Case Name: THE S. S. WHITE DENTAL MANUFACTURING COMPANY v. THE UNITED STATES
Court: United States Court of Claims
Jurisdiction: United States
Decision Date: 1944-05-01
Citations: 102 Ct. Cl. 115
Docket Number: No. 45763
Parties: THE S. S. WHITE DENTAL MANUFACTURING COMPANY v. THE UNITED STATES
Judges: LittletoN, Judge/ and Booth, Chief Justice (retired), recalled, concur.
Reporter: United States Court of Claims Reports
Volume: 102
Pages: 115–128

Head Matter:
THE S. S. WHITE DENTAL MANUFACTURING COMPANY v. THE UNITED STATES
[No. 45763.
Decided May 1, 1944]
Mr. Harry Levine for plaintiff.
Mr. J. W. Hussey, with whom was Mr. Assistant Attorney General Samuel O. Clark, Jr., for defendant. Messrs. Robert N. Anderson and Fred K. Dyar were on the brief.

Opinion:
MaddeN, Judge,
delivered the opinion of the court:
The plaintiff sues to recover a part of the income and undistributed profits taxes paid by it for the year 1937. It contends that the stated income upon which these taxes were paid was not its proper taxable income, because no deduction was allowed it by reason of the abandonment, in that year, of one of its manufacturing plants.
The plaintiff carried on its manufacturing operations at three plants located at Frankford, Pennsylvania, North-wood, Pennsylvania, and Staten Island, New York. On April 1, 1936, the plaintiff's executive committee, by resolution, decided to transfer the operations of the Northwood plant to the Staten Island factory, and to build at the latter place a new factory, at an estimated cost of $170,000. The resolution provided for subsequent consideration of the transfer of the Frankford operation to Staten Island. It was estimated that if both these operations should be moved, operating economies of $110,000 a year would be achieved, and that the removal of the Northwood plant alone would cost some $24,000 and would produce annual operating economies of $30,649.
On May 22,1936, the plaintiff contracted for the construction of the new building at Staten Island, at a cost of about $200,000. That building was completed and all the operations of the Northwood plant were moved into it by May 1, 1937, at which time operations at Northwood were abandoned and the plant there was vacated. It was not thereafter used by the plaintiff.
The plaintiff's directors, when they considered these changes in 1936, estimated that the sale or salvage value of the Northwood plant when it would be vacated in 1937 would be $75,000, which was a reasonable estimate. They offered the plant for sale in 1936, and sold it on July 1,1937, for a net sale price of $83,160.50. On May 1, 1937, when the North-wood plant was vacated, its depreciated value, i. e., its cost to the plaintiff less depreciation previously allowed by the Commissioner of Internal Revenue, was $163,610.71.
The Commissioner has treated the plaintiff's loss in connection with the Northwood plant as a loss on the sale of a capital asset, which, though it amounted to the difference between $163,610.71, the cost less depreciation, and $83,160.50. the net price received at the sale, was, under the statute, deductible for tax purposes only to the extent of $2,000, the plaintiff having had no gains on the sale of capital assets against which the loss could be set over. Revenue Act of 1936, Section 117 (d). The plaintiff made a timely claim for refund, which was rejected. The claim for refund was, and this suit is, based upon the proposition that Section 23 (f) of the Revenue Act is applicable, which says that there shall be allowed as a deduction from gross income:
In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.
Since deductions taken for losses which come under Section 23 (f) are not limited to a maximum of $2,000, the plaintiff is claiming that it should have been allowed to deduct the entire amount of its loss from its otherwise taxable income. The position of the Government here is that taken by the Commissioner of Internal Revenue when he denied the plaintiff's claim for refund, that is, that the plaintiff's loss was a loss incurred in the sale of a capital asset, hence the loss was deductible from taxable income only to the amount of $2,000.
Section 23 (f), which we have quoted, is of course not very enlightening when taken by itself. Paragraph (j) of the same section shows that losses from sales of capital assets were not meant to be included in it. Article 23 (e)-3 of Treasury Regulations 94, promulgated under the Revenue Act of 1936 is reproduced in the footnote. It is the Government's interpretation of Section 23 (f). Regulations of similar content were promulgated as far back as the Revenue Act of 1918, and have the force of law. Helvering v. Winmill, 305 U. S. 79. We shall therefore ascertain whether the transaction here in question is one of the kind described in the regulation, and therefore within Section 23 (f) of the statute.
The first sentence of the regulation seems to describe what plaintiff did with regard to its Northwood plant, reserving for the moment the adverb "suddenly". There was a change in business conditions, as they appeared to the plaintiff's managers in 1936, as compared with the time when they built or acquired the Northwood plant. If there had not been, they would not have been willing to abandon that plant, salvaging it for less than its depreciated value, and spend almost three times the expected salvage recovery in building a new plant to house the Northwood operation. We think the words "change in business conditions" in the Regulations must mean, "in the opinion of the managers of the business." They cannot refer to anything more objective than that, since assets are discarded upon the basis of that opinion, and upon no other basis.
The words "the usefulness in the business of some or all of the capital assets is terminated" must mean terminated in whole or in such part that, in the opinion of the managers of the business, good management calls for their being discarded. Practically never is a capital asset wholly useless when discarded. It is discarded when it becomes relatively uneconomical to continue to use it, when its use is considered in relation to one or more alternatives. This choice was here made by the plaintiff's managers, and their action comes within the quoted language of the regulation.
We now come to the word "suddenly" which precedes the word "terminated" in the language quoted in the preceding paragraph. We think that this word, also, is a relative word. We think it was written to contrast with the word "gradual" which appears in the following sentence in the same paragraph of the regulation:
This exception does not extend to a case where the useful life of property terminates solely as a result of those gradual processes for which depreciation allowances are authorized.
If the word "suddenly" means anything more nearly instantaneous than we have suggested, the regulation would practically never be applicable. The language of the whole regulation indicates that it was not intended to be limited to infrequent situations where by legislation or by catastrophe the supply of raw materials, or the market, has been destroyed in a day. Here the relative usefulness of the Northwood plant terminated, not by physical decay, nor by obsolescence, see S. S. White Dental Manufacturing Co. v. United States, 93 C. Cls. 469, but by changes in conditions, affecting the plaintiff's business, sufficient to cause the managers to conclude that it would be economical to discard the plant. We think that the word "suddenly" in the regulation is satisfied, though it seems to us to be a rather inept word to express the apparent meaning of the regulation.
The regulation, in its second sentence, speaks of a requirement of "proof of some unforeseen cause by reason of which the property has been prematurely discarded We think that this language, when read in connection with the next following sentence, means only that the cause of its being discarded must have been unforeseen when the asset was acquired so that depreciation of its cost, on the basis of a short prospective use, would not have been an allowable deduction from income.
In the instant case the Northwood plant was sold within the taxable year in which its use was abandoned, in fact within two months after it was abandoned. We think that is immaterial to our problem. Of course, it made the amount of the loss quite definite, and avoided the necessity of reliance upon estimates as to the salvage value of the abandoned plant. But the loss occurred before the sale. When the plaintiff's directors decided, in 1936, to abandon the North-wood plant, they did not have any contract to sell it. When they built the new Staten Island plant to replace it, they still had no contract to sell it. When they vacated the Northwood plant on May 1,1937, and abandoned its use, they still had no such contract. They were, in arriving at their decision to abandon, not in the situation of making a choice between keeping and operating the Northwood plant, on the one hand, or accepting an ipffer which they had in hand to sell that plant and, with that money and more, and in view of other advantages, building a new plant at Staten Island. If that had been the case, we suppose their loss would have been a loss on a sale, which they chose to make because they preferred the price to the plant. But here they first abandoned the plant, taking their chances as to whether and for how much they could sell it. It was thus made useless to them before they sold it. When one discards capital assets, he hopes to sell the discard, and has an opinion or a hope as to how much he will get for it. When and if he sells, he is not selling a current capital asset, but is salvaging a discarded capital asset.
Plaintiff is entitled to recover. Entry of judgment will await the filing of a stipulation by the parties as to the amount of the judgment. It is so ordered.
LittletoN, Judge/ and Booth, Chief Justice (retired), recalled, concur.
In accordance with the above opinion, upon the filing of a stipulation by the parties showing the amount due thereunder to be $17,539.70 with interest as provided by law, and upon plaintiff's motion for judgment, it was ordered October 2, 1944, that judgment be entered for the plaintiff in the sum of $17,539.70, with interest as provided by law.
ART. 23 (e)-3. Loss of useful value. — When, through some change in business conditions, the usefulness in the business of some or all of the capital assets is suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from use in such business, he may claim as a loss for the year in which he tabes such action the difference between the basis (adjusted as provided in section 113 (b) and articles 113 (a) (14) — 1, 113 (b)-l, and 113 (b)-2) and the salvage value of the property. This exception to the rule requiring a sale or other disposition of property in order to establish a loss requires proof of some unforeseen cause by reason of which the property has been prematurely discarded, as, for example, where an increase in the cost or change in the manufacture of any product makes it necessary to abandon such manufacture, to which special machinery is exclusively devoted, or where new legislation directly or indirectly makes the continued profitable use of the property impossible. This exception does not extend to a case where the useful life of property terminates solely as a result of those gradual processes for which depreciation allowances are authorized. It does not apply to inventories or to other than capital assets. The exception applies to buildings only when they are permanently abandoned or permanently devoted to a radically different use, and to machinery only when its use as such is permanently abandoned. Any loss to be deductible under this exception must be fully explained in the return of income. The limitations provided in section 117 with respect to the sale or exchange of capital assets have no application to losses due to the discarding of capital assets.
*
In cases in which depreciable property is disposed of due to causes other than exhaustion, wear and tear, and normal obsolescence, such as casualty, obsolescence other than normal, or sale, a deduction for the difference between the basis of the property (adjusted as provided in section 113 (b) and articles 113 (a) (14) — 1, 113 (b)-l, and 113 (b)-2) and its salvage value and/or amount realized upon its disposition may be allowed subject to the limitations provided in the Act upon deductions for losses, but only if it is clearly evident that such disposition was not contemplated in the rate of depreciation.
See Article 143 of Regulations 45.