Court Opinion

ID: 8594581
Source: CourtListenerOpinion
Date Created: 2022-11-23 16:01:36.488208+00
Date Added: 2024-06-11T16:54:49.495178
License: Public Domain

Davis, Judge,
dissenting in part:
I join with the court on “Unamortized Debt Discount Carryover” (Part LI) and “Original Issue Discount” (Part III) but diverge on “The Seduction of Basis” (Part I). The latter question is very close. The court relies most heavily on the literal wording of the regulation which can easily be •read without strain in the taxpayer’s favor, as the court does. The counterforce, for me, is the overall purpose of Congress, in §§ 108 and 1017, not to put oh' indefinitely the taxation of gain from the reacquisition of corporate indebtedness.
The 1951 Senate Committee report (S. Eep. No. 781, 82d Cong., 1st Sess. 59-60,1951-52 Cum. Bull. 458, 500), quoted in the majority opinion, indicates that the “exclusion of income by operation of section 22(b)(9)” [now § 108(a)] should “result only in a temporary postponement of the tax liability”, and that placing the exhaustion of nondepreciable property after the exhaustion of depreciable property (or property subject to cost depletion) “will assure the collection within a reasonable time of the taxes postponed and will, therefore, have no appreciable, long-run effect on the revenue.” Under plaintiff’s system of retirement accounting, that goal will not be at all achieved. The taxes postponed will not be collected in substantial measure unless the track and rails are wholly abandoned without replacement (an unlikely event as to any major segment of the road), or the railroad goes out of business (and in the latter case, as defendant points out, the company is unlikely to have any taxable income).1 In other words, because the replacement of rails and tracks is expensed annually and the railroad does not use depreciation deductions as a means of gradually recouping the cost of those items, the basis-reduction sought by the taxpayer will not have the effect Congress envisaged of simply extending for a reasonable period the taxation of the gain on the reacquisition of the preferred stock, but will rather result in the indefinite postponement of most of the *63tax on that gain (with a good chance that it will never be taxed).
The court points out, in answer, that in the ratable system of depreciation many properties have a useful life of 50 years or more, hardly a temporary period. But the difference is that in those instances the reduction in basis, under the regulation, would lead at once to a pro rata reduction in the annual depreciation deductions, and thus to a gradual but continuous recovery of the postponed tax. Under plaintiff’s view, there would be no such steady (though extended) payment of the tax.
In this light, the wording of the regulation does not seem to me to be decisive. Although we now consider the retirement-replacement-betterment system a geheral system of tax depreciation, that was not so clear in early 1953 when the regulation was promulgated. The broad language of Boston & Maine R.R. v. Commissioner, 206 F. 2d 617 (C.A. 1, 1953), was not yet on the books, and in the litigation of that case the Revenue Service obviously did not consider the retirement system a method of depreciation for all tax purposes. True, Chicago & North Western Ry. v. Commissioner, 114 F. 2d 882, 885-86 (C.A. 7, 1940), cert. denied, 312 U.S. 692 (1941), had accepted, over the railroad’s protest, the Service’s designation of the retirement system as a proper method of computing depreciation deductions under the predecessor of § 167, but that did not necessarily mean that rails and tracks were “property of a character subject to the allowance for depreciation” (the terms of the regulation now involved). There could be different characterizations for different purposes. The Service may have been thoughtless in letting this language remain unqualified after the Boston & Maine opinion, but that neglect does not override, in my opinion, the indications that neither the Congress nor the Treasury expected the regulation to be applied as plaintiff would have it.
Nor does it not seem to me stretching the words too far to exclude (because the purpose so requires) the plaintiff’s replacement system for rails and track. The literal language is not that compelling or rigid. It is possible, in this setting, to read a “reduction in basis” to be applied “first *64against property of a character subject to the allowance for depreciation under section 167” as limited to property the basis of which is significant in the computation of the depreciation deduction and, conversely, as designating replaced property as not “of a character subject to the allowance for depreciation.”
In sum, I deem fulfillment of the legislative goal in this particular context as more important than adherence to the normal understanding, in other contexts, of the general language of the regulation, and believe that there is an acceptable reading of the regulation which advances rather than negates the Congressional aim.
Nichols, Judge, joins in the foregoing dissenting opinion.

 For its track and rails, the plaintiff does not reduce its income tax by depreciation deductions (■which, of course, are intimately related to the basis of the property being depreciated) but by full deductions for replacements as if they are repairs (and for retirement if the property is permanently retired without replacement). The calculation of the replacement deductions has no necessary connection with the basis of the particular property; a reduction in basis under the regulation will therefore not reduce the allowable deductions.