ALVIN GLEN HALL, PETITIONER, V. COMMISSIONER OF INTERNAL

REVENUE, RESPONDENT.

GUY N. HALL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

RALPH MILLER FORD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 1049, 1053, 1057.

Promulgated November 29, 1946.

DEDUCTIONS.-(1) Remaining useful life of construction equipment determined for purposes of depreciation. (2) Cost of cattle sold and profits and losses on sale thereof determined. (3) Amount irrevocably contributed by a certain partnership to a pension trust for selected employees and constituting, together with regular compensation paid, reasonable compensation for services actually rendered, held deductible business expense under section 23 (a), I. R. C.

Benjamin Grund, C. P. A., and Maxwell Wexler, C. P. A., for the petitioners.

Frank M. Thompson, Jr., Esq., and S. Earl Heilman, Esq., for the respondent.

FINDINGS OF FACT AND OPINION.

TYSON, Judge: These consolidated proceedings involve the following income tax deficiencies:

In the proceedings of Alvin Glen Hall and Guy N. Hall the ultimate issue presented is whether for each of the years 1940 and 1941 the respondent correctly determined the net income of the partnership of Pioneer Contracting Co., and, as a necessary consequence, the partners' distributive shares thereof, and this issue involves, in turn, three subsidiary questions as hereinafter set out. In those two same proceedings one question as to a claimed deduction of $18,116.64 for 1941 by Pioneer Contracting Co. for equipment rental expense has been abandoned. The proceeding of Ralph Miller Ford presents only one of those subsidiary questions, i. e., depreciation on Pioneer Contracting Co.'s construction equipment for the one year, 1940. We first set forth findings of general facts pertinent to the issue and to all or most of the three subsidiary questions, and then as to each such question we set forth separate findings of fact particularly applicable thereto, and our opinion thereon.

FINDINGS OF GENERAL FACTS.

Petitioners Alvin Glen Hall and Guy N. Hall are citizens of the United States and residents of Dyersburg, Tennessee, and for the calendar years 1940 and 1941 they each filed their tax returns, on the cash basis, with the collector of internal revenue at Nashville, Tennessee. Petitioner Ralph Miller Ford is a citizen of the United States and a resident of Baton Rouge, Louisiana, and for the calendar year 1940 he filed his tax return, on the cash basis, with the collector of internal revenue at New Orleans, Louisiana.

Throughout the years 1940 and 1941 petitioners Alvin Glen Hall and Guy N. Hall each owned a 25 per cent interest in the Pioneer Contracting Co. of Dyersburg, Tennessee (hereinafter referred to as Pioneer), a partnership engaged principally in the contracting business and also in farm operations. Throughout those two years the remaining 50 per cent interest in Pioneer was owned by a partnership known at Forcum-James Construction Co. of Dyersburg, Tennessee (hereinafter referred to as the Construction Co.). Petitioner Ralph Miller Ford owned a 25 per cent interest in the Construction Co. throughout 1940.

Throughout the year 1941 Pioneer owned a 50 per cent interest in each of two partnerships, one known as Pioneer-Hereford Co. of Dyersburg, Tennessee (hereinafter referred to as Hereford), and the other known as Hall Farm Co., also of Dyersburg, Tennessee (hereinafter referred to as Hall Farm) both of which partnerships were engaged principally in farm operations. Hereford kept its accounts on the basis of a fiscal year ended June 30.

Respondent increased the net income as reported by Alvin Glen Hall and Guy N. Hall, respectively, by the amounts of $2,938.01 for 1940 and $14,584.38 for 1941 as a result of increasing their respective distributive shares of the net income of Pioneer by such amounts for those years. Respondent increased the net income as reported by Ralph Miller Ford for the year 1940 by the amount of $1,481.51 as a result of increasing his distributive share of the net income of the Construction Co., the net income of the latter having been increased by $5,876.02 for 1940 as a result of its 50 per cent interest in Pioneer. First Subsidiary Question-Depreciation, Contracting Equipment.

In its income tax returns Pioneer claimed deductions for depreciation on its construction equipment in the amounts of $37,767.75 for 1940 and $72,250.16 for 1941, and in determining Pioneer's distributable net income for those years the respondent disallowed $11,752.04 for 1940 and $16,705.64 for 1941 of such claimed deductions. All three petitioners allege error in respondent's determination for 1940 and petitioners Alvin Glen and Guy N. Hall allege error in respondent's determination for 1941.

FINDINGS OF FACT.

Prior to and during 1940 and 1941 Pioneer's principal business was that of a contractor in the construction of levees, dams, reservoirs, and roads and in excavation work, all of which involved digging, moving, dumping, and grading of soil, and it owned various types of equipment employed in that work. During 1940 and 1941 Pioneer had contracts which because of the nation's defense program required 24 hours a day operation for excavation work on defense plants where speed was essential; for construction of levees sometimes 30 feet high above ground level and having very steep grades; and for construction of earth fill dams approximately 25 feet high. The sand, and mud and steep grades encountered on those jobs, the roundthe-clock use of equipment without time for proper upkeep and usual repair of same, and the necessity of employing new inexperienced employees, caused much greater wear and tear on Pioneer's equipment during 1940 and 1941 than would have occurred under normal operating conditions. During 1941 and subsequently Pioneer had more breakdowns on equipment than ever before because of the extra hard use and lack of repair parts. Pioneer's past experience showed that good equipment is a vital and principal factor in meeting competition in its line of work and it operated on an established principle of buying new equipment as often as needed, but during the war years such equipment was hard to obtain and old equipment was kept in use beyond its economical usefulness.

During the years in question Pioneer owned a large number of items of construction equipment, but only 16 of such items are involved herein, and the remaining useful life of such 16 items was as follows:

OPINION.

There is no controversy as to the date of acquisition, the cost of all the items involved, and the unrecovered cost on December 31, 1939, of items acquired prior to 1940. The question presented as to the 16 items is one of fact; namely, what was the remaining useful life, on January 1, 1940, for items acquired prior to that date, and from the date of acquisition for items acquired during 1940 and 1941? On such questions our above finding of ultimate facts is conclusive.

Second Subsidiary Question-Farm Operations.

This question involves the redetermination of Pioneer's income for 1941 from its own farm operations and from its 50 per cent distributive share of the net income of the partnerships of Hereford and Hall Farm. The specific question is whether respondent erred in disallowing as ordinary and necessary business expense deductions for 1941 the respective amounts of $6,809.72 expended by Pioneer, $15,397 expended by Hereford, and $3,013.99 expended by Hall Farm in connection with their respective farm operations during 1941. In the alternative, petitioners Alvin Glen and Guy N. Hall allege that respondent has erroneously overstated Pioneer's net income by the amount of $5,101.59 from cattle operations for 1941, both directly as attributable to its own operations and indirectly as attributable to the operations of the subpartnerships of Hereford and Hall Farm.

FINDINGS OF FACT,

In determining Pioneer's net income for 1941 respondent disallowed a deduction of $6,809.72 claimed by it for expenditures in its own farm operations. Also, as a result of his disallowing Hereford's claimed deduction of $15,397 and Hall Farm's claimed deduction of $3,013.99 for expenditures in their respective farm operations, respondent increased Pioneer's reported net income in the amounts of $7,698.50 and $1,507 by decreasing its 50 per cent distributive shares of the net loss reported for 1941 by Hereford and Hall Farm, respectively.

During the calendar year 1941 Pioneer expended $6,809.72 in connection with the operation of its farm, such sum consisting of $5,943.17 for cattle purchases, $586.55 for equipment, $250 for levee repairs, and $30 for fees. Of the cattle so purchased Pioneer sold, in the same year, cattle costing $3,878.77 for a total sales price of $3,236.26 resulting in a loss of $642.51 from such sales.

During its fiscal year ended June 30, 1941, Hereford expended $15,397 for the purchase of cattle in connection with its farm operations. Of the cattle so purchased in that fiscal year, Hereford sold, in the same year, cattle costing $2,438.10 for a total sales price of $2,919.20, resulting in a profit of $481.10 from such sales.

During the calendar year 1941 Hall Farm expended $3,013.99 for the purchase of cattle and hogs in connection with its farm operations. Of the hogs so purchased in 1941, Hall Farm sold, in the same year, hogs costing $295.75 for a total sales price of $544.16, resulting in a profit of $248.41 from such sales.

OPINION.

Petitioners Alvin Glen and Guy N. Hall presented no evidence with respect to Pioneer's expenditures in 1941 for equipment, levee repairs and fees and, on brief, have abandoned their claim based thereon.

The respondent admits that farm operation expenditures were made in the amounts of $6,809.72 by Pioneer, $15,397 by Hereford, and $3,013.99 by Hall Farm, and further admits that he has not allowed any portion of such amounts, respectively, as a deduction in his determination of each partnership's net income for the period in question.

The complaint of petitioners is as to respondent's failure to allow any deduction for the cost of cattle sold by Pioneer and Hereford, and the cost of hogs sold by Hall Farm. Our above findings of fact as to such cost is conclusive on this question. The gain or loss sustained by Pioneer, Hereford, and Hall Farm on their respective sales is as set out in our findings of fact. Petitioners have failed to prove that such partnerships are entitled to any other deductions in determining their respective gain or loss on farm operations.

Third Subsidiary Question-Pension Trust.

This question involves the propriety of respondent's disallowance of the amount of $7,500 claimed by Pioneer as a deduction for 1941 for ordinary and necessary business expenses represented by contributions by Pioneer in that year to a pension trust for the benefit of its employees, or, in the alternative, represented by compensation paid for services rendered by its employees during 1941. Respondent denies error in his disallowance of such claimed $7,500 deduction in determining Pioneer's net income for 1941.

FINDINGS OF FACT.

On November 15, 1941, a written agreement, or plan, effective as of November 1, 1941, was entered into by Forcum-James Co., ForcumJames Construction Co., Pioneer Contracting Co., L. O. Brayton & Co., and W. R. Aldrich & Co., for the establishment of a pension trust styled "Forcum-James Associates Pension Trust" for the "exclusive benefit of some or all of the employees of each member of the group The plan provided that beginning with November