Court Opinion

ID: 9644040
Source: CourtListenerOpinion
Date Created: 2023-08-22 20:47:09.03748+00
Date Added: 2024-06-11T18:11:07.718385
License: Public Domain

SIMONS, Circuit Judge
(dissenting).
I regret that I am unable to concur. While I am not of those who would press the Dobson doctrine to logical or illogical extremes, or who view with complacency the growing tendency to subordinate a great system of constitutional courts to administrative tribunals, it is nevertheless clear to me that determination of the useful life of property is one of fact within the competence and exclusive province of the Tax Court, whether in the post-Dobson or pre-Dobson era.
When, in 1915, the building here involved was constructed, it was assumed to have a useful life of 33% years and so depreciation was taken in each tax year by its several owners at the rate of 3%. In 1940 it was agreed that this assumption was erroneous and the building had a useful life of 50 years, with an allowable annual depreciation of 2%. Depreciation at this rate was claimed and allowed for 1940, 1941 and 1942. It was found, however, upon computation of the depreciation base, that for half of 1915, and the full years 1916, 1917 and 1921, no depreciation had been claimed. The taxpayer, accepting the rule of Virginian Hotel Corp. v. Helvering, that the depreciation base must be reduced by deductions allowable for years when no deductions were claimed, reduced the base by deductions from it for the open years at the rate of 2%. The Commissioner asserted the 3% rate for those years. When the issue reached the Tax Court, that tribunal had before it two circumstances, the first, a prospective estimate of useful life projected in 1915, and the second an agreement in 1940 between taxpayer and Commissioner that the useful life of the building was, in fact, 50 years. It made a finding, indicated in Syllabus 2 of its opinion, that the depreciation sustained in the open years was sustained at the rate of 2% rather than 3%, following its own decision in Mutual Fertilizer Company, 5 T.C. 1122. While this finding lacks something in explicitness, *1016it .is perfectly clear that the Tax Co.urt, to which is committed- the drawing of infer- , enees from ■ evidentiary facts, concluded that the building had always had a useful life of 50 years, which of course, includes the open years here involved, and that the fact was reasonably known or ascertainable at the end of each year. The greater depreciation deducteÜ and allowed in other years was, of course, beyond its reach by reason óf § 113(b) (lj (B) of the Internal Revenue Code, 26 U.S.C.A: ' Int.Rev.Code, § 113(b) (1) (B), .interpreted and applied in the Virginian Hotel case.
It is now urged by my brothers tljat the Tax-.Court is precluded .from drawing the inference, it did by Treasury Regulation 103, § 19.113(b) .(1)-1, T.R. 111 and § 19.23 (l)-5, the first providing that the determination of the amount properly allowable shall be made on the basis of facts reasonably known to exist at the end of the taxable year or period, and the second, precluding the. taxpayer from taking advantage in later years of his prior failure to take any depreciation allowance. The failure of the Tax Court to apply these regulations is said to present to this court a question of law., .
It was pointed out by Mr. Justice Douglas in.the Virginian Hotel case, that under our federal tax system there is no machinery for formal allowances of deductions from gross income. Deductions stand, if the ..Commissioner takes no steps to challenge -them, and if -they are not challenged-they are allowed, since tax liability is then determined on the basis of the returns, and that apart from contested cases that is the-only way in which deductions are “allowed.” What was .said of allowed deductions applies even more forcibly to “allowable” deductions. ., Up to the time of the Commissioner’s present challenge and when , this case reached the Tax Court, there was no determination of the allowable deductions during the open years. The deductions claimed in other years at 3% and standing unchallenged by the Commissioner,. had no other basis except a forecast of useful life made in 1915, assumed to be correct until 1940 when, in the light of actual experience, it was found to be inaccurate. The Tax Court now finds that in the light of that experience, culminating in the agreement of 1940, the actual rate of depreciation during the open years was 2% and not 3%.
My brothers argue, however, that this is “hindsight,” that depreciation must be considered upon the basis of an understanding of value existing at the end of each annual or accounting period. But a consideration of. allowable deductions must always be hindsight — it cannot be otherwise. If a depreciation is claimed in a tax return and not challenged, it is ■ an allowed depreciation, — if it is not claimed it must, nevertheless, to the extent allowable, be deducted from the' depreciation base. But this ascertainment only involves the base for taking depreciation in subsequent years and is made in subsequent years. This would appear to be beyond dispute. So when the-Tax Court came to consider the Commissioner’s challenge to the 2% deductions, claimed by the - present taxpayer in the years 1940 to 1942 inclusive, it became necessary for the Tax Court to determine-what was the actual depreciation in the-open years at the end of each tax periods This we must assume it did, or else the expertness in accounting, interpretation and; valuation, with which the Supreme Court so eloquently credited it in the Dobson case, has no foundation in fact. It is inconceivable that the Tax Court was unfamiliar with, or ignored the Treasury Regulations, especially in view of Judge Disney’s challenge in the Mutual Fertilizer case. It must be noted that the present decision is. by a unanimous court and the conclusion is inescapable that the determination of allowable deductions at 2% in the open years was based upon facts reasonably known or readily ascertainable at the end of each of the open years here involved.
There is here no -accumulation of depreciation to be held for use in a subsequent year when it would bring the taxpayer more taxable benefit. The question here-does not involve ignoring deductions in the open years. It is limited simply to the applicable rate. The Tax Court’s decision, reaches an eminently just result and Mr. Justice Jackson’s observation in dissenting *1017in the Virginian Hotel case applies with greater force here than there. “The question comes simply to this: Whether the Commissioner, upon determining whether taxpayer has in good faith erred, may use a correction in so far as it helps the Government and adhere to the mistake in so far as it injures the taxpayer. 1 think that no straining should be done to find a construction of the statutes that will support the result.”
I think the Tax Court was right and that its decision should be affirmed.