Court Opinion

ID: 4484538
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:48.957032+00
Date Added: 2024-06-11T14:54:04.495592
License: Public Domain

Goffe, J., concurring: Because I was the author of the concurring and dissenting opinion in Zuanich v. Commissioner, 11 T.C. 428 (1981), I feel constrained to file a concurring opinion in this case to explain why I view the majority opinion as being consistent with my opinion in Zuanich. In the instant case, petitioners deducted the sales tax they paid when they acquired the farm equipment on which they claimed the investment credit. I agree with the reasoning and the holding of the majority that by deducting the sales tax the petitioners are precluded from including it in the basis for purposes of the investment credit. If petitioners had, instead, capitalized the sales tax, the question would arise (but does not herein because the sales tax was deducted) as to whether petitioners would be entitled to the investment credit for the sales tax. I conclude that they should be. The basis of the asset upon which the investment credit is allowed is specified in section 1.46-3(c)(l), Income Tax Regs., 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, and would include all items properly included by the taxpayer in the depreciable basis of the property, such as installation and freight costs. * * * [Emphasis supplied.] Section 1012 is the general rule for determining basis and forms the springboard from which basis is determined for various taxable events. The general rule is that basis is cost. However, section 1016 provides for adjustments to basis. Because section 1016(a)(1)(A) provides that no adjustment shall be made to basis for taxes and other carrying charges described in section 266 for which the taxpayer has taken, a deduction in the current taxable year, there is a clear implication that sales taxes are not considered a part of the taxpayer’s cost under section 1012.1 That is the rationale which I view as appropriate to the holding of the majority in the instant case. In my view, the majority’s result in the instant case is correct because the sales tax is not part of the asset’s cost under section 1012 nor is it an adjustment to basis under section 1016(a)(1)(A) by virtue of its deduction. Accordingly, the taxpayer’s investment in qualified property does not include the sales tax. See sec. 1.46-3(c)(l), Income Tax Regs. When, however, a taxpayer elects to capitalize the sales tax, he may elect to treat the capitalized amount as a part of his original cost for purposes of section 1012 or treat it as an upward adjustment to basis under section 1016(a). See sec. 1.1016-2(c), Income Tax Regs. Under either approach, the capitalized sales tax becomes part of the taxpayer’s qualified investment and, consequently, is subject to the investment tax credit. If treated as original cost under section 1012, the capitalized sales tax fits neatly within the language of section 1.46-3(c)(l), Income Tax Regs. If, however, the capitalized taxes are treated as an upward adjustment to basis, the result is less' obvious. Section 1.46-3(c)(l), Income Tax Regs., prohibits taking into account downward adjustments to basis for purposes of the investment tax credit. It was on this basis that I concluded the adjustments to basis required by the Merchant Marine Act in Zuanich did not affect the taxpayer’s ability to claim an investment tax credit. Section 1.46-3(c)(l), Income Tax Regs., however, does not prohibit upward adjustments to basis. In my view, capitalized sales taxes are proper upward adjustments for puposes of the investment tax credit. Cf. sec. 1.1016-2(c), Income Tax Regs. This view is strengthened by the last phrase of section 1.46-3(c)(l), Income Tax Regs., quoted above, "The basis * * * would include all items properly included by the taxpayer in the depreciable basis of the property, such as installation and freight costs.” Accordingly, the net effect of whether a taxpayer elects to treat sales taxes as part of the original cost under section 1012 or as an upward adjustment to basis under section 1016(a) will not affect his ability to claim the investment tax credit for sales tax.2  Irwin and Hall, JJ., agree with this concurring opinion.  This implication is further buttressed by the regulations issued under sec. 266. Sec. 1.266 — 1(b)(1), Income Tax Regs., provides: (b) Taxes and carrying charges. (1) The taxpayer may elect, as provided in paragraph (c) of this section, to treat the items enumerated in this subparagraph * * * either as a component of original cost or other basis, for the purposes of section 1012, or as an adjustment to basis, for the purposes of section 1016(a)(1). * * * [Emphasis added.] If the sales tax paid on the purchase of an asset were inherently includable in the sec. 1012 concept of cost, then it would not be necessary to "elect” such treatment.   I realize that from a purely conceptual or economic viewpoint, the result reached in the majority opinion here and in my opinion in Zuanich are not easily reconcilable. That this discrepancy exists does not mean that either position is wrong, but, rather, that an application of the Code in these circumstances produces inconsistent economic treatment. In Zuanich and the present case, we are dealing with three distinct categories of tax provisions designed to foster certain congressional aims. These categories are (1) the investment tax credit provisions, (2) treatment of sales tax provisions, and (3) the ordinary income account provisions of the Merchant Marine Act (MMA). There is no indication in either the statutory provisions themselves or the legislative history that Congress contemplated the interrelationship between the investment tax credit and either sales taxes or the ordinary income account. Rather, Congress had independent purposes for enacting those various schemes. Congress enacted the investment tax credit as an incentive to spur investments in certain types of property. Legislative history indicates two possible approaches for analyzing how this is accomplished: (1) By reducing the cost of the property or (2) by reducing the purchasing taxpayer’s tax liability. Regardless of which analysis is accepted as correct, the end result is the same — the taxpayer acquires the property for less. In Zuanich, this Court dealt with the ordinary income account provisions of the Merchant Marine Act which Congress enacted to promote the American merchant marine. In short, a taxpayer is entitled to reduce taxable income by an amount equal to his contribution in that year to an ordinary income account established under the MMA. The apparent cost extracted under the provisions of the MMA from a taxpayer in exchange for this right is the forbearance of depreciation deductions (via a reduction in depreciable basis) in later years when cash from the fund is used to purchase certain types of property. The cost of the property to the taxpayer is affected only to the extent of the time value of this accelerated deduction. I am aware of nothing indicating that Congress intended to extract an additional cost in the form of the forbearance of the investment tax credit. In addition, it is apparent from the majority opinion in Zuanich that strict statutory construction also does not impose such an additional cost. The sales tax provisions provide taxpayers with the benefit of deducting currently a portion of the cost of certain assets. (Cost, at least in an economic and probably in an accounting sense, includes items such as sales taxes, installation costs, and freight costs. If a taxpayer cannot acquire an asset unless he pays a sales tax, the sáles tax is an economic cost of the property.) The Code sections dealing with sales taxes also extract a cost from the^ taxpayer in exchange for the benefit of current deductibility. This cost, as in the case of the ordinary income account, is the forbearance of greater depreciation deductions in later years. Again, the cost of the property to the taxpayer is affected only to the extent of the time value of this accelerated deduction. Here, too, I am aware of nothing indicating that Congress intended to extract an additional cost in the form of forbearance of the investment tax credit. However, the fact remains that, as pointed out in the text of this concurring opinion, the taxpayer choosing to currently deduct sales taxes falls neatly within the Code and the accompanying regulations which results in extracting this additional cost. Although I seriously doubt whether Congress ever fully considered this issue, I conclude that the result reached by the majority is the correct one under the Code. Thus, there is economic discrepancy between the results reached in my opinion in Zuanich and the majority opinion here, but it is a discrepancy required by the MMA and the applicable tax provisions and, thus, an appropriate one.