Court Opinion

ID: 8595695
Source: CourtListenerOpinion
Date Created: 2022-11-23 16:02:53.635975+00
Date Added: 2024-06-11T16:54:55.174237
License: Public Domain

Cowen, Chief Judge,
dissenting:
The provisions of the Merchant Marine Act, 46 U.S.C. § 1101, et seq. (hereafter MMA or “The Act”), as interpreted by the Maritime Administration, required shipowners to make deposits into the reserve funds to account for depreciation, not only for ships in existence but also for the future depreciation of ships yet to be built. The result was practically unique in that (1) depreciation was permitted and earnings were exempted from tax for ships which had not yet been purchased; and (2) depreciation deposits generally exceeded the depreciation allowed for tax purposes. In the absence of the closing agreements, the shipowners might well have claimed additional depreciation beyond that required by the Act, by deducting depreciation on newly purchased ships bought with tax-deferred funds. In effect, this would have permitted them to depreciate the cost of the ships once before purchase and once after.
The Closing Agreements of 1947 and 1954 sought to prevent this “double dip” by excluding the tax-deferred funds from the computation of the tax basis of the ships. This was not a “special depreciation agreement” as the majority main*95tains. Kather, it was a broad attempt to limit excessive depreciation deductions for any tax purpose. The Closing Agreement of 1954, provided as follows:
I. Definitions:
*****
(d) “Tax-deferred” or “Tax-deferment” referring to ordinary income and capital gains deposited in Reserve Funds means that such items are not to be recognized as taxable income, except as provided in paragraph VI (c) hereof, and likewise are not to be recognized in the determination of cost basis or invested capital.
‡ Hí # ❖ #
II. Tax treatment of deposits in reserve funds:
All earnings including capital gains, (not tax exempt under the Internal Revenue Code), which are deposited in the taxpayer’s Reserve Funds, shall be Tax-deferred income; provided, however, that the taxpayer shall not be bound by this commitment beginning with the calendar year in which a decision of any court, sustaining the contention that Section 607 (h) of the Act gives a tax exemption, instead of a Tax-deferment as herein provided, shall become final.
Article V of the same Agreement, entitled “Depreciation on Subsidized Vessels,” provided in part as follows:
* * * Where, as the result of a portion of the price paid for vessels having been paid from funds not recognized as a part of basis for tax purposes, the amount of depreciation deposits required by the Maritime Administration exceeds the amount of depreciation so computed for tax purposes, such excess deposits shall be treated as' required deposits of earnings, tax-deferred in character. * * *
These provisions, taken together, show that the parties intended that the entire amount of tax-deferred deposits would reduce the basis of the ships for all “tax purposes.” There is no attempt to limit the nature or scope of the basis reduction, or to characterize the situation in any way as a “special depreciation arrangement” for a specific purpose.
The investment tax credit, as enacted in 1962 and reenacted in 1973, allows a tax credit of 7 percent of the taxpayer’s basis on the article purchased. Int. Rev. Code § 46(c) (1) (A). *96For newly acquired articles, the taxpayer’s basis is generally the cost, as specified by Treasury Regulations § 1.46-3(c) (1). However, it is apparent that neither the Treasury Regulations nor the drafters of section 46 considered a situation by which a taxpayer’s basis in property could be reduced even before the article was purchased, as occurred with the uniquely situated subsidized shipowners.
The reduction of the shipowners’ basis before their purchase of the ships, while unusual, is nevertheless in keeping with principles evinced throughout the Internal Revenue Code. For example, section 167 requires reduction of basis to the extent of depreciation already taken, because the depreciation deduction reduces the tax cost of the article purchased.
Since the provisions of the MMA permitted the taxpayer to make deposits in a tax-deferred fund to account for future depreciation, it was reasonable that the parties would, in the Closing Agreements, agree to reduce their basis in the ships in accord with the tax deferment already received. What is not reasonable is that the majority would now restore the reduced basis of the ships to the level that existed before any depreciation had been taken. This result allows the taxpayer to compute the tax credit upon an artificially increased amount.
'If it is permissible to restore a taxable basis previously reduced by agreement to the pre-existing level for purposes of computing the investment tax credit, it is logically permissible to restore that taxable basis for other purposes. For example, if the taxpayer derived capital gains from subsequent sales of its ships, it could argue that its cost basis in the ships should not be reduced by the allocable amount of reserve fund payments, but rather that the cost basis of the ships should be restored to the full amount of the cash purchase price.
The majority seeks to avoid such an untenable result by premising its holding in part upon “special reference” by Congress to subsidized industries in passing the investment tax credit. Yet the majority can find no special reference to subsidized shipowners in the legislative history and is forced to draw inferences from general statements regarding the *97broad objectives of the tax credit. In contrast to the majority’s inferences, it is my opinion that the legislative history indicates that Congress passed the credit without considering any possible effects upon the subsidized shipping industry. Statements appearing in the Senate Finance Committee Report on the Tax Reform Act of 1976 reinforce this conclusion. I recognize the general principle that subsequent Congressional reports on what Congress intended in enacting prior legislation, are to be accorded little weight, but I feel that the remarks of the Senate Finance Committee are too pertinent to escape note here. In its Report, the Committee states that:
* * * since the tax provisions relating to the capital construction fund are in the Merchant Marine Act of 1936 rather than in the Internal Revenue Code, this question [of the effect of the shipowners’ reduced basis upon the investment credit] was not reviewed when the investment credit was subsequently generally restored. S. Rep. No. 94-938, 94th Cong., 2d Sess., 196-97 (1976).
The only reasonable conclusion to be drawn from this statement is that the framers of the tax credit were completely unaware of the situation of the subsidized shipowners when provision was made for a tax credit to be computed upon a taxpayer’s basis in acquired property. It may well be that if the question now before us had been presented to and considered by Congress when the investment credit was authorized, special provision would have been made to give the subsidized shipowners the credit claimed in this action. However, I find nothing in the applicable law or its legislative history which is sufficient to warrant judicial restoration of a taxable basis in property which has been reduced in accordance with the provisions of the MMA and the Closing Agreements of 1947 and 1954.
In summary,! would grant defendant’s motion for partial summary judgment in so far as plaintiff’s claim for investment credit includes a taxable basis which had previously been reduced by use of tax-deferred funds in purchasing the property, including both original payments and subsequent mortgage installments.