Court Opinion

ID: 4484536
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:48.90885+00
Date Added: 2024-06-11T14:54:04.489246
License: Public Domain

Goffe, J., concurring in part and dissenting in part: I fully concur with the majority as to the foreign tax credit issue but respectfully dissent as to the investment credit issue. I would, instead, reach the result reached by the Court of Claims in the following eight cases: Pacific Far East Line, Inc. v. United States, 211 Ct. Cl. 71, 544 F.2d 478 (1976); Pacific Transport Co. v. United States, 211 Ct. Cl. 99, 544 F.2d 493 (1976); Delta Steamship Lines, Inc. v. United States, 211 Ct. Cl. 104, 544 F.2d 496 (1976); Oglebay Norton Co. v. United States, 221 Ct. Cl. 749, 610 F.2d 715 (1979); O. L. Schmidt Barge Lines, Inc. v. United States, 221 Ct. Cl. 793, 610 F.2d 728 (1979); Ness v. United States, an unreported case (Ct. Cl. 1980, 45 AFTR 2d 80-784, 80-1 USTC par. 9243); Gilman v. United States, an unreported case (Ct. Cl. 1980, 45 AFTR 2d 80-782, 80-1 USTC par. 9244; Moore McCormack Resources, Inc. & Consolidated Subsidiaries v. United States, an unreported order (Ct. Cl. 1980, 46 AFTR 2d 80-5075, 80-2 USTC par. 9495). The majority in the instant case strains to divine the intent of Congress as to whether the investment credit should be allowed for the qualified investment in a fishing reel which is paid for from a Merchant Marine Act (MMA) capital construction fund ordinary income account. Yet the majority traces the legislative history of the investment credit and the MMA and virtually concedes that Congress never contemplated the MMA when it enacted the investment credit provisions and never contemplated the investment credit provisions when it enacted the MMA. In 1976, when Congress finally saw fit to coordinate the investment credit provisions with the MMA provisions, it made clear that no inference was to be drawn as to the availability of the investment credit for prior years. Conferees’ Joint Explanatory Statement on the Tax Reform Act of 1976 (S. Rept. 94-1236 (Conf.), at 448 (1976), 1976-3 C.B. (Vol. 3) 852 (Joint Committee General Explanation 188,1976-3 C.B. (Vol. 2) 200)). Although there is no congressional intent as to the relationship of the investment credit and the MMA, there is a widely understood congressional intent as to the investment credit and there is an independent widely understood congressional intent as to the MMA. It matters not whether the congressional purpose of the investment credit is viewed as a reduction of the cost of the asset or as a reduction of the taxpayer’s income tax because the overall purpose of its enactment was to encourage the acquisition of qualified assets by the taxpayer. The effect of the holding of the majority is to charge petitioner with a higher cost for acquiring the fishing reel or to increase his tax liability by denying the investment credit because he used his MMA account instead of purchasing the fishing reel directly. Petitioner’s investment in the fishing reel falls squarely within the intent of Congress. Only the timing is off. Instead of directly acquiring the qualified asset for cash, he acquired it in two stages. First, he made deposits into an MMA capital construction fund ordinary income account. He parted with actual cash to make these deposits. It is true that he was allowed to deduct these amounts under the MMA, but when he acquired the reel he was deprived of the depreciation deduction to offset his deductions for contributions to the MMA account. Nevertheless he made a net outlay of cash to acquire a new asset qualifying for the investment credit. He should, therefore, be entitled to the investment credit for the qualified investment he has made. The independent congressional intent as to the MMA is expressed solely in denying a deduction for depreciation of assets purchased from funds in the ordinary income account. Petitioner falls squarely within the prohibition of a depreciation deduction on the fishing reel because he purchased it from the ordinary income account. The income tax consequences to a taxpayer of utilizing the MMA capital construction fund ordinary income account are fully and completely spelled out in the MMA provisions. If a taxpayer was allowed a deduction when he contributed money to the fund, he cannot later benefit from a depreciation deduction on an otherwise depreciable asset purchased from the MMA fund. In an attempt to interject the MMA provisions into the investment credit provisions, the majority upsets the neat and tidy symmetry of the MMA by constructing an intent of Congress unsupported by any legislative history contrary to the stated purpose of the investment credit. The enactment of an investment tax credit was first proposed by President Kennedy in 1961.1 Congress considered the President’s proposals, but did not enact the credit in 1961. It was not until 1962 that the Kennedy administration and Congress moved in concert to enact the investment tax credit provisions. In his economic report to Congress, President Kennedy reiterated his desire that Congress enact the proposed investment tax credit, saying: In particular, I urge the earliest possible enactment of the tax proposals now before the House Committee on Ways and Means. The centerpiece of these proposals is the 8 percent tax credit against tax for gross investment in depreciable machinery and equipment. * * * The tax credit increases the profitability of productive investment by reducing thé net cost of acquiring new equipment. It will stimulate investment in capacity, expansion and modernization, contribute to the growth of our productivity and output, and increase the competitiveness of American exports in world markets. [Economic Report to Congress, Jan. 22, 1962, 108 Cong. Rec. 584. Emphasis added.] Obviously, President Kennedy perceived the purpose of the investment tax credit to be that of encouraging investment in productive assets by reducing the net cost thereof. The legislative intent of Congress is as follows: Realistic depreciation alone, however, is not enough to provide either the essential economic growth or to permit American industry to compete on an equal basis with the rapidly growing industrial nations of the free world. The major industrialized nations of the free world today provide not only liberal depreciation deductions but also initial allowances or incentive allowances to encourage investment and economic growth. This is true, for example, in Belgium, Canada, France, West Germany, Italy, Japan, the Netherlands, Sweden, and the United Kingdom. The investment credit will stimulate investment because — as a direct offset against the tax otherwise payable — it will reduce the cost of acquiring depreciable assets. This reduced cost will stimulate additional investment since it increases the expected profit from their use. The investment credit will also encourage investment because it increases the funds available for investment. [H. Rept. 1447, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 405, 412. Emphasis supplied.] Realistic depreciation alone, however, is not enough to provide the essential economic growth. In addition, a specific incentive must be provided if a higher rate of growth is to be achieved. The investment credit will stimulate investment, first by reducing the net cost of acquiring depreciable assets, which in turn increases the rate of return after taxes arising from their acquisition. Second, investment decisions are also influenced by the availability of funds. The credit by increasing the flow of cash available for investment, will stimulate investment. The increased cash flow will be particularly important for new and smaller firms which do not have ready access to the capital markets. Third, the credit can be expected to stimulate investments through a reduction in the "payoff’ period for investment in a particular asset. This reduction in risk, coupled with the higher rate of profitability and increased cash flow, will lower the level at which decisions to invest are made and will help to restore to past levels the proportion of the annual national output devoted, through investment in machinery and equipment, to capital formation. The objective of the investment credit is to encourage modernization and expansion of the Nation’s productive facilities and thereby improve the economic potential of the country, with a resultant increase in job opportunities and betterment of our competitive position in the world economy. The objective of the credit is to reduce the net cost of acquiring new equipment; this will have the effect of increasing the earnings of new facilities over their productive lives and increasing the profitability of productive investment. It is your committee’s intent that the financial assistance represented by the credit should itself be used for new investment, thereby further advancing the economy. Only in this way will the' investment credit fully serve the overall national interest in greater productivity, a healthy and sustained economic growth, and a better balance in international payments. [S. Rept. 1881, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 707, 717. Emphasis added.] It is the understanding of the conferees on the part of both the House and the Senate that the purpose of the credit for investment in certain depreciable property, in the case of both regulated and nonregulated industries, is to encourage modernization and expansion of the Nation’s productive facilities and to improve its economic potential by reducing the net cost of acquiring new equipment, thereby increasing the earnings of the new facilities over their productive lives. [Conf. Rept. 2508, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 1129,1142.] One can hardly dispute the conclusion that Congress enacted the investment tax credit in order to encourage investment in new equipment. In reality, the investment tax credit is a Government subsidy or, in the parlance of academia, a "tax expenditure.” See Surrey, "Tax Incentives as a Device for Implementing Government Policy: A Comparison with Direct Government Expenditures,” 83 Harv. L. Rev. 705 (1970). Congress has decreed that the U.S. Government will, through the vehicle of the investment tax credit, help investors buy a specified percentage of certain kinds of assets. As distinguished from the provisions for the deduction of depreciation, which deductions are allowed primarily for the purpose of charging the costs of producing income against the income produced by those costs, i.e., the matching principle, the investment tax credit provides a one-time subsidy that is intended to reduce the net cost, at the outset, of investing in certain assets. So, it would appear that if an asset is of the kind specified by Congress, then the purchaser should, absent a specific exception, receive the benefit of the subsidy. As we conclude our examination of the intent with which Congress enacted the investment credit, we would note that the investment tax credit provisions are to be interpreted liberally in keeping with their purposes. United Telecommunications, Inc. v. Commissioner, 65 T.C. 278, 289 (1975), affd. 589 F.2d 1383 (10th Cir. 1978), cert. denied 442 U.S. 917 (1979); Minot Federal Savings & Loan Assn. v. United States, 435 F.2d 1368, 1372 (8th Cir. 1970); Northville Dock Corp. v. Commissioner, 52 T.C. 68, 73 (1969). The MMA was enacted in 1936 to promote the American merchant marine at a time when shipping constructed during World War I was becoming obsolete. The investment incentive with which we are here concerned is the capital construction fund provisions of section 607 of the MMA. This portion of the MMA, as it existed during the years here relevant, allowed a U.S. citizen who owned or leased an eligible vessel to enter into an agreement with the Secretary of Commerce to establish a capital construction fund with respect to any or all of such vessels.2 Such agreements are to be for' the purposes of providing replacement vessels, additional vessels, or reconstructed vessels, subject to certain limitations not here relevant.3 The agreements, in order to effectuate the goal of providing funds for future qualified withdrawals, are to provide for yearly deposits in the fund of agreed-upon amounts, such amounts not to exceed 50 percent of the taxpayer’s taxable income (as computed under other provisions of the MMA) which is attributable to the operation of the vessels encompassed by the terms of the agreement.4 Section 607(b) of the MMA provides certain ceiling limitations on the amounts which may be deposited in the fund. Section 607(c) of the MMA places restrictions on where the assets in the fund may be deposited and in what they may be invested. Section 607(e) of the MMA sets forth the three types of accounts that are to be maintained in the fund, the distinction in the accounts being the source of the income which is deposited into each of them. We are here concerned only with the "ordinary income account” defined in section 607(e)(4) of the MMA. This account basically includes amounts deposited therein which had their origin in ordinary income-type transactions of the depositing taxpayer, especially "amounts referred to in subsection (b)(1)(A),”5 which are defined as: (A) that portion of the taxable income of the owner or lessee for such year (computed as provided in chapter 1 of the Internal Revenue Code of 1954 [26 U.S.C. sec. 1 et seq.] but without regard to the carryback of any net operating loss or net capital loss and without regard to this section) which is attributable to the operation of the agreement vessels in the foreign or domestic commerce of the United States or in the fisheries of the United States. Qualified withdrawals from the fund can be made only for: (A) The acquisition, construction, or reconstruction of a qualified vessel, (B) The acquisition, construction, or reconstruction of barges and containers which are part of the complement of a qualified vessel, or (C) The payment of the principal on indebtedness incurred in connection with either (A) or (B), above.6  Qualified withdrawals are treated as first coming out of the other two accounts in the fund, and then as coming out of the ordinary income account.7 However, in the present case, we have only an ordinary income account with which to deal. That completes a summary of the mechanics of establishing an account, making deposits thereto, and withdrawing funds therefrom. It is the remaining provisions of the MMA that provide the inducement to engage in those exercises. Section 607(d)(1)(A) of the MMA provides that a taxpayer’s taxable income for the taxable year in which he makes a deposit to a fund shall be reduced by an amount equal to the amount deposited for the taxable year out of amounts referred to in subsection (b)(1)(A) (which amounts are, as we noted earlier, amounts out of the taxable income of the taxpayer (as computed under that subsection) which is attributable to the operation of vessels in the foreign or domestic commerce of the United States or in the fisheries of the United States). In other words, a taxpayer may deduct amounts derived from the ordinary income of his fishing or shipping business which he deposits in a capital construction fund ordinary income account. However, this deduction does not result in a permanent exclusion of such amounts from the taxpayer’s income. Sec. 607(g)(2) of the MMA provides that: (2) if any portion of a qualified withdrawal for a vessel, barge, or container is made out of the ordinary income account, the basis of such vessel, barge, or container shall be reduced by an amount equal to such portion. In effect, the amount deducted in the year of withdrawal is restored to income in the years that the taxpayer’s depreciation deductions under section 167 are reduced because of the reduced basis mandated by section 607(g)(2) of the MMA. This mechanism provides a tax deferral, not a tax exclusion.8 The intent of Congress is amply illustrated by the language in the following excerpts from a committee report: Three separate accounts are to be maintained in the fund according to the nature of the deposits: the capital account, the capital gain account, and the ordinary income account. Withdrawals may be from the fund and without payment of tax for the purpose of acquiring vessels used in foreign trade, in the Great Lakes trade, in the noncontiguous domestic trade, or the fisheries. These amounts, however (to the extent taken from the ordinary income account or to some extent in the case of withdrawals from the capital gains account), reduce the basis for computing depreciation on the vessels built with withdrawals from the fund. * * * [S. Rept. 91-1080, at 40, to accompany H.R. 15424 (Pub. L. 91-469,84 Stat. 1018 (1970). Emphasis added.] When these assets are withdrawn from the fund for use to build vessels, however, the basis of the vessels for depreciation purposes is reduced to the extent tax-deferred earnings or capital gain were used to finance it. [S. Rept. 91-1080, supra at 41.] The independent legislative objectives behind the investment credit and the MMA can thus be summarized: (1) Congress intended to subsidize the purchase of productive assets which meet the requirements of the investment tax credit statutes; and (2) the basis reduction that is mandated by section 607(g)(2) of the MMA was enacted solely to complete the tax deferral scheme found in section 607 of the MMA and was, therefore, designed to reduce a vessel’s basis only for purposes of depreciation. Since Zuanich’s reel seems to be the type of property in which Congress desired to encourage investment, I believe that the legislative goals of Congress would be best attained by construing these two statutory provisions in such a way that the investment tax credit is available under these facts. By limiting the application of section 607(g)(2) of the MMA to its intended scope, i.e., the reduction of a vessel’s basis solely for purposes of depreciation, the intent of Congress with regard to the availability of the investment tax credit in this context will not be thwarted. The majority indulges in the kind of legislative construction which the Supreme Court condemned in Helvering v. Stockholms Enskilda Bank, 293 U.S. 84 (1934), where the Court said: The intention of the lawmaker controls in the construction of taxing acts as it does in the construction of other statutes, and that intention is to be ascertained, not by taking the word or clause in question from its setting and viewing it apart, but by considering it in connection with the context, the general purposes of the statute in which it is found, the occasion and circumstances of its use, and other appropriate tests for the ascertainment of the legislative will * * * [293 U.S. at 93.] Even after the majority attempts to support a phantom legislative intent by comparing the situation here with other situations where Congress manifested such an intent, it painstakingly takes the reader through the investment credit provisions (which were never intended by Congress to relate to the MMA) but overlooks a basis provision which effectively excludes the MMA from the investment credit provisions. The majority concludes that petitioner’s basis is zero but fails to point out the general provision that basis is cost. Section 1012 defines "basis” as follows: The basis of property shall be the cost of such property, except as otherwise provided in this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses). The cost of real property shall not include any amount in respect of real property taxes which are treated under section 164(d) as imposed on the taxpayer. The adjustment to basis which the majority interjects is not embodied by the unmistakable specific language of section 1012. It is derived from the Merchant Marine Act, 46 U.S.C. sec. 1177. The plain words of section 1012 define basis as cost. Moreover, petitioner has a cost in the fishing reel. His cost is reflected in the cash he deposited into the MMA account and then later withdrew to purchase the fishing reel. Moreover, the regulations which relate to the investment credit refer to section 1012. Section 1.46-3(c)(l), Income Tax Regs., provides in part as follows: . (c) Basis or Cost. (1) The basis of any new section 38 property shall be determined in accordance with the general rules for determining the basis of property. Thus, the basis of property would generally be its cost (see section 1012), unreduced by the adjustment to basis provided by section 48(g)(1) with respect to property placed in service before January 1, 1964, and any other adjustment to basis, such as that for depreciation * * * [Emphasis supplied.] The adjustment to basis required by section 607(g)(2) of the MMA could hardly be classified as part of the "general rules” for determining basis referred to by the regulations. Furthermore, the regulations provide that basis for purposes of the investment credit be determined before any adjustments to basis. The reduction in basis to zero made by the majority in its opinion by reason of the MMA is certainly an adjustment to basis. The majority, contrary to the regulations quoted above, denies the investment credit by reducing the basis and applying the investment credit after the adjustment to basis. The majority attempts to support its conclusion as to congressional intent by relying on cases in which the taxpayer had no cost in the asset. In the instant case, petitioner incurred a cost in acquiring the asset. In Anderson v. Commissioner, 54 T.C. 1035 (1970), affd. 446 F.2d 672 (5th Cir. 1971), taxpayers who owned partial interests in some oil and gas leases, sold a production payment to a third party with the proceeds from the sale being pledged to equip oil and gas wells on the leases. The reality of such transactions is that the "purchaser” of the production payment has invested funds in the development of the leases in exchange for an interest in the property. See G.C.M. 22730, 1941-1 C.B. 214. The assignors in such a case are denied any depreciation with regard to property purchased with such funds, inasmuch as they have not invested any money therein. See G.C.M. 24849, 1946-1 C.B. 66. The taxpayer^/assignors in the Anderson case claimed the investment credit on the assets purchased with the funds provided by the third party/assignee. Since, under the law of oil and gas taxation, the taxpayer/assignors are not treated as having invested in such assets, we held that they are not entitled to the investment credit for such assets. Petitioners argued that the regulations were contrary to the statute and should not be followed by the Court. We held that it was not necessary to rely upon the regulations but held, instead, that petitioners had no investment in the assets and, therefore, the property did not fall within the general definition of section 38 property. We held, further, that the taxpayer must have incurred a cost for the property to be eligible for depreciation and for the investment credit, and in that respect, the regulations were consistent with the statute. That case, however, involved only the question of whether the taxpayer made an investment in the property. It is undisputed that petitioner in the instant case made an investment in the property. The United States Court of Appeals for the Fifth Circuit affirmed Anderson v. Commissioner, supra. It, too, decided the case on the ground that the taxpayers had not made an investment in the subject property: The taxpayers made no investment in the equipment obtained pursuant to this transaction which would entitle them to a return of capital through the depreciation deduction. The assignee, * * * and not the taxpayers, provided the funds for the equipment. [446 F.2d at 672, 673.] The court, however, affirmed based upon our opinion. In Millers National Insurance Co. v. Commissioner, 54 T.C. 457 (1970), we were presented with the question of whether property used both in the underwriting activity and the investment activity of a mutual insurance company qualified in full for the investment credit. At that time, underwriting income was not taxable. The Supreme Court previously held that assets used in the underwriting activity were not depreciable because Congress intended to limit the deductions to expenses related to taxed income. Rockford Life Ins. Co. v. Commissioner, 292 U.S. 382 (1934). We held that because the taxpayer was not entitled to depreciation on the assets, it was not entitled to the investment credit on them. In the instant case, there is no compelling reason to deny "section 38 property” status to Zuanich’s fishing reel. As stated above, it is clearly tangible personal property of a depreciable character with at least a 3-year useful life, which is all that the relevant statute requires. Since Zuanich is seeking the investment credit for property that was undisputedly purchased with his own investment funds, the prohibition found in the Anderson case is inapplicable. Finally, because the income from Zua-nich’s fishing business is generally subject to the Federal income tax, there is no danger of a nontaxable business providing tax benefits to a taxable business of the same taxpayer and, therefore, the rationale of the Millers National Ins. Co. case is not relevant in this case. I, therefore, disagree with the holding of the majority and would allow petitioner the investment credit for the fishing reel he acquired. Legislative intent fabricated by the majority as to the interplay of the investment credit and the MMA is woven out of whole cloth and that unsupported intent violates the avowed intent of Congress as to the investment credit and the avowed intent of Congress as to the Merchant Marine Act. Irwin, Hall, Wiles, and Nims, JJ., agree with this concurring and dissenting opinion.  Message from President Kennedy to Congress, Apr. 20,1961,107 Cong. Rec. 6376 (1961).   Sec. 607(a), Merchant Marine Act, 1936.   Sec. 607(a), MMA.   Sec. 607(a), MMA.   Sec. 607(e)(4)(A), MMA.   Sec. 607(f)(1), MMA.   Sec. 607(g)(1), MMA.   A further tax incentive is found in the portion of the MMA which excludes from a taxpayer’s gross income any income realized from the investment and reinvestment of amounts held in the fund. Sec. 607(d)(1)(C), MMA.