Union Terminal Cold Storage Co. v. Commissioner

4 B.T.A. 264, 1926 BTA LEXIS 2320

• Court: United States Board of Tax Appeals
• Decided: July 20, 1926
• Docket: Docket No. 4319.
• Status: Published

Opinion

OPINION.

Trammell

: The Commissioner reduced the invested capital of the taxpayer for 1919 upon the ground that it failed to deduct an adequate amount in prior years for the exhaustion, wear and tear of the physical assets used in its business. The taxpayer contends that no reduction should be made on this account for the reason that it had kept up its buildings and equipment by repairs and replacements which had been charged to expense and not capitalized.

The allowance provided by statute for exhaustion, wear and tear of assets used in business is in addition to the deduction allowed for amounts expended for repairs. The fact that assets are constantly being repaired does not prevent exhaustion thereof due to wear and tear, and if proper deductions are not made for such exhaustion, the earned surplus is erroneously stated for the taxable year. A tax-pa}^ may, however, replace certain assets and make permanent improvements on others and erroneously charge such expenditures to expense instead of to capital account, so that the amount of exhaustion due to wear and tear may be balanced by the capital acquisitions or expenditures, in which case its books may properly reflect its earned surplus as of the beginning of the taxable year, although no deductions were taken on account of exhaustion, wear and tear. In this case there is no evidence as to whether this was true or not. On the other hand it is possible that taxpayer may not use a consistent method of charging off depreciation. It may take a small deduction one year, none at all in another year, and a large deduction in another. In such a case the question to be determined, with respect to the earned surplus of the taxable year, is: Was a fair and reasonable amount deducted in prior years, taking the entire amount of deductions as a whole? However, evidence tending to prove that the assets as of the beginning of the taxable year had a value equal to the cost of such assets is not sufficient to establish the fact that an adequate and reasonable deduction was made on account of the exhaustion, wear and tear thereof. The value of assets may actually increase, but this does not mean that they are not gradually being exhausted in use. . •

In his case, while there is some evidence that certain replacements, renewals and betterments were charged to expense, there is no evi-deuce as to the amount of such charges, and we are not in a position to say that such charges or such amounts were sufficient, taken as a whole, to overcome the fact that no deduction whatever was taken on account of exhaustion, wear and tear of assets. The Commissioner has determined that a reasonable deduction on account of depreciation of the physical assets used in the business was $174,585.35. The presumption of the correctness of the determination of the Commissioner is not overcome by the evidence in this case, and accordingly such determination is approved.

Order of redetermination will be made on 15 days' notice under Rule 50.