Court Opinion

ID: 4481284
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:48.694698+00
Date Added: 2024-06-11T14:54:00.619317
License: Public Domain

Tannenwald, J., dissenting: It is significant that the majority carefully refrains from resting its decision on a finding that the decedent made a valid completed gift prior to her death in a transaction separate from the settlement. Indeed, even though the endorsement of the stock certificates gave Early the power to transfer good title to a bona fide purchaser, the transaction was potentially subject to rescission as between Early and the decedent’s estate, since Early was not a bona fide purchaser in his own right. Compare art. 1302-6.07 with art. 1302-6.08, Tex. Rev. Civ. Stat. Ann. (1962). Eather, the majority reasons that the petitioners had claims of full ownership which were exchanged for life interests in a transaction which should similarly be considered independent of the original purported gift of the shares by the decedent. Such a rationale, in my opinion, misconceives the applicability of Lyeth v. Hoey, 305 U.S. 188 (1938). In that case, the taxpayer was an heir and claimed as an heir and it was held that what was received in the compromise should be treated as having been received as an heir. The tax characterization of the property received was thus held to be determined by the status of the claimant which gave rise to the claim and the settlement.1 Helvering v. Safe Deposit Co., 316 U.S. 56 (1942); In re Sage’s Estate, 122 F. 2d 480 (C.A. 3, 1941); Estate of Mary Clare Milner, 6 T.C. 874 (1946); 1 Mertens, Law of Federal Gift and Estate Taxation, sec. 4.19 (1959). In the instant case, the original transfer was claimed to be a gift. Petitioners’ claim stemmed from their asserted standing as donees and. that standing was the basis for the financial recognition accorded to them by the settlement. To paraphrase what- the Second Circuit Court of Appeals said in Harte v. United States, 252 F. 2d 259, 261 (C.A. 2, 1958), by way of explanation of Lyeth v. Hoey, what petitioners received is to be treated as if it were acquired by gift. To say, as the-majority does, that their bona fide claims of ownership dispel their donee standing and convert the settlement into an independent trans-. action is to emasculate Lyeth v. Hoey, since every settlement within the ambit of that case necessarily involves a bona fide claim'. There is not the slightest suggestion in the record herein that the dispute between Early and the contestants of decedent’s will was other than bona fide. Cf. Housman v. Commissioner, 105 F. 2d 973 (C.A. 2, 1939); Bailey v. Ratterre, 144 F. Supp. 449 (N.D.N.Y. 1956). Nor does this case involve a settlement under which a taxpayer receives property belonging to another party claimant rather than to the decedent. Compare Lydia Hopkins, 13 T.C. 952 (1949), with Darthey I. Williams. 36 T.C. 195 (1961). The cases relied upon by the majority are clearly distinguishable. Sherman Ewing, 40 B.T.A. 912 (1939), and Commissioner v. Matheson, 82 F. 2d 380 (C.A. 5, 1936), both involved situations where there was no dispute and the taxpayer received property in discharge of a monetary legacy to which he was unquestionably entitled. Gist v. United States, an unreported case (S.D. Cal. 1968, 22 A.F.T.R. 2d 5895, 68-2 U.S.T.C. par. 9667), also did not involve any dispute; the decedent’s widow exchanged her admitted community property rights for the rights which she was entitled to receive in exchange under decedent’s will. In White v. Thomas, 116 F. 2d 141 (C.A. 5, 1940), the taxpayer received cash outright in lieu of his claim to real estate. In holding that the cash was not received as a gift, the Fifth Circuit Court of Appeals expressly distinguished the situation where “what is received is a part of the very thing claimed.” See 116 F. 2d at 147. This distinguishing factor clearly applies herein where petitioners received interests in a trust which contained the very property they were claiming as donees. Thus, despite broader language in the Court of Appeals opinion, which seemingly supports the conclusion of the majority, that case clearly is inapplicable.2 Moreover, the fact is that the taxpayer in White v. Thomas had no bona fide claim of a gift and the District Court held that the payment was in the nature of a settlement of litigation involving a claim for compensation by the taxpayer and an alleged interference by the taxpayer with the property rights of the decedent’s estate. See White v. Thomas, an unreported case (N.D. Tex. 1940, 27 A.F.T.R. 1163, 40-2 U.S.T.C. par 9708). I can see no escape from the conclusion that the petitioners herein acquired their life interests under the circumstances designated in section 273. Since, under my view, petitioners are not entitled to any amortization, I am not required to reach the second issue involved herein, namely, whether it is necessary for petitioners to allocate the amortization allowed between taxable income and taxable interest income. I am constrained to note, however, that I also disagree with the majority conclusion on this issue. The difference between depreciation and amortization is one which has not been the subject of precise analysis in the decided cases. See, e.g., KIRO, Inc., 51 T.C. 155, 167-168 (1968), and the cases cited therein. Compare Rev. Rul. 62-20, 1962-1 C.B. 21, with Rev. Rul. 60-358, 1960-2 C.B. 68. The statute and respondent’s regulations, however, point up the difference. When Congress desired to permit deductions over a period less than the useful life of the property involved or in situations where the property had no measurable useful life, it did so by way of separate provisions rather than by amendment to the depreciation section of the Code. Compare, for example, section 167 (depreciation) with section 168 (amortization of emergency facilities), ' section 169 (amortization of grain storage facilities), section 174 (research and development expenditures), section 177, (trademark and trade name expenditures), and section 248 (corporate organizational expenditures). Moreover, it is noteworthy that in several of these sections the item covered by the permitted deduction is characterized as a “deferred expense.” See secs. 174, 177, and 248. Compare also section 615(b) (exploration expenditures); section 616(b) (development expenditures). Similarly, in dealing with the deduction by lessees for improvements made on a lessor’s property, Congress specifically distinguished between the deduction for depreciation, i.e., “for exhaustion, wear and tear, obsolescence” and “amortization.” Compare secs. 167 and 178. See also sec. 1014(b) (9). This dichotomy is carefully preserved by respondent’s regulations under section 167 dealing with depreciation, wherein it is provided that the deduction for amortization by a lessee is governed by sections 162 and 178. See sec, 1.167 (a) -4, Income Tax Regs. The dichotomy has appeared in respondent’s regulations since 1918 (see art. 109, Eegs. 45) and is therefore deemed to have congressional approval and has the effect of law. See Commissioner v. Noel's Estate, 380 U.S. 678, 680 (1965); Douglas H. Tanner, 45 T.C. 145, 148 (1965), affirmed per curiam 363 F. 2d 36 (C.A. 4, 1966). From the foregoing, it appears that where the deduction is determined by the useful life of the underlying property it should be taken by way of depreciation under section 167 but where the deduction is determined by the useful life of the taxpayer’s interest in the property, without regard to the useful life of the underlying property itself, it should be taken by way of amortization in the nature of a deferred expense under some other section. Compare Cane v. Commissioner, 331 U.S. 1 (1947). Under such rationale, write-off of the cost of petitioners’ life interests is not governed by section 167. Certain language in KIRO, Ino., supra, points in the direction of treating amortization as a section 167 deduction. However, in that case we were responding to a different factual situation and a different argument belatedly raised by respondent, namely, that the taxpayer’s rights were in substance a lease. Moreover, we recognized that the fact that a deduction might be covered by section 167 did not preclude a holding that it also lay within the ambit of section 162. See KIRO, Inc., 51 T.C. at 168.3  The question then is, what section should govern? If petitioners’ cost had been incurred in connection with a “trade or business,” the applicable section would be section 162. But petitioners were not so engaged and, since their life interests were held for the production of income, we must necessarily look to section 212. It has long been settled that sections 162 and 212 are correlative with respect to the classification of items for which deduction is permitted. Trust of Bingham v. Commissioner, 325 U.S. 365 (1945). Applying the foregoing rationale, the following conclusions appear in order: (1) Petitioners’ deduction is for amortization, not depreciation; (2) the right to the deduction is not governed by section 167; (3) the character of the deduction is such that it falls within the ambit of section-162 and, by virtue of Trust of Bingham v. Commissioner, supra, within section 212 with respect to taxpayers such as petitioners. Such conclusion is fully consistent with the legislative concern which resulted in the specific provision dealing with interest in section 265, namely, congressional reluctance to hamper the marketing of tax-exempt securities; no mention is made of any amortization or depreciation deduction, for the obvious reason that tax-exempt securities are simply not the kind of property to which such deductions apply. Cf. Whittemore v. United States, 383 F. 2d 824 (C.A. 8, 1967); see H. Rept. No. 704, 73d Cong., 2d Sess. p. 23 (1934); S. Rept. No. 558, 73d Cong., 2d Sess. pp. 26-27 (1934); 78 Cong. Rec. 7831 (1934). Since section. 212 is the governing section, section 265 requires that the deduction claimed must be disallowed insofar as it is allocable to tax-exempt interest. Raum:, agrees with this dissent.   Compare also the terms of the Supreme Court’s remand in Helvering v. Safe Deposit Co., 316 U.S. 56, 66 (1942) with the holding of the Court of Appeals, 121 F. 2d 307, 315 (C.A. 4, 1941).    The majority opinion herein states that, “It is not disputed that the amortized cost is deductible, if at all, under section 167(a)(2).” The record and briefs indicate that this merely means that the respondent did not seek to support his deficiency under any other section. But we are not necessarily precluded from deciding the case, on the facts as presented, on the basis of a legal theory not argued by the parties. See Brook v. Commissioner, 360 F. 2d 1011, 1013 (C.A. 2, 1966), reversing and remanding on other grounds a Memorandum Opinion of this Court; Casco Products Corp., 49 T.C. 32, 36 (1967); Estate of Firmin D. Fusz, 46 T.C. 214, 215, fn. 2 (1966); 2 Casey, Federal Tax Practice, sec. 7.6, fn. 41.