Nichols
v.
Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.Nov 6, 1964
43 T.C. 135 (U.S.T.C. 1964)

Docket No. 84901.

1964-11-6

C. L. NICHOLS AND MILDRED H. NICHOLS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

T. M. Ingersoll and W. R. Mockridge, for the petitioners. David A. Pierce, for the respondent.


T. M. Ingersoll and W. R. Mockridge, for the petitioners. David A. Pierce, for the respondent.

Petitioner, during the year 1955, contracted to sell all of the assets of his quarrying and rock-crushing business, with the exception of the cash, accounts receivable, two automobiles, and a pickup truck. The portion of the aggregate selling price allocable to depreciable machinery and equipment and certain quarry lease agreements was $195,000. The adjusted cost basis of such machinery and equipment was $145,993.94. Petitioner claimed a deduction for depreciation on all his machinery and equipment for the year 1955 without placing thereon any salvage value. Respondent disallowed all of such claimed depreciation with respect to those assets which were contracted to be sold, and reduced the depreciation claimed on the three retained vehicles after determining a salvage value for them. Petitioner established that approximately $79,000 of the gain reported by him did not result from his claiming excessive depreciation on the machinery and equipment sold by him. Petitioner, however, failed to establish that approximately $14,600 of the gain realized by him did not result from excessive depreciation. Held, respondent's determination regarding the depreciation claimed on the assets contracted to be sold is sustained to the extent of approximately $14,600. Held, further, the salvage value determined by respondent for the three vehicles and his reduction of the depreciation claimed for them are approved for failure of petitioner to show error with regard thereto.

FAY, Judge:

Respondent determined a deficiency in petitioners' income tax for the year 1955 in the amount of $25,682.62.

The sole issue for decision is whether, under the facts and circumstances of this case, petitioner C. L. Nichols was entitled to claim depreciation on various assets used by him in a quarrying and rock-crushing business in 1955, the year he contracted to sell these assets. All other issues raised by the pleadings have been conceded by the petitioners.

FINDINGS OF FACT

Petitioners, C. L. Nichols and Mildred H. Nichols, are husband and wife residing in Charlotte, Iowa. They filed a joint income tax return for the taxable year 1955 with the district director of internal revenue at Des Moines, Iowa. The wife, Mildred, is a party hereto solely by reason of her having joined in the filing of said joint return; and the term ‘petitioner‘ as hereinafter used will refer only to the husband, C. L. Nichols.

Petitioner, both during and for several years prior to the taxable year 1955 here involved, was engaged in the business of quarrying and rock crushing in Clinton County, Iowa. Prior to 1955, he had been associated in such business with a man named George F. Schrader. Their business operations had been conducted initially as a partnership, later for a time through a corporation, and then thereafter again as a partnership. On January 1, 1955, petitioner had acquired Schrader's interest in the assets and operations of the business, by transferring to him certain real estate and cash, the aggregate value of which is not established by the evidence. Thereafter, during the year 1955, petitioner continued to operate said business as a sole proprietorship, under the former trade name of Nichols & Schrader.

The properties which petitioner employed during the year 1955 in his proprietorship business operations consisted principally of: Miscellaneous machinery and equipment, including such items as rock crushers, drills, compressors, shovels, pumps, bulldozers, trucks, and related units; several automobiles and trucks of various kinds; and four parcels of real estate which he owned, including two on which there were rock quarries and farm buildings, one on which there was a combination garage and office building, and one on which there were bulk oil storage facilities. All of said land (together with the quarries and other improvements located thereon) and approximately 85 percent of said machinery and equipment had previously been used in the above-mentioned partnership between petitioner and Schrader. As to several of the depreciable items, the original cost thereof had been fully depreciated for income tax purposes prior to 1955. One of the above automobiles (an Oldsmobile) had been acquired by the partnership in 1954 and was partially depreciated during that year. Another automobile (a Dodge) and a pickup truck (also a Dodge) were acquired by petitioner in 1955.

In addition, petitioner during the year 1955 was a ‘lessee‘ under six quarry lease agreements relating to land owned by various other persons on which rock quarries were situated. At least three of these agreements, as hereinafter shown, had been executed by him during the year 1955; and all had been obtained without payment of any ‘cost‘ or consideration, other than his agreement to pay specified royalties on the rock he removed, and to perform the other obligations imposed on him thereunder. The dates of these quarry lease agreements, the period for which they were to run, their costs to petitioner, and the amounts of the royalties which petitioner had contracted to pay to the lessors on the rock he removed, were as follows:

+--------------------------------------------------------------+ ¦Name of lease¦Date of lease¦Period of¦Cost to ¦Royalty to be¦ +-------------+-------------+---------+----------+-------------¦ ¦ ¦ ¦ ¦ ¦lease ¦petitioner¦paid lessor ¦ +-------------+---+----+----+---------+----------+-------------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+---+----+----+---------+----------+-------------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------------------------------------------------------+

Years Per ton Fatchett Aug. 10, 1954 5 None $0.05 Mackeprang Feb. 23, 1955 5 None .05 Ehlers Mar. 4, 1955 5 None 1 .05 Shaff Aug. 18, 1955 5 None .10 Spain (2) (2) None (2) Weibel (2) (2) None (2)

The following is an itemized list of the depreciable machinery and equipment sold by petitioner on January 4, 1956. It sets forth pertinent facts relating to the depreciation claimed on these assets.

+-----------------------------------------------------------------------------+ ¦ ¦ ¦ ¦Adjusted ¦ ¦Estimated¦ +------------------+----------+------------+-----------+------------+---------¦ ¦ ¦Original ¦Depreciation¦basis as of¦Depreciation¦remaining¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Type of property ¦cost or ¦claimed ¦Jan.1,1955,¦claimed in ¦useful ¦ ¦ ¦ ¦prior ¦ ¦ ¦life ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦ ¦basis ¦to Jan.1, ¦or at time ¦1955 ¦as of ¦ ¦ ¦ ¦ ¦ ¦ ¦Dec. ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦ ¦ ¦1955 ¦acquired ¦ ¦31, 1955 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦ ¦ ¦ ¦during 1955¦ ¦(years) ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Primary crusher ¦$15,744.90¦$1,718.75 ¦$14,026.15 ¦$3,747.45 ¦3 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Secondary crusher ¦16,742.05 ¦823.38 ¦15,918.67 ¦3,979.67 ¦3 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦GMC twin 6 power ¦9,549.20 ¦2,782.94 ¦6,766.26 ¦2,259.79 ¦2 ¦ ¦unit ¦ ¦ ¦ ¦ ¦ ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Koehring shovel ¦14,437.50 ¦6,562.50 ¦7,875.00 ¦3,937.50 ¦1 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Bucyrus-Erie 3/4 ¦16,358.10 ¦4,755.90 ¦11,602.20 ¦4,640.88 ¦1 1/2 ¦ ¦yd. shovel ¦ ¦ ¦ ¦ ¦ ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Dragline bucket ¦1,986.26 ¦283.74 ¦1,702.52 ¦567.21 ¦2 ¦ ¦and attachment ¦ ¦ ¦ ¦ ¦ ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦A.C. Mod. HD 15A ¦16,777.04 ¦2,396.72 ¦14,380.32 ¦4,795.83 ¦2 ¦ ¦dozer ¦ ¦ ¦ ¦ ¦ ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Koehring dumpsters¦18,215.66 ¦5,288.43 ¦12,927.23 ¦6,463.62 ¦1 ¦ ¦(2) ¦ ¦ ¦ ¦ ¦ ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Portable bins (3) ¦8,359.21 ¦1,156.80 ¦7,202.41 ¦1,244.83 ¦4-7 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Sanderson well ¦7,220.44 ¦3,281.98 ¦3,938.46 ¦1,312.80 ¦2 ¦ ¦drill ¦ ¦ ¦ ¦ ¦ ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Air compressor ¦5,207.34 ¦3,352.66 ¦1,854.68 ¦927.34 ¦1 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Truck scales (8) ¦13,369.13 ¦1,185.40 ¦12,183.73 ¦2,051.60 ¦2-4 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Caterpillar dozer ¦5,508.98 ¦4,382.68 ¦1,126.30 ¦813.15 ¦1/2 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦International ¦7,129.17 ¦1,320.21 ¦5,808.96 ¦2,904.48 ¦1 ¦ ¦truck tractor ¦ ¦ ¦ ¦ ¦ ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Tanks ¦1,235.95 ¦215.83 ¦1,020.12 ¦123.07 ¦2-9 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦1953 Dodge pickup ¦1,108.34 ¦291.67 ¦816.67 ¦408.34 ¦1 ¦ ¦truck ¦ ¦ ¦ ¦ ¦ ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦1953 Ford pickup ¦798.07 ¦208.97 ¦589.10 ¦294.55 ¦1 ¦ ¦truck ¦ ¦ ¦ ¦ ¦ ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦1955 Dodge pickup ¦ ¦ ¦ ¦ ¦ ¦ ¦truck ¦ ¦ ¦ ¦ ¦ ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦(w/toolbox) ¦2,358.79 ¦ ¦2,358.79 ¦393.13 ¦2 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦1955 Dodge pickup ¦1,777.38 ¦ ¦1,777.38 ¦296.23 ¦2 ¦ ¦truck ¦ ¦ ¦ ¦ ¦ ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Rock breaker ¦479.52 ¦88.38 ¦391.14 ¦39.11 ¦9 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Trailer lowboy ¦2,080.33 ¦1,580.33 ¦500.00 ¦250.00 ¦1 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Trailer ¦372.71 ¦113.44 ¦259.27 ¦51.86 ¦4 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Dodge dump truck ¦3,760.19 ¦274.60 ¦3,485.59 ¦1,162.45 ¦2 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Michigan loader ¦15,167.47 ¦ ¦15,167.47 ¦1,516.75 ¦4 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Ford industrial ¦668.95 ¦ ¦668.95 ¦66.90 ¦4 ¦ ¦engine ¦ ¦ ¦ ¦ ¦ ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Pump ¦737.55 ¦603.45 ¦134.10 ¦67.05 ¦1 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Desk and chairs ¦59.45 ¦19.41 ¦40.04 ¦8.01 ¦4 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Calculator (used) ¦28.84 ¦21.16 ¦7.68 ¦7.68 ¦ ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Check protector ¦61.49 ¦13.49 ¦48.00 ¦7.99 ¦5 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Typewriter (used) ¦38.50 ¦21.50 ¦17.00 ¦17.00 ¦ ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Safe ¦190.28 ¦18.72 ¦171.56 ¦10.72 ¦15 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Adding machine ¦141.19 ¦30.82 ¦110.37 ¦18.39 ¦5 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦2 Fireproof files ¦523.26 ¦ ¦523.26 ¦17.54 ¦14 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Grease machine ¦235.15 ¦146.15 ¦89.00 ¦44.52 ¦1 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Filling station ¦302.60 ¦112.40 ¦190.20 ¦47.55 ¦3 ¦ ¦equipment ¦ ¦ ¦ ¦ ¦ ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Air compressor ¦212.40 ¦75.60 ¦136.80 ¦28.36 ¦4 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Steam cleaner ¦183.34 ¦66.66 ¦116.68 ¦23.34 ¦4 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦Scale house ¦98.44 ¦36.56 ¦61.88 ¦15.47 ¦3 ¦ +------------------+----------+------------+-----------+------------+---------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+

Respondent, pursuant to statutory notice of deficiency, disallowed all of the depreciation claimed by petitioner with respect to the machinery and equipment which petitioner had contracted to sell on December 20, 1955, and actually did sell 2 weeks later on January 4, 1956. Respondent in the notice of deficiency gave the following explanation for his action:

Depreciation deduction claimed on the return is decreased in the amount of $45,929.15. Some of the assets were contracted to be sold as of January 4, 1956 during the year 1955. In 1955 the sale price was known and such sale price exceeded the remaining cost basis on January 1, 1955 or date of acquiral during 1955.

With regard to the other business assets which petitioner retained, respondent reduced the amount of depreciation claimed by redetermining the amount of depreciation to be allowed. The aggregate amount of allowable depreciation for all the assets retained by petitioner as recomputed by respondent was $765. Respondent arrived at this amount by taking into consideration ‘Estimated Salvage Value,‘ as determined by him, in the amount of $1,218.96 for the Oldsmobile automobile, $1,311.95 for the Dodge automobile, and $640 for the Dodge pickup truck.

OPINION

It is respondent's position that, as a matter of law, no depreciation is allowable with respect to the machinery and equipment contracted to be sold by petitioner in 1955 because petitioner knew, before the end of that year, that the amount to be received for such assets exceeded his aggregate adjusted basis therein as of January 1, 1955, or their date of acquisition during 1955. This Court in a very recent opinion, Macabe Co., 42 T.C. 1105 (1964), held that there is no such rule of law. See also Smith Leasing Co., 43 T.C. 37 (1964); and Harry Trotz, 43 T.C. 127 (1964).

Despite the fact that we cannot sustain respondent as a matter of law, the determination made in his statutory notice of deficiency is presumptively correct. As we indicated in Macabe Co., supra at 1115, the amount received upon the sale of property at or near the end of its estimated useful life (especially in the case of property with a short useful life) may be a relevant yardstick for purposes of determining salvage value. Thus, where respondent, pursuant to a statutory notice of deficiency, disallows a depreciation deduction in the year of sale because the sales price exceeds the estimate of salvage value, respondent has made a prima facie case that excessive depreciation has been claimed and that no depreciation is allowable in the year of sale. At that point, petitioner, in order to establish that he is entitled to some or all of the depreciation claimed, must show that estimates used by him in his depreciation schedule were correct and that the gain realized on the sale resulted from market appreciation. Our holding that depreciation cannot be disallowed as a matter of law solely because the sales proceeds exceed the adjusted basis of the asset as of the beginning of the year does not detract from the presumptive correctness of respondent's disallowance of depreciation. This is not a situation where respondent's determination loses its presumption of correctness because it was arbitrarily made or is plainly wrong. Cf. Helvering v. Taylor, 293 U.S. 507 (1935); and Welch v. Commissioner, 297 F.2d 309 (C.A. 4, 1961), reversing a Memorandum Opinion of this Court. The instant case involves a situation where petitioner is claiming a deduction. The burden is therefore on petitioner not only to show that the respondent's determination was incorrect but also to establish the amount of the deduction claimed. Burnet v. Houston, 283 U.S. 223 (1931). To the extent petitioner can establish that he is entitled to the deduction claimed, we will allow such deduction. Cohan v. Commissioner, 39 F.2d 540 (C.A. 2, 1930). To the extent petitioner cannot demonstrate that he is entitled to the depreciation claimed, we must sustain respondent's determination.

A review of the record before us indicates that petitioner has carried his burden as to the major portion of the depreciation claimed by him.

Petitioner claimed depreciation on the assets sold on the basis of the straight-line method of depreciation. Various useful lives had been assigned to the assets. As of December 31, 1955, the assets had remaining useful lives ranging from zero to 4 years, with only a few exceptions. In each instance the estimate of useful life was based upon petitioner's intention to hold the asset for its full physical life. Respondent does not dispute the correctness of any of these estimates of useful life. It is true that petitioner contracted to sell the major portion of the operating assets used in his business within 1 year after he bought out his partner and began to conduct the rock-crushing and rock-quarrying business as a sole proprietorship. However, respondent in the present situation does not regard petitioner's sale as evidence that petitioner, at the time he acquired his partner's interest in the business, intended to sell the business and the underlying assets within 1 year's time. Cf. Smith Leasing Co., supra. On the basis of the record before us, petitioner, as of the beginning of 1955, or at such times during 1955 when he acquired additional assets for use in his business, did not anticipate selling such assets prior to the expiration of the various estimates of useful life he had made with regard thereto.

In computing depreciation on these assets, however, petitioner had neglected to take any salvage value into consideration. It was conceded on behalf of petitioner that the assets in question, at the end of their estimated useful lives, would have had some salvage value. Because of this fact, petitioner over the years may have claimed more depreciation than he was entitled to.

However, in our view, petitioner has demonstrated that the major portion of the gain realized by him on his sale was not an artificial or pseudo gain resulting from excessive depreciation (the claiming of depreciation at a faster rate than actual exhaustion was taking place) on the equipment sold.

PIERCE, J., dissenting:

I

II

Another unique feature of the Court's opinion herein is that, in determining the ‘salvage’ or resale value of the machinery and equipment which was sold, the Court disregarded the sale price upon which the parties themselves had agreed, and employed instead opinion-evidence as to fair market value of the property at the time of its sale. By such process, it approved the use of a fair market value for the machinery and equipment in the amount of $116,000, in lieu of the actual sale price of $195,000— thus making possible the use of one ‘sale price’ for the seller, in computing salvage value for present depreciation purposes; and the use of a different sale price for the buyer, in computing its cost basis for depreciation in future years. The difference between these two amounts ($116,000 and $195,000) is $79,000; and as to this amount, the Court was unable, even by use of conjecture, to identify the same with any of the specifically listed items of property included in the sale agreement for the rock-crushing business involved.

In my view, such use of fair market value in lieu of the actual sale price, for determining realizable ‘salvage value’ in the year of sale, is not warranted. No support or authority for such method can be found either in the pertinent statute or the Income Tax Regulations; and it appears to be completely out of harmony, both with the above-cited Court of Appeals authorities and with the decisions of the Supreme Court in Massey Motors v. United States, 364 U.S. 92 (1960), and Hertz Corporation v. United States, 364 U.S. 122 (1960).

Based on all the foregoing, I respectfully express my dissent.

MULRONEY, J., agrees with this dissent.

+------------------------------------------------------------------+ ¦The total aggregate valuation ascribable to all of the ¦ ¦ +---------------------------------------------------------+--------¦ ¦machinery, equipment and leaseholds contracted to be sold¦ ¦ +---------------------------------------------------------+--------¦ ¦and described in the contract of sale was in the sum ¦ ¦ +---------------------------------------------------------+--------¦ ¦of ¦$195,000¦ +---------------------------------------------------------+--------¦ ¦The valuation of the inventory of all stockpiles of road ¦ ¦ +---------------------------------------------------------+--------¦ ¦rock on hand was in the sum of ¦9,000 ¦ +---------------------------------------------------------+--------¦ ¦The agreed values of the two parcels of real estate owned¦ ¦ +---------------------------------------------------------+--------¦ ¦by petitioner, upon which the business building and ¦ ¦ +---------------------------------------------------------+--------¦ ¦facilities were situated, were $8,000 and $2,000, ¦ ¦ +---------------------------------------------------------+--------¦ ¦respectively, or a total of ¦10,000 ¦ +---------------------------------------------------------+--------¦ ¦Total of amounts so allocated (being equal to ¦ ¦ +---------------------------------------------------------+--------¦ ¦the aggregate sale price) ¦214,000 ¦ +------------------------------------------------------------------+

The total purchase price of $214,000 was to be paid in installments as follows: $3,000 upon execution of the agreement (the receipt of which was therein acknowledged); $24,500 on January 4, 1956; $3,000 on the first of each month from February through December 1956; and $5,000 on the first of each month from May 1, 1957 (excepting February, March, and April of each year), until the whole of said purchase price of $214,000 was paid in full. As regards the real estate, possession thereof was to be given to the second party on January 4, 1956, but legal title thereto was to remain in the first party until the entire purchase price was paid, at which time warranty deeds were to be executed and delivered. And as regards the machinery and equipment, possession thereof also was to be given to the second party on January 4, 1956, but title to the same was to remain vested with the first party until $186,500, being the entire remaining purchase price, had been paid. At that time a bill of sale was to be executed and delivered. The first party further agreed to assign to the second party on January 4, 1956, all his right, title, and interest as ‘lessee’ in the six above-mentioned quarry lease agreements; and the second party agreed to assume from and after January 4, 1956, payment of the royalty payments to the ‘lessors' and also performance of all other obligations called for in said lease agreements.

Two weeks thereafter on the agreed closing date of January 4, 1956, petitioner, Farquhar, and Lawrence met again, and on that date the following events occurred.

(1) As regards the first-mentioned contract of December 20, 1955, relating to the two parcels of real estate owned by petitioner, upon which rock quarries and farm buildings were situated, this contract was made effective without any change of provisions. Possession of these properties was given to the named buyers. Thereupon they paid petitioner the agreed further installment of $2,000 on the total agreed purchase price of $35,000 (which was in addition to the $500 they had paid at the time of execution of this contract).

(2) As regards the second contract of December 20, 1955, relating to the two remaining parcels of real estate (on which the oil storage facilities and garage-office building were situated), the machinery and equipment, and the leases, Farquhar and Lawrence requested, and petitioner agreed, that a new contract of sale be substituted. This new contract was substantially identical with the other, except for two changes. These changes embodied in the substituted contract were as follows:

(a) In the substituted agreement, the name of the second party was changed from Farquhar Quarries, Inc., an Iowa corporation, to Quarries, Inc., an Indiana corporation which was authorized to operate in the State of Iowa. In the case of both corporations, Farquhar was president and Lawrence was secretary.

(b) In the substituted contract, the description of those properties (other than real estate) as to which an agreed value of $195,000 was assigned for the purpose of allocating the sale price thereto was changed so that any reference to the six quarry lease agreements was omitted (in order to permit assignment of petitioner's ‘lessee’ interests therein to be covered by a separate agreement, as hereinafter shown); and the revised comparable provision of the substituted contract thus read as follows:

The total aggregate valuation ascribable to all of the machinery, equipment (contracted to be sold and described in the contract of sale) * * * is in the sum of— $195,000

Petitioner gave credit to the substituted second party, Quarries, Inc., for the $3,000 initial payment which had theretofore been made on December 20, 1955. Quarries, Inc., thereupon paid petitioner the additional amount of $24,500 (making a total of $27,500 for the initial payments under the substituted contract). Also, possession of the properties covered by this contract was thereupon given to the second party, subject to reservation of title in petitioner pending full payment of the purchase price of $214,000.

(3) Concurrently with the closing of the two above-mentioned agreements, another agreement was executed by petitioner and by Farquhar and Lawrence, individually, under which petitioner, ‘in consideration of the mutual agreements herein made and in consideration of the sum of ONE DOLLAR,‘ assigned to Farquhar and Lawrence in their individual capacities, all his right, title, and interest as ‘lessee’ in the six above-mentioned quarry lease agreements. Farquhar and Lawrence at the same time agreed to assume all obligations under said leasehold agreements, including the payments of the royalties therein provided for. They further agreed (a) that they would not assign any of said quarry leases without the written consent of petitioner and (b) that in the event of any default of any of the payments or covenants of the previously mentioned contract between petitioner and Quarries, Inc., they would reassign said leaseholds to petitioner, and all of their rights in said leases would revert to petitioner without further action on his part.

(4) Petitioner, as above stated, did not sell, but retained for himself, the following assets of his proprietorship: The cash, the accounts receivable, the Oldsmobile and Dodge cars, and a Dodge pickup truck.

Petitioner, on the joint income tax return which he and his wife filed for the year 1955, claimed a deduction for depreciation for said year of $46,694.15, consisting of depreciation of $45,197.18 on the machinery and equipment he had contracted to sell during 1955 and depreciation of $1,496.97 on the three automotive vehicles which he had elected to retain. In computing such claimed depreciation, petitioner did not provide for, or take into consideration, any salvage value for any of the assets, but rather he proceeded on the theory that all of the assets would be used in his business until their usefulness would be exhausted and they would have no substantial salvage value. The manner in which he computed his claimed depreciation for 1955 was as follows:

+------------------------------------------------------------------+ ¦ ¦ ¦ ¦Depreciation¦Remaining ¦Depreciation¦ +-----+--------+--------+------------+----------------+------------¦ ¦ ¦ ¦ ¦allowed ¦adjusted ¦claimed ¦ +-----+--------+--------+------------+----------------+------------¦ ¦ ¦ ¦ ¦in ¦cost ¦for ¦ +-----+--------+--------+------------+----------------+------------¦ ¦ ¦Date ¦Original¦prior ¦basis on ¦year ¦ +-----+--------+--------+------------+----------------+------------¦ ¦Asset¦acquired¦cost ¦years ¦Jan. 1, 1955 1 ¦1955 ¦ +-----+--------+--------+------------+----------------+------------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----+--------+--------+------------+----------------+------------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------------------------------------------------+

Sold Machinery and equipment 1955 $27,889.55 none ) $44,562.06 $145,993.94 Do Pre-1955 161,335.62 $43,231.23 ) Farm buildings Pre-1955 581.32 118.61 462.71 46.26 Garage and office Pre-1955 4,775.56 1,024.44 3,751.12 375.11 building Oil storage facilities 1949 1,327.50 472.50 855.00 213.75 Total for sold assets 151,062.77 45,197.18

Retained Oldsmobile car 1954 2,109.58 140.62 1,968.96 656.65 Dodge car and pickup truck 1955 5,041.95 none 5,041.95 840.32 Total for retained assets 7,010.91 1,496.97 Total for both sold and retained assets 158,073.68 46,694.15