Court Opinion

ID: 9752512
Source: CourtListenerOpinion
Date Created: 2023-08-28 18:11:46.783455+00
Date Added: 2024-06-11T09:45:51.625904
License: Public Domain

WHITAKER, Judge,
(dissenting).
I am unable to agree with the opinion of the majority.
In Real Estate-Land Title & Trust Co. v. United States, 309 U.S. 13, 16, 60 S.Ct. 371, 373, 84 L.Ed. 542, the plaintiff as a result of a consolidation acquired two title plants. Both of them were efficient plants, but in the hands of plaintiff one was a duplication of the other and so it decided to abandon one. It claimed the right to deduct the value of the one abandoned, less its salvage value, under the provision of the statute providing for a deduction for obsolescence. The Supreme Court denied its claim. It said:
“* * * obsolescence under the Act connotes functioñaMepreciation, as it does in accounting an engineering terminology. More than non-use or disuse is necessary to establish it. To be sure, reasons of economy may cause a management to discard a title plant either where it has become outmoded by improved devices or where it is acquired as a duplicate and therefore is useless. But not every decision of management to abandon facilities or to discontinue their use gives rise to a claim for obsolescence. For obsolescence under the Act requires that the operative cause of the present or growing uselessness arise from external forces which make it desirable or imperative that the property be replaced. * * * Suffice it here to say that no such external causes are present, for the record shows little more than the desire of a management to eliminate one plant which was a needless duplication of another but which functionally was adequate. The fact that fewer employees were required to operate the one retained than the one discarded is inconclusive here. For this is not the case of acquisition of a new plant to take the place of one outmoded or less efficient. Rather the conclusion is irresistible that the plant was discarded only as a proximate result of petitioner’s voluntary action in acquiring excess capacity.”
Following that case we held in S. S. White Dental Mfg. Co. v. United States, 38 F.Supp. 301, 93 Ct.Cl. 469, that the plaintiff was not entitled to deduct in the year 1936 obsolescence of its Northwood plant, the identical plant here involved. In the mer proceeding plaintiff sought to deduct in the year 1936, the year in which it had decided to abandon this plant as soon as additional buildings at its Staten Island plant could be erected, 75 percent of the value of the plant, less its salvage value, and 25 percent in the year 1937. If it was entitled to a deduction on account of obsolescence at all, it was entitled to deduct at least a part of it in the year in which it had decided to abandon its plant. We held it was not entitled to a deduction for obsolescence at all, and that decision, of course, is controlling here on its right to the .deduction under the obsolescence section of the statute.
This leaves open only the question as to whether or not it is entitled to the deduction under section 23(f) of the statute, 49 Stat. 1648, 1659, 26 U.S.C.A. Int.Rev.Acts, page 828, which provides for a deduction of “losses sustained during the taxable year and not compensated for by insurance or otherwise.”
In Real Estate-Land Title & Trust Co. v. United States, supra, the Supreme Court refused to decide this question because in that case plaintiff’s claim for refund was not based upon that section, but upon the obsolescence section.
I am, however, of the opinion that the plaintiff is not entitled to the deduction under this section for the same reason it is not entitled to it under the obsolescence section.
Plaintiff claims the deduction under article 23(e)-3 of Treasury Regulations 94, which was promulgated in explanation of section 23(f) of the statute. This article allows a deduction of “abnormal obso*123lescence.” It was promulgated because of the restricted interpretation put upon section 23(1) of the statute, 26 U.S.C.A. Int. Rev.Acts, page 829, authorizing the deduction of “a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence (Italics ours.) The Commissioner held that this obsolescence deduction had to be taken annually over the life of the property in anticipation of the time the property would become obsolete. Regulations 94, art. 23 (l)~6. To take the deduction the taxpayer had to foresee that the property would become obsolete before its usefulness was exhausted by wear and tear. But, obviously, this did not take care of the case where the property became obsolete unexpectedly, as, for example, where some new and unexpected invention of a new machine outmoded the old, necessitating its abandonment. Not having expected the invention the taxpayer had not taken a deduction for obsolescence of his old machine during the years he had used it, and yet he had to discard it, not because it had worn out, but because it was no longer profitable to use it. To meet this situation article 23(e)-3 was promulgated.
It was intended to take care of unforeseen obsolescence. This seems plain from a reading of it. It speaks of the “sudden” termination of the usefulness of the property due to an “unforeseen cause.” It allows the deduction for “causes other than * * * normal obsolescence, such as casualty, obsolescence other than normal," etc. (Italics ours.)
The deduction claimed is for obsolescence. In this case it is claimed under article 23(e)-3 as abnormal obsolescence; in the former case it was claimed under 23 (Z) as obsolescence there allowed. Following the Supreme Court’s decision in the Real Estate Land Title & Trust Co. case, supra, we held in the former case (38 F.Supp. 301, 93 Ct.Cl. 469) that it was not entitled to the deduction because its abandonment was not the result of “external forces” but only on account of the voluntary act of the management done to effect economy in operation. The same is true in this case. If a deduction for gradual obsolescence can be taken only where the abandonment of the property is a result of external forces, it must follow that abnormal obsolescence can only be taken in the same circumstances.
Plaintiff falls far short of coming within the terms of the Regulation. The property was not abandoned as a result of “some change in business conditions.” Its usefulness was not “suddenly terminated” due to some change in business conditions. No “unforeseen cause” brought about its abandonment. No change in business conditions is pointed out. Apparently business conditions had been the same for a number of years. No cause that had not existed for years brought about the sudden termination of the usefulness of the property. Plaintiff voluntarily abandoned the building because it decided to consolidate its operations. The building was still “functionally adequate.” It lost its valué to plaintiff only because plaintiff decided to transfer its operations elsewhere.
The transaction here was nothing more nor less, in my opinion, than the sale of a capital asset. Plaintiff had a building in Northwood which it did not want and it sold it, and it is entitled only to the deduction provided for on a sale. This is limited by section 117(d) of the Revenue Act of 1936, 49 Stat. 1648, 1692, 26 U.S.C.A. Int. Rev.Acts, page 875, to $2,000.00. This has been allowed it.
I am of opinion that the plaintiff is not entitled to recover and that its petition should be dismissed.
WHALEY, Chief Justice, concurs in the foregoing opinion.