Opinion
Judgment in accordance with opinion. Wilbur A. Giffen, of Chicago, Ill. (Kixmiller, Baar & Hoffman and Kixmiller, Baar & Morris, all of Chicago, Ill., were on the brief), for plaintiffs.
Ralph C. Williamson, of Washington, D. C., and Charles B. Rugg, Asst. Atty. Gen., for the United States.
Before GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Plaintiffs sue to recover $26,256.81, income and profits tax alleged to have been erroneously collected for 1919. The two questions involved are basically questions of fact, and are (1) the loss sustained in 1919 on a sale of assets on May 1, 1919, and (2) the depletion sustained on timber cut from January 1, 1919, to May 1, 1919.
Special Findings of Fact.
1. Plaintiffs are and were at all times material to this proceeding Wisconsin corporations. The M. Hilty Lumber Company, hereinafter referred to as the 'Hilty Company,' is and was engaged in the wholesale and retail lumber business at Milwaukee, and the Forster-Mueller Lumber Company, hereinafter referred to as the 'Mueller Company,' was engaged in the manufacture of lumber at Hiles, Forest county, in the northeastern part of Wisconsin, from the time of its incorporation in 1906 until the date of the sale of its capital assets to the C. W. Fish Lumber Company on May 1, 1919, as hereinafter shown.
2. May 1, 1919, the Mueller Company sold the following assets to the Fish Lumber Company: (a) Its plant assets, consisting of town buildings (store, office, hotel, and approximately 47 residences for employees), sawmill, planing mill, flooring mill, logging railroad and equipment, and other assets auxiliary to the foregoing; (b) town-site lands; and (c) all of its standing timber, such timber being located in the vicinity of Hiles. It retained title to all of the land under timber and all cut-over lands.
3. Some of the assets sold were acquired prior to March 1, 1913, but in all such cases cost was less than their fair market value on March 1, 1913.
4. The undepreciated cost to plaintiffs of the plant assets sold, including the acquisitions in April 1906, the original plant having been built in 1904, and subsequent additions up to May 1, 1919, was $209,829.42. Of the foregoing amount, $54,885 represented original cost in April 1906, and the additions by years were as follows:
April 1906 to December 31, 1906 ..
$ 9,289.58
1907 ..............................................
22,207.98
1908 ..............................................
2,822.68
1909 ..............................................
6,502.24
1910 .............................................
16,718.24
1911 .............................................
10,595.60
1912 .............................................
21,085.54
1913 .............................................
13,529.93
1914 .............................................
16,645.31
1915 ..............................................
988.46
1916 ..............................................
622.21
1917 ..............................................
546.41
1918 .............................................
16,185.58
Jan. 1 to May 1, 1919 ....................
17,204.66
5. The depreciation sustained on the foregoing assets from their respective dates of acquisition to the date of their sale, May 1, 1919, was $113,356.78, leaving as the depreciated cost $96,472.64 on that date.
6. The town-site lands sold were acquired in April 1906 at a cost of $8,630.44.
7. The timber involved in the sale was acquired in three separate tracts, namely: (a) The original tract purchased in 1906, (b) a tract of 120 acres acquired in 1914, and (c) the Burt tract acquired June 15, 1918.
8. The cost of timber remaining uncut and sold was as follows:
Original tract ...........
$ 41,210.56
Burt tract .................
83,374.65
Tract purchased in 1914 .....
1,166.50
-------------
$125,751.71
9. The above-mentioned assets were sold May 1, 1919, to the Fish Lumber Company for a total consideration of cash and promissory notes of $175,000, payable as follows: Cash $45,000; six notes of $5,000 each, aggregating $30,000, payable in a monthly series during 1919; and four notes of $25,000, aggregating $100,000, payable May 1, 1920, May 1, 1921, May 1, 1922, and May 1, 1923. The four notes of $25,000, aggregating $100,000, had a fair market value on May 1, 1919, of $90,000.
10. The Mueller Company sustained depletion from January 1 to May 1, 1919, as follows: (1) $2,012.22 on 444,200 feet of timber cut from the Burt tract which had been acquired in 1918 at a cost of $4.53 a thousand; and (2) $18,768.92 on 4,304,800 feet of timber cut from the original tract which was acquired in 1906 on the basis of a cost of $1.78 a thousand, but which had a value on March 1, 1913, of $4.36 a thousand.
11. March 11, 1920, plaintiffs filed a consolidated income and profits tax return for 1919 in which a loss of $174,648.13 was claimed on a sale by the Mueller Company of its capital assets to the Fish Lumber Company, and in which a consolidated net loss was shown of $59,687.99. In the claimed loss on the aforementioned sale, plaintiffs set up cost, or March 1, 1913, values of assets sold, as follows: Depreciated cost of plant $98,599.88 (cost $211,956.66, less depreciation of $113,356.78, as shown by its books); March 1, 1913, value of town site, $19,675; March 1, 1913, value of timber, exclusive of Burt tract, $167,207.25; cost of Burt tract, $64,166. From the total of $349,648.13 there was deducted the consideration of $175,000 for the sale, thus showing a loss of $174,648.13.
12. Upon audit of the return, the commissioner determined the consolidated tax liability for 1919 in the amount of $26,256.81, which was duly assessed. This amount was paid October 16, 1923, by the Hilty Company. In making this determination, the commissioner computed a loss on the aforementioned sale of $39,401.34 as follows: Depreciated cost of plant, $98,599.88 (cost $211,956.66 less depreciation of $113,356.78); cost of town site, $8,000; cost of timber acquired prior to March 1, 1913, $44,179.13; cost of Burt tract, $62,475.79; minor purchase of land and timber acquired in 1914, $1,146.54. From the total of $214,401.34 there was deducted the consideration of $175,000, thus showing a loss of $39,401.34.
13. July 16, 1925, plaintiffs filed a claim for the refund of $22,860.88, or such greater amount as was legally refundable, paid for 1919, and such claim raised the two issues involved in this suit; namely, the loss sustained by the Mueller Company on the sale of its assets May 1, 1919, to the Fish Lumber Company, and the depletion sustained by the Mueller Company on timber cut from January 1 to May 1, 1919.
LITTLETON, Judge.
The questions involved in this case concern the amount of loss sustained by the Forster-Mueller Company on the sale of its plant assets and standing timber on May 1, 1919, and the depletion allowable on timber cut by the Mueller Company from January 1 to May 1, 1919. Some objection is made by defendant to a consideration of the latter question on the ground that it was not properly raised in a claim for refund. We are convinced, however, from a careful consideration of the document attached to the claim as a basis therefor, in conjunction with the action of the commissioner which gave rise to the additional tax sought to be recovered, that such issue was raised by the claim for refund and we have so found.
The principal issue arises as a result of the sale on May 1, 1919. Included in the assets sold were plant assets of the character ordinarily found in a sawmill unit, such as sawmill, planing and flooring mill, logging railroad and facilities, and other auxiliary equipment. There were also the town-site lands and the buildings located thereon, consisting of a store, office, hotel, and residences for employees. In addition the sale included standing timber, but not the land on which it stood. The timber and certain other assets were acquired prior to March 1, 1913, and others subsequent thereto, but we are satisfied from the evidence, and have found as a fact, that in all cases where the acquisitions were prior to March 1, 1913, such cost was less than the March 1, 1913 value. Inasmuch as cost was less than such value, and likewise less than the selling price, the deductible loss in 1919 is the difference between the cost and the selling price. United States v. Flannery et al., 268 U.S. 98, 45 S. St. 420, Much of the evidence in the extended record was directed to the purpose of establishing the depreciated cost of the depreciable assets. Plaintiffs contend that the proper cost attributable to such assets is $209,889.42 and that the depreciation sustained is $75,041.28, whereas the defendant contends for a cost of $198,137.08 and depreciation sustained in the amount of $136,058.45. On the other hand, the Commissioner of Internal Revenue in his determination used a cost of $214,401.34 and accepted the depreciation of $113,356.78 entered by plaintiffs on their books as the sustained depreciation. The argument of the defendant's counsel is based largely on the proposition that depreciation should be computed on the basis of timber to be cut from the area owned by the Forster-Mueller Company after proper allowance for salvage at the time the cutting of timber is completed. That is, the recovery of the capital investment in depreciable property should be allowed over the period when the timber, for which such depreciable property was acquired or constructed to serve, was being cut. This appears to be the basis followed by the commissioner, though consideration is also given not only to timber owned but, also, to timber which may reasonably be considered as available for manufacture at a given sawmill plant.
Plaintiffs' argument proceeds in general upon the proposition that the timber owned, plus that which was available for manufacture at the mill in question, was sufficient to warrant a computation of the sustained depreciation based upon the useful life of the property and equipment measured in terms of exhaustion from ordinary wear and tear. In other words, plaintiffs say that there was sufficient timber available, owned and for purchase, to justify a computation based upon what might be considered the ordinary useful life of the equipment in question, though providing for its ultimate exhaustion about 1921. To that end various witnesses testified as to the ordinary life of items of sawmill equipment, town buildings, etc., and in their brief plaintiffs present a schedule showing a life of the assets ranging from 10 to 25 years.
We have carefully considered the evidence presented and have reached the conclusion that the depreciation of $113,356.78 entered upon the books represents a fair and reasonable determination of the depreciation sustained. It may be true that much of the equipment in question could be made to last almost indefinitely through repairs and replacements, provided it did not become obsolete, but in a very substantial sense it would not be the same equipment as originally installed. We are here seeking to determine the reasonable period over which plaintiffs might be expected to-recover the capital invested in the enterprise and the extent to which this had been effected at the date of sale. In this connection we have considered not only the ordinary useful life of the assets from a wear-and-tear standpoint, including obsolescence, but also the timber for the manufacture of which the assets would be consumed and from the sale of which the capital would be recovered. It is suggested in plaintiffs' evidence concerning sustained depreciation for the purpose of gain or loss on the sale, that such depreciation is not the same as should be determined in an accounting sense and it is indicated that a different amount might be proper as deductions in computing gross income from that determined as sustained depreciation on a given date. We cannot agree. The two computations should be consistent to the end that double deductions may not be allowed. The further suggestion is made in plaintiffs' brief that the depreciation entered upon the books and claimed as deductions in the returns filed, particularly in the high-tax years, should be given little weight because of the losses sustained and the manner in which such depreciation was determined. Apparently such depreciation was not determined in the most scientific manner and it may be that, due to the losses sustained in certain years, the utmost care was not always exercised in determining the depreciation sustained, but, from a consideration of the whole case, we are of the opinion that the depreciation determined and entered upon the books should not be disregarded. We have endeavored to give due weight to the many pertinent elements concerned in a determination of the ultimate fact required, namely the depreciated cost to be used as a deduction from the consideration received from the sale of the assets in question, in order to arrive at the loss sustained, and we have reached the conclusion set out in the findings, which is, we think, fair and reasonable under all the circumstances.
It follows, therefore, that the loss deductible from income for 1919 was $65,854.79, represented by the difference between the total cost of the assets sold, after considering depreciation of $230,854.79, made up of plant assets of $96,472.64; town-site lands of $8,630.44; and timber of $125,751.71; and the fair cash value of the consideration received of $165,000. The facts as found with respect to the depletion sustained between January 1 and May 1, 1919, should be sufficiently clear as not to warrant comment, and the allowance therefor will be made in accordance with our findings.
Entry of judgment will be withheld pending the submission by the parties of a computation in accordance with the conclusions set forth herein. It is so ordered.
BOOTH, Chief Justice, did not hear this case on account of illness and took no part in its decision.