Appeal from the District Court of the United States for the District of New Jersey; Guy L. Fake, Judge.
Before BUFFINGTON, DAVIS, and THOMPSON, Circuit Judges.
This is an appeal from a judgment of the District Court disallowing a claim of the appellant for amortization of the cost of certain facilities acquired for the production of articles contributing to the prosecution of the war.
In 1918 and for many years prior thereto, the appellant was engaged in the manufacture of rubber tires. In computing its net income for 1918 it claimed an allowance for the year of a reasonable deduction for amortization of the cost of certain buildings, machinery, equipment, and other facilities constructed, erected, installed, or acquired by it on or after April 6, 1917, for the production of articles contributing to the prosecution of the war against the German government under section 234 (a) (8) of the Revenue Act of 1918 (40 Stat. 1078), which provides that: "(8) In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of the present war, there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the taxpayer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income."
The taxpayer claimed a deduction for amortization under this section for the year 1918. The Commissioner allowed $682,044.99. This was unsatisfactory to the taxpayer, and it brought suit to recover $799,106.99 with interest on account of an overpayment of income and profits taxes for that year. The amount sued for was increased to $1,927,241.67 by plaintiff's reply to the counterclaim of the United States. The District Court held that no part of the cost borne by the appellant for its facilities constituting its plant in Cumberland, Md., was amortizable, and so did not make any allowance whatever for these facilities.
From its organization in 1899 the principal business of the appellant consisted of the manufacture and sale of rubber tires for automobiles and other vehicles. Its principal plant was at Akron, Ohio. During the years 1915 and 1916 its business increased greatly. This was due to the supplying of tires by its branches and agencies to the United States government for the Mexican invasion and to automobile manufacturers who were making trucks for France, England, and Belgium. This increase taxed appellant's facilities to the utmost. In consequence in 1915 appellant's officers and directors felt that a new plant should be built to replace its existing facilities and to supply the increasing demand for its tires. It seemed necessary to build an entirely new plant because there was no room for expansion of the plant at Akron.
An investigation of available locations was made, and in the spring of 1916, negotiations were begun with the city of Cumberland, Md., with the result that on October 4, 1916, appellant entered into an agreement with the Cumberland Development Company, a corporation organized by public-spirited citizens of Cumberland, whereby appellant agreed to build a new plant at Cumberland to take the place of its plants at Akron and elsewhere. In order to induce the appellant to locate at Cumberland and move its various plants there, the city agreed to give it $750,000 and a site for the plant. The new factory was to cost a minimum of $1,500,000, which would employ three thousand persons within two years after its completion. A contract was entered into by the city and appellant for the extension and improvement of the streets of the city. The Baltimore & Ohio Railroad Company under an agreement with the appellant relocated its tracks so as to have them traverse the site of the plant.
The feeling in this country in 1915 and 1916 ran high in favor of entering the World War on the side of the allies, and by November 4, 1916, when the appellant entered into a contract for the erection of the plant, it was practically certain that we would enter into the war and that there would be a great demand for the products of the appellant.
In 1916 and 1917 it had various orders for tires from the War Department. All this was making a new plant desirable, if not necessary. Its engineering department estimated in 1916 that the erection of the new plant would cost about $2,500,000. In November or December of that year outside engineers were employed, and their first estimate was $4,800,550 exclusive of engineering fees and other indirect costs.
In March of 1917 the appellant concluded to go ahead and put up the factory, and on April 2, 1917, it decided to break ground for the plant not later than April 10th. This it did on April 11th. It was expected at that time that the plant would be completed by July, 1918, but in the meantime, on April 6, 1917, war had been declared against Germany, and structural steel could not be secured because all the steel that the plants of the country could produce was required for the building of ships for the government. This, of course, delayed the work. However, in February, 1918, it was able to get structural steel for its mechanical building, which was finished when the Armistice occurred on November 11, 1918. At that time the grading for the entire plant was practically completed, the sewer lines were laid, and the underground work was completed. During the year of 1918 war orders represented 40 per cent. of appellant's business, which had expanded from 1,000 tires to 5,000 a day. This was due to the stimulus of the war in Europe, for purely peaceful, domestic consumption would not have created such a demand.
The period following the Armistice was a time of great uncertainty. No one seemed sure of just what would take place. The appellant was in a dilemma as to whether to stop or go on with its plan of building and complete its contracts. Among the losses which it had to consider if it stopped were the following:
Loss on plant site $75,000.00
Loss on expenditures and pur-
Loss on Cumberland Develop-
ment Company contract ...