Pennsylvania Salt Mfg. Co. v. Commissioner , 18 B.T.A. 1148 ( 1930 )

PENNSYLVANIA SALT MANUFACTURING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Pennsylvania Salt Mfg. Co. v. Commissioner

Docket Nos. 27199, 38453, 41691.

United States Board of Tax Appeals

18 B.T.A. 1148; 1930 BTA LEXIS 2510;

February 14, 1930, Promulgated

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The petitioner is entitled to an annual deduction from gross income for the exhaustion of contract.

Owen J. Roberts, Esq., and Edward A. Coughlin, C.P.A., for the petitioner.

John D. Foley, Esq., for the respondent.

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ARUNDELL

In these proceedings which have been consolidated for hearing and decision, the petitioner seeks a redetermination of its income-tax liability for the years 1922, 1923, 1925, and 1926, for which years the respondent has determined deficiencies as follows:

1922	$3,484.08
1923	4,616.05
1925	39,877.67
1926	5,176.56

The petitioner alleges that the respondent erred in the computation of its net income (1) through failure to correctly compute the allowance for depletion in the taxable years 1922 and 1923; and (2) through failure to allow a deduction covering the amortization of the cost of a contract.

It has been stipulated that the correct allowance for depletion in the year 1922 is $4,726.08 and in the year 1923, $4,733.57, thus leaving at issue only the second assignment of error, which pertains to all the years under consideration.

FINDINGS OF FACT.

The petitioner is a corporation organized under the laws of the State of Pennsylvania with its principal office in the Widener Building, Philadelphia.

On June 19, 1908, the petitioner entered into a contract with the Goldschmidt Chemical Co., whose name was subsequently changed to the Metal & Thermit Corporation, by the terms of which the petitioner agreed to sell to the Metal & Thermit Corporation certain quantities of chlorine gas which were to be liquefied by the Metal & Thermit Corporation in a plant built by it upon ground belonging to the petitioner. This contract was for a period of ten years, with right to renew for an additional five years. It was still in force under the renewal provisions on March 31, 1922, when other contract arrangements were made between the parties.

From the year 1916 until March 31, 1922, when the new arrangements were entered into, the petitioner and the Metal & Thermit Corporation operated under a further agreement whereby all the surplus liquid chlorine manufactured by the Metal & Thermit Corporation was sold by the petitioner. To manufacture this surplus liquid chlorine the petitioner furnished gas free. The net sales of surplus chlorine were then divided equally between the petitioner and the Metal & Thermit Corporation. Out of its share the petitioner paid the cost of making gas and derived a profit. From the other half the Metal & Thermit Corporation paid the expenses of liquefying and derived a profit.

On March 31, 1922, the Metal & Thermit Corporation had a liquefying plant on land belonging to the petitioner under a lease which would expire February 1, 1925. The surplus liquid chlorine from this plant was sold by the petitioner under its own brand to its trade. On this date the petitioner bought the liquefying plant of the Metal & Thermit Corporation. As part of this purchase and sale the Metal & Thermit Corporation agreed for itself and the interest which it controlled, or might thereafter control, not to sell liquid chlorine for a period of five years from April 1, 1922. On the same date the petitioner entered into a contract with the Metal & Thermit Corporation to sell to that company all the liquid chlorine needed by it in its other business over a period of five years from April 1, 1922, at a price of 3 1/2 cents per pound.

This contract of purchase contained a provision whereby the Metal & Thermit Corporation had the right to extend the terms of the agreement at the expiration thereof for a further period of five years at 3 1/4 cents per pound for liquid chlorine, provided notice was given on or before April 1, 1926.

The agreement by which the petitioner purchased the plant of the Metal & Thermit Corporation property stated a consideration of $325,000, payable in five annual installments of $65,000 each. The contract for the sale of liquid chlorine had a stated consideration of $1. It has been stipulated that the $325,000 consideration "was paid, $150,000 for plant and equipment and the remainder of $175,000 for the other considerations received by the taxpayer under the contracts."

During the five years the contract was in force the petitioner sold the Metal & Thermit Corporation 20,000,000 pounds of liquid chlorine at 3 1/2 cents per pound, on which there was a profit of 2 cents per pound. The petitioner attributed the $175,000 to the cost of the contract whereby petitioner was to sell to the Metal & Thermit Corporation all of the liquid chlorine it would need for a period of five years from April 1, 1922. In its tax returns the petitioner sought to recover this cost by way of a depreciation deduction over that period. The respondent disallowed the claimed deduction on the ground that the amount of $175,000 represented the purchase price of good will of the liquid chlorine business.

Of the sum of $325,000 which the petitioner paid under the contract of March 31, 1922, $175,000 was paid for the contract to sell to the Metal & Thermit Corporation all of the liquid chlorine it would require for a period of five years commencing April 1, 1922.

OPINION.

ARUNDELL: In these proceedings the parties have reached an agreement as to the proper depletion deduction for the years 1922 and 1923 as set forth in the opening statement of this report. The remaining issue arose out of respondent's refusal to allow as a deduction depreciation of the amount claimed by petitioner as the cost of a contract.

By the terms of the contract of sale dated March 31, 1922, the Metal & Thermit Corporation sold to petitioner for the sum of $325,000, payable in installments, its plant and equipment located at Wyandotte, Mich., and the liquid chlorine business which it at the time of the sale was conducting and of which petitioner was the agent for the vendor. The contract also provided that the vendor would not sell liquid chlorine for a period of five years from April 1, 1922. The parties have agreed that $150,000 of the total amount paid under the contract was for plant and equipment and it is petitioner's contention that the remaining $175,000 was paid in consideration of the Metal & Thermit Corporation agreeing to purchase from petitioner for a period of five years all the liquid chlorine that it would need. This so-called requirement contract was entered into on the same day as the contract of sale and was part and parcel of one and the same transaction.

We are satisfied from the evidence that what the petitioner really acquired for the $175,000 payment was the contract to sell the Metal & Thermit Corporation its requirements of liquid chlorine for a period of five years. This contract is a capital asset having a determinable life and its cost may be exhausted over its term. It follows that petitioner should be permitted to deduct over the five-year life of the contract its established cost of $175,000.

Decision will be entered under Rule 50.