Pitzman's Co. v. Commissioner

PITZMAN'S CO. OF SURVEYORS & ENGINEERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Pitzman's Co. v. Commissioner

Docket Nos. 21745, 39299.

United States Board of Tax Appeals

21 B.T.A. 1368 ; 1931 BTA LEXIS 2199 ;

January 27, 1931 , Promulgated

*2199 DEPRECIATION - SURVEYING AND ENGINEERING RECORDS. - During the taxable years here under review the petitioner owned and used in its business a large collection of engineering and surveying records, books, plats, drawings, etc. Held, that these properties were during said years subject to exhaustion, wear and tear and did depreciate during those years. Held, further, that the amounts computed by the petitioner and charged off upon its books and claimed as deductions in its income tax returns for each of said years were a reasonable allowance for exhaustion, wear and tear of said properties and the deduction of said amounts should be allowed in the computation of petitioner's net income for said years.

Abraham Lowenhaupt, Esq., and Stanley S. Waite, Esq., for the petitioner.

T. M. Mather, Esq., for the respondent.

TRUSSELL

*1368 These are proceedings for the redetermination of deficiencies in income tax determined by the respondent in the following amounts: for 1922, $597.43; for 1923, $597.43; for 1924, $1,236.15; for 1925, $154.59; and for 1926, $646.54.

The petitioner complains of the disallowance of deductions from income *2200 upon the returns by way of allowance for depreciation and obsolescence of books, plats and records, hereinafter referred to as "records." Upon motion duly made and granted, the cases were consolidated for purposes of hearing and decision.

*1369 FINDINGS OF FACT.

The petitioner, a Missouri corporation, with principal place of business at St. Louis, was incorporated on January 25, 1892, with an authorized capital stock of $50,000, all of which is outstanding. The petitioner is engaged in the business of conducting an engineering and surveying business, consisting in general of surveying lots and subdivisions and designing and completing subdivisions, establishing grades and designing and supervising street, sidewalk, and sewer improvements. Included in the property of the petitioner are various records, more particularly hereinafter described, which are necessary to and are used in its business.

On or about January 30, 1892, the petitioner acquired all of the surveying and engineering business of Julius Pitzman and all of his plats, books and records; the petitioner paid for such plats, books and records a consideration of $47,000.

Julius Pitzman, hereinafter referred *2201 to as Pitzman, was born in 1837 and died in 1923. He entered the employ of his brother-in-law in 1851 in the surveying business. He began, on his own account, the surveying business in St. Louis in 1854, and carried on the business continuously in his individual capacity until it was taken over by the petitioner, excepting, however, a period during the Civil War incident to Pitzman's service in the Federal Army. In connection with his surveying business, Pitzman initiated and maintained records of the locations of physical marks of whatever nature known as "monuments." These monuments were marked upon buildings, on curbstones, on iron sills or upon objects set in the ground, or even in the old days blazes on trees. The Pitzman records went back to the determinations of a special land court which, in the early history of St. Louis, straightened out overlapping land claims. They included surveys by Joseph Brown made in 1822 and by Pitzman's brother-in-law subsequent to 1846. Pitzmam made a map of St. Louis and St. Louis County between 1864 and 1868. Pitzman had also acquired the records of other surveyors including William Couzens, Thomas Sayers, and Davis & Fetherstone.

Prior *2202 to 1913 the petitioner also acquired the records of a surveyor named J. B. Johnston. On March 1, 1913, the records of the petitioner consisted of the following: 45 plat books, showing in detail the various city blocks, and containing a total of 7,338 pages; 28 grade plat books, including survey levels, some sewer data and proposed street grades; 4 deed books showing all plats attached to deeds filed in St. Louis from 1764 to 1901; 1 book of data compiled from deeds relative to boundaries of parcels in city blocks numbered 1 to 400, inclusive, covering the most valuable part of St. Louis; *1370 2 index books covering United States survey subdivisions, partitions, streets and city blocks; 82 district maps showing boundaries of subdivisions; 24 plat books containing 1,030 pages of plats recorded in St. Louis City and County, starting in about 1836 and running to 1901; 2 large grade plat books containing 82 pages, showing various sections of St. Louis and especially grades of streets and alleys; 3 complete sets of topographical maps of St. Louis, containing 38 sheets each; 1,000 blue prints of subdivisions recorded in the city; 148 tin boxes containing small field sketches; 16 *2203 books of certified copies of original United States field notes; 1 book of certified copies of United States field plats and Joseph Brown's map of St. Louis; 1 plat book containing 24 pages of United States surveys; 7 plat books, totaling 245 pages showing districts and subdivisions, property lines and survey notes, including survey marks; 11 plat books, totaling 3,300 pages, embracing St. Louis County in sections on a large scale; 1 index map for petitioner's pigeonhole file of the City of St. Louis; 1 similar index map applying to the county; various field plats and miscellaneous notes filed in 724 pigeonholes; a miscellaneous collection of other records and notes, including those of the Mullanphy partition, Couzens, Sayers and Davis, and Johnston.

With respect to the facts recorded, the records were up to date in 1913 and they were the most complete in St. Louis, other available records being only partially complete. The records were of practical use to surveyors, engineers and title companies, including use in aiding in determining claims to properties; in new surveys; in restoring old boundaries; in determining grades; and in avoiding expense incidental to searches of the *2204 land records.

The fair market value of the records on March 1, 1913, was at least $250,000, which is less than the original cost or the reproduction cost.

Physically, the records were of various ages and conditions. Single pages or sheets in active use in the office lasted from 10 to 15 years, others, comparatively inactively used, lasted 25 to 40 years, but even when not in use the paper is subject to deterioration, finally reaching a condition where it may not be used at all. Sheets in active use in the field are subject to damage from the weather and to excessive wear, and they have an average life of about six months. In the office as well as in the field the records are subject to damage by the soft coal in the atmosphere of St. Louis. Beginning about 1883 the records have been kept in a vault built especially for them. Records in use during the day are returned to the vault for housing during the night.

The records were compiled from the field plats made during the course of work done for clients, together with all other available *1371 sources of information, such as the county land records and the records of the probate court. Prior to 1922 the records *2205 were in charge of a specially qualified employee, and the actual work of recording the facts or replacing the depreciated sheets was done by the office force at odd times whenever business conditions would permit. When old sheets were replaced with new, and the facts copied from the old sheet had been carefully verified, the new sheet effected a complete replacement of the old. The records were kept current and up to date, including the deletion of obsolete information no longer in use. The records became obsolete with reference to the physical marks in the field called monuments, whenever the monuments were destroyed or moved from their right location. The bound books required repairing or replacing when they became worn out.

Many of the records on hand on March 1, 1913, have since been replaced or renewed.

The expense of maintenance and recording of the records was charged off upon the books direct to expense account during the period from 1913 to 1921, inclusive. The cost of this work was not borne by the clients of the petitioner.

In 1922, due to an unusual amount of work under way, it was necessary to transfer an employee from the office to the field, and this, together *2206 with the illness of Pitzman, rendered it impossible to keep the records up to date or even to maintain their physical condition. During the taxable years they were subjected to physical deterioration and also to hard wear and tear. Allowances for depreciation of the records were entered upon the books, being charged off to profit and loss and credited to a reserve for depreciation in the following amounts: in 1922, $4,779.44; in 1923, $4,779.44; in 1924, $4,789.19; in 1925, $4,789.19; and in 1926, $4,789.19. These amounts of depreciation were claimed as deductions in the returns filed by the petitioner.

It was not until 1926, upon the return to the office of the employee formerly in charge of the maintenance of the records, that determined effort was started to restore the records to their previous current and good physical condition. The cost of this rehabilitation is being charged to the reserve for depreciation and not to profit and loss.

In determining the deficiencies the respondent has disallowed the deductions claimed for depreciation of the records, giving as his reason for the disallowance that the cost of the records was fully recovered by the petitioner from its *2207 clients.

The said amounts of depreciation entered upon the books in the taxable years reflect reasonable allowances therefor.

*1372 OPINION.

TRUSSELL: We are required in this case to determine questions of fact relative to depreciation of the surveying and engineering records of the petitioner. In each of the taxable years amounts of reserves for this depreciation were set up on the books of the petitioner by charges to profit and loss, and the same amounts were claimed as deductions in the returns filed by the petitioner. The respondent has disallowed the deductions in their entireties, alleging that there is no cost returnable to the petitioner, since all of the cost was borne by the clients of the petitioner. On the contrary, however, the parties now stipulate that the records originally acquired by the petitioner upon organization in 1892 cost the petitioner $47,000 and, further, the evidence shows that the cost of the recording of the additional facts subsequently incorporated into the records was distinctly not charged to or paid by the clients. With respect to the records acquired prior to March 1, 1913, after a careful study of the evidence, including a *2208 showing of the probable original cost, the cost of reproduction and the amount of a bona fide cash offer for the records about that time, we are satisfied that the claim of the petitioner for recognition of a fair value in the amount of $250,000 on March 1, 1913, is allowable.

Prior to 1922, the records were kept in good physical condition and up to date. The work was done by the office force at odd times whenever opportunity offered. The costs thus incurred were merged with the expenses and currently charged off to profit and loss account; they were not capitalized upon the books. The application of strict theory would require the charging off in each of the years of allowances for depreciation and the capitalization of expenditures which resulted in capital additions to the assets, but the situation here is similar to other cases in which the cost of the replacements and additions is considered to equal the allowances for depreciation, and it is sufficient for all practical purposes to measure annual depreciation by the cost of replacements. Cf. *2209 . This customary maintenance of the records was not accomplished, however, during the taxable years, for the reason that the demands of greatly increased business, together with an unavoidable reduction of the office force, rendered it impossible to compile the accumulating additional information or even to physically maintain the existing records. Thus, on the one hand, there was a failure to maintain the previously steady stream of capital additions, while, on the other hand, there was clearly a depreciation of the existing records. We are satisfied that the petitioner is entitled to the deduction of reasonable allowances for depreciation growing out of this situation.

We must determine from the evidence what allowances will be reasonable in amount. A consistent method of accounting was followed *1373 by setting up reserves during the taxable years for the depreciation and subsequently the cost of the rehabilitation of the records was charged to the depreciation reserve and not to profit and loss. This case is similar to *2210 , wherein we approved a similar method of accounting. After a careful study of the evidence, we are of opinion that the petitioner has not sustained the burden with reference to its claim for obsolescence, and we do not view with favor the proposition to revise upward the allowances originally charged off on the books and claimed in the returns. We think that such allowances, estimated when apparently in close touch with the facts and conditions, satisfactorily reflect for income tax purposes the depreciation recognizable and allowable. We, therefore, conclude that the deficiencies should be recomputed allowing in the taxable years deductions from income of the depreciation entered each year upon the books and claimed in the returns.

Reviewed by the Board.

Judgment will be entered pursuant to Rule 50.

MORRIS, LANSDON, STERNHAGEN, ARUNDELL, MURDOCK, and MATTHEWS dissent.