Court Opinion

ID: 4499929
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:16:41.159981+00
Date Added: 2024-06-11T08:00:32.752673
License: Public Domain

Trammell,
dissenting: Since the trial of this case the Circuit Court of Appeals for the Eighth Circuit has decided in the case of Red Wing Malting Co. v. Willcuts, 15 Fed. (2d) 626, that good will is not the subject' of the obsolescence allowance provided by the statute.
Notwithstanding my great respect for and deference to the learned judge who rendered the decision of the court and the judges who concurred therein, I find myself unable to agree with the views expressed. A writ of certiorari has been denied by the United States Supreme Court in that case, but this does not as a matter of law amount to a decision of that court affirming the decision of the Court of Appeals. It amounted to a final disposition of the particular case but is not a precedent laid down by the Supreme Court which settles the law on the question involved. It was not a decision of the Supreme Court on the merits of the case. The decision of the Board was based upon the Red Wing Malting Co. case. I dissent from the decision of the Board in this case for the reasons hereinafter stated.
The pertinent portion of the statute involved is as follows:
Sec. 234 (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
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(7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.
For the purpose of this case it does not seem to me to be material whether the word “including,” as used in the above section of the statute, means a new and additional deduction or whether, as stated by the court in the Red Wing Malting Co. case, supra, the phrase *965“including a reasonable allowance for obsolescence” is “closely connected with and relates to the subject-matter of the other phrase of said subsection (7), and applies only to such property therein designated used in the business as is subject to exhaustion, wear, and tear.” In any event, the statute includes in the deduction allowed on account of exhaustion, wear and tear an element, to wit, obsolescence, even though it is not considered a new kind of deduction. I think that the court in the Red Wing Malting Co. case, supra, correctly stated the purpose of Congress as follows:
It [Congress] was merely trying to provide the restoration of capital value of a depreciable asset over the period of its useful life by allowing something, known as obsolescence, as an additional element to exhaustion, wear, and tear.
It is clear that a 'deduction of an increased amount must be allowed whenever the element of obsolescence exists.
In revenue acts prior to the Revenue Act of 1918, the deduction on account of depreciation or exhaustion, wear and tear was included in the deduction allowed for losses. In the Revenue Act of 1918 a change was made and the deduction was disassociated from the loss provisions and is classified separately and distinctly from losses. Obsolescence being closely connected with and relating to the same subject matter and being included as an element of exhaustion, wear and tear, it is governed by the principles applicable to such deductions and not by the principles applicable to deductions with respect to losses.
Assets may have a life of twenty years but on account of new inventions and improvements, statutory requirements or for other reasons, they may become valueless and have to be abandoned at a much earlier date. It is this process of becoming inadequate or useless and the foreseen necessity of abandonment before the assets would become exhausted through the process of “ exhaustion, wear and tear ” that the deduction in the statute is provided to cover'. Obsolescence is in fact exhaustion but not of a physical nature and by physical processes. It is the exhaustion of commercial usefulness or value before the expiration of physical usefulness. The statute simply recognizes a long recognized fact that under certain conditions which frequently exist capital values can not be returned to -a taxpayer with respect to its depreciable assets by the time they have to be abandoned or lose their usefulness unless the element of obsolescence is considered and provided for.
On the question of the obsolescence of assets held by a railroad, the Supreme Court of New York, in the case of People ex rel. Brooklyn Heights R. Co. v. State Board of Tax Com'rs., 127 N. Y. S. 825, said:
As surely as humanity travels to the grave, the machinery and equipment of a public service corporation travel toward the scrap pile. The plant and *966structures depreciate in less degree but as certainly. This is ordinary depreciation. But another form of depreciation in the case of properties here being valued talces place. The machinery or equipment, while still capable of years of service, becomes inadequate to do the worlo demanded — not only by the corporation, but by the law itself. In the case particularly of electrical machinery, the type becomes obsolete by reason of invention, and increasing public demands frequently require in aid of safe and.adequate service that the obsolete appliance or equipment give way to the new. Property which in itself may be almost indestructible in the hands of a public service eorporation may be required to be replaced by the requirements of the public which the corporation serves. These requirements for change of plant, structure, and equipment and their replacement, can be and are made by the state itself. Some of these changes are capable of definite ascertainment. Others are not so readily ascertainable. Many of them, however, may be provided against for the future by setting apart from gross earnings a reasonable sum to create a reserve against the day when they shall come. This reserve, with amounts set apart for ordinary depreciation, go to amortize the capital of the company. (Italics ours.)
While the dictionaries define obsolescence as being “the process of going out of use ” or “ the state of becoming obsolete,” and define obsolete as being “ no longer in use — disused, neglected or discarded,” which carries the idea that the property remains in existence but is not used or useful, I do not think that the statute should be construed by a narrow dictionary definition of a word. Here we are construing -the statute and not merely defining a word. The purpose of the statute, together with conditions existing at the time of its enactment, the remedy sought to be afforded, the common use and understanding of words used and other things are to be considered. If the statute be construed, however, by such technical definition of the word “obsolescence,” in my opinion even by that construction this taxpayer would not be deprived of relief. The taxpayer was forced to abandon its business, of which its good will was a part. This asset was abandoned when the business was abandoned. If good will was destroyed because of its forced abandonment, that is a matter that does not affect the jirinciple involved. Certain kinds of tangible assets may be destroyed by abandonment. In my opinion, assets which can no longer be used in the trade or business, and as the result of abandonment are totally and completely destroyed, come within the scope of the provision to the same extent as assets which are merely abandoned or discarded but not destroyed. If it can be foreseen that assets will be destroyed as the result of legislation which prohibits their use, I do not think that the statute should be so construed as to prevent a deduction on account of the obsolescence thereof when, if the property remained in existence but without useful value and was abandoned, the deduction would be allowed. Under either view, however, the trade brands and trade-marks would come within the scope of *967the provision. They were not destroyed. They remained in existence but were discarded and were without value. Their values, however, were closely intermingled and interwoven with the value of good will so that it can not be determined what portion of values attributable to intangible assets related to them. They were, in fact, a part of and included in good will and under the facts here are incapable of a separate valuation. The trade brands, trade-marks and good will, all together, however, had a definite and determinable life as the result of prohibition legislation.
It may be conceded that if good will, trade-marks and trade brands constitute a kind of property that is not subject to exhaustion, then the taxpayer can not prevail.
It is true that under ordinary circumstances and conditions this kind of property has an indefinite and indeterminable life and for this reason deductions on account of exhaustion thereof are not ordinarily allowable.
Conceding that good will under ordinary circumstances is not subject to exhaustion, it does not follow that it is never subject to exhaustion. It is not ordinarily, because under usual circumstances and conditions it continues and has an indefinite life. But there is nothing inherent in its nature that makes it impossible, under any circumstances, for its life to be made definite and limited in duration. It is, in any case, a question of fact to be determined whether its useful life for any cause arising before or after its acquisition has become limited in duration. If it can be established as a fact that good will has in a particular case become limited in duration, it seems clear that the, provision of the statute allowing a deduction on account of exhaustion, including obsolescence, is just as applicable to such property as to. any other property. Actual facts in the particular case before us are controlling over general principles or theories as to what the facts ordinarily are. If the taxpayer’s good will did in fact exhaust or was becoming obsolete, the fact that good will ordinarily does not exhaust dr depreciate seems to me to be immaterial. The statute is certainly broad enough in its terms to allow the deduction if the fact of obsolescence can be shown. It seems to me that this reduces the question to one of fact, that is, whether during the taxable year the taxpayer’s intangible assets were in the process of becoming obsolete or losing their useful value.
The principle has long been recognized by.the Treasury Department .in connection, with the intangible assets of brewers and distillers that, if they are in fact destroyed or become obsolete, deductions "are allowable with respect thereto to the same extent as other property.
*968Under the Revenue Act of 1918 the Treasury Department published Bulletin F on the subject of depreciation and obsolescence. The caption page contains the following statement:
Tliis bulletin contains information from which taxpayers and their counsel may obtain the best available indication of the trend and tendency of official opinion in the administration of the income and profits tax provisions of the Revenue Act of 1918, with respect to depreciation and obsolescence.
Thát bulletin, on page 14, contains the- following statement :
Obsolescence is not ordinarily applicable in the case of intangibles but will be allowed in exceptional cases, as in the case of the discontinuance of a going business because of the exhaustion of its source of supply, where the cost of the good will, or its value as of March 1, 1913, if acquired prior to that date, can be definitely shown and the period of its obsolescence determined with reasonable accuracy.
On page .15 of the same bulletin appears the following statement:
Intangible assets of brewers, distillers, and dealers in liquor. — In Advisory Tax Board Memorandum 44 (Cumulative Bulletin, December, 1919; p. 133) it was held that distillers and dealers in liquor are entitled t'o make a deduction (based upon actual cost or fair market value as at March 1, 1913) from gross income, on account of depreciation or obsolescence of their intangibles, such as good will, trade-marks, trade brands, etc., such deductions being limited to assignable assets, the value of which has been destroyed by prohibition legislation.
Article 163 of Regulations 45, promulgated by the Treasury Department, is as follows :
Depreciation of intangible property. — Intangibles, the use of which in the trade or business is definitely limited in duration, may be the subject of a depreciation allowance. Examples are patents and copyrights, licenses and franchises. Intangibles, the use of which in the business or trade is not so limited, will not usually be a proper subject of such an allowance. If, however, an intangible asset acquired through capital outlay is known from experience to be of value in the business for only a limited period, the length of which can be estimated from experience with reasonable certainty, such intangible asset may be the subject of a depreciation allowance, provided the facts are fully shown in the return or prior thereto to the satisfaction of the Commissioner.
The Treasury Department, however, in all cases that have been called to my attention or which I .have found, interpreted that regulation in accordance with the Advisory Tax Board Memorandum 44 as above quoted.
I have been unable to find any regulation or published ruling or decision of the Commissioner on the question of the obsolescence of intangible assets which is contrary to the opinion expressed in the above-quoted statement. There are rulings and opinions of the Commissioner to the effect that when a taxpayer, instead of abandoning his business on the effective date of prohibition legislation, continued in some other business in which the Commissioner considered *969that the good will continued and was not destroyed, no allowance should be made on account of the obsolescence thereof. I am unable to find any case in which the Bureau of Internal Revenue has denied the right of brewers or distillers to the obsolescence of intangible assets which were destroyed, or were discarded or abandoned as the result of prohibition legislation, where their cost or value on March 1, 1918, has been established, until the decision of the District Court in the case of Red Wing Malting Co. v. Willcuts. I think that this uniform practice of the Bureau, representing the interpretation of the administrative body charged with the execution of the law, should be given great weight. Edwards's Lessee v. Darby, 12 Wheat. 206; Brown v. United States, 113 U. S. 568; United States v. Falk, 201 U. S. 143; National Lead Co. v. United States, 252 U. S. 140. The Revenue Acts of 1921, 1924, and 1926 contain the same language as was used in the Revenue Act of 1918, which had been construed in published rulings of the Treasury Department. This fact adds force and weight to the administrative construction of the Treasury Department. We should also not lose sight of the ride of construction of doubtful statutory provisions laid down by the United States Supreme Court in the case of Gould v. Gould, 245 U. S. 151. If there is doubt as to the proper construction, that doubt should be decided in favor of the taxpayer.
Good will has been defined as being the advantage or benefit which is acquired by an establishment beyond, the mere value of capital stock, funds or property employed therein, in consequence of the general public patronage and encouragement which it receives from constant or habitual customers on account of its local position, or from celebrity or reputation for skill or affluence or punctuality, or from other accidental circumstances or necessities, or even from ancient partialities or prejudices.
See Brown v. Benzinger, 118 Md. 29; 84 Atl. 79; Haugen v. Sundseth, 106 Minn. 129; 118 N. W. 666; Goetz v. Ries, 123 N. Y. S. 433; Johnson Co. v. Roberts, 159 N. Y. 70; 53 N. E. 685; Morgan v. Perhamus, 36 Ohio St. 517; 38 Am. 607; Story on Partnerships, sec. 99.
Good will is property in and of itself. It is something that may be the subject of ownership, may be transferred and may be protected by law. The term “ property ” includes good will. See Metropolitan Bank v. St. Louis Dispatch Co., 149 U. S. 436; Coca-Cola Bottling Co. v. Coca-Cola Co., 269 Fed. 796; Washburn v. National Wall Paper Co., 81 Fed. 17. Good will, however, has no. existence except in connection with a going business and it may be bought and sold in connection with a going business as an incident or element of the business. Camden v. Stuart, 144 U. S. 104; Sawilowsky v. Brown, 288 Fed. 533.
*970The word “ property,” however, as used in'the section oí the statute here involved, is not used in any restricted sense. Lynch v. Alworth-Stephens Co., 267 U. S. 364. This being true all kinds of property must be held to be included in the deduction when obsolescence is shown as a fact to be actually taking place. Whether any particular kind of property ordinarily becomes obsolete is beside the question if it is shown in a particular case that it is reaching that point.
While good will has no existence separate and apart from a going business, it is recognized by the courts as an asset in the business. Frequently it is the most valuable and the greatest income-producing asset. possessed. Businesses, including tangible property, are frequently purchased for the purpose of acquiring good will only. While good will is valuable only in connection with a going business and can not be separated from a business, it is, nevertheless, a separate element forming a part of the. property and assets of an enterprise. It is capable of a separate valuation and may be protected separately by law. It may be entered separately on the books. It increases the total value of the business but does not increase the value of tangible assets segregated from the business. It is not indissolubly connected with specific tangible property. Washburn v. National Wall Paper Co., supra. A business as a goihg concern consists of all its assets, tangible as well as intangible. The value of good will is not dependent ujion the value of other assets. Good will is recognized in the Revenue Acts of 1917 and 1918 for the purpose of being included in invested capital when acquired for stock, without regard to the value of other assets, subject to the limitations provided in the statute and without any limitation when acquired for cash or other property. Intangible assets, including good will, are, in my opinion, used in the business in the sense of the word used in the statute. It is used like a lease, contract, franchise or similar property. In the case of Henrici Co. v. Reinecke, 3 Fed. (2d.) 34, the court said “ that the leasehold was used in the trade or business is very evident.” It is true that good will is not used like tangible assets are used. But neither are leases, contracts, patents, and other classes of assets. Leases, contracts, patents, and good will may be sill the assets of a business, yet none of them are capable of physical use as other assets are. The statute, however, does not require that assets be used physically in order to come within the deduction provided for exhaustion, wear and tear, including obsolescence.
In the Red Wing Malting case, supra, the court used the following language:
We are satisfied there can be no wear, or tear of good will, or exhaustion thereof by use, and, even should we assume that good will, separate and distinct from tangible property, is property used in the business, section 284 *971(a), subsection (7), of the 1918 Revenue Act limits the allowance for obsolescence to such property as is susceptible to exhaustion, wear, and tear by use in the business, and good will is not such property. ,
I am unable to agree with the learned court in the above quoted ¡Statement. I readily concede that good will is not subject to exhaustion, wear and tear, or obsolescence by use in a trade or business. The statute, however, does not require that the exhaustion, wear and tear, including obsolescence, be the result of use in the business but only that the assets subject to exhaustion, wear and tear, and obsolescence be used in the trade or business in order to come within the provision. The Eevenue Act of 1918 is different from the prior revenue acts in that respect. The Eevenue Act of 1913 provided for the deduction on account of the depreciation of property by use, wear and tear. The Eevenue Act of 1916 provided for the deduction for the exhaustion, wear, and tear of property arising out of its use or employment in the trade or business. The Eevenue Act of 1918, however, does not contain such provisions but merely provides that the deduction on account of exhaustion, wear and tear, including obsolescence, will be allowed with respect to property used in the trade or business. If the deduction on account of the obsolescence of property is held to be allowable only in cases where it is becoming obsolete by or on account of its use in the trade or business, the effect would be to eliminate the deduction from the statute because property does not become obsolete by or as the result of use. Obsolescence is different from exhaustion, wear and tear in that it is the shortening of the useful life of an asset on account of economic conditions, new inventions, legislation prohibiting the use or other extraneous causes which have no connection with the physical use of the asset. It relates to economic or commercial life rather than physical life. If the deduction on account of exhaustion, wear and tear of assets, including obsolescence, be limited only to such assets as suffer exhaustion, wear and tear or obsolescence by or on account of the use in the business, it would amount to putting a restriction in the statute which, in my opinion, is not warranted by the language used. Certain assets become exhausted by the mere efflux of time. Leases, contracts, patents, and franchises are of this class, yet the deduotion provided by statute is clearly broad enough to permit a deduction on account of the exhaustion of such assets. A deduction on account of the exhaustion of a mining lease was allowed in Lynch v. Alworth-Stephens Co., supra. A deduction on account of the exhaustion of a lease was allowed in the case of Henrici Co. v. Reinecke, supra, and in the case of Kaufman-Straus Co. v. Lucas, 12 Fed. (2d) 774, (C. C. A., Sixth Circuit, June 11, 1926.)
There being conflict between the decision of the District Court in the case of Kentucky Tobacco Products Co. v. Lucas, 5 Fed. *972(2d) 723, decided April 17, 1925, and the case of Kaufman-Straus Co. v. Lucas, Supra, decided by the Circuit Court of Appeals for the Sixth Circuit on June 11, 1926, in which Kentucky is situated, the decision of the Circuit Court of Appeals is paramount.
A lease may run for a definite period of years and it expires, not on account of its use, but by the passing of time. A patent has a definite life as established by law and that definite life becomes exhausted not by the use to which the patent is put. The amount of use does not affect the amount of the exhaustion which takes place. I think the statute should be construed according to its language, which does not provide that in order to come within the statute the exhaustion, wear and tear, including obsolescence, must be by or on account of use in the trade or business. The deduction is with respect to all assets used, in the business when it is shown that they are approaching the end of their useful life as the result of exhaustion, wear and tear, and if the element of obsolescence is present the deduction should also include it, so that by the time they are abandoned as useless the capital value will have been returned out of earnings. It is true that the element of obsolescence is not always present either in the case of tangible or intangible assets. Whether it is, is always a question of fact to be established by evidence. Ordinarily good will, trade-marks and trade brands are not subject to exhaustion, including obsolescence. Under ordinary circumstances their life is indefinite and indeterminable. But ordinary circumstances and conditions did not obtain in the case of brewers when the prohibition aznendment became effective, nor when it became a foregone conclusion that it would be passed. The good will that ordinarily had an indefinite life then had a definite and limited life. It was then known or reasonably expected that it would soon lose its value. If assets having a definite life are subject to exhaustion, I see no basis for holding that assets having no definite life when acquired yet whose life becomes limited and definite by subsequent events', are not to be included in the deduction. The fact that good will can not.be sold except in connection with a going business is not sufficient reason for denying the right to a deduction on account of obsolescence thereof if it is, in fact, taking place. The business itself may become obsolete. If good will exists and can be sold only in connection with a going business, I see no reason why it may not be destroyed or' rendered obsolete in connection with the business when the business is destroyed or rendered obsolete. That it can be destroyed is beyond question. It is a physical fact capable of demonstration. Good will, being property used in the business which may, under certain conditions and circumstances, lose its useful value, suffer exhaustion or become obsolete, a deduction is allowed by thb *973plain language of the statute on account of the exhaustion, including obsolescence thereof.
Being of the opinion that good will, trade-marks and trade brands may be the subject of the obsolescence deduction if established by evidence to have a definite and limited life, the question now arises as to whether under the evidence in this case the taxpayer is entitled to the deduction.
The taxpayer had and was using in its trade or business during 1918 good will, trade-marks and trade brands. They had a value as we have found on March 1, 1913, of $1,000,000. As the result of prohibition legislation the taxpayer was forced to give up and abandon its established business in which these assets were used and were income-producing factors. The good will which it had and used in its brewery business ceased to be of any value. While it might be presumed that if a going concern established a new business of a similar character or kind as the business formerly engaged in, then its good will, built up on account of its good reputation, the quality of its product or for other reasons, might remain and be an income-producing factor in the new business, still it is a presumption which may be overcome by evidence. In this case, as a matter of fact, the good will was destroyed or became obsolete. This being true, in my opinion the taxpayer has met the provisions of the statute which entitle it to the obsolescence deduction. I do not think that the statute should be construed as meaning only assets whose useful life is known at the time of acquisition to be definitely limited in duration. In my opinion, assets whose useful life is unknown and indefinite at the time acquired but becomes fixed and definitely limited subsequent to acquisition, are subject to the deduction allowed on account of exhaustion, including the element of obsolescence if that element is present.
The Board holds that with respect to tangible assets the obsolescence deduction is allowable. I see no valid distinction, as a matter of law, between the tangible and intangible assets. If, under the law and the facts of this case, obsolescence is allowable with respect to tangible assets I see no reason why it should not be allowed in the case of intangibles when it can be foreseen that their value will come to an end at a reasonably definite time. If it could be foreseen that the useful life of the tangible assets would come to an end as the result of prohibition legislation, it seems to me that the end of the useful life of intangible assets could be foreseen equally as clearly if not more so. One of the principle difficulties in the case of intangible assets is in determining the value with any degree of accuracy, but in this case the value as of the basic date is found as a fact. This value became a total loss as the result of prohibition. Since the statute makes no distinction as to the kind or nature of *974property that is the subject of thei obsolescence deduction, I see no authority to allow the deduction in the case of one kind of property and deny the deduction in the case of another kind when under the facts the intangible assets were destroyed as effectually as the tangible assets and the fact was just as clearly known in advance as it was known in the case of the physical assets, if not more clearly and definitely known.