Court Opinion

ID: 9450214
Source: CourtListenerOpinion
Date Created: 2023-08-04 16:38:29.456682+00
Date Added: 2024-06-11T17:32:11.766489
License: Public Domain

MOORE, Circuit Judge
(dissenting).
By its decision in this case and in United States v. The Motorlease Corporation, 2 Cir., 334 F.2d 617, this court not only enacts judicial legislation which the Congress itself has rejected but overturns judicial and administrative precedents of many years’ standing in the field of allowable depreciation.
The law in effect in 1957, the applicable year here, provided as to “Depreciation” that “There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) — (1) of property used in a trade or business, or (2) of property held for the production of income.” (Sec. 167, Int.Rev.Code of 1954.) The basis, “for the purpose of determining *19the gain on the sale or other disposition of such property,” was to be the “adjusted basis provided in section 1011.” See. 167(f).
The Regulations provide for the setting aside as a depreciation deduction an amount “in accordance with a reasonably consistent plan,” “so that the aggregate of the amounts set aside, plus the salvage value, will, at the end of the estimated useful life of the depreciable property, equal the cost or other basis of the property as provided in section 167(f) and § 1.167 (f)-l.
“Useful life,” here determined by the Commissioner to have been three years, was subject to modification “by reason of conditions known to exist at the end of’the taxable year” and could be “redetermined” but “only when the change in the useful life is significant.” § 1.167 (b).
The other important factor, “salvage value,” is defined with clarity as “the amount (determined at the time of acquisition) which is estimated will be realized upon sale or other disposition — ” § 1.167(c)-l. The Regulation contains the injunctions that “Salvage value shall not be changed at any time after the determination made at the time of acquisition merely because of changes in priee levels,” and that “Salvage value must be taken into account in determining the depreciation deduction * * * ” The time period during which depreciation is allowable is from the time “when the asset is placed in service” until it “is retired from service.” Proportionate parts of one year s depreciation are aliowable for the first and last years during T o 6 aSS6 1S m SerV1Ce' ^ ' '
These underlying and controlling legal principles are clear. Their application to the facts of this case are (or should be) equa y c ear.
The asset or property is the S. S. Feuer. Its acquisition date was Decern-ber 21, 1955 — the price $469,000.
The Commissioner accepted “Useful life” as three years and salvage value as $54,000. The “reasonably consistent plan” required the setting aside of $378.-65 a day for depreciation. If this were-done, the “aggregate of the amounts set aside” ($415,000) “plus the salvage-value” ($54,000) would equal the cost ($469,000).
During 1957 the S S Feuer earned some ?289,340 as gross profit. To-achieve this profit the Feuer had to be used and after each day of its use it had suffered wear and tear (depreciation) to the extent of $378.65. The $289,340 was-not the net income on which the petitioner under the law was required to pay taxes. Its obligation rested upon net income and net income was obtained only after depreciation ($135,367.24) was deducted. Thus far there can be no vari-anee in thought or legal result — even by the Commissioner, the Tax Court or the-majority.
But just as our much vaunted system-of law on a national basis can be so> easily ignored and repudiated both by judicial and extra-judicial fiats, even more so is this true on an international basis. International law and contract to the contrary, the Suez Canal was closed to shipping in the latter part of 1956. Suddenly the price of ships soared, petitioner chose to forego the balance (approximately one and a half years — or one-half of the agreed-upon useful life) of the contemplated three-year reasonable plan-period and sold the Feuer in June 1957 for $700,000 (actually $695,500 on closing).
The tax computat¡on shou]d have been simple. The cost (?469)ooo) less depreciation to the date of saIe ($277,739.-51) enabled petitioner because of its sale for $695,500 to obtain a capital gain of $504,239.51, which petitioner reported,
Particu]arly important is it to note that although the Suez crisis had radical_ ]y affeeted the shipping situation and ship values, the Commissioner did not avaii himself of the remedy of modification of useful life and after such redeter-mination then, but only then, of a rede-termination of salvage value. Actually *20his own regulation prevented him from changing salvage value “merely because of changes in price levels.”
Faced with this insurmountable barrier of Congressional enactment, precedent, and regulation, the Commissioner resolved the problem by the simple and much-used device of amending the statutes without the aid or even participation of Congress. To the depreciation allowance section he merely added in substance the words “except in the event that the asset shall be sold prior to the expiration of its useful life, in which event no depreciation shall be allowed for the year in which such sale is made if the price realized exceeds the depreciated cost at the beginning of such taxable year.”
There would have been nothing wrong with such a statute; in fact, the Treasury had been trying to have similar provisions enacted for years. If, however, under our three branches of government system, the legislative branch does not function to the satisfaction of the executive and judicial branches, it is apparently incumbent on the latter two to take over the legislative powers. To be sure the taxpayer had planned his business transaction relying on the law as it was on the books at the time but sooner or later taxpayers must learn not to rely upon Commissioner’s rulings, acquies-cences, prior audits — or even Commissioners and courts.
What possible rationale is available for the result reached by the majority? They first infer that the Commissioner is being quite magnanimous in being “content” with only a 1957 disallowance as if taxes and the law were to depend on Commissioners’ whims, caprices and contentment. They recognize that in so doing that the Commissioner was “perhaps logically inconsistent” as indeed he was. In enacting his own ex post facto legislation, he might just as well have had a sale for more than cost eliminate all depreciation for three years or even from the date of acquisition.
To arrive at its result the majority relies exclusively on what it can only call a strong suggestion in Cohn v. United States, 259 F.2d 371 (6th Cir. 1958). It ignores (as it must) the many Supreme Court decisions and the statutes and regulations leading to a contrary result. When the Cohn case is read, no principle is found therein which could support the Commissioner’s ruling. The taxpayers in Cohn had not fixed any salvage value for their property at the end of its useful life. For this value the District Court chose the sale price. There was no holding in Cohn that sale price during the course of useful life (here at the half-way point) should eliminate all depreciation in the year of sale. Nor can Cohn possibly be stretched to stand for the proposition that any “reasonably consistent plan” adopted by a taxpayer.is to be considered as abrogated by a sale. Any such conclusion would be in specific disregard of the statutes and regulations which provide for the methods of re-determination of useful life and salvage value.
In Randolph D. Rouse, 39 T.C. 70 (1962) (the Tax Court here held it “necessary to recognize the Rouse case as dispositive of the question presented in this case”) relied upon Cohn. Depreciation was disallowed only as to the houses which Rouse had sold. Since he had not adopted any “reasonably consistent plan” or estimated any salvage value at the time of acquisition a situation somewhat similar to that in Cohn existed. Neither set of facts leads to a result which should be controlling or even persuasive here.
The Tax Court assumed, erroneously and without any supporting basis in my opinion, that “changes in economic conditions have brought about new considerations by the courts of the old, well-established rules relating to depreciation allowances in the light of the rising market prices of used assets and the corresponding realization of large gains upon the resale of such used assets.” Massey Motors, Inc. v. United States, 364 U.S. 92, 80 S.Ct. 1411, 4 L.Ed.2d 1592 (1960) and Hertz Corp. v. United States, 364 U.S. 122, 80 S.Ct. 1420, 4 L.Ed.2d 1603 (1960) are cited as examples for *21this proposition. Actually neither case justifies any such conclusion. Both cases involved taxpayers whose business experience enabled them to determine an estimated salvage value based upon sales long before the end of the physical life of the automobiles used in their businesses. Instead of declaring the principle that sale automatically disqualified a taxpayer from claiming depreciation if the .sale price was higher than the depreciated value at the beginning of the year, the Massey case, as to one of the taxpayers, used the estimated salvage value of $1,-•325 per ear instead of the actual sales price of $1,380. Had the Supreme Court wished to declare the principle now urged by the Commissioner, it had every opportunity to do so merely by taking the actual sales price. However, it did not.
A thorough and well reasoned analysis of the depreciation problem is set forth in the trial court’s decision in The Motor-lease Corporation v. United States of America, 215 F.Supp. 356 (D.Conn. 1963). Although a panel of this court “On the authority of, and for the reasons given in Fribourg Navigation Co. v. Commissioner, 2d Cir., Docket No. 28165, decided today,” reversed Motorlease, this case in reality supplies neither reasons nor authority. Motorlease reaches its result by saying “neither the Code nor the regulations are dispositive of the issue.” To ignore the tax law as clearly written and the interpreting regulations is quite essential to a decision in contravention of such laws. This court in Motorlease does not believe that the transmutation of ordinary income into capital gains should be encouraged. Here is another example of the judicial enactment of a law which Congress it.self over a long period of years had rejected. As pointed out in Evans v. Commissioner, 264 F.2d 502, 513 (9th Cir. 1959), rev’d on another ground sub nom. Massey Motors, Inc. v. United States, 364 U.S. 92, 80 S.Ct. 1411 (1960), “The legislative history of section 117(j) shows that Congress [had] not receded from its original purpose. Congress was aware of the Commissioner’s contention that taxpayers were converting into capital gains ordinary income arising from unreasonable deductions for depreciation.” After reviewing various legislative attempts to have gain treated uniformly as ordinary income the court added tersely, “The recommendation was heard but not adopted.” 264 F.2d at 514.
In Motorlease the Commissioner did what he did not do in Massey. He took sale price as a new and substituted salvage value despite the specific requirement that it was to be “determined at the time of acquisition.” Thus Motorlease as decided by this court in substance and actuality goes contrary to the decisions of the Supreme Court in Massey and Evans.
The factual distinction which makes Fribourg, even as the majority decide it, completely inapplicable to Motorlease, is that Fribourg admittedly does not deal with a business which consisted of short time use of property and its sale before the expiration of its physical life. Mo-torlease was analogous to, and should have been controlled by, Massey, Evans and Hertz. Yet there is no consideration of, or even mention of, those important cases or the legal principles declared therein.
Another series of illuminating beacons the light of which is more than adequate to reveal the right path.are recent district court cases from other circuits.
In Wyoming Builders, Inc. v. United States, 227 F.Supp. 534, D.C.D.Wyo., the court was confronted with a refund case involving the disallowance of depreciation on property sold two months before the close of the taxpayer’s fiscal year (November 1, 1957 — October 31, 1958). The property, an Air Force base housing project, had been set up on a seventy-five year lease basis, all improvements to remain the property of the government upon expiration or termination. When the property was sold to the government in 1958, the taxpayer, as here, reported as a capital gain the difference between the sale price and the cost less eight *22years’ depredation. The court considered the applicable statutes and regulations as well as the Cohn case and concluded that the government’s theory that no de-preeiation occurred in the year of sale was untenable, saying in part:
“Depreciation occurs by use; the use of the property by the taxpayer until September 1, 1958, when the sale took place, resulted in a continued depreciation of the property until September 1, 1958. The expense of using the property was properly allocated by the taxpayer to the period of time which was benefited by that asset, that is, from the beginning of the fiscal year in issue until the date of the sale. Depreciation is the measure of the cost of that part of the assets which has been used up or gradually ‘sold’ through wear and tear.” United States v. Ludey, 274 U.S. 295, 301, 47 S.Ct. 608, 71 L.Ed. 1054 (1927).
The conclusions of the court in Wyoming Builders are so consonant with the law that it is impossible to conjure up countervailing arguments. The court held that “Neither the law nor the regulations permit this court to substitute the term ‘sale price’ for the regulation’s term ‘reasonable salvage value’,” and that “to sustain the disallowance of taxpayer’s depreciation deduction would require an unwarranted judicial extension of the Code and Treasury Regulations.” The court believed, as do I, that, if the law is to be changed, “Congress, not the Court, must enact adequate controls and set the standards.”
The history of the Wier Long Leaf Lumber Co. case, 9 T.C. 900 (1947) and the Commissioner’s acquiescence (1948— 1962), his non-acquiescence (1962) and its affirmance and partial reversal on other issues, 173 F.2d 549 (5th Cir. 1949), is relevant here. The Tax Court held that the sale of depreciated automobiles did not preclude any depreciation allowance in the year of sale and that “mere appreciation in value due to extraneous causes [here the Suez situation] has no influence on the depreciation al~ lowance, one way or the other.”
Kimball Gas Products Co. v. United states, 63-2 U.S.T.C. if 9507, W.D.Tex-1962 was brought for a refund for overpayment of taxes due to the Commissioner’s disallowance of depreciation in the year of sale (1959) of properties acquired in 1955 which for depreciation purposes had useful lives of seven years, The Commissioner disallowed one-half of the depreciation claimed in the year of sale. The court held that the taxpayer was entitled to the full depreciation and a tax refund.
The taxpayer in S & A Company v. United States, 218 F.Supp. 677 (D.Minn., 1963), a company manufacturing and selling outboard motors, sold its land and depreciable assets on April 1, 1956 to a company which continued the business, it claimed deduction for depreciation from September 1, 1955 to April 1, 1956 jn its 1955-1956 fiscal year. The issue framed there was identical with the issue here. The court reviewed in detail the history of the tax laws material to the subject, the Regulations, the Massey, Hertz, Cohn and Wier Long Leaf Lumber cases and came to the conclusion that the Commissioner improperly disallowed the deduction. In the course of its opinion the court pointed out the distinguishing features of the Cohn case (assuming it to be correct), namely, that although “a sale of an asset at the end of its useful life for an amount in excess of its undepreciated cost at the beginning of the year of sale will justify a redetermination of salvage value,” it is equally clear that the Tax Court held that sale of assets prior to the end of “useful life” at a price in excess of undepreciated cost at the beginning of ttie year of sale does not justify a determination o± salvage value because the excess of price over cost is mere appreciation in value,
Refutation cannot be found in saying that these are only district court decisions. They are decisions which apply the tax statutes as they were written and the Supreme Court cases for the prin*23■ciples expounded therein. They do not attempt to ascribe to Congress an intent not enacted into law. Rather the legislative history has disclosed that Congress had been aware of the problem and had intentionally chosen not to act.
The fallibility of the majority opinion is that it completely ignores that law. 'The majority say “Because our income ■tax system is based on annual reporting * * * the proper amount of depreciation to be taken each year must depend -on estimates.” They should have taken notice of the statutory words requiring that salvage value be “determined at the time of acquisition” — of necessity, an ■estimate. They then interpret the Commissioner’s claim to be that it is “unreasonable to follow an estimate when one knows that estimate is incorrect.” To impute such a claim to the Commissioner is to imply that he is unable to read, understand and follow the specific provisions of the law under which he can airways seek to rectify an incorrect estimate. Instead of pursuing such a remedy here, the Commissioner concedes the accuracy both of useful life and the salvage ■value “determined at the time of acquisition.”
Finding no support in law for its position and forced to concede that “the increment in the Feuer’s value resulted from a fortuity normally associated with -capital gain,” the majority satisfy themselves with the belief that “no injustice results from denying the taxpayer an allowance he knows to be fictional at the time he claims it.” Any such legal philosophy has the effect of writing depreciation allowances and depreciation as a matter of sound accounting out of the tax laws. Possibly they intend by their opinion to do so because under such circumstances they say “the economic factors responsible for the lack of expense to the taxpayer should be of no concern in arriving at the depreciation allow.ance.” This approach can scarcely be reconciled with their comment that “If ■depreciation schedules had to be revised each time an asset’s market value rose ■or declined, an intolerable strain would be placed on accounting methods.” It was for this very reason that the Regulation, § 1.167(e), provided that “Salvage value shall not be changed at any time after the determination made at the time of acquisition merely because of changes in price levels.” Of course, sales price can easily be compared with the depreciated cost at the beginning of the year. But there is no law or regulation which declares that in such event no depreciation shall be allowed if the sales price is higher. Therefore, because this decision seems to be completely at variance with the statutes and the applicable decisions, I must dissent.