Opposition Brief — P. Dougherty Co. v. Commissioner

CITATIONS

Becker v. Anheuser-Busch, Inc., 120 F. 2d 403, certiorari

denied, 314 U. 8. 625

Beckridge Corp. v. Commissioner, 129 F. 2d 318

Black Hardware Co. v. Commissioner, 39 F. 2d 460, certi-

orari denied, 282 U. 8. 841

Buffalo Union Furnace Co. v. Helvering 72 F. 2d 399.......

Commissioner v. Lane-Wells Co., 321 U. 8. 219.

Pittsburgh Brewing Co. v. Commissioner 107 F. 2d 155... 12,13

Spies v. United States, 317 U. 8. 492

United States v. Ludey, 274 U. S. 295

United States v. Real Estate-Land Title & Trust Co., 102

F. 2d 582, affirmed, 309 U. 8. 13

United States Industrial Alcohol Co. v. Helvering, 137 F. 2d

Virginian Hotel Corp. v. Helvering, 319 U.S. 523, affirming

‘ 9, 12, 18

Yellow Cab Co. of Pittsburgh v. Driscoll, 24 F. Supp. 993-- c)

Zimmern v. Commissioner, 28 F. 2d 769

(1)

742937—47——__1

AU OBA, WO CENA LLORES

eI An AEA AIRES ATI

Sec. 718 (26 U.

118)..-....-------------------

ll

201

Sec. 729 (26 U. 8. C. 729)-------------------------

Revenue Act of 1928, c. 852, 45 Stat. 791, Sec. 23

Revenue Act of 1932, c. 209, 47 Stat. 169, Sec. 23._..-.--

Revenue Act of 1934, c. 277, 48 Stat. 680, Sec. 23...-----

Revenue Act of 1936, c. 690, 49 Stat. 1648, Sec. 23... ----

Revenue Act of 1938, c. 289, 52 Stat. 447, Sec. 23...-----

Treasury ‘Regulations 103:

Sec. 19.23 (a)-4-------------------------9-- 77-777

Treasury Regulations 112:

Sec. 35.729-1

21

22

23

23

24

24

25

Wood: peek cn sthebr at aot

Sate Seqrome courts faced Ges:

‘Ocrosen Team, 1946.

No. 1271

Tus-P. Dowamert CoMPANY, PETITIONER

v. |

COMMISSIONER OF InreRNaL BEVENUY |

a re

‘ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES CIROUIT COURT OF APPEALS FOR THE FOURTH

crRouIT

BRIEF FOR THE RESPONDENT IN OPPOSITION ”

OPINIONS BELOW

The prevailing (R. 3-18) and dissenting (R.

18-20) opinions in the Tax Court are reported in

5 T. C. 791. The opinion of the Circuit Court of

Appeals (R. 24-31) is reported in 159 F. 2d 269.

The judgment of the Circuit Court of Appeals

was entered on December 23, 1946. (R.31.) The

time for filing a petition for a writ of certiorari

was extended to April 21, 1947, by order of this

Court dated March 10, 1947. (R. 43.) The peti-

tion for certiorari was filed on April 21, 1947.

(1)

The jurisdiction of this Court is invoked under —

Section 240 (a) of the Judicial Code, as amended

by the Act of February 13, 1925.

QUESTIONS PRESENTED

1. Whether the taxpayer-corporation is entitled

under Sections 23, 113 and 114 of the Internal

Revenue Code to a greater deduction for depre-

ciation than was allowed by the Commissioner and

the courts below.

2. Whether the amount spent by the taxpayer

in rebuilding the stern of a barge was deductible

under Section 23 of the Internal Revenue Code as

a business expense, as the taxpayer contended, or

whether it was a capital expenditure under Sec-

tion 24 of the Internal Revenue Code, as the

Commissioner and the courts below determined.

3. Whether the 25% penalty for failure to file

an excess profits tax return was properly imposed

‘under Section 291 of the Internal Revenue Code.

| STATUTE AND REGULATIONS INVOLVED

_ These appear in the Appendix, infra.

STATEMENT

The Tax Court found the following facts (R.

5-9):

The petitioner (referred to herein as ‘“‘tax-

payer’’) is a Maryland corporation engaged in

the towing and barge transportation business,

with its principal offices at Baltimore. It filed

its corporation income and declared value excess

profits tax return for the fiscal year ended Feb-

ruary 28, 1943, with the Collector of Internal

Revenue for the District of Maryland at Balti-

more. Taxpayer keeps its books and files its in-

come tax returns on the basis of a fiscal year end.

ing February 28. (R. 5.)

Taxpayer acquired seven wooden barges during

the period 1915 to 1918, seven more in 1921, and

two steel tugs in 1923. The dates of acquisition

and cost of such tugs and barges were as fol-

lows (R. 6): .

Oost

Barge Wilmington__...____ 1915 $51, 450. 24

Barge Montank_...._._____ 1915 51, 300, 29

Barge Delaware_.......... 1916 52, 141. 49

Barge Baltimore__.....____ 1916 49, 413. 43

Barge Maryland_________._ 1917 51, 066, 72

Barge Providence_._...____ 1917 78, 280. 29

Barge Annapolis____...____ 1918 72, 518. 80

Barge Harford__.....-_____ 1921 90, 000. 00

Barge Mayo 1921 90, 000. 00

Barge Allegany 1921 90, 000. 00

Barge Oaroline__...._______ 1921 90, 000. 00

Barge Frederick__..._______ 1921 90, 000. 00

Barge Gorrett__....________ 1921 90, 000. 00

Barge Montgomery_________ 1921 90, 000. 00

Tug Ivanhoe... 19238 OA, 774. 75

Tas. DOMNOTB 6 ois i 1923 54, 774. 75

Wale. a Dee 1, 141, 620. 26

The tugs and barges listed above are the only ones

to which the depreciation questions raised in this

proceeding relate. (R. 6.)

During the years 1940 and 1941 taxpayer ex-

pended the following amounts for altering and

reconditioning the tugs and barges, which the

4

parties have stipulated should be capitalized and

depreciated at the rate of 10% per armum (R. 7):

Barge Providence, Nov. 1, 1940_..._..._ 11, 871. 18

Barge Baltimore, Dec. 1, 1940....._..__ 11,878.98

Barge Maryland, Nov. 1, 1941

Barge Annapolis, Nov. 1, 1941__...---. 15, 262. 84

During 1942 taxpayer expended $17,593.32 to

replace the stern of the barge Maryland. lt

was found that much of the woodwork had rotted

and had to be torn out and replaced. Taxpayer

treated this expenditure as ordinary repairs and

deducted the cost thereof in its return for 1942.

The Commissioner determined that it was a capi-

tal expenditure and therefore not deductible in its

entirety in that year. (R. 7.)

For all the years prior to 1922, taxpayer com-

puted depreciation on its tugs and barges, both in

its books and its income tax returns, on a declin-

ing basis at the rate of 10% of the balance at the

beginning of each year. A revenue agent who in

1921 made an examination of taxpayer’s books for

the years 1917 to 1920, inclusive, recommended

that this method be changed and that depreciation

deductions be taken on a straight-line basis at the

rate of 5%. Taxpayer adopted that method in

1922 and has since followed it, both in its books

and its returns. For many years taxpayer re-

ported net losses in excess of the depreciation

deductions contained in its returns. All of the

5 ‘

depreciation so claimed by the taxpayer in its re-

turns, up to 1942, was allowed by the Commis-

sioner. (R. 7.)

In 1942 taxpayer restored to capital, as exces-

sive depreciation, a portion of the depreciation

previously charged off in its books and its returns.

Some of its tugs and barges were not in actual use

during part or all of the years 1922 to 1942, in-

elusive. Both of its tugs were idle from early in

1931 until the close of 1941. Three barges were

idle continuously from 1931 to 1941, inclusive.

Several other barges were idle for all or portions

of the years 1930 to 1941, inclusive. During the

protracted periods of idleness the tugs were tied

up at the Colona shipyard, Norfolk, Virginia, and

the barges in the James River near Willcox Farm,

all under the care of watchmen. They were all

kept painted and in seaworthy condition. Ac-

cording to taxpayer’s books of account, the depre-

ciation on the tugs and barges for the time that

the7 were not in use, computed at the rate of 5%,

amounted to $530,176.72. Apparently the amount

which taxpayer restored to capital represented the

depreciation computed on the tugs and barges dur-

ing the periods of idleness. Its depreciation de-

ductions for 1942 and 1943 were computed on a

cost basis, including such restored capital. (R.

7-8.) The 1941, 1942 and 1943 returns showed

net losses, depreciation claimed, and depreciation

allowed as follows (R. 8):

Ane RETIN Ree a oc Raat

teed

Ae TRI

>

1941 1942 1948

Net losses... $35, 600.84 $60,779.22 $95, 404. 88

allowed... 38,652.39 36,746.60 24, 214. 74

In computing taxpayer’s depreciation for the

years 1941, 1942, and 1943, the Commissioner in-

cluded in the cost basis the remaining original cost

of the tugs and barges on hand, with the addition

thereto of the cost of reconditioning, which he

treated as capital expenditures. He thus allowed

a greater depreciation in 1941, before restoration

to capital of the prior years’ alleged excessive de-

preciation, than was claimed by taxpayer. (R.8.)

At the end of taxpayer’s taxable year 1941, the

original cost of the seven barges acquired during

the period 1915 to 1918, inclusive, had been fully

written off in taxpayer’s books and in its returns,

through depreciation deductions. There re-

mained only $3,000 of the original cost of each

of the seven barges acquired in 1921 and $5,477.25

of the original cost of each of the tugs. (R. 8-9.)

The taxpayer filed its income and declared value

excess profits tax return (Form 1120) for the tax

year ended February 28, 1943, but did not file an

excess profits tax return on Form 1121. In re-

porting a loss of $95,404.88 for that year taxpayer

deducted, in addition to depreciation in the

amount of $52,786.72, a claimed loss on the salv-

age sale of the barges Allegany, Caroline,

and Montgomery in the amount of $141,000,

and net opevating lost: for 98h end: 206 tie

total amount of $80,298.06. (R. 9.)

The Tax Court sustained the Commissioner as

to all points here involved (R, 9-18), and the Cir-

cuit Court of Appeals affirmed (R. 31).

ARGUMENT

1. Section 114 (a) of the Internal Revenue

Code provides that the basis for depreciation shall

be the adjusted basis provided in Section 113 (b)

for the purpose of determining the gain upon the

sale or other disposition of the property. Section

113 (b) (1) (B) provides that in determining

such basis, proper adjustment shall be made in

respect of any period since February 28, 1913, for

depreciation to the extent allowed (but not less

than the amount allowable) under the Code or

prior income tax laws.

Both of the courts below held, correctly, we

submit, that the taxpayer could not restore to

capital in the year 1942 amounts previously

charged off and allowed as depreciation deduc-

tions, and thus increase its adjusted basis for

depreciation under Section 113 of the Internal

Revenue Code. In so holding, they took the view —

that the taxpayer’s tugs and barges which lay

idle for varying periods during the years 1922

to 1942, inclusive, were nevertheless subject to

depreciation because they were kept in usable

condition and were ready for use should the

occasion arise. In such circumstances there is no

7429387—47——_2

- 8

adequate basis for taxpayer’s contention that the

properties were not used in trade or business

within the meaning of the tax laws (Section

23 (1) (1) of the Internal Revenue Code, Ap-

pendix, infra; Section 23 (1), Revenue Acts of

1938, 1936, 1934; Section 23 (k), Revenue Acts

of 1932, 1928), which provide for the allowance of

depreciation deductions with respect to property

used in trade or business.” The reason is stated as

follows in Kittredge v. Commissioner, 88 F. 2d

632 (C. C. A. 2d) at page 634:

To read the phrase ‘“‘used in the trade

or business’’ as meaning only active em-

ployment of property devoted to the busi-

ness would lead to results which we can-

not believe Congress intended. For ex-

ample, one factory of a large industrial

plant may lie idle for a year, and in fact

suffer depreciation as great, or greater,

than that sustained by the factories in op-

eration. To allow no depreciation for the

idle factory would be most unfair to the

taxpayer, for he must claim the deduction

in his tax return for the year when the

depreciation occurs, and may not take it in

a later year. See Hardwick Realty Co.

v. Commissioner, 29 F. 2d 498, 500 (C. C. A.

2). Hence we think the phrase should be

read as equivalent to ‘‘devoted to the trade

or business’’; that is to say, that property

once used in the business remains in such

use until it is shown to have been with-

drawn from business purposes. * * *

9

And in Yellow Cab Co. of Pittsburgh v. Driscoll,

24 F. Supp. 993 (W. D. Pa.), the same result was

reached. Cf. United States v. Ludey, 274 U. 8.

295; Beckridge Corp. v. Commissioner, 129 F, 2d

318 (C. OC. A. 2d); United States Industrial Alco-

hol Co. v. Helvering, 137 F. 2d 511, 517 (C. C. A.

2d); Herder v. Helvering, 106 F. 2d 153, 162

(App. D. C.), certiorari denied, 308 U. 8. 617.

Moreover, under this Court’s decision in Vir-

gintan Hotel Corp. v. Helvering, 319 U. S. 523,

affirming 132 ¥'. 2d 909 (C. C. A. 4th), it is imma-

terial that for many early years the taxpayer in

the instant case reported net losses in excess of

the depreciation deductions which it claimed in

its returns. Both of the courts below so held

(R. 10-11, 28.)

In support of its application for certiorari the

taxpayer relies upon cases (Becker v. Anheuser-

Busch, Inc., 120 F. 2d 408 (C. C. A. 8th), cer-

tiorari denied, 314 U. 8. 625; Gambrinus Brewing

Co. v. Anderson, 282 U. 8. 638; United States v.

Real Estate-Land Title & Trust Co., 102 F. 2d

582 (C. C. A. 3d), affirmed, 309 U. S. 13; and

Helvering v. Owens, 305 U. 8. 468), which are

not at variance with the instant decision. Three

of those cases involved claims for ‘‘obsolescence’”’

and turned upon the meaning of that term, and

the other case (Helvering v. Owens) involved the

basis for computing loss from damage by casualty

to property acquired and used for pleasure.

SR REE ORR

10

For the same reasons, there is no merit in

the taxpayer’s further contention (Pet. 8, 12-13)

that in the computation of invested capital the

alleged excessive depreciation taken in prior years

should be restored to capital and the accumulated

earnings and profits at the beginning of the tax-

able year, includible in equity invested capital

under Section 718 (a) (4) (Appendix, infra),

correspondingly increased. Both of the courts

below correctly so held. (R. 16, 26-27.)

2. The courts below properly held that the cost

of replacing the stern of the barge Maryland

should be capitalized. This item was not an in-

cidental repair which should be treated as a de-

ductible business expense. It was a major re-

placement the cost of which should be recovered

through depreciation. The regulations are in

harmony with this view (Treasury Regulations

111, Section 29.23 (a)-4; Treasury Regulations

103, Section 19.23 (a)-4, Appendix, infra) and so

are the other available authorities: Hubinger v.

Commissioner, 36 F. 2d 724 (C. C. A. 2d), cer

tiorari denied sub nom. New Haven Bank v. Com-

missioner, 281 U. S. 741; Black Hardware Co. Vv.

Commissioner, 39 F. 2d 460 (C. C. A. 5th), cer-

certiorari denied, 282 U. S. 841; Buffalo

Union Furnace Co. v. Helvering, 72 F. 2d 399

(C. C. A. 2d).

Moreover, as pointed out by the Circuit Court

of Appeals (R. 29), it is peculiarly within

ss

the competence of the Tax Court to determine

where to draw the line in cases of this kind, and

the decision of the Tax Court should not be dis-

turbed unless manifestly wrong. Dobson v. Com-

missioner, 320 U. §. 492; tabs: Kelley .(9- ¥

Commissioner, 326 U. §. 521.

The taxpayer asserts (Pet. 11) that Kinnyes

v. Commissioner, 28 F. 2d 769 (C. C. A. 5th), is in

conflict with the decision here. In the Zunmery

case the court allowed the deduction of the cost of

repairs necessary to restore a sunken barge to the

condition it was in before it sank; but that case

did not involve a major replacement such as the

one here, and in any eyent the decision is difficult

to reconcile with the later decision of the same

court in the Black Hardware case, supra, where the

cost of raising the floor of a building was held not

deductible.

In the circumstances we submit that the de-

cision as to this point is in accordance with the

law and the regulations; there is no direct con-

flict, and no occasion for further reyiew by this

Court.

3. The other point as to which certiorari is

sought is whether the 25% penalty for failure to

file an excess profits tax return was properly im-

posed. Section 291 of the Internal Revenue Code

(Appendix, infra) provides for the imposition of

the penalty unless it is shown that the failure to

file the return was due to reasonable cause and not

A nt NNR a 8 RE NT

12 |

to willful neglect. The Tax Court took the view

(R. 17) that the evidence did not suggest that the

taxpayer was willfully negligent but further held,

five judges dissenting, that the failure to fille was

not due to a reasonable cause within the meaning

of the law. In affirming the decision of the Tax

Court, the Cireuit Court of Appeals said (R.

30-31) that the question is one of fact and pe-

culiarly within the province of the Tax Court

(Commissioner v. Lane-Wells Co., 321 U. 8. 219,

225; Paymer v. Commissioner, 150 F'. 2d 334, 337

(C. C. A. 2d)), and an innocent mistake by a

taxpayer which leads him to believe he is not re-

quired to file a return is of itself insufficient to

show that his failure was due to reasonable cause

within the meaning of the statute. .

The taxpayer argues (Pet. 13-14) that it deter-

mined, following the decision in Pittsburgh Brew-

ing Co. v. Commissioner, 107 F. 2d 155 (C. C. A.

3d), that its operations were at a loss, and there-

fore did not file an excess profits tax return. Tax-

payer contends here, as it did below, that it was

justified in relying on the Pittsburgh case. How-

ever, it has not been shown that the Pittsburgh

case, even if correct, would have eut down the

taxpayer’s income to a point where no excess

profits tax return would have been required.

Moreover, the Pittsburgh case was wrongly de-

cided and it was disapproved by both the Fourth

Circuit and this Court in the Virginian Hotel

13

case, supra. The Fourth Circuit’s decision in that

case was rendered on January 2, 1943, and this — |

Court’s decision was rendered on June 7, 1943.

In the circumstances, we submit that the taxpayer,

when it determined its course of action for the

taxable year ended February 28, 1943, was not —

justified in oe that it could safely follow

the Pittsburgh case.’

4. In conjunction with the petition for cer-

tiorari, the taxpayer has moved this Court (Pet.

15) to defer consideration of its application for

the writ until such time as Congress shall have

acted upon a bill, H. R. 1104, introduced by Rep-

resentative Hobbs on January 20, 1947, and re-

ferred to the Committee on Ways and Means.

Apparently this bill has not yet been reported out

of committee. On pages 17-20 of taxpayer’s peti-

tion for certiorari there is printed a copy of Mr.

Stam’s letter of March 17, 1947, to the Chairman

of the Ways and Means Committee which points

out the administrative difficulties which would

arise if the bill were passed in its present form.

We oppose this motion, and urge that considera-

tion of the taxpayer’s application for certiorari

should not be delayed pending the final outeome of

the bill. The bill undertakes to overcome the effect

of the Virginian Hotel case and to change the

1 Spies v. United States, 317 U. S. 492, upon which tax-

payer also relies (Pet. 13), is not at variance with our conten-

tions here. It was a criminal case and it dealt with

statutory provisions not here involved.

aaa

14

law only where depreciation has been allowed in

excess of that properly allowable and resulted in

no tax benefit. It will be noted that the bill does

not undertake to change the law as to adjustments

in respect to allowable depreciation. Under the

decision in the instant case, all of the depreciation

here involved was not only allowed but properly

allowable, and in this view there is no adequate

basis for the application of the bill’s provisions.

Moreover, no foundation appears for the tax-

payer’s allegation (Pet. 15) that the passage

of the bill would relieve it of all the tax in

controversy.

CONCLUSION

The decision is correct; there is no conflict ;

and the petition should be denied. The applica-

tion for a postponement of action on the petition

for certiorari should also be denied.

Respectfully submitted.

3 GrorcE T. WASHINGTON,

Acting Solicitor General.

SEWALL Key,

Acting Assistant Attorney General.

Ler A, JACKSON,

| L. W. Post,

Special Assistants to the Attorney General.

May 1947.

APPENDIX

Internal Revenue Code:

Sec. 23. DEDUCTIONS FROM GROSS INCOME.

In computing net income there shall be

allowed as deductions:

(a) Expenses.—

(1) Trade or Business Expenses.—

(A) In General—aAll the ordinary and

necessary expenses paid or incurred duri

the taxable year in carrying on any trade

or business, including a reasonable allow-

ance for salaries or other com tion for

personal services actually rendered; travel-

ing e (ineluding the entire amount

expended for meals and lodging) while

away from home in the pursuit of a trade.

or business; and rentals or other payments

required to be made as a condition to the

continued use or possession, for purposes

of the trade or business, of property to

which the taxpayer has not taken or is not

taking title or in which he has no equity.

* * * * *

(i) Basis for Determining Loss.—The

basis for determining the amount of deduc-

tion for losses sustained, to be allowed

under subsection (e) or (f), and for bad

debts, to be allowed under subsection (k),

shall be the adjusted basis provided in sec-

tion 113 (b) for determining the loss from

the sale or other disposition of property.

* * *

* *

(1) Depreciation—A reasonable allow-

ance for the exhaustion, wear and tear (in-

(15)

16

cluding a reasonable allowance for ob- —

solescence )— ee

(1) of property used in the trade or busi-

ness, or

(2) of property held for the production

of income.

* * * > *

(n) Basis for Depreciation and Deple-

tion.—The basis upon which depletion, ex-

haustion, wear and tear, and obsolescence

are to be allowed in respect of any property

shall be as provided in section 114.

* * * * *

(26 U. 8. C., Supp. V, 23.)

Sec. 24. ITEMS NOT DEDUCTIBLE.

(a) General Rule.—In computing net in-

come no deduction shall in any case be

allowed in respect of—

* * * * *

(2) Any amount paid out for new build-

ings or for permanent improvements or

betterments made to increase the value of

any property or estate;

(3) Any amount expended in restoring

property or in making good the exhaustion

thereof for which an allowance is or has

been made;

* * * * *

(26 U.S. C. 24.)

Sec. 113. ADJUSTED BASIS FOR DETERMIN-

ING GAIN OR LOSS.

(a) Basis (Unadjusted) of Property—

The basis of property shall be the cost of

such BEopery } epaia that—

* *

Pn héiistes Basis. —The adjusted basis

for determining the gain or loss from the

sale or other disposition of property, when-

17 ‘

ever acquired, shall be the basis deter-

mined under subsection (a), adjusted as

hereinafter provided.

(1) Goneeai Rule.—Proper adjustment

i ee oe ee

be rcs

(B) in ‘aiieah of an any period since Feb-

ruary 28, 1913, for tion, wear =e

tear, obsolescence, amortization, and deple-

tion, to the extent allowed (but not less

than the amount allowable) under this

chapter or prior income tax laws.

* * * * *

(26 U.S. C. 113.)

Sec. 114. Basis FOR DEPRECIATION AND DE-

PLETION. ,

(a) Basis for Depreciation—The basis

upon which exhaustion, wear and tear, and

obsolescence are to be allowed in respect of

any property shall be the adjusted basis

provided in section 113 (b) for the purpose

of determining the gain upon the sale or

other disposition of such property.

> * + * -

(26 U. S. C. 114.)

Sec. 291. FAILURE TO FILE RETURN.

In case of any failure to make and file

return required by this chapter, within the

time prescribed by law or prescribed by the

Commissioner in pursuance of law, unless

it is shown that such failure is due to rea-

sonable cause and not due to willful neglect,

there shall be added to the tax: 5 per

centum if the failure is for not more than

thirty days with an additional 5 per centum

for each additional thirty days or fraction

thereof during which such failure con-

tinues, not exceeding 25 per centum in the

iimnnieb inte ee

es

aggregate. The amount so added to any

tax shall be collected at the same time and

in the same manner and as a of the tax

unless the tax has been paid before the dis-

covery of the neglect, in which case the

amount so added shall be collected in the

same manner as the tax. The amount

added to the tax under this section shall be

in lieu of the 25 per centum addition to the

tax provided in section 3612 (d) (1). (26

U.S. C. 291.)

Sec. 718 [as added by Section 201 of the

Second Revenue Act of 1940, ¢. 757, 54

Stat. 974, and as amended by "Section 218

of the Revenue Act of 1942, c. 619, 56 Stat.

798].

UITY INVESTED CAPITAL.

(a) Definition —The equity invested cap-

ital for any day of any taxable year shall

be determined as of the beginning of such

day and shall be the sum of the following

amounts, reduced as provided in subsec-

tion (b)—

(1) Money Paid In.—Money previously

paid in for stock, or as paid-in surplus, or

as a contribution to capital ;

(2) Property Paid In —Property (other

than money) previously paid in (regardless

of the time paid in) for stock, or as paid-in

surplus, or as a contribution to capital.

Such property shall be included in an

amount equal to its basis (unadjusted) for

determining loss upon sale or exchange. If

the property was disposed of before such

taxable year, such basis shall be determined

under the law applicable to the year of

disposition, but without regard to the value

of the property as of March 1, 1913. If

the property was disposed of before March

1, 1913, its basis shall be considered to be its

tions in stock—

(A) Made prior to such taxable year to

the extent to which they are considered dis-

tributions of earnings and profits; and

(B) Previously made during such tax-

able year to the extent to which they are

considered distributions of earnings and

profits other than earnings and profits of

such taxable year;

(4) Earnings and Profits at sagnning

of Year—The accumulated i an

profits as of the beginning of such taxable

year; * * *

* * * ue

(26 U.S. C., Supp. V, 718.)

Sec. 729 [as added by Section 201 of the

Second Revenue Act of 1940, ec. 757, 54 Stat.

974, and as amended by Section 205 of

= ein a Act of 1942, ¢. 619, 56 Stat.

LAWS APPLICABLE.

(a) General Rule.—All provisions of law

(ineluding penalties) applicable in res

of the taxes imposed by Chapter 1,

insofar as not inconsistent with this sub-

chapter, be applicable in respect of the tax

imposed by this subchapter.

(b) Returns—

(2) No Return Required.—Notwithstand-

ing subsection (a), no return under section

> ccrerenacrs tiie TT te iene. ae

wren

ee oll

A A AO te

20

52 (a) shall be required to be filed by any

taxpayer endae’ tile subchapter for any

taxable year for which its excess profits net

income, computed with the nts

provided in section 711 (a) (2) and placed

on an annual basis as provided in section

711 (a) (3), is not greater than $5,000 or,

in the case of a mutual insurance company

(other than life or marine) which is an

interinsurer or reciprocal underwriter, is

not greater than $50,000.

(26 U. 8. C., Supp. V, 729.)

Treasury Regulations 111, promulgated under

the Internal Revenue Code:*

Sec. 29.23 (a)-4. Repairs.—The cost of

incidental repairs which neither materially

add to the value of the property nor appre-

ciably prolong its life, but keep it in an

ordinarily efficient operating condition, may

be deducted as expense, provided the plant

or property account is not increased by the

amount of such expenditures. Repairs in

the nature of replacements, to the extent

that they arrest deterioration and appreci-

ably prolong the life of the property,

should be charged against the depreciation

reserve if such account is kept. (See

sections 29.23 (1)-1 to 29.23 (1)-10,

inclusive. )

* Treasury Regulations 111 are applicable only to years be-

ginning after December 31,1941. Treasury Regulations 103,

also promulgated under the Internal Revenue Code, are ap-

plicable to earlier years beginning after December 31, 1938.

Sections 19.23 (a)-—4, 19.23 (1)-1, 19.23 (1)-2, 19.23 (1)-4,

19.23 (1)-5, 19.113 (a)—1, 19.113 (a)-2 and 19.113 (b) (1)-1

of Treasury Regulations 103 do not differ from the corre-

sponding provisions of Treasury Regulations 111, above

quoted, in any material respect.

21

Seo. 29.28 (1)-1. Depreciation.—A rea-

sonable allowance for the exhaustion, wear

and tear, and obsolescence of property used

in the trade or business, or ted under

section 29.23 (a)-15 as held by the tax-

payer for the production of income, may

deducted from income. For con-

venience such an allowance will usually be

referred to as depreciation, excl

the term any idea of a mere reduction in

market value not resulting from exhaus-

tion. wear and tear, or obsolescence. The

proper allowance for such depreciation is

that amount which should be set aside for

the taxable year in accordance with a rea-

sonably consistent plan (not necessarily at

a uniform rate), wha the aggregate of

the amounts so set aside, plus the salvage

value, will, at the end of the useful life of

the depreciable property, equal the cost or

other basis of the property determined in

accordance with section 113. Due regard

must also be given to expenditures for

current upkeep. * * *

Sec. 29.23 (1)-2. Depreciable Prop-

erty.—The necessity for a depreciation

allowance arises from the fact that cer-

tain property used in the business, or

treated under section 29.23 (a)—15 as held

by the taxpayer for the production of in-

come, — approaches a point where

its usefulness is exhausted. The allowance

should be confined to property of this na-

ture. In the ease of nos ew property, it

applies to that which is subject to wear and

tear, to decay or decline from natural

causes, to exhaustion, and to obsolescence

due to the normal progress of the art, as

where machinery or other property must

be replaced by a new invention, or due

to the inadequacy of the property to the

22

growing needs of the business. It does

not apply to inventories or to stock in —

trade, or to land apart from the improve-

ments or physical development added to it.

It does not apply to bodies of minerals

which through the process of removal suf-

fer depletion, other provisions for this be-

ing made in the Internal Revenue Code.

(See sections 23 (m) and 114.) Pro

kept in repair may, nevertheless, be the

subject of a depreciation allowance. (See

section 29.23 (a)-—4.) The deduction of an

allowance for depreciation is limited to

roperty used in the taxpayer’s trade or

usiness, or treated under section 29.23

(a)-15 as held by the taxpayer for the pro-

duction of income. No such allowance may

be made in respect of automobiles or other

vehicles used solely for pleasure, a building

used by the taxpayer solely as his residence,

or in respect of furniture or furnishings

therein, personal effects, or clothing; but

properties and costumes used exclusively in

a business, such as a theatrical business,

may be the subject of a depreciation allow-

ance.

Sec. 29.23 (1)-4. CaprraL SUM RECOVER- —

ABLE THROUGH DEPRECIATION ALLOWANCES.—

The — sum to be replaced by deprecia-

tion allowances is the cost or other basis of

the property in respect of which the allow-

ance is made. (See sections 113 (a) and

114.) To this amount should be added

from time to time the cost of improve-

ments, additions, and betterments, and

from it should be deducted from time to

time the amount of any definite loss or dam-

age sustained by the property through

casualty, as distinguished from the gradual

exhaustion of its utility which is the basis

of the depreciation allowance. (See sec-

tion 113 » Seigunethies

Seo. 29.23 (1)-5. MerHop oF COMPUTING

DEPRECIATION ALLOWANCE.—The capital

to be recovered shall be charged off over

the useful life of the property, either in

equal annual installments or in accordance

with any other recognized trade —-

such as an apportionment of the capi

sum over units of production. Whatever

plan or method of apportionment is

adopted must be reasonable and must have

due regard to operating conditions di

the taxable period. The reasonableness o

any claim for depreciation shall: be deter-

mined upon the conditions known to exist

at the end of the period for which the re-

turn is made. If the cost or other basis

of the property has been recovered through

depreciation or other allowances no further

deduction for depreciation shall be allowed.

The deduction for depreciation in respect

of any depreciable property for any taxable

year shall be limited to such ratable amount

as may reasonably be considered neces-

sary to recover during the ini

life of the property the unrecov cost or

other basis. e burden of proof will rest

upon the taxpayer to sustain the deduc-

tion claimed. Therefore, taxpayers must

furnish full and complete information with

respect to the cost or other basis of the as-

sets in respect of which depreciation is

claimed, their age, condition, and remain-

ing useful life, the portion of their cost or

other basis which has been recovered

through depreciation allowances for prior

taxable years, and such other information

as the Commissioner may require in sub-

stantiation of the deduction claimed. * * *

24

Sec. 29.113 (a)—1. Scope OF BASIS FOR DE- —

TERMINING GAIN OR L088.—The basis of prop-

erty for the purpose of determining gain or

loss from the sale or other disposition

thereof is the unadjusted basis prescribed

in section 113 (a), adjusted for the various

applicable items specified in section 113

(b). Unless otherwise indicated, the word

‘“*hasis,’’ as used in this section and sec-

tions 29.113 (a)-2 to 29.113 (a) (22)-1,

inelusive, has reference to the unadjusted

basis. * oe *

Sec. 29.113 (a)-2. GeneRaL RULE—In

general, the basis of property is the cost

thereof. This rule is subject, however, to

the exceptions stated in sections 113 (a)

(1) to 113 (a) (21), inclusive.

Sec. 29.113 (b) (1)-1. ADJUSTED BaSsIs:

GENERAL RULE.—The adjusted basis for de-

termining the gain or loss from the sale or

other disposition of property is the cost of

such property or, in the case of such prop-

erty as is described in section 113 (a) (1) to

(21), inclusive, the basis therein provided,

adjusted to the extent provided in section

113 (b).

The cost or other basis shall be properly

adjusted for any expenditure, receipt, loss,

or other item, properly chargeable to capi-

tal account, including the cost of improve-

ments and betterments made to the prop-

erty. * * #

The cost or other basis must also be de-

creased by the amount of the deductions for

exhaustion, wear and tear, obsolescence,

amortization, and depletion to the extent

such deductions have in respect to any pe-

riod since February 28, 1913, been allowed

(but such decrease shall not be less than the

amount of deductions allowable) under

25

chapter 1 or prior income tax laws. The

adjustment required for any taxable year or

period is the amount allowed or the amount

allowable for such year or period under the

law applicable thereto, ichever is the

greater amount. A taxpayer is not per-

mitted to take advantage in a later year of

his prior failure to take any depreciation

allowance or of his action in taking

an

allowance plainly inadequate under the = ~—

known facts in prior years. The determi-

nation of the amount properly allowable

shall, however, be made on the basis of facts

reasonably known to exist at the end of

such year or period. The aggregate sum

of the greater of such annual amounts is the

amount by which the cost or other basis of

the property shall be adjusted. * * *

Treasury Regulations 112, promulgated under

the Internal Revenue Code:

Sec. 35.729-1. TIME AND PLACE FOR FIl-

ING RETURNS AND INFORMATION TO BE IN-

CLUDED.—Excess profits tax returns shall be

filed at the same time and place as the time

and place prescribed in sections 53 and 235

and the income tax regulations under such

sections for the filing of income tax returns.

The excess profits tax return of a corpora-

tion of income received or accrued

(a) from the date of its incorporation to

the end of its first accounting period, where

the period between the date of incorpora-

tion and the end of such period is less than

12 months, or.

(b) from the beginning of its last ac-

counting period to the date it ceases opera-

tions and is dissolved, retaining no assets,

where the period between the beginning of

the accounting period and such date is less

26

than 12 months, shall be considered as |

return for a fractional part of a year co

sisting of such period, and shall be filed

within the time prescribed for filing returns “

for taxable years of less than 12 months. —

The excess profits tax return shall ~

Form 1121 ceudionl, and such return s

contain all the information required

such form and by these regulations with

spect to computation of such tax. The

return, however, requires the computation: n

of the tax with only the credit which results)

in the lesser tax, anda return so filed me

the requirements of the statute. Thus 3

taxpayer may omit from the return th e

computation and information with respe

to the excess profits credit under section

713 or section 714 which does not result in the =

lesser excess profits tax and may omit the”

computation and information with respect ©

to the excess profits net income otherwise :

to be computed with such omitted credit.”

A return filed in this manner shall be™

audited as filed, regardless of whether it~

may be determined that the use of the”

omitted credit would result in a lesser tax,

A corporation which files a return is not, ©

by reason of the fact that only one method”

of computing its credit is employed, pre-~

cluded from using the other method in the —

computation of its excess profits tax for

such taxable year and, if an overpayment *

results, from filing a claim for the refund ©

of such overpayment within the applicable;

arent of limitation. a

* * * *

y

U. S. GOVERNMENT PRINTING OFFICE: 1947