained in this respect upon removal of cabinets and filters. Any shrinkage in value occasioned through physical wear and tear of materials while in use should be taken care of through annual deductions for depreciation. It appears, therefore, that the Commissioner erred in allowing these deductions from the income of the years 1917 and 1918. This is admitted by the petitioner in its brief, so far as it concerns the year 1917, but nothing is said therein so far as concerns the year 1918. As for the years 1919, 1920, and 1921, no evidence was adduced to show that the petitioner sustained any losses in those years as the result of removals of cabinets and filters from customers’ premises. Of the total deduction of $15,521.67 allowed by the Commissioner for the year 1918, $5,173.89 has been disposed of under the third issue necessitating an adjustment of but $10,347.78 under this issue. The net income determined by the Commissioner for the years 1917 and 1918 should be increased by the amounts of $12,970.19 and $10,347.78, respectively.
The fifth issue concerns the Commissioner’s action in adding to the income for the year 1919 an item of $31,336.89, which he held to be the cost of materials used in making installations in that year which [671]*671the petitioner deducted as expense.
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[668]*668OPINION.
MaRquette:
The first issue concerns the Commissioner’s action in twice adding to the net income for the year 1917 the net increase for that year of $958.53 in the reserve for past due and doubtful accounts. The manner in which this net increase in the reserve was made is set out in the findings of fact and need not be repeated here. The revenue agent, in computing taxable net income, used book net income as a starting point and added thereto the sum of $958.53, the amount by which the increase in the reserve which had been taken as a deduction exceeded the total debts ascertained to be worthless and charged off during the year, less total collections on accounts previously charged off as worthless. The Commissioner in computing net income in the deficiency letter, used the net income as computed by the revenue agent as the starting point and again added thereto the net increase in the reserve of $958.53. The Commissioner’s action resulted in a duplicate adjustment of income in respect of the same item and was,, therefore, erroneous. The net income determined by the Commissioner in the deficiency letter should be reduced by the amount of $958.53.
During all of the years involved in the appeal, the petitioner capitalized the cost of labor, materials,’ and overhead used in assembling cabinets and filters and in the installation thereof in customers’ premises, by charging such cost on its books to cabinet and filter property accounts. The Commissioner held that only the cost of the materials (cabinet and filter parts) used in assembling and installation should be capitalized and that the cost of labor and overhead should be deducted as expense. In accordance with this ruling the [669]*669Commissioner reduced the income of the years 1917 and 1918 by the amounts expended in those years for labor and overhead used in assembling and installation. The petitioner, while agreeing with the Commissioner as to the proper accounting treatment of the costs of assembling and installation, complains that the Commissioner has not uniformly applied the same rule in all years, in that he failed to allow as deductions from income of the years 1919, 1920, and 1921, the costs of labor and overhead incurred in those years in assembling and installation. We think the point which the petitioner raises is well taken. If the costs of labor and overhead incurred in assembling and installation are to be treated as deductible expenses, as the parties agree they should be, which,.all circumstances considered, we think is in accord with sound accounting principles, they should be uniformly so treated for all years. For the years 1919, 1920, and 1921, the costs of labor and overhead incurred in assembling and installation were $20,109.68, $23,525.17, and $33,385.55, respectively. The Commissioner reduced the income of the years 1920 and 1921 by the amounts of $10,217.40 and $41,353.78, respectively, which he determined to be the amounts capitalized on the books of account by charges to cabinet and filter property accounts in excess of the actual cost of the materials used in making installations in those years. Thus it appears that the Commissioner has allowed a deduction for a part of the cost of labor and overhead incurred in 1920, and for the year 1921 has allowed a deduction for labor and overhead in excess of the actual cost of labor and overhead incurred in that year. The net income determined by the Commissioner for the years 1919 and 1920 should be reduced by the amounts of $20,109.68, and $13,307.77, respectively, and the net income determined by the Commissioner for the year 1921 should be increased by the amount of $7,968.23.
The third issue concerns the Commissioner’s action in adding to the income of the years 1917 and 1918 the amounts of $22,424.50 and $29,108.16, respectively, which he held the petitioner had deducted from income as losses sustained through removals of cabinets and filters from customers’ premises. The accounting procedure adopted by the petitioner in maintaining the books of account, as it related to removals of cabinets and filters, is set out in detail in the findings of fact. When cabinets and filters were removed from customers’ premises, the cabinet and filter property accounts were credited with the original costs of installation. One-half of the credits so made to the cabinet and filter property accounts were charged to filter material account, a capital account, and the other one-half to cabinet and filter operating expense accounts. These charges to cabinet and filter operating expense accounts were, at the [670]*670close of the year, transferred to and charged against surplus. No part of the charge made against surplus in 1917 was deducted in arriving at book net income which the revenue agent used as the starting point in computing taxable net income. Of the charge made against surplus in 1918, one-third, or $5,173.89, was deducted by the petitioner in its return. The net income determined by the Commissioner for the years 1917 and 1918 should be reduced by the amounts of $22,424.50 and $23,934.27, respectively.
The fourth issue is that the Commissioner failed to allow as deductions from income, for all of the years involved in the appeal, the losses alleged to have resulted from removals of cabinets and filters from customers’ premises. The fact of the matter is that the Commissioner has allowed as deductions from income of the years 1917 and 1918, the amounts of $12,970.19 and $15,521.67, respectively, which are the amounts charged against surplus in those years as losses occasioned by removals. As outlined in our discussion of the third issue, these charges against surplus represented one-half of the cost of installation of the removed cabinets and filters. It is apparent that these charges to surplus represent either the cost of labor and overhead used in installation, or the cost of labor and overhead plus the difference between the cost of the materials and the value at which they were charged back to the filter material account. We have already held, in agreement with the parties, that the cost of labor and overhead used in installation should be charged to expense and not capitalized; hence, no loss is sustained in this respect upon removal of cabinets and filters. Any shrinkage in value occasioned through physical wear and tear of materials while in use should be taken care of through annual deductions for depreciation. It appears, therefore, that the Commissioner erred in allowing these deductions from the income of the years 1917 and 1918. This is admitted by the petitioner in its brief, so far as it concerns the year 1917, but nothing is said therein so far as concerns the year 1918. As for the years 1919, 1920, and 1921, no evidence was adduced to show that the petitioner sustained any losses in those years as the result of removals of cabinets and filters from customers’ premises. Of the total deduction of $15,521.67 allowed by the Commissioner for the year 1918, $5,173.89 has been disposed of under the third issue necessitating an adjustment of but $10,347.78 under this issue. The net income determined by the Commissioner for the years 1917 and 1918 should be increased by the amounts of $12,970.19 and $10,347.78, respectively.
The fifth issue concerns the Commissioner’s action in adding to the income for the year 1919 an item of $31,336.89, which he held to be the cost of materials used in making installations in that year which [671]*671the petitioner deducted as expense. From an examination of certain balance sheets submitted by the petitioner, the Commissioner determined that the net increase in the cabinet and filter property accounts, for the year 1919, amounted to $2,754.08. The Commissioner further determined that the cost of the materials used in making installations during the year was $34,090.97. Since the net increase in the cabinet and filter property accounts was $31,336.89 less than the cost of the materials used in making installations during the year, the Commissioner assumed that the petitioner had deducted this amount from income. The evidence is conclusive that no part of the costs of installations made during the year were deducted from income by the petitioner. Furthermore, the comparison which the Commissioner made of gross cost of materials used with net increase in the property accounts is obviously an erroneous one, since it fails to take into account the fact that the property accounts were credited with the costs of installation, including labor and overhead as well as materials, of removed cabinets and filters. The net income determined by the Commissioner for the year 1919 should be reduced by the amount of $31,336.89.
The sixth issue is that the Commissioner failed to allow adequate deductions from income, for all years involved in the appeal, for depreciation of cabinets and filters installed in customers’ premises. The deductions which the Commissioner has allowed represent 10 per cent of the total cost of materials used in making installations to the beginning of each year, plus an additional amount computed at the rate of 5 per cent of the cost of materials used in making installations during each year. The evidence convinces us that the average useful life of petitioner’s cabinets and filters does not exceed five years, and that a rate of 20 per cent should be used in computing the depreciation allowance. Because of the numerous changes in the cabinet and filter property accounts during any year, which are occasioned by additional installations, changes, and removals, the base to which this 20 per cent rate should be applied should be determined by adding together the cost of materials actually in use in installed cabinets and filters at the beginning of the year and at the end of the year and dividing the sum thus obtained by two.
The seventh issue concerns the Commissioner’s action in refusing to allow deductions for the years 1917, 1918, and 1919, for depreciation of patents acquired at the date of organization, in disallowing the deductions which the petitioner took in the returns for the years 1920 and 1921 for depreciation of these patents, and in refusing to allow any value for these same patents for invested capital purposes. The patents in question were taken over from the United Centadrink Manufacturing Co., one of the predecessor companies. [672]*672Since the average annual earnings of that company for the five-year period immediately proceeding the date of organization of petitioner represented a return of less than 8 or 10 per cent upon the average tangible assets for the same period, the Commissioner held that the patents had no value at the date of acquisition, February, 1913, or at March 1, 1913. He accordingly held that the petitioner was not entitled to deductions for depreciation of these patents, and that no value in respect thereof could be included in invested capital. The petitioner contends that because of the close relationship of the United Centadrink Manufacturing Co. and the Hew York Centadrink Co., and the nature of, and manner in which they carried on their businesses, the Commissioner should have determined upon a value for the patents based upon the combined average annual earnings of the two companies for the five-year period immediately preceding the date of organization of petitioner. All that we have been told about these patents is that there were 18 or 20 of them in number. We know nothing about the inventions covered by these patents, of the stage of development reached at the time they were acquired by the petitioner, of the availability of markets for the products manufactured under them, of the earnings of prior years attributable to them as distinguished from the earnings attributable to good will, of the probabilities as to the earnings which cordd reasonably be expected during the remaining life of the patents, or of the remaining life of the patents from the date of acquisition. Fox aught that has been told us, the whole lot of them may have been entirely obsolete. Ho evidence was introduced relating to their values. In short, we h¡*ve no evidence before us upon which we can base a finding that these patents had a determinable value at the date of acquisition. Under the circumstances, we can not disturb the action of the Commissioner in refusing to allow deductions from income, for all of the years involved in the appeal, for depreciation of patents acquired' from the predecessor companies, and in refusing to allow any value in respect of these patents for invested capital purposes.
The eighth issue concerns the Commissioner’s action in twice adding to the income for 1921 the sum of $24,371.11, representing the deduction taken by the petitioner for depreciation of the patents referred to in the seventh issue. The petitioner deducted only one amount of $24,371.11, in its return, for depreciation of patents; hence, the Commissioner’s action in twice adding this item to income is in error. The net income determined by the Commissioner for the year 1921 should be reduced by the amount of $24,371.11.
The ninth issue is that the Commissioner failed to give credit in computing the deficiency for the year 1917, for the additional tax [673]*673of $3-81.08 assessed for that year and paid on July 25, 1923. No evidence was submitted in connection with this issue; hence, we are unable to make any finding in respect thereof.
Juág^nent will he entered on 15 days’ notice, under Rule 50.