Court Opinion

ID: 4482982
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:49.506038+00
Date Added: 2024-06-11T07:58:16.779519
License: Public Domain

Wilbur, J., concurring: This case concerns the application of the investment credit provisions to self-constructed property whereby a taxpayer uses property A to self-construct property B. Even though property A and property B meet the statutory definition of qualified property, the regulations deny a “double credit” by requiring that the credit be taken on property A and that the basis of property A be excluded from property B for purposes of computing the investment credit on property B. While hardly free from doubt, the regulations are not plainly inconsistent with the statute.1  The regulation in question (sec. 1.46-3(c)(l)) provides: (c) Basis or cost. (1) The basis of any new section 38 property shall be determined in accordance with the general rules for determining the basis of property. Thus, the basis of property would generally be its cost (see section 1012), unreduced by the adjustment to basis provided by section 48(g)(1) with respect to property placed in service before January 1, 1964, and any other adjustment to basis, such as that for depreciation, and would include all items properly included by the taxpayer in the depreciable basis of the property, such as installation and freight costs. However, for purposes of determining qualified investment, the basis of new section 38 property constructed, reconstructed, or erected by the taxpayer shall not include any depreciation sustained with respect to any other property used in the construction, reconstruction or erection of such new section 38 property. (See paragraph (b)(4) of section 1.48-1)*** [Emphasis added.] The majority broadly construes this regulation to exclude from the basis of self-constructed property (property B) any depreciation on other property (property A) used in the construction process. When the other property (property A) used in self-constructing assets does not qualify for the investment credit, this interpretation of the regulation denies any credit, and the emphasized portion of the regulation is therefore declared invalid by the majority. If this interpretation of the regulation is correct, the regulation is invalid. However, the regulation can and should be construed in pari materia with related provisions of the regulations to achieve the same result without declaring it invalid. Immediately following the sentence the majority invalidates is a specific reference to section 1.48-l(b)(4), Income Tax Regs. Section 1.48-1 deals in its entirety with the definition of “section 38 property,” that is, property qualifying for the investment credit. Section 1.48-l(a), in providing a general definition of qualifying property, states that it must he property on which depreciation is allowable. Subsection 1.48-l(b) dealing with the issue of when property otherwise within the definition of qualifying property is property on which depreciation is allowable, states: (b) Depreciation allowable. (1) Property is not section 38 property unless a deduction for depreciation (or amortization in lieu of depreciation) with respect to such property is allowable to the taxpayer for the taxable year. A deduction for depreciation is allowable if the property is of a character subject to the allowance for depreciation under section 167 and the basis (or cost) of the property is recovered through a method of depreciation, including, for example, the unit of production method and the retirement method as well as methods of depreciation which measure the life of the property in terms of years. If property is placed in service (within the meaning of paragraph (d) of section 1.46-3) in a trade or business (or in the production of income), but under the taxpayer’s depreciation practice the period for depreciation with respect to such property begins in a taxable year subsequent to the taxable year in which such property is placed in service, then a deduction for depreciation shall be treated as allowable with respect to such property in the earlier taxable year (or years). Thus, for example, if a machine is placed in service in a trade or business in 1963, but the period for depreciation with respect to such machine begins in 1964, because the taxpayer uses an averaging convention (see section 1.167(a)--10) in computing depreciation, then, for purposes of determining whether the machine qualifies as section 38 property, a deduction for depreciation shall be treated as allowable in 1963. * * * (4) If depreciation sustained on property is not an allowable deduction for the taxable year but is added to the basis of property being constructed, reconstructed, or erected by the taxpayer, for purposes of subparagraph (1) of this paragraph a deduction for depreciation shall be treated as allowable for the taxable year with respect to the property on which depreciation is sustained. Thus, if $1,000 of depreciation sustained with respect to property no. 1, which ⅛ placed in service in 1964 by taxpayer A, is not allowable to A as a deduction for 1964 but is added to the basis of property being constructed by A (property no. 2), for purposes of subparagraph (1) of this paragraph a deduction for depreciation shall be treated as allowable to A for 1964 with respect to property no. 1. However, the $1,000 amount is not included in the basis of property no. 2 for purposes of determining A’s qualified investment with respect to property no. 2. See paragraph (c)(1) of section 1.46-3. [Emphasis added.] Paragraph (b)(1) makes it clear that, while depreciation may not be allowable during the year property is placed in service due to a particular depreciation convention, a deduction for depreciation shall be considered as allowable for purposes of determining whether the machine qualifies as section 38 property. Paragraph (b)(4) also makes it clear that, while depreciation on property used to self-construct another asset must be carried over to the self-constructed asset, the property used in the construction process will be deemed depreciable for purposes of subparagraph (1) of this paragraph. Both paragraphs assume and deal with a situation where the property used in the construction process is itself section 38 property, rather than nonqualifying property as the majority assumes. Regulations section 1.48-l(b)(4) and section 1.46-3(c)(l) (invalidated in part by the majority) contain reciprocal cross references. Furthermore, since they both deal with the same matter, they must be construed in pari materia, as it is indeed clear they were intended to be construed. By construing these regulations together, it is clear they were intended only to disallow a double credit and advise the taxpayer which property to claim the credit on rather than to deny any credit at all. Since Treasury regulations constitute contemporaneous constructions by those charged with the administration of the statutes, they must be sustained unless “plainly inconsistent” with the statute. This is particularly true where the Commissioner’s regulatory authority derives not only from the general rule-making authority granted in section 7805, but also under a specific mandate contained in the statutory provisions being construed. See William F. Sanford, 50 T.C. 823, 832 (1968), affd. per curiam 412 F. 2d 201 (2d Cir. 1969), cert, denied 396 U.S. 841 (1969). Properly construed, the regulation is not plainly inconsistent with the statute. The majority apparently feels that its interpretation of the regulation is not only clear, but clearly inconsistent with the statute. But if it is clear to the majority, it must have been clear to Congress; and Congress has in the sum total of its actions through the years, clearly indicated that the regulation incorporates the rule of the statute. Congress has reenacted and expanded provisions of the investment credit with specific knowledge of the construction placed upon the statute by the regulations. The investment credit was added by the Revenue Act of 1962 and amended in the Revenue Act of 1964. The regulations in question were promulgated by TD 6731 on May 7, 1964, and have not been amended since that time. During the 11 years those regulations have been in effect, the investment credit was suspended,2 restored,3 repealed,4 reenacted,5 and substantially broadened.6 All of these congressional actions required Congress to deal with basis problems, and no change in the applicable statutory language has occurred during the entire 11-year period the regulations have been on the books. While this alone might not be enough, in the last legislative action taken by Congress (Pub. L. 94-12 (Mar. 29, 1975)), the rule provided by the regulation was specifically commented upon (in a virtually verbatim restatement), approved, and incorporated in the statute. (Sec. 46(d)(3)). In greatly expanding the investment credit, Congress added provisions to the statute making the credit applicable to certain work in progress, even though the property has not yet been “placed in service.” In doing so, the credit was made available for “qualified progress expenditures,” defined by the statute (to the extent here relevant) as follows: (3) Qualified progress expenditures defined. — For purposes of this subsection— (A) Self-constructed property. — In the case of any self-constructed property, the term “qualified progress expenditures” means the amount which, for purposes of this subpart, is, properly chargeable (during such taxable year) to capital account with respect to such property. [Emphasis added.] In explaining what is meant by this statutory language, the committee reports contain the following comment: In the case of self-constructed property (i.e., property where it is reasonable to believe that the taxpayer will bear more than half of the construction costs directly) “qualified progress expenditures” will generally equal the costs incurred by the taxpayer which are properly chargeable to capital account in connection with that property (for purposes of the investment credit). Thus, qualified progress expenditures would not include any depreciation sustained with respect to other property (machinery, equipment, etc.) used in the construction of new section 38 property (because such depreciation is not part of the basis for purposes of section 38), nor generally would it include the adjusted basis of reconstructed property at the time the reconstruction is commenced. [H. Rept. 94-19, 94th Cong., 1st Sess. 38 (1975). (Emphasis added.) See also S. Rept. 94-36,94th Cong., 1st Sess. 46 (1975) (substantially identical language).] It is therefore clear that Congress has specifically considered the language of the regulation, and declared it is the rule the statute contemplates. Moreover, the language in section 46(d) (when considered in the light of the legislative history) actually incorporates the rule of the regulation.7  My quarrel with the majority arises from their willingness to disregard more than a decade of congressional actions subsequent to the promulgation of the regulations in question as well as their implicit assumption that Congress adopted (for purposes of qualifying progress expenditures under new section 46(d)), an unambiguous rule clearly inconsistent with the statute as it then existed.81 believe the regulation is ambiguous, and should be read to preclude only a double credit and not to deny any credit at all on certain property, and that Congress in fact understood the rule in this manner. In discussing the rule of the regulation in issue, Congress noted that the basis of self-constructed property excludes “any depreciation sustained .with respect to other property (machinery, equipment, etc.) used in the construction of new section 38 property (because such depreciation is not part of the basis for purposes of section 38).” H. Rept. 94-19, supra at 38 (emphasis added). It is hard to believe that Congress, in referring to “machinery and equipment,” did not have in mind items themselves qualifying for the investment credit. When Congress used the terms machinery and equipment in other provisions of the investment credit, it contemplated qualifying property. See secs. 48(h)(4)(A) and 48(h)(6). Additionally, in liberalizing the statute earlier this year, Congress followed the historical practice of treating those who self-construct equipment and facilities on the same basis as those who purchase these items from others. If the majority is correct, and the rule of the regulation Congress referred to and adopted excludes all depreciation of any kind from the basis of self-constructed property, it would be economically disadvantageous to self-construct capital intensive items. This would be clearly inconsistent with the parity of treatment Congress intended, particularly in view of the nature of the assets qualifying for the investment credit. The majority broadly construes the regulation in question, and then invalidates the regulation as so construed. A narrow construction of the regulation, which accords with the statutory language and underlying purpose, as well as the legislative history, would obviate the problems created in invalidating one part of an interrelated set of regulations. The investment credit provisions are an interrelated set of rules developed over the last 13 years to achieve economic objectives rather than equity in the area of cost recovery. The provisions have been enacted, amended, suspended, restored, repealed, reenacted, and greatly expanded over this 13-year period. Necessarily, legislative action through the years has tied into language added to the Code in earlier years and developed a series of complex and integrated rules that require the interpretation of the investment credit provisions as a whole rather than in fragmented parts. It simply will not work any other way and it is inconsistent with the way Congress has developed the provisions through the years. There is simply no need or cause to invalidate the regulation, which has apparently worked reasonably well through the years and has met with the approval of Congress. Raum, Tannenwald, Sterrett, and Quealy, JJ., agree with this concurring opinion.   If property B is purchased, the taxpayer will get the full credit on property B. The purchase price of property B in a competitive environment will reflect a passthrough of.the investment credit on property A that the manufacturer has used in manufacturing property B. If the manufacturer’s markup is ignored, a taxpayer may, by purchasing rather than self-constructing property B, derive the benefit of the credit on both property A and B that he is denied when self-constructing. Additionally, due to the manufacturer’s markup, the cost of the tax credits to the Federal Government when the property is purchased may exceed the cost of the credits when the property is self-constructed, although the macroeconomic effects (ignoring those associated with the manufacturer’s distribution) would be essentially the same. Thus, it can be argued that the purpose of the credit, as well as the intent to treat those self-constructing property the same as those purchasing property, require that both property A and B qualify for the credit. However, as pointed out infra, the regulations have been in effect for more than a decade during which Congress has suspended, restored, repealed, reenacted, and substantially broadened the credit. Earlier this year the regulations were specifically considered by Congress, and determined to be the rule the statute contemplates. See sec. 46(d), added by Pub. L. 94-12 (Mar. 29,1975). See also H. Rept. No. 94-19, to accompany H.R. 2166 (Pub. L. 94-12), 94th Cong., 1st Sess. 38 (1975); S. Rept. No. 94-36, to accompany H.R. 2166 (Pub. L. 94-12), 94th Cong., 1st Sess. 46 (1975). Additionally, these arguments can also be made with regard to depreciation, and yet it is clear an individual self-constructing assets can claim depreciation only on the asset he constructs. Commissioner v. Idaho Power Co., 418 U.S. 1 (1974). Admittedly, the method the regulations employ to deny a double credit differs from the method used in reference to depreciation under Idaho Power, and this can produce some anomalies. (For example, property A may have a short useful life qualifying for only one-third of the credit, while property B has a longer useful life qualifying for the full credit; only the partial credit for property A is allowed rather than the full credit for property B). But this difference is understandable, since the entire investment credit is claimed in the year an asset is placed in service (rather than over its useful life as in the case of depreciation), and the taxpayer cannot defer claiming the credit because he may later use the asset in self-constructing other property.    Pub. L. 89-800 (Nov. 8,1966).    Pub. L. 90-26 (June 13,1967).    Pub. L. 91-172 (Dec. 30,1969).    Pub. L. 92-178 (Dec. 10,1971).   Pub. L. 94-12 (Mar. 29,1975).    The majority repudiates all of this legislative history on the basis of United States v. Price, 361 U.S. 304, 313 (1960), and in this they err. In 1971 Congress amended the definition of property qualifying for the investment credit to include motion picture film, indicating in the legislative history that the prior law was intended to cover film. The Government, citing Price, argued that the legislative history of a subsequent Congress was of little value in interpreting a law enacted by a prior Congress. The Ninth Circuit firmly rejected this argument in the following words: “The government urges that this legislative history is irrelevant because the 1971 Act changed prior law, or at least that the history is entitled to little weight because ‘the views of a subsequent Congress form a hazardous basis for inferring the intent of an earlier one.’ United States v. Price, 361 U.S. 304, 313, 80 S. Ct. 326, 332, 4 L. Ed. 2d 334 (1960). However, although the 1971 re-enactment of the investment credit did change prior law in several ways, see, e.g., Revenue Act of 1971, Pub. L. No. 92-178, section 104(c), 85 Stat. 497, 501, it did not change the phrase ‘tangible personal property’ as used in the 1962 Act, Int. Rev. Code of 1954, section 48(a)(1)(A). And, while subsequent legislative history normally is not of controlling weight, it should not be ignored when it is clearly relevant. “In this case we give subsequent legislative history special weight, because the inferences flow not from Congressional action or inaction on amendatory legislation, but from explicit Congressional statements of the meaning of a phrase which was unchanged during the period in question. * * * [ Walt Disney Productions v. United States, 480 F.2d 66, 68, 69 (9th Cir. 1973). Citations omitted. Emphasis added.]” The case before us is clearly within this rationale.    Apparently, under the majority opinion the plain rule of the invalidated regulation which Congress adopted will apply to the new progress expenditure provisions of the investment credit, but not to provisions enacted by previous Congresses. This seems anomalous since the statute and legislative history made it clear that the new provisions were carefully integrated with existing provisions, and yet two separate rules regarding the basis of self-constructed assets will apply. See H. Rept. 94-19, supra at 40.