Court Opinion

ID: 9425335
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:14:24.472241+00
Date Added: 2024-06-11T17:22:54.828990
License: Public Domain

Mr. Justice Stewart,
with whom Mr. Justice Douglas joins, dissenting.
This case involves the depreciation of certain railroad facilities constructed with public funds prior to June 22, 1954. The precise question before the Court is whether those facilities constituted “contributions to capital” within the meaning of § 113 (a)(8)(B) of the Internal Revenue Code of 1939.
Beginning in the early 1930’s, various state governments entered into agreements with the respondent railroad for the construction of highway overpasses and underpasses at highway-railroad intersections, and construction of grade-crossing protection equipment such as *418flashing-light signals and automatic gates. The agreements generally provided that the States would pay 50% or more of the total cost, and subsequently Congress authorized the Federal Government to assume the State’s share of the construction costs. See National Industrial Recovery Act §204 (a), 48 Stat. 203. Under the Federal-Aid Highway Act of 1944, §5, 58 Stat. 840, the Federal Government reimbursed the States for the entire cost of the highway-railroad crossing projects, subject to payment by the railroads for up to 10% of the cost of the project if the railroads were benefited by the facilities.
The respondent filed suit in the Court of Claims seeking a refund on its 1955 income taxes, claiming that the Commissioner of Internal Revenue had erred by refusing to allow a depreciation deduction for these publicly contributed facilities. The respondent asserted that these facilities were “depreciable property” held throughout 1955 “for use in its trade or business,” and that they were acquired prior to June 22, 1954, as “contributions to capital.”
The respondent’s claim was an uncomplicated one. Section 167 of the Internal Revenue Code of 1954, 26 U. S. C. § 167, applicable to the respondent’s 1955 income tax return, allowed as a depreciation deduction “a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) — ’(1) of property used in the trade or business ....” Section 1052 (c) of the 1954 Code, 26 U. S. C. § 1052 (c), provided for using the basis rules of the 1939 Code for certain property that was acquired in transactions to which the 1939 Code applied, including “contributions to capital.” 1 The *419respondent contended that the publicly contributed facilities were “contributions to capital,” and that under § 113 (a)(8)(B) of the 1939 Code, it could carry over the transferor’s basis; in short, it claimed that its basis for the highway-safety facilities was the cost of the facilities to the governments that had financed them.2
The Court of Claims agreed with the respondent that these facilities were exhaustible assets properly depre-ciable to the full extent of their value. 197 Ct. Cl. 264, 276, 455 F. 2d 993, 1002. The depreciable nature of the facilities was undisputed, since the Government conceded that “the facilities are of a character normally subject to allowance for depreciation and that to the extent they were paid for by [the respondent], appropriate depreciation deductions are proper.” Id., at 273-274, 455 F. 2d, at 999. The court concluded that the facilities were “contributions to capital” under § 113 (a)(8)(B) of the 1939 Code and that the Government’s cost basis in the facilities was, therefore, available to the respondent.3 “The facilities were constructed primarily for the benefit of the public to improve safety and to expedite motor-vehicle traffic flow. The record shows, however, that *420[the respondent] received economic benefits from the facilities, e. g., probable lower accident rates, reduced expenses of operating crossing equipment and, where permitted, higher train speed limits. [The respondent] also received intangible benefits, e. g., goodwill from the community-at-large, which was to [the respondent’s] long-term economic advantage.” Id., at 272, 455 F. 2d, at 998.4 The court thus concluded “that the facilities enlarged [the respondent’s] working capital and were used by [the respondent] in its business; and though they may not produce income to the same extent as other railroad property, such as track or freight cars, [the respondent] derived economic benefits from them.” Id., at 276, 455 F. 2d, at 1000.
I think the Court of Claims was entirely right in holding that these publicly contributed facilities constituted contributions to capital within the meaning of § 113 (a) (8) (B) of the 1939 Code.5 The facilities at issue fall within the plain language of a “contribution to capital.” As the Court noted, they were “contributed” to the respondent in the sense that the railroad now owns them. *421And they are now part of the “capital” of the railroad as that term is generally used in business and accounting practice, part of the permanent investment in the business. See Brown Shoe Co. v. Commissioner, 339 U. S. 583, 589 and n. 11; Texas & Pacific R. Co. v. United States, 286 U. S. 285; Edwards v. Cuba R. Co., 268 U. S. 628, 631-633; H. Guthmann & H. Dougall, Corporate Financial Policy 136-138 (4th ed.); R. Marple, Capital Surplus and Corporate Net Worth 136-137; 1 J. Mertens, Law of Federal Income Taxation § 5.06 n. 47 (J. Malone rev. ed.); Harvey, Some Indicia of Capital Transfers Under the Federal Income Tax Laws, 37 Mich. L. Rev. 745, 747-749.6
The only two prior decisions of this Court that bear directly on the question before us — Detroit Edison Co. v. Commissioner, 319 U. S. 98, and Brown Shoe Co. v. Commissioner, supra — confirm that these publicly contributed facilities are contributions to the respondent’s capital.
In Detroit Edison Co. v. Commissioner, supra, prospective customers of an electric company were required to pay for the construction of additional facilities in order *422to receive the company’s services. The Court rejected the contention that those payments were contributions to capital: “[I]t overtaxes imagination to regard the farmers and other customers who furnished these funds as makers either of donations or contributions to the Company. . . . The payments were to the customer the price of the service.” Id., at 102-103.
In Brown Shoe, supra, various community groups contributed cash and property to the taxpayer corporation to induce it to locate in or expand its operations in the respective communities. The Court held these assets to be “contributions to capital” within the meaning of § 113 (a)(8)(B), stressing the fact that they were in a very practical sense an addition to the corporation’s capital: “‘[T]he assets received . . . are being used by the taxpayer in the operation of its business. They will in time wear out, and if [the taxpayer] is to continue in business, the physical plant must eventually be replaced. Looking as they do toward business continuity, the Internal Revenue Code’s depreciation provisions— and especially those which provide for a substituted rather than a cost basis — would seem to envision allowance of a depreciation deduction in situations like this. . . .’ ” Id., at 590 (quoting Commissioner v. McKay Products Corp., 178 F. 2d 639, 643). The Court explained Detroit Edison as a case of payments for services rather than contributions to capital. By contrast, in Brown Shoe, “[t]he contributions to [the taxpayer] were provided by citizens of the respective communities who neither sought nor could have anticipated any direct service or recompense whatever, their only expectation being that such contributions might prove advantageous to the community at large.” Id., at 591.7
*423It seems plain to me that the present case is controlled by Brown Shoe. As in that case, these publicly contributed facilities were in no sense direct payments for services. The State and Federal Governments did not purchase any services in connection with construction of the facilities. Rather, to achieve the public goal of transportation safety they transferred assets to the railroad which increased its working capital. In short, these, assets fell within the practical, working definition of “contributions to capital” that was recognized by the Court in Brown Shoe,, and they did not fall within the narrow exception of payments for services that the Court found significant in Detroit Edison.
The Government urges us to read Brown Shoe as holding that, in order to establish a “contribution to capital,” a taxpayer must prove that the transferor of the asset had a definite purpose to enlarge the taxpayer’s working capital. But that case did not turn on the presence of any such specific purpose. The purpose of the community contributions in Brown Shoe was to induce the taxpayer to locate or expand its operations in the local area, and this purpose was accomplished by contributing assets; there was no gratuitous attempt to enlarge the taxpayer’s capital. The Court noted, in passing, the existence of a purpose to enlarge the taxpayer’s working capital only in order to underline the fact that the community groups there were not customers paying compensation for services rendered. And, as in Brown Shoe, the State and Federal Governments here attempted to accomplish a general public goal by contributing facilities to the taxpayer. As in Brown Shoe, they were not paying for services.
*424The Court today, however, does not appear to decide this case on the presence or absence of any specific motive, intent, or purpose. Rather, the Court constructs a series of guidelines that must be met before there can be a “contribution to capital.” These guidelines seem to be based upon the value of the assets to the transferee. For the Court relies primarily on the fact that the publicly financed facilities were “peripheral” to the railroad’s business and did not materially contribute to the production of further income, and concludes that they were not therefore contributions to the railroad’s capital. But the Court cites nothing in the statute, the regulations, or our prior cases to warrant this strange definition of “capital” when that term is used in the phrase “contribution to capital.”
Brown Shoe made clear that “capital” was to be defined “as that term has commonly been understood in both business and accounting practice . . . .” 339 U. S., at 589. The facilities in the present case meet that test. They are certainly part of the respondent’s capital under any traditional understanding of that term; they are assets permanently invested in the railroad’s business. See supra, at 421. Indeed, many of these facilities are essential to the railroad’s continued operation- — a railroad bridge, for example, is an obvious physical necessity if the railroad is to operate. All of the facilities enlarged the railroad’s working capital, were used in its business, and yielded tangible and intangible economic benefits to the railroad. And the Court even appears to acknowledge that these assets are “capital” in the normal sense of that term, since it concedes that the portion of the facilities constructed by the railroad with its own funds is depreciable.8 I do not understand why *425that portion of the same assets that was contributed to the railroad is not also part of the railroad’s capital. I would maintain the straightforward approach taken by Brown Shoe and Detroit Edison — nonshareholder additions to capital are “contributions to capital” unless they are direct payments for services rendered.
The Government argues that to allow the railroad to claim a depreciation deduction on these facilities as “contributions to capital” would lead to the “anomalous” result that although the railroad had incurred no expense with respect to the publicly financed facilities, it could nevertheless recoup their cost. But if this is an anomaly, it is the same anomaly that existed in Brown Shoe. The taxpayer there had not paid for the property contributed by the community groups, yet it was able to claim a full depreciation deduction on it. In short, this so-called anomaly is the ineluctable result of § 113 (a)(8)(B) which allowed a carryover basis for non-shareholder contributions to capital. It was Congress that had created the anomaly, and it was for Congress to correct it. In enacting § 362 (c) of the 1954 Code,9 *426Congress did precisely that. It eliminated any depreciation deduction for nonshareholder contributions to capital by providing a zero basis for such transfers, but it did so only for property acquired on or after June 22, 1954.
In sum, Congress in 1954 rewrote the tax law so as to overrule Brown Shoe and prohibit depreciation to be taken on contributions to capital made by nonshare-holders on or after June 22, 1954.10 As it now turns out, Congress could have saved itself the trouble. For today the Court rewrites the law and prohibits depreciation to be taken on such assets the railroad has owned since the 1930’s. I would follow the law as Congress wrote it and affirm the judgment of the Court of Claims.

 The basis provision of the 1954 Code, which provides a zero basis for nonshareholder contributions to capital, applies only to property acquired on or after June 22, 1954. 26 U. S. C. § 362. See n. 9, *419infra. All the property at issue in the present case was acquired before June 22, 1954.

 Section 113 (a)(8) provides in pertinent part:
“If the property was acquired after December 31, 1920, by a corporation—

“(B) as paid-in surplus or as a contribution to capital, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.”

 It was undisputed that the facilities had been “contributed” to the respondent by the States, “and this is taken to mean that [the respondent] owns them 197 Ct. Cl. 264, 272, 455 F. 2d 993, 998.

 The Findings of Fact of the Trial Commissioner which were accepted by the court indicated as follows:
“The facilities . . . were constructed primarily for the benefit of the public to improve safety and to expedite highway traffic flow. [The respondent], however, received benefits from the facilities, among others, probable lower accident rates, reduced expenses of operating crossing facilities, and, where permitted, higher train speed limits, all of which permitted [the respondent] to function more efficiently and presumably less expensively.” 197 Ct. Cl., at 326-327.

 The Government has suggested as an alternative basis for reversal that the respondent entered into a “terms letter” agreement with the Commissioner whereby it agreed to exclude contributed property from its depreciation base. The Court does not reach this contention. I agree with the reasoning of the Court of Claims in holding that the terms letter did not bar the respondent from claiming a depreciation deduction on contributed property.

 The text of §113 indicates that there is no significance in the fact that the State and Federal Governments attempted here to achieve the public goal of transportation safety rather than simply to make a gratuitous transfer to the railroad. For if a donative purpose were required for a “contribution to capital” then that provision would simply be duplicative of § 113 (a) (2) of the 1939 Code which allows a carryover basis for gifts.
And similarly it is of no consequence that the contribution was by a nonshareholder, for a contribution by a shareholder would have a carryover basis under the “paid-in surplus” provision of § 113 (a)(8)(B). See Treas. Reg. Ill, §29.113 (a) (8)-l.
In short, a “contribution to capital” is any nongratuitous transfer to a corporation by a nonshareholder, such as is involved in the present case. See Freeman & Speiller, Tax Consequences of Subsidies to Induce Business Location, 9 Tax L. Rev. 255, 261.

 Federal courts in distinguishing between Brown Shoe and Detroit Edison have relied on the fact that Detroit Edison involved direct payments by customers for services. See United Grocers, Ltd. v. *423United States, 308 F. 2d 634, 639-640; Teleservice Co. v. Commissioner, 254 F. 2d 105, 110-111. See also Note, Taxation of Non-shareholder Contributions to Corporate Capital, 82 Harv. L. Rev. 619, 626-627.

 There is no dispute that the railroad can claim a depreciation deduction for its 10% share of the cost of the facilities.

 Section 362 of the Internal Revenue Code of 1954, 26 U. S. C. §362, provides in pertinent part:
“(a) Property acquired by issuance of stock or as paid-in surplus.
“If property was acquired on or after June 22, 1954, by a corporation—

“(2) as paid-in surplus or as a contribution to capital, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain recognized to the transferor on such transfer.

"(c) Special rule for certain contributions to capital.
"(1) Property other than money.
“Notwithstanding subsection (a)(2), if property other than money—
*426“(A) is acquired by a corporation, on or after June 22, 1964, as a contribution to capital, and
“(B) is not contributed by a shareholder as such,
“then the basis of such property shall be zero.
“(2) Money.
“Notwithstanding subsection (a)(2), if money—
“(A) is received by a corporation, on or after June 22, 1954, as a contribution to capital, and
“(B) is not contributed by a shareholder as such,
“then the basis of any property acquired with such money during the 12-month period beginning on the day the contribution is received shall be reduced by the amount of such contribution. The excess (if any) of the amount of such contribution over the amount of the reduction under the preceding sentence shall be applied to the reduction (as of the last day of the period specified in the preceding sentence) of the basis of any other property held by the taxpayer. The particular properties to which the reductions required by this paragraph shall be allocated shall be determined under regulations prescribed by the Secretary or his delegate.”

 It was explicitly recognized that 26 U. S. C. §362 (c) was enacted to overcome the effect of Brown Shoe. H. R. Rep. No. 1337, 83d Cong., 2d Sess., A128; S. Rep. No. 1622, 83d Cong., 2d Sess., 271-272; Veterans Foundation v. Commissioner, 317 F. 2d 456, 458.