Court Opinion

ID: 9419367
Source: CourtListenerOpinion
Date Created: 2023-08-02 22:49:07.945203+00
Date Added: 2024-06-11T17:22:17.721483
License: Public Domain

Mr. Chief Justice Stone,
dissenting:
It is true that the 1938 Revenue Act does not speak of a “tax benefit” to the taxpayer. Section 23 speaks only of deductions from gross income which “shall be allowed” in computing net income, among which it includes, § 23 (1), “a reasonable allowance for the exhaustion, wear and tear of property used in trade or business.” And by § 113 (b) (1) (B) the basis for depreciation of property is its cost adjusted by depreciation “to the extent allowed (but not less than the amount allowable).” It is equally true and obvious, and of some importance to the correct interpretation of the statute, that any depreciation in excess of the reasonable allowance authorized can, under the statute, result in no tax advantage to the taxpayer *529and in no tax prejudice to the Government, unless the excess has in fact been deducted from the taxpayer’s gross income.
I can find no warrant in the purpose or the words of the statute, or in the principles of accounting, for our saying that the taxpayer is required to reduce his depreciation base by any amount in excess of the depreciation “allowable,” which excess he never has in fact deducted from gross income. Whatever else the statutory reference to depreciation “allowed” may mean, it obviously cannot and ought not to be construed to mean that a deduction for depreciation which has never in fact been subtracted from gross income is a deduction “allowed.”
And there is no reason why such should be deemed to be its meaning. The only function of depreciation in the income tax laws is the establishment of an amount, which may be deducted annually from gross income, sufficient in the aggregate to restore a wasting capital asset at the end of its estimated life. The scheme of the 1938 Revenue Act is to prescribe the permissible deductions for depreciation, and to preclude the taxpayer from gaining any unwarranted advantage by the amount and distribution of those deductions. The Act accomplishes the latter by compelling the taxpayer to reduce his depreciation base by the amount of the allowable annual depreciation, whether deducted from gross income or not, and by such further amount as he has in factjdeducted from gross income. No reason is suggested why the taxpayer’s tax for future years should be increased by reducing his depreciation base by any amount in excess of the depreciation “allowable,” unless the excess has at some time and in some manner been deducted from gross income. So inequitable a result cannot rightly be achieved by saying that a “deduction” for depreciation which never has been deducted from gross income has nevertheless been “allowed.”
*530What I have said does not imply that a taxpayer, who has deducted excessive depreciation from his gross income in any year, is not subject to a deficiency assessment as the statutes and regulations prescribe; or that excessive deductions for depreciation taken from gross income — or allowable depreciation, whether so deducted or not — may not properly be used to reduce the taxpayer’s depreciation base. The statute so provides. But I do assert that, under the system of taxation which we have established, the overstatement of the taxpayer’s depreciation base on which the Government insists is not to be justified because the taxpayer may in some other year have deducted from gross income excessive depreciation which has already been subtracted from his depreciation base. See Burnet v. Sanford & Brooks Co., 282 U. S. 359, 365. The statute neither compels nor permits so incongruous a result. The judgment should be reversed.
Me. Justice Roberts, Mr. Justice Murphy and Mr. Justice Jackson join in this dissent.
Mr. Justice Jackson,
dissenting:
The first and fundamental step in determining accrued depreciation is to estimate the probable useful life of the property to be depreciated. This depends upon judgment and is not capable of exact determination. When it is found, and after making allowance for probable salvage value at the time of retirement, it is a mere matter of mathematics to compute under the straight-line method the rate of annual accrual.
This rate when applied to the cost of the depreciable property fixes two things: (1) The amount of the depreciation accrual to deduct from gross, before determining net, income. For this purpose a high rate works in favor of the taxpayer for any given year. (2) It also determines the amount by which the cost base must be reduced *531for application of depreciation rates the following year. In this aspect a high depreciation rate works in favor of the Government.
The Virginian Hotel Corporation misconceived, as the Commissioner thinks, the probable life of its depreciable property. Attributing to it a longer life span, he corrected that judgment. To apply that correction consistently would lower the rate and consequent deduction on account of depreciation and cause a smaller subtraction from the valuation base, leaving a larger base to which the smaller rate would be applied.
The Commissioner proposed to correct taxpayer’s returns by considering only the year in question. He eliminated the error as far as it affected the rate and thus reduced the depreciation accrual and increased the tax. But he retained the base as reduced by the taxpayer’s accumulated errors, refusing to readjust the base consistently with the corrected depreciation rates.
To the extent that the taxpayer had obtained advantage from the use of the higher depreciation rate, I would think it quite justifiable to refuse to make a correction. The Government, however, stipulates as to the years in question that “the entire amount of the depreciation deducted on the income tax returns for those years did not serve to reduce the taxable income.” We should not disregard a deliberately made stipulation, even if, on our limited knowledge of its background, we are in doubt as to why it was made. The question comes simply to this: Whether the Commissioner, upon determining whether taxpayer has in good faith erred, may use a correction in so far as it helps the Government and adhere to the mistake in so far as it injures the taxpayer. I think that no straining should be done to find a construction of the statutes that will support the result.
I am the less inclined to lay down a rule that will permit the Government to make inconsistent corrections in the *532matter of depreciation because consistency in the matter of depreciation is one of the few important principles of its application. There has been no more futile tax litigation than that over depreciation rates. In an era of rising taxes the faster a taxpayer depleted his base for depreciation the more the Government realized in revenue from him. If this present taxpayer had been permitted to continue its high depreciation rates, it would have come into the present era of exceedingly high taxes with its depreciation base correspondingly exhausted. What is important for the protection of the revenues is that accrual for depreciation be applied only to property that is properly depreciable, that it be stopped when the property is fully depreciated, and that the rate be consistently applied so that the taxpayer cannot choose to take only a little depreciation when he has a little income and a lot of depreciation when he has a large income. If these conditions are observed, litigation about the rate serves chiefly to vindicate theories rather than to protect the revenues.
If the Government desires to make revisions of theoretical rates, there is no reason why it should not observe the rule of consistency that is one of the cardinal rules to impose on the taxpayer. Hence, I join in the dissenting opinion of the Chief Justice.