Document: 383 U.S. 272 86 S.Ct. 862 15 L.Ed.2d 751 FRIBOURG NAVIGATION COMPANY, Inc., Petitioner,v.COMMISSIONER OF INTERNAL REVENUE. No. 23. Argued Nov. 10, 1965. Decided March 7, 1966. [Syllabus from pages 272-273 intentionally omitted] James B. Lewis, New York City, for petitioner. Jack S. Levin, Dept. of Justice, Washington, D.C., respondent. Mr. Chief Justice WARREN delivered the opinion Court. 1 The question presented determination is whether, as a matter law, sale depreciable asset an amount in excess its adjusted basis at beginning year bars deduction depreciation that year. 2 On December 21, 1955, taxpayer, Fribourg Navigation Co., purchased Joseph Feuer, used Liberty ship, $469,000. Prior to acquisition, taxpayer obtained letter ruling Internal Revenue Service advising would accept straight-line ship over useful economic life three years, subject change if warranted by subsequent experience. also advised salvage value on Feuer $5 per dead-weight ton, amounting $54,000. Acting accordance with computed allowable depreciation, and income tax returns 1955 1956 claimed ratable deductions 10-day period date purchase end full 1956. audited each these years accepted without adjustment. As result deductions, 1957 was $326,627.73. 3 In July 1956, Egypt seized Suez Canal. During ensuing hostilities canal became blocked sunken vessles, thus forcing ships take longer routes ports otherwise reached going through canal. resulting scarcity available carry cargoes caused sales prices rise sharply. January February 1957, even outmoded brought much $1,000,000 market. June offer sell $700,000. Delivery accomplished 23, under modified contract terms which reduced price $695,500. adopted plan complete liquidation pursuant provisions § 337 Code 1954, it thereafter carried out within 12 months. Thus, no liability incurred capital gain ship. developed, taxpayer's timing impeccable—by shipping shortage had abated were being scrapped amounts nearly identical $54,000 originally predicted value. 4 return, information purposes only, reported $504,239.51 disposition measured selling less after taking allowance $135,367.24 357 1/2 days 1957. gross included taken Feuer. Although Commissioner did not original reconsider he disallowed entire His position sustained single judge Tax Court and, one dissent, panel Appeals Second Circuit. 335 F.2d 15. agreed important, currently heavily litigated, there conflict between circuit courts appeals this issue. Therefore, we granted certiorari. 379 998, 85 717, 13 700. We reverse. I. 5 takes here Ruling first published day before trial case Court1 limited exceeds realized sale. argues are designed give equal 'actual net cost' since exceeded year, use during 'cost' 'nothing.' tying manner, has commingled two distinct established concepts accounting wear tear or gradual expiration fluctuations changes levels market values. 6 Section 167(a) 1954 provides, language substantially unchanged 50 revenue statutes: 'There shall be allowed reasonable exhaustion, (including obsolescence)—(1) property trade business, (2) held production income.' United States v. Ludey, 274 295, 300—301, 47 608, 610, 71 L.Ed. 1054 described follows: 7 'The charge permitted determining taxable business any represents reduction, assets plant used. sum should set aside order that, aggregate sums will (with value) suffice provide cost.' See Detroit Edison Co. Revenue, 319 98, 101, 63 902, 903, 87 1286. so defining law long recognized concept process estimated allocation does account valuation appreciation.2 8 It is, course, undisputed may require redetermination when becomes apparent either factors been miscalculated. fact greater than depreciated evidence such miscalculation. Macabe 42 T.C. 1105, 1115 (1964). But alone above establish error allocation. That certainly true when, here, profit resulted unexpected shortlived, but spectacular, world 9 contends our decisions Massey Motors, Inc. States, 364 92, 80 1411, 1592, Hertz Corp. 122, 1420, 1603, confirm his theory. To extent cases relevant all, they support position. time acquires asset, reasonably expects physical life, must, computing employ based expected use. those estimates Since admittedly proved accurate, ground disallowance depreciation. II. 10 This reflected Commissioner's own regulations. provided 167 explained Treas. Reg. 1.167(a)—1 'that consistent * aside, plus value, will, property, cost other *. reflect representing mere reduction value.' Treas.Reg. 1.167(a)—1(c) defines amount, determined realizable upon business. section continues: 'Salvage changed made acquisition merely because levels. However, redetermined facts known life.' Useful 'only significant clear convincing redetermination.' 1.167(a)—1(b). carefully constructed regulatory scheme provides disallowances challenge reasonableness accuracy Further, 1951 until certiorari case, regulations dealing amortization contained example expressly indicating could profitable asset.3 11 relies 1.167(b)—0 providing claim 'upon conditions exist return made.' He 'knew' him 'nothing' again ignores distinction gains appreciation. court below admitted increase circumstances 'normally associated gain.' intended interplay clearly 1.167(a)—8(a)(1), provides: 'Where retired arm's length, recognition loss sections 1002, 1231, applicable law.' III. sudden unwarranted volte-face administrative judicial practice followed prior 1962. cited wealth litigated cases4 several rulings5 unhesitatingly favorable Against array authority, 'focus' issue most instances. hardly persuasive response overwhelmingly display One might well speculate many treated too settled consideration. Moreover, instances, consent sale, insisted objection taken.6 14 adds Wier Long Leaf Lumber 990, rev'd grounds, Cir., 173 549, focus contended class promptly acquiesced decision.7 1948—1 Cum.Bull. 3. acquiescence withdrawn later present 1962—1 5. recognize itself commit interpretation addition already authority showing attempts further explain away aligned against stating rulings 1942 (when treatment basis) irrelevant taxed same ordinary rate have applied disallowed. contention decision involves fundamental basic lack 'focus,' explanation involved.8 Even theory, willingly supra, although contesting automobiles involved, $1,325 despite average $1,380. U.S., 94—95, 1413, 1592. And claims up objecting only attempt obtain refunds changing retroactively double declining balance method depreciation.9 presently hundred litigation where none testimony inescapable conclusion broken espousing novel theory now urges us. 16 relied 62—92, Cohn Cir. 259 371, departure practice. simply assigned found selection scheduled yardstick measure value.10 aptly stated Cohn, 'It purport automatic hindsight re-evalution self-executing triggered assets.' Motorlease 215 F.Supp. 356, 363, rev'd, 334 617, pet. cert. filed. brief rest anything resembling principally himself sought adjustment regulations, 'if redetermined.' Brief pp. 24—26, quoted Merritt, Government briefs refute IRS year-of-sale 20 J. Taxation 156, 158 IV. 17 Over extended foregoing precedent accumulating, Congress repeatedly re-enacted provision change. beyond generally understood scope itself, long-standing must deemed received congressional approval. See, e.g., Cammarano 358 498, 510—511, 79 524, 531—532, 462; Leslie Salt 350 383, 396—397, 76 416, 423—424, 100 441; Helvering Winmill, 305 79, 83, 59 45, 46—47, 83 52. 18 legislative history area makes abundantly cognizant possibilities cost. restored assets.11 accompanying House Report 'an undue hardship' taxpayers who able treat income. H.R.Rep.No.2333, 77th Cong., 2d Sess., 54 (1942). This, pro tanto effect disallowing basis. strange indeed, especially light Report, conlcude labored create which, application fiat exceeding their then excess. succeeding asked enact legislation treating income;12 declined do 19 1961, Message Congress, President observed existing depreciate difference gain.13 Secretary Treasury concurred position.14 exhibits appended contain mention power recalculation existence power. Treasury, sold basis, gain.15 asserted practice, alleges possesses disallow 1962 enacted 1245 future dispositions personal taken. For post-1962 transactions applies situation occurred instant produce revenue. report all recouped notwithstanding part nonrecognition 337. 1964, more complex recapture real enacted. time, however, took into increases often attributable general level percentage H.R.Rep.No.749, 88th 1st 101—102 (1963); S.Rep.No.830, 132—133 (1964).16 ignore limitation. Compounding activity repeated re-enactment face find untenable. V. 21 Finally, contains inconsistencies. shows view, price, well. reliance structure annual reporting system cure illogic apparently extend new situations benefit taxpayer. If seem follow construction additional permitted. 69—92 refused make so.17 22 finds among lower federal recently dealt issue.18 Upon consideration en banc, concluded authorization statute regulations.19 23 foregoing, conclude erroneously 24 Reversed. 25 WHITE, whom BLACK CLARK join, dissenting. 26 my opinion, faithful Regulations. Accordingly, I affirm. 27 authorizes 'reasonable allowance' tear, obsolescence. (Emphasis added.) enable recover investment wasting loses obsolescence.1 manner net, rather gross, produced not, intent actual thereby convert excessive 'Congress thereby, protect them loss.' Motors 1416. 1286, allow portion initial represent expenditure borne customers. judging whether given 'reasonable,' determine tax-free 105, 1418, 1419, calculated instead amount. 28 easy enough compute required wait know precision investment, allowance. Whether reopen previous spread ratably them, ensured precisely, than, actual, investment. both reasons, chosen advance estimating what allocated estimate unknowns: duration taxpayer2 (resale resold).3 Every effort made, values, come close figures possible. supra. Indeed, knowable advance. become differ materially previously can substituted almost inconvenience unfairness, seems me unreasonable, hence unauthorized 167, continue rely estimates. 128, 1423. 29 knew be. immunizing normal rates.4 readjustment finality resale definitely determined. Nevertheless, continued figures, erroneous. me, patently unreasonable therefore, outside 167. 30 Not violate statute, failed comply applicable, Regulation 1.167(a)—1(b) reason whenever redetermination. companion provision, At overestimated approximately one-third, error. about one-thirteenth And, clearest possible redetermination—it figures. read surely situation. 31 says 'deductions exceed necessary unrecovered *.' §§ 1.167(a)—1(a) (c), warn value,' remembering 1.167(b) 0. Yet knowingly recovered 'cost basis' salvage. Here, 32 think majority misreads 'determined acquisition) Salvage levels.' 1.167(a)—1(c). recognizes concluding agreement administratively burdensome frequently futile redeterminations ultimately prove ephemeral. express policy redetermination, premature Rev. Rul. 29; 378. very next sentence regulation acknowledge relevance levels, cause hardship: 'However, *, 33 faults having 'commingled values.' concepts, Code, necessarily unrealistic expect isolated other. essential elements 1.167(a)—1(a); resold, 105—107, 1418—1419; Edward Lane, 37 188; directly influenced predictable, considered making Bolta CCH Ct.Mem. 1067.5 addition, predictable affect asset. disposal attractive appreciation defined shorten. rapid normally exactly life. disregarded. 34 inconsistency sufficiently high indicate earlier either. known. rate, modification (for whatever reason) years. example, believed, taken, remaining undepreciated minus accordingly current Cleveland Adolph Mayer Realty Corp., 160 1012; Mutual Fertilizer 159 470; Mertens, Law Federal Income Taxation, 23.47; see Virginian Hotel Lynchburg Helvering, 523, 1260, 1561; S.Rep.No. 665, 72d 29. 35 There alleged refusing turns inconsistency, properly us.6 36 turn majority's dramatic reflects approval interpretation. Several past concerned 1922,7 applicable.8 precedential significance positions saving offset correspondingly due ruling9 primarily issues us.10 absence indication instances focused precise us examples early Board Appeals, Herbert Simons, B.T.A. 711, Court, consider problem sells challenged right least court's position.11 leaves Simons appear inconsistent urged Commissioner. disapproved statutory interpretative recent observed, substantial basis.12 38 cases, hold position.13 re-evaluate experience reflection adjust convinced comport intent, results reversal Dixon 381 68, 1301, 223; Automobile Club Michigan 353 180, 77 707, 746. Were denied tantamount freezing acknowledged strange, today deny absolutely arrangements 39 Under circumstances, argue re-enacting occasions promulgation 62—92 1962, force reasoning 'no aid construction,' Reynolds, 313 428, 432, 61 971, 973, 1438, unreliable indicium best' writing Glenshaw Glass 348 426, 431, 75 473, 476—477, 99 483. particularly unless officially promulgated specifically connection provision. Higgins 312 212, 475, 783; generally, Davis, Administrative 5.07. Here official Decision articulating indicated earlier, Regulations seemed quite opposite conclusion. Nor anyone considering embraced various requests directed indications separately. H.R.Rep.No. 749, 103 830, 133 'undue prompted 1231 doubt hardship paying bunched refusal way alleviate hardships bunching President's 1961 regular construed representation claims. recommendation 'previous' abuse never correct assistance. None sale.15 40 1964 certain provisions.16 These attitude, position, gain. concrete really aware Senate Reports 1250, estate. comments highly relevant: 41 '(T)he enactment allowable. known, reduce realized. holding.' p. gave delegate, primary responsibility constitutes 'reasonable' When adopts rational purpose behind deduction, Regulations, affirm Cum. Bull. (originally T.I.R. 384, 1962). part: '* any, exchange.' 1109; 999, 549; Note, Va.L.Rev. 1431 (1964); Comment, U.C.L.A.L.Rev. 593 Montgomery's Auditing 268 (8th ed. 1957). 1.1238—1, Example (1), H.R.Rep. 3124, 81st (1950), amended conform 1, 1965—1 366. (1927); Eldorado Coal & Mining Mager, 255 522, 526, 390, 65 757 (1921); Beckridge 129 318 (C.A.2d 1942); Clark Thread 257 (C.A.3d 1938), affirming 1128, 1140 (1933); Kittredge 88 632 1937); Seymour Mfg. Burnet, App.D.C. 22, 56 494, 495—496 (1932); Hall 43 130, 131—132, 95 Ct.Cl. 539, denied, 316 664, 62 944, 1740 (1942); 712—713 (1930); Max Eichenberg, 1368, 1370 (1929); Louis Kalb, 865, 866 355, 356 (1925); H. L. Gatlin, 131, 132 (1960); P. M. Brown 708, 709—710 (1959). G.C.M. 1597, VI—1 S.M. 2112, III—2 22(1924); A.R.R. 6930, III—1 45 (1924); I.T. 1494, I—2 (1922). 1158, I—1 note 4, tried success forgo taxes payable increased increasing 4. argument ambiguous another merit. rested record permit ascertain With respect assets, stated: parties stipulation narrowed controversy. They precludes allowance.' 999. held: article factors.' Ibid. 4; (1927). cited, 6, 165 261, 265, 269, Transcript Record 13—18. Court's discussed F.2d, 378—379. overthrow. noted: 'Necessarily, nature Id., 377. Int.Rev.Code, 1939, 117(j), Stat. 846 (now 1231). Hearings Ways Means Committee, 80th Revisions, pt. 5, 3756 (1948), recommended taxation arose accelerated depreciation; Finance 83d H.R. 8300, 3, 1324 (1954), American Institute Accountants Department Release A—761, 15, 1960. 'Another flaw corrected relates property. Such preferential gains, though 'This arises coincide decline While holds resale, occurs, rate. advantages liberalization rates. 'I therefore recommend deducted seller permitting Committee Means, Representatives, H.R.Doc. 140, 87th (1961). 40. 262—267. 1963, courts, alluded Commissioner, noting that: 133, Cong. Admin.News 1412 Engineers Limited Pipeline 44 226 (1965), get deduction. Whitaker 379. A 338 629 (C.A.8th Cir.), 218 677 (D.C.D.Minn.), filed; Occidental Loan 235 519 (D.C.S.D.Calif.); Wyoming Builders, 227 534 (D.C.D.Wyo.); (D.C.D.Conn.), reversed 617 Mountain Mixed Feed 245 369 (D.C.D.Colo.). Kimball Gas Products 63—2 Cas. 9507 (D.C.W.D.Tex.). Contra, Killebrew 234 481 (D.C.E.D.Tenn.). 1105 distinguish inaccurate sustain burden proof contest McNerney, Disallowance Depreciation Year Sale Gain, L.Rev. 615, 650 (1965). 'allowances (whereby) invested business.' 1337, U.S.Code 4046. Similarly, 1561, 'which, along replace 528, S.Ct., 1263. has, occasions, spoken physically 104, say thing different words. views representative exhaustion nuts bolts 'financial consequences subtle effects 904. Investment cost, 'net investment,' 103, 904, cost,' 106, 1419. 1.167 (a)—1, reimbursements arrive investment.' word 'investment' meanings, accountant lawyer, some meanings considerable violence allowances. realities possibly conceptualized idea inherent n. 1. actualities reality practical definition contemplated talked 'real price' 'resale' 107, 127, 1423, spoke 'the retired.' 1.167(a)—1(c), speaks 'realizable sense means nothing Obviously suffered compensated affected asking prevented deliberately compounding innocently continuing recovered. entirely clear. Compare Smith Leasing 37, 1105. appreciated reads, 'exhaustion, (or) obsolescence.' Of one, (1927), involved 1921. Both Supreme 1054; 757, 1922. 232, 206(a). show interaction 168 1238, adoption 1951. T.D. 6825, 318; 257; 632; 494; 539; 1368; 131; 708. Duncan-Homer 730 15; 371; 481. clearer arguably holdings. front cumulative bulletin acquiescences 'have Decisions 223. U.S.C.A. 7805 (1964 ed.), gives delegate 'prescribe needful rules including alteration relation internal revenue.' Subsection (b) prescribe extent, regulation, relating laws, retroactive effect.' addressed mentioned problems remedial U.S.C. 1245, 1250 ed.).

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