
    Planters Nut & Chocolate Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8788, 10081.
    Promulgated May 28, 1927.
    
      Leon F. Gooyer, Esq., and R. E. Glessner, Esg., for the petitioner.
    
      L. L. Sight, Esq., for the respondent.
   Teammell:

These are proceedings for the redetermination of income and profits taxes for the years 1917, 1918, and 1919, in the respective amounts of $6,233.78, $21,542.50, and $15,898.14. The two proceedings were consolidated for the purpose of hearing and decision.

At the hearing petitioner waived all issues except the issue relating to the deductions on account of exhaustion, wear and tear of assets.

At the hearing the petitioner and the respondent submitted a stipulation agreeing to the classification of the petitioner’s property in Suffolk, Va., in 1917, 1918, and 1919, the cost or values of such classes of property to be used for depreciation purposes and also the rates of depreciation applicable to such classes of property, leaving in dispute only the question of the correct rate of depreciation on the “ brick candy building ” and the correct rate of depreciation on candy machinery.

FINDINGS OF FACT.

The petitioner is a Pennsylvania corporation engaged in the business of manufacturing and selling nut confections, principally salted peanuts and nut chocolates, and has plants located in Wilkes-Barre, Pa., Suffolk, Va., San Francisco, Calif,, and Toronto, Canada.

During the years 1917, 1918, and 1919 the petitioner owned and used in the operation of its business in Suffolk, Va., several buildings and also certain machinery, equipment, furniture and fixtures, automobiles, and trucks.

It was stipulated, that the following assets were used in its plant at Suffolk, Ya.; that their cost or value and the rate of depreciation was as follows:

Schedule A.
Depreciation sustained during gear ended December SI, 1917, at Suffolk (Ya.) plant.
Schedule B.
Depreciation sustained durinig year ended December 31, 1918, at SuffolJc (Ya.) plant.
Schedule C.
Depreciation sustained during year ended December 81, 1919, at Suffolk (Va.) plant.

The brick candy building was built by the petitioner in 1916 and 1917. It is a brick building of mill construction having wood floors and wood frame or supports, there being no steel. It is approximately 35 by 100 feet, four stories high, and has a tin roof. The building is used principally for peanut cleaning. Machinery for the shelling and blanching of peanuts is housed in it. This machinery is heavy and causes the building considerable wear. The building is immediately adjacent to a boiler room and steam from an exhaust is at all times around it. The steam exhaust under it comes up through the sides, causing considerable damage. Materials of heavy weight are stored in the building. Generally, there are in it 700 pounds of peanuts in coolers and trucks, which cause wear on the floor and walls. The building stands upon the ground which is damp from natural causes.

This building was specially built for the purpose of petitioner’s business and is adaptable to no purpose other than that for which it was built.

Considering ordinary repairs made from time to time, the building has an expected life of 40 years. A reasonable allowance for depreciation, including obsolescence, of this building is at the rate of 2y2 per cent for each of the years 1917,1918, and 1919, based upon the cost above set out.

The candy machinery of the petitioner consisted of peanut roasters, peanut blanchers, glucose tanks, marshmallow beaters, copper kettles, tin pans, wooden trays, galvanized iron pans, mixers of different kinds, scales, and those things which are necessary in the candy business.

Much of this candy machinery is subjected to heat, extreme heat in some instances. This is especially true of the roasters, which are operated at temperatures of from 360 to 400 degrees over open fires. The steam kettles, copper kettles, and glucose kettles are likewise subjected to extreme heat. The copper kettles as well as other parts and utensils ar'e over open fires. The glucose kettles are used for keeping the glucose warm in the mixtures and this is done with steam. The candy mixers and the chocolate mixers are all subjected to terrific heat, some over open fires and some by steam, the chocolate mixers having been operated under these conditions for periods of from 70 to 72 hours at a time. Practically all of the candy machinery is subjected to extreme heat, either over open fires or steam.

Because of these conditions under which it must be operated, the greater portion of this machinery depreciates rapidly. The roasters are machines consisting of numerous parts, such as cylinders, brick fireplace underneath, round-shaped hoods over the tops to retain the heat inside, sprockets, pulleys, shafting and belting, all of which is subject to rapid depreciation. Some of these parts will not last more than two or three years. The base and uprights of these machines, which are made of cast iron and constitute about 25 per cent of the entire machine, will last much longer.

A considerable portion, about 20 per cent, of the candy machinery is used in making salted peanuts. The salt causes corrosion, resulting in rapid depreciation.

About 10 per cent of the candy machinery consisted of numerous small miscellaneous items, such as metal pans and wooden trays, which last between two and three years.

The petitioner began the manufacture of candy at its Suffolk, Ya., plant in the early part of 1917, but did not engage in it as extensively as during the years 1918 and 1919, when candy was made on a very extensive scale. The depreciation of the candy machinery for 1917 was not as great as during the years 1918 and 1919. The candy sales for each of the years 1918 and 1919 were about double those of 1917. During the years 1918 and 1919 the machinery was operated frequently 14 and 15 hours a day and sometimes 24 hours. The normal working day was 10 hours. The care and maintenance of this machinery is entrusted to inefficient help.

The nature of the petitioner’s business requires frequent changes in the kinds and design of machinery due to the lessening in popular favor of the various pieces of novelty candy which it makes from time to time, necessitating a change to some other more popular piece of candy. The necessity for these changes is frequent and is anticipated. Machinery used in making a certain piece of candy having ready sales because of popular demand must be discarded when the demand ceases and some new piece requiring a different kind of machinery takes its place. A reasonable allowance for the exhaustion, wear and tear, including obsolescence, of the candy machinery for 1917 is 10 per cent, and for 1918 and 1919 is 15 per cent, based upon the cost as above set out.

Judgment will he entered on 15 days' notice, under Bule 50. 
      
       Building completed in 1920, therefore, no depreciation to be allowed in 1919.
     