Court Opinion

ID: 9636691
Source: CourtListenerOpinion
Date Created: 2023-08-22 14:39:29.455746+00
Date Added: 2024-06-11T12:12:45.432586
License: Public Domain

PARKER, Circuit Judge
(concurring in part and dissenting in part).
I concur in the conclusion of the court on the first point discussed in its opinion, because of the decision of the Circuit Court of Appeals of the Second Circuit in New York Central Railroad Co. v. Commissioner, 79 F.(2d) 247, and because of the fact that certiorari has been denied (56 S.Ct. 370, 80 L.Ed. —) by the Supreme Court in that case. While we are *312admonished not to attribute weight to the denial of certiorari, I feel that the nature of the question involved was such that certiorari would have been granted if the decision of the Circuit Court of Appeals had not been approved. If I did not feel constrained by this circumstance, I would think that the opinion of the court pressed too far the doctrine laid down in Weiss v. Wiener, 279 U.S. 333, 49 S.Ct. 337, 73 L.Ed. 720.
With respect to the right to deduct depreciation, I can see no difference between the case of a railroad which owns its property and that of one which leases it under a 999-year lease with agreement to maintain, repair, and renew during the term of the lease. In either case the annual wear and tear on equipment is one of the expenses of operation and should be taken care of by an allowance for depreciation to the extent that it is not covered by the charging of items to expense in preserving the normal level of maintenance.1 It is true, theoretically, that the property upon which depreciation is allowed in the latter case is not the property of the taxpayer, but to all intents and purposes it is his property, he must replace it when it is worn out, and its depreciation during the year has been incurred in earning the income upon which he is taxed.
In United States v. Ludey, 274 U.S. 295, 301, 47 S.Ct. 608, 610, 71 L.Ed. 1054, the Supreme Court says: “The theory underlying this allowance for depreciation is that by using up the plant a gradual sale is made of it. The depreciation charged is the measure of the cost of the part which has been sold.” This gradual sale of railroad equipment through operation is made whether it be owned or leased; and if there is an agreement on the part of the lessee to repair and replace, the depreciation of material represents a partial sale of equipment and a liability incurred therefor during the year for which the lessee should be permitted to take deduction, where, as here, it is certain that the liability will eventually be met and discharged by him. The situation is not unlike that applying in the case of bond discount, the amortization of which is permitted although it is not in reality paid until the bonds mature. Helvering v. Union Pac. R. Co., 293 U.S. 282, 287, 55 S.Ct. 165, 79 L.Ed. 363.
In Gambrinus Brewery Co. v. Anderson, 282 U.S. 638, 643-645, 51 S.Ct. 260, 261, 75 L.Ed. 588, it was said: “The cost of plant depreciation, i. e., exhaustion, wear, tear, and obsolescence, is a part of operating expenses necessary to carry on a manufacturing business. The gain or loss in any year cannot be rightly ascertained without taking into account the amount of such cost that is justly attributable to that period of time. * * * The statute contemplates annual allowance for obsolescence just as it does for exhaustion, wear, and tear. That is necessary in order to determine true gain or loss because postponement of deductions to cover obsolescence until the property involved became obsolete would distort annual income.” And in Burnet v. Niagara Falls Brewing Co., 282 U.S. 648, 654, 51 S.Ct. 262, 264, 75 L.Ed. 594, the court emphasized the importance of applying the provision of the statute for the benefit of all taxpayers, saying : “Clearly the statute contemplates that, where warranted by the facts, the taxpayer shall have the benefit of, and in making his return may deduct in each year, a reasonable allowance to cover obsolescence of the tangible property. And that is in accord with sound principles of accounting. Cf. Kansas City So. Ry. v. United States, 231 U.S. 423, 451, 34 S.Ct. 125, 58 L.Ed. 296, 52 L.R.A.(N.S.) 1; Pacific Gas & Electric Co. v. San Francisco, 265 U.S. 403, 415, 44 S.Ct. 537, 68 L.Ed. 1075. The provision is general, and applied alike to all taxpayers; its purpose 'is to guide the ascertainment of taxable income in each year. It is a familiar ruie that tax laws are to be liberally construed in favor of taxpayers.” I see no reason why a railroad company which practically owns a leased system, and which is bound under its contract to make good depreciation sustained, should not have a reasonable deduction for such depreciation annually instead of having its income distorted by being allowed an undue amount for replacements for the years in which they are made.
The Interstate Commerce Commission allows such depreciation in computing income for rate making purposes; and, not to allow it when computing income for purposes of taxation, seems to me to ignore the actualities of the situation. When an item of the leased equipment is worn out, the Coast Line will be compelled to *313replace it in the same way that it replaces equipment which it owns; and, to permit a deduction of annual depreciation in the latter case and deny it in the former does not impress me as reasonable or as in accord with the principles under which depreciation is allowed. While the taxpayer does not own the title to the property leased as a matter of technical law, it is the owner of such property for all practical purposes and should be allowed depreciation on its “economic interest” therein, in accordance with the same principle on which depletion was allowed in Lynch v. Alworth-Stephens Co., 267 U.S. 364, 45 S.Ct. 274, 69 L.Ed. 660, and Palmer v. Bender, 287 U.S. 551, 53 S.Ct. 225, 77 L.Ed. 489.
For the foregoing reasons, I would be of opinion that the Board of Tax Appeals should be reversed in No. 3895 but for the decision of the Second Circuit in the New York Central Case and the refusal of .certiorari by the Supreme Court (56 S.Ct. 370, 80 L.Ed. —).
There is in my mind no doubt as to the correctness of the court’s decision in the matter of the Carolina, Clinchfield & Ohio, No. 3896.
On the second point in No. 3895, i. e., whether the expenditures made by the Atlantic Coast Line to make good its guaranty of dividends to the holders of the preferred stock of the A. B. & C. Railroad are deductible as expenses of operation, I must dissent from the conclusion of the majority. The guaranty of dividends was not given by taxpayer as a means of acquiring the common stock of the A. B. & C. as a capital investment, but the common stock was acquired at the price approved by the Interstate Commerce Commission and the guaranty of dividends on preferred stock was given in order that taxpayer might gain control of the railroad’s properties and operate them as a part of its system. If it failed to make good its guaranty of dividends on preferred stock, it would lose the control which it had acquired; but, irrespective of this, any payment made under the guaranty was made under an obligation assumed for the purpose of operating the railroad as a part of its system. I see no reason why expenditures made in accordance with such obligation should not be considered in law, what they are in fact, expenses of operation. They add nothing to the value of the property or to the value of the common stock held by the taxpayer. If they had been made in paying interest on the bonds for which the preferred stock was exchanged, no one would contend that they were not proper deductions from income, yet they diminish the real income of the taxpayer just as truly as if they were made for such purpose.
A case very much in point is New York, etc., R. Co. v. Helvering, 63 App. D.C. 247, 71 F.(2d) 956. Tn that case the Lake Erie & Western Railroad Company had leased properties of the Northern Ohio Railway Company, in perpetuity, acquiring all of the common stock of that company as a part of the same transaction. It agreed to pay as rental the net earnings of the company, and in the event these were not sufficient therefor, certain other expenses including interest on the Northern Ohio’s bonds. The out of pocket cost to the Lake Erie under this agreement was approximately three and three-quarter million dollars, and it was argued ttiat this amount should be treated as capital expenditure and as a part of the cost of acquisition of the stock and lease, but the court held otherwise. Certainly if interest on bonds which one agrees to pay at the time of the acquisition of stock may not be considered as a part of the cost of the stock, there is no reason for so considering amounts paid under a guaranty of dividends made under similar circumstances.
It is a mistake, in my opinion, to consider the payments made as arising out of the contract under which the common stock was purchased. While provided for by that contract, they in fact arise out of losses incurred in the operation of taxpayer’s railroad system. If in the operation of that system sufficient revenue accrues to the A. B. & C. Railroad to pay the dividends on its preferred stock, the dividends are paid from such revenue; but if the revenue of the A. B. & C. is not sufficient to pay these dividends, they must be paid by the taxpayer from its other revenues, and there can be no question about the fact that its net income is decreased accordingly, without anything being added to its invested capital. To deny it a deduction of the amounts paid under such circumstances on the ground that the amount paid in dividends is a capital investment, is to sacrifice fact to theory, and to be legalistic in a matter as to which we are admonished to be practical.

 As to charging to expense in railroad accounting repair and replacement items necessary to preserve the normal level of maintenance, see Sou. Ry. Co. v. Com’r (C.C.A.4th) 74 F.(2d) S87, 890.