Court Opinion

ID: 9444861
Source: CourtListenerOpinion
Date Created: 2023-08-03 21:14:42.855569+00
Date Added: 2024-06-11T17:30:02.122979
License: Public Domain

PARKER, Chief Judge
(dissenting).
I think that the decision of the Tax Court should be affirmed for reasons adequately stated in its opinion. The question before that court was the proper allocation between depreciable and non-de-preciable assets of the price of $500,-000 paid for the property in 1929. This was not a matter readily determinable, like the price paid for a piece of machinery, but rested largely in opinion. The valuation of $243,592.28 placed upon the depreciable assets in 1934 was found by the Tax Court to be too low after the abandonment of the water power in 1945; and that court after a careful hearing found that the depreciable assets at the time of their purchase in 1929 had a value of $316,670. In the meantime taxpayer had been taking depreciation on only $243,592.28, or depreciation considerably less than would have been taken on the basis of $316,670.
The question here involved is not the simple one of valuing the property as of 1944 but whether, when it is valued as of 1929, it should be depreciated for the intervening years in the full amount allowable on that valuation or in the amount actually allowed, which was the maximum then allowable on the existing valuation. If depreciated for the intervening years on the full 1929 valuation as made in 1944, taxpayer will lose the benefit of depreciation to which it is justly entitled, as it cannot go back and amend its returns. If depreciated in accordance with the amount of depreciation actually allowed during the intervening years, the value added by the reappraisal *744will be depreciated through the remaining life of the property, which will result in substantial justice, even though there is a “bunching” of depreciation on the added value in the remaining years. The real question then is whether the right to this depreciation has been permanently lost to the taxpayer or whether the increased value found by the Tax Court may be depreciated through the remaining life of the property. It seems clear to me that the Tax Court has given the correct answer to this question.
A change in original valuation based on fuller knowledge of the facts should no more be made retroactive for purposes of computing depreciation than a change of depreciation rate based on fuller knowledge. As said by the Court of Appeals of the Sixth Circuit in Commissioner of Internal Revenue v. Cleveland Adolph Mayer Realty Corp., 160 F.2d 1012, 1015, a case involving a change in the depreciation rate: “And if depreciation is to be taken each year, if must perforce be taken upon the basis of the understanding of value, existing at that time (at the end of the accounting period), and not, as has been said, in the light of ‘hindsight.’ ” See also Commissioner of Internal Revenue v. Mutual Fertilizer Co., 5 Cir., 159 F.2d 470, 471 which quotes the Regulation' 19.113(b) (1)-1, providing “ ‘The determination of the amount properly allowable shall, however, be made on the basis of facts reasonably known to exist at the end of such year or period.’ ” In the case last cited the court said:
“The error of The Tax Court lies in its majority’s view that it ‘‘now appears’, years after the end of the periods for which ‘allowable’ amounts must be determined, that 33 years is and was the foreseeable useful life of the plant assets. The crucial factor is not what ‘now appears’, but what ‘then appeared’ to be the useful life of the plant; that is, what reasonably was known and ascertainable at the end of each of such periods as to the reasonably foreseeable useful life of the plant.”
In Sample-Durick Co., 35 B.T.A. 1186, 1189, the Board of Tax Appeals said:
“The reported cases reveal that this question has arisen principally in cases involving depletion allowances. Where the basis has proven to be materially erroneous the Board has allowed a revision of the estimated content in order to properly deplete the natural resource. • The revised estimate is then depleted over the remaining life; it cannot be carried back and the allowances for prior years revised. Sterling Coal Co. Ltd., 8 B.T.A. 549; James R. McCahill, 29 B.T.A. 1080; Big Four Oil & Gas Co., 28 B.T.A. 61, aff[irme]d Big Four Oil & Gas Co. v. Commissioner [3 Cir.], 83 F.2d 891.
“The same principle is applicable here although we are concerned with a depreciation allowance. This allowance is for the purpose of correctly reflecting a taxpayer’s net income, and if the depreciation allowance properly reflects net income or net loss under the known facts for the taxable year, the deduction should stand. Cf. Du[e]senberg, Inc. [of Delaware] v. Commissioner [7 Cir.], 84 F.2d 921, affirming 31 B.T.A. 922. Facts that are subsequently developed should be reflected in the allowances for subsequent years, but they should have no retroactive force or effect. Alpin J. Cameron et al., 8 B.T.A. 120; Firemen’s Insurance Co., 30 B.T.A. 1004, 1011, and eases there cited.” (Italics supplied) .
I would affirm the decision of the Tax Court, which because of its wide experience in tax matters has peculiar competence in dealing with questions of this character.