Legal Document

41 United States Supreme Court Reports Lawyer’s Edition 2d Series KF101.8 U54 535 94 Reporter 2757 418 U.S. 1 COMMISSIONER OF INTERNAL REVENUE, Petitioner,v.IDAHO POWER COMPANY. Number 73—263. Argued Feb. 27, 1974. Decided June 24, Syllabus Section 167(a) of the Internal Revenue Code 1954 allows a depreciation deduction from gross income for 'property used in (taxpayer's) trade or business' 'held production income,' whereas § 263(a)(1) disallows '(a)ny amount paid out new buildings permanent improvements betterments made to increase value any property estate,' expenditures which, regulations state, include 'cost acquisition, construction, erection buildings.' 161 makes deductions specified that part Code, including 167(a), subject exceptions provided 263. Respondent public utility claimed under all year on its transportation equipment (cars, trucks, etc.), portion attributable use constructing capital facilities, although books, as required by regulatory agencies, it charged such equipment, extent was assets so constructed. The Commissioner disallowed construction-related depreciation, ruling nondeductible expenditure 263 (a). upheld Tax Court, but Appeals reversed, holding expressly enumerated may properly be taken even if relates item, and inapplicable because is not an 'amount out' section. Held: allocable taxpayer's construction facilities must capitalized 263(a)(1). Pp. 10—19. (a) Accepted accounting practice established tax principles require capitalization cost acquiring asset, incurred facilities. purpose allocation expense using asset over periods benefited asset. 10—13. (b) Construction-related unlike other items, workers' wages, which treated significant fact exhaustion does represent final disposition investment equipment; rather assimilated into constructed, this prevents distortion would otherwise occur acquisition were deducted currently realized. Pacific KF135 P2 13—14. (c) Capitalization taxpayer own work maintains parity with has done independently. 14. (d) Where generally accepted method acocunting compulsory agency clearly reflects income, here, almost presumptively controlling federal consequences. 14—15. (e) Considering 263(a)(1)'s literal language denying '(a) ny improvement reflect basic principle current well indicating purposes equates incurred,' there no question 'paid same manner supplies, materials, capitalized. 16—17. (f) priority-ordering directive requires 263(a)'s provision take precedence, facts, 167(a). 17—19. 9 Cir., 477 Federal Reporter, 2nd 688, reversed. Keith Atlantic Jones, Washington, D.C., petitioner. Frank Norton Kern, New York City, respondent. Mr. Justice BLACKMUN delivered opinion Court. This case presents sole issue whether, purposes, entitled 1954, 26 KF62 167(a),1 owns uses whether 263(a)(1),2 bars deduction. 2 deduction, it. (Scott, J., reviewed full court) Commissioner's determination. 29 T.C.M. 383 (1970). Ninth Circuit, declining follow Claims decision, Southern Natural Gas company versus States, 412 1222, 1264—1269, 188 Ct.Cl. 302, 372—380 (1969), 688 (1973). We granted certiorari order resolve apparent conflict between Appeals. 414 999, 351, 38 235 3 * Nearly relevant facts are stipulated. taxpayer-respondent, Idaho Power Company, Maine corporation organized 1915, principal place business at Boise, Idaho. It engaged production, transmission, distribution, sale electric energy. keeps books files returns calendar accrual basis. years 1962 1963. 4 For many years, employees additions facilities.3 major consisted transmission lines, switching stations, distribution connecting 5 During 1963, question, owned wide variety automotive passenger cars, trucks descriptions, power-operated trailers. Radio communication devices affixed daily operations. operation maintenance having useful life more than one year. 6 On various methods charging costs connection either accounts. To operating (other pension contributions social security motor vehicle taxes) directly through clearing accounts accordance procedures prescribed Commission adopted Public Utilities Commission. 7 however, differently. year's computed composite 10 straight-line declining-balance methods. had expenses deducted. 8 summarize: Commission-Idaho methods, increment 167(a).4 Upon audit, depreciation. He ruled application. added adjusted basis then allowed appropriate addition, (30 more) A day-to-day also allowed. result these adjustments disallowance returns, net amounts $140,429.75 $96,811.95 respectively. gave rise asserted deficiencies taxes those two of.$73,023.47 $50,342.21. agreed decision Gas, supra, described effect 'depreciation deductible should recovered constructed.' T.C.M., 386. accordingly, held 'properly . used.' Ibid. 11 Appeals, hand, perceived presence liberal congressional policy toward underlying theory exhausted without replacement. F.2d, 690—693. court concluded 'no exception relate item.' Id., 693. found applicable out,' unpersuasive felt 'constrained distinguish' reversing judgment. 695—696. 12 asserts 'trade thereon therefore 167(a)(1) Code. concedes 167 said have application construction,5 Brief Petitioner 16, contends read light specifically betterments.' argues takes precedence virtue what he calls 'priority-ordering' terms (and describes 'housekeeping' provisions) 161,6 sound taxation mandate 13 worth noting items here. mathematics, such, dispute. capitalized, assets, contributions, construction. contested. dispute equipment's contrast thereof, qualifies income. There disagreement maintenance. issue, thus comes down primarily timing, recognized, 692, is, amortized shorter or, instead, longer II 14 Our primary concern necessity treat comports realities. Over period time consumed and, correspondingly period, theoretical thereby reduced. Depreciation device recognizes physical consumption true cost, since being depleted.7 As process continues, allowed, asset's reduced affected. stated Hertz Corporation 364 122, 126, 80 1420, 1422, 1603 (1960): '(T)he allocate asset.' See Ludey, 274 295, 300—301, 47 608, 610, 71 L.Ed. 1054 (1927); Massey Motors, Incorporated 92, 96, 1411, 1414, 1592 (1960); Fribourg Navigation Revenue, 272, 276—277, 86 862, 865—866, 15 751 (1966). When further operations, benefit usually correlate Thus, offset produced. clear, different implicated when that, future, will produce themselves. In latter situation, represented Rather, certainly presently incurred, related future appropriately allocated income-producing opined allowance provide means recovery, Knoxville Water Co., 212 1, 14, 148, 152, 53 371 (1909), Court's decisions, e.g., Detroit Edison 319 98, 101, 63 902, 903, 87 1286 (1943), endorse replacement 'a fund restore property.' 691. Although tax-free depreciating accounting, alone Only last Term, Chicago, baron & Q.R. 401, 93 2169, 37 30 (1973), we rejected strict depreciation: 16 'Whatever desirability creating reserve circumstances, matter good practice, answer '(d)epreciation existing potential replacement." 415, S.Ct., 2177. 17 Even look replacement, constructed build them, concerned. If now decide construct employees, it, theory, occasion replace prior 18 practice8 Woodward 397 572, 575, 90 1302, 1305, 25 577 (1970), observed: 'It long been general matter, expenditures.' obvious purchase, applied, well, See, supra; Great Northern R. 40 372 (CA8), cert. denied, 282 855, 51 31, 75 757 (1930); Coors Commissioner, 60 KF6280 A2 U55 368, 398 (1973); Norfolk Shipbuilding Drydock 321 F.Supp. 222 (E.D.Va.1971); Producers Chemical 50 940 (1968); Brooks 927, 935—936 (1968), rev'd grounds, 424 116 (CA5 1970).9 19 can little tools, wages workers, this. Of course, reasonable carrying qualify 162(a)(1) 162(a)(1). But they acquired. Briarcliff Candy 475 775, 781 (CA2 1973); Perlmutter 44 382, 404 (1965), aff'd, 373 45 (CA10 1967); Jaffa 198 234, 236 (N.D.Ohio 1961). Treas.Reg. 1.266—1(e). 20 workers. exchaustion rather, business. recognized procedure treatment, credit account debit facility account. By token, T.C., 398; 1265, Ct.Cl., 373—374. 21 An additional pertinent factor who independent contractor. contractor's during performance job element contractor his services, entire cost; performed. Appeals' lead disparate treatment among taxpayers allow firm sufficient resources obtain another capitalize 22 Some, controlling, weight given agency-imposed practices do necessarily dictate consequences, Old Colony 284 552, 562, 52 211, 214, 76 484 (1932), irrelevant accorded some significance. Lincoln Savings Loan Ass'n., 403 345, 355—356, 91 1893, 1899—1900, 519 (1971). opinions American Automobile Association 367 687, 81 1727, 1109 (1961), Schlude 128, 83 601, 633 (1963), urged upon us contrary. former observed merely employs procedures, 'is hold binding Treasury.' U.S., 693, 1730. Cincinnati, N.O. T.P.R. 563, 570, 191 583—584 Nonetheless, where income,10 23 Its denies taxpayr contends, held, represents decrease within meaning disagree. 24 serves prevent utilizing attributable, amortization, later becomes producing. state 263(a) extends 1.263(a)-2(a). manifests administrative understanding 263(a)(1), incurred.' Service position Rev.Rul. 59—380, 1959—2 C.B. 87; 55—252, 1955—1 Cum.bull. 319. workers.11 elements see reason purchase price; simply allocating payment 935, 'depreciation—inasmuch up capital—is much 'expenditure' labor direct cost.' Finally, 161—or, 261 26112—requires provides Part VI Subchapter B Income Subtitle 'subject IX.' includes IX clear import set forth itself elsewhere (as, example, relating contributions), none might deemed VI. 27 concluded, reference 161, did apply business, though assets.13 think erred espousing absolute rule, obviously overlooked contrary direction 161. reliance placed intent, evolvement 'liberalization depreciation,' H.R.Rep.No.1337, 83d Cong., Sess., (1954), misplaced. House Report states provisions 'give economy stimulus resilience departing realistic standards accounting.' 24. U.S.Code Cong. Admin.News, Page 4049. sure, accelerated resulting greater available. These changes, computation Congress intend construed enlarging class depreciable lessening reach 263(a). Note, 1973 Duke L.J. 1386. 28 judgment ordered. 31 Judgment 32 DOUGLAS, dissenting. 33 has, many, seemed particularly ill-equipped disputes taxpayers. reasons (1) field become increasingly technical complicated due expansions proliferation (2) seldom enough them develop expertise area. Indeed, called mostly conflicts circuits providently go standing committee resolution. 34 That sentiment behind Dobson 320 489, 64 239, 88 248, written Jackson enthusiastically promoted Black, Frankfurter, myself. Dobson, save egregious error constitutional questions, left picayune cases present largely whose recognized. short-lived, continue our leaden-footed pursuit law justice field. 1939, 1141, amended, 62 Statutes-at-Large 991. 35 Now N Dec. Immigration Nationality Decisions disagree disallowing claim truck let say, years. $10,000, expect exhaustion, wear tear' $1,000 liberalization respect both estimate service.'1 22. 36 Not so, says Government. Since plant lower rate used—a spread 10. 'used income' taxpayer. intimation satisfied. argument rested exceptions' provides: 'No shall for— '(1) Any estate ..' 39 agree 'payment' setting Congress—not courts—should make decision. suspect building here arguing persuasively 40-year period. impugn integrity IRS. only illustration capricious character how get greatest possible return permissible Judge Trask concurred Judges Choy McGovern my view law. 42 automobile charitable Orr 343 553; Mitchell 953, 973—974, 170(a)(1). Likewise transport son doctor medical 213 'paid' Gordon 986; Calafut 1431.2 43 IRS, capitalized.3 Ruling, legal agency, Regulation Treasury force Act Congress.4 Bartels Birmingham, 332 132, 67 1547, 1947. test improvements, different. But, noted, 'any describe unless words acquire esoteric meanings accommodate lawmaker; taking affirm '§ 167. Depreciation. General rule. 'There tear (including obsolescence)— '(2) income.' Capital expenditures. estate.' near end World War II, improvements. At times, outside contractors performed work. trial case, 140 construction; 300 engaged. 1963 $8,235,440.22 $5,988,139.56, amounts, $7,139,940.72 $5,642,342.79. self-construction portion, therefore, substantial gross. amounted $150,047.42 $130,523.99, portions issue. presented, key phrase business.' Construction context infrequent consistent. (1930), railroad transported men site, train No consideration available Gulf, M. N.R. B.T.A. 233, 245—247 (1931), aff'd issues, App.D.C. 244, 953 (1934), 293 55 79 (1934); Missouri 267, 286—287 (1931); Helvering, 508, 513 (CA8 1936). subsequent 691 Board reached identical facts. branch lines railroad, satisfied requirements statute. deductible. 708. appears prevailing until issuance Cum.Bull. 87, stated: 'In instant constitute However, cannot considered regular taxpayer.' 88. 'Rev.Rul. 59—380 1268, 378—379 (1969). "a business" approach favor rule Equipment, natural gas company. allowable contested taxpayer: 'The continuity regularity activities, number expended point conclusion aspect activities auxiliary operations incident producing, transmitting, distributing selling electrical energy section 167.' 696. conceded Power's need proper assume, deciding, Allowance deductions. computing taxable 63(a), part, (sec. following, deductible).' Committee Terminology Institute Certified Accountants discussed definitions that: 'These broadly speaking, describing downward changes regardless their causes money usefulness. term sometimes applied itself, considers desirable emphasize concept term: thus, labor.' APB Accounting Principles, Bulletin 1—Review Resume 48, 9512 (1973) (emphasis original). proposition seriously open question. urges, authority W. Paton, Asset 188, 192 193 (1952); Haw. Hawai‘i KFH45 Finney Miller, Principles Introductory 246—247 (6th ed. 1963) (depreciation matched income); Accountants' Handbook 652 (3d 1943); 1377, 1384; N.C.L.Rev. 684, 692 (1974). Except courts consistently relied, 1928, 23(k), 800 (the corresponding Code). argued B.T.A., 446 446, reads follows: 446. accounting. 'Taxable regularly computes keeping books. '(b) Exceptions. 'If taxpayer, as, Secretary delegate, contribution 170 170, 553 1965); 973—974 (1964), medical-expense 213, 986 (1962). concerned, nature phrases 'payment year' year.' respectively §§ 213. sections relevance 940, 959 (1968) 261. part.' relied All-Steel 54 1749 467 1184 (CA7 1972), All-Steel, faced taxes, losses, research experimental manufacturing inventory deductible, contrast, certain repair producing could 'only manufactured goods repairs sold.' 1186. note 263(a)(1)(B) excepts Snow 416 500, 1876, 336 (1974), 266 266, creates providing election charges. discussing expenditures, 'deductions statute deferred items.' 1759. statement, context, overbroad interpretation evident decided limitations indicated 'reasonable' allowances straightline method, annual exceed method. 22—23. explicitly 'More anticipated far-reaching economic effects. incentives timed help maintain high level equipment. acceleration speed recovery critical importance management incur risk. faster writeoff working materially aid growing businesses financing expansion. segments economy, liberalized policies assist modernization expansion industrial capacity, growth, increased higher standard living. 'Small farmers vital stake constructive policy. They especially dependent earnings short-term loans funds bill permit secure available.' 4048. intended explicitly, 615(a) 88: '(D)epreciation sustained So thereof recoverable '(D)epartmental rulings promulgated interpreting .,' Biddle 302 573, 582, 58 379, 383, 82 431. each warns 'Revenue Rulings reported Department Regulations. .'

Classification Label: 11