Source: https://supreme.justia.com/cases/federal/us/418/1/case.html
Timestamp: 2016-09-30 13:35:53
Document Index: 33015352

Matched Legal Cases: ['§ 263', '§ 167', '§ 263', '§ 167', '§ 263', '§ 263', '§ 263', '§ 263', '§ 167', '§ 167', '§ 263', '§ 263', '§ 167', '§ 167', '§ 167', '§ 263', '§ 263', '§ 167', '§ 161', '§ 161', '§ 161', '§ 263', '§ 161', '§ 167', '§ 263', '§ 1141', '§ 167', '§ 161', '§ 167', '§ 263']

Commissioner v. Idaho Power Co. :: 418 U.S. 1 (1974) :: Justia U.S. Supreme Court Center Log In
› Commissioner v. Idaho Power Co.
Commissioner v. Idaho Power Co. 418 U.S. 1 (1974)
U.S. Supreme CourtCommissioner v. Idaho Power Co., 418 U.S. 1 (1974)Commissioner of Internal Revenue v. Idaho Power Co.No. 73-263Argued February 27, 1974Decided June 24, 1974418 U.S. 1CERTIORARI TO THE UNITED STATES COURT OF APPEALS
Section 167(a) of the Internal Revenue Code of 1954 allows a depreciation deduction from gross income for "property used in the [taxpayer's] trade or business" or "held for the production of income," whereas § 263(a)(1) of the Code disallows a deduction for "[a]ny amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate," expenditures which, the regulations state, include the "cost of acquisition, construction, or erection of buildings." Section 161 makes the deductions specified in that part of the Code, including § 167(a), subject to the exceptions provided in the part including § 263. Respondent public utility claimed a deduction from gross income under § 167(a) for all the depreciation for the year on its transportation equipment (car, trucks, etc.), including that portion attributable to its use in constructing capital facilities, although, on its books, as required by the regulatory agencies, it charged such equipment, to the extent it was used in construction, to the capital assets so constructed. The Commissioner of Internal Revenue disallowed the deduction for the construction-related depreciation, ruling that that depreciation was a nondeductible capital expenditure under § 263(a). Page 418 U. S. 2 The Commissioner was upheld by the Tax Court, but the Court of Appeals reversed, holding that a deduction expressly enumerated in the Code, such as that for depreciation, may properly be taken even if it relates to a capital item, and that § 263(a)(1) was inapplicable because depreciation is not an "amount paid out" as required by that section.
(e) Considering § 263(a)(1)'s literal language in denying a deduction for "[a]ny amount paid out" for construction or permanent improvement of facilities, and its purpose to reflect the basic principle that a capital expenditure may not be deducted from current income, as well as the regulations indicating that, for purposes of § 263(a)(1) "amount paid out" equates with "cost incurred," there is no question that the cost of the transportation equipment was "paid out" in the same manner as the cost of other Page 418 U. S. 3 construction-related items, such as supplies, materials, and wages, which the taxpayer capitalized. Pp. 418 U. S. 16-17.
This case presents the sole issue whether, for federal income tax purposes, a taxpayer is entitled to a deduction from gross income, under § 167(a) of the Internal Revenue Code of 1954, 26 U.S.C. § 167(a), [Footnote 1] for depreciation on equipment the taxpayer owns and uses in the construction of its own capital facilities, or whether the capitalization provision of § 263(a)(1) of the Code, 26 U.S.C. § 263(a)(1), [Footnote 2] bars the deduction. Page 418 U. S. 4
For many years, the taxpayer has used its own equipment and employees in the construction of improvements and additions to its capital facilities. [Footnote 3] The major work has consisted of transmission lines, transmission switching stations, distribution lines, distribution stations, and connecting facilities. Page 418 U. S. 5
To summarize: on its books, in accordance with Federal Power Commission-Idaho Public Utilities Commission Page 418 U. S. 6 prescribed methods, the taxpayer capitalized the construction-related depreciation, but, for income tax purposes, that depreciation increment was claimed as a deduction under § 167(a). [Footnote 4]
"depreciation allocable to the use of the equipment in the construction of capital improvements was not deductible in the year the Page 418 U. S. 7 equipment as so used, but should be capitalized and recovered over the useful life of the assets constructed."
The taxpayer asserts that its transportation equipment is used in its "trade or business," and that depreciation thereon is therefore deductible under § 167(a)(1) of the Code. The Commissioner concedes that § 167 may be said to have a literal application to depreciation on equipment used in capital construction. [Footnote 5] Brief for Petitioner Page 418 U. S. 8 16, but contends that the provision must be read in light of § 263(a)(1), which specifically disallows any deduction for an amount "paid out for new buildings or for Page 418 U. S. 9 permanent improvements or betterments." He argues that § 263 takes precedence over § 167 by virtue of what he calls the "priority-ordering" terms (and what the taxpayer describes as "housekeeping" provisions) of § 161 of the Code, 26 U.S.C. § 161, [Footnote 6] and that sound principles of accounting and taxation mandate the capitalization of this depreciation.
It is worth noting the various items that are not at issue here. The mathematics, as such, is not in dispute. The taxpayer has capitalized, as part of its cost of acquisition of capital assets, the operating and maintenance costs (other than depreciation, pension contributions, and social security and motor vehicle taxes) of the transportation equipment attributable to construction. This is not contested. The Commissioner does not dispute that the portion of the transportation equipment's depreciation allocable to operation and maintenance of facilities, in contrast with construction thereof, qualifies as a deduction from gross income. There is no disagreement Page 418 U. S. 10 as to the allocation of depreciation between construction and maintenance. The issue thus comes down primarily to a question of timing, as the Court of Appeals recognized, 477 F.2d at 692, that is, whether the construction-related depreciation is to be amortized and deducted over the shorter life of the equipment or, instead, is to be amortized and deducted over the longer life of the capital facilities constructed.
"[T]he purpose of depreciation accounting is to allocate the expense of using an asset to the various periods Page 418 U. S. 11 which are benefited by that asset."
"Whatever may be the desirability of creating a depreciation reserve under these circumstances, as a matter of good business and accounting practice, Page 418 U. S. 12 the answer is . . . [depreciation] reflects the cost of an existing capital asset, not the cost of a potential replacement."
This principle has obvious application to the acquisition of a capital asset by purchase, but it has been applied, as well, to the costs incurred in a taxpayer's construction of capital facilities. See, e.g., Southern Natural Gas Co. v. United States, supra; Great Northern R. Co. v. Commissioner, 40 F.2d 372 (CA8), cert. denied, 282 U.S. 855 (1930); Coors v. Commissioner, Page 418 U. S. 13 60 T.C. 368, 398 (1973); Norfolk Shipbuilding & Drydock Corp. v. United States, 321 F.Supp. 222 (ED Va.1971); Producers Chemical Co. v. Commissioner, 50 T.C. 940 (1968); Brooks v. Commissioner, 50 T.C. 927, 935-936 (1968), rev'd on other grounds, 424 F.2d 116 (CA5 1970). [Footnote 9]
Construction-related depreciation is not unlike expenditures for wages for construction workers. The significant fact is that the exhaustion of construction equipment does not represent the final disposition of the taxpayer's investment Page 418 U. S. 14 in that equipment; rather, the investment in the equipment is assimilated into the cost of the capital asset constructed. Construction-related depreciation on the equipment is not an expense to the taxpayer of its day-to-day business. It is, however, appropriately recognized as a part of the taxpayer's cost or investment in the capital asset. The taxpayer's own accounting procedure reflects this treatment, for, on its books, the construction-related depreciation was capitalized by a credit to the equipment account and a debit to the capital facility account. By the same token, this capitalization prevents the distortion of income that would otherwise occur if depreciation properly allocable to asset acquisition were deducted from gross income currently realized. See, e.g., Coors v. Commissioner, 60 T.C. at 398; Southern Natural Gas Co. v. United States, 188 Ct.Cl. at 373-374, 412 F.2d at 1265.
Some, although not controlling, weight must be given to the fact that the Federal Power Commission and the Idaho Public Utilities Commission required the taxpayer Page 418 U. S. 15 to use accounting procedures that capitalized construction-related depreciation. Although agency-imposed compulsory accounting practices do not necessarily dictate tax consequences, Old Colony R. Co. v. Commissioner, 284 U. S. 552, 284 U. S. 562 (1932), they are not irrelevant, and may be accorded some significance. Commissioner v. Lincoln Savings & Loan Assn., 403 U. S. 345, 403 U. S. 355-356 (1971). The opinions in American Automobile Assn. v. United States, 367 U. S. 687 (1961), and Schlude v. Commissioner, 372 U. S. 128 (1963), urged upon us by the taxpayer here, are not to the contrary. In the former case, it was observed that merely because the method of accounting a taxpayer employs is in accordance with generally accepted accounting procedures, this "is not to hold that, for income tax purposes, it so clearly reflects income as to be binding on the Treasury." 367 U.S. at 367 U. S. 693. See also Cincinnati, N. O. & T. P. R. Co. v. United States, 191 Ct.Cl. 572, 583-584, 424 F.2d 563, 570 (1970). Nonetheless, where a taxpayer's generally accepted method of accounting is made compulsory by the regulatory agency and that method clearly reflects income, [Footnote 10] it is almost presumptively controlling of federal income tax consequences. Page 418 U. S. 16
There is no question that the cost of the transportation equipment was "paid out" in the same manner as the cost of supplies, materials, and other equipment, and the wages of construction workers. [Footnote 11] The taxpayer does not Page 418 U. S. 17 question the capitalization of these other items as elements of the cost of acquiring a capital asset. We see no reason to treat construction-related depreciation differently. In acquiring the transportation equipment, taxpayer "paid out" the equipment's purchase price; depreciation is simply the means of allocating the payment over the various accounting periods affected. As the Tax Court stated in Brooks v. Commissioner, 50 T.C. at 935, "depreciation -- inasmuch as it represents a using up of capital -- is as much an expenditure' as the using up of labor or other items of direct cost."
The Court of Appeals concluded, without reference to § 161, that § 263 did not apply to a deduction, such as that for depreciation of property used in a trade or business, Page 418 U. S. 18 allowed by the Code even though incurred in the construction of capital assets. [Footnote 13] We think that the court erred in espousing so absolute a rule, and it obviously overlooked the contrary direction of § 161. To the extent that reliance was placed on the congressional intent, in the evolvement of the 1954 Code, to provide for "liberalization of depreciation," H.R.Rep. No. 1337, 83d Cong., 2d Sess., 22 (1954), that reliance is misplaced. The House Report also states that the depreciation provisions would "give the economy added stimulus and resilience without departing from realistic standards of depreciation accounting." Id. at 24. To be sure, the 1954 Code provided for new and accelerated methods for depreciation, Page 418 U. S. 19 resulting in the greater depreciation deductions currently available. These changes, however, relate primarily to computation of depreciation. Congress certainly did not intend that provisions for accelerated depreciation should be construed as enlarging the class of depreciable assets to which § 167(a) has application or as lessening the reach of § 263(a). See Note, 1973 Duke L.J. 1386.
2 APB Accounting Principles, Accounting Terminology Bulletin No. 1 -- Review and Resume ¦ 48, p. 9512 (1973) (emphasis in original).
That was the sentiment behind Dobson v. Commissioner, 320 U. S. 489, written by Mr. Justice Jackson and enthusiastically promoted by Mr. Justice Black, Mr. Justice Frankfurter, and myself. Dobson, save for egregious error and constitutional questions, would have left picayune cases such as the present one largely to the Tax Court, whose expertise is well recognized. But Dobson was short-lived, as Congress made clear its purpose that we were to continue on our leaden-footed pursuit of law and justice in this field. Internal Revenue Code of 1939, § 1141, as amended, 62 Stat. 991. Page 418 U. S. 20
Not so, says the Government. Since the truck was used to build a plant for the taxpayer and the plant Page 418 U. S. 21 has a useful life of 40 years, a lower rate of depreciation must be used -- a rate that would spread out the life of the truck for 40 years even though it would not last more than 10. Section 167(a) provides for a depreciation deduction with respect to property "used in the (taxpayer's) trade or business" or "held for the production of income" by the taxpayer. There is no intimation that § 167(a) is not satisfied. The argument is rested upon § 161, which allows the deductions specified in § 167(a) "subject to the exceptions" in § 263(a), which provides:
Depreciation on an automobile is not allowed as a charitable deduction, Orr v. United States, 343 F.2d 553; Mitchell v. Commissioner, 42 T.C. 953, 973-974, Page 418 U. S. 22 since it is not a "payment" within the meaning of 170(a)(1). Likewise depreciation on an automobile used to transport the taxpayer's son to a doctor is not deductible as a medical expense under 213, because it is not an expense "paid" within the meaning of the section. Gordon v. Commissioner, 37 T.C. 986; Calafut v. Commissioner, 23 T.C.M. 1431. [Footnote 2/2]
The IRS, however, has ruled that depreciation on construction equipment owned by a taxpayer and used in its construction work must be capitalized. [Footnote 2/3] That Revenue Ruling, as the Court of Appeals held, is a legal opinion within the agency, not a Regulation or Treasury decision. It is without force when it conflicts with an Act of Congress. [Footnote 2/4] See Bartels v. Birmingham, 332 U. S. 126, 332 U. S. 132. Page 418 U. S. 23