Appeal from the United States Board of Tax Appeals.
Before WOOLLEY and DAVIS, Circuit Judges, and AVIS, District Judge.
This is an appeal from an order of the United States Board of Tax Appeals disallowing a deduction of $61,270 made by the appellant in its tax return for the year 1923. The Commissioner disallowed the deduction and determined an additional tax of $7,309.32, and this determination was sustained by the Board on appeal.
There is no dispute as to the facts, nor as to the absolute good faith of the taxpayer. The question is one of law on admitted facts.
The Atwater Kent Company was making radio parts for receiving sets during the year 1922, and, under the practice then prevailing, the company did not assemble the parts. It was left to the purchasers to assemble them into radio receiving sets. In May, 1923, the Kent Company decided to change its policy, assemble the parts itself, and thereafter sell complete radio receiving sets. This required a great deal of space in addition to that which the company then had.
As the manufacture and sale of radio sets is largely a fall and winter business, it was necessary to have an assembly plant ready for use by October 1, 1923, unless that season's business was to be lost. The company was confronted with two propositions; rent an old plant or build a new one. It decided to build rather than rent. Mr. W.F. Ballinger was employed as architect, and Mr. A. Atwater Kent, president of the company, told him in the early part of May that the new plant must be ready for occupancy by October 1, 1923. It was impossible to complete the new plant by that time, except on the "cost plus basis" and by paying large bonuses for steel to secure quick fabrication and for labor to work overtime at higher rates. It was thought that the profits, which they anticipated, would justify the additional expense which the construction of the new plant by October 1st would necessitate. It was found, and about this there is no dispute, that "the excess cost to complete it (the new plant) by October 1, 1923, was not less than $61,270." This additional expense the company paid and completed the plant.
When the company came to make up its income tax return for that year, as above stated, it deducted the $61,270 which it had been compelled to expend in order to have the use of the plant in October, November, and December, of the year 1923. It is admitted that, if this extra expense had been paid out for rent, instead of expediting the completion of the new building, it would have been a legitimate deduction. The question is whether or not, having paid out the same amount to have the plant built ahead of time and take advantage of the season, it could be legally deducted by the taxpayer.
Section 234 (a) of the Revenue Act of 1921 (42 Stat. 227), under the title, "Deductions Allowed Corporations," provides:
"That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * *
"(7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolscence."
The taxpayer contends that at the end of the year, when the new plant had been used in producing the season's profit, its depreciation on account of that use -- exhaustion, wear, and tear -- was at least $61,270; that the plant, the season having passed, was worth $61,270 less than it was on October 1, 1923.
Regulations 62, article 161 in force at that time, provides:
"Depreciation, -- A reasonable allowance for the exhaustion, wear and tear and obsolescence of property used in the trade or business may be deducted from gross income. For convenience such an allowance will usually be referred to as depreciation, excluding from the term any idea of a mere reduction in market value not resulting from exhaustion, wear and tear or obsolescence. The proper allowance for such depreciation of any property used in the trade or business is that amount which should be set aside for the taxable year in accordance with a reasonably consistent plan (not necessarily at a uniform rate) by which the aggregate of such amounts for the useful life of the property in the business will suffice, with the salvage value, and having due regard for expenditures made for ...