Appeal of THE CINCINNATI FROG & SWITCH CO.

Appeal of THE CINCINNATI FROG & SWITCH CO. Docket No. 2032. Submitted May 18, 1925. Decided September 30, 1925. During tbe year 1918 certain of tbe taxpayer's planers were equipped with a device invented by the president of tbe corporation, which increased the output of the machines to a considerable extent. Meld,, that the evidence does not prove such an abnormality of income as requires the determination of tax liability under section 328 of the Revenue Act of 19Í8. E. L. Bono, Esq., for the taxpayer. ■ Robert A. Littleton, Esq., for the Commissioner. Before James, Smith, and Trussell. This appeal is from the determination of a deficiency in income and profits tax for the year 1918 in the amount of $6,062.83. The taxpayer sought relief from tax liability by having its profits tax determined under section 328 of the Revenue Act of 1918. The Commissioner has denied the claim of taxpayer to this relief on the ground that the evidence did not indicate such an abnormality of invested capital or income as warranted such consideration. FINDINGS OF FACT. The taxpayer was incorporated in 1906 and began operations in 1907. It is engaged in the manufacture of frogs and switches for railroad and mine trackage. In order to enable the taxpayer to survive during the first few years of its existence, its officers served the company at a small salary and the salaries of the office force were reduced 50 per cent. This reduction was in force for at least two years. At the time that the taxpayer was organized practically all frogs and switches for the use of trackage in mines were made in blacksmith shops. The president invented a device for the making of switch points which was much superior to any device then on the market. This device is put on a planer and when the rail is placed in the device it is impossible for the man to set it in the wrong direction, so that it is not necessary for him to use any caution in planing the rail because he knows it is going to go right every time. With this device an operator could turn out from 20 to 30 per cent more switch points than could be turned out in any other manner. Two of the planers used by the taxpayer were equipped with this attachment. The device was never patented, nor was any application for a patent ever made. The percentage of profits tax assessed against the taxpayer for 1918 to income is 59.53. The St. Louis Frog & Switch Co. is engaged in substantially the same business as taxpayer. Its percentage of profits tax to income for the year 1918 was 57. DECISION. The determination of the Commissioner is approved. [MAJORITY — Smith:] OPINION. Smith: In its petition the taxpayer alleges error on the part of the Commissioner in determining a deficiency for the year 1918 in the amount of $6,062.83, as follows: (a) The Commissioner’s determination of the deficiency does not give the taxpayer the relief by special assessment to which it is entitled. (5) The Commissioner, in obtaining comparatives, has used corporations which are not properly comparable to taxpayer. (c) The taxpayer has not been informed what comparatives have been used by the Commissioner in determining the said deficiency. The only material evidence presented in this appeal is stated in the findings of fact. The taxpayer alleges an abnormality in income for the year 1918 arising from the fact that during the early years of taxpayer’s existence the officers had served the corporation at small salaries and that the president had equipped two of the planers used by it in the making of switch points with a device invented by him which materially increased the output and lessened the cost of production of switch points. We do not think that these facts prove any material abnormality of income. The president of the corporation would not state any specific amount of its profits for the year 1918 which could be ascribed to the use of the device, and the only evidence before the Board that the taxpayer’s profits tax determined by the Commissioner was in excess of the profits tax paid by representative concerns is that the profits tax of the St. Louis Frog & Switch Co. for 1918 was only 57 per cent of the total net income. This evidence does not prove such an abnormality of income as warrants the determination of the taxpayer’s liability under the provisions of section 328 of the Revenue Act of 1918. Aiiundell not participating.